893.51/7724
The Ambassador in China (Gauss) to the Secretary of State
[Received December 16.]
Sir: I have the honor to refer to previous despatches and telegraphic reports in regard to the current economic and financial situation in China as it relates to the war effort, including the Embassy’s despatches nos. 1529 and 1564 of August 31 and September 10, 1943, respectively,3 and to submit further comment on this subject.
1. Mr. S. Adler, the Chungking representative of the U. S. Treasury Department, summarizes various of the significant factors in the general economic situation in China as follows:
- a.
- Notes in circulation at the end of August 1943 reached a total of CN $56,250,000,000, and, with the continuing rate of monthly increase of CN $3,250,000,000, at the end of 1943 will total something like $70,000,000,000 CN, having more than doubled during the year.
- b.
- The budgetary deficit for 1943 will probably amount to more than CN $25,000,000,000. In 1944 expenditures are expected to reach between CN $60,000,000,000 and CN $80,000,000,000. Revenues are not expected to exceed one-half of the expenditures.
- c.
- Along with these aspects of currency inflation, prices continue to advance approximately 10 per cent a month and at the end of October 1943, were some 160 times (16,000%) the 1937 level.
- d.
- There is little reason to expect that any great reduction of note circulation will result from the Chinese Government’s announced plan, if put into effect, of selling in China $200,000,000 U. S. worth of gold, to be obtained from the United States against the half-billion dollar American credit. (Notwithstanding announcement of this plan, definite decision has not yet been taken as to the employment of the gold in question.)
- e.
- A further adverse factor is the lessening of the existing meager industrial production in free China due to machine deterioration and lack of replacement parts.
The Minister of Economic Affairs, Dr. Wong Wen-hao, one of the soundest and more competent of the higher officials of the Chinese Government, informed us not long ago that he could envisage no solution for the problem of inflation in this country, and he mentioned that even the tax system, especially collection in kind, had proven disappointing because of corruption on the part of the poorly paid tax officials. He said that the people found it unbearable, as evidenced by the resultant peasant revolts against it in a number of provinces of free China.
It must be accepted as fact that the Chinese cannot solve their desperate economic problems. China not only lacks the administrative machinery to enforce price, anti-hoarding and other anti-inflationary controls, but Chinese officials, merchants and the people in general do not have the psychological make-up under present conditions which is necessary for effective cooperation for success in such matters.
2. The military and political implications in this situation are obvious and have lately become more and more apparent. Corollary to the economic deterioration there has been a steady military deterioration with the result that China’s war effort the past four years has been completely defensive and in many respects has become very passively and complacently so. The Chinese have more and more developed the tendency to rely, for the protection and maintenance of free China, less upon their armies than upon geographic factors and the reluctance of the Japanese to expend enough men and materials to drive the Chinese Government from Chungking. (The U. S. 14th Air Force has been the weapon, by its attacks upon enemy air strength, including installations, which has forced the Japanese air arm to concentrate on counterattacks on “allied” airfields and to refrain from costly efforts to bomb the Chinese Government out of Chungking.) We have mentioned in previous reports the serious and widespread deterioration of the Chinese troops due to malnutrition, lack of militarily useful activity, corruption of officers, and the participation by troops in trade with the enemy and enemy-held territory [Page 170] for subsistence purposes and sometimes for profit; we have reported the weakening of the Government’s internal position and the serious effects which the situation is having upon prospects for postwar political and economic reconstruction.
Serious as are the political implications in the situation, it would be a mistake to assume that the inevitable result will be compromise with Japan. Chiang Kai-shek and his supporters who control the Government have no thought of capitulation, or of endeavoring to work out any modus vivendi with Japan as long as they can keep going. They learned long ago in north China in the bitterest way what “cooperation” with the Japanese means and since have had more than ample evidence in the occupied areas of China and of other Far Eastern countries of what might be expected from coming to terms with Japan. A compromise arrangement with the Japanese would hold no benefit to the leaders of a Government whose soundest store of value is in its funds and foreign exchange credits in the United States and who realize the necessity of being on the winning side. There is no question that China’s leaders and the Chinese as a whole have during the past year acquired a conviction that the Allies will win the war. Indeed, the optimism and wishful thinking of the Chinese in respect to an early termination of the war, including an early collapse of Japan, have made them all the more vulnerable psychologically to reverses; and this provides one of the reasons why failure of a Burma campaign would have most serious effects upon Chinese morale. By hastening the process of the already continuing economic, military and political deterioration, it would without much question tend to diminish at an accelerated pace China’s war effort and reduce the amount of active help which the Chinese Government could furnish to our military and other governmental agencies concerned in the general war effort in this theatre.
3. The question of what further the American Government can do toward causing improvement in this situation remains ever before us and becomes increasingly urgent as time goes on.
In addition to the problem of assisting an Ally who has suffered at the hands of the enemy for six years and who continues to contain almost half a million Japanese troops with their equipment including a large number of planes, our pressing immediate problems are twofold: (1) to increase our aid to China so that if she can be persuaded to do so she may in time take an active rather than a passive—an offensive rather than a weak defensive—role in the war against Japan; and (2) to induce the Chinese to make such actively affirmative contribution to the war effort now as is in their capacity—and there is much they can do at present to help the Allied cause which they are not by any means doing. (There is another long range problem [Page 171] which need not be considered here—that of diverting the Chinese Government from its fascist-like tendencies, both political and economic, into the direction of democracy so that it will be easy and natural for China to cooperate with us, economically as well as politically, after the war.)
4. Unfortunately, due in part to China’s inability to help herself economically, there appears to be little effective economic help we can furnish China at the present time and under present conditions. Foreign loans appear to have lost effective value as a palliative for the constantly deteriorating economic situation. The American Stabilization Loan has not been actually used and the Stabilization Board (which since the outbreak of the Pacific War has more and more become an instrumentality of the Chinese Ministry of Finance rather than a free agent and which is now moribund) has not stabilized the currency. While the official rate as against U. S. currency is 20 to 1, American dollars sell in black markets at from 80–100 to 1, and the only “stabilization” that has been effected has been in the restricted field of international remittances. The American half-billion dollar credit, although it gave great encouragement to the Chinese Government at the time it was arranged and consequently helped to sustain confidence in the Government’s capacity to carry on, has had little or no other effect on China’s internal economy, has not retarded inflation, and has been economically useful to the Chinese Government chiefly because it has provided a means of building up the Chinese Government’s foreign exchange reserves abroad. (There is reason to believe that the Chinese Government has been eager to use up the half-billion dollar credit to clear the decks for a request for a further American loan.) The project for the sale of gold—the most recent Chinese device to utilize the American loan—may be abandoned by the Chinese Government as far as its original purpose is concerned and the gold may be used as a reserve in connection with post-war international monetary arrangements. Even if the gold should be utilized for the originally announced purpose, it is not expected that its sale in free China will, as against the continuing excessive rate of currency expansion, so reduce note circulation as to retard inflation to any appreciable degree.
5. Politically, it is believed that the American Government has been doing everything possible to assist China. Mere political gestures have, like loans, lost effective value. But concrete gestures such as the inclusion of China in the recent Moscow Declaration have obvious immediate as well as long range value and tend to strengthen and make more solid China’s community of interest with us and her other principal ally in international affairs. Such developments hold, of course, a very considerable appeal to the Chinese, especially because [Page 172] of the implications that China is one of the “Big Four” and is a first-class power and because considerations of face so extensively govern Chinese thought and action.
But such developments do not influence China much, if at all, toward acting like a first-class power in respect to her obligations to her Allies. This is not entirely due to cynical selfishness and self-interest. It is due in part to war weariness and to the Chinese conviction, which we and our propagandists both official and unofficial have helped the Chinese to acquire, that they have already done their part and may well sit back, conserving what they have of treasure and materials and men and obtaining from us more treasure and materials if they can, while we defeat Japan and bring into being the rosy postwar China on which they are now concentrating so much wishful thinking.
Mixed with this wishful thinking are some definite apprehensions for the future which gnaw on the official Chinese mind as justification for conservation of military resources and for diverting more than half a million soldiers (including some of the best Chinese divisions) from the Japanese front to blockade the Chinese communist forces. The Chinese are apprehensive lest in time the Russians sweep down through Manchuria and with the aid of the Chinese communists occupy north China as well as Manchuria. They suspect that the British do not wish Burma recaptured with the assistance of China and the United States; that the British may occupy Thailand and stay there; and that once Malaya is retaken from the Japanese, British effort toward crushing Japan will dwindle. They suspect that by the time this happens the United States itself may be so war weary that we may make a compromise peace with Japan. There is a definite relationship between these apprehensions and the question of the Chinese willingness, aside from the question of capacity, to revitalize China’s war effort.
6. We cannot expect China to increase her contribution to the war effort beyond her capacity, or even up to a point near the limit of her capacity. The yardstick of China’s great manpower as a mighty military potential, so frequently used by commentators and “experts” in the United States and elsewhere to measure China’s value to the Allied cause, is a false gauge. Without artillery, without adequate supplies and reserves of munitions and equipment and other essentials, without intensive training of troops, efficient leadership and vastly improved morale, it is fantastic to expect China to undertake any serious offensive against the Japanese, now or in the long future. China simply does not have the capacity, or the spirit, to do so.
But there is much that China can do, and is not doing, to assist in the defeat of Japan. China can and should contribute to her ally, the [Page 173] United States, a larger, more realistic and wholehearted cooperation and assistance in the measures taken by the United States to aid China in the China theater; to protect China from Japan and to reach forward to the vitals of Japan—to strike at Japan’s war industries, and bases, and shipping and naval strength and air and military strength in China, in the areas near China, and in Japan, for the purpose of crippling and destroying them by air power.
China has long cried loudly for greater air aid—for planes for an almost nonexistent Chinese air force, and for American air support. But the expansion of aerial activity in China and its extension to the vitals of Japan depends not alone on the provision of planes and pilots but on the necessary facilities for the use and support of those planes and pilots; it depends upon the provision of numerous adequate air bases with all the facilities needed at such bases for efficient air operations; it depends on roads connecting airfields with bases of supply; it depends on transport for constant and continuing supply, and so on. It depends also upon military dispositions by the Chinese ground forces to cover the extension of the line of bases eastward, ever forward, to within striking distance of Japan and Formosa and neighboring areas. It depends upon proper and adequate military dispositions by Chinese ground forces to cooperate with the air forces themselves in protecting such bases against the inevitable Japanese expeditions for their destruction.
It is such aid and assistance that China can give, and give in abundant measure, to assist her allies, and by assisting them, to help herself in the winning of the war. It is such aid and assistance that China is not giving, or is giving only half-heartedly or in meagre measure.
The Chinese—some of them sincerely but lacking knowledge of the real situation—may dispute that charge; but the facts remain that China’s aid has been found sadly wanting; that there are long, unexplained delays in getting on with the construction of air bases and air base facilities and roads; that budgets are cut and only restored after pressure; that appropriated funds are long delayed in being issued from the Chinese treasury and work is constantly postponed until funds are available; that there is evidence of graft and corruption and even of sabotage of honest effort; that costs are fantastically high for both labor and materials and there is no disposition to check them; that, while the American Government itself is contributing enormous sums for the provision of the necessary air base facilities, for transportation costs, et cetera, exchange rates are being held at a ridiculous and arbitrary level—with no real disposition to effect an honest adjustment, or to provide reverse lend-lease or mutual aid; that troops which might be used to protect the eastward movement [Page 174] of our line of attack on Japan from the air—to protect air base construction and to defend the bases when constructed—are stationed elsewhere to blockade Chinese communist areas or to prepare for civil war in China after the defeat of Japan; and that there is also evidence that under threats by the Japanese of bombing operations in localities where airfields may be constructed, local authorities have impeded—practically sabotaged—the plans for such projects.
Be as charitable as one may, it cannot be said that China is contributing in any reasonable measure, within her resources, to the war effort in the China theater; China is not helping her Allies to help herself.
7. After some six years of war the Chinese are undoubtedly tired and war weary. While they have no thought of capitulating or of seeking an arrangement with Japan, they have more or less persuaded themselves that they have done their full part in this war and their inclination is to sit back, conserve their resources, and let us win the war for them. We are ourselves greatly to blame for having allowed China to slip into this state of complacency. Our propaganda at home has helped the Chinese to persuade themselves that they have done their full share in the war.
China is dependent upon the friendship and generosity of the United States not only during the war but in the post-war reconstruction period. Her leaders fully realize this but are too inclined to take American aid—military, financial, and political—as a matter of course; almost as a matter of right.
By a more realistic—but frank, honest and open—attitude and approach it should be possible for us to persuade China to abandon her lethargic complacency and revitalize her war effort within the available means and resources of the country and in a more cooperative and responsible and appreciative attitude toward her American ally, which alone is assisting her in her distress.
Our aid to China by way of the provision of military and other supplies must continue to be limited until land or sea supply routes can be re-established. Reopening of the Burma Road would not, of course, result in an immediate influx of consumers goods, because its capacity would be taxed with the transport of military supplies needed to expand our military activities and to equip the Chinese for any possible expansion of theirs. But it would result in a tremendous upswing in morale which would have a very salutary effect on the general economic situation because it would cause a rebirth of confidence in the currency and would force the release of hoarded goods.
8. As present circumstances limit us to the military (principally the aerial) field in aiding China, it is to military developments within China and in adjacent areas that we must look for possible sources of [Page 175] improvement in the unhappy economic situation. Meanwhile, barring crop failures, that situation will continue as it is, worsening steadily toward some time and point at which the present almost fixed rate of deterioration will break into chaos. Fortunately that time and point is yet some distance away.
Mention was made in despatch no. 1529 that economic and financial experts in China seem to agree that inflation of itself (notwithstanding the fantastic rate of the spiraling) will not result in economic collapse in the near future because China is fundamentally an agricultural country and the great majority of the population live off the land. Dr. Young,4 American adviser to the Chinese Ministry of Finance, was cited as of the opinion that the determining factors in the situation for the future were the extent of the Chinese Government’s growing deficit; the state of public confidence, which largely depends upon the military situation especially in China and in areas adjoining China; and the state of the crops.
In despatch no. 1564, we reaffirmed our opinion that the agricultural considerations mentioned above preclude the probability of the occurrence of a general economic collapse in the same time ratio as that of the collapse in Austria in the years 1921–23 following a somewhat parallel seven year period of inflation, and that the question of the maintenance of the economic situation against wholly disastrous deterioration resolves itself into military problems. We pointed out that acceleration of American victories in the Pacific would improve Chinese morale and therefore benefit Chinese economy and finance (the Chinese, notwithstanding their own lack of affirmative war effort, are very articulate in their complaints against the slowness of the “stepping-stone campaign” in the South Pacific islands). The view was expressed that early recapture of Burma would result in a great lift in confidence, which would have extremely beneficial results on the economic situation in general. (It was also pointed out, as has been done in other despatches and telegraphic reports, that failure of a Burma campaign would be a disaster of the first magnitude.) We gave our considered opinion that the determining factors were and would continue to be those comprised in military developments within China and in adjoining areas.
Dr. Wong Wen-hao has stated to us that he believes it is impossible to make any definitive prediction as to how long the present disheartening financial and economic situation can continue but that in his opinion a major economic crisis does not seem likely to occur within a year or a year and a half. Mr. Adler, in connection with his summary of the adverse factors in the situation described in paragraph numbered one of this despatch, has commented that, notwithstanding [Page 176] the famine conditions in some areas and the failure of a second crop in Honan Province, the 1943 harvest has been on the whole satisfactory and that the Chinese Government should be able to supply the Chinese forces with sufficient food to last during the coming year. Mr. Adler considers that, other factors being more or less constant, there is no danger of imminent collapse so long as the food supply continues to be maintained and he believes, as does the Embassy, that the chief hope for economic improvement in free China rests in an early and successful Allied campaign against Burma.
9. While some of the highest officials are complacent in regard to the question of a Burma campaign, the general feeling is that the Burma Road is China’s life-line and must be reopened soon. In the absence of such campaign—or in the absence of a comparable substitute such as the occupation of Indochina or of a south China port—the situation may be expected to continue to develop adversely along its present course, giving us a leeway of perhaps a year or a little longer before a serious crisis occurs. Meanwhile our present aid to China will continue to help maintain the situation, especially if the Chinese can be persuaded to help themselves by helping us in the ways that are open to them to do so. This can be accomplished by making it clear to the Chinese, as we continue to help them with the 14th Air Force and with lend-lease materials, that we expect them to do their part, within their capacities, actively and affirmatively to further the common cause.
Respectfully yours,