Nation-Building and Corruption: A Warning from French Vietnam

Nation-building has long been a popular project—albeit a controversial one—among Western nations. Nation-building is a complicated activity, one that requires balancing such a wide variety of considerations, and making hard choices about what areas to prioritize. As a result, anticorruption is sometimes neglected or ignored in the nation-building process. This, however, is a mistake. Unchecked corruption can have devastating effects on nation-building. And while contemporary critics make this point in the context of modern nation-building initiatives, such as U.S.-led efforts in Afghanistan, there are also compelling historical illustrations of how tolerance of corruption can help derail the nation-building project. One such lesson comes from the French experience during the First Indochina War.

Though France had held on to Vietnam with ease from the mid-nineteenth century to the early days of World War II, the post-war era spelled trouble for the French Empire in Southeast Asia. The Viet Minh, a burgeoning nationalist force led by Ho Chi Minh, challenged French colonial dominance in the region, eventually securing the support of China and the Soviet Union. By the early 1950s, France’s military campaign against Ho’s guerrilla forces was flailing. So, rather than trying to continue to hold Vietnam as a colonial territory, French leaders decided to create an independent Vietnamese state. In attempting to build this new country, however, French leaders turned a blind eye to a corruption scheme—the so-called “Piastres Affair”—that would gravely weaken this enterprise.

The Piastres Affair was so named because it involved the French-backed Indochinese currency known as the piastre. Since the 1920s, the piastre’s value had been pegged to the French franc, and the French treasury guaranteed the exchange of piastres for francs. In 1945, the French High Commissioner in Vietnam set the value of the piastre at the equivalent of 17 francs. This proved to be a massive over-valuation, as the market price of the piastre was actually 10 francs. Local Vietnamese and French citizens living in Vietnam (called colons) quickly took advantage of the situation by buying piastres on the black market and then reselling them to the French government—an extremely profitable venture for those involved, but a devastating expense for French taxpayers. At the height of this piastre trade in 1953, the French treasury was losing roughly 500 million francs per day (the equivalent of US$1.4 million).

That the Piastres Affair went from black market scheming to a full-blown financial crisis can be attributed in large part to local Vietnamese officials. It was not simply that these officials turned a blind eye to the illicit trade; rather, government leaders actively participated in and encouraged this scheme. In a nation with limited resources due to a prolonged series of conflicts, Vietnamese leaders had limited means to live lives of luxury. The piastres trade offered the perfect response. Vietnamese officials often partnered with colon businessmen to use the illicit trade to fund lavish lifestyles. French taxpayer dollars were used to fund opulent banquets, excursions to the French Riviera, and constructions of large villas. Among the greatest beneficiaries of this scheme was the French-installed Vietnamese monarch, who laundered billions of francs to fund a life fit for a king.

But this piastre scheme also benefitted the communist revolutionaries led by Ho Chi Minh. Ho’s allies––many of whom kept tabs on the business affairs of local Vietnamese officials––quickly learned of the piastres trade and saw a way to profit. Reports from the American Central Intelligence Agency revealed that communist sympathizers would travel to Paris to exchange their piastres for francs, and then use their francs to purchase gold. The sympathizers would then transport their gold to China, where Chinese officials used the gold to purchase vast sums of weapons––upwards of 500 tons per month––for the Viet Minh. In effect, French taxpayers were indirectly financing their enemies. The same guns, bombs, and artillery that were used to kill French soldiers in the jungles of Vietnam were financed by the French people themselves.

For years, the French leadership did not pay much attention to this underground activity. It was not until a 1953 reportpublished by the popular newspaper Le Monde that the scheme became widely known among the French public. The report, naturally, generated massive controversy in France, and support for nation-building efforts in Vietnam—and for continued French military presence there—plummeted among the French citizenry. Thus, the piastre scheme not only financed the Viet Minh’s armaments, but also helped to sap the French public morale. In May of 1953, France finally responded by devaluing the piastre –– but the move was far too late, as France would leave Vietnam just one year later.

It seems that French government officials were aware of the black market piastres trade years before the Le Monde report, but nevertheless tolerated the practice. Why? The French government seems not to have been aware of the degree to which the Viet Minh were benefitting from this illicit trade, but still: Why didn’t French officials intervene earlier to stop a scheme that was costing the French government millions of francs?

One likely explanation is that Paris did not want to ruffle feathers with the local Vietnamese. The French were rapidly losing popularity and legitimacy in the region, and angering local officials by disrupting the piastre trade probably seemed impolitic. Additionally, the French may have felt like they had too much on their plates to pay attention to currency black markets and the associated corruption of Vietnamese officials. By 1953, the French had committed hundreds of ground forces to a campaign that was becoming more and more unwinnable. At the same time, France was in domestic turmoil, as a succession of weak governments presided over a nation trying to emerge from the rubble of the Second World War. This combination of military and domestic preoccupation probably made the piastres trade a low priority for French officials. 

But it turned out that neglecting what seemed like a secondary problem was a significant mistake. The Piastres Affair shows that corruption can be just as toxic to a nation-building effort as the guns and bombs of the enemy. Corruption has the power to not only sustain enemy forces, but also to reduce the desire of citizens back home to continue the struggle. And therein lies the lesson for modern would-be nation-builders. Indeed, aspects of the Piastres Affair bear an eerie resemblance to American nation-building efforts in Afghanistan. Much as unchecked corruption in French Indochina led to French taxpayers footing the bill for their enemy, reports have shown that corrupt Pakistani officials have taken American aid to Pakistan and funneled large chunks of the aid to the Taliban in Afghanistan. American officials largely turned a blind eye to this corrupt funneling of money, out of concern that putting pressure on Pakistan could weaken American-Pakistani relations. Even as U.S. forces prepare to leave the region under President Biden’s leadership, America still gives massive sums to Pakistan, and Pakistan’s corrupt funneling of money to the Taliban has yet to abate. What the Piastres Affair shows is that this type of unmitigated corruption can have long-term consequences that may ultimately make the nation-building effort impossible to succeed. If the U.S. hopes to retain its successes in the region without the presence of American ground forces, the Piastres Affair offers a good reason for why the U.S. should remain concerned about Pakistani corruption.

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