033.1193 Nelson, Donald M./1–1245

Mr. Donald M. Nelson to President Roosevelt 44

My Dear Mr. President: This is my report to you on my work in China this autumn. As I cabled you from Chungking on November 22, the situation there has undergone marked improvement, particularly with respect to the cooperation between the Generalissimo and our military forces. It is clear, however, that China is passing through her greatest crisis of the war. Most of our military authorities in China believe that if the Japanese are able to press their drive through Kweiyang, they will direct their next thrust against Kunming, rather than Chungking. If Kunming were to fall, it is generally agreed that China would cease to be an active belligerent. Under those conditions, there is no doubt in my mind that at least an additional year and possibly several additional years of warfare, with an expenditure of many American lives, would be required to beat Japan and liberate China.

Fortunately, the Generalissimo is working energetically with General Wedemeyer45 to halt the Japanese advance. If they are successful—and I think they will be—steady progress from defensive to offensive warfare should follow in the China theatre.

My main effort in China to date has been concentrated on measures of immediate benefit to the war effort. During my visit to Chungking in September, I was disturbed by the widespread postwar thinking in official circles, and by a relative lack of constructive war effort. This situation, I am glad to report, has been largely corrected. China’s government is now throwing its weight into the job of winning the war. In my many talks with Chinese leaders in November, postwar questions were put aside by mutual agreement. With your approval, I shall reserve postwar discussions in China until the Chinese war effort is further advanced.

Findings on China’s War Effort

China’s ability to wage war, as I found it in my September visit to Chungking, was deteriorating rapidly. General Wedemeyer has no doubt reported the tragic defects in the leadership, training, equipment, [Page 288] and supply of the Chinese armies. The long persistence of these defects was due in large part to the attitude of the Ministry of War, which clung to traditional practices in the face of imminent disaster.

Prior to the cabinet changes in November, this attitude was characteristic of most of the Generalissimo’s cabinet. The chief officials surrounding him rested on the assumption that the United States would defeat Japan, and that China could do little to help. Attempts to bring about cooperation between the National Government and socalled Communist China were sternly resisted by certain key ministers. Although these ultra-conservative officials were obedient to the Generalissimo, their influence upon him was profound. Most of the news that reached him was filtered through their offices.

While the Chinese government persisted in a stand-pat military and political policy, her war economy steadily disintegrated and production declined. Chinese arsenals have been operating in the midst of war on only 55% of capacity. Operating rates of most other industries have been even lower. The steel industry has been operating at less than 20% of capacity.

Another factor undermining China’s war effort has been her vicious price inflation. It has made hoarding profitable and production unprofitable. To meet swiftly rising costs of raw materials and labor, factories were forced to raise prices, and China’s war procurement agencies were unable to meet those prices. The bad price situation has been further aggravated by uneconomical production practices in key industries.

Moreover, the Chinese Ministry to [of] Finance and the four government banks had established an excessively “tight” policy. Funds allocated for Ordnance Procurement were insufficient to keep arsenals and other war plants operating at full capacity. The government banks had established interest rates of over 40% per annum, together with certain outmoded practices which made it virtually impossible for war industries to borrow.

On another side, China’s feeble war production effort was handicapped by her unbelievable transportation difficulties. As you know, there are only 6,000 trucks in China and those old and in bad condition. Free China is also desperately short of planes, liquid fuel, usable rolling stock for the country’s few small and unconnected railroads, and spare parts.

The economic war effort of the nation was poorly planned and entirely uncoordinated. Chinese Ordnance procurement officers made little use of plants owned by other agencies of the government and by private sources. Government departments had no mechanism for cooperation with each other or with private industry in the war effort. Procurement was piecemeal. Statements of requirements by government [Page 289] departments were non-existent or completely unrealistic. No system of priorities existed, nor any mechanism to subsidize high cost production of essential materials such as iron and steel.

Along with the military and economic vitality of the nation, the morale of the Chinese people was being drained away. In September, I found the civilians of China wavering between resigned reliance on the United States to defeat Japan, and bleak pessimism. Their will to victory withered for lack of strong moral leadership. In the educated, salaried middle class, which has been nearly ruined by the inflation, resentment of hoarding and speculation by the wealthy, and of official corruption had been steadily growing.

In recent years, leaders of the country, from the Generalissimo down, have been unable effectively to rally the people to the war effort. It must be kept in mind, too, that the civilians of China receive little war news, largely because of lack of communication. For the most part, they have no feeling of participation in the war. The lack of an army postal system and prevailing illiteracy virtually prevent communication between civilians and soldiers.

Although the Generalissimo is highly respected and widely regarded as the one man capable of holding China together, there are many rumors of disaffection among powerful provincial leaders. For example, the allegiance of the Governor of important Yunnan Province, General Lung, is reported to hang by a thread. Such rumors, whether true or not, depress morale.

Action Taken

It was clear to General Hurley and to me, as we faced the situation in September, that if China was not to drop out of the war as a belligerent, she had to move rapidly. Swift action by the Generalissimo was the goal of the talks which we had with him in September. Such action obviously required the closest cooperation with the representatives of this country. Your appointment of General Wedemeyer to the command of the China Theatre, your subsequent appointment of General Hurley as Ambassador, and the arrival of the American war production mission in China, laid the groundwork for a number of significant measures, since put into effect:

Active steps were taken to check the Japanese advance. The diversion of Chinese troops from the border of Yenan Province to the fighting zone in Kweichow suggests a shift in attitude of the National Government toward the Communists; while the movement of Chinese troops from Burma to Kweichow was the work of the newly established military command in China. The latter development was made possible only by close cooperation among the Chinese, Americans, and British. In talks which I held at General Wedemeyer’s request with [Page 290] ranking American and British commanders in Calcutta and Ceylon, I found a healthy understanding of the Chinese military situation, and a willingness to make far-reaching changes in campaign plans, so as to give full cooperation to General Wedemeyer. Of great importance also is the fact that the Chinese Service of Supply has now been put under the command of General Wedemeyer.
The Chinese War Production Board was established and is functioning. In September, I obtained the enthusiastic agreement of the Generalissimo to create an agency in the Chinese government to plan and coordinate Chinese war production and related economic activities. Following your approval in our Washington conversation of November 2, I returned to China with a small group of men who have had long experience in American war production. Our first step was to work with a group of Chinese officials headed by Dr. Wong Wen-Hao, Minister of Economics, to draft the basic law for a Chinese War Production Board. This law, which grants very wide powers, was immediately approved by the Generalissimo, and has since been passed by the Executive and Legislative Yuans. We worked closely with Dr. Wong on organization and policy, participated in working up firm ordnance requirements for the Chinese Army, and aided in winning cooperation for the Chinese War Production Board from all Ministries of the Chinese government and from leading financial and industrial groups.
For the first time, the Chinese economic war effort is now coordinated. Two members of the staff of the American War Production Board have remained in Chungking to act as my deputies in further advising the Chinese War Production Board on problems of policy and operation. Excellent arrangements also have been made for close liaison between the Chinese War Production Board and U. S. Army Ordnance, represented in Chungking by officers of high ability.
An American technical production mission has begun work in China. By arrangement with the Foreign Economic Administration, on my return to China in November, I brought with me six American production specialists, five of whom are experts in steel production, one in alcohol production. These highly qualified men immediately began to visit Chinese industry and to study production methods there. They will work with Chinese plant managers and government officials over a period of three months with a view to increasing output, improving quality, and reducing costs. Attention was focused at once on measures to obtain immediate increased production of entrenching tools, small arms, trench mortars and ammunition needed by the Chinese Armies.
War production requirements have been financed. The four Chinese government banks have contracted to lend 10 billion CNC [Page 291] to the Chinese War Production Board to finance essential production. The urgent need for additional working capital in many Chinese industries also made it necessary that China’s government banks reduce interest rates for war production to a point where management would once more find it possible to borrow capital and borrow it quickly. With the approval of the Generalissimo I put the issue before the newly appointed Minister of Finance and participated in negotiations among the Chinese War Production Board, the Ministry of Finance, and the four government banks. The bankers agreed to reduce interest rates on loans for war production purposes to 20% per annum, or less than half the previous customary rate. The time necessary to negotiate a loan has been reduced from four or five months to a few days. Complicated red tape in granting and servicing loans has been sharply cut.
Additional transportation facilities have been allocated to China. On October 19, after my return to the United States from my first visit to China, I recommended and you approved the production of 10,000 additional trucks for China, now scheduled for production in 1945. At the same time you approved my negotiating with General Arnold46 for 30 C–46 cargo planes for use of the Chinese National Aviation Company; and General Arnold agreed to this proposal, deliveries to begin in January or February 1945.
Shifts were made in the Chinese Cabinet with a view to strengthening the war effort. On November 27, the Generalissimo announced a number of important cabinet changes, in which new ministers were appointed for War, Finance, Education, and Information. While these changes by no means mark a new era in the government, yet they certainly represent a step toward a more aggressive war policy. Following on the heels of the cabinet reorganization, and closely related to it, came important changes in the Chinese system of military supply and far closer cooperation between the Chinese and American High Command. Conversations between the National Government and Communist leaders looking toward war cooperation were also benefited.
Moves have been made to bolster Chinese civilian morale. The establishment of the Chinese War Production Board and the arrival of the technical mission had an immediate effect on the morale of the Chinese civilian. These were the first constructive economic achievements which the country had seen for a long while. During November, I discussed the morale problem with the Generalissimo, and he stated that he would personally assume responsibility for strengthening morale. With the same purpose, I accepted an invitation to address the Presidium and Resident Members of the People’s Political [Page 292] Council in Chungking—China’s nearest approach to a representative legislative body. Taking the need for cooperation within China as my theme, I also talked before the China-American Institute of Cultural Relations, as well as to leaders of Chinese industry and finance. Before I left Chungking, I attended a joint meeting of the Chinese War Production Board, the Ministry of Information, and the American OWI,47 to discuss the possibility of reaching Chinese workers with inspirational and educational material. A cabled report from Chungking states that such material is beginning to be actively used in factories.


The Kweiyang–Kunming–Chungking triangle, with its great agricultural wealth, and the possibility of driving the Americans out of China, may prove an irresistible temptation to the Japanese. Apparently, they have men and supplies available, should they decide on another offensive aimed at Kweiyang. In that event, the crisis would arise again. The morale of the Chinese armies in Kweichow, even as now reinforced, is still a doubtful factor. Fortunately, the recent close cooperation between the Chinese and American military may make a profound difference in the near future. On the whole, time is now working for the Chinese—a new development.

In addition to the improvement in the military situation, we can look for far-reaching gains on the economic front, as a result of action taken this autumn in China. The 1945 schedule of the Chinese WPB for production of entrenching tools and trench mortar shells is double the program previously prepared by China’s Ordnance Department, and increased production rates will be felt within the next few weeks on the fighting fronts of China. Alcohol schedules are similarly double rates planned prior to the arrival of our mission. By spring of 1945, I expect the rate of China’s total war production should be at least double the November rate.

The expected opening of the Ledo–Burma road in February for one-way traffic, and the opening of the Calcutta–Kunming pipeline—which will be the longest in the world—will greatly strengthen the supply situation. The Ledo–Burma road should carry about 30,000 tons, and the pipeline should deliver some 17,000 tons per month when they are operating smoothly. In November ATC and CNAC47a flew over the Hump 37,000 tons of cargo—a record figure. Indications are that next summer we should be getting into Kunming around 75,000 tons per month of cargo from all sources. This compares with 25,000 tons in September 1944.

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Increased and coordinated production, plus improved transportation will make itself felt in an accession of strength to the entire Chinese economy. Better distribution of regional and local production, and less scarcity of manufactured products will be forces operating to check the inflation. Over a period of time, technological improvement in an expanding economy will mean greater productivity of industrial workers, higher real wage levels, larger purchasing power and tax returns, and more government funds with which to tackle urgent problems such as increasing per capita agricultural output in China.

The feeling that China’s economy is being strengthened and that the country’s productive ability is growing will do more than any amount of propaganda to raise the morale of the Chinese people and hearten them for a sustained and intensified war effort. Growing confidence in the national future will make for greater governmental effectiveness and stability, as will experience gained in war production planning, which is teaching the advantages and techniques of cooperation.

The government should also benefit from its closer relations with industry. At the same time, the heightened status of Chinese industry under the War Production Board will tend to exert a liberalizing influence. Under that influence, there is more likelihood that moderate elements in the Kuomintang will continue to gain power, adding to the chances of genuine cooperation between the national government and the Communists. Such cooperation, if attainable, will be of historical importance both in speeding the progress of the war and in strengthening the bases of the peace.

The success of China’s venture in planned war production, if properly followed up through American government and business channels, will make for close postwar economic relations between China and the United States. China has the capacity and the desire to develop herself industrially with American aid. If that aid is realistically planned, and if financial arrangements are put on a sound business basis, China should soon after the war begin to replace Japan as the leading industrial nation of the Orient. In that event, a market of enormous size should progressively open up for American export industries. I believe, too, that with American guidance, China’s development can be turned into peaceful and democratic channels, eliminating much of the fear of war which has for so long shaped political attitudes in the Orient and South Pacific.


The creative work in aiding China to organize her economy effectively for war is virtually completed. From this time forward, our [Page 294] job will be to sustain and advise the Chinese War Production Board on a day to day basis. Arrangements have been made to this end, and continuous reports will keep me in close touch with the situation. With a view to creating the most favorable background for my deputies in China, I have tentatively accepted, subject to your approval, an invitation from the Generalissimo to become High Economic Advisor to the Chinese Government.

After leaving China on December 4, I stopped at Pearl Harbor to acquaint Admiral Nimitz48 with the existing Chinese situation. In the course of our conversation, I found that the information which had reached the Admiral through usual channels did not accord with the facts as General Hurley and I had learned them. Accordingly, I suggested to Admiral Nimitz that arrangements be made with General Hurley to transmit to him and to General MacArthur49 regular reports on the Chinese situation, as viewed by General Hurley and General Wedemeyer.

In the same conversation with Admiral Nimitz, we discussed the importance of Chinese waterways for military transport, especially in the event of a coastal invasion of China. Proper use of the waterways for war purposes would undoubtedly require special river boats and equipment, and the Admiral was deeply interested in this aspect of the matter.

If the Chinese war effort progresses well, I believe that the spring of 1945 would be a good time to begin work on a postwar program of Chinese-American economic cooperation. I recommended that at that time, the military situation permitting, a seven-man American mission be appointed to go to China to work with the Chinese Government in planning the progressive expansion of Chinese-American trade on a realistic business basis. In my judgment, this Commission should comprise businessmen of wide experience, high standing, and awareness of America’s stake in expanding foreign trade. To obtain the kind of aid implicit in such a mission, the Chinese Government, I feel sure, would make strenuous efforts to meet all prerequisite conditions.

In the interest of healthy diplomatic relations, I believe it would be advisable to keep the governments of Russia, Great Britain, Australia, and New Zealand informed of the measures we have taken and may hereafter take, in aiding China to develop her economy. During my return trip from China, I stopped at Canberra and at Wellington to talk with members of the Australian and New Zealand Governments, both on the Chinese situation, and on postwar trade problems. [Page 295] Together with Mr. Nelson Johnson, your Minister to Australia, I also visited Prime Minister Curtin at Melbourne, where he is convalescing in a hospital from a recent serious illness, and discussed with him the American and Australian positions in postwar foreign trade.

I found the views of Prime Minister Curtin and of Dr. Evatt, the Australian Minister for External Affairs, particularly satisfying from an American standpoint. Prime Minister Fraser of New Zealand and Mr. Nash, the Minister of Finance, were also sympathetic to the expansionist viewpoint on foreign trade. I believe that both governments felt pleased at having been given direct information on developments in China; and they show keen interest in the considerably enlarged potentialities of postwar trade between their countries and the United States.

As reports reach me on the progress of Chinese war production, I shall, of course, keep you informed of salient points.


Donald M. Nelson
  1. Copy transmitted to Secretary of State Stettinius by Mr. Nelson in his letter of January 12, 1945. In his letter of acknowledgment of January 15, 1945, Acting Secretary of State Grew congratulated Mr. Nelson “on the constructive work already accomplished and the favorable outlook that you have created for an important potential improvement in China’s war effort, increased war production and eventual industrial development.”
  2. General Wedemeyer succeeded General Stilwell in command of U. S. Army Forces in China.
  3. Gen. Henry H. Arnold, Commanding General, U. S. Army Air Forces.
  4. Office of War Information.
  5. Air Transport Command (U. S.) and China National Aviation Corporation.
  6. Adm. Chester W. Nimitz, U. S. Navy, Commander in Chief, U. S. Pacific Fleet and Pacific area.
  7. Gen. Douglas MacArthur, Supreme Commander, Allied Forces, Southwest Pacific.