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895B.13/3–1550

Memorandum of Conversation, by the Officer in Charge of Korean Affairs (Bond)1

confidential

Subject: 1. Integration of Korean and Japanese Economic Aid Program.

2. Economic and Political Situation in Korea.

Participants: ECA—Dr. Bunce
Dr. Johnson2
Mr. Bunting
Mr. Street
State—Mr. Butterworth
Mr. Merchant3
Mr. Allison
Mr. Doherty
Mr. Bond

[Here follows discussion of subject no. 1.]

2. Economic and Political Situation in Korea.

Dr. Bunce said that the question which he was most anxious to discuss with the Department was that arising out of the difficulty which the American Mission in Korea was encountering in dealing effectively with President Rhee and his personal entourage (especially Madame Rhee and Mr. Harold Lady, his personal “economic adviser”). He said that the Mission was seriously concerned with the increasing tendency on the part of President Rhee toward a personal authoritarian type of government backed by police support. As an example, he cited President Rhee’s somewhat equivocal conduct in connection with the sale of 100,000 tons of rice to Japan. He added that in this and other analogous transactions the influence of Mr. Lady appeared to carry much more weight with the President than the advice of his own Cabinet Ministers, who customarily supported the position of the Mission. He stated that President Rhee had failed completely to appreciate the nature and the gravity of the inflationary threat in Korea and that, apparently with encouragement from Lady, he had continued to by-pass the provisions of the Constitution with respect to the financing of the Government.

Dr. Bunce referred to the recent defeat of the Constitutional amendment designed to create a system of parliamentary, rather than executive, [Page 31]responsibility in Korea,4 and said that he had been somewhat disturbed by the fact that Ambassador Muccio, in conversations with Korean legislative leaders, had expressed opposition to that amendment. He stated that Clarence Ryee, the Korean Director of Public Information, had gone so far as to issue a public statement to the effect that ECA aid would cease if the Constitutional amendment were adopted, a statement to which the Mission had forced the Korean Government to issue a prompt retraction. Dr. Bunce went on to say that the present police state tendencies of the Government lead him to fear that the elections presently scheduled for May 10 will, if held at all, be dominated by the police and youth groups. In this connection he suggested the desirability of our encouraging the UN Commission on Korea to observe those elections. Mr. Bond said that attention was already being given to this problem.

Dr. Bunce said that he wished to make it clear that he and the Ambassador were in complete agreement on the fundamental issues with which they were confronted in Korea, and that they had both appreciated the support which they had received from Washington, particularly on the question of financial stabilization. He added, however, that it was his own view that the Department might do well to provide the Ambassador with more ammunition with which to fight President Rhee’s trend toward personal government. On this point he said he thought President Rhee might be more compliant with our wishes if he were made to feel a little more uncertain about continuing U.S. support. Dr. Bunce went on to say that, while he realized the necessity of relatively optimistic statements for Congressional consumption in connection with consideration of Korean aid bills, he wanted to point out that such statements did create a problem for the Mission by bolstering the President’s complacency over the certainty of continuing U.S. aid. He said, however, that the defeat of the Korean Aid Bill in the House in January5 had had a most salutary effect and had been worth a thousand official statements. Dr. Bunce emphasized once more that the greatest obstacles with which the Mission was confronted in dealing with President Rhee were, first, the President’s own incompetence, and second, the influence of Mr. Lady, who was persistently endeavoring to minimize in the President’s mind the importance of the inflationary threat.

In response to a question from Mr. Butterworth Dr. Bunce outlined the work of the Joint Economic Stabilization Committee in attempting [Page 32]to retard the inflationary trend. He stated that the Stabilization Committee was receiving a gratifying degree of cooperation from all branches of the Korean Government except the defense and police authorities who, despite the efforts of KMAG, continued to expend government funds excessively and irresponsibly within their respective bailiwicks. Dr. Bunce said that the Department’s instruction No. 90 (of December 30, 1949)6 had been a very useful weapon for the Mission and that the Ambassador had talked to President Rhee with great firmness on the basis of that instruction. He added that his own view would be that we should have used instruction No. 90 as an ultimatum, with the threat of publicity. Mr. Butterworth pointed out, however, that such publicity, had we been obliged to resort thereto, might well have sunk the pending Korean aid legislation. Dr. Bunce expressed confidence that the threat of inflation could be licked if the political situation were effectively dealt with and if the anti-inflation program were carried out.

Mr. Street said that he wished to point out that Mr. Hoffman was fully advised of the problems confronting ECA and State in Korea, although it was his feeling that the time had not yet come when all of the circumstances of the situation, as they were being discussed at this meeting, should be made available to the Congress. Mr. Street went on to express the opinion that the problem in Korea was basically a political problem and that the State Department should take steps to bring about a return to “normal democratic processes” in Korea. Mr. Butterworth replied that, in the first place, there is no such thing as “normal democratic processes” in a country such as Korea and that we would be deluding ourselves to think otherwise. He expressed the view also that the problem with which we are confronted in Korea is compounded of both political and economic factors which cannot be separated. Mr. Butterworth went on to point out that the State Department had become concerned as early as last fall with the growing threat of inflation in Korea and with the lack of vigor with which that threat was being combatted, and that it continued to be concerned with both the inflationary situation and the unsatisfactory political situation which, by interacting one upon the other, served to create the present total problem.

Mr. Street then suggested that we might use the termination clause of the Aid Agreement7 as a weapon vis-à-vis the Korean Government, course of action which Mr. Butterworth said that he regarded as superfluous. Mr. Bond suggested that the tactics with which we could [Page 33]best combat the existing unhealthy political and economic tendencies in Korea would in the last analysis have to be determined in the field, and that the Department would certainly be receptive to any suggestions from the Mission as to how it could best backstop such tactics. He expressed the opinion that President Rhee’s strongest weapon is his knowledge that the U.S. could not let the Republic of Korea fall without incurring the gravest political repercussions. Mr. Doherty interjected the thought that, if the present trend continued very long, the time might come when the lesser of two evils would be to cut loose and run the risk of incurring such consequences.

Dr. Johnson then suggested the possible advisability of sending to Korea a high level U.S. official (possibly the Deputy ECA Administrator8) to impress upon President Rhee and the Korean Government the gravity with which we viewed the trend of events there. Mr. Bond expressed the view that such a mission might have the unintended effect of undermining the authority of the Ambassador and the Chief of the ECA Mission, and that a preferable course might be to recall the Ambassador for consultation and send him back armed with new and stronger representations from the highest quarters of this Government.

Mr. Bond then raised the question of whether any useful purpose would be served by using the threat of stoppage of military assistance as a weapon with the Korean Government. In support of this he suggested that President Rhee, as an old revolutionary, had a more ready understanding of bullets than of capital investments, and that such a threat might get more directly at the heart of the obstacles to stabilization interposed by the defense and police officials.

Mr. Butterworth suggested at this point that a State-ECA working-group be set up, while Dr. Bunce was still in Washington, to formulate recommendations. Mr. Doherty asked what the terms of reference of such a group would be, expressing the thought that all the technical and administrative problems had been thoroughly explored by the Economic Stabilization Committee and that the crucial remaining and unsolved problem was the basically political problem of the ability and willingness of the present Korean Government to enforce the measures which had been recommended. Mr. Butterworth repeated that in his view the problem of the inflation was compounded of a number of factors—political, economic and administrative—and that the working group should concentrate on all the steps that could be taken to get the Korean Government to deal in a responsible fashion with this problem.

  1. The memorandum was codrafted by Mr. Edward W. Doherty, Officer in Charge of Economic Affairs in the Office of Northeast Asian Affairs.
  2. Edgar A. J. Johnson, Director of the Division of Korea Program in the Economic Cooperation Administration.
  3. Livingston T. Merchant, Deputy Assistant Secretary of State for Far Eastern Affairs.
  4. The constitutional changes referred to received approval from a majority of those voting on them in the National Assembly, but failed to gain the required two-thirds vote of the duly elected and seated members of that body; see U.N. document A/1350, p. 21.
  5. See footnote 1 to the memorandum of conversation by Mr. Williams, January 20, p. 12.
  6. Foreign Relations, 1949, vol. vii, Part 2, p. 1112.
  7. The agreement relating to economic aid between the United States and the Republic of Korea entered into force on December 14, 1948; for the text, see TIAS 1908, or 62 Stat. (pt. 3) 3780.
  8. William C. Foster.