The question is, is it efficient or is it wasteful? Are the commodities sent to Vietnam under the program fully utilized? Is the potential of runaway inflation kept in tow? Has the CIP prevented a balance-ofpayments deficit, as intended, as well as to keep under control our constant concern for the flow of gold and what is termed "hard money" from this country?

I might add, because of some personal experiences I have had in this connection with AID, Mr. Chairman, I am going to be very curious also as to how they select their employees and whether they reward or discharge those accountants who find instances of corruption. The record of AID as I have observed it in that area has not been good in other parts of this country.

I understand that the expenditures for the AID commodity import program were about $97.8 million for fiscal year 1962. Then, after a short drop to $95 million in fiscal year 1963, they rose steadily to $113.9 million for fiscal year 1964, to $152.8 million for fiscal year 1965, and to $398.1 million for fiscal year 1966. The exact fiscal year 1967 figure has not been finalized at this time.

While I recognize that a certain amount of this increase has to be attributed to our corresponding troop buildup, I am concerned about this steady growth to where the CIP program-as the chairman has said-now amounts to almost one-half of our entire AID effort in that Southeast Asia country.

I have learned from the Senate Foreign Relations Committee, on which I also serve, from the report of our staff members who were in Vietnam late last year, and from talking to several persons who were in Vietnam and have returned to this country, that there is a serious question as to the actual need for the many commodities which have gone into a country of 16 million persons since we started our expanded AID program in 1955.

That is why I asked the earlier question. It is why I shall ask some more based upon my experience with another subcommittee on which I serve, which has also been dealing with AID.

Just a rapid tabulation shows, if my figures are correct-and they came last October from the AID Assistant Director John A. Ulinski, Jr., who administered the commodity import program-that in a 5year period our country has spent $857.6 million for this one phase of our total AID expenditures. Mr. Chairman, that is crowding a billion dollars.

I believe that we should render our fighting forces every assistance possible in Vietnam, but this commodity import program, as I understand it, relates only indirectly to our military personnel. It is mostly interested and directed to AID's attempts to combat inflation and critical commodity shortages in the marketplace, villages and hamlets of that country.

I hope, then, that we carefully examine this program to eliminate any "fat" or inefficiency, waste or graft from it-particularly with increasing costs and the talks of higher taxes in the United States. to finance the conflict in that country.

As we proceed into these hearings, it will be interesting to examine what has gone on behind the unusual number of import licenses issued in Vietnam for commodity purchases under $10,000, to which

the chairman has alluded, many of which are in the neighborhood of $9,900.

One doesn't have to be too curious to be struck by the proximity of the $10,000 figure which these licenses have assumed as they have proliferated in number. Some hanky-panky appears to be going on someplace, Mr. Chairman, and we should find it, because this is counter-productive to the war effort instead of helpful to it.

It is my understanding that an import order for over $10,000 has to be circularized in this country by the Small Business Administration before it is completed, per regulations, to give honest, small businessmen everywhere a chance to participate in the business. However, a license for a commodity under that $10,000 amount does not have to fit this requirement. It can be handed out to friends and political associates, or it can be handed out on the basis of bribes.

This, then, could well amount to a negotiated purchase-or more— between a Vietnamese importer and a U.S. exporter-supplier. It does complete violence to the whole concept of competitive bidding and, in the main, it has been the tool devised by AID to make these transactions possible. We ought to know why that kind of deficiency is built into the program in the first instance.

I understand that there is a limit-three licenses per quarter per commodity group-to the number of licenses that can be obtained annually by an importer under $10,000, except for end-users for whom these restrictions may be waived.

I imagine there is a way around this too, Mr. Chairman. I daresay that some Vietnamese importers-and some American suppliers as well-figure out a way around these regulations just about as rapidly as they are printed and disseminated.

I know that in one instance brought to my attention, when the man on the ground floor found that kind of corruption going on, they shot the watchman at the gate and fired him-the fellow who discovered the graft-instead of the people involved in it.

By these statements, I do not mean to imply that I have prejudged this matter. In fact, as I have said several times at the outset of other hearings conducted by this subcommittee, I believe that, as pertains to our investigation of the AID program in Vietnam-and to the persons involved therein-we should "let the chips fall where they may," and I, for one, will follow that adage in attempting to determine what is best for all concerned, consistent with what is economic and efficient for our Federal Government in this matter in which we are currently undertaking our inquiry.

I am certain to that end these hearings will be constructive, factfinding, and objective under the able direction of our chairman and I look forward to working with him and the subcommittee members in correcting a situation which appears "to stink to high heaven" and to be operating against the best interests of our military in Vietnam instead of helping same.

The CHAIRMAN. Senator Harris?

Senator HARRIS. I have nothing to say, Mr. Chairman. Thank you. The CHAIRMAN. Senator Curtis?

Senator CURTIS. I have no statement at this time.

The CHAIRMAN. Very well, counsel, call your first witness.

Mr. ADLERMAN. The Honorable Rutherford M. Poats, Assistant Administrator, Agency for International Development.

The CHAIRMAN. Mr. Poats, you have a prepared statement, I believe.

Mr. POATS. I do, sir. I understand from the committee staff that the committee would like to, at the outset, go into the mechanisms of the commercial import program, its purpose and how it operates. I am prepared to proceed on that basis now, if you wish.

The CHAIRMAN. You may proceed with your prepared statement, if you like.

The Chair has many committees, some of them requiring an oath and some not requiring the oath. This is an investigating committee, in the process of making an investigation. Therefore, under the rules of the committee, the oath is required, so you will please be sworn.

You do solemnly swear the evidence you shall give before this Senate subcommittee shall be the truth, the whole truth, and nothing but. the truth, so help you God?

Mr. POATS. I do.

Senator MUNDT. May I suggest if the gentlemen with him are going to participate in the testimony, they should be sworn.

The CHAIRMAN. Are they to be interrogated?

Mr. ADLERMAN. They will contribute, I believe.

The CHAIRMAN. Very well. Those of you expecting to testify will be sworn.

Do you, and each of you, solemnly swear the evidence you shall give before this Senate subcommittee shall be the truth, the whole truth, and nothing but the truth, so help you God?

Mr. BACON. I do.

Mr. GRANT. I do.

Mr. HEILMAN. I do.

TESTIMONY OF HON. RUTHERFORD M. POATS, LESLIE A. GRANT, JOHN HEILMAN, MARVIN A. BACON, AND MALCOLM ARNOLD

The CHAIRMAN. Would you identify yourselves for the record? Mr. HEILMAN. John Heilman, Associate Assistant Administrator for Commodity Management in the AID program.

The CHAIRMAN. The next one?

Mr. GRANT. My name is Leslie A. Grant, Deputy General Counsel

of AID.

The CHAIRMAN. The next gentleman?

Mr. BACON. I am Marvin Bacon, Chief of the Financial Review Division in the Office of the Controller.

The CHAIRMAN. Very well.

You may proceed.

Mr. POATS. Mr. Chairman, I appreciate this opportunity to discuss the AID commercial import program of assistance to Vietnam. In dollar terms this is the largest of four elements of the AID program in Vietnam. The other three elements-revolutionary development, war relief and support, and long-term development--and Vietnamese military operations, as well, are to a great degree dependent on the economic and budgetary support of a large and flexible commercial

import program. It is, therefore, important that the Congress be fully informed as to the policies and procedures governing this program, the problems in its management and the steps AID and the Vietnamese Government have taken to meet these problems and guard against abuses.

The commercial import program has two major complementary objectives:

First, by providing foreign exchange to finance essential production and consumer goods, the program is designed to counteract inflation both directly and by expanding domestic Vietnamese industrial and agricultural output.

Second, by generating local currency to supplement Vietnamese revenues, the program is designed to support mutually agreed Vietnamese budget expenditures for defense, rural development, and other expanded civil programs crucial to the war effort.

Beginning with the buildup of U.S. and other free world military forces in the summer of 1965, the inflationary pressures in Vietnam mounted rapidly. The commercial import program was our primary weapon in the battle to prevent runaway inflation which could cause a breakdown in Vietnamese support of the war effort. The civil war in China in the late 1940's was a vivid reminder of what happens when self-generating inflation takes hold within an economy; the collapse of resistance to the Communist forces in China was in part attributable to the disintegration of the economic system. This must not be allowed to happen in Vietnam, where American soldiers are fighting with Vietnamese to cast out the same discredited Communist system. Yet, paradoxically, the military expenditures themselves are a prime cause of the economic threat.

With the influx of American and allied troops came vastly increased demands for local goods and services. To meet their logistics requirements, new port facilities, bridges, roads, airfields, housing, office space, and myriad other facilities were purchased on the local economy or constructed, employing Vietnamese as well as imported labor. Off-duty servicemen buy goods and services from the Vietnamese. All of this means more and more affluent buyers competing for the limited and war-restricted resources of South Vietnam, injecting new money into a fragile economy. Between January 1965 and January 1966, the Veitnamese money supply increased from 30 billion to 51 billion piasters, an increase of 69 percent. By January of this year, money supply had increased further to more than 70 billion piasters-an increase of 37 percent in 12 months. Thus in 2 years, money supply more than doubled, but as one would expect the increase was not distributed evenly among the different elements of the population. Wages in the Vietnamese military and civil services were held down, while the incomes of those engaged in building trades, business, transportation, entertainment, and so forth, increased sharply.

Since many consumer goods and most raw materials and machinery must be imported, and Vietcong action blocked the flow of domestic farm products to market, an increase in buying power meant an increase in demand for imported goods. It was, therefore, urgently necessary to increase imports to the extent that they could absorb this rising demand by sale on the commercial market. To the extent that this

policy is effective, those with increased incomes have no need to bid up prices on the necessities of life, since their demands can be satisfied at lower prices within the range of everyone.

As I have noted, the import program also makes piasters-the Vietnamese currency-available to the government for budget support. In order to prosecute the war effectively the Vietnamese Government must field military and paramilitary forces of about 600,000 men. It must train, equip and pay a large civil service, with increasing requirements for police, village workers, rural teachers, health workers, et cetera. It must build and repair bridges, roads, power stations, and other public facilites constantly subject to the destructive Vietcong terrorism. All of this costs a great deal more money than its tax-collection system can obtain. The commercial import program provides a partial solution. It creates a channel through which imported commodities purchased with American dollars can be converted into piasters, which can in turn be made available to the Vietnamese Government for piaster support of joint economic and military programs. To understand how this is done, one must have an understanding of the mechanics of the system itself.

The commercial import program is exactly what its name implies— it is a commercial operation which works through commercial banking channels and is dependent upon the activities of private businessmen. An import firm which sees an opportunity for profit in the importation and resale of particular goods eligible for AID financing obtains an import license from the government, consumates an "exchange contract" with a local bank, arranges for procurement and transportation, from a foreign supplier, pays the total cost of the goods in piasters to the local bank, pays customs duties on arrival of the goods, warehouses and sells the goods on the open market. The risk inherent in this commercial transaction falls to the importer and his bank-and the profit. or loss goes to him.

AID pays the dollar cost of the commodities and of transportation to Vietnam against documents submitted by the supplier to a U.S. bank. The importer's bank pays the piaster equivalent into a special account at the national bank. This account-called the "Counterpart special account"-is jointly controlled by the U.S. Government and the Government of Vietnam. Piasters accumulated in this fashion are used to meet Vietnamese military expenditures and joint United States-Vietnamese civil program expenditures, and a portion is used to pay for official U.S. piaster expenditures. Through this mechanism piasters are in effect taken out of private Vietnamese hands and transferred to the Vietnamese Government for uses jointly agreed by the United States and Vietnamese Governments. On the one hand the system provides a way to absorb excess purchasing power; on the other it reduces the necessity for inflationary deficit financing by the government.

I have dwelt at some length on the objectives, the rationale, and the mechanics of the commercial import program. I have done so because one often hears criticisms in terms of excesses and abuses of the program, but one seldom hears an explanation of why we are spending the taxpayers' dollars in this fashion.

Let me turn now to some of the problems in this program.