895B.00/2–2752
Memorandum by the Deputy Director of the Office of the Northeast Asian Affairs (McClurkin) to the Assistant Secretary of State for Far Eastern Affairs(Allison)
Subject:
- Status of the Korean Economic Problem
Except for brief periods of relative stability the Korean inflation has progressed steadily since the outbreak of the war. Prices are now about 40 times the 1947 level, and in recent weeks there has been an acceleration of the increase in the general price level. Since November the Korean Government has become increasingly concerned about this problem and has often spoken of imminent “financial collapse”. During the past year the Korean Government has done all that could be expected of it to counteract the inflation. The budget has been balanced and credit reasonably well controlled. The Government has alleged, therefore, that the won drawings of the UN forces have been the basic cause of the expansion in currency and of the resulting inflation. This contention is basically true, but substantial expenditures which should properly be considered as part of the Korean budget are borne by the UN Command out of the won drawings. In addition, the U.S. has undertaken a civil relief program at the rate of $200 million a year. The value of the relief program in fact substantially exceeds the value of the [Page 63] won drawings.1 Because practically all these goods must be distributed on a free basis, however, they do not serve to reduce the currency in circulation and their anti-inflationary potential therefore is not fully realized.
The fundamental cause of the inflation is that the Korean economy simply cannot bear any substantial costs of supporting the war. There is common agreement on the basic measures to be taken in the short run to control the inflation. These measures boil down to increasing imports and withdrawing from circulation the proceeds of the sales of these imports. The mechanics would be to pay to the Korean Government part or all of the dollar counterpart of won drawings; to utilize the ROK foreign exchange assets thus earned as well as that already accumulated to increase imports; to sell such imports in the open market; and to use the won proceeds of sale for anti-inflationary purposes.
You may recall that I addressed a memorandum to you on February 1 concerning an Army outgoing telegram regarding the financial situation in Korea. A copy of that memorandum is attached for your reference.2 The reference telegram was sent because of a letter from the Prime Minister to Ambassador Muccio which contained a threat to suspend the UNC privilege of drawing won after currency in circulation exceeded 600 billion won.3 The telegram4 contained authorization for the UNC to offer to pay $5 million in settlement of troop purchases of won through December 31 and to make periodic settlements of troop purchases of won thereafter, and, without commitment, to discuss periodic settlements for dollars of the remainder of the won drawings. It is believed that these measures together with others discussed in the telegram5 would go far toward achieving a reasonable degree of stability.
After receipt of the Army telegram the UNC took steps to resume the Aid Agreement negotiations with the Korean Government. We have received from the Embassy copies of memoranda of conversation relating to the first three Aid Agreement discussions.6 Considering the negotiating tools at the disposal of UNC the results of the negotiations [Page 64] thus far have been discouraging. The Korean Government still balks at any wording in the Aid Agreement which connotes foreign control over the Korean foreign exchange earned outside the UN operations. On the other hand, the UNC negotiators have used little of the authority given them in the telegram to discuss the matters described above. A telegram of February 21 states that Aid Agreement discussions have been inconclusive and have been recessed from February 18 to March 1.7
We are following these developments with the closest attention. Whether the inflation will soon degenerate into hyper-inflation and whether financial collapse is imminent is conjectural. Such a development generally reflects a change in outlook on the part of the population rather than a change in external circumstances. Should the negotiations, when resumed, continue at the indifferent level that was apparent in the report of the first three meetings, the Department must consider alternative methods of achieving a meeting of the minds on the basically simple solution to the inflation problem.
Some weeks ago Ambassador Muccio recommended a “Dodge Mission” for Korea.8 The Department has suggested that he may wish to discuss this matter with Assistant Secretary Johnson who is currently in Tokyo. Such a mission may become necessary. We plan to draft a joint Army, State, Treasury telegram reiterating our concern over the present situation and urge the utmost efforts to reach an agreement upon the resumption of the negotiations of March 1.
I will keep you advised on this subject.
- A note in McClurkin’s handwriting on the source text at this point read as follows: “—or would if it were all getting to Korea; and I’m not sure it is.”↩
- The memorandum, not printed, was not attached to the source text. (895B.13/2–152)↩
- The text of the letter is in telegram 707 from Pusan, Jan. 19, 1952, not printed (895B.13/1–1952).↩
- The telegram under reference was DA 93254 to CINCUNC, which was received by the American Embassy in Korea on Jan. 30, 1952. It is summarized and commented upon in telegram 572 to Pusan, Jan. 29, 1952, not printed (895B.10/1–2952). See footnote 5, below.↩
- Such measures included discussion without commitment between the ROK and CINCUNC on the issues of reduction of won drawings inter alia by payments in kind for services, transfer of some charges to the ROK budget, the cost of which was to be defrayed in part by using proceeds from sales of aid goods as ROK revenue, and a pay-as-you-go procedure for won drawings for U.S. forces’ procurement, excluding expenditures on behalf of the ROK within the framework of the proposed financial agreement; telegram 572 to Pusan, Jan. 29, 1952 (895B.10/1–2952).↩
- Not printed (895B.00/2–552).↩
- Not printed (795B.5/2–2252).↩
- Muccio made his suggestion on Jan. 30; telegram 748, from Pusan, of that date, not printed (895B.10/1–3052).↩