893.24/1659
Memorandum of Conversation, by the Chief of the Division of Far Eastern Affairs (Ballantine)
| Participants: | Maj. Gen. A. H. Carter, Fiscal Director, Army Service Forces; |
| Col. E. M. Foster; Col. J. R. Gilchrist; Lieut. Col. P. G. Pennoyer; Maj. H. S. Patton, War Department; | |
| Mr. Irving Friedman, Treasury Department; | |
| Mr. Charles Denby, O. L. L. A.; | |
| Messrs. Alger Hiss, Joseph Ballantine, Augustus Chase, Kermit Roosevelt, State Department. |
The War Department representatives expressed doubt that the Chinese Government would be able to meet General Stilwell’s Reverse Lend-Lease Chinese currency needs for the pay of Army personnel and for other purposes, including especially construction projects, and they considered that the purposes other than pay should have priority even though this well might mean that despite the receipt of large amounts of fapi by the U. S. Army, our troops would still utilize the black market for exchange of their pay. The War Department representatives stated that most projects would involve mainly the furnishing of labor for which such currency would not necessarily be required40 but they felt confident that U. S. Army expenditures in China would greatly increase and that pay of troops would constitute only a relatively small portion of the total. They said that it would be difficult to make any firm commitment to use the fapi received for troop pay, observing that because of inflation even the transportation of the currency to certain remote areas would be a major problem. It would be difficult also to estimate in advance currency needs for a given period, and in the event of major operations the amount required might greatly exceed what had been anticipated [Page 553] and what the Chinese could supply. Even should the amount prove sufficient both for pay and other purposes there would be occasions when it would be expedient to use American dollars instead of Chinese currency (even if available) for projects.
One of the points most strongly stressed by the representatives of the War Department was their conclusion that present budget allotments for U. S. military expenditures in China will prove insufficient in view of the continuing spiral of inflation. General Carter said that he was not considering the high policy question of how much should be spent in China as compared to the magnitude of our efforts in other areas, but merely the question of how much is available for China without going back to Congress and asking for more money on the ground that costs in China are “twenty times” what they are elsewhere. It was said that General Stilwell has recently reported on several occasions that the Chinese are “getting away with” a good deal in the matter of prices.… General Carter said that the War Department is consequently anxious to get as much Reverse Lend-Lease aid from China as possible.
In the course of the discussion the War Department representatives stated that, although General Stilwell agreed in principle that Reverse Lend-Lease currency should be applied first to the pay of his troops, he could not be rigidly committed on this point, as military exigencies might require the use of so much of the available currency for projects that the amount left would be inadequate to pay the troops. While recognizing the desirability of his troops’ abandoning the black market, he considered the morale of his men to be of major importance and that their morale could not be maintained unless they were permitted to have recourse to the black market or received amounts in Chinese currency comparable to what they could obtain on the black market. In other words, General Stilwell was prepared to do his best to carry out the proposed Reverse Lend-Lease arrangement, but he could not afford to have his hands tied to the extent specified in the “Memorandum of Principles”.40a [This paragraph represents the net position of the War Department representatives progressively reached in the course of a prolonged discussion. In particular, the “agreement in principle” reflected in the first sentence was not expressed at the early part of the meeting.]41
It was pointed out to the War Department representatives that the only restriction on General Stilwell which was contemplated was the requirement that he use the available Chinese currency first for the payment of his troops, and that, if he did not receive enough for them, [Page 554] he would of course be justified in allowing his men to resort to the black market. It was generally agreed that it should be understood that provision of sufficient fapi to permit adequate compensation of personnel would be a condition of the whole arrangement in so far as agreement to keep American troops out of the black market is concerned.
The War Department representatives raised the point that the adequacy of the proposed compensation factor to be fixed by the Treasury might not prove acceptable to General Stilwell, and it was agreed that in this event the whole scheme would have to be abandoned.
It was pointed out to the War Department representatives that the whole arrangement was also dependent upon what the Chinese would accept; that the Chinese were naturally sensitive to our troops resorting to the black market; that we had already indicated to Dr. T. V. Soong that the proposed arrangement could be expected to put an end to this practice; and that the Chinese, mindful that what they granted to us would have to be granted to other governments, would probably not accept the arrangement if this were not the case.
At one point General Carter suggested tentatively that in order to minimize black market operations it might be well to request the Chinese Government to make dollar currency illegal in specified areas. [However it is believed that after further consideration, the War Department would conclude that such action would probably not be desirable from the viewpoint of the War Department as it would tend to interfere with General Stilwell’s desire to retain freedom to operate outside the agreement.]41a
Mr. Hiss then reviewed in broad terms what the Department of State would like to be able to propose to the Chinese, including an undertaking that, provided the Chinese fulfilled their obligations, American military and government personnel would except in cases of clear military exigency not patronize the black market, although General Stilwell would reserve the right to make official purchases and contracts apart from the agreement. General Carter stated that he was inclined to favor the proposition as so stated in general terms, but that the War Department objected to the rigid and mandatory character of the phraseology employed in the “Memorandum of Principles” submitted by the Office of Lend-Lease Administration. It was finally agreed that Mr. Hiss would revise the phraseology in question with a view to meeting if possible the War Department’s desires.
At the request of those present, Mr. Ballantine then briefly discussed the broader political factors involved.