Foreign Relations of the United States, 1951, Asia and the Pacific, Volume VI, Part 2

S/S Files: Lot 60 D 167

Memorandum by the Deputy Under Secretary of State (Matthews) to the Executive Secretary of the National Security Council (Lay)

top secret

Washington, August 6, 1951.

Subject: First Progress Report on NSC 84/2, “The Position of the United States with Respect to the Philippines”.¹

NSC 84/2 was approved by the President on Nov. 10, 1950. It is requested that this Progress Report, as of July 13, 1951 be circulated to members of the Council for their information.

I—Policy Implementation

Economic Measures

The United States Economic Mission to the Philippines (The Bell Mission) during the summer of 1950 surveyed Philippine economic conditions at the request of President Quirino and made specific recommendations for cooperative measures to improve the situation. President Truman then designated William C. Foster, Administrator of the Economic Cooperation Administration, as his special representative, to discuss implementation of these recommendations with the Philippine Government. Following the conversations in the Philippines, President Quirino and Mr. Foster in November 1950 signed an agreement whereby President Quirino undertook to secure from the Philippine Congress the following legislation:

(a) Appropriate minimum wage legislation.

(b) Increased taxation legislation designed to balance the Philippine budget.

(c) A general Congressional resolution expressing approval of the over-all recommendations and objectives of the Bell Mission report.

The agreement stated that once the Philippine Government had complied with these undertakings, President Truman would seek from the Congress of the United States funds to initiate an economic development program to be administered by the ECA. The Bell Mission Report and the Quirino–Foster Agreement, although antedating NSC 84/2² conform accurately to it and were an integral part of the developments which led to the formal policy statement set forth in NSC 84/2 to guide subsequent American activities.

Despite important political opposition, President Quirino by April 1951 had secured Congressional approval of legislation which (a) expressed Congressional support for the general objectives and recommendation of the Bell Report; (b) enacted measures designed to increase Government revenues by approximately ₱250 million annually; and (c) established fairly satisfactory minimum wage standards for agricultural and industrial labor. The proof of this theoretical performance will of course come only through vigorous implementation in which the United States is prepared to assist, at the request of the Philippine Government, with technical advisers. On April 27, 1951, President Quirino and Ambassador Cowen signed a bilateral agreement for an ECA program. The ECA made available $15 million for the balance of FY–51. President Truman has requested the Congress to appropriate funds for a program for FY–52. The recommended amount is $35.4 million. The Export–Import Bank has earmarked $25 million for a loan program and a technical mission to recommend specific projects is scheduled to arrive in Manila early in August. There is general agreement that as the program develops during an anticipated five-year period in accordance with the Bell recommendations, increasing emphasis should be placed on loans rather than grants.

There is attached a copy of a letter of July 9, 1951 from the Governor of the Central Bank of the Philippines to the Assistant Secretary of State for Far Eastern Affairs, which sets forth an excellent analysis of the current Philippine economic situation.

Military Measures—MDAP

In accordance with the recommendations of the United States MDAP Survey Mission to Southeast Asia (Melby–Erskine Mission) and of the Departments of State and Defense, President Truman has recommended to the Congress a military assistance program for the Philippines for FY–52 of approximately $48 million. These recommendations, although originally formulated just prior to NSC 84/2, conform to the policy stipulated in that document. This program will enable the Philippine Government properly to equip the 26 battalion combat teams deemed necessary to restore and preserve internal law and order and liquidate the armed forces of the Huk movement. At the very end of FY–51 it was also possible to increase the previously approved and functioning MDAP program by approximately $5.5 million from unallotted funds. In order to speed up deliveries the Joint Chiefs of Staff raised the priority rating of the Philippines from 4 to 3. Due to requirements elsewhere and despite the higher priority, however, deliveries to the Philippines have not been as rapid as would have been desirable.

Budgetary Aid

In order to bring the strength of the Philippine armed forces to the required 26 battalion combat teams, it is necessary for the Philippines to increase its present army by an additional 10 battalion combat teams. To relieve the anticipated economic strain of this increase President Quirino in January 1951 requested $50 million from the United States to be applied to the troop pay and maintenance of the Philippine army. This request contravened an established American principle against direct financial assistance for military purposes, but in view of the unique American relationship to the Philippines and the unlimited American guarantee to protect the Philippines against aggression, it was decided to make $10 million available in May 1951 from FY–51 funds as a one-time operation until the effects of the economic program and the new Philippine legislation can begin to make themselves felt. These funds are to be spent as the American Ambassador and the Commanding General of JUSMAG deem necessary to assure the pay and maintenance of the Philippine armed forces.³ Improvement in the Philippine budgetary situation during the past three months now opens the possibility of expending these funds at a somewhat slower rate and as a lever to deter utilization of the troops for fraudulent purposes in the elections of next November.

Philippine Military Actions

As a result of prodding from the United States a major shake-up has taken place in the top Philippine command. Under the intelligent and aggressive leadership of the Secretary of National Defense Magsaysay, younger and more active officers are being given an opportunity to demonstrate their abilities. Operation Sabre, which has been going on since the beginning of 1951, has inflicted the first serious damage suffered by the Huk armed forces and has put them on the defensive. A highly successful raid last October on Philippine Communist headquarters and the coincident arrest, trial and conviction of most of the members of the Communist Politburo have seriously disrupted Huk activities and organization.

Philippine Political Actions

During recent months there have been numerous changes of key personnel in the Philippine Government which have brought in abler and more conscientious men. These changes are largely due to the persuasiveness of Ambassador Cowen with President Quirino. Although the performance of the latter still leaves much to be desired, there is evidence that he is making an honest effort to improve the calibre of his Government. In this connection it should be remembered that his position is a difficult one in view of his own limitations and weaknesses and the unfortunate political obligations he contracted in the past. Attention is now being increasingly focused on the mid-term Congressional elections next November which will have an important bearing on the future development of Philippine democracy. Such encouragement as may be possible is being given President Quirino and responsible Filipinos to insure that honest and free elections are held.

Philippine Foreign Relations

The determination of the Philippines to play a role in the struggle of the free world against communism has been demonstrated. The Philippines has continued unfalteringly in its support of the United States in the United Nations. General Romulo has rendered particularly distinguished service in this respect and on numerous occasions has been able to temper some of the more erratic activities of the Arab-Asian block. The Philippine battalion in Korea continues to give a good account of itself. During the recent visit of Indonesian President Sukarno to Manila, he stated in a press interview that he would have no objection to a Communist government in Indonesia if the people of Indonesia so desired it. President Quirino publicly replied that the Philippines is wholeheartedly committed to the United States and has no intention whatsoever of even considering any change in its policy. Recent efforts of prominent Nacionalista Party leaders to create dissension by calling for an independent Philippine foreign policy divorced from American policy have created much public furore but have so far made no real headway.

II—Policy Evaluation

The measures taken to implement the policy set forth in NSC 84/2 and NSC 48/5,⁴ some of which were conceived and initiated prior to the formalization of these two documents, have made a significant contribution toward the development of economic and military stability in the Philippines. Although prudence demands that progress must be considered as preliminary, the success already achieved is evidence that the policy course is the correct one and that continued and determined action along these lines will crystallize the desired American position in the Philippines. It can also be expected that success in the Philippines will make an important contribution toward persuading the rest of Southeast Asia of the integrity and capabilities of American intentions.

H. Freeman Matthews

[Enclosure]

The Governor of the Central Bank of the Philippines (Cuaderno) to the Assistant Secretary of State for Far Eastern Affairs (Rusk)

Manila, July 9, 1951.

Dear Mr. Rusk: I am taking this opportunity to thank you once again for the invaluable assistance you have rendered the Philippine Government last year by favorably endorsing its use of the United States funds which were on deposit with the Philippine National Bank. Thanks to this timely action, the Philippine Government was able to weather a critical period and to make necessary adjustments for solving its short-run financial problems.

After the trying times it endured last year, the Philippine economy began looking up these last eight months. There has been a marked improvement during the last quarter of 1950 and the first half of 1951.

The international reserves has risen from $250 million in December 1949 to $356.7 million in December 1950 to $382.2 million as of June 1951. These gains in the reserves, the improvement in the trade position and the promise of ECA assistance enabled the Central Bank to recommend and the Government to adopt an import policy that was progressively liberalized covering many commodity imports. This import policy, the new tax measures passed, the intensification of tax collection, the greater control exercised over government expenditures, the price control and anti-hoarding measures are the instruments that the Government has been using in its determined fight against inflation. Because of the deteriorating short-run prospects for Philippine exports and the rise of the level of commodity imports due to “decontrol,” a substantial portion of the gains made in the international reserves position will probably be lost. However, if the decline in the international reserves brings with it a reduction in the level of consumers prices and improves the financial setting for vigorous economic development and the profitable use of U.S. aid, we would consider the effort well worth the cost. In any event, we are hoping that the decline in the international reserves will probably not be such as to compel an immediate reversal of the present import policy.

The actuations of the Government in the recent past relating to its fiscal operations appear to assure that further inflation of the money supply due to bank financing of budgetary deficits would be held in check. The cash resources of the Philippine Government including the ₱40 million unexpended balance of the U.S. loan amounted to ₱73.6 million as of June 30, 1951 compared to only ₱12.6 million on the same date last year. The total tax receipts for the first quarter of 1951 is about 40 percent greater than the total for the corresponding period in 1950. Compared to last year when the Government owed the Central Bank ₱44 million for budgetary requirements and the Philippine National Bank about ₱17 million for Treasury warrants cashed by its branches, when a loan of ₱22 million had to be secured from the International Monetary Fund to pay teachers’ salaries which were in arrears and when a loan of the funds which the U.S. Government had on deposit with the Philippine National Bank which amounted to about ₱70 million had to be arranged in order that pressing requirements of the Government, especially of the armed forces, could be met—today, notwithstanding the payment of ₱7 million made recently on the U.S. loan, the Government owes the Central Bank about ₱6 million only for budgetary purposes, all outstanding Treasury warrants have been paid, payment of teachers’ salaries is up-to-date, and, so far payments to the “counterpart fund” on government accounts are being fully met. Of course, with the increase in tax receipts, special funds utilized for budgetary purposes that year, such as the gasoline tax fund, will have to be replaced in order that important public services, like the repair of roads, may be accomplished. If it were not for the fact that funds will have to be provided for essential public works (none was provided in fiscal year 1951) and for the ECA “counterpart fund”, and the further fact that the cost of maintaining peace and order is increasing due to price inflation, I believe the Government might be able to meet its financial requirements in fiscal year 1951–1952.

With the solution of the short-run financial problems of the Government, thanks to the timely loan accommodations extended by the U.S. Government and the International Monetary Fund last year, and the approval by our Congress of a number of tax measures, this country, with ECA assistance, now has the opportunity to pull itself out of long-run fundamental economic difficulties. The achievement of this objective should not be difficult with the observance of sound monetary and fiscal policies and continued close cooperation between the Philippine Government and the ECA mission in this country.

With kindest regards, I am

Sincerely yours,

M. Cuaderno, Sr.

1. For text, see Foreign Relations, 1950, vol. vi, p. 1514.
2. In actuality NSC 84/2 antedates the Quirino–Foster Agreement of November 14, 1950 by four days.
3. Procedures for the administration of the budgetary aid funds were set forth in an aide-mémoire of June 14 from the American Embassy to the Government of the Philippines. The aid was to be furnished to assure the maintenance of essential Philippine troop forces and matériel, and was to be contingent on assurance that AFP troops would be paid in full and on time. The Government of the Philippines was to accomplish such construction and other military projects as might be jointly decided upon by the Secretary of National Defense and the Chief Adviser, JUSMAG–Philippines. These procedures were accepted by the Philippine Government in an aide-mémoire of June 26. (Summary based on telegrams 4261, June 22, and 4269, June 29, both from Manila; 796.5–MAP/6–2251 and 796.5–MAP/6–2951, respectively)
4. “United States Objectives, Policies, and Courses of Action in Asia,” approved by President Truman May 17. For text, see p. 33.