893.24/1502: Telegram

The Ambassador in China ( Gauss ) to the Secretary of State

127. Your 76, January 15, 7 p.m. I have discussed reverse Lend-Lease and related problems with General Stilwell. He is agreeable to [Page 525] reverse Lend-Lease agreement subject to stipulation for his freedom and discretion to be able to secure supplies, equipment and services locally from private or other agencies by nonreverse Lend-Lease contracts or purchases whenever time or specifications make such course appear to him advisable. In view of actual conditions in China I am of the opinion that there will be frequent need of obtaining services, supplies and equipment outside of reverse Lend-Lease.

Stilwell is concerned, as is this Embassy, regarding the spiraling of Chinese prices and the fantastic United States currency equivalents at which reverse Lend-Lease would be debited against United States at the present official exchange rate.

The only direct indication I have had here of Chinese intention to adopt reverse Lend-Lease is related to this matter of exchange rate. During recent informal conversation with Foreign Minister I inquired whether there is any basis for rumors that China proposes to adopt reverse Lend-Lease. He explained that there has been considerable friction and difficulty with our Army authorities over the charges for supplying food, lodging and services of the hostels used by our troops. He said Chinese prices have risen so high that when converted at official exchange rate the United States currency payments for supplies and services provided might appear to be extortionate, that Minister of Finance considers it inadvisable at this time to revise the official exchange rate or to grant special rates, and that accordingly Soong had recommended that China refuse payment for supplies and services being provided and should regard them as reverse Lend-Lease.

Stilwell confirms that Chinese have now taken that position and says that Generalissimo himself indicates that payment will not be accepted. Stilwell has referred for instructions of War Department. He explained that difficulty has arisen largely out of failure of Chinese Government agency not [sic] to submit detailed break down of costs to support prices they asked.

In my brief conversation with the Foreign Minister he appeared to favor reverse Lend-Lease hot only to overcome situation mentioned above but also for political reasons. The Minister of Finance and others however may not have a similar far sighted view.

From a strictly confidential source I know that reverse Lend-Lease has also had consideration in connection with the study of possible measures to ameliorate situation regarding foreign exchange rate on which there has been much complaint of unfairness from foreign military and diplomatic establishments, relief and missionary organizations, and foreign residents in China as well as from Chinese dependent upon remittances from their relatives abroad.

Minister of Finance maintains that rate cannot be revised at this time because of danger of effect on whole price structure and currency [Page 526] situation, and there is equal opposition to granting any special rates for special purposes as such special rates could not be kept secret.

I understand that as to such organizations as United China Relief it is proposed that Chinese Government grant subsidies of dollar for dollar remittances received from abroad at the official rate.

I am informed in strictest confidence that as to military forces and perhaps diplomatic establishments there has been some proposal that inter-governmental arrangements be made under which the Chinese Government would advance Chinese currency funds for their expenses, such advances to be charged to reverse Lend-Lease or to be left for future settlement between the Governments, with the rate of exchange left open for future decisions. This expedient was proposed to avoid granting special rate. But I understand this matter is complicated by the situation arising out of the use of United States currency amongst our troops and the sale of United States currency and Treasury checks by our military personnel in the black market. The Chinese have been critical of this for some time but have avoided open complaint because of possible adverse effect on morale of our Army personnel. British are also critical; their personnel are forbidden to deal in black market.

I am of opinion that if reverse Lend-Lease could be extended to cover Chinese currency advances for expenses in China, something reasonable by way of reverse Lend-Lease might be accomplished, and it should be possible to devise means of avoiding use of United States currency and sale of such currency and of Treasury checks in black market. Additional compensation, and subsistence, per diem, cost of living, rent and other allowances could be fixed and paid in Chinese currency and rates could be revised periodically to meet rising living costs.

I recommend that we seek, or preferably encourage Chinese to propose, reverse Lend-Lease agreement, with necessary reservations to meet Stilwell’s stipulations, and that we endeavor to provide amongst other things for cash advances in Chinese currency for official American Government expenses in China, the amounts of such advances to be fixed in periodical requisition every few months perhaps within certain limits. The agreement might provide or it could be stipulated in a separate unpublished understanding that the rate of exchange at which such Chinese currency advances as well as the value of supplies, equipment and services furnished shall be debited against the United States in the Lend-Lease accounts shall be settled later between the two Governments, it being understood that this procedure is adopted to avoid granting special exchange rates or revision of the official exchange rate at this time. If and when such an arrangement is made, the use of United States currency by our [Page 527] Army should be discontinued so far as possible and all Government personnel should be forbidden to use the black market.