895B.10/8–3051

The Acting Secretary of State to the Secretary of Defense ( Marshall )

secret

My Dear Mr. Secretary: The Department of State has given very careful consideration to the views expressed by the Department of Defense in Mr. Lovett’s letter of August 30, 1951, with respect to the release to the Government of the Republic of Korea of funds now in suspense account in the Treasury Department, accumulated from sales of Korean currency to individual members of the United Nations forces for their personal expenditures. That letter suggests that the matter be deferred until a later date, but adds that if there are political factors which have sufficient weight to counterbalance the considerations set forth, the Department of Defense will defer to our evaluation of these factors.

While appreciating the importance which the Department of Defense attaches to these problems, the Department of State believes that the release of the funds can be accomplished in such a way as to avoid the difficulties which you foresee, and that there are political considerations which have sufficient weight to make it desirable to take this ‘action. First, it is important to the objectives of the United States in Korea to take action to support the Government of the Republic of Korea in its adoption of difficult and unpopular measures designed to strengthen the Korean economy. In addition, it is equally important to [Page 892] satisfy the Government and the people of the Republic of Korea, particularly while the armistice negotiations are in progress, of the continued interest and support of the United States.

These political factors are inextricably related to compelling economic considerations which likewise lead us to believe that the release of those funds is desirable. Although the military action of the United Nations in Korea is sustained in very large measure by equipment and resources introduced into Korea by the United States and other participating governments, the continuing hostilities have placed a tremendous burden upon the weak economy of South Korea. The Republic of Korea not only must continue to provide support for its armed forces, but must also furnish the local currency required by the United Nations forces. Consequently, every appropriate effort should be made to offset the inflationary effect of the won drawings of the United Nations forces. The immediate release of the funds in question will allow the Republic of Korea, in consultation with the United Nations Command, to import consumers goods in sufficient quantity to have a significant counter-inflationary impact. In addition, a decision to release the funds will have considerable political and psychological value in inducing the Korean Government to take other measures which are required to counteract the present inflation.

The Department of State believes that the action which is recommended in this letter is consistent with actions which have been taken by the United States in other allied and liberated countries, in some of which the United States has had financial arrangements similar to the financial agreement of July 28, 1950, with the Republic of Korea.

If the release of funds is to result in maximum benefits, it should be accomplished as soon as possible. Accordingly, it is requested that representatives of the Department of Defense join promptly with officers of the Department of State and of the Treasury Department in working out the conditions of release and appropriate controls.

The Department of State entirely agrees that the availability of the funds in question to finance necessary imports into Korea should be made known to any committees of the Congress which have occasion, in connection with legislative requests for Korean aid, to inquire into the resources of the Republic of Korea itself. However, in view of the urgency of the matter1 and in view of the consistency of the [Page 893] recommended action with previous actions of the United States Government in similar circumstances, prior consultation with the Congress would not appear to be necessary.

Sincerely yours,

James E. Webb
  1. The final draft of this letter, which had been forwarded to Mr. Webb by Mr. Merchant, was accompanied by copies of telegrams 235 and 238, September 7 and 8, from Seoul, in which Ambassador Muccio strongly urged immediate action on this question and reported on a proposal by the National Assembly of the Republic of Korea to send a special economic mission to the United States to obtain a settlement of the matter (895B.10/9–851).