Foreign Relations of the United States, 1949, The Far East and Australasia, Volume VII, Part 2

895.50 Recovery/5–1649

The Acting Secretary of State to the Director of the Bureau of the Budget (Pace)

top secret

[Washington,] May 16, 1949.

Dear Mr. Pace: You asked me the other day for a statement of the policy underlying the proposed program of economic assistance to the Republic of Korea. I am enclosing two documents which I believe will give you the essential information: (1) the National Security Council paper on Korea which was approved by the President on March 23, 1949 (Tab A)¹ and (2) a letter from Secretary Marshall to Mr. Hoffman dated September 19, [17] 1948 (Tab B).²

The NSC paper is an up-to-date statement of United States policy toward Korea. As you will see, after considering alternatives of abandonment or unlimited support, it has been concluded as a matter of policy (Para. 2c(3), page 13):

…³ to establish within practicable and feasible limits conditions of support of the Government of the Republic of Korea as a means of facilitating the reduction of the U.S. commitment of men and money in Korea while at the same time minimizing to the greatest practicable extent the chances of south Korea’s being brought under Communist domination as a consequence of the withdrawal of U.S. armed forces.”

In order to support this course it is concluded (Para 3, pages 17–19) that the United States should continue to give political support and economic, technical, military and other assistance to the Government of the Republic of Korea.

So far as economic assistance is concerned, the decisions as to basic policy and as to the actions which should be taken to support it were based on the following considerations:

(1) The economy of South Korea now falls more than $100,000,000 short of being self-supporting at the present standard of living—which is somewhat lower than existed during the prewar period under the Japanese. The major deficiencies are in such vital areas as coal, power, transportation and fertilizer.

(2) Without outside assistance to meet these fundamental capital deficiencies and to bring the economy more closely to a level of self-support, it will suffer a rapid and inevitable collapse at any time U.S. assistance is withdrawn, whether now or later. Under such circumstances the morale of the people will unquestionably deteriorate and the Government will succumb to Communism, either from internal or North Korean sources, or both, and quite possibly after a bloody contest.

(3) The only visible source of adequate economic assistance toward a level of self-support is the United States.

(4) It is of considerable importance to the overall foreign policy objectives of the United States that the Republic of Korea continue to survive and, if possible, flourish because:

(a) It is the only effective foothold of western democracy on Continental Northeast Asia. In the degree to which the Republic with its democratic government flourishes, it will create continuing resistance in the minds of hundreds of millions of people in this area to the acceptance of Communism.

(b) Korea is the only area in the world in which democratic and communist principles are being put to the test side by side and in which the U.S. and the USSR have been, and no doubt in the estimation of the world will continue to be, the sole contenders for the way of life of 30,000,000 people. The entire world and especially Asia is watching this contest. To the degree that the Republic succeeds, the people in the still free nations of Southeast and Southern Asia and Oceania will be persuaded of the practical superiority of democratic principles. To the degree the United States continues to support the efforts of the South Korean people to develop a self-supporting economy and a stable democratic government the people of this area will be persuaded of the firmness of U.S. determination to support Democracy and oppose Communism. Weakening on the part of the United States will damage their confidence and undermine the position of the United States.

(c) Abandonment of Korea would raise grave doubts in the minds of those Japanese who are trying to establish a democratic nation based on a sound economy, regarding our determination to help them do so. It will encourage the Japanese Communists who have already made substantial gains and will discourage their opponents.

(d) The Republic owes its existence in large measure to the good offices of the UN. The U.S. placed the question of Korean independence before the General Assembly of the UN and played a leading part in the adoption of the course of action which it took to establish a free government in Korea. Failure of that government to survive will not only directly affect U.S. interests in the Far East, but will indirectly affect the interest of the U.S. through damaging the prestige and influence of the UN, the support of which is a primary principle of U.S. foreign policy.

(e) The United States wishes to withdraw its forces from Korea as soon as possible in order to comply with the UN Resolution, to reduce expenses and to remove the possibility of serious involvement. The decision in NSC 8/2 that the United States should withdraw its forces by July 1, 1949, rested on the assumption that economic assistance would enable the Republic to survive without outside military assistance anything but overt external aggression.

NSC 8/2 concludes (Para. 3 g, page 18) on the specific point of economic assistance that:

“Legislative authorization should also be sought for the presently contemplated ECA program for Korea for FY 1950 and, subject to annual review in the light of developments, for the continuance of economic and technical assistance to Korea beyond FY 1950.”

The “presently contemplated ECA program for Korea for FY 1950” referred to was the program then being planned, which in all essential respects is that now before you.

This program, prepared by ECA, was based upon policy guidance given the ECA by the Department of State. You will recall that when the decision was reached in your office last summer that the ECA should take over from the Army responsibility for the economic assistance program to Korea, Mr. Hoffman said that ECA acceptance of responsibility was premised on the assumption that the economic assistance to be given would be an ECA type program and of several years’ duration. Immediately after this meeting Mr. Hoffman requested the Department of State to give his agency policy guidance as to the future program of economic assistance for which it should plan. Following his request Secretary Marshall sent Mr. Hoffman the letter dated September 17, 1948 (Tab B).

Secretary Marshall’s letter stated that the Department of State felt it should be the policy of the United States to provide Korea with the aid which in the long run will be most effective for the fulfillment of U.S. objectives regarding Korea and which will entail the least drain on the economy of the United States. The letter enclosed a study made in the Department of several alternative courses of action to accomplish U.S. policy objectives with respect to Korea. The letter stated that after careful consideration of the advantages and disadvantages of these alternative courses it was the conclusion of the Department that the interests of the United States will in the long run be best served by planning for a program of relief and economic development of several years’ duration, including immediate expenditures 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. The letter added that 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 fiscal year 1949 (later changed at ECA’s request to FY 1950) and to extend over the life of the Economic Cooperation Administration to June 30, 1952.

It was the view of the Department that the capital development program proposed would be the most effective for the fulfillment of U.S. objectives and would entail the least drain on the economy of the United States for the following reasons:

(1) The only real hope for establishing a united Korea which will be independent—rather than under Soviet control—will be for the Republic to demonstrate its ability to survive and for its people to become substantially self-supporting at a reasonable standard of living. In order to become substantially self-supporting Korea must have capital equipment in the fields of coal, electric power, and commercial fertilizer production and of transportation. This can of course be provided only through a capital assistance program. Without it, no matter how long relief is continued, it will be known to the people of both South and North Korea that the economy of South Korea is not becoming self-supporting and must depend upon outside assistance for its survival. Since there is no reasonable hope for a large income for South Korea from exports, the withdrawal of assistance at any time before South Korea has become able to meet its requirements for coal, power and fertilizer from internal sources would result in an increasing deficit or progressive lowering of the standard of living. Under such circumstances there would appear to be no prospect that the regime and people in North Korea will be persuaded of the future stability of the Republic and thus be induced to join with it.

(2) Assuming the United States will not abandon the Republic before it is substantially able to support itself, a capital equipment program will in the short run be the most economical form of assistance. Taken over a three year period, I understand that recent ECA estimates place the total cost of a capital assistance program at $415,000,000, and that thereafter the annual deficit would be approximately $40,000,000 at the same standard of living. Under such circumstances the Koreans would be able to supply most of their basic needs for coal, electric power and fertilizer production and, with the possibility of some small private investment, the United States could either end its assistance entirely or reduce it very considerably.

As a second alternative, ECA estimates that a relief program, with some raw materials and spare parts, would come to approximately $332,000,000 for a three year period, but would leave a deficit in the fourth year of about $94,000,000. Such a program would not provide for increases in fertilizer plant capacity necessary to produce the fertilizer required to preserve productivity of the soil, or for the coal and electric power production capacity necessary to run such fertilizer plants if they existed. Nor would this program enable the production of sufficient commodities for export to make it possible for Korea to buy even its minimum fertilizer requirements, much less its total import needs. Under the circumstances, with the ending of U.S. aid, South Korea would rapidly become unable even to feed itself.

The ECA estimates that a third alternative, a program of pure relief, would cost some $310,000,000 over the planning period and would leave a deficit of some $109,000,000 in the fourth year. Without continuing assistance, the situation of South Korea would not only be as bad as under the second alternative, but would be worsened by the fact that the entire industrial plant, being without repair parts, would have already suffered continuing deterioration.

It is appreciated that the capital development program proposed would cost some $50,000,000 to $70,000,000 more in FY 1950 than the second and third alternatives mentioned above and $20,000,000 to $35,000,000 more in 1951, if continued. However, it would cost less than the second and no more than the third if continued in 1952. In succeeding years, as indicated above, it would enable the Koreans at least to meet their minimum domestic food requirements.

The object of any defensible program for Korea should be to solve the balance of payment problems. It therefore seems imperative that the program chosen be one which by dealing directly with fundamental deficiencies in the Korean economy can come reasonably close to meeting this objective—as a relief or relief and rehabilitation program could not.

A part of the capital equipment which would be made available to Korea under this program might be done without should unity of the country occur. However, it does not seem wise to act on the assumption that unification may occur in the next two or three years. Unification on a democratic basis does not now seem assured tinder any circumstances. It can hardly be hoped for at all unless the Republic gives convincing evidence of its firm and lasting character which can come only from progress toward self-support.

For the reasons outlined above, I believe that the character of program now before you is, of the several alternatives, the one best calculated to make effective the conclusions of the National Security Council reached in March with the President’s approval and that legislative authorization should therefore be sought for the program.

The points I have outlined above of course relate only to the interests of the United States in supplying assistance to Korea and to the preferability of the particular character of assistance proposed. They are not intended to refer to the actual projects embraced by the ECA request. By agreement between ECA and the Department of State, ECA is responsible for the preparation of the program itself. The program as proposed is considered to be in accord with the policy established by the Department. The ECA has presented its estimate to the Bureau and made an oral defense at a hearing before a panel. I am sure if you have further questions on this aspect of the problem Mr. Hoffman will be glad to answer them.

Very sincerely yours,

James E. Webb

1. NSC 8/2; see p. 969.
2. See Foreign Relations, 1948, vol. vi, p. 1303. Mr. Paul Hoffman was Administrator of the Economic Cooperation Administration.
3. Omission indicated in the source letter.