Memorandum by the Director of the Office of Far Eastern Affairs (Hornbeck)

As was the case when we had under consideration the $500,000,000 loan to China,40 the question with which we are confronted is in large measure political. From the time when in 1938 we assisted China by giving her a credit of $25,000,000, we have repeatedly given China what amounts to injections: we have given the Chinese manifestations of confidence in the Chinese which in turn have given them confidence in themselves and in us and have enabled them to carry on. The situation now is one in which China needs another injection. Our problem is to find a way and a means by which we can again manifest confidence in China and enable the Chinese leaders to cite to their people clear evidence of our confidence. It may be conceded that what President Chiang is asking for (and he is asking for it in lieu of military operations in which we are not prepared to engage) will not directly improve the economic situation as such in China; but, for us to take the action which Chiang has requested, or to take it even in a fractional part, would have an effect in China of sustaining and strengthening Chiang’s position, the position of his Government, the position of China’s currency, and the morale of the Chinese armies and people; [Page 847] it would thus indirectly affect favorably the general economic situation in China. Political and psychological factors have a substantial bearing upon economy in any of its aspects which involve the human equations.

When the Chinese note, as they do, the figures of the aid which we have given them, the United Kingdom and the Soviet Union in connection with Lend-Lease alone, and when they compare those with the figures for all of the aid which we have given to China, they are unable to believe and there is no possible way of convincing them that consideration of their requests in terms of economic soundness only or mostly is not an indication that we in our own minds differentiate and discriminate as between our major European associates and our major Asiatic associate. Nor can they be convinced that refusal on our part to assist them more generously than we have shown ourselves willing or able to do spring from considerations other than those of unwillingness.

It is believed that we should make every possible effort to work out with them, at this point, something which constitutes new and clear evidence of our confidence in them and of our willingness and intention to confer, to collaborate and to cooperate with them in the same spirit and in the same manner and liberality in which we do with the British and the Russians.

S[tanley] K. H[ornbeck]