S/SNSC files, lot 63 D 351, NSC 118 Series

Memorandum by the Secretary of Defense (Wilson) to the National Security Council1

The Republic of Korea is contending that since the outbreak of hostilities it has advanced to United States forces Korean currency (won) having a total dollar value of approximately $171 million.
To date the United States has paid a total of $74 million on account for such currency advances. Although it has been estimated that a total payment of $119 million could represent settlement on a realistic basis as provided for in the exchange of notes which stemmed from the Meyer Agreement, the Commander-in-Chief United Nations Command recently was authorized to negotiate with the Republic of Korea for settlement in the total amount of $139 million involving payment of an additional $65 million for won advances up to December 15, 1952. This authorization was granted in an effort to reach an early and satisfactory settlement with the ROK and took into consideration the lack of preciseness of day to day variations in realistic exchange rates during the period covered.
The difference between the Republic of Korea position and the United States position amounts to $32 million. General Clark has indicated that he believes the Republic of Korea would reduce its claim by $10 million, in recognition of a Republic of Korea contribution contemplated in the Meyer Agreement, to a net difference of $22 million.
The Republic of Korea claim is based on an exchange rate of 6,000 won to the dollar established in March 1951. Since that time realistic won values have decreased sharply to a point where for several months a realistic rate of exchange would be 18,000 or more to the dollar.
The Republic of Korea Government has informed the United States that currency advances would be discontinued, as of 6 February 1953, unless full settlement was made for won advances. If won advances are discontinued, United States forces will be left with two alternatives:
Dollar procurement of won from the Bank of Korea at a 6,000 to 1 rate (present minimum realistic rate 18,000 to 1).
Payment for goods and services in United States dollars.
Payment in final settlement of outstanding obligations at an amount higher than an additional $65 million, which the Republic of Korea has rejected, and which represents a liberal payment for won advances, would involve the use of Department of Army appropriations for a purpose other than that intended by the Congress, namely, general economic [Page 748] assistance in the form of some contribution to stabilization of the won.
CINCUNC has urgent need of instructions as to the amount he may offer in settlement. Two possible courses of action are listed below:
Insistence by the United States that the Republic of Korea accept the $65 million previously offered. In the event the Republic of Korea refuses to accept this offer and refuses to continue won advances, CINCUNC may be instructed to procure won at the official rate of exchange or procure goods and services for United States dollars until satisfactory arrangements are made.
Authority to pay up to $87 million, in exchange for a new agreement providing payment at a realistic rate for future won advances, in which case the source of the amount in excess of $65 million requires determination by the National Security Council. If military appropriations are determined to be the desirable source of funds, Congressional clearance may be necessary for any sums in excess of $65 million.

There is attached a Statement of the Problem, with background information.


Statement of the Problem

To determine United States policy to be followed in reimbursing the Republic of Korea for Korean currencies furnished to the United States Forces. This problem needs to be resolved in the light of the over-all economic rehabilitation of the Republic of Korea, including the division of responsibility within the United States Government and its relationship to the responsibilities of the UN in this matter.

Background Information

On 28 July 1950, the United States and the Republic of Korea entered into an agreement whereby Korean currency (won) would be furnished to United States Forces without concurrent reimbursement, such currency to be used for military requirements and for sales to United States troops for their personal needs. The agreement provided for settlement to be made by the United States at a subsequent time mutually agreeable to both Governments. This provision was consistent with United States practice and policy established in World War II in similar circumstances.

The United States thereupon established an account in the U.S. Treasury, to which was deposited the sums clearly adequate to cover the value of Korean currency actually used from month to month. In the absence of a firm international rate of exchange for the won, the conversion rate at which such deposits were made was determined by [Page 749] the United States in the light of the then current economic conditions in Korea. The first rate used was 1,800 Korean won to one U.S. dollar. Subsequent adjustments have been made from time to time, resulting in a current rate of 6,000 to 1. The same rate used for deposit purposes into the Treasury account has also been used consistently for sales of currency to U.S. troops. Sales to U.S. troops have amounted to approximately five percent of total sales, the remainder has been used to pay for goods and services. Because of Korean allegations that the raising of the United States rate of exchange contributed to inflation, the Command recommended continuance of the 6,000 to 1 rate. Therefore, no adjustments were made in the rate after March 1951, although it is estimated that a more realistic rate would be 18,000 to 1 at the present time.

Early in 1952, the Korean Government, in a letter to the U.S. Ambassador,2 alleged that the won expenditures of our forces were further aggravating the inflation in Korea, and that it would be necessary to discontinue advances of currency under the 1950 agreement. Because such a move would interfere seriously with military operations, a mission headed by Mr. Clarence E. Meyer was dispatched to Korea to negotiate a new agreement. As a result, on 24 May 1952, an agreement was consummated entitled “Agreement on Economic Coordination between the Republic of Korea and the Unified Command” (commonly known as the Meyer Agreement). While this agreement dealt mainly with the economic considerations, an exchange of notes was consummated on the same date pursuant to the agreement, which dealt with the manner of reimbursement for won drawings by U.S. Forces at realistic rates of exchange. (A copy of the Meyer Agreement and the exchange of notes are enclosed as Tab A.* Also attached as Tab B is a “Summary of U.S. Commitment to Reimburse the Republic of Korea for currency advanced to the United States Forces” which outlines the effects of the exchange of notes covered by Tab A.)

Up to that time there had been no thought of the U.S. reimbursing Korea for all won drawings until a later time, possibly after hostilities, when the total effect of our aid to Korea could be evaluated and perhaps set off against any debt remaining from won drawings. Thus the exchange of notes specified that settlement for won withdrawn prior to 1 January 1952 would be made at a future unspecified time.

Notwithstanding the terms of the 1950 agreement and the exchange of notes, which called for settlement at realistic rates of exchange, the Republic of Korea, on 15 December 1952, terminated any further advances of currencies on the stated grounds that it would be impossible [Page 750] to continue to provide for United Nations requirements in the manner agreed to, because of the resultant inflationary effects of a constantly increasing currency issue. Subsequent to December the Republic of Korea, through an interim arrangement, has continued to advance won. The Republic of Korea has threatened to discontinue this arrangement immediately.

On 3 December 1952, the Commander-in-Chief, United Nations Command (CINCUNC) advised the Department of the Army that in his opinion satisfactory arrangements for future currency drawings could be made only as part of a “package deal,” encompassing payment for most, if not all, of the currency advance to the U.S. since the beginning of Korean hostilities for which payment has not already been made. Authorization was thereupon granted to the Commander-in-Chief, United Nations Command, to negotiate a new exchange of notes on the basis of which the United States would pay $65 million which, together with payments made previously by the United States, would be in full and final settlement for all Korean currency credits advanced to the United States Forces prior to 15 December 1952. As a quid pro quo for the settlement, the Korean Government was to agree to a new conversion rate of 18,000 to 1 with adjustments to be made in the future in accordance with changes in the Pusan Wholesale Price Index. This, in effect, was the agreement the Koreans had given the United States under the terms of the Meyer Agreement.

On 24 January 1953, CINCUNC reported that the Korean Government had rejected the U.S. settlement offer of $65 million and was demanding a settlement payment of approximately $97 million, making the Korean total of $171 million as compared to the $139 million regarded by the United States as the maximum amount owed. The Commander-in-Chief, United Nations Command, considers the $97 million figure could probably be reduced by negotiation by approximately $10 million, and has requested authority to negotiate on the basis of a final settlement totalling up to $87 million, in addition to the $74 million already paid. CINCUNC stated that it is of paramount importance to reach an agreement which will provide for a realistic future rate of exchange and assure continued availability of currency.

CINCUNC’s request for authority to negotiate for a settlement figure of up to $87 million raises anew the question of the extent to which the political, economic, and military factors should be considered as overriding. In addition to CINCUNC’s judgment as to the “paramount importance” of receiving immediate authority to negotiate for a settlement which will provide an assured future supply of won at a realistic rate to avoid disruption to the military effort, the following factors are important: [Page 751]

CINCUNC has indicated that continued use of won is the only satisfactory method of meeting the military requirements for acquisition of labor and materials in Korea. The Republic of Korea has indicated that the only alternative to settlement and negotiation of a realistic rate is to buy won directly from the Bank of Korea at a rate of 6,000 to 1.
The Republic of Korea has indicated that coincidental with a settlement of past won drawings it would be willing to settle for approximately 53 billion won drawn in January and early February at a “realistic rate.” If no settlement is reached and it is necessary to pay for these drawings at the 6,000 rate, current Army appropriations would need to be charged for an additional several millions of dollars.
The United States Ambassador to Korea pointed out in a recent radio supporting fully CINCUNC’s request for further negotiating authority that the total United States contribution to the joint undertaking in the Korean theater “runs to many hundreds of millions of dollars a year in military and economic aid.” Even if the United States were to save given number of dollars in negotiations for settlement of outstanding won drawings, he pointed out, the ROK dollar deficit would be increased by that amount and the United States would be faced with a recommendation for increasing United States economic assistance by the same amount.
CINCUNC’s responsibilities, as assigned by the Joint Chiefs of Staff and the UN Security Council, include responsibility for assistance to the civil economy of Korea, particularly to the extent required to prevent development of conditions prejudicial to the success of military operations. CINCUNC has indicated that U.S. failure to settle for past won drawings has been widely publicized as a major cause of the present rampant inflation in the Republic of Korea.

At the present time there is a definite plan on the part of the Korean Government to effect a currency reform by issuing a new series of won with a specified conversion factor for exchanging present holdings into the new issue. Any dollars paid to the Korean Government at this time would probably aid in stabilizing this new currency issue and thereby aid the economy of the country.

[Tab B]

Summary of U.S. Commitment to Reimburse the Republic of Korea for Currency advanced to United States Forces

A. Korean Currency Sold to U.S. Personnel

Settlement for all Korean currency sold to U.S. personnel will be effected at the rate at which the currency was sold.
Full and final settlement for all Korean currency sold to U.S. personnel through 30 April 1952 will be effected as promptly as possible.
Monthly settlement for Korean currency sold to U.S. personnel after 30 April 1952 will be effected within 60 days after the month in which the currency was sold.
[Page 752]

B. Korean Currency Expended for U.S. Military Requirements

Settlement for Korean currency, expended for U.S. military requirements during the period, from the beginning of hostilities through 31 December 1951, will be deferred to a future unspecified time.
Settlement for Korean currency expended for U.S. military requirements during the period 1 January 1952 through 31 May 1952 will be accomplished by reimbursement to the Korean Government as promptly as possible. This reimbursement is to be effected at the rate of 6000 to 1, less 10% which will be deducted as a charge against the Korean Government for expenditures covering projects of benefit solely to that Government.
Final settlement for Korean currency expended for U.S. military requirements during the period 1 June 1952 through 31 March 1953 will be effected as soon after the end of the period as possible, taking into account the 10% deduction covered in B (2) above as well as all relevant factors in determining a rate to be used for settlement purposes. However, a four million dollar per month payment on account will be made during this period to be applied against the over-all obligation. Such payment to be subject to modification in event of a significant change in either the amount of Korean currency advanced to the U.S. or other pertinent factors.
Settlement for Korean currency expended for military requirements after 31 March 1953 will be effected on a yearly basis similar to that outlined in (3) above.
  1. This memorandum with attachments was transmitted to the NSC under a covering memorandum by Lay, Feb. 9, 1953.
  2. The text of the letter is in telegram 707 from Pusan, Jan. 19, 1952, not printed. (895B.13/1–1952)
  3. Not attached hereto. Available upon request to the Executive Secretary, NSC. [Footnote in the source text.]