Foreign Relations of the United States, 1949, The Far East and Australasia, Volume VII, Part 2

895.50 Recovery/11–1449

The Secretary of State to the Embassy in Korea

confidential
No. 90

Washington, December 30, 1949.

The Secretary of State refers to the Embassy’s despatch No. 725, of November 14, 1949, and expresses the Department’s approval, concurred in by the Economic Cooperation Administration, of the action taken by the Chief of the ECA Mission in presenting to the Prime Minister proposals for controlling the mounting inflation in Korea.

It is evident that both the political and economic stability of the Republic of Korea are being threatened by the inflation, the implications thereof being of such a serious nature as to warrant the strongest representations to the President of the Republic. Accordingly, the Officer in Charge is instructed, in close cooperation with the Economic Cooperation Administration’s representative, to present a detailed set of proposals to the President of the Republic of Korea, setting forth the manner in which it is believed the program outlined in the Embassy’s despatch under reference might be implemented. Assurances should be sought that the advice and assistance which the Economic Cooperation Administration Mission in Korea stands ready to extend to Korean Government agencies will be fully utilized in achieving the reversal of the present inflationary trend. In making detailed representations to the President, the Officer in Charge should incorporate the substance of the following as considerations meriting the closest attention of the Korean Government:

1. The military and political situation can not be viewed as more important than the economic situation or as not being directly affected by the latter. On the contrary, it must be recognized that expenditures for military and security purposes, which are intended to maintain political stability, are an integral part of the total economy, and a balance of all three factors must be maintained.

2. The irresponsible financial policies of the Korean Government, if continued, will not only nullify the economic assistance and recovery program but may even bring about the ultimate collapse of the Government. Consequently, the Government must realize that unless it can bring about the conditions technically necessary for the success of the recovery program, the entire Korean Aid Program will have to be reviewed in terms of its feasibility. In this connection, it should be emphasized that the counterpart fund is designed, as in other countries receiving economic assistance, to utilize the deflationary impact of the aid imports to provide financing for the local currency expenses of the recovery projects. In Korea the other inflationary factors so heavily outweigh the effects of the ECA imports that counterpart fund releases for investment purposes have become extremely difficult to justify in terms of the standards set up for other countries. Unless some improvement can be demonstrated, reconsideration of some or all of the investment projects will be necessary.

3. The elimination of the basic inflationary factors, rather than continued efforts to hold down prices through subsidies and other artificial means is requisite to the stabilization of the Korean economy. The main factors which must be brought under control are the following:

(a) uncontrolled government spending;

(b) unrestricted expansion of bank credit to finance operating deficits of government enterprises;

(c) subsidized prices of both ECA goods and locally produced goods and services, and

(d) the operation of the tax collection system. Radical measures must be taken to eliminate the system of “voluntary contributions” and to put a stop to unauthorized expenditures and transfers of government funds. The elimination of subsidies in the prices of goods and services supplied by government enterprises must be undertaken immediately unless those subsidies can be financed, as appears quite unlikely, from taxes or other revenues. This will in turn permit the cessation of unsound bank credit expansion, and the early introduction of orthodox bank credit policies. Likewise, the Korean Government must arrange for realistic adjustments in the prices of ECA imports to the maximum levels at which the available supplies can be sold with corresponding adjustments in the counterpart fund deposit rate. Gradual adjustment of these prices, as the experience of the past six months has shown, will never catch up with the inflation. These measures will require persistent courage and firmness of purpose, but they should nevertheless demand the immediate attention of the Government.

4. The Government of the Republic of Korea is obligated, under the terms of the Aid Agreement,¹ to help itself by taking such measures as were contained in the despatch under reference. So far there has been little evidence of such self help. Unless President Rhee and his Government show the willingness and the ability to inaugurate measures designed to stabilize the internal economy of Korea, the United States Government will be forced to re-examine the character and extent of economic assistance which can be made available. The United States Government therefore desires that the President make regular reports to the Embassy of progress being made by the Korean Government in this regard.

The Economic Cooperation Administration concurs in this instruction and the Secretary of State requests that the Officer in Charge periodically report to the Department all particulars with regard to the progress made in initiating and carrying out such measures.

1. Reference is to the United States–Korean Agreement respecting economic cooperation, signed at Seoul on December 10, 1948, and entered into force on December 14, 1948; TIAS No. 1908, printed in 62 Stat. (pt. 3), 3780.