S/S–NSC files, lot 63 D 351, NSC 118 Series
Memorandum by the Assistant Secretary of State for Far Eastern Affairs (Allison) to the Secretary of State1
- Consideration by the National Security Council of Settlement of Republic of Korea Advances of Korean Currency to United States Forces.
Upon instructions of the President, the above question has been submitted to National Security Council by memorandum of the Department of Defense. There are a number of related questions, discussed below, which are relevant.
In November 1952, the Republic of Korea informed the United Nations Command that it would no longer make local currency available [Page 753] to the United Nations forces against future settlement, and requested settlement for all won advances heretofore made. After a number of conferences with the Republic of Korea and cable exchanges with Washington, CINCUNC was authorized in January to offer $65 million in settlement for won previously received by the United States forces, and to agree to purchase won thereafter at a realistic exchange rate. CINCUNC actually offered only $62 million. This offer was rejected by the Republic of Korea, which demanded settlement at the conversion rate in effect when won were drawn, or approximately $96 million. CINCUNC concluded that a settlement of $87 million would satisfy the Republic of Korea and requested authority to negotiate a settlement at the best figure obtainable up to $87 million, stating that he considered the securing of a satisfactory arrangement for meeting local currency requirements at a definitely agreed realistic rate to be of paramount importance. The United States Ambassador to Korea has strongly supported CINCUNC’s recommendation, pointing out that in view of Korea’s total aid requirements the amount of settlement is much less important than satisfactory arrangements for the future.
A proposed exchange of notes with the Republic of Korea would provide for monthly payments in the future at a conversion rate bearing the same ratio to the wholesale index as existed in March 1951, and for periodic adjustments of the conversion rate. An instruction to the Command tentatively agreed between the Department of State and the Department of the Army provides that the arrangements for acquistion of and settlement for Korean currency on the part of the United Nations forces other than those of the United States will not be affected. It is not certain that the Republic of Korea will accept this condition.
The amount of settlement is the main issue. Two possible courses of action are set forth in paragraph 7 of the Defense memorandum.2
- Insistence that the Republic of Korea accept the $65 million previously offered. (In fact, only $62 million was offered.) Consideration only of the price levels during the period in question would result in the conclusion that even less than $50 million should be paid. This course could not be expected to result in satisfactory arrangements for the future, and would probably require continued purchase of won at the unrealistic rate of 6,000 to 1. The cost to the United States would soon make up the difference between $87 million and $65 million. Maintenance of the unrealistic rate would also be unfair to United States troops and would impede the whole counter-inflationary attack in Korea. It would be impossible to work out an intelligible aid program.
- Authority to pay up to $87 million in return for an undertaking to make won available at a realistic rate. This presents the only basis for aceptable future arrangements. The amount paid can and should be taken into account in consideration of Korea’s total aid requirements. [Page 754] No new United States appropriations are involved, since military appropriations have been debited from time to time at the current conversion rate, and the dollars paid into a suspense account in the United States Treasury. There are now over $93 million in the suspense account. The Judge Advocate General of the Department of the Army has given opinion that up to $90 million can legally be paid in settlement. Any amount in the suspense account not paid out in final settlement will go to miscellaneous receipts of the United States Treasury.
The Defense statement under paragraph 7 (b) is misleading in indicating that a decision to settle for more than $65 million requires special decision on the source of the funds or Congressional clearance. Strictly from the standpoint of sound financial procedures, the settlement should be at conversion rates corresponding to the real value of the won during the various periods involved, but in the absence of any agreement with the Republic of Korea on the rates to be applied, there is no legal or fiscal impropriety in settling at the conversion rate actually in effect. The funds are in hand and the decision is within the discretion of the United States Executive, taking all considerations into account. It would be appropriate to inform the interested committees of the Congress, as has been done in connection with prior settlements.
It is recommended that you strongly support a decision to offer the Republic of Korea $87 million in full settlement for won advances prior to December 16, 1952, and that the best United States offer be made at the outset of renewed negotiations. Further delay in a satisfactory resolution of this problem will not only exacerbate relations with the Republic of Korea, but will cost us even more because of the necessity of continuing to buy won at three times their real value.
Visit of Acting Prime Minister Paik Tu Chin
President Rhee has requested through both Ambassador Briggs and General Clark that he be permitted to send a mission to the United States headed by Paik Tu Chin, Acting Prime Minister and Finance Minister to discuss Korea’s needs for economic assistance.
When the interest of the Republic of Korea in such a mission was first reported, the Department of State instructed the Ambassador to discourage a mission at this time, because the present administration was not yet prepared to receive foreign dignitaries and because it will need further data from the Command on Korea’s economic capabilities and requirements before entering into any negotiations with the Korean Government. It would be reasonable to adhere to this line and to discourage a visit for the next month or so, at the end of which time more information on Korea’s needs should be available.[Page 755]
Both General Clark and Ambassador Briggs have recommended that an invitation be extended, however, and there would be some advantages to permitting Mr. Paik to proceed to Washington soon. First, if President Rhee is going to be any easier to deal with in the future than he has been in the past, it is desirable for the new United States Administration to get off to a good start with him. Holding off the proposed visit would strike Rhee as a demonstration of an unsympathetic attitude toward the economic plight of the Republic of Korea. Second, if Mr. Paik came soon it could be made clear in the invitation that he should not expect immediate answers to his requests. If such a mission is delayed, on the other hand, Korean expectations of immediate fruits would be heightened.
If Paik is allowed to come soon, it will be necessary to decide who is the proper United States spokeman with whom he should deal and to organize effective staff work involving Defense, State, and Treasury.
It is recommended that a decision be made to extend an invitation promptly to President Rhee to send Acting Prime Minister Paik to Washington with a limited number of advisers as soon as the present negotiations for won advances are concluded. The invitation should point out clearly that we will not be in a position to reach final decisions during his visit. A draft message to be sent to Ambassador Briggs is attached (Tab A).3
Korean Economic Aid Requirements
Data presently available do not permit a conclusion with, respect to the adequacy of the economic support for the Republic of Korea which is presently programmed. Present programs are not based upon a comprehensive analysis of requirements for necessary relief, adequate support of defense forces, adequate support of normal governmental functions, and some rehabilitation. The Republic of Korea budget for their fiscal year commencing April 1 is designed to present ROK expenditures more realistically, and a Budget Review Group consisting of representatives of the ROK, the Command, and UNKRA has made a report on a comprehensive budget taking into account all expenditures and resources. The Group did not go into policies or controversial questions. The UNC is now completing a survey of its own which will probably be based heavily upon the report of the Budget Review Group.
The report of the Budget Review Group is not considered reliable because the basic data were not critically analyzed and because of a number of arbitrary assumptions. Depending on the assumptions applied, [Page 756] possible conclusions from its data range from the conclusion that aid presently in sight (including a payment of $87 million) would be adequate to close the budgetary gap, to the conclusion that about $150 million additional will be required. It appears likely that the UNC will recommend supplementary assistance of this order of magnitude.
The ROK budget for the coming fiscal year is based upon an army of 600,000 men, as compared with presently authorized forces of 507,000. It is understood from the Department of Army that 20 ROK divisions would represent approximately 680,000 men but no indication has been given when it would be expected to reach this level. Information presently available does not indicate how much of total Korean budgetary requirements are attributable to the number of men under arms. A manpower problem could be largely avoided by selective draft policies, but whether they can practically be applied is uncertain.
It would appear from the report of the Budget Review Group that to obtain these various objectives, imports to Korea of the order of $450500 million a year are required. Experience to date raises serious question whether imports of this magnitude, in addition to purely military imports, can in fact be imported into Korea and effectively distributed in view of limitations of physical facilities and administrative skills. Inability to do so, however, implies to that extent a failure of the effort to achieve economic strength.
The stability of the ROK economy is of such importance that such failure should not be assumed. Instead, efforts should be focused upon means of strengthening techniques of administration. United States planning should be based on the assumption that the amount required can be used, but arrangements should be such that a lag in the program will simply result in the non-expenditure of appropriated funds.
No decision on increased assistance to the Republic of Korea should be made until the report of the Command has been received and adequate analysis made by the United States agencies concerned. If a prompt settlement is made for the won advances, dollars in the hands of the Republic of Korea in addition to CRIK and UNKRA programs will be adequate to meet present needs.
Measures to Strengthen Administration of Economic Assistance
The record of the United States for the administration of relief in Korea is on the whole good, but it is not good with respect to coordinated attack upon economic problems. Even prior to June 1950, the efforts under the Economic Coordination Administration to make the Republic of Korea self-supporting were faced with serious obstacles of inflation and administrative backwardness. When the destruction and disorganization [Page 757] of war were superimposed upon previously existing difficulties, the tasks of creating adequate standards of living, supporting defense forces, commencing reconstruction, and preserving fiscal stability called for superhuman efforts. While there have been many deficiencies on the Korean side, the measures taken by this Government have also been seriously deficient. Everything possible must be done to give the economic task in Korea the best leadership of which this Government is capable, and to remove unnecessary obstacles. There are now in Korea no men representing the United States Government with broad economic experience and the channels for Washington action are unduly cumbersome. The present won negotiations, which commenced in November, could well be taken as a case study of the delay and frustration which have surrounded the most important economic questions in Korea.
Action responsibility on most economic matters is presently assigned to the Office of the Chief, Civil Affairs and Military Government in the Department of the Army, but action on financial matters is ordinarily assigned to the Comptroller of the Department of the Army. The Comptroller is properly concerned primarily with the United States fiscal interest, rather than the achievement of United States objectives in Korea, and CA/MG does not have sufficient standing in the Pentagon to obtain decisions without frustrating delays and harmful compromises. There has not been strong leadership from the Office of the Secretary of Defense. On both theoretical and practical grounds it would seem that CA/MG matters belong in the Office of the Secretary of Defense.
- Immediate consideration should be given to the appointment of a highly qualified civilian, preferably with military experience, to represent the Unified Command in the Combined Economic Board and to serve as adviser on economic matters to General Clark.
- The focus for economic responsibilities in the field should be moved from Tokyo to Korea so that reports and recommendations can proceed directly from the authorities working with the Republic of Korea to this Government. Responsibility in Washington should be focused in an office in the Department of Defense having sufficient standing to obtain rapid decisions.
Agencies and Appropriations
At present United States aid to Korea, other than the dollars paid the ROK for won, are found in the contribution to the UNKRA (a part of the Mutual Security Program) and the appropriations to the Department of Defense for Civil Relief in Korea (CRIK). The UNKRA is proceeding during the United States fiscal year with a $70 million program [Page 758] and plans to complete the balance of its initial program of $250 million during United States fiscal year 1954. United States contributions are 65 percent. The CRIK program is based upon physical needs for relief and sustaining imports. In terms of types of imports, there is now no clear distinction among these three programs, (including ROK imports) because each includes consumer goods. It is clear that if additional assistance is required, it should not be allowed to compound this difficulty. In principle, such additional aid would be defense support, which is ordinarily provided for by this Government through the Mutual Security Program. Given the responsibilities of this Army in Korea, however, any additional aid required should be sought through appropriations to the Department of Defense. It would be well, however, to provide more liberal methods of administration so that, for instance, some part of the commodities could be purchased in private trade, perhaps by adapting procedures applicable to the Mutual Security Agency.
Any additional assistance for Korea above the present programs should be sought by redefining the CRIK appropriation to the Department of Defense to include the concept of defense support. Consideration should be given to authorizing the use of procedures applicable under the Mutual Security legislation.