Memorandum of Conversation, by the Adviser on Political Relations (Hornbeck)

Participants: Mr. Frank A. Southard, Mr. Bernard Bernstein, Mr. Friedman of the Treasury;
Mr. Berle;
Dr. Feis;
Mr. Hornbeck.

The Secretary’s office called Mr. Hornbeck this morning and stated that the Secretary of State and the Secretary of the Treasury had been conferring about the proposed loan to China57 and it had been agreed that Mr. Southard of the Treasury should confer with Dr. Feis and Mr. Hornbeck about the matter. A few minutes later Mr. Southard called Mr. Hornbeck and asked for an appointment with Mr. Hornbeck and Dr. Feis. Mr. Hornbeck suggested, for reference to the Secretary of the Treasury, that Mr. Berle and Dr. Currie be also included. Mr. Hornbeck next asked the Secretary’s office for the Secretary’s authorization to make that inclusion. This was approved. The Secretary shortly thereafter suggested to Mr. Hamilton that Mr. Hamilton keep in touch with this matter.

At 2:30 this afternoon Messrs. Southard, Bernstein and Friedman came to Mr. Hornbeck’s office and were taken by Mr. Hornbeck down to Mr. Berle’s office. Dr. Feis shortly thereafter joined the group. Dr. Currie was out of town. Mr. Hamilton was occupied with other and necessary business.

In the discussion in Mr. Berle’s office, points were brought out as follows:

Mr. Hornbeck said at the outset that he was present because he had been told to participate and had been involved in organizing the meeting; he said that he had already expressed, in his capacity of political adviser, his views regarding the general subject under discussion.

Mr. Berle expressed an opinion that Mr. Hornbeck could not so easily divest himself of responsibility in relation to procedures which might follow. Mr. Berle briefly summarized his concept of what had occurred up to date with regard to Chiang Kai-shek’s request for a loan, and concluded his statement with an expression of opinion that the project for more or less directly financing the Chinese armies had met with a conclusively unfavorable reply by Chiang Kai-shek.

[Page 445]

Mr. Bernstein indicated that, such being the case, the problem before this meeting was to consider what to do next. Mr. Friedman made mention of the question of turning dollars into yuan and deciding upon amounts and periods involved.

Mr. Hornbeck suggested that attention be focused first of all on what it is that Chiang Kai-shek has asked for: he recalled that in several telegrams Chiang has requested a loan of $500,000,000 “without strings”. He touched upon what he conceived to be Chiang’s view of the problem and the possibilities. He said that in essence what Chiang apparently wants is an expression of confidence on the part of the United States in China, China’s moral and military intentions and capacity, the Chungking Government, and Chiang Kai-shek. Chiang’s problems are political, military and economic. The Chinese want the fullest possible recognition of their full participation in the associated effort of the United Nations in resistance to the common enemies; they want to be treated and be treated with as we treat and treat with the British and others with whom we deal on a basis of human parity. For our purposes, we should consider the problem of this loan as one concerned primarily with political features and only in a very minor sense with financial features. If we make this loan, we should make it to serve political and military objectives, not as a business or a banking deal. We should make the loan promptly and in generous amount. Could we not say to the Chinese at an early date that we are definitely prepared to support them to the extent of several hundred million dollars and we are ready to discuss with them plans and procedures which need to be adopted by common consent.

Mr. Friedman and Mr. Berle raised certain questions regarding possible safeguards and possible fractionalizing of the total sum into monthly or quarterly amounts.

There came up the question of official and unofficial opinions. Mr. Hornbeck stated that the Department of State had committed itself officially in one context only: in response to a request which had issued from a meeting held at the Treasury some ten or twelve days ago the Secretary of State had sent the Secretary of the Treasury a letter recommending that a loan be made in the amount of, say, $300,000,000 as soon as possible. Mr. Bernstein raised question regarding a State Department memorandum of January 23.58 It turned out that this was a memorandum which had been prepared by Messrs. Berle and Feis and been concurred in by Messrs. Hamilton and Hornbeck, for the Secretary of State, of which, apparently, the Secretary of State had given the Secretary of the Treasury a copy. Mr. Hornbeck expressed opinion, later concurred in by Mr. Berle, that this was not to be [Page 446] regarded as an official commitment or communication by or on the part of the Secretary of State but was to be regarded as something affording a basis for discussion.

Dr. Feis said that he would recommend that the Congress be asked to appropriate $500,000,000 with an understanding that details would be worked out between the Chinese and the appropriate agencies of the American Government.

Mr. Hornbeck called attention to the fact that the Chinese had asked not only of this Government a loan of $500,000,000 but also of the British Government a loan of similar amount, the two together to be $1,000,000,000. He suggested that we keep this in mind while considering what sum we might be willing to put up. One of the Treasury officials asked for an opinion how far we should try for parallel action by the British. Mr. Hornbeck pointed out that the Secretary of State had suggested that we should not wait upon action by or with the British but should inform the British of our thoughts and intentions, affording them an opportunity to take action in the light of their knowledge of our action. He suggested that frequently one of the best ways to get the British to act is to take action and expect them to act in order to save themselves from being left behind.

Mr. Berle said that if it were a matter of having to choose between giving the Chinese a loan of $500,000,000 without strings or losing the potentially advantageous political effects of a loan through too great solicitude with regard to strings, he would favor the former.

There appeared to be a consensus of opinion that if it could be decided that a loan could be made in substantial amount, and if the Chinese could be informed of this fact with an indication that this decision was tentative and there must be knowledge on our part of and conference regarding purposes for which the Chinese would expect to use this assistance, safeguards could be provided, by discussion, which would serve purposes useful both to China and to United States.

In the course of a brief after-meeting discussion with Messrs. Southard, Bernstein and Friedman, Mr. Hornbeck by way of summarizing gave a brief review of American-Chinese relations in the field of loans and credits over the period of the last three decades, especially the period from 1933 to date, and said that he felt that we have a good deal of leverage in regard to Chinese handling of the proceeds of a loan in the fact that while profiting by one loan the Chinese have their minds on the subject of a later to-be-hoped-for loan. He said that he felt that we could gain great present advantage in connection with our problem of the war in its present defensive stage through being generous now with the Chinese, being helpful to maximum extent to Chiang and his major leaders, convincing the Chinese that we expect to help them to the full extent of our capacity and expect them to reciprocate, et cetera; he felt that, first, the Treasury and the President [Page 447] must find a basis on which we can make a promise in principle; second, we should say to the Chinese that we are in position to make them a substantial loan and that we would appreciate having them give us an outline of their concept of uses to be made and having certain persons representing them sit with representatives of the Treasury Department and representatives of the State Department with a view to adoption of a plan freely acceptable to both Governments.

S[tanley] K. H[ornbeck]
  1. See letter of January 21 from the Chinese Minister for Foreign Affairs to the Secretary of the Treasury, Department of State, United States Relations With China ([Washington,] 1949), p. 478.
  2. Not found in Department files.