Memorandum by Mr. Woodbury Willoughby of the Division of Commercial Policy and Agreements

For the past several weeks this Division has had under consideration an informal note from Mr. Oscar Cox, General Counsel of the Lend-Lease Administration, addressed to Mr. Eugene V. Rostow,1 in which Mr. Cox asks “What about a reciprocal aid agreement with China?”

The proposal was discussed with appropriate officials in this Department, the War Department, Lend-Lease Administration, the Export-Import Bank and with Mr. Lauchlin Currie.2 The War Department had obtained, several months ago, the views of General Stilwell3 and he was strongly opposed to reverse lend-lease as applied to his command. Under these circumstances the matter was not pushed. Also, Mr. Currie requested that the matter be held in abeyance pending the arrival of an United States Army officer who had been concerned with the handling of supplies in China and was on his way to Washington.

A new development last week throws an entirely different light on the subject. In connection with the re-acquisition by the United States Army, from the Chinese Government, of certain military planes which the latter originally had purchased in the United States, Generalissimo Chiang Kai-Shek4 is said to have indicated that his Government was taking action through appropriate channels to negotiate a reciprocal lend-lease agreement between China and the United States. Correspondence relating to this aspect of the subject are attached as Exhibits 1 and 2 respectively.5

It is assumed that the Department would not want to decline to negotiate a reciprocal aid agreement with China. With a view to overcoming the objections of General Stilwell, it was suggested informally [Page 516] to representatives of the War Department that a provision might be included in the agreement which would allow our forces in China to continue to purchase supplies and services where expedient. Major Gaud of the International Division of the War Department stated over the telephone on Friday, November 20, that a radio message was being dispatched to General Stilwell explaining the situation and requesting his comments. No answer has yet been received. Major Gaud said that he will let us know as soon as an answer is received.

In giving consideration to Mr. Cox’s query in regard to a reciprocal aid agreement with China, we also obtained information concerning several other aspects of the problem which is summarized below.

As would be expected, the amount of defense articles transferred to China under lend-lease has been small since the Burma road was closed. In the third quarter of 1942 the total was only $16,640,000. The attached table (Exhibit 3)6 gives detailed information concerning lend-lease to China compared with other countries.
It can be assumed that the monetary value of reciprocal aid that might be obtained from China would be unimportant. It is limited in the first place by the small number of troops and the restricted scope of our current military operations in China. Furthermore, as General Stilwell is opposed to obtaining his supplies and services by reverse lend-lease, it is probable that he would continue to a considerable extent to pay cash even if a reciprocal aid agreement were concluded.
The amount of reciprocal aid that we are likely to request is so small that the question of China’s financial ability to furnish it is not a serious problem. But the financial and exchange situation in China is very bad. Prices are rising rapidly. The Government appears to have exhausted possibilities of raising funds by taxation and progressive currency inflation is in progress. While the United States and, to a lesser extent, Great Britain have made available to China large amounts of foreign exchange, transportation difficulties prevent China from using it on a large scale for imports. Converting such exchange into local currency for domestic use results in further increase in the amount of currency in circulation thus aggravating inflation. The foreign exchange value of the Chinese National dollar is pegged but there exists an active black market at which its value in terms of United States dollars is much below the official rate.
Inasmuch as the Chinese Government cannot obtain additional tax revenue with which to pay for any goods or services that it might supply our troops, it would appear that any reverse lend-lease by that country would necessitate increasing further the amount of currency in circulation. As pointed out above, however, the amount involved [Page 517] would be small and, moreover, the immediate effect upon the financial situation in China of current purchases by our armed forces of supplies and services in that country is not very different. In order to pay for such goods and services, our forces must exchange United States money for local currency which the Chinese Government can supply only by printing it.
The question was raised as to whether China might be asked to furnish raw materials for American war industries as reciprocal aid. While it may be well to keep in mind the possibility of asking China to do so at some future date, when supply routes are reopened, it would not appear reasonable to make such a request now. A substantial part of China’s exports to the United States are used to pay off loans by the Reconstruction Finance Corporation. During the four months, June to September, United States general imports from China averaged only $386,000, equivalent to a yearly rate of $4,632,000, whereas payments due the Reconstruction Finance Corporation on account of principal and interest on its loans in the year 1943 total $14,165,204.82.

Recommendation. It is suggested that no action be initiated in regard to a reciprocal aid agreement with China pending receipt of word from the War Department as to General Stilwell’s comments on the proposal. If, however, the Chinese Embassy approaches the Department before General Stilwell’s comments are received, it is believed that the Embassy should be told that we should be glad to enter into negotiations looking to an agreement along the general lines of those concluded with the United Kingdom, Australia, New Zealand and the French National Committee.

  1. Adviser on Lend-Lease Affairs to the Assistant Secretary of State (Acheson).
  2. Administrative Assistant to President Roosevelt.
  3. Gen. Joseph W. Stilwell, Commanding General, United States Army Forces in China, Burma, and India.
  4. President of the Chinese Executive Yuan (Premier).
  5. Neither printed.
  6. Not printed.