Foreign Relations of the United States, 1950, Korea, Volume VII

895.00R/1–1850

The Ambassador in Korea (Muccio) to the Secretary of State

confidential
No. 57

Seoul, January 18, 1950.

Ref: Depins 90, December 30, 1949¹

Subject: Control of Inflation in Korea²

As instructed in the reference cited above, I called on President Rhee Syngman at his office by appointment at 2:00 o’clock p.m. on Sunday, January 15, 1950, in the company of Dr. Arthur C. Bunce, Chief, Economic Cooperation Administration, Mission to Korea. The following is a summary of the ensuing conversation, in course of which I presented to the President certain documents referred to in the text below. Copies of these documents are attached as enclosures herewith.

I expressed regrets at having to call on a Sunday. I recalled that I had mentioned in the course of my recent visit with Dr. Jessup that I had received firm instructions to present a note to him expressing my Government’s grave concern over the mounting inflation and recommending a drastic plan of control. I explained that I had discussed this instruction with Dr. Jessup, who left Saturday, and intended originally to present the note and plan for control on Monday. With the near rice panic in Seoul, I had decided to come to see him immediately.

I mentioned that the Economic Cooperation Administrator and the Secretary of State could not understand why President Rhee did not take a more serious view of the mounting inflation. If he appreciated its seriousness he would and could keep it under control. I had been instructed by my Government to present the note and the plan for control, which were thereupon handed to him (Enclosure I).³ I cited that Korea seemed to be in the same position as China in 1947–1948; that the Chinese officials also continuously stated that they could put a stop to inflation at any time. They never faced the situation realistically; inflation got out of hand and contributed even more than the military inertia to bringing about the Nationalist downfall.

President Rhee went into a long dissertation on his difficulties. It was almost impossible for him to get his cabinet members to carry out his policy and his orders. He did not like to change ministers. He would have to remove them. He had the resignations of Agriculture and Forestry, of Commerce and Industry, and of Home Affairs. He would change others but he just could not find competent men to take the jobs. After listening to this harangue, I pointedly expressed my opinion that the difficulty would not be solved by a mere change of ministers. I considered most of his ministers quite competent. I admitted that there was a great deal of bureaucracy, particularly in the Ministry of Commerce and Industry, where Bureau chiefs were thwarting the good intentions of the Minister in order to perpetuate their respective empires.

However, I did not consider that the main impediment to effective government. I considered the main impediment the repeated instances where: first, he and the State Council adopted a policy, then plans were drawn up by the competent ministry in discussion with ECA officials, and finally, when recommendations were sent to him, there was an inordinate delay. Time and again when inquiry was made by Americans as to the delay in getting going, the reply was that the matter was still pending in the President’s office and, in many instances, that the matter lay on Mr. Lady’s desk.⁴ I cited two glaring instances, reading to him from the memoranda dated January 15, 1950 (copy of which was also left with the President, see Enclosures 2 and 3),⁵ of bungling: the rice export program and the food program culminating in the current rice price crisis.⁶

I reminded him that we had in ECA some two hundred Americans, that these men had been most carefully selected in the course of the past year. Some of them were outstanding experts in their respective fields. They were brought here at great effort and expense to the United States specifically to advise and make available to the Korean Government the best technical and professional talent obtainable in the United States. If he felt that men available to him were better qualified on food matters, there was no point in having men like Mr. Dawson, who is probably the world’s best authority on agriculture in the Far East, Mr. Beck and others waste their time here. If he felt that the President of the Bank of Korea knew all there was to know about banking and finance there was no need to have Messrs. Loren, Bloomfield, Jensen or Smith here.

President Rhee countered that he had several times asked me to have an American placed in each ministry and that I had failed to do so. I reminded him that every member of the American Mission was available to him and to the Korean Government. I could not, however, see my way to placing an American in each ministry with a view to checking and reporting direct to President Rhee what was going on therein. The Koreans would consider the Americans spies and the Koreans would not cooperate with any one under such conditions. I added that Mr. Lady for that very reason was the most despised American in Korea. The President agreed that Americans would be so considered and stated the Koreans hated Mr. Lady because he reported their actions to him.

I made the suggestion that one possibility that occurred to me would be for him to select two or possibly three capable and reputable Koreans and for Dr. Bunce to select two or three of the most competent men he had, to work together as a committee. This committee should be exclusively charged with implementing the control plan outlined in the detailed memorandum (Enclosure 2) accompanying my note (Enclosure 1). This committee could keep in touch with each ministry concerned and report direct to the President its findings and recommendations.⁷ The President inquired if I had any Koreans in mind I could recommend for this purpose. I told him that I considered several of his cabinet members eminently qualified, and that undoubtedly there were other Koreans in the community who could discharge such an undertaking.

Several times during the conversation, the need to decentralize executive authority was stressed; on each occasion the President agreed that he had too much to do and must have responsible men to carry out his (i.e. the President’s) ideas. At no time did the President appear to grasp the thought that a Minister should be any more than a “yes” man whose sole purpose was to carry out the President’s ideas. The concept of other persons sharing in leadership and being given responsibility was completely missing.

President Rhee concluded the interview at 3:30 o’clock p. m. by saying that he would study the note and the control plan. I expressed the hope that he would send word to me as soon as possible, hopefully by the following day.

I desire to assure the Department that I am personally, in cooperation with Dr. Bunce and his associates, exerting every possible effort to bring the present most unsatisfactory situation under control and shall keep the Department currently informed of developments.

I attach (Enclosure 4)⁸ as further reflecting the President’s views on inflation, excerpts from a press interview which President Rhee held with foreign correspondents on January 14, 1950, as reported by the United States Information Service.⁹

It is requested that copies of this despatch with enclosures be provided to the Economic Cooperation Administration.

John J. Muccio

1. Foreign Relations, 1949, vol. vii, Part 2, p. 1112.

2. In despatch no. 68, January 21, from Seoul, not printed, the Ambassador reported on a meeting he had had on January 5 with President Rhee concerning the state of the Korean economy. Mr. Muccio explained that he had not reported on this meeting at the time in anticipation of the receipt of instruction no. 90 from the Department. Ambassador Muccio concluded despatch no. 68 with the following observations:

   “It will be noted that the Mission’s efforts to correct and improve the critical economic situation frequently have not found response in the President and that the latter’s attitude has not reflected the gravity of the situation. Obviously, the President’s proposed remedies are often not related to either the magnitude of the overall problem or to the specific considerations which are essential to improve Korea’s economic plight. This condition is illustrated by his views on the sale of vested properties and by his lack of deep concern over the delay in concluding the sale of rice to Japan.” (895.00R/1–2150)

3. Not printed. The plan for control called for firm action by the Republic of Korea in the following fields:

   I. Control of Government expenditures and establishment of budgetary accounting controls; II. Control over extension of bank credit and creation of Government debt; III. Elimination of subsidies in prices and rates of Government-produced goods and services; IV. Increase of the counterpart deposit rate, increases in the prices of aid supplies and restriction of credit in sales of aid supplies; V. Improvement of tax assessments, enforcement of tax collection, and elimination of the “voluntary contribution” system; VI. Expansion of extraordinary and non-recurring Government revenues; VII. Implementation of Land Reform Law; VIII. Expansion of exports and facilitation of approved imports; IX. Measures to facilitate the development and establishment of unitary rate of foreign exchange; X. Termination of the rice purchase program.

4. Harold Lady, an American, was an adviser to President Rhee.
5. Not printed.
6. The memorandum on the rice crisis attributed the situation to the failure of the Korean Government to carry out programs which had been agreed upon with the ECA, specifically calling for a rationing program and the export sale of 100,000 metric tons of rice to Japan. The sale of rice had been personally held up by President Rhee in hopes of exacting a higher price.
7. Despatch no. 96, January 25, from Seoul, not printed, reported on the establishment of the committee under reference, known as the Joint Korean-American Economic Stabilization Committee (895B.10/1–2550).
8. Not printed.

9. In the interview, President Rhee was quoted as making the following statement:

   “Although Jessup did not say so, it seems some people in America think there might be some big inflation which might cause an economic crash in Korea. I want to say, we do not fear any economic crash. Conditions here are completely under control and we will see that inflation does not get beyond control.”