Memorandum by the Deputy Director of the Office of Far Eastern Affairs (Ballantine) to the Secretary of State 38

Mr. Secretary: With reference to the message from Chiang Kai-shek to the President, reported in Chungking’s 105 and 106 and the Ambassador’s own comments on the subject, contained in Chungking’s 108, we offer the following brief analysis of the Generalissimo’s proposals for your consideration:

1. Generalissimo Chiang Kai-shek proposes:

That the United States make an “out-and-out one billion dollar loan” which it is stated would enable China to meet a part of her war deficit and also to cover through reverse lend-lease a part of the military expenses of the United States forces in China; or alternatively,
That our military expenses in China should be borne by the American Government at the official rate of 20 yuan to the United States dollar.

From a purely technical economic point of view the first proposal is not likely to be of real present assistance to China in that China is unable to utilize such a credit at the present time. In spite of Generalissimo Chiang’s assurances that such a credit would not be “hoarded [Page 843] for post-war purposes” it cannot otherwise than be used largely for post-war purposes. It is further evident from this proposal that in connection with the extension by the Chinese of possible assistance to our armed forces in China it is the intention of the Generalissimo to utilize a part of the requested loan as reciprocal aid. Under such an arrangement China would expect to receive credit, as reciprocal aid, for funds derived from the proposed loan. On the other hand we need to consider also the fact that General Chiang appears to attach great importance to the psychological value of such a loan and his judgment in this matter should be given due weight. In this respect and to this extent such a credit might operate to maintain confidence in China and prevent collapse in the economic structure.

With reference to the Generalissimo’s second proposal, this, in effect, would simply mean a continuation of the present unsatisfactory situation whereby the expenditures of our armed forces in China are made at the unrealistic official rate of 20 yuan to the United States dollar. This situation results in excessive expenditures by our armed forces which are out of all proportion to the value of the materials purchased and the services rendered and which, according to our military authorities, means that materials and supplies purchased and military installations constructed in China cost from 8 to 10 times what similar materials and construction would cost in the United States. The Treasury had hoped to effect some favorable change in the official rate but it is apparent from the Generalissimo’s statement that the present unsatisfactory official rate is “unalterable”.

Failure on our part to accept one or the other of Chiang Kai-shek’s proposals would automatically result in the second proposal coming into operation. This would not contribute in any way towards resolving our difficulties, and it would seem that the only way in which we could solve the problem of our military needs would be to try to effect a satisfactory compromise with Chiang Kai-shek on his first proposal through the medium of a commission to be dispatched to China for specific purpose.

J[oseph] W. B[allantine]
  1. An unsigned note of May 5, attached to the memorandum by Mr. Ballantine and to the three memoranda by Mr. Hornbeck, of January 18, 19, and 20, stated: “These memoranda were not seen by the Secretary but they were used in discussions with him on this subject.”