Office of the Historian

893.5151/969: Telegram

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

Chungking, November 24, 1943—midnight [noon?].
[Received November 25—10:06 a.m.]

2228. From Adler to Secretary of Treasury.

1.
Saw Dr. Kung yesterday and asked him for quotation on price at which Chinese Government would be willing to make CN dollars 400,000,000 monthly available to United States Government. We had long and amicable conversations though Kung tended to be evasive except toward close. He reviewed Chinese financial situation at some length, claiming that change in official rate would undermine confidence in fapi and accelerate rise in prices, to which I replied Treasury was not raising question of official rate and that it made no difference to internal prices whether United States Government expenditures were financed at price of 20 to 1 or of 100 to 1. Kung, after commenting that experts could understand that but not laymen and that it was impossible to keep secret price at which Chinese Government sells fapi to us, stated that China has advanced CN dollars 3,000,000,000 since outbreak of Pacific war for constructing airports and providing transportation facilities, et cetera, for USAAF, that China was preparing to ask us for another loan, and that any increase in the expenditures for USAAF would merely mean an increase in amounts he would ask for.
2.
At this stage I mentioned the three alternative methods of payment indicated in your point 3 (re your 1672 of November 20th). Kung first rejected all three and offered as alternatives:
(a)
His going over USAAF expenditures with Generalissimo and General Stilwell—which he is to do in near future—finding out where it was possible to cut them: and agreeing to bear a proportion, which he did not specify, under reverse Lend-Lease. I pointed out that reverse Lend-Lease negotiations had been protracted and that it might take some time to conclude them, to which he claimed that his Government had already decided to agree in principle and that agreement might be consummated in near future.
(b)
His not objecting to Treasury shipping U.S. currency to China to be sold in black market, adding that sales in quantity would push down price. But he did not recur to this suggestion in his final offer.
3.
I then pointed out that USAAF expenditures were being financed at official rate, that U.S. Government expenditures in China were out of all proportion to return on them and that U.S. is now selling gold in Middle East to finance its expenditures, emphasizing your point 2. Kung said he had no objection in principle to gold being sold on our account in China, but sales in any quantity would both push price down and compete with China’s gold selling policy and in any case would not yield enough to cover our needs. I made it clear that [Page 579] sale of gold on our account need not compete with theirs if sales conducted through one selling agency, to which he agreed, indicating Central Bank was now selling gold for Chinese Government. He added parenthetically that cost of shipping gold was so high that he was considering keeping gold on earmark with Federal Reserve Bank and selling certificates representing claims on gold rather than selling gold itself.
4.
Finally he said he was willing to offer Treasury choice of one of following alternatives: A. 2(a) above. B. Agreeing to your 3(c) subject to Generalissimo’s consent and paying 40 to 1 in exchange for U.S. dollars for U.S. Government needs over and above proceeds of sales of gold for our account.
5.
Comments on offer. For 4A see my comment on 2 (a) above; for this reason alone—not to mention fact that Kung would not specify what proportion of our expenditures China would be willing to finance under reverse Lend-Lease—it is not worth serious consideration as an alternative, though it may be as a supplementary measure. As for 4B:
(a)
It is clear from above conversation and from other sources that China does not contemplate selling much gold and that Kung does not expect us to be able to raise anywhere near enough by this means to cover our expenditures. However, with the exertion of sufficient pressure it might be possible to push the sale of gold to the point where it would yield an appreciable part of our needs.
(b)
As for price of 40 to 1, it is miserably low. I suggest that Treasury ask for at least 100 to 120 to 1 in which case it might be possible to settle finally at not less than 80.
6.
Dr. Kung concluded with remark that above conversation was a preliminary discussion. [Adler.]
Gauss