Memorandum by the Director of the Office of Philippine and Southeast Asian Affairs (Lacy) to the Assistant Secretary of State for Far Eastern Affairs (Rusk)1


Subject: Current Problems in the Philippines

Ambassador Cowen is due to arrive in San Francisco today and will probably arrive in Washington Monday.2 There are a number of very urgent and important matters in the Philippines which are causing him great concern and which he will undoubtedly want to discuss with you shortly after his arrival. For your information, a brief resume of the more pressing problems and their current status follows:

1. General Situation:

Largely due to the political ineptitude of President Quirino and the complete lack of confidence in him even by members of his own party, the over-all situation in the Philippines is very disturbing. The country was badly shaken by the corruption during the last election which was so bad as to bring about widespread pessimism and lack of confidence even among the Filipinos themselves as to the future prospects of a stable and orderly government. Public order is bad, businessmen badly frightened, and Quirino seems to lack the political [Page 1429] courage and the political support necessary to restore normal conditions. How all this came about is partially explained by the following paragraphs, not necessarily arranged in the order of their importance.

2. Import Controls:

The Philippines since the war have been importing twice what they export, the unfavorable balance being taken care of by U.S. disbursements. To prevent the inevitable siphoning away of the dollar exchange as the U.S. disbursements began to draw to a close, import controls were instituted about a year ago in an effort to curtail the heavy importation of non-essentials such as cigarettes, toilet goods, etc. These controls were not particularly effective and were very badly managed with the usual attendant corruption.

3. Exchange Controls and the Question of Devaluation:

Partly as a result of the ineffectiveness of the import controls mentioned above, and partly as a result of the general lack of confidence following the election, in November it became evident that a flight of capital had begun. Under the Philippine Trade Act3 any limitations on foreign exchange have to be approved by the President of the United States and in December the President approved the establishment of “temporary” exchange controls. It was the opinion, however, of the National Advisory Council4 that the real remedy was the devaluation of the peso. This Quirino, for political reasons, could not do. The NAC felt that the Philippine Government was not equipped to manage exchange controls and that there were too many easy ways to evade it, and experience has abundantly proved that the NAC was right.

FE’s position has been that even if devaluation is advisable it would be a mistake for this Government to try to force it on the Philippines. American exporters to the Philippines are having a great deal of difficulty and the Department is receiving quite a good deal of congressional mail forwarding bitter complaints from constituents who as usual blame the Department.

4. Guerrilla and Veteran Problems:

As you will recall, there has been constant agitation since the war for this Government to do more for guerrillas and Philippine veterans. President Truman last August told Quirino flatly that the recognition of guerrillas was finished and that he had done all he could [Page 1430] to secure legislation for Philippine veterans in general. Notwithstanding this, Quirino all through his campaign assured the voters that he was going to get something for them from Congress. More recently President Quirino’s brother, Judge Antonio Quirino, a sinister figure who seems to be mixed up in all sorts of dubious transactions in the Philippines, has organized a confederation of veterans and after having come to Washington and failing to get anywhere has publicly attacked Ambassador Cowen as the reason no veterans legislation was forthcoming. Widespread racketeering has been going on and a few weeks ago the Department addressed a very stiff note to Ambassador Elizalde stating that these questions were closed and reminding him that Quirino had been informed that they were closed. To stop the attacks on Ambassador Cowen, the racketeering, and the sending of useless missions to Washington, a draft of a proposed press release has been sent to Ambassador Cowen with instructions to show it to Quirino and tell him that the Department proposed to release it. Quirino, who since his recent operation is reported to be very emotional and difficult to get along with, wept when Ambassador Cowen talked to him and said of course we were a great nation and if we wanted to destroy him we could. The Ambassador has therefore requested that this statement be held in abeyance.5 Meanwhile Ambassador Elizalde, who has also been attacked by Quirino’s brother, called in the Associated Press and showed them our note on the subject.6 This has been widely published in the Philippines and it would appear that we have finally gotten it across pretty definitely that these issues are closed. This being so, it may be just as well not to issue any further statements as it would be looked upon as rubbing salt into Quirino’s wounds.

5. War Damage Authorization:

The War Damage Commission has been instrumental in having legislation introduced in Congress adding $100 million to the war damage authorization.7 Hearings are to start in the House on April 3. Waring, Chairman of the Commission, has been orally authorized by the president to support it.8 He has shown us a draft of the testimony [Page 1431] he expects to give, which is to a considerable extent based on the argument that it is in support of our Far Eastern policy.9

Many observers feel that the legislation has a fair chance of passing, others that Congress will have to think twice, after having cut the President’s budget, about adding $100 million he did not ask for. Whether or not the legislation passes, however, the Department will be in a difficult position if it opposes it. If we oppose and Congress elects not to approve a convenient excuse would be to blame it on the Department. If we oppose and Congress still passes it we will be accused of not taking dynamic leadership.

6. Payment of War Damages to Alleged Collaborators:

The War Damage Commission has proposed to the Bureau of the Budget that a rider be placed on their appropriation authorizing the Commission to refuse to pay anyone who in the judgment of the Commission collaborated with the enemy or where the best interest of the United States would not be served. The Department has strongly opposed this on the ground that we left it up to the Philippines to pass on the collaboration question and that it is contrary to the entire concept of American justice to allow the Commission, without hearings, to rule on such a difficult question. It is probable, however, that this legislation will be introduced privately and it will stir up a great deal of ill feeling in the Philippines.

7. Economic Mission to the Philippines:

When President Quirino was here in January he asked President Truman to send an American mission to the Philippines somewhat on the order of the Dodge Mission to Japan.10 The Secretary has subsequently in public speeches announced that we intended to do so. Quirino, however, went back to the Philippines and in spite of repeated warnings from the Embassy kept talking about a joint Philippine-American mission. It was the Department’s feeling that a joint mission would be useless. The controversy has gotten into the press in Manila and Quirino for political reasons cannot back down because certain sections of the press are saying that this is just a return to the days of the governors general and high commissioners. A rather serious impasse has resulted. Quirino wept about this in his last talk [Page 1432] with Cowen and Ambassador Cowen has suggested that we try to work out some face-saving means of postponing the matter.11

8. Southeast Asian Union:

You are probably familiar with this and are aware that Quirino’s proposed conference promises to develop into a serious fiasco which will hurt him at home. It is quite probable that this is one of the main reasons for his highly emotional state and his irritation at the United States. He can stand anything but ridicule and his opponents heap ridicule on him. Deep down in his heart he is going to blame the United States Government … and he will think, even though he may not say so, that if we had really wanted to save him this humiliation we could have done so. Quirino is extremely jealous of the favorable publicity that Romulo has received and is not willing to allow him to try to salvage the situation. In the end he is likely to blame the fiasco publicly on Romulo but we are of the opinion that while it may not appear in the record his real resentment will be against us.12

9. General Financial and Tax Situation:

The Government’s finances are in very bad shape. The tax rates are low. A very competent expert from the Treasury Department recently surveyed the tax system in the Philippines and reported that their tax rate is among the lowest in the world and that of course there is widespread evasion. On top of that, the drastic import controls which are necessary take away some of their best sources of revenue.

The foregoing does not present an encouraging picture. Here is a country which under more competent leadership, with some help from us, could be restored to stability without too much of a strain. The Government, however, will not find it easy from a political standpoint to install what amounts to an austerity program by a curtailment of luxury goods which Filipinos have been accustomed to import for many years and to increase taxes to what they ought to be and actually collect them. It seems abundantly clear that any aid which we might extend must be extended under rigid U.S. control or otherwise it will be largely dissipated. Taking into consideration Quirino’s colossal vanity and the rabid nationalistic sentiment it is not going to be easy to be of assistance.

  1. On March 28, 1950, Dean Rusk, until then Deputy Under Secretary of State, succeeded W. Walton Butterworth as Assistant Secretary of State for Far Eastern Affairs. Butterworth was assigned to work directly with the Secretary of State and to devote his full time to Japanese affairs.

    This memorandum was prepared by Richard R. Ely, Deputy Director of the Office of Philippine and Southeast Asian Affairs.

  2. April 3.
  3. The Philippine Trade Act of 1946 was approved as Public Law 371 on April 30, 1946; for the text of the act, see 60 Stat. 141.
  4. The National Advisory Council on International Monetary and Financial Problems coordinated the policies and operations of the representatives of the United States participating in the making of foreign loans or engaging in foreign financial, exchange, or monetary transactions. The Secretary of the Treasury was Chairman of the Council whose membership included the Secretary of State.
  5. See telegram 889, March 28, from Manila, p. 1427.
  6. The reference here is to the Secretary of State’s note of March 13 to Ambassador Elizalde, p. 1419.
  7. For an identification and description of the legislation under reference here and the official view thereon ultimately adopted by the Department of State, see the letter of April 17 from Assistant Secretary of State McFall to Senator Connally, p. 1438.
  8. In a memorandum of March 30 to Under Secretary of State James Webb, not printed, Assistant Secretary of State Rusk stated that he had had, that day, a conference with Frank Waring, Chairman of the Philippine War Damage Commission. Waring told Rusk that members of the Commission had called on President Truman, apparently on March 9, and found the President sympathetic with the proposed legislation to authorize additional war damage payments to the Philippines. Although the President appeared to feel that the Department of State opposed the legislation, he felt the Commissioners had the right and the duty to support it (296.0041/3–3050).
  9. For the text of the statement and testimony by Waring before the House Committee on Foreign Affairs on April 24, 1950, see To Amend the Philippine Rehabilitation Act of 1946: Hearings before the House Committee on Foreign Affairs, 81st Cong., 1st and 2nd sess., on S. 1033 and H.R. 7600 (Washington: Government Printing Office, 1950), p. 61.
  10. For the Secretary of State’s memorandum of President Truman’s meeting with President Quirino in Washington on February 4, see p. 1412. Joseph M. Dodge, President and Director of The Detroit Bank, was heading a special financial mission in Japan for General MacArthur.
  11. Ambassador Cowen’s description of his March 26 meeting with President Quirino and the suggestion mentioned here were presented in telegram 891, March 28, from Manila, not printed; see footnote 3 to telegram 503, March 24, to Manila, p. 1426.
  12. For additional documentation on the attitude of the United States toward proposed regional Far Eastern security arrangements, see pp. 1 ff.