893.51/7373: Telegram
The Ambassador in China (Gauss) to the Secretary of State
[Received 10:35 p.m.]
549. Reference my No. 548, December 30, 6 p.m. Following are my comments:
Initial Japanese successes, which are being exploited in Japanese radio propaganda directed toward China at the same time that the Japanese forces in this country are taking the offensive, have undoubtedly affected the morale of the people, including the upper classes. It remains to be seen how the army has been affected. We are watching Chinese resistance to the new Japanese drive against Shanghai [Changsha] with some anxiety.
General Chiang described the proposed loan as a political measure. While we have known from the inside that China was proposing before December 7 to ask for this American loan, even while failing realistically to face the drastic domestic measures which should be taken to meet the deteriorating economic situation, the problem now takes on full political character.
The absence of definite proposals for the use of the Anglo-American loan, aside from support for a domestic bond issue to slow up inflation, [Page 772] makes for difficulty. I suggest, however, that the Congress might be asked to authorize the granting of loans or credit stock in a [sic] up to a specified amount under agreements to be made by the executive branch of our Government.
With this as an immediate measure to bolster the situation here and to indicate support of General Chiang as the leader of the policy of resistance, the actual issuance of the loan for [or] credits might follow upon the presentation and consideration of definite proposals on the use they [to be?] made of them.
We know that the advice and recommendations of the financial experts and advisers of the Government have been given but scant consideration. They may be able to work out proposals which will permit of a sane and helpful application of the financial support sought.
Our information indicates that a domestic bond issue would attract perhaps 2 billion Chinese dollars and not more than 4 billion, the amount depending in large measure upon whether distribution is primarily among the public as distinguished from the Government banks. Grants of loans to encourage domestic production independent of imports, backed or supported by foreign credits, might amount to a billion dollars Chinese. This total of 5 billion Chinese dollars might be doubled to provide for the political or psychological factors, or for other legitimate demand, but still the total would not exceed 10 billion Chinese dollars as compared with the equivalent of 20 billion requested by the Generalissimo from the British and ourselves. I think that credits not exceeding this amount would satisfy requirements, and credits in excess of the amount would be misleading and invite attempts at misuse.