Foreign Relations of the United States, 1952–1954, Korea, Volume XV, Part 2

S/S–NSC files, lot 63 D 351, NSC 156/1 Series

Report by the National Security Council Planning Board to the National Security Council¹

top secret
NSC 156/1

Washington, July 17, 1953.

Strengthening the Korean Economy

background

1. The current policies of the United States with reference to this subject are:

a. NSC 118/2, 12/21/51

2–d “Whether or not an armistice in Korea is achieved; (2) develop and equip dependable ROK military units, as rapidly as possible and in sufficient strength with a view of their assuming eventually responsibility for the defense of Korea.” (6) “working in and through the organs of the UN where feasible, continue to strengthen the government and domestic institutions of the Republic of Korea, and continue to contribute to the United Nations’ effort for economic recovery and rehabilitation in the Republic of Korea and in areas of Korea liberated from Communist control.”

b. NSC Action No. 787, 5/13/53

• “d. Noted that the President in accordance with NSC Action No. 765–b, authorizes the Commander-in-Chief, United Nations Command, to activate additional Republic of Korea divisions, over and above the 16 already activated, to a total of 20.”
• “e. Noted a report by the Secretary of Defense that, within existing authorization, he has approved the Joint Chiefs of Staff recommendations for the following personnel increases in Republic of Korea forces:

  (1) Marine Corps—19,880 to 23,500

  (2) Navy—9,402 to 10,000

  (3) Air Force—7,034 to 9,000”

c. NSC Action No. 828, 6/25/53

• “a. Noted the report made to the President on ‘Strengthening the Korean Economy’, dated June 15, 1953 (NSC 156), by the mission headed by Henry J. Tasca, Special Representative of the President on Korean Economic Affairs.”
• “b. Referred the report to the NSC Planning Board for preparation of recommendations relative thereto, based upon study by a Special Committee consisting of representatives of the Director for Mutual Security (Chairman), the Secretaries of State, Treasury and Defense, and the Director, Bureau of the Budget.”
• “c. Agreed that any implementation of the Report should be deferred until the Korean situation could be clarified.”

d. NSC 154/1, 7/7/53—United States Tactics Immediately Following an Armistice in Korea.

“Aid to the Republic of Korea

14. On the assumption that the Republic of Korea will cooperate satisfactorily with the UN in carrying out the terms of the armistice:

a. Continue to develop and equip dependable ROK military forces in accordance with the present program, with a view to the assumption by the Republic of Korea of greater responsibiity for the defense of Korea.

b. Undertake with respect to the security of Korea, commitments (with or without reciprocal undertakings on the part of the ROK) similar to those undertaken by the U.S. under the treaties with the Philippines, Australia and New Zealand.

c. Working in and through the organs of the UN where feasible, continue to strengthen the government and democratic institutions of the Republic of Korea and continue to contribute to the economic recovery and rehabilitation of the Republic of Korea.”

2. The Korean situation is now sufficiently clarified so that the U.S. Government is justified in proceeding on the assumption that the Republic of Korea will cooperate in an armistice. President Rhee, in letters to the President and to Mr. Robertson, has stated in writing that he would not obstruct an armistice on the terms which have hitherto been tentatively agreed with the Communists.

3. On this assumption, an expanded program of economic assistance should be initiated promptly for that portion of Korea controlled by the Republic of Korea and the United Nations Command, whether or not the Communists sign an armistice. If an armistice is promptly forthcoming, such a program would be necessary to achieve the objectives laid out in, and for the reasons given in, NSC 156. If an armistice should be delayed by Communist action, such a program of assistance would become even more urgent for purposes of military support, although in some particulars the program would require modification.

4. The United States has already warned the Republic of Korea that economic aid is dependent upon cooperation in connection with an armistice. Furthermore, an important factor in deterring the Republic of Korea from taking action to frustrate or violate an armistice will be the immediate undertaking of an enlarged program of economic assistance. If, however, despite its assurances, the Republic of Korea takes action to frustrate or violate an armistice, or fails to cooperate with the United States in developing and carrying out satisfactory economic and financial programs, the United States should reconsider the program of additional economic aid, and should be prepared to cut off such aid if it is deemed advisable to do so.

recommendations

5. The Tasca Report should be noted as an excellent statement of the Korean economic problem and as a basis for the development of an expanded program of economic assistance to the Republic of Korea under the conditions specified in the following paragraphs.

6. An expanded program of economic assistance should be initiated in that portion of Korea controlled by the Republic of Korea and the United Nations Command, conditioned upon a satisfactory understanding with the Government of the Republic of Korea with respect to internal measures required to achieve economic stability.

a. Pending an armistice, the expansion of the program should be subject to the following conditions:

(1) The Republic of Korea does not obstruct the arrangement of an armistice.

(2) The armed forces of the Republic of Korea should be built to and maintained at approximately presently approved levels.

(3) Economic stabilization for the Republic of Korea should be the overriding objective in order to provide maximum support for the military effort of United Nations forces in Korea.

b. When a satisfactory armistice is arranged in Korea, the expanded program should be subject to the following conditions:

(1) The Republic of Korea satisfactorily cooperates in carrying the armistice into effect.

(2) The armed forces of the Republic of Korea should be built to and maintained at approximately presently approved levels, unless and until a political settlement makes possible a reduction.

(3) A standard of living approximating the 1949–1950 levels should be the goal toward which the program should contribute.

(4) The investment component of the program should be stepped up. Initially, however, investment should be confined to projects for reconstruction rather than new construction.

(5) Investment in areas which would be most affected by renewal of hostilities should proceed at a limited rate until an assessment can be made of the likelihood of such renewal.

(6) Investment in those projects which would be subject to reconsideration in the event of unification should proceed at a limited rate until an assessment can be made of the likelihood of such unification.

7. The Bureau of the Budget, in consultation with interested agencies, should submit to the President an organizational plan for the effective administration of present and future economic assistance to the Republic of Korea.

[Attachment 1]

Financial Appendix

1. Consideration should immediately be given to submitting to the Congress at its existing session proposals for new legislation to provide additional funds for an expanded program of economic assistance for the Republic of Korea, or to provide for the transfer of existing appropriated funds for such expanded program of economic assistance.

2. In the event that no new funds or new authorization are obtained from the Congress during this session, funds appropriated for other purposes, but legally authorized for possible use in Korea, should be utilized to initiate an expanded program. The size of such a program should be determined in the light of fund availabilities as a result of pending appropriations and competing global requirements.

3. Because of the many uncertainties involved, it is difficult to estimate the ultimate cost of an economic program. The following appear to be reasonable cost estimates:

a. If only South Korea is involved, it would appear that an expenditure of between $700 million and $1 billion would be required during a four- or five-year period in addition to economic programs totalling about $190 million in expenditures from FY 1953 obligations and from programs now before Congress. These estimates do not include payments made to the ROK’s for military local currency requirements or the costs of military civil construction. A program for a unified Korea would be larger.

b. Additional expenditures during FY 1954 over and above the economic programs now approved by or before the Congress involves many uncertainties, such as the time required to get the program underway, but under the most favorable circumstances probably would not exceed $165 million.

c. Maximum expenditures in any fiscal year during the four or five years of the program probably would not exceed $300–$400 million.

d. U.S. expenditures under this program may be reduced to the extent that other countries can be induced to make additional contributions to South Korean rehabilitation.

U.S. Expenditures for Economic Aid to Korea

	1954		1955–57	Total 1954–57
Additional Economic Assistance	$165	}	$540–840	$895–1195
Existing Programs Before Congress (including carryover)	$190
Total Expenditures not to exceed:	$355		$540–840	$895–1195

4. It is the view of the Director for Mutual Security that in light of the reduction, by Congressional Action, of the President’s request for funds for the Mutual Security Program, it will be impossible to finance an expanded economic assistance program for Korea through the reduction or elimination of lower priority country programs within the present authorization provisions for Mutual Security Program. The carrying out of an expanded Korean program would therefore require additional Congressional appropriations, or authority to utilize funds authorized and appropriated for general expenditure by the Department of Defense and the Mutual Security Program.

5. It is the view of the Secretary of the Treasury that additional resources for Korean relief and reconstruction in fiscal year 1954 should be provided from funds already requested from the Congress for security programs and planned for expenditure in fiscal year 1954, such as savings in the expenditures of the armed forces as a result of the cessation of combat in Korea or savings in aid programs for other areas. It may, of course, be necessary to obtain Congressional approval for transfer of funds from other uses to the Korean program.

Annex

Washington, July 13, 1953.

Memorandum by Norman S. Paul, Chairman of the Special Committee to the Chairman of the Planning Board (Cutler)
top secret

Subject:

• The Tasca Report on “Strengthening the Korean Economy”

Attached hereto is a report by the Special Committee established in accordance with NSC Action #828(b) for the purpose of studying and reporting to the Planning Board on the Tasca report. This report reflects the agreement of the Special Committee members, but does not represent final agency positions on the recommendations contained therein.

You will note that the Special Committee report contains no estimate as to the amount of new obligational authority required to carry out an expanded program of economic assistance to Korea. Other agency views have not as yet crystallized on this figure, and the Bureau of the Budget does not agree that such a figure should be included in a report which is to be submitted to the National Security Council for approval.

I am authorized to state, however, that the Director for Mutual Security is prepared to support a new obligational authority request for $280 million for an expanded program of economic assistance to Korea during FY 1954, based on the assumption indicated in the attached report. This figure, which is $20 million less than the recommendation made in the Tasca report, was arrived at after taking into account the basic factors involved. A factor which tends to reduce the amount of new obligational authority required is the likelihood that two months of the current fiscal year will have elapsed before a program could be effectively initiated. On the other hand, account had to be taken of the fact that the Tasca report assumed the availability of $75 million from army appropriations for civilian relief in Korea, which has now been reduced by Congressional action to $58 million. Maximum contributions by other UN-member countries for Korean relief and rehabilitation were assumed. A major factor in the estimate arrived at by the Director for Mutual Security was the considered need for a substantial move of consumer goods into the Korean economy to avert runaway inflation during the coming crucial months. Apart from purely economic considerations, it is the view of the Director that such a program would have an important psychological effect on both the Koreans and the rest of the world as concrete evidence of United States determination to help revive an economy shattered by the ravages of war against the Communist aggressor. To the extent that South Korean forces do not attain the 20 division level assumed in the attached report, it is believed that aid requirements could be reduced at a rate of $15 million per division. In other words, if the program were based on a security assumption of a 16 rather than a 20 division force level, the estimate of the need for new obligational authority could be reduced to $220 million.

In conclusion I should like to emphasize on behalf of the Special Committee the absolute necessity of rapid action on the recommendations contained in paragraphs 19 and 20 of the attached report. The imminence of Congressional adjournment permits no delay in reaching a basic judgment as to the manner or timing of an approach to the Congress.

For the Special Committee:

Norman S. Paul

[Attachment 2]

Report of Special Committee on Tasca Report

Objectives

1. As long as hostilities continue in Korea, it is essential that our military position not be jeopardized by civilian unrest or internal subversion. In the event of a truce and in the absence of unification of Korea, it will be important to our security to have a friendly government in South Korea with an economy able to maintain armed forces in accordance with the NSC-approved program, with a view to the assumption by the Republic of Korea of greater responsibility for the defense of Korea. Under a political settlement and unification of Korea on terms acceptable to the United States, it will be desirable to have an economy able to maintain forces sufficient for internal security and capable of defending Korean territory short of an attack by a major power.

Background

2. Economic assistance is now being provided to the Republic of Korea in several forms. The Department of Defense provides an emergency civilian relief program (CRIK). The United Nations Korean Reconstruction Agency (UNKRA), pursuant to a UN-approved initial budget of $250 million, has been implementing a program of reconstruction and rehabilitation during FY 1953, and has proposed a program of $130 million for FY 1954. In addition, substantial economic aid has been provided in the form of dollar payments to the South Korean government for local currency requirements, at the rate of approximately $50 million per year, employment of South Koreans by various U.S. agencies, and substantial military construction by U.S. army engineers that has civil as well as military value. Included are such items as roads, bridges, power plants and railroads.

3. The war has created conditions in Korea which must be improved if a dangerous economic and political crisis is to be avoided. There have been widespread damage and destruction of homes and factories. Millions of people have been displaced. The Seoul–Yung Dung Po and Inchon areas, where most of South Korea’s industry was located, has been completely gutted by the four military shifts of control since 1950. Lack of transport capacity has retarded the import and internal movement of essential commodities. Impaired domestic production, greatly expanded military expenditures, and inadequate anti-inflationary steps have all contributed an inflationary situation that continually threatens to get out of hand.

4. The projected increases of the armed forces to a level of 20 divisions will place a further burden on the Korean economy whether hostilities cease or not, and even the maintenance of the present 16 division level will involve a severe economic strain.

5. Because of the precarious economic situation, and its potential effect on our security objectives, an economic mission was sent to Korea by the President under the following terms of reference:

“It is desired that you make a full investigation of the ways and means of strengthening the Korean economy in the light of the security objectives of the United States and the United Nations. Your mission will include, but is not limited to, a recommendation as to the amounts and types of U.S. assistance desirable in support of the Korean economy; proposals as to the manner in which the United States best can be assured that any resources it may contribute are utilized in the most efficient manner possible; and the formulation of measures to be adopted to insure the coordination of all economic programs in Korea.”

The Tasca Report

6. The Mission headed by Dr. Henry J. Tasca has issued a report which contains a comprehensive analysis of South Korean economic problems. No attempt was made to analyze the economic problems involved, and the aid requirements of a unified Korea. It recommends a three year funding of a program of economic aid, military support, relief and reconstruction, involving U.S. expenditures (including UNKRA and CRIK) in excess of $1 billion. These expenditures probably would be spread over a period of four to five years. Although the economy of South Korea as a result of the expenditures of these funds would be in reasonably sound condition, it is expected that the need for some additional assistance would continue to exist.

7. The program recommends imports of $1.5 billion of which $.5 billion would be financed by South Korean trade and invisibles (principally United States payments for local currency needs) and by aid from countries other than the United States. Of the $1.5 billion total, about $1 billion is for raw materials and other consumable goods while $.5 billion is for investment. Proposed major fields of investment are public health, education, agriculture, transportation, and general industry. Significant investment would also take place in electric power, mining, public works, communications and fisheries.

8. The report also recommends that, coordinate with increased aid, the ROK make major changes in policy relating to the exchange rate, prices, economic controls, banks and credit, sale or lease of Government-owned enterprises and steps to monetize the economy. This would involve a basic shift from a policy of trying to suppress inflation through rigid controls in certain sectors and currency reforms to one of restoring market prices, increasing taxes and moving towards a balanced budget. Such a shift requires additional consumable goods to succeed. But it also requires legislative action and strong executive leadership on the part of the Republic of Korea.

Assumptions of Tasca Report and Analysis

9. The Tasca report assumes (a) political and security conditions which will permit the initiation of an expanded economic assistance program immediately, (b) effective administration of aid and full cooperation between the United States and the Republic of Korea, (c) a divided Korea during the three to five-year period, (d) absence of hostilities during the period, (e) an immediate build-up of ROK Army forces to 20 divisions and retention of this strength for a three-year period, phasing down to a security force of 10 divisions thereafter, (f) restoration of approximately the 1949/50 standard of living, and (g) continuation of an UNKRA program as an instrument of collective UN action, at least through the completion of its initially authorized $250 million program.

10. On the basis of these assumptions, the report recommends all possible speed in both the investment programs and the import of consumable goods. It points out that domestic production cannot increase without aid to agriculture, investment in repair parts, additional machines to replace those lost in war damage, and rebuilding. The sooner production is increased, the sooner outside aid can be reduced. In addition, the psychological impact of rapid reconstruction would be of tremendous advantage in showing the world that the United States cares about restoring the damage suffered by the Republic of Korea in the fight against Communist aggression, and in creating confidence in the Koreans that they can survive economically in the future.

11. There are reasons for a policy of slower investment in certain industries and geographical areas in the period between a truce and a political settlement. Furthermore large investment now in South Korea would cause further inflationary strains, particularly if the Government of the Republic of Korea does not make the necessary economic reforms before such a large investment program is begun. Until pricing policies are changed, it is difficult to know what industries might be most economical. There are also impediments to the rapid expansion of the level of imports generally, due to inadequacies of transportation and distribution system.

12. Should an assessment of the political situation following the signing of the truce indicate the strong possibility of unification, an immediate review of the composition and extent of aid would be required.

13. The experience in Korea of four years of military government, a year of ECA, and several more of active war, has demonstrated that bottlenecks of supply, inexperienced staff and Korean institutional and political conditions may place a limitation on the speed with which a program can be carried out.

Organization Problems

14. The Tasca mission recommends (a) a continuation of the concept of Presidential Representative for Korean Economic Affairs, serving under CINCUNC as long as South Korea remains a military theater; (b) “positive operational control” by the U.S. over UNKRA, to be obtained by General Assembly action; and (c) principal backstopping in Washington for Korean economic aid matters by DMS, in consultation with other agencies. These recommendations, which involve the interests of several agencies, are under review by the Bureau of the Budget, in consultation with other agencies.

Recommendations

15. An expanded program of economic assistance should be initiated promptly for that portion of Korea controlled by the Republic of Korea and the United Nations Command, subject to the understanding that its implementation will continue only so long as the Republic of Korea cooperates with the United States during the armistice and post armistice developments. The following should be accepted as planning assumptions for economic assistance:

a. ROK army forces will be built to 20 divisions in accordance with present plans.

b. An ultimate reduction to a 10 division force basis for the Republic of Korea.

c. A standard of living approximating 1949/50 levels.

16. Certain parts of the program should be somewhat restricted pending further clarification of the Korean political situation. Investment in areas which would be most affected by renewal of hostilities should proceed at a limited rate until an assessment can be made of the likelihood of such renewal. Investment in those projects which would be subject to reconsideration in the event of unification, should proceed at a limited rate until the possibility of unification as a result of the political conference can be assessed.

17. The provision of additional aid should be conditioned on an understanding with the Government of the Republic of Korea with respect to internal measures required to achieve economic stability.

18. Since provision for this program has not been made in cost estimates of existing approved security plans and programs, the appropriate agencies should immediately complete the steps necessary for a request of funds from Congress.

19. An immediate Executive decision should be made as to whether, or in what manner, an approach should be made to Congress during this session.

20. In the event that no new funds or new authorization are obtained from the Congress during this session, funds appropriated for other purposes, but legally authorized for possible use in Korea, should be utilized to initiate an expanded program. The size of such a program should be determined in the light of fund availabilities as a result of pending appropriations, and competing global requirements.

21. Because of the many uncertainties involved, it is difficult to estimate the ultimate cost of an economic program. If only South Korea is involved, a reasonable estimate would involve the expenditure of between $700 million and $1 billion during a four or five-year period in addition to economic programs totaling about $150 million in expenditures now before Congress. These estimates do not include payments made to the ROK’s for military local currency requirements or the costs of military civil construction. A program for a unified Korea would be larger. Additional expenditures during FY 1954 over and above the economic programs now approved by or before the Congress involves many uncertainties, such as the time required to get the program underway, but under the most favorable circumstances probably would not exceed $175 million. U.S. expenditures under this program may be reduced to the extent that other countries can be induced to make additional contributions to South Korean rehabilitation.

22. Concurrently with the steps described above, the Bureau of the Budget, in consultation with interested agencies should prepare, for submission to the President, an organizational plan for the effective administration of an expanded program of economic assistance to Korea. The details of such a plan, unless basic security policies are involved, should not be submitted to the National Security Council for approval.

1. According to a covering note by Lay, this report and the recommendations contained in paragraphs 5–7 were being submitted by the Planning Board to the NSC for consideration at its 156th meeting on July 23, 1953. For a report of that meeting, see p. 1420. This report was prepared in response to NSC Action No. 828–b, June 25, 1953, which referred the Tasca Report (NSC 156) to the Planning Board for preparation of recommendations based upon study by a Special Committee consisting of representatives of the Director for Mutual Security, the Secretaries of State, the Treasury, and Defense, and the Director, Bureau of the Budget. A Financial Appendix and an Annex containing the report of the Special Committee were attached for the Council’s information.