The Ambassador in China (Gauss) to the Secretary of State

No. 266

Sir: I have the honor to refer to my despatch no. 261 of December 31, 194121 on the subject of finance-economic conditions in China and to my telegrams nos. 548 and 549 of December 30 and 31, 1941,22 in regard to the Chinese Government’s request for an American credit of half a billion dollars and a British credit for one hundred million pounds, and to enclose for the Department’s information (1) a memorandum of my conversation with General Chiang on December 30 when he asked me to place his request for a loan before the American Government, (2) paraphrase of a telegram21 sent by the British Ambassador to his government on the reference subject, (3) copy of a memorandum21 of Mr. Vincent’s23 conversation with Mr. Hall-Patch, financial attaché of the British Embassy, and (4) copy of a confidential memorandum21 prepared by Mr. Chang Chia-ngau, Minister of Communications, for General Chiang and Dr. Kung24 in regard to the financial situation in China.

I suggested in my telegram no. 549 of December 31, 5 p.m., that the Congress might be asked to authorize a credit to China up to a specified amount for utilization under agreements or arrangements to be made by the executive branch of the Government after the presentation and consideration of definite proposals to be put forward by the Chinese Government.

I am convinced that credits of the magnitude requested by General Chiang (a total of about one billion U. S. dollars) are out of all proportion to the needs of the situation viewed from the political-psychological [Page 426] or the finance-economic standpoint—or both. While, in the absence of any definite proposals supported by factual data, only a rough estimate can be made, I feel that credits (American and British) of at most no more than a half billion dollars would generously satisfy all the requirements of the situation, psychological and financial, and that credits in excess of such an amount would be misleading and invite attempts at misuse. They would be misleading in that they might lead to popular expectation of practical results commensurate with the size of the credits, which would not be the case, because in present circumstances there is no practicable way in which such large credits could be effectively and legitimately utilized. They would invite attempts at misuse on the part of the self-seeking banking and government elements who would find it difficult to resist the temptation to draw on such excessive credits for their own gain.

Aside from the broad idea of supporting government credit and retarding currency inflation, I am not informed with regard to any program for using the credits requested. Conversations with Dr. Fox and with Sir Otto Niemeyer lead me to believe that the Chinese Government has not formulated plans for coping with the serious internal situation and is therefore hardly in a position to indicate with any exactness the use it expects to make of desired foreign credits. Mr. Chang Chia-ngau sets forth in very general terms the need and usefulness of an internal bond issue supported by foreign credits (enclosure no. 4) and the Vice Ministers of Finance25 speak of “reconstruction” even more vaguely, and unconvincingly in so far as immediate needs are concerned (enclosure no. 3). These, I fear, are examples illustrative of the government approach to the problem. The attitude and ideas of the Minister of Finance and the Minister of Economics26 are no more encouraging.

In the absence of technical studies on the subject, it is difficult for the Embassy to arrive at even a relatively precise idea of the reasonably constructive uses to which the credit might be put. However, it may serve some purpose to indicate in purely suggestive terms the Embassy’s thoughts in the matter based on general observation.

A domestic bond issue, supported by foreign credits, would seem to be theoretically sound and advisable. No approximately definite figures as to the amount of such bonds that might be marketed are obtainable. The figure of two billion Chinese dollars is the one most often mentioned and under favorable conditions the amount might increase to four billions. Distribution primarily among the investing public would seem to be essential to accomplish the ends desired; that is, the withdrawal of currency from circulation and the release of [Page 427] goods now being hoarded. Obviously no public benefit would result from the government banks’ exchanging currency in their vaults and newly issued currency for bonds backed by foreign currency at a fixed rate.

Encouragement of agricultural and small industrial production is wanting and badly needed. If it is feasible to do so, a portion of the credit might be used to support loans or grants to agricultural interests for the reclamation and improvement of farm land and to home and community industrial enterprises. The Chinese Government, notwithstanding the obvious advantages of such action, has been slow and reluctant to give assistance but it might be induced to do so if credits were set aside available only to support loans or grants of the kind. Only a very rough guess can be made as to the amount that might be earmarked for this purpose. Although there is slight likelihood that it would all be used, one hundred million dollars might be designated for the purpose of supporting grants or loans up to a billion Chinese dollars for small scale production and a like amount for agricultural improvement.

In the Embassy’s telegram no. 11 of January 3, 9 [10] a.m. Dr. Fox suggests, inter alia, (to the Secretary of the Treasury) use of a portion of the credit to promote imports from Russia into China. (He makes a similar suggestion with regard to imports from India). I am not in a position to evaluate the practical features of such a plan but I know that any opportunity to encourage the inflow of goods into China at this time should not be overlooked. One hundred million dollars of the credit might be set aside for this purpose in the hope that some portion could be used to accomplish the desired results.

The Central Executive Committee of the Kuomintang, at its meeting in December last passed a resolution calling for “The execution of a land policy and the institution of government machinery to deal exclusively with land registration and the equalization of land ownership …”.27 Various Kuomintang organs and committees have in the past passed similar resolutions, the effect of which has been inconsequential. To encourage implementation of the resolution quoted above, a practical step would seem to be the earmarking of a portion of the credit (one hundred million dollars is suggested as a generous estimate) for the support of the necessary financing of the agrarian reform contemplated.

The Generalissimo stresses the psychologically beneficial effect of a large political loan or credit at this time but he offers no program for its use, stating that a program will be forthcoming after the credit is given. I concur in his statements as to the need and the effect of a [Page 428] credit (while differing with regard to the amount) but I am convinced of the advisability, from the Chinese point of view as well as our own, of earmarking portions of the credit for certain purposes. Designation of portions of the credit for support of measures suggested above may be ill-received in banking and some governmental quarters but I believe that, viewing the situation as a whole from the standpoint of general public welfare and from the standpoint of strengthening the country’s economic structure for continued resistance to Japan, it will produce more constructive results than the granting of a large, lump credit or loan without designation as to use. It is well not to overlook the beneficial psychological effect upon the Chinese people of support for measures mentioned above (in particular measures for increased production and agrarian reform); and the practical effects of even partial application and implementation of such measures would fully justify our support. Probably no more than half the amounts suggested would be effectively used for the purposes mentioned and no doublt there would be administrative difficulties and inefficiencies, but even so, urgent requirements would at least be partially met—production of commodities would be increased (thereby removing some of the curse from currency inflation) and a start towards long overdue agrarian reform would be made. And those elements in China which have been urging such measures and the infinitely greater number that would benefit therefrom would be encouraged and strengthened in their resolve to support active prosecution of the war against Japan, having received a practical demonstration that they are fighting for something. The alternative is purchase of the support of the retrogressive, self-seeking, and, I fear, fickle elements in and intimately associated with the government through the granting of a “free” credit, for I am convinced that a substantial credit should be granted.

With reference to my telegrams nos. 34 and 35 of January 12th,28 I cannot too strongly emphasize my feeling that we should clearly and forcefully make known to the Chinese Government, in connection with financial aid that we may extend to China, our opposition to the use of any portion of such aid, directly or indirectly, for the financing of expensive and harmful monopolies. This is a matter which calls for no clarification on my part in as much as I am sure that the Department is fully aware of the dangers of the situation.

Respectfully yours,

C. E. Gauss
[Page 429]

Memorandum of Conversation, by the First Secretary of Embassy in China (Vincent)29

Present: General Chiang Kai-shek;
The American Ambassador;
Mr. Vincent;
Dr. Hollington Tong,30 interpreting.

General Chiang requested the Ambassador to call on him at his residence late this morning. He opened the conversation by stating that he had desired to see the Ambassador for some time in order to discuss matters with him. He said that much had happened since the outbreak of the Pacific war and that he wished to give the Ambassador a brief review of events insofar as he was concerned with them. He said that he had received favorable replies from President Roosevelt31 and Premier Churchill32 in response to his message of December 8th (Embassy’s telegram 481, December 8, 6 p.m.33 and dispatch 240, December 16, 194134), and that Mr. Stalin35 had also replied.36 He said that Russia was apparently not yet prepared to join the anti-aggression front (presumably in the Far East!), but that he was certain that Russia could not avoid war with Japan.

General Chiang referred to the recent military councils in Chungking which General Wavell37 and General Brett38 had attended and said that this was further evidence of determination of ABCD39 powers to cooperate fully in fighting Japanese aggression. General Chiang said that China had a vast man power which it could offer to help in the fight against Japan and that he had already authorized the despatch of Chinese troops to aid in the defense of Burma. He remarked that China was in a position to aid the other military powers in a military way by man power, but that China must look to America and England for aid to enable her to meet the economic and financial difficulties with which it is beset. He admitted that the financial situation in China is serious and that the extension of the war in the Far East will be likely to result in its further deterioration, and that [Page 430] this is a situation which has aroused a very real concern in many quarters.

General Chiang said that the Japanese were utilizing their initial successes to great advantage in the field of propaganda; that intelligent people did not lack confidence in the ultimate success of the ABCD powers; but that the masses, the doubters, and those connected with the traitors in Nanking were affected by Japanese propaganda. He referred specifically to a recent radio broadcast message addressed to him by the Premier of Siam, in which the Premier had called upon General Chiang to join with other Far Eastern nations for Far Eastern solidarity against the Western nations—or “Asia for the Asiatics”. (General Chiang mentioned this appeal of the Siamese Premier several times during his conversation.) He said that if England and America would show their confidence in China and in the ultimate victory of the democracies by granting China a substantial political loan, the doubters, the dissenters and the ignorant would be silenced and morale in China would be greatly improved.

General Chiang stated that he had asked the British Ambassador to transmit a request to his Government that it grant China a credit of 100 million pounds sterling, and that he wanted the American Ambassador to transmit a request to the American Government that it grant China a credit of about 500 million dollars.

General Chiang stated that at present China’s note issue in circulation amounted to something over thirteen billion dollars national currency; that the anticipated deficit for the year 1942 would amount to nine billion dollars. He said that the credit he requested would be used partly to withdraw currency in circulation through the issuance of bonds supported by the credit, and to serve other purposes in regard to which plans were being formulated. He said that he wanted the credit advanced first and that the plans for utilization would be forthcoming afterwards. He expressed the desire that the credit be granted as soon as possible in order to improve morale. He referred to the fact that Chinese New Year was coming soon (early in February) and said that he hoped the credit would be granted before then. He asked the Ambassador to transmit his request and comments to the American Government.

The Ambassador said that he would of course report immediately and faithfully to the American Government the request and observations made by General Chiang, adding that he felt confident that the American Government would be disposed to give sympathetic consideration to any reasonable proposals for aid to China in her resistance to Japan. He stated that he believed, however, that he could be of assistance to General Chiang as well as to his own Government if he were to suggest that the request made by China should be accompanied by a careful presentation of the needs of the situation in [Page 431] this country and a careful outline of the measures to be taken to meet the situation—the measures China proposes to take to help herself and the measures to be undertaken with any American loan or credit. These were matters in which the considered opinions and studies of the financial experts and advisors of the Chinese Government would be most helpful. He pointed out that the American Congress has control of the national funds in the United States, and when the executive branch of the American Government has need of funds a careful statement of the needs must be prepared and submitted to the Congress and it must be shown how the funds, if appropriated, are to be applied. The same fundamentals would seem to apply in the case of a request for a loan to a foreign Power; the American Government should have before it a careful statement of the needs and of the measures to be undertaken with the funds from the loan; this would seem to be desirable in a study of the matter by the executive branch of the Government as well as in presentation of any request to the Congress for an appropriation or for an authorization to grant the loan. Mr. Gauss continued that he did not wish to appear to be quibbling; he was not suggesting that the Generalissimo formulate proposals as to the terms and conditions of the loan he seeks; but he did suggest the need for a more detailed and precise statement of the needs of the situation and of the measures to be undertaken with the funds sought by way of a loan or credit. Mr. Gauss pointed out that America had already extended substantial financial aid to China—by way of import-export bank credits, a stabilization fund loan, and appropriation of large sums for lend-lease supplies which were being moved as rapidly as possible to China. He felt that the American Government would be disposed to give sympathetic consideration to China’s needs, but suggested that those needs be stated more precisely along with the proposals as to the purposes and manner in which any loan would be applied.

General Chiang replied that the plans for the use of the proposed credit or loan were now being drawn up by the financial experts and advisors of the Government; when the loan is assured, these proposals can be put forward; meanwhile he requested that the Ambassador put forward to the American Government the request for a loan.

Mr. Gauss inquired whether the Generalissimo could tell him for example, whether the proposed loan and the measures to which it was to be applied, had been suggested, recommended, or approved by Sir Otto Niemeyer, the head of the British Economic Mission to China. General Chiang said that Sir Otto was informed of the request and it had been put forward to the British Government. (He carefully avoided saying whether Niemeyer had supported the proposal.)

The Ambassador continued, in a fully sympathetic manner, to impress upon General Chiang the importance of a more complete presentation [Page 432] of the proposals. He acknowledged the Generalissimo’s statement that the loan sought is more in the nature of a political loan than an economic loan, but pointed out that it would seem most desirable to submit a more complete presentation of the situation to the American Government, but General Chiang’s replies were evasive and confined to reiteration of the request that the proposal for the loan be communicated to the American Government; information on the measures and manner in which the loan would be applied could be forthcoming later when the financial experts and advisors had completed their studies.

The Ambassador stated that he would return to the Embassy and report the Generalissimo’s request and observations fully and sympathetically to the American Government.

J[ohn] C[arter] V[incent]
  1. Not printed.
  2. Foreign Relations, 1941, vol. v, pp. 768 and 771.
  3. Not printed.
  4. Not printed.
  5. John Carter Vincent, First Secretary of Embassy in China.
  6. Not printed.
  7. H. H. Kung, Chinese Minister of Finance.
  8. O. K. Yui and Y. C. Koo.
  9. Wong Wen-hao.
  10. Omission indicated in the original.
  11. Post, pp. 495 and 496.
  12. Notation by the Ambassador: “Approved”.
  13. Chinese Vice Minister of Information.
  14. See message of December 14, 1941, Foreign Relations, 1941, vol. iv, p. 751.
  15. Winston Churchill, British Prime Minister.
  16. Foreign Relations, 1941, vol. iv, p. 736.
  17. Not printed.
  18. Iosif Vissarionovich Stalin, Chairman of the Council of Commissars (Premier) of the Soviet Union.
  19. See message of December 12, 1941, Foreign Relations, 1941, vol. iv, p. 747.
  20. Gen. Sir Archibald P. Wavell, British Commander in Chief, India.
  21. Maj. Gen. George H. Brett, U. S. A., Chief of the Air Corps.
  22. American–British–Chinese–Dutch.