Foreign Relations of the United States Diplomatic Papers, 1941, The Far East, Volume V

893.50/245¹⁄₈

Memorandum by Mr. Joseph M. Jones of the Division of Far Eastern Affairs³³

[Washington,] April 14, 1941.

Résumé of the Economic and Political Situation in China and Suggestions for Action

1. Economic Situation.

Mr. Currie’s trip to China has disclosed in terms of concrete facts and figures a serious economic situation of which we have been in part aware, though in more general terms.^* The basic difficulty is a large excess of expenditures over revenues, which is being met almost wholly at the present time by increase in the note issue. During 1940 of a total estimated budget of CH$6,179,000,000 only CH$703,000,000 was obtained from taxes, leaving a deficit of CH$5,476,000,000, most of which was financed ultimately by the issue of new notes. The budget outlook for 1941 is for a total budget of CH$8,922,000,000 with receipts at CH$1,222,000,000 and a deficit of CH$7,700,000,000 of which about CH$5,000,000,000 must be financed through new note issue. Chinese national currency in circulation in China at the end of 1940 amounted to CH$9,600,000,000 as compared with less than CH$2,000,000,000 at the beginning of the current hostilities in 1937. (In addition there were large amounts of puppet currency, estimated at $2,363,000,000 in circulation in the occupied areas of China in addition to $1,000,000,000 in Manchuria.) Mr. Currie’s survey disclosed that practically no effective steps had been taken to increase the revenue of the Chinese Government since the main items of revenue, namely, the customs revenue, consolidated tax revenue and salt revenue, were either cut off or largely reduced by the Japanese occupation. Practically no budget existed and little effort had been made to correct the situation.

Mr. Currie’s principal recommendation to General Chiang was that the National Government seek largely increased revenue from the land tax. This tax is now collected by district magistrates, part of it being retained by the magistrate for local expenses and part being turned over to the provincial governments. Mr. Currie recommended that the provincial authorities assume responsibility for collection of the tax (the magistrates being often the creatures of the landlords), that large blocks of the land at present unregistered be registered, and that the tax rate be increased considerably, the increased revenue to be turned over to the National Government. The land tax is now yielding to provincial and district governments approximately CH$600,000,000. It is estimated that through registration and taxation at existing rates of over 80 percent of the land now unregistered, that sum can be increased by CH$160,000,000, making a total yield of CH$760,000,000, and that through raising the tax rate on the whole to CH$20 per acre as a conservative adjustment to higher farm prices (with no increase in the real burden compared with the pre-war burden) the total yield could be increased to CH$3,800,000,000, or an increase of CH$3,200,000,000 over the present yield. The carrying out of Mr. Currie’s suggestion would be an important step in meeting China’s budgetary problem but it would still leave a large gap between expenditures and revenues.

The Eighth Plenary Session of the Kuomintang on April 3 adopted resolutions for execution by the National Government calling, among other things, for the National Government “to take over provincial revenues from land levies”. Those acquainted with civil administration in China under its present management (including Mr. Currie) are not too optimistic in regard to the results which may be expected from this resolution. Land taxation, especially on the scale contemplated by Mr. Currie’s suggestion, requires an efficient administration and a zeal inspired by realization of the seriousness of the present situation. It may be expected that the Central Government will derive some increase in revenue from the land tax but it is feared that under the present administration the increase will not be nearly as great as it might be if efficiently administered. Indeed, all that we know now is that the Kuomintang has resolved that the land tax be taken over by the Central Government.

The Eighth Plenary Session of the Kuomintang also adopted resolutions calling upon the National Government to inaugurate national monopolies for fie sales of sugar, salt and other goods. The creation of monopolies for such commodities is a favorite project of the present Minister of Finance, Dr. H. H. Kung. Dr. Lockhart, who is the senior foreign official of the Salt Gabelle, and an American citizen, has brought to our attention already a draft scheme³⁴ to establish a salt monopoly. The plan provides for the purchase by the National Government of all salt from primary producers and the transportation and distribution of such salt. It is estimated that the plan will require an outlay by the National Government of CH$1,500,000,000 and the assumption by the National Government of vast, new transportation burdens at a time when government transport is practically broken down. This policy runs directly counter to a policy of reducing and avoiding unnecessary expenditure. The National Government can scarcely acquire money for this project save by printing a huge amount of new currency for the purpose at a time when all possible steps should be taken to reduce unnecessary expenditure. Moreover, it is clear that the Chinese do not possess an extensive trained civil service which may be expected to make a success of such a project as a monopoly of the purchase and distribution of salt, especially under existing conditions. Nevertheless, the development of monopolies such as this salt monopoly is one of the principal “remedies” for the present economic situation put forward by the Kuomintang.

It would seem to be clear that the Chinese economic and financial situation is not only bad but that judging by the present trends and indications it promises to become much worse than need be the case, with little relief from note issue on an ever-increasing scale. The underlying reason for the failure of the Chinese Government to attempt elementary budgetary reform measures would seem to be that the Generalissimo has not had the benefit of training in economic and financial fields and relies largely upon the present Minister of Finance to take care of economic and financial problems. Other reasons must account for the failure of the Minister of Finance to keep China’s financial house in better order at the present time. Lack of true comprehension of the complexities of modern finance, lack of imagination, lack of that zeal and sense of urgency which is required to achieve basic reform, a conservatism which hesitates at (or fails to conceive) measures which, however useful to the nation, might impose burdens on the ruling and landlord class generally—these are some of the many complex factors which might contribute to the present laissez faire attitude of the Minister of Finance. The waging of prolonged warfare by any state at any time requires great economic sacrifices from all classes of the population according to their means. It requires the zealous application of all the intelligence which can be mustered not only to the military but to the economic and financial problem. The Government at Chungking has aroused the admiration of the world for the way in which it has resisted aggression and maintained internal services under great difficulty, but at the present time it does not seem fully to appreciate the immensity and complexity of the economic and financial problem or the necessity of equal sacrifice for all classes in a protracted war, and these facts are necessarily having their effect upon the functioning of the economic system and upon the national morale. The rapidly worsening economic situation and the growing discontent in China with the Chungking Government (as distinct from General Chiang) are evidence of this lack of appreciation.

Even were China’s finances managed with the greatest science, zeal, and honesty, there would remain at the present time a considerable disparity between revenues and expenditures, but the rate of economic deterioration would be sharply reduced.

2. Political Situation.

It is not the intention of this memorandum to attempt to evaluate the political situation as a whole but to discuss only one or two factors which the political and economic situation share in common.

The Kuomintang Party tends to be reactionary and it influences the Government in that direction in so far as internal policy is concerned. At the other end of the scale stands China’s only other organized political group, the Communist party. One of the most discouraging features of the political situation in China, both immediately and looking into the future, is that neither of China’s two political parties commands broad popular support, the one being in practice reactionary and the other being Communist. China’s greatest need would seem to be for a modification of the practices of both parties, a meeting on common ground sympathetic to the bulk of China’s population. This is a need which has a bearing not only upon the immediate continued and effective resistance to Japan but upon the future of China for a long period of years. There seems to be unanimity in the opinion that only General Chiang Kai-shek, who holds a unique position above political parties, is capable of keeping China united, and that should he disappear from the scene a long period of chaos and internecine strife would necessarily ensue. But the economic and political conservatism of the Chinese Government at the present critical time, and the failure of the Government to appreciate the seriousness of the economic and financial situation and to conceive and put into effect drastic remedial measures seem to be growing rapidly incompatible with the continued strength and authority of General Chiang and a united China. The impasse with the Communists is one example of this incompatibility. The widespread popular dissatisfaction with the Kung Government (as distinct from the Generalissimo) which has been reported by practically all observers recently returned from China is another example. The critical economic situation in China, the absence of measures to cope with the situation, are still others.

There are a number of economic measures which might be taken which would have the effect of cutting the ground out from under the Communists and of broadening immeasurably the political basis of General Chiang’s Government: (1) the land taxes could be so administered as not only to obtain increased revenue and to force land owners to sell their hoards of rice (thus improving the economic situation) but to accomplish a certain degree of land redistribution, a step necessary to strengthen national morale for the war effort, on the one hand, and for the growth of democracy, from a longer-range point of view; (2) the land rent could be sharply reduced and possibly made payable to the Government in kind, land owners being reimbursed in Government bonds; (3) cooperatives of various types—industrial, commerce and credit—could be actively promoted throughout the country.^† It is not unlikely that if such steps were taken the Communist party would decline in importance and the impasse which is so greatly feared would probably dissolve; a large part of the attractiveness of the Communist Party at the present time (by comparison) would have disappeared.

3. A Suggestion for Action.

General Chiang has on several occasions asked that expert advisers in the form of an “economic mission” be sent to China. The request has been made directly to Ambassador Johnson; it has been made again to this Government through Dr. Soong; and a third request has been made of the President through Mr. Currie upon the latter’s return from China. General Chiang seems to feel that the economic situation is getting out of control. Ambassador Johnson has reported that the presence of expert advisers in Chungking has a beneficial effect and that talking with such advisers aids the Chinese in reaching decisions in regard to their own problems.

There are certain objections to sending the usual type of economic mission to China to make a study, to make a report, and to return. Mr. Currie himself has suggested that there are many trained Chinese in Chungking who are capable of diagnosing the situation and of recommending a program. Mr. Cyril Rogers has commented that an economic mission could probably write a report before it left for China. The question seems to be not one of finding out what is wrong with the Chinese economy, but in getting effective measures taken to remedy known defects. And it is clear that the major defect lies in the inefficiency of the internal administration in China. An economic mission of the usual type may be and often is used by the Chinese as a screen behind which to postpone taking necessary but unpleasant action. However, in view of the seriousness of the economic situation and its expected continued deterioration, it is possible that if a group of experts were sent by this Government under the terms and conditions suggested below to aid General Chiang real results might be achieved.

With the foregoing in mind, the following suggestions are made:

It is suggested that a communication be sent to the Chinese Government recalling the community of interests between China and the United States, the assistance which we have extended to China in the form of credits, currency support and supplies, and pointing out that China’s principal problem now seems to be an inflationary situation, the remedies for which are almost wholly internal in character: the raising of new revenue, the cutting down and avoidance of unnecessary expenditure, the improvement of transport, and the most important matter of efficiency in the administration of measures designed to relieve the inflationary situation in China, such efficiency being directly related to the matter of public confidence, which is of great importance in such situations. It is suggested that in the communication the Chinese Government be asked to say whether it is in agreement with this Government in regard to the character of the principal problem to be solved and, in view of the internal character of that problem, whether the Chinese Government is prepared to welcome further suggestions by this Government and of such experts as this Government may send to China.

It is suggested further that in the communication it be stated that in our opinion such experts as might be sent to China by this Government should not be sent as the usual type of “mission” to study the situation, make a report, and return home, but that these experts, although paid by the United States Government and having the privilege of maintaining close contact with the United States Government through the American Embassy, should be attached directly to the staff of the Generalissimo and that they should assist directly and immediately in the working out of the various problems concerned with economic defense. (A draft communication to the Chinese Government in the foregoing sense is attached.³⁵)

Should a favorable reply be received to the communication suggested above (the economic situation is becoming so serious that it is believed that the Generalissimo would welcome advisers on the terms specified), the way would be paved for the sending to China of a group of experts with wholly new functions as compared with economic missions which have been sent to China in the past, and for the offering by this Government and its experts of more frank criticisms of matters of administration than would otherwise be the case. Through this procedure it is thought that something concrete may be accomplished in the matter of improving the internal administration in China. The implications of this Department’s communication to the Chinese Government should be clear and the advice of American experts stationed at posts in the Chinese Government would probably soon make itself felt in the same direction, namely, that of pressure on the present administration for greater efficiency.

Any mission which this Government might send to China should, of course, confine itself strictly to technical matters and should be instructed carefully to avoid any suggestion of interference in matters of personnel. It is well known that there has for a number of years been a family dispute involving cliques headed respectively by H. H. Kung and T. V. Soong. At present the Kung clique is in power and T. V. Soong is in Washington. The United States Government occupies an especially strong position at the present time in relation to the Chinese Government, but if a mission of experts which should be sent out from Washington were not careful to avoid any action which might be interpreted by the Chinese as a desire to interfere with or make changes in the personnel of the Chinese Government, the sending of the mission would be branded in Chungking as a scheme promoted by the T. V. Soong faction. The usefulness of such a mission would in this way be seriously impaired.

33. Initialed by the Chief of the Division (Hamilton).
34. Mr. Currie made a few specific recommendations to General Chiang Kai-shek and has made an oral report to the President. He does not have any intention, however, of writing a report on his trip or of initiating a continuing program of economic assistance and advice to China apart from assistance under the Lease-Lend Act. Mr. Currie has, however, conveyed to the President a request on the part of General Chiang for the sending of an “economic mission” to China. For the writing of this memorandum I have had the benefit of extensive talks with Mr. Currie and Mr. Despres as well as statistical information in regard to the financial situation in China, which they compiled and a copy of which Mr. Currie has furnished me. In this memorandum I have endeavored to synthesize the most expert views which have come to my attention in regard to the economic (and to a lesser extent the political) situation in China. In addition to the regular sources of information provided by our own reporting services and the press I have endeavored to make use of the private views of Mr. Currie, Mr. Despres, Mr. Cyril Rogers, Dr. T. V. Soong, Dr. Rajchman, and others. [Footnote in the original; Mr. Rogers was British chairman of the management committee of the China currency stabilization fund and Dr. L. W. Rajchman was a Polish adviser to the Chinese Government. For written report by Lauchlin Currie on March 15 to President Roosevelt, see vol. iv, p. 81.]
34. Not printed.
35. Operating on exceedingly small financial resources the Chinese Industrial Cooperatives have made a splendid record during the past two years. The scope of their operations has necessarily remained small but they have been doing a splendid job not only in educating the people involved but in producing goods on a small scale. The foreign funds which have been collected for the benefit of the Cooperatives, and these have been rather substantial, have been made available directly to the district offices of the C. I. C. through a Hong Kong office, without sending them through the Chungking headquarters because of mistrust of the headquarters. Dr. H. H. Kung is titular head of the C. I. C. Notwithstanding the meager resources of the C. I. C. and the smallness of the remuneration received by field workers, the Chungking headquarters has been loaded up with twice as much personnel as is needed for the job there. The Chinese Industrial Cooperatives’ representatives in the United States have recently been conducting a program to raise new funds and to obtain a dollar loan either from the U. S. Government or from the Chinese Government for the benefit of the C. I. C. There seems to be rather general agreement that a loan to the Chinese Industrial Cooperatives large enough to permit a substantial training program for cooperative workers, to permit an increase in the salaries of the workers already operating, to provide revolving capital for new projects, et cetera, on a modest scale, would be desirable. According to one of H. H. Kung’s representatives in the United States, however, one Hubert Liang, an official of the C. I. C., Dr. Kung has big ideas for the organization. He is thinking in terms of a loan from this Government of as much as $30,000,000 for the Cooperatives, this amount to be spent on basic industries, such as iron and steel, heavy chemical plants, et cetera. It is clear that Dr. Kung is interested in building up large state enterprises and that he does not have a clear conception of what a true industrial cooperative is or of the larger social or political possibilities of the movement. He seems to feel that an enterprise can be made a cooperative by calling it by that name. Even in the limited field of industrial cooperatives Dr. Kung’s inefficiency and lack of comprehension of economic and financial realities stand as a check on progress. [Footnote in the original.]
35. On April 25 a telegram was drafted by Mr. Jones for delivery by the Ambassador in China as a message to Generalissimo Chiang from President Roosevelt. The Chief of the Division (Hamilton), however, indicated that the telegram should not be dispatched pending reference to Dr. Currie and President Roosevelt, and it was never sent (893.50/245⁵⁄₆).