The Deputy Administrator of the Economic Cooperation Administration ( Foster ) to the Embassy in Korea
Reference: Ecato 354, Toeca 4301
Ecato 395. Eyes only Johnson to Bunce.
Subject is Prime Minister’s letter March 4 delivered to Bunce at Airport
Following is full text Hoffman’s answer to Prime Minister despatched 23 March. State has concurred.
“Your letter of 4 March to the Chief of the Economic Cooperation Administration Mission in the Republic of Korea,2 on the subject of inflation, has been shown to me by Dr. Bunce. In recent weeks, as a result of your Government’s participation in the affairs of the ‘Korean Government—American Mission Economic Stabilization Committee’, I had come to feel some assurance that your Government was really determined upon a vigorous anti-inflationary course of action. Your letter deprives me of such assurance.
It is my candid opinion that the appraisal of the present economic situation in the Republic of Korea which your letter sets forth is invalid and that the optimism which the letter seems to reflect is unwarranted. Obviously, certain immediate revenues can be derived from the sale of presently held government stores of rice, cotton and tobacco. This expedient, however, does not come to grips with the central problem, namely, that regular government revenues continue to fall far short of matching present rates of expenditure.
It is a foregone conclusion that unless tax revenues are sharply increased and expenditures are drastically reduced, prices will continue to rise, probably at an accelerating rate. The value of the Korean currency will seriously depreciate, and public confidence not only in the currency but also in the Korean Government will be progressively undermined. Such continuing deterioration in basic economic conditions in Korea will make our efforts to help your country increasingly difficult. It is my real fear that the point will be reached in the not too distant future where our aid would make no further net contribution to the welfare of the people of the Republic of Korea.[Page 37]
In view of the thorough-going and detailed examination of all the inflationary forces which has been conducted by representatives of the ECA Mission and representatives of your Government in the Economic Stabilization Committee, I can hardly believe that the true nature of the situation is not known to you. I am, therefore, impelled to raise with you the question of whether your Government has a real intention to deal with the problem of inflation.
It is my duty to make certain that ECA funds are purposefully and effectively utilized in a genuine recovery program. The investment which the United States Government is making in Korean recovery is not an inconsequential amount. Further inflation will jeopardize the entire ECA program in Korea. I have asked Dr. Bunce to keep me personally informed of the progress made by the Government in carrying out the anti-inflationary measures recommended by the Economic Stabilization Committee. I must inform you that stop-gap measures will not be adequate.
It is my duty to remind you that the Government of the Republic of Korea must take such measures as will satisfy the ECA Mission in Korea and will satisfy me that the inflationary problem is being dealt with effectively. I cannot otherwise justify an aid program for Korea of the size and character contemplated for the remainder of fiscal year 1950 and for fiscal year 1951, and unless I am convinced that a forthright, immediate effort will be made to control inflation in Korea, I must consider the advisability of requesting a lesser sum from the Appropriations Committees than the $60,000,000 authorized by the Congress of the United States. Similarly, I must further review the request of $100,000,000 which the ECA is making for Korea aid during fiscal year 1951.”