Memorandum by the Assistant Chief of the Financial Division (Luthringer) to the Chief of the Division of Far Eastern Affairs (Hamilton)

Attitude of This Government Toward the Terms of the Anglo-Chinese Financial Aid Agreement as Proposed by the British Government

Mr. Hamilton:


With respect to the conversation this morning with Sir Frederick Phillips and his request for our assistance in securing Chinese acquiescence to the terms of the agreement proposed by the British I have been wondering whether we might not take a position somewhat intermediate between that requested by the British and what as I understand it was our indication that we could not intervene in any way to secure Chinese acceptance of a financial aid agreement substantially less liberal than our own. As I recall Sir Frederick did remark that if the Chinese Government comes to us about the matter much would depend on the way in which we handled the situation, but I do not recall that we made any direct response to this.

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I have been wondering whether we could not inform the British that (a) as indicated in our conversation with Sir Frederick we did not feel that we could take any initiative in approaching the Chinese about the matter and (b) if, however the Chinese should approach the Department on its own initiative we are prepared to take the line that we thought that this was a matter which should be settled entirely between the British Government and the Chinese Government and that the British Government itself was the best judge of what conditions must necessarily be imposed on financial assistance extended by the British to China in the light of the over-all British financial and foreign exchange position. Since, however, our opinion had been asked we thought that the Chinese Government must keep in mind that the British Government and the United States Government were in an entirely different financial situation. The gold and foreign exchange resources of the British Government had been seriously depleted by expenditures for war purposes as the Chinese Government is doubtless aware. Our program of lend-lease and other types of assistance to the British were in large part made necessary by the depletion of British foreign exchange resources. The British will end the war with their foreign exchange resources largely depleted and hence cannot undertake to the same degree as the United States to extend unconditional financial assistance to other United Nations in ways which will give the recipient of this aid very large claims to goods and services in the United Kingdom which may be presented only after the war. In the light of these considerations it would seem to us that in general the conditions imposed by the British should be regarded as arising from the financial necessities of the British situation rather than any difference in attitude toward China of the British Government and this Government.

It may be that the foregoing would go a little too far but I believe that essentially it would be a realistic and justifiable position for us to take. There is no getting around the fact that the vastly different financial situation of the sterling area and this Government does permit us to make sweeping gestures in the financial field which the British cannot afford to parallel. The British are making every effort to prevent great accumulations of sterling in hands of other countries which will one day present them in payment for British goods or services leaving the British without means of obtaining the goods and services which the British will at that time find necessary to import. From the broad point of view of post-war economic policy I believe that we also have a direct and strong interest in assisting the British to minimize the accumulation of sterling balances in the hands of persons or governments outside the sterling area. It should be noted that the British restriction on the use of the sterling which they propose to advance does not apply to sterling used to guarantee Chinese bonds [Page 521]but only to that used to purchase goods and services. Moreover although we have no parallel in our agreement to the British provision that Chinese purchases must be on the basis of contracts in which the British Government concurs I am not sure that this provision is an arbitrary one. Unless some provision of this type were included the Chinese might nullify the British provision that purchases must be made during hostilities by negotiating long-term contracts. Moreover all of the sterling area countries have export controls and there must therefore be governmental approval at some point in the proceedings as to the export of specific kinds and quantities of goods to the Chinese.


You will recall that Sir Frederick informed us that he had put to the Treasury the suggestion that the depleted sterling balances of the Stabilization Board of China be replenished by sale of part of the dollar assets of the Board, the $50,000,000 United States contribution to which not having yet been drawn upon at all. Sir Frederick said that he had not yet received any reply from the Treasury on this proposition. I had a feeling that our Treasury had already indicated a willingness to go along with such a suggestion. On checking back through the telegrams pertaining to the Stabilization Board I found that on May 2, 1942, telegram 344 to Chungking,65 the Treasury Department had informed Adler that “with reference to the anticipated depletion of the sterling assets of the Board, if sterling is not available from other sources, Treasury has no objection to using its dollar assets for the purchase of sterling”. For some reason not altogether clear to me our Treasury has not informed Sir Frederick of this. It may be that the particular person who talked with Sir Frederick was not aware of this message to Adler. I feel, however, that it is up to the Treasury Department rather than this Department to inform the British.

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