103.91702/3783: Telegram
The Ambassador in China (Gauss) to the Secretary of State
[Received October 7—10:54 a.m.]
1878. [Here follows report on sale by American civilian personnel of United States currency and drafts in the Chinese black market.]
I am circulating all Foreign Service personnel in China directing attention to provisions of notes IV and V section 1–19 Foreign Service Regulations and am also cautioning all members of Embassy that facilities for issuance of bank drafts for United States currency for any part of their salaries or allowances will be available only for the purposes of direct transmission to the United States and such drafts are not to be sold directly or indirectly in the black market.
Situation reported by this telegram is result of three factors: fantastic and continuously spiraling cost of living, open use of black market by American Army personnel, apparently with tacit approval of American Government, thus creating gross discrimination as between members of the military and civilian services; and subjection of cost of living allowances to income and victory tax which heavily reduces those allowances.
While the only immediate action which can be taken in the present problem of living costs at Kunming, and at Chungking and elsewhere, is by increasing without delay cost of living allowances for American [Page 566] personnel and further temporary salary increases for Chinese personnel, this is not a satisfactory solution, which can probably be found only in provision of Chinese currency grants by Chinese Government under reverse Lend-Lease and the fixing of allowances in Chinese currency adequate to meet rapidly spiraling living costs. It was my understanding that furtherance of reverse Lend-Lease proposals was awaiting a report from General Stilwell who tells me it was sent in some three weeks ago by telegraph. I trust that Department may be soon in a position to urge the proposal on the attention of the Chinese Government. On cost of living allowances let me emphasize that American personnel do not enjoy full benefit of such allowances due to resulting increase in their income and victory taxes since Treasury Department rules that such allowances represent taxable income. I find that our income and victory taxes are increased by amounts equalling 22 to 59% of the amount of our cost of living allowances. First mentioned figure represents result to unmarried American clerk while latter figure represents my own case. I urge that Treasury be asked to reconsider ruling which includes cost of living allowances as taxable income. Such allowances are in actual fact exchange adjustments. If Treasury unwilling to reconsider matter I urgently recommend legislation by Congress. I am informed that allowances to other services are made in a form which does not bring them within taxable income but so far I have not been able to obtain precise information concerning their allowances.