43. Telegram From the Economic Coordinator in Korea (Wood) to the Foreign Operations Administration1
Tofoa 1535. KATO. Preparations should commence immediately for conference and negotiations with ROKs on subject of exchange rate which Stassen promised President Rhee would take place in June.2 President is counting heavily on this conference and expects it to result in agreement on a permanent fixed rate. This was principal subject he discussed with General Taylor on General’s May 3 visit. In addition, Rhee has delayed finalization ROK budget on grounds a budget cannot be adequately developed until agreement is reached on fixed exchange rate. He also issued public statement May 5 on subject. See Tofoa 1529 for text.3 In Korean Republic editorial May 7 welcoming Ambassador Lacy, following appears: [Page 84]
“We hope sincerely that Mr. Lacy will be able to help us achieve these objectives, or at least to make Washington aware of the great importance that we attach to them:” (paragraphs 1 and 2 deleted),
“3. Stabilization of the dollar-Hwan exchange rate at a definite level. This will do more to speed recovery than any other single act.”
We can expect major crisis unless we accept fixing of rate for at least one year. No certainty he will not demand permanent rate but indications are he would accept proposal he recently made to Liberal Party Committee, which was indorsed by Committee, that rate be fixed for one year and then revised. On basis of experience last June when we took action to change military conversion rate under then existing agreements, I am apprehensive that major fight may develop at end of year. If we wish to make change at that time no matter what our agreement on subject stated.
If we were to contemplate agreement in June to fix rate for year, I believe President will insist fixing value Hwan far above its present realistic value. Figure of 350 to dollar is so frequently mentioned that it may be he has already decided on this. It would be unwise fix rate even at real value of Hwan at beginning of year since our forecast for FY 1956 indicated substantial degree of inflation.
I fear device of permitting President to fix an “official rate” at an unrealistic level while using various devices to have great bulk of transaction carried on at different rates is no longer open to us since it is clear he will insist that all transactions must take place at rate set and he will insist on enforcing this rate by drastic police action and all other means he can think of. If we accept it, this would mean that all Hwan requirements would be obtained thru drawing system at official rate, aid goods would be priced at that rate and any further progress towards realistic pricing would be impossible. All old evils of greatly stimulated black markets and windfall profits to favorites would return in full force. I see no satisfactory course except face issue on its merits, refuse agree to fixed rate at this time, and be prepared for acrimonious controversy that is bound ensue.
There may be considerable advantage in having negotiations take place in Washington rather than Seoul. This could be suggested by us without potential embarrassment because President stated last month he wished send mission to discuss this and other subjects and our response to him that June might be appropriate time do this.4 It [Page 85] would be helpful if I could be informed soon concerning your views on location of negotiations, position US should take and person or persons who would represent US.5 If Seoul to be site of conference, visiting delegation should be headed by man of very considerable rank and stature.
Suggest US position and guidelines for negotiations follow separate message.
- Source: Washington National Records Center, FOA/ICA Files: Lot W–144, FRC 56 A 632, Korea. Confidential. Also sent to CINCUNC, the Department of the Army, and the Embassy in Seoul and repeated to the Department of State.↩
- See Document 28.↩
- Not printed.↩
- On March 17, President Rhee told Ambassador Briggs during a discussion of Governor Stassen’s visit to Seoul that he would like to send two or three officials of his government to Washington “fairly soon” to work on the problem of the exchange rate in preparation for the economic conference in June which had been agreed upon with Stassen. (Telegram 1041 from Seoul, March 17; Department of State, Central Files, 033.95B11/3–1755) The Department responded that such a visit would be premature and the Embassy was instructed to convey an invitation to the Republic of Korea to send senior level officials to Washington in mid-June for the proposed discussions of military and economic aid programs for fiscal year 1956. (Telegram 607 to Seoul, March 26; ibid., 033.95B11/3–2255) Rhee, irritated by the rejection of his suggestion, indicated that he might send a delegation to Washington before June to “be in touch with various of our friends.” (Telegrams 1086 and 1106, March 31 and April 5; ibid., 033.95B11/3–3155 and 033.95B11/4–555, respectively) Ultimately Rhee waited and sent the delegation to Washington in June in accord with the invitation which had been extended.↩
- In telegram 725 to Seoul, May 26, the Department responded that the discussions would take place in Washington and would cover the exchange rate problem and such related matters as the budget of the Republic of Korea, inflationary factors in Korea, and broad aspects of the aid program. Assistant Secretary Robertson was designated as the senior U.S. representative for the discussions. (Ibid., 795B.5–MSP/5–2655)↩