Foreign Relations of the United States, 1952–1954, Korea, Volume XV, Part 1

795B.5 MSP/3–3152

Memorandum by the Director of the Office of Northeast Asian Affairs (Young) to the Assistant Secretary of State for Far Eastern Affairs (Allison)

secret

[Washington,] April 4, 1952.

Subject:

• Background Memorandum on the Objectives of the Special Presidential Mission to Korea, and Major Issues to be Negotiated.

This memorandum is for your use in meeting with Mr. Meyer and any other members of his mission.

I. Objectives

The basic objective of the mission is to negotiate an agreement with the Republic of Korea which will provide for the establishment and operation of joint machinery to stabilize the economy. This involves the effective utilization of United States economic aid, the adoption of appropriate fiscal and monetary trade measures to alleviate the inflation, and provisions for settlement by the United States for some of the won drawings under the Financial Agreement of July 28, 1950.

We intend to emphasize the importance of establishing the proper negotiating atmosphere prior to the discussions. Mr. Meyer will be briefed on the political situation in Korea and the general feeling of frustration which the Government apparently now has with respect to its efforts to stabilize the economy.

II. Economic and Financial Issues

There are the following economic and financial issues to be resolved during the course of the negotiations.

1. The payment of the accumulated dollars in the Suspense Account. The Suspense Account contains the dollar equivalent of the won which has been advanced by Korea to the Unified Command. The Financial Agreement of July 28, 1950 provides that a future settlement will be made of these won drawings at a mutually agreed time. The Korean Government has requested that full settlement be made immediately, so that private imports can be increased to alleviate the inflation. It is the opinion of the concerned agencies in Washington that it would be unwise to turn over to the Korean Government the balance in the Suspense Account, which totals over $70 million. This is Korea’s main foreign exchange asset, and considering the uncertainty of future United States budgetary appropriations for economic aid to Korea, this money can probably be better utilized at some future date for basic rehabilitation purposes. It is felt that if the United States proceeds on a current settlement basis most of the inflationary pressure can be removed. In addition, the question of claims and counterclaims complicates a settlement, and in accordance with practice in other countries during World War II a settlement is more practicable after the cessation of hostilities.

2. Joint control of foreign exchange of the Republic of Korea. This was the main point of contention in the negotiations between CINCUNC and the Korean Government. The Korean Government has stated in the strongest terms that joint control of all foreign exchange is an unwarranted infringement of its sovereignty. President Rhee has indicated, however, that he would agree to joint control of foreign exchange arising from United Nations operations. The Department of State opposes joint control of all foreign exchange. Mr. Foster and the fiscal people in the Department of Defense favor it.

3. The conversion rate of won to dollars. The present rate of 6,000 to 1 has been in effect for a year and is no longer realistic. The present Korean price level would justify a rate of at least 10,000 to 1. The Korean Government, however, desires to continue the 6,000 rate because it feels that further depreciation would accelerate the inflation.

4. The Financial Agreement of July 28, 1950. The Korean Government wishes to supplant it with a new agreement providing for current settlements. General Ridgway, on the other hand, desires to continue the Financial Agreement, which provides for the won drawing privilege, in the light of the highly uncertain military situation in Korea.

5. Effective machinery for joint economic planning. This should not be a serious problem, since both the Korean Government and CINCUNC agree to the need for some formal arrangements for a joint effort. The mission can direct its efforts toward insuring that such a committee will actually be effective.

6. Adjustment of dollar payments to the Korean Government for those expenditures made by the Unified Command which can be considered a proper burden for the Korean budget. Examples of this type of expenditure are the Unified Command’s support of the Korean Railway and of certain public utilities. It will be difficult to obtain agreement of the Korean Government both on the principle involved and the criteria which will be applied in application of the principle.

III. Other Issues

There is attached my memorandum of March 31, 1952¹ outlining State’s opposition to a civil affairs agreement. This matter has been deleted from our redraft of the terms of reference. Defense will probably fight this.²

1. Not printed; see footnote 5, p. 124.
2. As a result of staff level discussions between the Departments of State and Defense, Meyer was provided with only discretionary authority, subject to further instructions from Washington, to initiate negotiations with the ROK for a Civil Affairs Agreement; telegrams Topad 2667 to Tokyo and 719 to Pusan, Apr. 5 and telegram 726 to Pusan, Apr. 10 (795B.5 MSP/4–552 and 795B.5 MSP/3–2952, respectively).