Foreign Relations of the United States, Diplomatic Papers, 1943, China

893.24/1628

Memorandum Prepared in the Department of State

[Washington,] July 8, 1943.

Informal statement of the understanding of the Department of State as to the principles which are to govern the disposition and use of Chinese currency received as reverse lend-lease.

Note: The purpose of the present memorandum is to serve as background for use by officers of the Department of State and other officers of the United States Government who may participate in negotiations with representatives of the Chinese Government for a reverse lend-lease agreement along the lines of the draft agreement handed to Dr. T. V. Soong by Assistant Secretary of State Dean Acheson on May 15, 1943.

Category I. Chinese currency to be used to provide compensation adjustment for American civilian officials and military personnel in China.

1. The Treasury Department has already drawn up a definitive draft of the necessary legal document to provide authorization for the payment of Chinese currency as an adjustment of the salaries of American civilian officials and of the pay of American troops in China.^*>

2. The Chinese currency utilized for compensation adjustment is to be regarded by the United States as being received from the Chinese Government as exchange adjustment, such currency (together with other currency to be received under reverse lend-lease arrangements [see category II infra])^42a to be credited to the Chinese on lend-lease account in terms of Chinese currency, final adjustment of the account to be made at some future date after the termination of the war. For its part the United States Government will deliver to the Chinese Government dollar exchange to the amount provided by statu[t]e and regulation for regular salaries and troop pay, not including compensation adjustment, to the extent that such regular salaries and pay are paid in Chinese currency.

3. Under the contemplated procedure the Secretary of the Treasury will fix a compensation factor to be used as the basis for determining the amount of Chinese currency to be paid as compensation adjustment with respect to civilian salaries and troop pay. It is understood that as a practical matter the Treasury Department will take into account all appropriate factors and opinions including, of course, the opinions of the appropriate military authorities and appropriate representatives of the other civilian agencies interested. It is to be understood that if General Stilwell should not be satisfied that the compensation adjustment computed on the foregoing basis was adequate for any given period of time, the operation of this part of the proposed arrangements would in fact not be practical. Since the entire purpose of this category of the proposed reverse lend-lease currency arrangements is to ease the exchange difficulties of Americans officially stationed in China, of whom the great majority are Army personnel, General Stilwell must maintain freedom of action to determine whether the proposed exchange relief measures constitute in fact an improvement or an impairment of the present status of his forces and to accept or reject relief accordingly.

4. The Department of State considers that in order to be in position to request the Chinese Government to advance currency for the purpose under reference, the Government of the United States will for its part have to be able to give assurances that, provided sufficient Chinese currency is obtained to make a reasonable adjustment of the compensation of American official personnel and American forces stationed in China and subject to the imperative requirements of major military exigencies (which are not now in fact foreseen as likely to arise), the United States Government will take steps reasonably calculated to prevent American official personnel from resorting to the so-called “black market”. To this end, subject to the conditions recited in the preceding sentence, it is anticipated that the payment of salaries and troop pay in currency other than Chinese currency will be discontinued or appropriate safeguards will be established to insure that any such payments made in United States currency can be exchanged only under such conditions as will not unduly hamper the efforts of the Chinese Government to control the “black market”. Similarly it is to be anticipated that steps will be taken to see to it that such remittances or allotments as American official personnel may make of their own funds from China will be on a basis which is in accord with the foregoing.

5. All the foregoing, of course, will be subject to any changes brought about in the light of experience by agreement between authorized American and Chinese representatives.

Category II. Chinese currency to be utilized for purposes other than the adjustment of compensation.

1. It is anticipated that Chinese currency made available under reverse lend-lease in amounts additional to the requirements for compensation adjustment will be utilized primarily by authorized representatives of the United States Army for such official purposes as the Army may deem proper in connection with its activities in China. The civilian agencies will also desire to utilize certain of these funds for official purposes, for example payment of rent and acquisition of supplies—especially the payment of rent. It is understood that in any instances in which currency of the category under reference is utilized without any concomitant expenditure of United States dollars, the articles acquired or benefits received by the United States in return for such expenditure shall in fact be regarded as a complete Chinese contribution under reverse lend-lease. It is understood that, so far as the Army now sees, all of the Chinese currency received by the Army for category II purposes will be utilized only in conjunction with the expenditure of the United States dollars in China and such Chinese currency will be regarded by the War Department as merely in the nature of exchange adjustment supplied by the Chinese Government, the Chinese Government to receive credit, in terms of Chinese currency, on its lend-lease account simply for the currency furnished by it, final adjustment of the lend-lease accounts to be made at some future date after the termination of the war.

2. It is understood that, subject only to major military exigencies (which exigencies are not in fact now foreseen), Chinese currency received under reverse lend-lease will be used for category II purposes only to the extent that such currency is available over and above the requirements for compensation adjustment (category I). This limitation is not a limitation upon any existing authority of General Stilwell’s. It is merely a definition of the nature of an additional facility that it is proposed will be made available to the United States Army in China. With the exceptions envisaged in this memorandum, the limitation does not restrict General Stilwell’s freedom of action. Without the limitation the Department of State seriously doubts the possibility of working out any satisfactory arrangement; with the limitation there becomes possible the adoption of a broad arrangement which would be of significant benefit to the Army not only in the field of troop pay but also in the general field of procurement and construction. This limitation is moreover, of course, subject to change by agreement between appropriate American and Chinese authorities and is, furthermore, to be interpreted in the light of actual circumstances as they arise. For example, if it should happen that Chinese currency received under reverse lend-lease is available in amounts insufficient to meet requirements of compensation adjustment for any particular period, it would be expected that the proposed arrangements as to compensation allowances would be inoperative so far as the Army is concerned for such period and it might be that the Chinese authorities would have no objections to the utilization of such currency for purposes other than compensation allowances.

3. In general it is to be emphasized that the primary purpose of the currency provisions of the proposed agreement (and indeed of the entire agreement) is to provide an extremely flexible framework under which the United States Army authorities in China by process of agreement with appropriate Chinese officials can arrange for the progressive development of Chinese reverse lend-lease assistance.

Reciprocal Aid Fund

As a procedural matter it is anticipated that a representative of the Lend-Lease Administration will be designated to receive from the American military forces and civilian agencies in China estimates of their reverse lend-lease currency requirements under categories I and II, to present a request for a “lump-sum” total amount of Chinese currency to the Chinese authorities and to receive such currency as is subsequently made available by the Chinese Government. It is understood that there is general agreement among the interested agencies that reverse lend-lease currency received from China shall constitute a “reciprocal aid fund” and that the necessary accounting and other procedures for the operation of this fund will be drawn up by the Lend-Lease administration and the War Department in consultation with the Treasury and State Departments.

Comment with respect to present plans of the War Department as to utilization of Chinese reverse lend-lease currency for purposes other than compensation adjustment

It is felt that the War Department’s present intentions with respect to utilization of Chinese reverse lend-lease currency for construction projects, purchase of materials, etc. may not prove practicable. It is understood that the War Department contemplates that there would be no uniform rule as to the amounts of Chinese reverse lend-lease currency to be so utilized—in one project such currency may represent 10 percent of the total costs in China, in another 20 percent, and so on. The Army’s present intention is understood to be to estimate what the project would cost in the United States, allocate a corresponding amount of United States dollars for it and then utilize Chinese reverse lend-lease currency to such extent as may be necessary to carry out the project. If China could be frankly credited with having furnished under reverse lend-lease that proportion of the completed project represented by the proposition of Chinese reverse lend-lease currency to the total cost (the Chinese currency to be computed at some basis similar to the “compensation factor” mentioned under category I), the proposal would, it is believed, be made more attractive to the Chinese. To insist that the Chinese contribution in this category as in category I is merely in the nature of exchange adjustment and hence has no measurable value, while at the same time determining the Chinese contribution by factors not specially related to exchange questions, is likely to seem arbitrary to the Chinese and may not be acceptable to them. On the basis of its present understanding the State Department would find it difficult to justify the War Department’s proposal to the Chinese because the anticipated lack of uniformity in application of the proposal minimizes its relationship to exchange adjustments.

1. It is understood that the Treasury Department is prepared to collaborate with the War Department, the State Department and the Lend-Lease Administration in the prompt formulation of the procedural steps which are to be adopted to carry out the contemplated receipt and distribution of Chinese currency under this category. It is suggested that the agencies mentioned undertake to draw up such procedural plans as may be called for to insure successful operation of this part of the proposed arrangements. [Footnote in the original.]
2. Brackets appear in the original.