Memorandum of Conversation, by the Assistant Administrator of the Foreign Economic Administration (Denby)

Meeting held at State Department January 6, 1944, 11: 30 a.m.

Re: China Currency Proposals

A meeting was held on the above subject at the time above stated. There were present the following: For the State Department, Messrs. Hornbeck, Ballantine, Hiss, Stanton;19 for the War Department, General Clay,20 General Carter,21 Colonel Foster, Lt. Colonel Pen-noyer; for the Treasury, Dr. White, Mr. Friedman;22 for FEA, Messrs. Currie,23 Denby, and Fowler.24 Mr. Ballantine presided.

Mr. Ballantine stated that the purpose of the meeting was to endeavor to arrive at agreement upon instructions to be sent to Ambassador Gauss concerning negotiations with the Chinese on the subject of the pending reverse lend-lease agreement and the proposed agreement with respect to obtaining currency from the Chinese Government.

In answer to Dr. White’s question, whether the reverse lend-lease agreement was being sought merely as a basis for reaching a proposed financial agreement, or whether the reverse lend-lease agreement would be concluded even if no financial agreement were to be sought, representatives of the other agencies stated that it is desirable that the reverse lend-lease agreement be entered into, even without the financial agreement, (1) because General Stilwell feels that his relations with the Chinese Government will be better if the agreement is entered into, and (2) because the agreement would prove a justification for the Chinese Government’s supplying labor battalions if necessary for the construction of military installations. They felt further, however, that it would be particularly desirable to conclude the main reverse lend-lease agreement if the agencies concerned should agree that the principle of reverse lend-lease furnishes the most promising basis for a financial agreement.

It was made clear that the principal issue before the meeting was therefore whether the United States should sign the principal agreement [Page 831] only, or should at the same time present the proposed financial agreement to the Chinese for signature.

General Clay stated that it is the view of the War Department that the Chinese Government should enter into an agreement to give us currency as their contribution to the general war effort, without the necessity of receiving a reverse lend-lease credit of any kind for the currency so made available; that realistically viewed the Chinese Government would not be furnishing anything, but would merely be counteracting the present unrealistic exchange rate. Others at the meeting expressed doubt that the Chinese could ever be persuaded to provide currency merely as a contribution, without receiving any “credit”. General Clay recognized this but objected to the possibility that the Chinese might eventually be in position to claim a reverse lend-lease contribution greatly in excess of our lend-lease contribution to China. This result might follow if they were to keep a record of currency furnished, and then translate the figures at the official rate of exchange.

Dr. White doubted that the Chinese would enter into any financial agreement of the kind being discussed. To do so would mean giving up large dollar payments which otherwise will have to be made. He stated that the Chinese looked forward to these large dollar payments and that they will not surrender them unless they see other and better considerations in exchange. Furthermore, he shared the fear of building up a huge reverse lend-lease “credit”, which would probably much exceed dollar expenditures which we might make even by carrying on our present arrangement of paying at the official rate. He stated that in his opinion we would be better off to endeavor to work out a better exchange rate; we would be better off to continue to pay even if we get a rate of only 40 or 50 to 1, than we would under the contemplated reverse lend-lease financial arrangement. Dr. White indicated also that he would prefer to make a further effort, to work out two other alternatives: (1) the Treasury’s plan for the sale of gold, and (2) another plan the terms of which are still secret, which has been proposed to the Chinese, before going along with the reverse lend-lease arrangement.

As against the views expressed by General Clay and Dr. White, several others present suggested (1) that in their opinion it was extremely doubtful that the Chinese would make any financial contributions except within the framework of reverse lend-lease; (2) that whether or not the contribution is labeled “reverse lend-lease”, the Chinese will nevertheless be equally well able to claim credit for having made a contribution when and if the time should come for making settlement; and (3) that it is hardly likely that we would agree, or the Chinese would expect us to agree, that any reverse lend-lease credit they might take would be recognized in terms of dollars, arrived at by converting [Page 832] their contribution in Chinese currency at the official rate of exchange. On the other hand, to permit the Chinese to make their contribution as reverse lend-lease would probably be helpful to them politically and would also perhaps enable them to resist similar requests from other nations if they should wish to do so.

The FEA and State Department representatives took the view that while all of the alternative suggestions which were reviewed have merit, there is doubt, on the past record, whether in fact anything can be accomplished except along the lines of a financial reverse lend-lease arrangement.

The following conclusions were reached: In view of the position of the Treasury, the War Department concurred with the Treasury in recommending that conclusion of the reverse lend-lease agreement be deferred pending a reply from the Chinese Government to proposals which have been made. However, the War Department representatives considered that such a delay should not exceed a week or ten days, after which they would feel free to go forward with the matter of obtaining financial relief by reverse lend-lease or by some other form of “contribution.” As between the latter two methods of obtaining financial relief, the War Department representatives were not insistent upon either method. General Clay suggested that both methods might be presented to the Chinese Government as alternatives with an indication that it choose the method it preferred.

Accordingly, the question of proceeding with conclusion of the reverse lend-lease agreement was deferred for a period of a week or ten days.

  1. Stanley K. Hornbeck, Adviser on Political Relations; Joseph W. Ballantine, Chief of the Division of Far Eastern Affairs; Alger Hiss, Assistant to Mr. Hornbeck; Edwin F. Stanton, Assistant Chief of the Division of Far Eastern Affairs.
  2. Maj. Gen. Lucius Clay, Director of Matériel, Army Service Forces.
  3. Maj, Gen. A. H. Carter, Fiscal Director, Army Service Forces.
  4. Harry Dexter White, Assistant to the Secretary of the Treasury, and Irving t3. Friedman of the Division of Monetary Research, Treasury Department.
  5. Lauchlin Currie, Deputy Administrator of the Foreign Economic Administration and Administrative Assistant to President Roosevelt.
  6. Walter W. Fowler.