895B. 13/5–2851
The Acting Officer in Charge of Economic Affairs in the Office of Northeast Asian Affairs (White) to Mr. Emerson Bigelow, Office of the Secretary of Defense
My Dear Mr. Bigelow: You are no doubt aware of a series of recent cables from the American Ambassador in Korea to the Secretary of State (Pusan 892, April 23; Pusan 910, April 27; Pusan 959, May 17; Pusan 964, May 18)1 in which the urgent problem of won advances to the armed forces under the Unified Command is discussed. I need not remind you of the informal discussions held among representatives of Defense, Treasury and State on the subject of possible releases of [Page 466] dollar funds from the suspense account now held by the Treasury as an equivalent to the won advances to the Unified Command under the Financial Agreement between the Governments of the United States and the Republic of Korea, July 28, 1950.2
In view of the messages received from Korea, and for reasons explained below, I am inclined to suggest that a release from the suspense account should be made immediately to the Government of the Republic of Korea. My reasons are chiefly the following:
- 1)
- That part of the won advances which is paid out to individual soldiers of the United Nations Forces represents a substantial portion of the total won advances made to the Unified Command, about 40 per cent, according to various estimates. Pusan 964 (May 18) indicates that during the month of April alone 10.6 billion won were sold to individual soldiers on this account, as compared to 41.6 billion won of total disbursements by the Republic of Korea Government on its budgeted account. The won advances sold to individual soldiers result from a banking transaction, and are freely spent in the Korean economy.
- I believe, therefore, that the United States Government has an obligation to reimburse the Republic of Korea Government for that portion. I am aware of the fact that such an obligation has not been conceded to the Republic of Korea Government, and that the terms of the Financial Settlement of July 28, 1950, leave settlement of all won advances to future negotiations between the United States and Republic of Korea Governments. However, it is not my understanding that in other areas in which United States forces were stationed, individual soldiers’ expenditures of local currency have been met by local governments. In fact, it is my understanding that we have always allowed pay-as-you-go settlements of such expenditures even in former enemy countries. I, therefore, fear that the moral position of the United States in Korea would be weakened if we did not acknowledge our obligation to reimburse the Republic of Korea Government for the won spent by individual soldiers.
- 2)
- The American Ambassador in Korea has indicated that there is considerable political pressure being brought by the ROK Government to negotiate a reimbursement of the local currency advances. The Ambassador feels that such a release would be desirable for political as well as economic reasons.
- 3)
- We have recently urged the Republic of Korea Government to stabilize its economy and prevent further inflation by raising its revenues and reducing its own expenditures. The Republic of Korea Government has shown a substantial improvement of the balance of revenues and expenditures in April; but the large won disbursement of United Nations Forces, amounting to a figure equal to one quarter of total Republic of Korea expenditures will continue to contribute to the overall inflationary pressures unless it can be translated into immediately available imports of fertilizer and consumers goods which can sop up purchasing power on the local market. I do not [Page 467] want to suggest that the release of funds from the suspense account–about $12 million if computed as approximately equivalent to the individual soldiers’ expenditure of won—would bring about the turning point of the inflation. For that, it is not nearly big enough. But it could certainly be used as a fund for Republic of Korea procurement of essential imports of commodities which are available now in Japan or in the Far East. It would stimulate Korean foreign trade, in itself a highly desirable objective.
I would suggest that releases from the Special Deposit Account with the Treasurer of the United States be made on the basis of a partial and interim settlement for that part of the won advances sold to individual soldiers; the ROK would in turn agree to relinquish any further claims against the U.S. Government arising from won sold to individual soldiers as of a certain cut-off date. It might also be possible, in connection with these negotiations, for the Ambassador to urge the Koreans to apply a more realistic counterpart rate on aid supplies.
An arrangement could be made by which the funds would be transferred to the Korean Government upon recommendation of the United States Ambassador from time to time. Allocations by the Korean Government should be made in accordance with Art. IV, para. 2 of the Aid Agreement.3 Such an arrangement would give the Ambassador control over the import program which the Republic of Korea Government would wish to carry out with its foreign exchange funds, and would establish safeguards against wasteful expenditures.
The details of the release of such funds will require further study, particularly by the Legal Section; however, it will be appreciated if you will carefully consider this proposal. Interested State Department officers will be glad to meet with representatives of the Department of Defense and other interested agencies to discuss the matter further if you think it desirable.
Sincerely yours,