895.50 Recovery/8–1248

Memorandum by the Assistant Secretary of State for Occupied Areas (Saltzman)1

top secret

Subject: Future Economic Assistance to Korea

The Problem:

The President has now decided that the Economic Cooperation Administration is to be responsible for the administration of the aid program for Korea, commencing some time between the first of January and the 15th of March. Requests for appropriations for FY 1950 for economic assistance to Korea must be submitted to the Bureau of the Budget as soon as possible. Mr. Hoffman has requested the Department of State to give his agency policy guidance as to the future program of economic assistance which the United States should provide to Korea.


During the period of occupation up to the present, economic aid given to Korea has been limited to relief: food, fertilizer, fuel and medical supplies. It has cost in the order of $100 million annually. Although the people have been adequately fed, the limitation of the [Page 1293] program to relief has not enabled the economy as a whole to make progress.
In order to make possible a progressing economy and to bring about a condition of substantial self-support in south Korea and on the assumption that the occupation would continue for several years, the Department of State in the spring of 1947 prepared a three-year relief and rehabilitation program in the total amount of $540 million. This program provided for relief and rehabilitation through supply of raw materials and through such capital construction as fertilizer plants, hydro and steam generating plants and additional mining facilities. It was intended to reduce the aid cost to some $50 million for the fourth year, $40 million for the fifth year and $25 million annually thereafter. This proposal was approved by the Bureau of the Budget and was on the point of formal presentation to the Congress. Due to the rush of business at the close of the session and the feeling of Congressional leaders that the program could not then be passed, it was decided not to present it.
Before the budget for FY 1949 was prepared, the Government was considering the early termination of the occupation. Therefore the budget request for Korean rehabilitation was limited to $60 million for the purchase of raw materials and repair parts and did not include construction of capital plant. The appropriation for Occupied Areas for FY 1949 is considered to include $20 million for rehabilitation use in the first half of FY 1949. The Army has deferred determination as to whether an approach should be made to the Congress for a supplementary appropriation for Korean rehabilitation for the latter half of FY 1949. The way for such an approach had been explicitly left open by Army and State representatives in discussions with the interested Committees of the Congress and with the Bureau of the Budget. In addition to the rehabilitation funds, $107 million was requested and $95 million regarded as appropriated for relief for FY 1949.
NSC #8 on “The Position of the United States with Respect to Korea”, April 2, 1948 (Tab A) states:

“2a. The broad objectives of U.S. policy in Korea may be defined as follows:


(3) To assist the Korean people in establishing a sound economy and educational system as essential bases of an independent and democratic state.”

In the review of principal international commitments of the United States with respect to Korea set out in NSC #8, it is stated (2b (5)):

“To the formal commitment which the United States has incurred under the terms of the General Assembly Resolutions of November 14, [Page 1294] 1947 must be added an implied commitment to the other members of the UN to withdraw its occupation forces from Korea only under circumstances which will bequeath at least a reasonable chance of survival to the government to be established in accordance with those Resolutions.”

NSC #8 also recognizes that Soviet actions in Korea make “inescapable the conclusion that the predominant aim of the Soviet policy in Korea is to achieve the eventual Soviet domination of the entire country” and “that the extension of Soviet control over all of Korea would enhance the political and strategic position of the Soviet Union with respect to both China and Japan, and eventually affect the position of the U.S. in those areas and throughout the Far East.” It adds that “the over-throw by Soviet-dominated forces of a regime established in south Korea under the aegis of the UN would, moreover, constitute a severe blow to the prestige and influence of the UN; in this respect the interests of the U.S. are parallel to, if not identical with, those of the UN.”

NSC #8 concludes (3b) that the:

“U.S. should establish within practicable and feasible limits conditions of support of a government established in south Korea as a means of facilitating the liquidation of the U.S. commitment of men and money in Korea with the minimum of bad effects. Such a program would require that…3 the U.S. extend economic aid to south Korea in order to forestall the economic breakdown which can be expected to ensue should no provision be made for the continuation of at least a minimum relief and rehabilitation assistance following the withdrawal of U.S. occupation forces.”


There appear to be four possible courses open to the United States: (1) to terminate aid with the end of FY 1949; (2) to revert to a relief program on an annual basis; (3) to continue a relief and rehabilitation (raw materials and repair and replacement parts) program on an annual basis or under a program of several years’ duration; (4) to provide relief and assistance for economic development, including capital expenditure, under a program of several years’ duration. There is no prospect that under any program south Korea can develop an export surplus. For this reason any program must be entirely a grant—not a loan.

The first course suggested above might be the most sensible one if it is considered that Soviet absorption is inevitable and if it is considered that its occurrence in the immediate future is less damaging to U.S. interests than the cost of deferring it. This alternative, however, [Page 1295] would be inconsistent with NSC #8 (para 2d (4) (a)), which rejects the idea of abandoning the government established in south Korea under UN or U.S. auspices, as unacceptable from the point of view of U.S. prestige, violative of the spirit of every international commitment taken by the U.S. during and since the war with respect to Korea and clearly indicative to the UN that the U.S. had utilized that body merely as a convenient vehicle for withdrawing from Korea.

The second course, a reversion to a program of relief, would have, it is estimated, a constant annual cost of $90 million. It would maintain an adequate diet and so long as it continued, would probably be of considerable value in staving off communist encroachment. However, it would provide only a slight increase in production and employment and would not result in an increase in standard of living nor contribute to long-run economic improvement and self-support. It would allow deterioration of Korean industry and its termination at any time could be expected to lead immediately to collapse.

The third course, providing relief and raw materials for rehabilitation (raw materials and repair and replacement parts), would require an expenditure estimated at $135 million in FY 1950. It would provide an adequate diet and a slight increase in standard of living. It would enable the manufacture of industrial raw materials into finished products for export, and result in a gradual reduction of the annual requirement for aid. For a three-year program the cost is estimated at $365 million. Following the completion of such a program it would cost about $100 million annually to maintain Korea at the same level (Tab I).4 It would provide minimum maintenance for existing industry, but would not provide the capital equipment necessary for the local production of raw materials such as coal and minerals, nor for the local production of fertilizer essential to self-support in food nor for electric power adequate to achieve a level of industrial production essential to economic self-support.

The fourth course, a planned program of relief and economic development over a, period of several years, including certain capital expenditures, would cost approximately $180 million in the first year. It would not only accomplish everything which the third course would accomplish, but also, by building up local coal, fertilizer, power and fisheries production, would lead to a rapid, substantial reduction in Korea’s annual trade deficit and, hence, the cost of U.S. aid. It is not believed, however, that south Korea alone can ever become fully self-supporting. It also would result in greater internal stability through considerably increased production and employment. If this course is undertaken at all it should be undertaken at once in order [Page 1296] that capital construction can be commenced as early as funds can be obtained and completed in the first three years to obtain most rapid results and earliest reduction in U.S. costs. A 3-year program would require an estimated total outlay of some $410 million. The completion of such a program would reduce the future cost of maintaining Korea at the same level to about $45 million annually (Tab II).5 It is estimated that new capital expenditure included in such a program would cost some $50 million in the first year and $130 million in total (Tab III).5 In case of communist subjugation of south Korea, this capital expenditure would be lost.

The choice among these possibilities must rest upon estimates of Korean political and economic prospects, of developments in U.S.-Soviet relations and of the economic capabilities of the United States to support this and other foreign aid programs. The political stability of the new government and its ability to guide the development of a sound economy cannot yet be fully estimated. There can be no guarantee that any aid program will successfully maintain an independent, democratic Republic. The only hope, however, of maintaining the independence of the new Republic appears to be a substantial U.S. aid program continuing over a period of several years.

If it is in the interest of the U.S. to make an effort to prevent communist subjugation of the new Republic, the choice appears to lie between the third and fourth courses stated. It is believed that the eventual advantages to be derived from an aid program including capital expenditures outweigh its greater initial cost and risk of loss of capital equipment.


It is concluded that in the light of all considerations the interests of the U.S. will best be served by planning for a grant program of relief and economic development of several years’ duration (alternative number four), including immediate expenditure for the most essential capital equipment, calculated to place the Republic of Korea as rapidly and as nearly as possible on a self-supporting basis. In order to reduce the cost to the United States to the minimum, this program should be planned to commence with the second half of FY 1949 and should extend over the life of ECA to June 30, 1952.

In presenting this program to the Congress it should be made clear that it has been prepared for planning purposes only. The Congress should be requested to authorize and appropriate funds for only the first year of this program which should be able to stand on its own feet as a one-year program. In order to avoid the implication of any commitment to Korea, the full plan should not be made public but should be discussed with the appropriate committees in Executive [Page 1297] session. They should be assured that additional requests will be made after further review in the light of any changes of basic assumptions, as in the event of communist seizure of south Korea or union of north and south Korea, and that the Aid Agreement to be signed with Korea places the U.S. under no obligation to continue aid and authorizes the U.S. to terminate aid upon its own volition. Discussion with the Koreans should be in terms of the first year’s appropriation only and with the understanding that future aid, if any, is a matter for further determination in the light of developments, including their effective use of the first year’s aid.6

The Department of State will be responsible for presenting to the President and the Congress the proposed policy of aid to Korea. The Economic Cooperation Administration will be responsible, with such assistance from the Departments of State and Army as it may desire, for presenting proposals as to the authorizing legislation and the appropriations necessary to carry out this basic policy.

The proposed policy should be discussed with Senator Vandenberg and Mr. Eaton7 by high officials of State and ECA before presentation to the Congress.


That you approve the conclusion stated above.
That you send the attached letter8 (Tab B) to Mr. Hoffman, Administrator of Economic Cooperation.


State: [Here follow initials of officers.]

ECA : This memorandum and draft letter have been discussed with Mr. Hoffman. He states that he regards the question of aid to Korea as essentially a matter of foreign policy and looks to the Department of State for guidance and leadership. While he has some doubts that Congress will appropriate the funds necessary to carry out the course recommended, he feels it is the one best calculated to carry out successfully U.S. policy toward Korea as enunciated by the Department of State, and he feels that it should be recommended to the Congress. He also regards this course as consistent with the position he expressed at the Bureau of the Budget meeting that ECA acceptance [Page 1298] of responsibility for administration of the Korean program was premised on the assumption that it would be an ECA type program and of several years’ duration. Mr. Hoffman regards the draft letter as giving him necessary guidance and will accept it.

Army: This memorandum and draft letter have been discussed with Mr. Draper. He is doubtful that the Congress will be willing to appropriate more than $125 million or so for FY 1950. However, he feels the policy to be recommended to Congress is the responsibility of the Department of State. He has made available the services of the Department of the Army staff working on Korean aid matters to assist ECA in the preparation and presentation of the necessary enabling legislation and appropriations request.

Charles E. Saltzman
  1. Addressed to the Secretary of State through the Under Secretary of State (Lovett); the latter replied in a note: “I’m not sure the conclusions are sound—a 4 year plan for Korea is too rich for my blood at the moment. Let’s talk this over. L”.
  2. Omission as indicated in the original.
  3. Omission as indicated in the original.
  4. Not printed.
  5. Not printed.
  6. Not printed.
  7. In a memorandum of September 16 (approved by the Secretary of State), Assistant Secretary Saltzman informed Under Secretary Lovett that this paragraph had been added to conclusions set out in the memorandum and letter to Mr. Hoffman and that the proposed economic aid had been discussed with John Foster Dulles, member of the U.S. delegation to the General Assembly in charge of presenting the Korean question. (895.50 Recovery/9–1648)
  8. Chairmen of the Senate Foreign Relations and House Foreign Affairs Committees, respectively.
  9. See letter of September 17, p. 1303.