896.00/9–2850: Telegram

The Officer in Charge of Philippine Affairs ( Melby ) to the Director of the Office of Philippine and Southeast Asian Affairs ( Lacy )1

secret

752. Upon returning to Manila this time I find that not only has the law and order situation continued to deteriorate but the economic picture has done the same thing but more rapidly than I had anticipated it could. Symptomatic is the rather startling fact that government cash reserves had declined to 5 million pesos and that within 2 weeks I am told there will literally be no cash left in the Government Treasury. I understand and I assume you know it also that Cuaderno is now in Washington asking Snyder for a budgetary loan. Yulo has estimated government cash requirement at 10 million dollars a month.

I have mixed reactions to a budgetary loan. The argument against it obviously is that such a loan solves no real problem. Certainly not unless there is that kind of control which will guarantee its repayment and the development of the resources to insure adequate revenues in the future. I think it questionable that the Philippine Government will give us that control unless it were part and parcel of a very large over-all program. On the other hand, the absence of cash creates an immediate crisis situation. School teachers have been unpaid since last spring and the army will not likely tolerate finding itself in the same position. The only alternative to a budgetary loan and a long-range solution is increased taxation and increased efficiency in collection but this will take considerable time. The immediate alternative to a budgetary loan is inflationary financing out of the Central Bank. This devise has apparently not yet occurred to Quirino and I understand that Cuaderno is most anxious it should not occur to him because once Quirino discovers how simple it is to raid the Central Bank simply by depositing therein worthless government securities, it will really be impossible to deal with him or get him to agree to anything. This process of inflationary financing, if our China experience is pertinent, can go on indefinitely.

Almost every responsible person except Quirino appears fully [Page 1494] aware of the imminence of crisis.2 Quirino is more serenely self-confident than I have ever seen him. He seems to feel that since he has reorganized his Cabinet3 all his problems have been solved by a mental process wherein he identifies his own pronouncements with accomplished fact. It must be admitted that the Cabinet reorganization is entirely in the right direction but his new appointments do not share his confidence. Quirino, for undisclosed reasons, is confident that he will secure a budgetary loan. He also talks as though he had secret information on what the Bell report will or will not recommend and Manila is full of rumors on the same subject. Washington press dispatches speculating on mission report contents and recommendations appear reasonable accurate from what Bell told me, although I have never seen a final copy nor has the Ambassador.4

One of the most discouraging aspects of the current situation more particularly attitude of all with whom I have talked, is general feeling of self-helplessness. Officials and private individuals alike have invariably ended up by stating that the present situation is hopeless, the government can do nothing and the only solution is for the US at once to extend large scale financial aid. Upon questioning they always agree that in the long run the basic solution must come from the Philippines itself but that this will take time and that in present impossible situation the long-range program can only succeed if the US makes possible an extended breathing period. I am afraid this line of reasoning is for the most part sound. The fact that the present crisis is largely of their own making cannot deny its existence or prevent Huks from exploiting a situation made to order for their purposes.

I question whether anything short of quick action by the US will prevent this situation from deteriorating beyond a point where the [Page 1495] issue will be in doubt. It is not yet too late. I am impressed by the necessity that the American program must be over-all and comprehensive and not on a piecemeal basis which would only permit certain undesirable elements to play such one piece against the other to our mutual disadvantage. I am even more impressed with the necessity that this action must be rapid even at the expense of making a few mistakes in the process. All with whom I have talked have had an almost pathetic and desperate faith that the Bell Mission results will be apparent quickly and would have the answers. Even if first action on our part is only token and symbolic I believe it could provide psychological boost now badly needed. Of course any detailing on my part of need that any program be accompanied by proper and adequate controls would be superfluous.

[Melby]
  1. This telegram was transmitted through the facilities of the Embassy in Manila. Melby and Marine Maj. Gen. Graves B. Erskine were principal officers of a joint State–Defense survey mission (Erskine–Melby Mission) which visited various Southeast Asian countries, including the Philippines, during September, October, and November 1950, to survey, evaluate, and make recommendations on the type and scope of military assistance to be extended to those countries. For documentation on the mission, see pp. 1 ff.
  2. During a conversation on September 27 on another subject with John M. Allison, Director of the Office of Northeast Asian Affairs and an Adviser to the United States Delegation to the Fifth Session of the U.N. General Assembly which convened in New York on September 19. Foreign Secretary Romulo, who headed the Philippine Delegation to the General Assembly, expressed his extreme concern with the current Philippine financial condition. Romulo said that he had received a telephone call late the previous evening from President Quirino who stated that unless some arrangements were made at once for a loan of some sort it would be impossible to meet the army payroll in the coming month (memorandum of conversation by Allison, September 27, 1950: 896.10/9–2750). According to a memorandum of September 27 from Eugene Clay to William S. Lacy, Director of the Office of Philippine and Southeast Asian Affairs, not printed, President Quirino also telephoned Philippine Central Bank Governor Cuaderno and Ambassador Elizalde to state that the internal financial situation was becoming desperate, and he requested both officials to make every effort to secure some immediate financial assistance from the United States (896.10/9–2750).
  3. On September 1, Philippine Congressman Ramon Magsaysay was sworn in as Secretary of National Defense replacing Ruperto Kangleon. On September 14, President Quirino named Vice President Fernando Lopez to be Secretary of Agriculture and Natural Resources and also named new Secretaries of the Departments of Justice, Education, Health and Economic Coordination.
  4. For the Report by the Economic Survey Mission to the Philippines, October 9, see p. 1497.