There is attached a Statement of the Problem, with background
information.
[Attachment]
Statement of the Problem
To determine United States policy to be followed in reimbursing the
Republic of Korea for Korean currencies furnished to the United
States Forces. This problem needs to be resolved in the light of the
over-all economic rehabilitation of the Republic of Korea, including
the division of responsibility within the United States Government
and its relationship to the responsibilities of the UN in this
matter.
Background Information
On 28 July 1950, the United States and the Republic of Korea entered
into an agreement whereby Korean currency (won) would be furnished
to United States Forces without concurrent reimbursement, such
currency to be used for military requirements and for sales to
United States troops for their personal needs. The agreement
provided for settlement to be made by the United States at a
subsequent time mutually agreeable to both Governments. This
provision was consistent with United States practice and policy
established in World War II in similar circumstances.
The United States thereupon established an account in the U.S.
Treasury, to which was deposited the sums clearly adequate to cover
the value of Korean currency actually used from month to month. In
the absence of a firm international rate of exchange for the won,
the conversion rate at which such deposits were made was determined
by
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the United States in
the light of the then current economic conditions in Korea. The
first rate used was 1,800 Korean won to one U.S. dollar. Subsequent
adjustments have been made from time to time, resulting in a current
rate of 6,000 to 1. The same rate used for deposit purposes into the
Treasury account has also been used consistently for sales of
currency to U.S. troops. Sales to U.S. troops have amounted to
approximately five percent of total sales, the remainder has been
used to pay for goods and services. Because of Korean allegations
that the raising of the United States rate of exchange contributed
to inflation, the Command recommended continuance of the 6,000 to 1
rate. Therefore, no adjustments were made in the rate after March
1951, although it is estimated that a more realistic rate would be
18,000 to 1 at the present time.
Early in 1952, the Korean Government, in a letter to the U.S.
Ambassador,2 alleged that the won expenditures of our
forces were further aggravating the inflation in Korea, and that it
would be necessary to discontinue advances of currency under the
1950 agreement. Because such a move would interfere seriously with
military operations, a mission headed by Mr. Clarence E. Meyer was dispatched to
Korea to negotiate a new agreement. As a result, on 24 May 1952, an
agreement was consummated entitled “Agreement on Economic
Coordination between the Republic of Korea and the Unified Command”
(commonly known as the Meyer
Agreement). While this agreement dealt mainly with the economic
considerations, an exchange of notes was consummated on the same
date pursuant to the agreement, which dealt with the manner of
reimbursement for won drawings by U.S. Forces at
realistic rates of exchange. (A copy of the Meyer Agreement and the exchange of
notes are enclosed as Tab A.* Also attached as Tab B is a “Summary of
U.S. Commitment to Reimburse the Republic of Korea for currency
advanced to the United States Forces” which outlines the effects of
the exchange of notes covered by Tab A.)
Up to that time there had been no thought of the U.S. reimbursing
Korea for all won drawings until a later time, possibly after
hostilities, when the total effect of our aid to Korea could be
evaluated and perhaps set off against any debt remaining from won
drawings. Thus the exchange of notes specified that settlement for
won withdrawn prior to 1 January 1952 would be made at a future
unspecified time.
Notwithstanding the terms of the 1950 agreement and the exchange of
notes, which called for settlement at realistic
rates of exchange, the Republic of Korea, on 15 December
1952, terminated any further advances of currencies on the stated
grounds that it would be impossible
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to continue to provide for United Nations
requirements in the manner agreed to, because of the resultant
inflationary effects of a constantly increasing currency issue.
Subsequent to December the Republic of Korea, through an interim
arrangement, has continued to advance won. The Republic of Korea has
threatened to discontinue this arrangement immediately.
On 3 December 1952, the Commander-in-Chief, United Nations Command
(CINCUNC) advised the
Department of the Army that in his opinion satisfactory arrangements
for future currency drawings could be made only as part of a
“package deal,” encompassing payment for most, if not all, of the
currency advance to the U.S. since the beginning of Korean
hostilities for which payment has not already been made.
Authorization was thereupon granted to the Commander-in-Chief,
United Nations Command, to negotiate a new exchange of notes on the
basis of which the United States would pay $65 million which,
together with payments made previously by the United States, would
be in full and final settlement for all Korean currency credits
advanced to the United States Forces prior to 15 December 1952. As a
quid pro quo for the settlement, the
Korean Government was to agree to a new conversion rate of 18,000 to
1 with adjustments to be made in the future in accordance with
changes in the Pusan Wholesale Price Index. This, in effect, was the
agreement the Koreans had given the United States under the terms of
the Meyer Agreement.
On 24 January 1953, CINCUNC
reported that the Korean Government had rejected the U.S. settlement
offer of $65 million and was demanding a settlement payment of
approximately $97 million, making the Korean total of $171 million
as compared to the $139 million regarded by the United States as the
maximum amount owed. The Commander-in-Chief, United Nations Command,
considers the $97 million figure could probably be reduced by
negotiation by approximately $10 million, and has requested
authority to negotiate on the basis of a final settlement totalling
up to $87 million, in addition to the $74 million already paid.
CINCUNC stated that it is of
paramount importance to reach an agreement which will provide for a
realistic future rate of exchange and assure continued availability
of currency.
CINCUNC’s request for authority
to negotiate for a settlement figure of up to $87 million raises
anew the question of the extent to which the political, economic,
and military factors should be considered as overriding. In addition
to CINCUNC’s judgment as to the
“paramount importance” of receiving immediate authority to negotiate
for a settlement which will provide an assured future supply of won
at a realistic rate to avoid disruption to the military effort, the
following factors are important:
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- a.
- CINCUNC has indicated
that continued use of won is the only satisfactory method of
meeting the military requirements for acquisition of labor
and materials in Korea. The Republic of Korea has indicated
that the only alternative to settlement and negotiation of a
realistic rate is to buy won directly from the Bank of Korea
at a rate of 6,000 to 1.
- b.
- The Republic of Korea has indicated that coincidental with
a settlement of past won drawings it would be willing to
settle for approximately 53 billion won drawn in January and
early February at a “realistic rate.” If no settlement is
reached and it is necessary to pay for these drawings at the
6,000 rate, current Army appropriations would need to be
charged for an additional several millions of
dollars.
- c.
- The United States Ambassador to Korea pointed out in a
recent radio supporting fully CINCUNC’s request for further negotiating
authority that the total United States contribution to the
joint undertaking in the Korean theater “runs to many
hundreds of millions of dollars a year in military and
economic aid.” Even if the United States were to save given
number of dollars in negotiations for settlement of
outstanding won drawings, he pointed out, the ROK dollar deficit would be
increased by that amount and the United States would be
faced with a recommendation for increasing United States
economic assistance by the same amount.
- d.
- CINCUNC’s
responsibilities, as assigned by the Joint Chiefs of Staff
and the UN Security Council, include responsibility for
assistance to the civil economy of Korea, particularly to
the extent required to prevent development of conditions
prejudicial to the success of military operations. CINCUNC has indicated that
U.S. failure to settle for past won drawings has been widely
publicized as a major cause of the present rampant inflation
in the Republic of Korea.
At the present time there is a definite plan on the part of the
Korean Government to effect a currency reform by issuing a new
series of won with a specified conversion factor for exchanging
present holdings into the new issue. Any dollars paid to the Korean
Government at this time would probably aid in stabilizing this new
currency issue and thereby aid the economy of the country.
