28. Telegram From the Embassy in Korea to the Department of State1

1012. Tokyo also pass CINCUNC, CG AFFE Eight and CAG. CINCUNC pass Stassen, Wood. Governor Stassen arrived Seoul eight a.m. March 7;2 conferences President Rhee two p.m., 7th; ten a.m., 8th; formal dinner Pres Rhee seven p.m., 7th; press conference two p.m., 8th; departure three p.m., 8th.

Participants in conferences besides Governor and members his party: Wood; Strom; Pyun, ROK FonMin; Sohn, Defense; Kang, Commerce and Industry; Lee, Finance; Yuh, Rehabilitation; and Paik Tu-chin, Economic Coordinator.3 Stage set by ROK for Governor’s visit by events following UNC dollar auction4 February 28: Up to $two million offered; bids totalling $1,068,000 at average price 485 accepted; and on March 2 Paik Tu-chin sent Wood letter5 impugning U.S. motives in buying less than full amount offered and giving official notice of ROK dissatisfaction with auction plans and formally invoking provision of agreed minute for return to Hwan drawing system (reftel 3–3 Unceb).5

In briefing Governor Stassen, progress in program was noted as follows: Substantial increases in agricultural and industrial production; recent decline in level of wholesale prices; reduction in exchange rate for general export dollar following initiation of dollar [Page 53] auctions: growth of private construction activity, including repair and erection of housing, largely due to massive import of building materials under aid program; initiation of such basic projects as power stations, fertilizer plant, cement plant, and glass factory which will yield substantial return in a few years’ time; general improvement of living standards and standards of health and sanitation; and satisfactory progress on preparing FRS and issuance of PA’s under FY 1955 program.

In next briefing step Wood enumerated ROK failures to honor its minute understanding6 commitments: first auction had to be thrown out and second was only nominally acceptable; ROK has offered none of its own foreign exchange for sale; in face falling market ROK has held 114,000 tons rice which could have been sold to acquire foreign exchange; ROK has lagged in instituting realistic pricing; Japanese boycott has continued; and ROK has failed to support private business endeavor, specifically in connection army sales salvage goods which are subject to gangster-type interferences.

In discussing failures it was pointed out to Governor most are related to Pres Rhee’s two major fixations on pegged foreign exchange and psychopathic opposition to Japanese, respectively. It was suggested that he will never be persuaded to relinquish these fixations; that measure of success aid program has been due to our success in persuading him to moderate his position on such things as dollar auctions and realistic pricing; and that any future success will depend on our ability to obtain continuation of moderate attitude.

President opened each conference with half-hour recital his grievances against NNSC followed by extensive remarks on relations with Japan and finally lengthy exposition his known views on exchange rates. In each conference he offered advance Hwan for UMC accepting repayment at any rate between 180 and 600 which UNC considered fair. As part of plan he would proclaim rate of 180 for all other transactions and asserted Korean people would accept this rate as part their patriotic duty; however, if after trial it was decided rate could not be held at 180 he would raise it, mentioning in this connection’ such rates as 220, 300 and eventually 400. He insisted his plan would succeed on six months’ trial; he pointed out that he and other Koreans knew more about their business than others (including ourselves); he would not auction off any of Korea’s foreign exchange; that it was Korea’s sovereign right to peg the rate at 180; and that if ROK actions in handling its foreign exchange problems accordance its best judgment were not acceptable to U.S. and its Congress, U.S. would have to withhold its aid or adjust itself to Korean policy in any way it found it possible.

[Page 54]

In replying at first conference, Governor on behalf U.S. thanked Korea for firm stand against communism; sympathized on NNSC issue and expressed opinion that in this as in many other situations in world today best solution was reached through exercise patience.

In taking up immediate problems connection aid program, Governor first noted improvements effected through program in recent months and then enumerated shortcomings in ROK performance under minute of understanding essentially as outlined in account of briefings given above. He then took up Paik Tu-chin’s letter of March 2 saying letter contained unjustified charges against U.S. and was not on whole kind of letter a government sends to another friendly govt. After some discussion various points Governor raised, conference adjourned about 3:30 pm to resume next morning at ten.

Main features second conference were President’s acrimonious remarks on exchange rate and discussion Paik’s letter. Governor let [led?] President most patiently and firmly through consideration consequences as far as American congressional and public opinion were concerned how ROK failures honor commitments under minute understanding with particular reference failure use its own holdings foreign exchange and discontinuation dollar auctions. He said U.S. also hoped eventually stabilize Hwan but pointed out this stabilizing process in Greece required four years after fighting ceased and in Japan, three and half. He noted the admitted improvement Korea’s last few months and asked for continuation dollar auction system through June 30 with offerings by ROK own foreign exchange to extent $14 million during this period. He promised around June 30 to send top FOA officials to Korea or come himself if possible to review situation and plan subsequent course with reference stabilization currency.

In course discussion Governor made repeated references desirability withdraw Paik’s objectionable letter (which also contained notice discontinuation auctions).

After more discussion President relented and agreed to Governor’s proposal: withdrawal of Paik letter; continuation weekly auction system; and review situation about June 30. Governor reiterated necessity ROK offer some of its foreign exchange for sale but Pres did not specifically commit himself to do it. Conference atmosphere friendly closing on most cordial note.

During past weeks Wood has tried unsuccessfully get Paik agree raising price at which POL enters ROK economy from 350 level agreed in January as transitory step towards more realistic price. Last night after dinner Paik raised question and Wood proposed pricing at 425 for March. Paik countered with 400. Wood advised Paik today that 400 for March and April allocations would be acceptable. Paik agreed subject to clearance by Minister Rehabilitation.

[Page 55]

Following Rhee conference today Wood returned Paik’s letter; Wood decided accompany Governor to Tokyo to discuss proposal holding auctions of two million dollars each on March 14 and 21; and Governor held successful press conference. Wood agreed advise Governor if during next two weeks ROK does not arrange auction million dollars of its own on March 28. In that event governor will write Rhee transmitting letter by telegraph pointing out importance this step.

Embassy and OEC consider Stassen visit was instrumental in averting extended crisis and improved President’s psychological attitude sufficiently to permit return to acceptable working relationship with ROK regarding aid program.

  1. Source: Department of State, Central Files, 033.1100–ST/3–855. Confidential; Priority. Repeated to Tokyo.
  2. Stassen was in Korea as part of a month-long tour of Embassies in the Far East and South Asia to review FOA programs. Stassen’s trip took him to India, Pakistan, Ceylon, the Philippines, Korea, and Japan before returning to Washington in mid-March. Additional information on the trip is ibid., 033.1100–ST.
  3. These Korean officials are: Sohn Won-il, Kang Sung Tae, Lee Joong-chai, Yun Wan Chang, and Paik Tu-chin, respectively.
  4. See footnote 3, Document 3.
  5. Not found in Department of State files.
  6. Not found in Department of State files.
  7. See footnote 3, Document 3, and footnote 5, Document 8.