Foreign Relations of the United States, 1958–1960, Japan; Korea, Volume XVIII

224. Telegram From the Embassy in Korea to the Department of State⁰

Seoul, May 23, 1958, 6 p.m.

866. Reference: Deptel 738.¹ Joint Embassy–CINCUNC–CINCREP message.

1. Disagreement on funding defense budget is in no way deterrent to final agreement on Appendix B, but rather lack of agreement on Appendix B with reference to reduction in force is preventing agreement of revision of Defense budget and general budget as well.²

While no indication MND going back on agreement set forth in February 28 memo,³ appears unwilling agree to budget revision based on force reduction until amendment minute understanding formalized. Longer this delayed, less likely reduction can be carried out before January 1, 1959 on gradual and orderly basis or that significant budget savings will be realized this year. PROVMAAG-K estimate 118.5 billion hwan based on 12-month phase down while MND figure 124.2 billion based on strength figure assumed in original budget presentation, i.e., 687,000.

2. In MND–PROVMAAG-K discussions, there has been no relationship between military budget problem and question pay increase. Both MND and PROVMAAG-K budget estimates based on current pay scales which average 14 percent above 1957 levels.

3. Financial stability last year and this year has been due large part to substantial accumulation counterpart.⁴ Would risk jeopardizing whole stabilization program if sizable net out-flow counterpart were to be permitted this year without offsetting adjustments elsewhere in ROK expenditures. There are dangerous signs that government planning additional expenditures which may not be covered adequately by new revenues and it would be deplorable if this one source over which we have control were allowed to swell expenditures threatening stability. Were we to accede to ROK position regarding Defense budget larger than revised estimate 118.5 billion hwan, this would either require use portions past counterpart accumulations, deficit financing, or reduction planned development program. (Further we would exceed PROVMAAG-K’s estimate of real need.) First two alternatives would have inflationary consequences and this would involve undesirable cut development program. Regarding counterpart utilization during remainder CY 58, OEC estimates all counterpart and US owned local currency collections will be needed meet planned development and defense costs this year. Some non-inflationary uses of so-called frozen counterpart under consideration and likely will provide justifiable and worthy requirements to draw down old balances.

4. State Council now considering supplementary budget which includes doubling of military and civil service pay. We consider pay increase highly desirable in interest development honest, efficient and loyal bureaucracy and maintenance morale and integrity in armed forces. Certain elements present financing plans appear inflationary. Emb–OEC working with Ministry Finance to develop sound non-inflationary program.

Dowling

0. Source: Department of State, Central Files, 795B.5/5–2358. Secret; Priority.
1. In telegram 738 to Seoul, May 16, the Department of State indicated that interagency clearance procedures had been initiated to formalize agreement on a revised version of Appendix B of the Agreed Minute of Understanding. The Department indicated that it did not “desire military budget support questions to jeopardize in any way settlement reached on force reduction problem.” The Department asked: “Is basis impasse over downward adjustment military budget that PROVMAAG-K estimate makes no allowance for military pay increases whereas ROK desires use savings from force reductions for such increases?” There were, the Department noted, large counterpart funds available for budgetary support for desirable increases in military pay. (Ibid., 795B.5/5–1658)
2. A separate joint Ambassador–CINCUNC message, May 23, reinforced this point: “It is becoming increasingly important that agreed reduction in ROKF be formalized. Until this is accomplished, subject must remain classified and implementation of reduction cannot be effected. Furthermore, Minister of Finance will submit revised ROK budget to National Assembly in early June, at which time MND requirements should be presented. It will be virtually impossible to discuss the latter until agreement on revision of Appendix B has been reached.” (Telegram UK 978111 from CINCUNC to the Department of State, May 23; ibid., 795.00/5–2358)
3. See footnote 3, Document 214.
4. Counterpart funds were local currency funds derived from the sale of U.S. aid goods. Counterpart funds were used to support specific projects jointly identified by the United States and the recipient country.