Vietnam War

The Event: Conflict between North and South Vietnam in which the United States first supported French efforts, then provided aid and U.S. troops to South Vietnam
Date: 1959-1975
Place: Southeast Asia
Significance: When the United States began sending combat forces to Vietnam in 1965, the American economy became overstimulated by the war expenses, resulting in higher wages, higher prices, and significant inflation. Government spending on the war and tax increases burdened American businesses despite war-related contracts. At the end of the war, the U.S. economy suffered from stagflation and no peace dividend materialized.
At the end of World War II in 1945, the American business community worried that countries that became communist would separate themselves from the capitalist system that drove the American economy. The decision by President Harry S. Truman to contain communism globally was cheered by U.S. businesses. In Vietnam, the nationalist movement fighting against French attempts to reestablish colonial power was led by Ho Chi Minh, an avowed communist. Ho’s allegiance to the Communist Party persuaded the United States to place its support behind France.
For the American business community, Vietnam was essentially economically irrelevant. Pre-World War II U.S. trade with colonial French Indochina—Vietnam, Cambodia, and Laos—was very light. In 1939, U.S. exports to Indochina were worth just $2.5 million and U.S. imports, primarily rubber, added up to $10.7 million. After World War II, American businesses were interested in strengthening the Japanese and West European economies so that these countries could withstand the surge of communism. However, Japan and France viewed Vietnam as a vital potential market with important natural resources.

France Goes to War

The United States grudgingly sided with France when war broke out in Vietnam. After Ho Chi Minh rejected a French proposal for limited Vietnamese autonomy, French warships bombed the Vietnamese- held harbor of Haiphong on November 23, 1946. While France sought U.S. aid for its war in Vietnam, it also jealously guarded its colonial economic privileges. It objected, for example, to oil exploration in Vietnam by Texaco.
On May 8, 1950, Truman agreed to provide aid for the French war effort, officially funneled through the semi-independent state of Vietnam founded that year. From 1950 to mid-1954, the United States supported the French war in Vietnam with some $3.6 billion, paying 75 to 80 percent of the French war expenses with U.S. taxpayer money.

U.S. Aids South Vietnam

The Geneva Accords of July 21, 1954, temporarily halted the Vietnam War. Cambodia and Laos became independent. Vietnam was temporarily partitioned into the communist North Vietnam and the noncommunist South Vietnam. U.S. support of South Vietnam enabled Ngo Dinh Diem to stabilize the Republic of Vietnam (RVN) in South Vietnam after the October 23, 1955, referendum. From 1955 to 1959, the United States provided Diem with $1.7 billion in military and $1.2 billion in economic aid.
U.S. representatives in Saigon were unhappy with Diem’s unwillingness to use U.S. economic aid to promote Vietnamese economic development and his spending up to two-thirds of the aid on consumer goods, often imported from France. Diem’s distrust of private versus state-owned enterprises exasperated American businessmen in South Vietnam. They also fought against Vietnamese restrictions on direct foreign investment and wanted some guarantees against nationalization of American owned businesses in Vietnam.
Beginning in late 1950, the United States sent U.S. soldiers to act as military advisers to Diem. When war in South Vietnam flared up again in 1957, the number of soldiers grew from the initial 77 to more than 1,000 in 1961. At a rough annual cost of $25,000 per soldier, this cost the United States an additional $25 million.
By late 1963, Diem was losing the fight against the communists. The United States acquiesced to a coup that killed and replaced him with a military junta. However, even ever-increasing American aid could not win the junta’s war against the communists. Year after year, the war in South Vietnam cost the U.S. economy more money, with few positive results.
Determined to keep South Vietnam from becoming communist, President Lyndon B. Johnson authorized the landing of U.S. Marines in Da Nang on March 8, 1965. In April, 1965, Johnson offered North Vietnam a billion-dollar economic aid program if the North stopped its aggression in South Vietnam, but Hanoi declined. By May, 1965, Johnson was forced to ask for the first supplemental budget increase of $700 million to finance the war in Vietnam for the remainder of fiscal year 1965. By August, the U.S. economists began warning that the costs of the Vietnam War could cause economic trouble. However, President Johnson still believed the U.S. economy was strong enough to pay both for the Vietnam War and his Great Society social projects without a tax increase.

Military Costs of Major Twentieth Century Wars

From Boom to Inflation

The United States’ full-scale engagement in the Vietnam War increased government spending for military operations, equipment, and aid to Vietnam. Low unemployment dropped further as young men were drafted for temporary military service, leading to a significant rise in labor costs. Prices rose as U.S. companies passed on these higher costs to their customers. In December, 1965, the Federal Reserve raised the discount rate from 4 to 4.5 percent to fight inflation.
In early 1966, the U.S. economy boomed. Americans bought new cars, fearing that the government might restrict domestic car production as was done in the Korean War. This fear proved groundless, but consumer spending increased, as did wages and prices. The consumer price index, which had been increasing annually at a rate of 1.2 percent from 1960 to 1964, rose at the rate of 3.5 percent in 1966. The wholesale price index rose, climbing from an annual rate of 0.0 percent to 2.2 percent in 1966. This increase was driven by direct and indirect government expenses for the Vietnam War and the Great Society programs. A tightening of the money supply by the Federal Reserve led to the credit crunch of 1966.
For the 1966 U.S. budget, the $4.4 billion for direct war expenses had to be supplemented by an additional $1.4 billion, and the war continued to rage with no end in sight. A proposed 1967 tax increase to cover the cost of the Vietnam War failed, and the government resorted to deficit spending.

Opposition to the War

By 1968, the majority of U.S. businesses turned against the war in Vietnam. Together with many other segments of American society, the business community was disillusioned by the communists’ surprise Tet offensive in February. By the end of fiscal year 1967, the original budget for direct military expenditures to fight the war in Vietnam nearly doubled from $10.2 billion to $19.4 billion, and $21.4 billion was projected for fiscal year 1968. Indirect costs of the war, such as those incurred by keeping draftees out of the civilian economy and providing for future veterans’ benefits and pensions, were not included in these budgets.
The American business community was deeply concerned about the cost of the war in Vietnam, viewing the conflict as predominantly a drain on the domestic economy and the trigger for unhealthy inflation. Businessmen blamed the March 14, 1968, run on the dollar and the ensuing gold crisis on the Vietnam War and disliked the increase in domestic unrest caused by antiwar demonstrations. U.S. business leaders felt that the United States could not continue to pay for both the Vietnam War and the Great Society, stabilize the dollar, and avoid new taxes. The business community was also aware that what people perceived as the government’s misconduct in handling the war was creating massive distrust of big business. America’s New Left combined opposition to the Vietnam War with popularization of its anticapitalist agenda.
Government spending for the Vietnam War also affected the U.S. trade balance, diminishing the surplus from about $4.7 billion in 1967 to a mere $1.4 billion in 1968. American businesses complained that the leaders of South Vietnam spent much of American economic aid on French consumer goods.
Given the U.S. business community’s dissatisfaction with Johnson’s conduct of the war in Vietnam, it is not surprising that stocks jumped on March 31, 1968, when Johnson announced that he would not seek reelection and would try to negotiate peace with North Vietnam. In June, 1968, Congress finally enacted a 10 percent tax surcharge to help pay the cost of the Vietnam War.

End of U.S. Involvement

When Richard M. Nixon became president in January, 1969, he did so with a promise to end the war. Unemployment was still at a low 3.6 percent, because the draft had removed many young men from the labor pool. The consumer price index rose 4.9 percent annually, the growth of the gross national product slowed, corporate profits declined, and utilization of production capacity fell.
The business community was pleased with the prospect of reducing U.S. troops in Vietnam and negotiating with the North to end the war. However, when Nixon instead announced on April 30, 1970, that American troops had entered Cambodia, the U.S. stock market plunged by 15 percent. As the draft slowed down, the unemployment rate began to rise. The Federal Reserve’s decision to increase the money supply during the 1970 fiscal crisis further heated up inflation.
As Nixon tried to wind down the Vietnam War, its cumulative effects hit the U.S. economy. The country slid into a recession from 1970 to 1972. In 1971, the trade balance turned negative. The dollar was devalued in 1971 and 1973. Then, the United States suffered stagflation, or economic stagnation coupled with high inflation.
Nixon finally negotiated a peace deal with North Vietnam on January 27, 1973. As the U.S. economy entered a severe recession from November, 1973, to March, 1975, there was little U.S. business support for aid to South Vietnam, and Congress cut aid from $1 billion to $700 million in 1974. Although American companies still did business in South Vietnam in 1974 and about ten thousand Americans were employed by the South Vietnamese government in military and economic advisory positions, the deterioration of the military situation after January, 1975, led to the U.S. economic disengagement from South Vietnam. Saigon fell on April 30, 1975, ending the war with a communist victory.

Aftershocks in U.S. Business

Engagement in the Vietnam War from 1965 to 1975 cost the United States about $111 billion, worth about $686 billion in 2008 fiscal year constant dollars. Some 58,000 U.S. soldiers were killed. The cost of the economic reintegration of about 7.9 million U.S. soldiers who served in Vietnam, most of them draftees, and their claims to veterans’ benefits (education, medical expenses, and pensions) is very difficult to calculate. Estimates vary widely and are billions apart. In 1987, the unemployment rate of Vietnam War veterans was 5.2 percent, higher than the 4.3 percent rate for the general population.
After the Vietnam War ended, there was no peace dividend because the Department of Defense easily swallowed the roughly $22 billion budgeted annually for the war until 1973. The money saved was spent on other defense projects and used to offset rising costs due to inflation.
In May, 1975, President Gerald R. Ford imposed a U.S. trade embargo on Vietnam. It was lifted in February, 1994, only because U.S. businesses complained that the embargo deprived U.S. companies of opportunities enjoyed by European and Asian competitors. After lifting the embargo, U.S. exports to Vietnam rose from$7 million in 1993 to $173 million in 1994, and imports from zero to $50 million. After the United States recognized the Socialist Republic of Vietnam in 1997,Vietnam joined the World Trade Organization in 2007. That year, the United States imported $10.6 billion worth of Vietnamese goods and exported nearly $2 billion worth, signs of an unbalanced, but vigorous, trade relationship.