Red blight

POLITICAL

Although the Chinese people are unanimous in their desire for peace at almost any cost, there seems to be no possibility of its realization under existing circumstances. On one side is the Kuomingtang, whose reactionary leadership, repression and corruption have caused a loss of popular faith in the government. On the other side, bound ideologically to the Soviet Union, are the Chinese Communists, whose eventual aim is admittedly a Communist state in China. Some reports indicate that Communist measures of land reform have gained for them the support of the majority of peasants in areas under their control, while others indicate that their ruthless tactics of land distribution and terrorism have alienated the majority of such peasants. They have, however, successfully organized many rural areas against the National Government. Moderate groups are caught between Kuomintang misrule and repression and ruthless Communist totalitarianism. Minority parties lack dynamic leadership and sizable following. Neither the moderates, many of whom are in the Kuomingtang, nor the minority parties are able to make their influence felt because of National Government repression. Existing provincial opposition leading to possible separatist movements would probably crystallize only if collapse of the government were imminent.

Soviet actions, contrary to the letter and spirit of the Sino-Soviet treaty of 1945 and its related documents, have strengthened the Chinese Communist position in Manchuria, with political, economic and military repercussions on the National Government’s position both in Manchuria and in China proper, and have made more difficult peace and stability in China. The present trend points toward a gradual disintegration of the National Government’s control, with the ultimate possibility of a Communist-dominated China.

Steps taken by the Chinese Government toward governmental reorganization in mid-April, 1947, aroused hopes of improvement in the political situation. However, the reorganization resulted in little change. Reactionary influences continue to mold important policies even though the Generalissimo remains the principal determinative force in the government. Since the April reorganization, the most significant change has been the appointment of General Chen Cheng to head the civil and militant administration in Manchuria. Projected steps include elections in the Fall for the formation of a constitutional government, but, under present conditions, they are not expected to result in a government more representative than the present regime.

ECONOMIC

Under the impact of civil strife and inflation, the Chinese economy is disintegrating. The most probable outcome of present trends would be, not sudden collapse, but a continued and creeping paralysis and consequent decline in the authority and power of the National Government. The past ten years of war have caused serious deterioration of transportation and communication facilities, mines, utilities and industries. Notwithstanding some commendable efforts and large amounts of economic aid; their overall capabilities are scarcely half those of the prewar period. With disruption of transportation facilities and the loss of much of North China and Manchuria, important resources of those rich areas are no longer available for the rehabilitation and support of China’s economy.

Inflation in China has been diffused slowly through an enormous population without causing the immediate dislocation which would have occurred in a highly industrialized economy. The rural people, 80 per cent of the total Chinese population of 450 millions, barter foodstuffs for local handicraft products without suffering a drastic cut in living standards. Thus, local economies exist in many parts of China, largely insulated from the disruption of urban industry. Some local economies are under the control of Communists, and some are loosely under the control of provincial authorities.

The principal cause of the hyper-inflation is the long-continued deficit in the national budget. Present revenue collections, plus the profits of nationalized enterprises, cover only one-third of governmental expenditures, which are approximately 70 per cent military, and an increasing proportion of the budget is financed by the issuance of new currency. In the first six months of 1947 note-issue was tripled but rice prices increased seven-fold. Thus prices and governmental expenditures spiral upwards, with price increases occurring faster than new currency can be printed. With further price increases, budget revisions will undoubtedly be necessary. The most urgent economic need of Nationalist China is a reduction of the military budget.

China’s external official assets amounted to $327 million (US) on July 30, 1947. Privately-held foreign exchange assets are at least $600 million and may total $1500 million, but no serious attempt has been made to mobilize these private resources for rehabilitation purposes. Private Chinese assets located in China include probably $200 million in gold, and about $75 million in US currency notes. Although China has not exhausted her foreign official assets, and probably will not do so at the present rates of imports and exports until early 1949, the continuing deficit in her external balance of payments is a serious problem.

Disparity between the prices of export goods in China and in world markets at unrealistic official exchange rates has greatly penalized exports, as have disproportionate increases in wages and other costs. Despite rigorous trade and exchange controls, imports have greatly exceeded exports, and there consistently has been a heavy adverse trade balance.

China’s food harvests this year are expected to be significantly larger than last year’s fairly good returns. This moderately encouraging situation with regard to crops is among the few favorable factors which can be found in China’s current economic situation.

Under inflationary conditions, long-term investment is unattractive for both Chinese and foreign capital. Private Chinese funds tends to go into short-term advances, hoarding of commodities, and capital flight The entire psychology is speculative and inflationary, preventing ordinary business planning and handicapping industrial recovery.

Foreign business enterprises in China are adversely affected by the inefficient and corrupt administration of exchange and import controls, discriminatory application of tax laws, the increasing role of government trading agencies and the trend towards state ownership of industries. The Chinese Government has taken some steps toward improvement but generally has been apathetic in its efforts. Between 1944 and 1947, the anti-inflationary measure on which the Chinese Government placed most reliance was the public sale of gold borrowed from the United States. The intention was to absorb paper currency, and thus reduce the effective demand for goods. Under the circumstance of continued large deficits, however, the only effect of the gold sales program was to retard slightly the price inflation and dissipate dollar assets.

A program to stabilize the economic situation was undertaken in February, 1947. The measures included a wage freeze, a system of limited rationing to essential workers in a few cities, and the sale of government bonds. The effect of this program has been slight, and the wage freeze has been abandoned. In August, 1947, the unrealistic official rate of exchange was replaced, for proceeds of exports and remittances, by a free market in foreign exchange. This step is expected to stimulate exports, but it is too early to determine whether it will be effective.

The issuance of a new silver currency has been proposed as a future measure to combat inflation. If the government continued to finance budgetary deficits by unbacked note issue, the silver would probably go into hoards and the price inflation would continue. The effect would be no more than that of the gold sales in 1944-1947, namely, a slight and temporary retardation of the inflationary spiral. The proposal could be carried out, moreover, only through a loan from the United States of at least $200 million in silver.

In the construction field, China has prepared plans for reconstruction of communications, mines and industries. Some progress has been made in implementing them, notably in the partial rehabilitation of certain railroads and in the textile industry. Constructive results have been handicapped by a lack of funds, equipment and experienced management, supervisory and technical personnel.

On August 1, 1947, the State Council approved a “Plan for Economic Reform.” This appears to be an omnibus of plans covering all phases of Chinese economic reconstruction but its effectiveness cannot yet be determined.

SOCIAL—CULTURAL

Public education has been one of the chief victims of war and social and economic disruption. Schoolhouses, textbooks and other equipment have been destroyed and the cost of replacing my considerable portion cannot now be met. Teachers, like other public servants, have seen the purchasing power of a month’s salary shrink to the market value of a few days’ rice ration. This applies to the entire educational system, from primary schools, which provide a medium to combat the nation’s grievous illiteracy, to universities, from which must come the nation’s professional men, technicians and administrators. The universities have suffered in an additional and no less serious respect—traditional academic freedom. Students participating in protest demonstrations have been severely and at times brutally punished by National Government agents without pretense of trial or public evidence of the sedition charged. Faculty members have often been dismissed or refused employment with no evidence of professional unfitness, patently because they were politically objectionable to government officials. Somewhat similarly, periodicals have been closed down “for reasons of military security” without stated charges, and permitted to reopen only after new managements have been imposed. Resumption of educational and other public welfare activities on anything like the desired scale can be accomplished only by restraint of officialdom’s abuses, and when the nation’s economy is stabilized sufficiently to defray the cost of such vital activities.

MILITARY

The overall military position of the National Government has deteriorated in the past several months and the current military situation favors Communist forces. The Generalissimo has never wavered in his contention that he is fighting for national independence against forces of an armed rebellion nor has he been completely convinced that the Communist problem can be resolved except by force of arms. Although the Nationalist Army has a preponderance of force, the tactical initiative rests with the Communists. Their hit-and-run tactics, adapted to their mission of destruction at points or in areas of their own selection, give them a decided advantage over Nationalists, who must defend many critical areas including connecting lines of communication. Obviously large numbers of Nationalist troops involved in such defensive roles are immobilized whereas Communist tactics permit almost complete freedom of action. The Nationalists’ position is precarious in Manchuria, where they occupy only a slender finger of territory. Their control is strongly disputed in Shantung and Hopei Provinces where the Communists make frequent dislocating attacks against isolated garrisons.

In order to improve materially the current military situation, the Nationalist forces must first stabilize the fronts and then regain the initiative. Further, since the government is supporting the civil war with approximately seventy per cent of its national budget, it is evident that steps taken to alleviate the situation must point toward an improvement in the effectiveness of the armed forces with a concomitant program of social, political and economic reforms, including a decrease in the size of the military establishment. Whereas some rather ineffective steps have been taken to reorganize and revitalize the command structure, and more sweeping reforms are projected, the effectiveness of the Nationalist Army requires a sound program of equipment and improved logistical support. The present industrial potential of China is inadequate to support military forces effectively. Chinese forces under present conditions cannot cope successfully with internal strife or fulfill China’s obligations as a member of the family of nations. Hence outside aid, in the form of munitions (most urgently ammunition) and technical assistance, is essential before any plan of operations can be undertaken with a reasonable prospect of success. Military advice is now available to the Nationalists on a General Staff level through American military advisory groups. The Generalissimo expressed to me repeatedly a strong desire to have this advice and supervision extended in scope to include field forces, training centers and particularly logistical agencies.

Extension of military aid by the United States to the National Government might possibly be followed by similar aid from the Soviet Union to the Chinese Communists, either openly or covertly—the latter course seems more likely. An arena of conflicting ideologies might be created as in 1935 in Spain. There is always the possibility that such developments in this area, as in Europe and the Middle East, might precipitate a third world war.

Part III—Korea

POLITICAL

The major political problem in Korea is that of carrying out the Moscow Agreement of December, 1945, for the formation of a Provisional Korean Government to be followed by a Four-Power Trusteeship over Korea. The United States-Soviet Joint Commission, established in accordance with that Agreement, reached a deadlock in 1946 in the effort to implement the Moscow Agreement due to Soviet opposition to consultations with the Commission by all Korean democratic parties and social organizations, as provided for in that Agreement. Soviet motives have been to eliminate the extreme rightist groups in the United States zone from consultations and subsequently from participation in the new government thus ensuring a Communist-dominated government in Korea. Soviet objections to such consultations have been based on the rightist groups’ openly expressed opposition to trusteeship, while the United States has taken the position that to disqualify these groups would deprive a large section of the Korean people of an opportunity to express views regarding their government.

A resumption of the Joint Commission meetings in May, 1947, following an exchange of notes between Secretary Marshall and Foreign Minister Molotov, resulted in a further deadlock on the same issue, although these notes had established a formula which would have permitted participation in consultation by the rightist groups in question. After the Soviet Government failed to reply to Secretary Marshall’s note of August 12, requesting the submission by the Commission of a joint status report or separate reports by each Delegation, the United States Delegation, on August 20, transmitted a unilateral report to Washington. An American proposal then made to China, the United Kingdom, and the Soviet Union for a Four-Power Conference to discuss Korea has been agreed to by China and the United Kingdom, but has been rejected by the Soviet Union.

Internally, the Korean problem has been complicated by the Soviet establishment of a Communist regime in North Korea and by the machinations in South Korea of Communist groups, openly hostile to the United States.

The latter, in accordance with their directives, are endeavoring to turn over to Koreans as rapidly as possible full administrative responsibility in governmental departments. In consequence with this plan they have organized an interim Korean legislative assembly and in general, are striving to carry out a policy of “Koreanization” of government in South Korea.

ECONOMIC

South Korea, basically an agricultural area, does not have the overall economic resources to sustain its economy without external assistance. The soil depleted, and imports of food as well as fertilizer are required. The latter has normally come from North Korea, as have most of the electric power, timber, anthracite, and other basic products.

The economic dependence of South Korea upon North Korea, and of Korea as a whole, in prewar years, upon trade with Japan and Manchuria, cannot be too strongly emphasized. Division of the country at the 38° North parallel and prevention of all except smuggling trade between North and South Korea have reduced the Korean economy to its lowest level in many years. Prospects for developing sizeable exports are slight. Food exports cannot be anticipated on any scale for several years, and then only with increased use of artificial fertilizer. South Korea’s few manufacturing industries, which have been operating at possibly 20 per cent of prewar production, are now reducing their output or closing down. In part this is a natural result of ten years of deferred maintenance and war-time abuse, but lack of raw materials and essential repair parts, and a gross deficiency of competent management and technical personnel are the principal factors.

A runaway inflation has not yet occurred in South Korea, because the Military Government has restrained the issuance of currency by keeping governmental expenditures and local occupation costs at reasonable levels; because cannibalization and the use of Japanese stocks have kept some industries going; and because the forcible collection of rice at harvest time has brought in sufficient food to maintain—with imports provided by the United States—an adequate official ration in the cities. Highly inflationary factors such as the exhaustion of raw material stocks, cumulative breakdowns in public services and transportation, and the cutting of power supply from the North might occur simultaneously. The South Korean economic outlook is, therefore, most grave.

A five-year rehabilitation program starting in July, 1948, and requiring United States financing at a cost of $647 million, has been proposed by the Military Government. A review of preliminary estimates indicates that the proposed annual rehabilitation cost would be substantially greater than the relief program of $137 million which was tentatively approved for fiscal 1948, but later reduced to $92.7 million. These preliminary estimates of costs and the merits of individual projects need careful review. It is not considered feasible to make South Korea self-sustaining. If the United States elects to remain in South Korea, support of that area should be on a relief basis.

SOCIAL—CULTURAL

Since the Japanese were expelled, the Korean people have vehemently and unceasingly pressed for restoration of their ancient culture. There is particular zeal for public education. Individual and collective efforts to reduce illiteracy have produced results meeting the praise of American Military Government officials. There will be materially better results when there are more school buildings, more trained teachers and advisors, and many more textbooks in the Korean language. Current American activities aim at adult visual education on a modest but reasonably effective scale. South Korea’s health and public-welfare work are at present fully as effective as under Japanese administration and considerably more so in the prevention of serious diseases. Even the Koreans’ eagerness for improvement cannot immediately overcome the unquestionable need for large funds for social betterment.

MILITARY

The military situation in Korea, stemming from political and economic disputes which in turn are accentuated by the artificial barrier along the 38° North parallel, is potentially dangerous to United States strategic interests. Large-scale Communist inspired or abetted riots and revolutionary activities in the South are a constant threat. However, American forces supplemented by quasi-military Korean units are adequate to cope with such trouble or disorder except in the currently improbable event of an outright Soviet-controlled invasion. Whereas American and Soviet forces engaged in occupation duties in South Korea and North Korea respectively are approximately equal, each comprising less than 50,000 troops, the Soviet-equipped and trained North Korean People’s (Communist) Army of approximately 125,000 is vastly superior to the United States-organized Constabulary of 16,000 Koreans equipped with Japanese small arms. The North Korean People’s Army constitutes a potential military threat to South Korea, since there is strong possibility that the Soviets will withdraw their occupation forces, and thus induce our own withdrawal. This probably will take place just as soon as they can be sure that the North Korean puppet government and its armed forces which they have created, are strong enough and sufficiently well indoctrinated to be relied upon to carry out Soviet objectives without the actual presence of Soviet troops.

It appears advisable that the United States organize, equip, and train a South Korean Force, similar to the former Philippine Scouts. This force should be under the control of the United States military commander and, initially should be officered throughout by Americans, with a program for replacement by Korean officers. It should be of sufficient strength to cope with the threat from the North. It would counteract in large measure the North Korean People’s Army when American and Soviet forces are withdrawn from Korea, possibly preclude the forcible establishment of a Communist government, and thus contribute toward a free and independent Korea.

Part IV—Conclusions

The peaceful aims of freedom-loving peoples in the world are jeopardized today by developments as portentous as those leading to World War II.

The Soviet Union and her satellites give no evidence of a conciliatory or cooperative attitude in these developments. The United States is compelled, therefore to initiate realistic lines of action in order to create and maintain bulwarks of freedom, and to protect United States strategic interests.

The bulk of the Chinese and Korean peoples are not disposed to Communism and they are not concerned with ideologies. They desire food, shelter, and the opportunity to live in peace.

CHINA

The spreading internecine struggle within China threatens world peace. Repeated American efforts to mediate have proved unavailing. It is apparent that positive steps are required to end hostilities immediately. The most logical approach to this very complex and ominous situation would be to refer the matter to the United Nations.

A China dominated by Chinese Communists would be inimical to the interests of the United States, in view of their openly expressed hostility and active opposition to those principles which the United States regards as vital to the peace of the world.

The Communists have the tactical initiative in the overall military situation. The Nationalist position in Manchuria is precarious, and in Shantung and Hopei Provinces strongly disputed. Continued deterioration of the situation may result in the early establishment of a Soviet satellite government in Manchuria and ultimately in the evolution of a Communist-dominated China.

China is suffering increasingly from disintegration. Her requirements for rehabilitation are large. Her most urgent needs include governmental reorganization and reforms, reduction of the military budget and external assistance.

A program of aid, if effectively employed, would bolster opposition to Communist expansion, and would contribute to gradual development of stability in China.

Due to excesses and oppressions by government police agencies basic freedoms of the people are being jeopardized. Maladministration and corruption cause a loss of confidence in the government. Until drastic political and economic reforms are undertaken United States aid cannot accomplish its purpose.

Even so, criticism of results achieved by the National Government in efforts for improvement should be tempered by a recognition of the handicaps imposed on China by eight years of war, the burden of her opposition to Communism, and her sacrifices for the Allied cause.

A United States program of assistance could best be implemented under the supervision of American advisors in specified economic and military fields. Such a program can be undertaken only if China requests advisory aid as well as material assistance.

KOREA

The situation in Korea, in its political, economic and psychological aspects, is strongly and adversely influenced by the artificial barrier of the 38° North parallel separating agricultural South Korea from the more industrialized North Korea.

The South Korean economic position is grave. Agriculture is debilitated and there are few other resources.

The establishment of a self-sustaining economy in South Korea is not feasible. Accordingly, United States aid should include a minimum of capital investment and should consist chiefly of items required for support on a relief basis.

Korean Communist agents are creating unrest and fomenting disorder in South Korea.

Since the United States-Soviet Joint Commission meetings have twice ended in deadlock, and offer no real hope of success, the United Nations now seems to be the appropriate medium through which a Provisional Korean Government, functioning under a Four-Power Trusteeship, can be established.

The United States may be confronted with a situation requiring decision concerning continued occupation in South Korea should the Soviet Union withdraw her occupation forces. This could reasonably be expected to occur when the Soviet-created puppet government and its armed forces are sufficiently well established to carry out Communist objectives without the presence of Soviet troops.

The creation of an American controlled and officered Korean Scout Force, sufficient in strength to cope with the threat from the North, is required to prevent the forcible establishment of a Communist government after the United States and Soviet Union withdraw their occupation forces.

Part V—Recommendations

It is recommended:

That the United States Government provide as early as practicable moral, advisory, and material support to China and South Korea in order to contribute to the early establishment of peace in the world in consonance with the enunciated principles of the United Nations, and concomitantly to protect United States strategic interests against militant forces which now threaten them.

That United States policies and actions suggested in this report be thoroughly integrated by appropriate government agencies with other international commitments. It is recognized that any foreign assistance extended must avoid jeopardizing the American economy.

CHINA

That China be advised that the United States is favorably disposed to continue aid designated to protect China’s territorial integrity and to facilitate her recovery, under agreements to be negotiated by representatives of the two government, with the following stipulations:

KOREA

That the United States continue efforts for the early establishment of a Provisional Korean Government in consonance with the Moscow Agreement and meanwhile provide necessary support of the political, economic and military position of South Korea.

Appendix E to Part III—Korea

POLITICAL

Resumé of United States Policy Toward Korea

The first treaty between the United States and Korea, signed in 1882, provided that if other powers dealt unjustly or oppressively with either Government, the other would exert its good offices to bring about an “amicable agreement.” During the early period of United States-Korean relations the United States considered Korea as an independent state for the purposes of fulfilling treaty obligations, although that nation was actually under Chinese suzerainty. Prior to the Sino-Japanese War of 1895, when efforts were made to gain the support of the United States to avert war, the United States took the position that, while it stood for peace, it would do nothing which might cause it to assume responsibility for settlement of the dispute. Under the treaty ending the war, China relinquished suzerainty over Korea, which was in turn assumed by Japan. Therefore, the United States continued its policy of non-interference in Korean internal affairs and in 1899 denied a Korean request for American initiative in obtaining from the powers an agreement guaranteeing Korea’s integrity. At the time of the Russo-Japanese War of 1904-05, President Theodore Roosevelt stated that the United States could not intervene to preserve Korea’s integrity since the Koreans were unable “to strike one blow in their own defense.” When Japan forced the Korean Emperor to agree to Japanese control of the administration of Korean affairs, the Emperor appealed to the United States, under the good offices clause of the United States-Korean Treaty of 1882, but his appeal was denied. Nor did the United States protest Japanese formal annexation of Korea in 1910. Thus, with little or no effort on the part of the United States to oppose such a development, Korea passed from the suzerainty of China to that of Japan and thence to the status of a Japanese colony. Efforts of Korean exiles to introduce Korea’s case at the Paris Peace Conference and at the Washington Conference of 1921-22 were rebuffed, but these exiles continued their efforts to further the cause of Korean independence, some of them in the United States. With the outbreak of World War II, the question of Korean independence was revived and Korean exiles in the United States and China began to agitate for Korean independence and official recognition. At the Cairo Conference in 1943, agreement was reached by the participating powers, later adhered to by the Soviet Union, that Korea would become independent “in due course.” This phrase caused great resentment among the Koreans who felt that they should be given immediate independence upon the defeat of Japan. This resentment was increased when the decision was reached at the Moscow Conference in December, 1945, that Korea would be placed under a Four-Power Trusteeship (the Soviet Union, the United States, the United Kingdom, and China) for a period of up to five years. A tentative agreement in this regard had previously been reached between the United States and the Soviet Union, and when the end of the war was imminent agreement was reached between the United States, the Soviet Union, the United Kingdom, and China that Soviet forces accept the Japanese surrender in Korea north of the 38° North parallel, while the American forces would accept such surrender south of that line. This arbitrary line, originally serving as a marker of military responsibility, soon became a complete barrier to free movement between North and South Korea. It has resulted in separation of the country into two parts, an economically unstable division which has seriously blocked efforts to establish a unified Korea.

Current Political Situation

The major political problem in Korea is that of carrying out the Moscow Agreement of December, 1945, for the formation of a Provisional Korean Government. The United States-Soviet Joint Commission, established in accordance with that Agreement, held its first meeting March 8, 1946, but finally adjourned on May 28, 1946, without having reached an agreement looking toward the implementation of the Moscow Agreement regarding Korea. The failure of the Joint Commission arose from the unwillingness of the Soviet Delegation to agree to consultation with the Commission of all Korean groups, as provided for in the Moscow agreement, to assist in the formation of the Provisional Korean Government. Soviet motives have been to eliminate the majority of the rightist groups in the American-occupied zone of Korea from consultation and subsequently from participation in the new government. Had the Soviet Delegation been successful the result would have been a Communist-dominated government in Korea. Soviet objections to consultation with these rightist groups have been based on the latter’s openly expressed opposition to trusteeship. The American Delegation has taken the stand that criticism of trusteeship did not disqualify Korean groups from participation in consultation, since to do so would deprive a considerable section of the Korean people of an opportunity to be heard in regard to the formation of the Provisional Korean Government. An exchange of notes between the Secretary of State and the Soviet Foreign Minister in April and May, 1947, resulted in a resumption of the meetings of the Joint Commission on May 21, 1947, under a formula which provided for consultation by all Korean groups which were prepared to sign a declaration that they would not, after such signing, “foment or instigate active opposition” to the work of the Joint Commission or to the fulfillment of the Moscow Agreement. After repeated sessions of the Joint Commission a deadlock was again reached in July, the Soviet Delegation returning to its position of the previous year and the American Delegation insisting upon the implementation of the formula set forth in the Marshall-Molotov letters, which guaranteed wide-scale participation of Korean democratic parties and social organizations in consultation and freedom of expression of opinion by all Koreans. Further meetings of the Commission having produced no results, Secretary Marshall addressed another note to Foreign Minister Molotov on August 12, requesting that the Commission submit by August 21, 1947, a joint status report or that each Delegation submit separate reports. No reply having been received to this note and the Soviet Delegation refusing to participate in a joint report, the American Delegation on August 20 transmitted a unilateral report to Washington. Since the receipt of this report, the Secretary of State has addressed identical notes to China, the United Kingdom, and the Soviet Union proposing a Four Power Conference for a settlement of the Korean situation. China and the United Kingdom have indicated their willingness to participate in such a conference. The Soviet Union has declined.

Internally, the Korean problem has been complicated by the Soviet establishment of a Communist state in North Korea and by its encouragement of the activities of Communist and Communist-dominated organizations in South Korea hostile to the United States.

The rightist groups are probably the best organized parties in South Korea. They command a majority of the Korean Interim Legislative Assembly and, if elections were held under present conditions would gain control of any government established in South Korea by such elections. The American authorities in South Korea are endeavoring to turn over to the Koreans as rapidly as possible administrative responsibility in the various departments of the United States Military Government, have organized a half-elected and half-appointed Korean Interim Legislative Assembly, and in general are striving to carry out a policy of “Koreanization” of government in South Korea.

Military Government Directive and Steps Taken to Implement Same

The Directive under which the United States Military Government now operates in Korea sets forth three basic United States objectives: (1) To establish an independent and sovereign Korea, free from all foreign domination and eligible for membership in the United Nations (2) to insure that the National Government so established shall be a democratic government fully representative of the freely expressed will of the Korean people; and (3) to assist the Koreans in establishing the sound economy and adequate educational system necessary for an independent democratic state. The Directive points out that the policy of the United States in regard to Korea, in accordance with the Moscow Agreement, contemplates the establishment of a Provisional Korean Government to assist the United States-Soviet Joint Commission in preparing Korea for self-government, the creation of some form of trusteeship for Korea under the United States, the United Kingdom, China, and the Soviet Union for a period of up to five years and the complete independence of Korea at the earliest possible moment, with subsequent membership in the United Nations. The Directive goes on to state that the American occupation of South Korea is for the purpose of facilitating the attainment of the basic American objectives in Korea and shall continue as long as it contributes to that end.

As a result of Soviet obstruction and tactics designed to eliminate the majority of the rightist groups from participation in the new government to be established for all of Korea, the American military authorities in South Korea have been unable to proceed with the initial steps required for the establishment of a Provisional Korean Government. As required by the Directive, the American authorities have made considerable progress in utilizing qualified Koreans in posts in local and provincial administration and in the administration of the United States zones as a whole. American personnel remains in the provincial administrations only in an advisory capacity and all administrative posts are filled by Koreans. In the overall administration of South Korea, all Government departments are now headed by Korean officials and Americans are utilized only in an advisory capacity, although important controversial matters may be referred either to the United States Military Governor or the Commanding General of the United States Occupation Forces for final decision. American military personnel in the Military Government are being replaced as rapidly as possible by American civilians. A Korean Interim Legislative Assembly was established in December, 1946, half of its membership being selected by the United States Commanding General from a list of Koreans recommended by Korean groups and half being elected as representatives of the various provinces and municipalities. Presently under consideration by this Assembly is a program for land reform in South Korea and the Assembly has recently adopted a general election law providing for election of officials to an Interim South Korean Government according to certain stipulated rules and regulations. In accordance with the Directive, the United States military authorities have permitted full freedom of expression to all political groups, except in those cases when the activities of certain Communist-dominated groups were clearly prejudicial to the security of American military occupation.

In seeking to attain the cultural objectives set forth in the Directive, the United States occupational authorities have caused funds to be set aside for training courses in industry and agriculture, have encouraged the establishment of teacher training schools and of summer and winter institutes for the reeducation of teachers and have in general devoted their efforts to the restoration of schools, the enforcement of new system of education and expansion of school facilities. They have also encouraged the formation of various committees for the purpose of democratizing the Korean educational administration. The implementation of these programs has been handicapped by lack of funds. Culturally, as well as politically, efforts have been made to carry out a process of “Koreanization” looking toward a free and independent Korea.

It should be pointed out that the Directive itself necessarily allows latitude of interpretation and execution and that the American authorities in Korea have functioned within the framework of that Directive.

Also, the failure to implement the badly needed land reform program has been due to the desire to await the unification of North and South Korea, at which time a Provisional Korean Government would be in a position to carry out a uniform program of this kind for the entire nation. Now that unification appears to be a matter for the indefinite future, plans are being made to carry out such a program at the earliest possible moment.

Obstructions to Realizations of United States Objectives

The chief obstructions to the realization of United States objectives in Korea have been the division of that country by the 38° North parallel barrier and the lack of Soviet cooperation in carrying out the provisions of the Moscow Agreement regarding Korea. Behind the 38° North parallel the Soviet Union has established a Democratic Front Government modelled along Soviet lines and has eliminated all political parties of a non-Communist character. North Korean Communist groups have thus been able to encourage and assist the activities of the Democratic Front and other Communist-dominated leftist groups in South Korea hostile to the United States by the infiltration of agents from North Korea into the American zone of occupation. The Soviet refusal in the United States-Soviet Joint Commission to consult with all Korean political and social organizations, as the first step in the formation of a Provisional Korean Government, has so far made it impossible to realize American objectives in Korea—the establishment of a self-governing, sovereign Korea, independent of foreign control and fully representative of the freely expressed will of the Korean people.

Other obstructions to the realization of American objectives in Korea have come from sources within the United States zone of occupation:

2. Similarly, extreme leftist groups have endeavored to foment hostility to the United States and opposition to the attainment of American objectives in Korea. Such groups have been particularly active among Korean peasants in opposing the rice collection program instituted by the United States Military Government for the purpose of ensuring sufficient food for the urban areas.

Implication of Withdrawal of All United States Assistance or Continuing Present United States Policy

The American occupation forces in Korea could not remain in that country if all assistance to South Korea were stopped, since the cessation of all aid would lead to an early economic breakdown and to the outbreak of riots and disorder throughout the United States zone of occupation. The withdrawal of American military forces from Korea would, in turn, result in the occupation of South Korea either by Soviet troops, or, as seems more likely, by the Korean military units trained under Soviet auspices in North Korea. The end result would be the creation of a Soviet satellite Communist regime in all of Korea. A withdrawal of all American assistance with these results would cost the United States an immense loss on moral prestige among the peoples of Asia; it would probably have serious repercussions in Japan and would more easily permit the infiltration of Communist agents into that country; and it would gain for the Soviet Union prestige in Asia which would be particularly important in the peripheral areas bordering the Soviet Union, thus creating opportunities for further Soviet expansion among nations in close proximity to the Soviet Union.

Present American policy provides that, in view of the failure of the United States-Soviet Joint Commission to succeed in implementing the provisions of the Moscow Agreement regarding Korea, the matter be referred to the Four Powers for solution. It also provides that the matter be referred to the General Assembly of the United States in the event of the failure of the Four Powers to solve the Korean problem. This indicates that the United States will continue to seek, by consultation with the powers concerned, a solution of the problem, but a failure to reach an agreement on Korea in the United Nations will require that the United States make a decision regarding its future course in Korea: whether it shall withdraw or whether it shall organize a South Korean Government and under what conditions and whether it shall give economic and military aid to such a government.

A continuation of present American policies will serve to give notice to the Soviet Union and to other nations in the Far East that the United States will not abandon Korea in the face of Soviet intransigence and that the United States will continue to insist upon the fulfillment of the Moscow Agreement regarding Korea.

A continuation of present American policies will serve to deny to the Soviet Union direct or indirect control of all of Korea and prevent her free use of the entire nation as a military base of operations, including the ice-free ports in South Korea.

Appendix F to Part III—Korea

ECONOMIC

South Korea has few resources except agricultural land. This area formerly obtained much of its anthracite, electric power, timber, fertilizer, and other chemical products from North Korea, and bituminous coal and food from Manchuria, but must now obtain these essential items (except electric power) as well as raw materials and repair parts for her industries, from other external sources.

Coal—The whole of Korea, particularly South Korea, lacks coal No bituminous deposits are known and existing coal deposits are of a law-grade anthracite. The coal runs high in ash, and tends to disintegrate to powder. The largest producing mine in South Korea, constituting in fact 50 per cent of the production, is located at Sam Chok on the east coast. Production involves costly rail-sea-rail distribution. This coal can be and is being used in thermal plants by pulverizing and mixing with oil, but its use is costly and maintenance of boiler equipment is heavy. In any case, bituminous coal must be imported for the operation of the railways and most of the industries.

Electric Power—Because of the unfavorable coal situation, South Korea is at the mercy of North Korea with respect to electric power because virtually all of the large hydroelectric installations are in North Korea. In 1945 there was a total of 1,240,000 kilowatts of installed capacity, 90 per cent of it hydroelectric and in North Korea. Some of the capacity in North Korea has been removed by the Russians. At the present time South Korea depends on North Korea sources for 75 per cent of its power requirements in the winter months when stream flow for its hydroelectric plants is low, and 50 per cent to 60 per cent during the rainy summer months. Conditions will be critical during the coming winter. Minimum peak requirements are estimated at 200,000 kilowatts and only 110,000 kilowatts are in sight including the area’s own generating capacity of 60,000 kilowatts—and that only if rehabilitation materials are received—plus 50,000 kilowatts from North Korea, which is all the Russians profess to be able to deliver. If North Korea power were cut off, all industrial production in South Korea would have to be suspended, and remaining locally generated energy rationed for military and emergency use. Any new plants to correct this deficiency or permit any revival of industry would require four to five years to complete, and would still be dependent upon imported coal or oil, or upon a considerable expansion of the low quality anthracite production. There is no reasonable solution to this dilemma other than to unite North and South Korea.

Forestry—The forest situation in South Korea is unfavorable. Before the war, effective programs of reforestation and erosion control were under way, but dining the war the annual cut averaged 168 million cubic feet as compared with annual estimated growth of only 113 million cubic feet. Furthermore, over two-thirds of South Korean requirements of lumber, fuel wood, and pulp were formerly supplied by North Korea. With this source cut off and coal imports and production drastically reduced, hills and mountains around the Urge cities have been literally denuded. Unless North and South Korea are united or substantial imports are provided, the needs of South Korea for fuel wood, lumber, railroad ties, and telephone and telegraph poles, make it inevitable that overcutting and denuding of forest land in South Korea will continue, with resulting increased erosion and flood damage to agricultural land.

Mineral Resources—Mineral resources of Korea are varied and rather extensive, but with a few exceptions are of low grade. There is a large deposit—over one billion metric tons—of low grade (35 per cent magnetic) iron ore at Musan in Northeastern Korea which the Japanese mined extensively before and during the war. Capacities are said to have been developed for the production of over 800,000 tons of pig iron and 350,000 tons of steel annually, but operations were possible only by large imports of bituminous coal from Manchuria and Japan.

In both North and South Korea, gold and copper were also mined, the latter as an adjunct of the former, and some lead and zinc, and a large quantity of graphite, the latter, however, of low quality. There is enough developed tungsten production in South Korea to make it an important export commodity.

Industries—The prospects for Korean industry, even in the event of early unification, are not bright. Before 1931 Japan exploited Korea primarily as a source of raw materials, rice and cheap labor. Thereafter Korea became Japan’s bridgehead to the Asiatic mainland, and with Manchuria, was developed as the mainland portion of Japan’s war potential. By 1938 there were 7,000 factories, mostly small, employing 183,000 workers, principally in the production of chemicals, textiles and processed foods. Main industrial concentrations were in the north, near hydroelectric power plants and the larger mineral deposits. This rather impressive industrial plant was not damaged by bombing, but it would be a mistake to assume therefore that Korea possesses a ready-made industrial plant which could quickly be turned to full and efficient peacetime operations. Production, at perhaps 20 per cent of capacity, was restored after the occupation, but output has dwindled as stocks of raw materials have been exhausted, and as machinery has stopped functioning for lack of spare parts and competent maintenance and operating personnel. The dearth of competent administrative supervisory and technical personnel, practically all of whom were formerly Japanese and are now evacuated, is the outstanding deficiency in Korean industries, power, and transportation systems. The unification of North and South Korea would make some of the required raw materials available, and spare parts may eventually be obtainable from Japan, but the serious deficiency of competent personnel is an unresolved problem.

Railways—Korea has an excellent standard-gauge railway system including a double-track main line from Pusan on the southeast coast to Antung on the Manchurian border, which adequately serves the country with the exception of the eastern half of Kangwon Province. However, trackage, rolling stock except locomotives, and railway communications are badly in need of rehabilitation as a result of years of undermaintenance because of wartime shortages of materials. The railways in common with the country as a whole have been badly crippled by the evacuation of the Japanese administrative, supervisory, and technical personnel. The right-of-way is excellently engineered and constructed and characterized by a profusion of concrete and masonry structures, but all of the seven million ties in South Korea will require replacement within the next seven years, and quantities of rails and fishplates are also needed. One hundred and one new locomotives of the 2-8-0 type have been provided by the Military Government, but much of the other rolling stock requires overhaul. Railway communications also require considerable rehabilitation.

Highways—There are no modern roads in Korea. The highways of South Korea are practically nonoperable for automotive traffic except from Seoul to Inchon, Kaisong, and Chunchon. Practically all supplies must be distributed throughout Korea by rail.

Shipping—The only shipping of South Korea consists of eight Baltic vessels, and 12 LST’s, operated by the Military Government coast-wise and for some trade with Japan.

Ports—There are two major ports in South Korea; Pusan, an excellent deep-water port with four large piers at the Southeast end of the peninsula, and Inchon, west of Seoul, a much smaller tidal-basin port which can accommodate four three-quarter-thousand-ton ships at dockside in the basin and larger trans-Pacific cargo and passenger vessels in the anchorage outside. Two other deep-water ports, Masan and Yosu, were mined and are little used at present. Mukko on the east coast is the export terminal for Sam Chok, the largest anthracite mining area in South Korea. The other ports of Mokpo, Pohang, Chinhae, and Kunsan are limited by unfavorable factors of nigh tidal range, and a lack of berths and port clearance facilities.

In North Korea, there are two first-class warm water commercial and naval ports at Wonsan and Chungjin on the east coast, the latter particularly desirable from a Russian viewpoint, and other ports Oongki, Rashin, Eungjin, Chinnanpo, and Simhu, the latter two handicapped by the 25- to 30- foot tides of the Yellow Sea.

Withdrawal of Japanese Personnel

As disastrous in its effects on Korean economy as the division of Korea’s people and resources by the 38° North parallel, was the evacuation of all Japanese personnel, except 500 retained in North Korea, after VJ-Day. The 700,000 Japanese formerly resident in Korea dominated all elements of the economy and supplied management and technical personnel even to the mechanic class. Koreans were denied opportunities or positions of consequence in all phases of political and economic life. It is no reflection on the individuals concerned to note that a former Korean stationmaster at Pusan is now head of the railways, or that a vocational school graduate is in responsible charge of a large hydroelectric plant not far from Seoul. It is however, an indication of an almost fatal deficiency in South Korean economy. The ultimate solution is not readily apparent.

Disinvestment

The process of disinvestment probably began in South Korea during the late thirties when the Japanese decided to put all new capital into war production and permit nonwar facilities to depreciate. Capital goods provided by the Japanese for maintenance and development in South Korea went with few exceptions to war plants such as the submarine shop at Pusan, and to the strategic transport services linking Japan with the Manchuria-North Korea industrial complex. This meant that facilities such as the north-south railroad from Pusan to Antung on the Manchurian border received the main portion of construction materials available. Other industrial establishments in South Korea were converted to war production or allowed to deteriorate. The supply of fertilizer, essential to rice culture in the exhausted paddies of South Korea, was drastically reduced in the early forties as a result of the conversion of North Korean nitrogen fixation plants to the manufacture of explosives. Exploitation of South Korea’s meager forest resources resulted in severe erosion and the destruction of crops and utilities through flooding The Japanese also depleted Korean stock-piles and withdrew skilled labor for Army service, or for the mines and factories of Manchuria and the Japanese islands. During two years of military government, the process of disinvestment has continued.

The possibility of South Korea financing a program of investment and rehabilitation out of the proceeds of exports is not worth considering in detail. Although South Korea is primarily agricultural, it is unlikely that it will be able to export foodstuff, even under the most favorable circumstances. Deterioration of agriculture, due to accumulated soil deficiencies and erosion, and an increase of population from 15 to 20 million since 1940 indicate that no export surplus of food can be expected in the next several years. The only exports which may be derived from South Korea are small amounts of such minerals as tungsten, gold and copper, some ginseng root, and marine products such as agar-agar. The most optimistic estimate is $10 million worth of exports by 1950. Much more than $10 million earned by Korean exports will be needed to finance essential raw material imports, and there is no prospect of any capital development out of current production.

Inflation

The Korean inflation is not as serious as the Chinese inflation in rate of price increase, but its causes are less susceptible to control by measures taken within Korea. Price increases have been due to physical inability to produce goods, and not to unrestrained issuance of paper currency. Prices of consumers’ goods in various categories have risen 200 to 700 times over the 1937 level. The official rise price, however, has risen only 70 times, and about 80 per cent of the calorie requirement for the urban population is available at the official price. A runaway inflation has not yet occurred in South Korea, because (a) the Military Government has restrained the issuance of currency by keeping governmental expenditures and local occupation costs at reasonable levels, and (b) because cannibalization and the use of Japanese stocks have kept some industry going, and (c) the forcible collection of rice at harvest time has brought in sufficient food to maintain, with “disease an unrest” imports, an adequate official ration in the cities without the use of large inflationary payments to the farmers. Highly inflationary factors such as the exhaustion of raw material stocks, cumulative breakdowns in public services and transportation, and the cutting of power supply from the North, might occur simultaneously. The Korean economic outlook is, therefore, more grave than in China or Japan, where governmental fiscal policies as well as low production, are the main causes of inflation. Korea, lacking raw materials and skilled labor, is not in a position to be saved from a disastrous and chaotic hyper-inflation by the efforts of its own people combined with correct policy decisions. A breakdown could be forestalled only by external provision of large amounts of consumers’ goods and transportation equipment.

Agriculture and Fisheries

Agriculture—Over three-quarters of the total population of South Korea are farmers. The total area of land under cultivation in 1946 was 6,033,000 acres, or about 2½ acres per farm household. Approximately 15 per cent of agricultural land was formerly owned by Japanese, but title thereto remains with the Military Government and will eventually pass to Koreans. In the projected land reforms an additional 60 per cent of land, which is tenant-operated, would be involved. The Military Government has not proceeded with land reform even with regard to Japanese-held land, in the view that such reform should not precede establishment of an interim Korean Government.

After VJ-Day the influx of over two and a half million Koreans from Japan, China, and North Korea into South Korea, coupled with almost complete lack of commercial fertilizers as well as severe floods, resulted in a severe food shortage. Farmers have been reluctant to double-crop soils already depleted because of a lack of fertilizer, and have preferred to conserve land for rice, the best money crop. In 1946 the average planted acreage was only 79 per cent of the 1935-39 average, and production of grains and pulses was only 71 per cent.

In the past, about 36 per cent of the population and 36 per cent of the food production of Korea were located north of the 38° North parallel. However, postwar population movements, plus the availability of more commercial fertilizers in North Korea (where almost all of Korea’s large chemical plants are located), has changed this situation. Only about 30 per cent of Korea’s population is now north of the 38° North parallel, but that area accounts for around 38 per cent of food production.

Rice is the principal Korean crop, and it has consistently represented more than half the total value of agricultural production. During the 1930’s the rice crop averaged about 100,000,000 bushels annually. Forty per cent or more was exported each year to Japan accounting generally for about one-third of the total gross value of exports. This was by no means voluntary on the part of the Korean people. In line with Japanese policy, farm tenancy increased from less than 40 per cent in 1910 to more than 75 per cent in 1945. This facilitated grain collections, for landlords usually received their rentals in rice, and these averaged about 60 per cent of the crop. Consequently, although Koreans preferred rice to other grains, their per capita consumption was forced down from 3.62 bushels in 1915-19 to 2.0 bushels in 1939-45, a decline of 44 per cent. This deficiency was partly made up by imports of Manchurian millet and soya beans, but underconsumption was nevertheless chronic.

To meet the food crisis in South Korea and to rehabilitate agriculture the Military Government developed program to import foodstuffs to prevent starvation and to assure Korean urban residents at least a subsistence diet until indigenous production could be increased to meet minimum food needs; and a fertilizer import program designed to restore depleted soils and increase agricultural production to levels at least as high as had been reached in the past.

In 1945 the Military Government’s attempt to institute a compulsory system of rice collection for rationing to non-self-suppliers was largely unsuccessful. In 1946, a poor crop year due to floods, the Military Government collected 87,428 tons of rice, or about one-sixth of the total production. In order to supplement indigenous production to meet the minimum needs of non-self-suppliers in South Korea, 180,848 metric tons of wheat, corn, and flour were imported into South Korea by the Military Government from May through December, 1946.

A program for the collection of the rice in 1946 was given highest priority by the Military Government, as one of the most important ways to ease the food situation, stabilize the economy, and check the inflationary spiral. This program was fully supported by all agencies, and it succeeded in collecting a total of 548,000 metric tons of polished rice, or its equivalent, about 30 per cent of the total 1946 production.

This successful collection program, coupled with the importation of 275,962 metric tons of cereals purchased with U. S. funds during the first seven months of 1947, has enabled the Military Government to stabilize the food situation in South Korea through the issuance to non-self-suppliers of minimum staple rations averaging slightly over 300 grams (1,050 calories) per person per day.

Fisheries—Fishing was one of the important prewar Korean industries, ranking sixth in the world. It is second in importance, only to agriculture in the economic structure of the country. The industry was, however, largely dependent upon Japan for imports of fisheries supplies and, has deteriorated seriously since this source has been cut off. Consumption of fish products has decreased from a prewar average of 47 pounds per capita per year to 32 pounds. Korea needs additional fisheries supplies, boats, manila line, nets, trawls, ammonia for refrigeration, tin plate for canning, salt and sugar for canning. Fears are expressed that if such supplies are not forthcoming and fishing operations considerably expanded, the Japanese will enter claims for fishing grounds now reserved for the Koreans.

Foreign Trade

The total volume of Korea’s external trade grew from 660,000,000 yen in 1910 to more than 2,400,000,000 yen in 1939. With respect to the principal categories of its trade, i. e., foodstuffs, textiles and fibres, minerals, manufactures, and miscellaneous items. Korea was consistently a net importer; of all, except for foodstuffs. Food exports however, were seldom so large that they did more than offset imports of textiles and fibers.

From 1910 to 1945, Korea’s external trade was almost wholly absorbed by the Japanese Empire and the prime factor during the entire period was the export of rice to Japan. In 1936, of the value of 41 Korean products showing a net export balance, rice accounted for approximately 64 per cent. Although by 1939 the relative importance of rice exports had declined in favor of minerals and manufactures, of the 55 net export products in that year, rice still made up one-third of the total money value. Until the years immediately preceding the war, fish and marine products ranked second to rice, averaging from 7.5 per cent to 9 per cent of all net export commodities. Other exports individually were of minor significance. Korea’s principal imports historically have reflected its dependence on the outside world for fuels, heavy manufacturers, machinery, automotive equipment, textiles, and fibers, and specialized products.

Under current conditions, foreign trade in the ordinary sense of the term is small in amount. During the period August 15, 1945, through June 30, 1947, the value of goods entering or leaving the area was approximately $168,000,000. Of this sum, however, only about $25,000,000 represents the value of goods exchanged between Korea and the mainland of Asia as a result of the operations of private traders. The remaining $143,000,000 represents mainly commodities imported by agencies of the United State Government as a part of the Civilian Supply Program and financed with appropriated funds of the War Department, or as shipments made under the $25,000,000 UNRRA supplies. Exports which enter into this figure are surplus Foreign Liquidation Commission credit, plus small amounts of government-owned minerals and marine products, to the value of some $5,000,000.

The Military Government is endeavoring to encourage such trade as will reduce the area’s dependence upon American funds. Credits realized from South Korea exports, unless balanced in kind by imports approved as essential, are to be used to purchase commodities similar to those making up the Civilian Supply list and certified for import by the Military Government. On July 15, 1947, Korea was declared open to small numbers of foreign businessmen, who might desire to develop trade possibilities within the framework established by the military authorities. Meanwhile, trade has been undertaken with Hong Kong and Macao, and some critically needed materials have been obtained by barter in exchange for Korean surpluses. Recent negotiations with the Egyptian government have led to an agreement to exchange 730 tons of tungsten concentrates for 3,000 bales of long-staple Egyptian cotton.

All dealings with Japan are restricted to a governmental level, and China has imposed conditions which make legitimate trade virtually out of the question. Actually, a growing smuggling trade is going on both with Japan and China, and via Hong Kong and Macao. An essential step for promoting Korea’s trade on a sound basis would be development of an efficient customs service.

United States Investment in Rehabilitation

There is one basic policy question which overhangs all financial and economic programs for Korea: How long will the occupation of South Korea continue on a unilateral basis? Until this question is answered in terms of months or years, no satisfactory decision can be made on United States financial or developmental programs for the area. The characteristics of the South Korean economy are such that there is no compromise which provides effective utilization of dollars, and at the same time leaves open the decision concerning the duration of the occupation. If a serious decline in the living standard, and possibly economic disintegration are to be avoided, South Korea must have (a) unification with North Korea, or (b) substantial relief supplies, or (c) relief and rehabilitation supplies of $200 to $300 million a year for several years. The third alternative would provide a possible basis for an indefinite continuance of occupation. The capital investment in a permanently separate South Korea would be wasteful, and the likelihood of a stable economy resulting therefrom would be in doubt for some years. South Korea is a depleted and eroded country with no minerals worth mentioning; an agriculture dependent on nitrate input, and a backward people. In terms of the needs of the East Asia area, an investment in rehabilitation and industrialization, which would permit South Korea to subsist on its own industrial output at its standards of the past 10 years with a minimum of relief, could be justified only by political and strategic consideration of the highest order.

A consideration affecting the duration of the occupation of Korea, and hence the type of economic program, is the estimated length of the occupation in Japan. General MacArthur has indicated his desire for a United Nations, or other international administration to take responsibility in Japan soon after the peace treaty is signed. There would be obvious difficulties in any long-term occupation and rehabilitation program for South Korea, initiated at a time when the occupation of Japan was about to be relinquished by the United States. Apart from the problem of tactical forces in Japan to back up the Korean occupation, there would be communication and supply problems. There might he political objection to the occupation of liberated Korea after the termination of occupation in defeated Japan.

The United States Military Government in Korea has recommended a five-year rehabilitation program starting in July, 1948, and requiring U. S. financing for a deficit of $647 million. The estimates indicate that the proposed rehabilitation of the Korean economy would cost more per year for the first three years, than the relief program of $137 million which was tentatively approved for fiscal 1948, but reduced in July, 1947, to $92.7 million.

A feature of the proposed rehabilitation program is an expenditure of $35 million to provide a chemical fertilizer industry and the supporting power installations, roughly duplicating the installations in North Korea which formerly supplied the fertilizer needs of South Korea. An additional amount of approximately $85 million is included in the five-year rehabilitation program to cover the cost of fertilizer imports, pending the completion of the plants. Other items in the program are investment in coal mining to provide low-grade anthracite for briquetting, and to provide for the development and reconstruction of the transportation, textile and fisheries industries. There is no assurance, however, that (a) $35 million fertilizer industry would meet the estimated requirements, or reach capacity production in the time allotted. The suitability of low-grade anthracite dust as the basic energy source for a considerable industrial establishment in South Korea has not been tested, and (b) there are no reliable estimates of the reserves of this fuel, and no evidence of this fuel, and no evidence that the mines and railroads could be developed to fit the prescribed time schedule.