Foreign Relations of the United States, 1950, East Asia and the Pacific, Volume VI

896.00/8–2350

Memorandum of Conversation, by the Chief of Mission, United States Economic Survey Mission to the Philippines (Bell) and the Deputy Chief of Mission (Marshall)¹

[Manila, August 21, 1950.]

General Marshall and I had breakfast this morning with President Quirino and Secretary Romulo for the purpose of advising the President on the findings of the Mission to date. Before we got into our problems, President Quirino discussed the political situation in general and the Lions Club dinner Saturday night in particular.² He said he had been definitely promised before hand that the dinner would be on a high plane for the purpose of trying to establish unity in their Government and that in view of the high purpose, which was charity, for which the dinner was given, he was assured that there would be no dirty political speeches and that, in any event, the speeches would be limited to 30 minutes. Under those conditions he accepted the invitation.

After these preliminary discussions of his troubles on the political front, as well as his difficulties in getting top men for the Government, he finally got down to the main business for which we were having the conference. He said he would like first to ask whether there was any reason from our standpoint why the special session of this Congress should be extended. Some of the members, particularly in the Senate, would like to extend it for another 10 days. Before he advised them he said he would like to know whether or not we have any recommendations to be embodied in our report which would require special attention at this session. We told him that we did not want, of course, to get into the question of whether or not he should extend a special session but very definitely we would not be prepared to submit recommendations at this time. We did feel, however, that in view of the critical financial position of the Government, it would be highly desirable to have a special session sometime either in October or the first part of November for the purpose of acting upon the recommendations of the Mission with respect to taxes. We told him that his Government needed ₱75 or ₱80 million to run it between now and December 31, about half of which was in the form of unpaid warrants which they would have to find ways of meeting, that beginning January 1 it was absolutely essential that new taxes begin flowing into the Treasury, but that as far as this session was concerned we would have nothing to recommend.

I then said that I would like to go through some of the notes that I had made for the purpose of this conference and give him a presentation of our tentative findings. First, we wanted him to know that we had received complete cooperation from his Cabinet and all of their subordinates in the various departments and agencies; that they all had been quite frank and had worked quite hard to give us the information we needed. We told him that we wanted to be quite frank with him in discussing this subject and while our language might not be couched in diplomatic style we wanted to assure him of our eagerness to help in the situation and hoped that he would overlook our bluntness and frankness.

We told him that we had all read in the American press before we came here about the alleged graft and corruption in the Philippine Government. All of our members and staff were admonished to ignore these press comments; that we were not out here to look for graft and corruption; we were out here to look for the causes of the present dilemma of the Philippine Government and to prescribe some remedies. We said that as we started through the Government departments and as we visited the provinces, we could not very well ignore the question of graft and corruption. We met it on every front and about the first thing we were told in almost every conference was that if the Government would eliminate the graft and corruption and collect its taxes due, there would be plenty of money to pay all the bills and people throughout the Philippine Islands would then cooperate with the Government in its program. We told him also that we had run into a great deal of anti-foreign sentiment, some of which we thought was directed against Americans. We said this not only came from the foreign elements but we even found some Filipinos who thought there was an attempt on the part of certain officials in the Government to take longstanding businesses away from American interests. He interrupted here to say that he had taken action on this front a few days ago. We told him we thought that was an excellent step but that probably more would have to be done.

We then called attention to the paragraph in the 1947 report and recommendations of the Joint Philippine-American Finance Commission which reads as follows:

“The next few years will thus be a critical period in the economic development of the Philippines. Unless proper steps are taken there is great danger that the swollen stream of payments will flow into the pockets of the Philippine people and flow promptly out again; much of it to pay for a wide variety of luxury and non-essential imports. There may well be an easy money buying spree which will come inevitably to an end when foreign exchange receipts fall again to a level at which they are provided primarily from current exports.”³

We said that contrary to this warning, the country had certainly gone on a spending spree, both in the foreign and domestic fields. It has run a budget deficit and even the $60 million loan from the American RFC was only a temporary stop-gap; this enabled the Government to get on a higher expenditure plateau and after that money was gone it had a deficit larger than ever. It has also a large deficit in the international payments field. As a result of all of this, it has used up all its dollar reserves that it had accumulated over a period of years and is using up current receipts from U.S. payments in the Islands which will materially decrease from here on. We told him that he had set up corporations to cover almost every front of the Philippine economy, many of which competed with private business. These corporations are inefficient, extremely costly and very few of them make money, then only in fields where they have a monopoly. What is more important than the money spent, they have spread what little managerial ability they have so thinly over the Government organizations that they are not able to function properly and some of the managements have been downright inefficient. This is a front on which action should be promptly taken to consolidate.

We told him that in early 1948 his Government began to talk about import controls, which were put on in January 1949 after they had been discussed for a period of more than six months, and for a year they were rather loosely administered. Then in December 1949 the exchange controls were added, after another six months of discussion. By the time that the controls were adopted everyone had full knowledge of what was likely to take place and they had ample time to get their money out of the country or to get a large volume of goods into the country. We said that this was a rough estimate but that it was possible that as much as $500 million had left the country during this period and was hiding in foreign lands, principally the United States, and that inventories had considerably increased. We told him that if high excise taxes on imports had been put on early in the game when they began to talk about controls, it would have been a deterrent against imports and the taxes collected would have helped balance the budget. It might have been possible under these conditions for the price level to come down to something well below what is now prevailing and more nearly to the wage level index. We told him that it was the Mission’s opinion that profits during this period had been fantastic and that the Government certainly missed the boat in not taxing and taxing heavily during that time.

We then came to the current position, part of which was a repetition of the information we had given to him in answer to his first question. We said that the budget deficit for 1950 was estimated at more than ₱200 million. At the present time there is no cash in the Treasury and they have unpaid warrants amounting to approximately ₱40 million, all of which vitally affects their Government credit. It has created a situation where the Government cannot borrow except from the Philippine National Bank or the Central Bank, both of which are owned and controlled by the Government. We called his attention to his request for additional taxes, which were all to the good as far as they have gone but that he did not go far enough on this front; that he recommended expenditures almost equivalent to those additional taxes so there was very little if any gain on the budget deficit. We told him that certainly from the information that we have been able to gather, taxes are not being collected, not even the real estate taxes where they have fairly good records to check up on individuals as to whether they have paid their taxes. We said that real estate taxes were certainly not high enough in many cases. We have found situations where land is selling currently for ₱3,000 a hectare, is assessed at ₱500 a hectare and at the rate of 1 percent, which is about the top limit, the owner pays ₱5 per hectare in taxes. In many cases even this is not being collected. We told him that someone would have to reorganize his revenue collection agencies, namely, the Bureau of Internal Revenue and the Bureau of Customs, so as to make them highly respected by all of the Philippine people. I said that if there is one organization in the Government of the United States which has the respect of the American people it is our Bureau of Internal Revenue. It plays no favorites, political or otherwise, and it gets the money; that that is what he has to work towards in the Philippine set-up. He said here that as soon as his reorganization committee reports he expects to make some drastic changes in his cabinet and other posts, particularly the revenue positions. We stressed that what the various departments and agencies need is a real career service and that when crookedness is found the culprits should be put in jail. He then went into a lengthy discussion of the various cases prosecuted and convicted but most of them are now on appeal.

We said that we had gone over the necessity for an extra session of Congress in October or November. On the short term program we told him again that it was absolutely essential that new revenue be flowing into the Treasury by January 1 in order to eliminate borrowing from the Philippine National and Central Banks and that a program of taxes ought to be laid out under which the Treasury would not only balance the budget but it would have at least a ₱50 million surplus far improvements and development. As to a long-term program, we thought that it was necessary to study the whole tax policies of the Philippine Government. It has many taxes which produce very small sums and probably the paper work and the administration in the office of the Collector costs more than the taxes that are received; that the relationship of the provinces and the National Government from a tax angle ought to be studied with a view to possibly giving the provinces more autonomy in taxes and expenditures, particularly for public schools. As it is now, the public schools are a political football and if you put the responsibility on the local people they will be more inclined to see that there are sufficient taxes to pay for the public schools and that they get the schools they want.

We then discussed the question of foreign capital flowing into the Philippines. We told him that everyone seemed desirous of getting foreign capital into the Philippine Islands to help develop their various industries but that it was quite apparent that this was more lip service than anything else. The attitude toward foreigners and their investments in this country would have to change if they expect to attract foreign capital. We said that we had no objection if the Philippine Government wanted to adopt nationalistic policies but that they shouldn’t expect foreign capital to flow here in any volume if that was going to continue to be its policy. Another thing that would have to be taken care of in order to attract foreign capital is the establishment of law and order and that foreign capital will have to be convinced that it is established beyond any shadow of a doubt before it will come here.

We told him that while this was not necessarily a part of the attraction for foreign capital it might help to a great extent and that further in suggesting it we knew we were on ticklish grounds because it involves the sovereignty of the Philippine Government, but we wanted him to understand that in suggesting it it was done on the most friendly terms and that we feel it is very much needed—that is a question of technical assistance. We told him that we thought the Philippine Government needed technical assistance on almost every front: fiscal, monetary, banking, internal revenue, public works, public health, education, etc. We said that while we hoped the President would accept this in a friendly spirit we felt that we had to make this suggestion in our report. We told the President that this Mission was out to help the Philippine people and its Government to get out of this dilemma and to get on to a sound financial and economic basis; that if we were able to help we did not want any credit for it. For that reason, I would prefer that the suggestion for technical assistance come from him. I said that I thought the people of this country would welcome it with open arms; while there might be a few political opponents I thought by and large throughout the entire Islands it would be accepted wholeheartedly. I said if he thought well of the suggestion we would help draft the kind of letter that we thought ought to be embodied in our report which we could readily endorse.

To our amazement, the President accepted this suggestion with enthusiasm, as did also Secretary Romulo. The President immediately said he thought it would be accepted much better by the country if it came from him rather than from us and that it was in line with his suggestion to President Truman that he send this Mission here. It would be continuing his request for help in this situation. He said he didn’t want his Government to be in the same position as China when General Chiang kai-Shek refused technical assistance, the consequences of which the money given resulted in very little benefit to China. We told him that in view of this we couldn’t, of course, say that it would be accepted by our State Department, Treasury Department, and the Congress of the United States but that we were perfectly willing to recommend in our report that the expenses of this technical assistance be paid for by the United States Government for a period of 5 years, and that if it is to be continued beyond that time it be a matter of agreement between the two Governments. He said he was very grateful for this suggestion and he thought it would be of very great help to his Government and to his people. He expressed great appreciation for the President’s having sent this Mission to the Islands and how fortunate it was for his Government that it came here at such a crucial time. He said that he appreciated the frankness with which we had discussed the matter and that he hoped if we ran into anything that needed to be corrected and that could be corrected at once without waiting for our report, he would like again to have a frank discussion about it and he would be glad to take whatever action is necessary on any front.

As we bade him good-by at the top of the stairs in the mansion he said: “Do you think that there is any possibility of the United States Government’s giving any aid for this immediate emergency? In other words, to help out in this financial crisis between now and December 31.” I said that I had some doubts about it because I said, as he knew, the wheels of government move very slowly and we have a war on our hands and all the departments of Government are bogged down with war problems and I would suspect that it would take longer than 3 months to get anything through that would do his Government much good in this crisis. I thought, therefore, that it was a problem which he and the rest of his cabinet would have to find the answer to. He appeared rather downcast at this remark but bade us good-by in the most friendly terms and again expressed appreciation for the fine job that we are doing.

D[aniel] W. B[ell]
R[ichard] J. M[arshall]

1. The source text was transmitted to Assistant Secretary of State Rusk by Ambassador Cowen under cover of a brief explanatory letter of August 23, not printed.

   The conference took place at Malacañan Palace, the Philippine Presidential residence.

2. In his telegram 431, August 22, from Manila, not printed, Ambassador Cowen reported that President Quirino had participated with Senator Lorenzo M. Tañada and José P. Laurel, Sr., in a broadcast symposium held at a Lions Club banquet on August 19. In the course of the symposium, Senator Tañada made an impassioned and detailed criticism of the Quezon administration (796.00/8–2250).
3. For documentation regarding the activity of the Joint Philippine-American Finance Commission, see Foreign Relations, 1947, vol. vi, pp. 1105, 1107, and 1109–1111.