485. Memorandum From Michael V. Forrestal of the National Security Council Staff to President Kennedy0
Laos
Last year with your approval, the economic assistance program for Laos was overhauled. The plan was predicated on the belief that military expenditures would be decreased as a result of the Geneva Agreements. Cash grants were also curtailed and a commodity import program was instituted to fulfill consumer demand and reduce inflationary pressure. Resumption of hostilities in the Plain of Jars last April and the decision to support the neutralists have increased military costs, and caused the Lao prices to double, as wild inflation began.
Souvanna Phouma, faced with an economic crisis which could seriously undermine his political position if left unchecked, has asked repeatedly for help.
At our suggestion the IMF sent an expert to Vientiane, who recommended that Western powers interested in Laos start a stabilization program. The attached cable1 describes the proposal of AID and State to revise the program in Laos in order to relieve the current inflation and apply some of the solutions proposed by the IMF. It includes the following:
- (1)
- Increase the commodity import program from $18 to $20 million to include semi-essential items such as motor vehicles and some consumables.
- (2)
- Establish a fund (with British, French and Australian support if possible) which will be used to purchase kip at the free market rate. Simultaneously an official devaluation will be effected. The purpose of this is to bolster the foreign exchange position of Laos and withdraw kip from the economy by selling foreign exchange at speculative prices. We propose to commit $4 million to this endeavor and would anticipate having to contribute an additional $2 to $4 million if we are unable to get our allies to participate.
- (3)
- Attempts will be made to have the IMF confirm the right of the Lao Government to draw two million dollars to augment its foreign exchange reserves, which now total only two million dollars, as opposed to twenty million dollars last year. While this credit will probably not be used, its availability should also reduce the pressure on the kip.
These proposals can only be effective if the Lao budget is limited to expenditures currently anticipated and the money supply is not increased. We expect to recommend further devaluation if these criteria are not met.
The proposed program has two unpalatable aspects. First, the level of total U.S. military and economic assistance proposed is approximately equal to the average level for the years 1961–62–63 ($62–$63 million plus $8–$9 million for the Meo operation [1 line of source text not declassified]. Since the Congressional presentation only included $43.5 million for Laos, explanations will have to be made on the Hill.
The second source of concern is the establishment of the proposed fund for purchase of foreign exchange. This is an unorthodox technique, which could be described by unfriendly critics as involving the United States in black market transactions. Nevertheless, it is a technique which is employed by central banks and if it is tightly controlled by our own people, it seems better than just turning free dollars over to the Lao Government to spend as they wish.
The above proposals have been extensively debated among State, AID, Treasury, and the Bureau of the Budget. No one is happy, but we are all convinced that they represent the best program for the mess in Laos.
Before approving the attached cable, you may wish more information and discussion. Depending upon the extent you desire to look into this, I may be able to fill you in myself, or we can arrange a meeting with the experts.
Addenda:
The balance of payments impact of the proposed program is estimated to be $16–$18 million. This compares with the following amounts for prior years:
| 1961 | $25,000,000 |
| 1962 | $18,000,000 |
| 1963 | $15,000,000 |
The annual housekeeping costs of a U.S. division in Laos (assuming no fighting and excluding transportation) is estimated to be around $35 million. This figure might be compared with the $18 million it costs to support Phoumi’s army, since we would probably have to continue some economic support of Laos in any event. Mac and I thought these comparisons might give you some chilly comfort.