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

Participants: Department of State: Herbert Feis EA, George Atcheson FE, Alger Hiss PA/H, Eugene Eostow A–A, W. Willoughby TA.
Administrative Assistant to the President: Lauchlin Currie
War Department: Colonel Eugene M. Foster (Fiscal Division), Major William F. Gaud (International Division).
Lend-Lease Administration: Charles A. Bane (Chief of Reciprocal Aid Section)

This conference was called to consider an inquiry by General Carter, Chief Fiscal Officer of the War Department (S. O. S.) as to whether reverse lend-lease procedure could be used to obviate or alleviate difficulties experienced by United States military forces in China as a result of the artificial levels at which the official United States dollar–Chinese National dollar exchange rate is pegged and to consider the advisability of proceeding with the negotiation of a reciprocal aid agreement.

Colonel Foster explained that American troops in China are paid, at least in part, in United States currency and that the troops are exchanging it on the black market for local currency at rates much more favorable than the official rate. Without this advantage the, purchasing power of the pay which our troops receive would be extremely small.

It was recognized by those present that it would be desirable to eliminate dealings by our troops on the black market. In response to a question, Colonel Foster indicated that it would not be feasible to grant a special increase in the pay of our troops in China so that they could be paid as many Chinese National dollars (computed at the official rate) as they now get by exchanging United States currency for Chinese National dollars on the black market.

Mr. Currie stated that he favored, and that he understood the Treasury to favor, a revision of the official rate but that the Chinese Government was opposed to further depreciation of the foreign exchange value of their currency.

Mr. Hiss suggested that the Chinese Government might be willing to provide, as reciprocal aid, Chinese National dollars at a special rate for United States troops. Colonel Foster undertook to take up [Page 521] this proposal with General Stilwell who appeared to have been opposed to such a solution last month. (See message from General Stilwell, paraphrased below.) Colonel Foster agreed to show to the appropriate officer of this Department the message on this subject to be sent to General Stilwell. Mr. Bane undertook to ascertain the reaction of the OLLA to such a proposal.* Mr. Atcheson and other officers of the Department expressed the hope that the benefits of any arrangement utilizing reciprocal aid procedure to alleviate the hardships of American troops in China would be extended also to other Americans such as those connected with our Embassy and consular establishments in that country.

A general discussion of the advisability of proceeding with negotiations looking to a reciprocal aid agreement brought out the fact that the Chinese Government apparently desired such an agreement and that, so far as is known, none of the interested agencies of the United States Government has any objection to the proposed agreement providing that it meets the approval of General Stilwell.

Detailed consideration was given to the views of General Stilwell as expressed in a radio message to the War Department dated November 27, 1942 which has been paraphrased as follows:

“Provided provisions of reverse Lend Lease agreement on general terms with China do not preclude or hinder securing equipment, services or supplies locally from private or governmental agencies by non-reverse Lend Lease contract or purchase whenever time and specifications are factors making such course appear advisable to assure procurement (your 1720 from Stilwell for Somervell9) there is no objection to entry into such agreement. Procurement strategic materials for metals reserve, AVG10 equipment, diversion of CDS11 supplies to our SOS, and perhaps CNAC12 transportation charges acceptable on reverse Lend Lease at the present time and under those conditions.

“Any differential between present exchange rate and a revised upward rate should not be chargeable to reverse Lend Lease nor should the present need for revision of exchange rate be affected by such an agreement.

“The Chinese, under present existing agreement between our SOS and Chinese, are occupied in constructing revetments, roads, airfields and other projects of operational nature at Chinese government expense. The cost of such projects now and in the future should not be charged against our Government under reverse Lend Lease credits or otherwise since these are permanent improvements of future benefit to China.”

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It was agreed that the proposed agreement should be so worded that General Stilwell could continue to make purchases for cash, without recourse to reciprocal aid procedure, when he found it preferable to do so. It was felt that the other recommendations pertained to the policy which might be pursued under the proposed agreement rather than to the wording of the agreement itself. The conclusion was reached that negotiations might be begun looking to an agreement which would not specifically embody all of General Stilwell’s recommendations but would not be inconsistent with them.

Dr. Feis raised the question as to who in the Department should be responsible in the first instance for handling the proposed reciprocal aid agreement. It was understood that Mr. Willoughby, reporting through appropriate channels, would assume primary responsibility.

  1. I will take the matter up with the Treasury Department.—W. Willoughby [Footnote in the original.]
  2. Lt. Gen. Brehon B. Somervell, Commanding General, United States Services of Supply.
  3. American Volunteer Group in China.
  4. China Defense Supplies.
  5. China National Aviation Corporation.