895B.10/2–1652
The Assistant Secretary of the Army for General Management (Bendetsen) to the Chairman, Senate Foreign Relations Committee (Connally)1
Dear Senator Connally: With the knowledge and approval of the Secretary of Defense I am writing on behalf of the Department of Defense to advise you of certain aspects of the current economic situation in Korea, concerning which I feel that you, as Chairman of the Foreign Relations Committee should be informed. I am also addressing identical letters to the Chairman, Foreign Affairs Committee (House); Chairman, Armed Services Committee (Senate); Chairman, Armed Services Committee (House); Chairman, Armed Services Sub-Committee on Appropriations (Senate); and Chairman, Armed Services Sub-Committee on Appropriations (House), respectively.2
In the early stages of the United Nations operations in Korea the United States effected an agreement with the Republic of Korea where-under the Korean currency (won) requirements of the United Nations forces were obtained from the Korean Government on an advance basis without concurrent reimbursement. Consistent with United States practice and policy established in World War II in similar situations, the agreement provided that negotiations for the settlement of any claims arising from the provision and use of Korean currency would be deferred to a time or times mutually satisfactory to the respective governments and the Government of the Republic of Korea.
Under a procedure related to the agreement a reserve account has been established in the United States Treasury to which counterpart values of Korean currency advanced to the United States forces in Korea have been credited by the Department of Defense. The Department of Defense appropriations have been charged for the corresponding amounts. Funds in this reserve account are available for use for the eventual settlement of the United States obligation to the Korean Government should dollar payment be required. The credits made to this account have been based upon dollar–Korean won conversion rates recommended by the United States field agencies in the Far East and approved by Washington agencies, including the Department of Defense, Department of State and Treasury Department. As of 31 December [Page 53] 1951 a total of approximately $70,000,000 had been credited to this account. The monthly credits to this account total approximately $5,500,000. Since March 1951, based upon recommendation of the United States field agencies that further increases in the rate would impair the political and economic stability of the Republic of Korea, it has remained at the rate of 6,000 to 1.
As of 10 October 1951 upon representations from the Government of the Republic of Korea and with the recommendation of the Department of State, a payment of $12,155,714 was made from the reserve account to that Government. This payment representing the value of Korean currency sold to United States personnel for their personal expenditure in the Korean economy from the inception of the Korean operation up through 31 July 1951, was effected with the understanding that the funds would be used by the Korean Government for supplying essential commodities to the war-torn Korean economy, over and above the types of relief supplies being brought in by the Unified Command. While to date the Korean Government has not used these funds for this purpose, it is understood that an import program has recently been developed.
Recently the Government of the Republic of Korea in a letter to the United States Ambassador stated that the won expenditures of the United Nations forces were aggravating the inflation in Korea;3 at the present time the Korean Government was printing 40 billion won a month; as of the end of January 1952 it anticipated that the circulation of won would reach the 600 billion level (approximately $100,000,000 at 6,000 to 1 rate); and that it would be obliged to discontinue the advances of Korean currency to the United Nations forces under the terms of the existing agreement of July 1950 to prevent hyper-inflation and collapse of the Korean economy.
As a possible remedy to the situation the Korean Government has proposed that the existing agreement be cancelled and two new agreements the first, covering the sale of Korean currency to United Nations troops; and the second, covering the expenditure of such currency for United Nations forces official purposes, be consummated. Under the terms of these proposed agreements, the Korean Government would receive immediate dollar payment for the currency sold to troops and would be paid for currency used for official purposes either by repayment in local currency from the sale of non-relief goods introduced in the local economy by the United States forces or in United States dollars. In recognition of the services rendered by the United Nations forces, the Korean Government under the second agreement covering the official expenditures of the United Nations forces, would be willing [Page 54] to contribute one billion won per month (approximately $166,000 at the rate of 6,000 to 1).
Upon being advised of the substance of the Korean Government’s position, General Ridgway, the Commander in Chief, United Nations Command, requested authority from the Department of Defense to take interim emergency measures of procuring Korean currency for dollars from legal sources available in Korea. Although the United States Ambassador advised General Ridgway that, in his opinion the Korean Government did not really mean to do what it said, General Ridgway felt that immediate action was necessary to insure that the current military needs of the United Nations forces for Korean currency were not in jeopardy. General Ridgway indicated that he did not concede the validity of the Korean Government’s contention that won expenditures of the United Nations forces had unduly aggravated inflation but felt it was absolutely essential that positive action be taken to remove the cause of the Korean Government’s contention, so that corrective counter-inflationary measures could be taken by the United Nations Command and by the Korean Government.
The unfortunate preoccupation of the Republic of Korea with the United States forces drawings as the cause of the inflation has obscured the basic fact that the inflation has been an inevitable result of the war. It should be pointed out that as an offset to the United Nations forces expenditures, the Civilian Relief in Korea Program as of 18 January 1952 was in process of furnishing to the Korean population approximately $272.8 million worth of supplies. It is estimated that as of 30 June 1952 the United States Government will have obligated or expended approximately $342.1 million for this purpose. This does not include large quantities of civilian type supplies and equipment serving common military-civilian purposes which are provided as a military necessity. Because of the existence of a large refugee and indigent population, it has been necessary to distribute the great majority of these supplies on a relief basis without cost to prevent disease and unrest; thus the counter-inflationary potential of such imports has not been fully realized as yet. In addition, many of the local costs of United Nations operation in Korea, such as the maintenance and operation of the Korean National Railroad which has been borne by the United States forces as a military expedient can properly be considered costs which should have been borne by the Korean Government.
To preclude any possibility that the United Nations military operation in Korea might be hampered by the lack of Korean currency needed, General Ridgway was granted the authority, in event the Republic of Korea refused to continue to advance currency under the existing arrangements, to take necessary interim measures to insure the successful accomplishment of his military mission, including purchase of Korean currency for dollars. The payment of dollars for such currency [Page 55] is consistent with the practice of the United States forces in other overseas areas where they procure their indigenous currency requirements with dollars.
In view of the possible far-reaching political, military and financial implications inherent in the Korean situtation described above, General Ridgway has been requested, without committing the United States to any specific course of action, to discuss with the Government of the Republic of Korea measures which would help to solve the Korean economic problem and based on such discussions furnish the Department of Defense his recommendations. You may be assured that the Department of Defense will continue to pursue this matter aggressively with a view to arriving at a conclusion of the problem which would be in the best interests of the United States.
Sincerely yours,