The Unstable Hwan

One day last spring, Arthur Dean, President Eisenhower's special envoy to South Korea, sat in Syngman Rhee's presidential mansion, discussing Korea's galloping inflation. Dean thought the solution was to let the hwan find its own level (i.e., free-market dollar value), then siphon away the excess hwan currency that was drowning the country. Said Syngman Rhee: "Nonsense. The best way to fight inflation is to say that the hwan is worth 180 to the dollar and then keep it there." At that time the hwan was worth less than that and fast losing ground.

The two men strolled out to a wisteria-covered arbor. Arthur Dean looked up at the cloudless sky and said: "Mr. President, make it rain." "You know that's impossible, Mr. Dean," Rhee answered. "Only the laws of the universe can make it rain." Dean smiled and said: "The exchange rate of the hwan is the same thing. Only the laws of economics can keep it steady."

Lush Windfall. Rhee chuckled with appreciation--but refused to budge from the, official rate of 180 hwan to $1. Thereafter, the Korean presses went on printing currency, and the value of the hwan dropped (on the black market) to 500 and even 750 to $1. Rhee himself showed what he. thought of the sanctity of the official rate by allowing the Bank of Korea to auction off a hoard of accumulated U.S. greenbacks (mostly to Korean importers). The prices paid were around 500 hwan to $1. Still Syngman Rhee would not change the official rate. His decision cost the U.S. military in Korea millions of dollars in unnecessary expense, and gave many South Koreans lush windfalls. In holding to 180 to $1, Rhee also broke his 1953 agreement with the U.S., by which the hwan is supposed to be pegged to the Pusan wholesale price index (which, at that time, would have given him a generous rate of 310 to $1).

A month ago the U.S. decided that things could go on this way no longer. The U.S. held up wage payments in hwan to Korean employees of the U.N. forces (a more than $1,500,000-a-month payroll). Moreover, the U.S. refused to allot any more oil to South Korea unless it was paid for at 310 to $1. When Rhee balked at this, fishing boats stayed in port, buses ground to a halt, some 300 factories closed down for lack of fuel, and seven desperate Koreans, trying to tap a U.S. pipeline for gasoline, were killed in an explosion. Still stubborn old Syngman Rhee stood fast. A fortnight ago the U.S. Army began paying its 100,000 Korean employees and contractors in greenbacks, not at the 310-to-$1 rate, but at 500 to $1.

Back Down. Rhee was startled: he did not think the U.S. would dare. Last week he began to back down. Even he could see that every day he held out was causing loss, trouble and discontent; the Korean employees of the U.N. forces were quite audibly grumbling. At last, Rhee's Finance Minister offered the U.S. 500 million hwan "unconditionally." When General John E. Hull, the U.S. commander in the Far East, replied firmly that he now needed 800 million, Rhee's men hastened to offer the additional amount--although they knew the U.S. would not repay at better than 500 to $1. The U.S. is still willing to reach a new exchange agreement with Syngman Rhee, but first wants it well understood that unilateral flouting of agreements must stop.

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