Memorandum of Conversation, by Mr. Alger Hiss, Special Assistant to the Director of the Office of Far Eastern Affairs (Hornbeck)

Participants: Under Secretary Bell and Mr. White of the Treasury Department; Major General Lucius Clay of the War Department; Messrs. Ballantine, Hiss and Collado.41

On the invitation of Mr. Bell, Messrs. Ballantine, Hiss and Collado went to Mr. Bell’s office to discuss a draft of a message to the Generalissimo from the President in reply to the Generalissimo’s communication and oral statements set forth in Chungking telegrams 105, 106 and 108 of January 16. The Department had not been previously consulted about this draft of a message and no advance copy of it was sent to the Department for consideration before the meeting in Mr. Bell’s office.

Upon arriving at Mr. Bell’s office the Department’s representatives were handed copies of a draft of a message (a copy attached hereto) [Page 848] which they were told had initially been prepared in the War Department, had been communicated to the Secretary of the Treasury by the War Department, had been read over the telephone to the President by the Secretary of the Treasury, had been orally approved by the President with certain suggested revisions, and had been redrafted in conformity with the President’s suggestions and with some further changes suggested by Dr. White. We were informed that in talking to the President Secretary Morgenthau had referred to Chungking’s cablegrams 105, 106 and 108, learned that the President had not read them and had then proceeded to describe the substance of those telegrams to the President after which recital the President approved the proposed draft message as stated above. We were informed that one of the changes directed by the President was that there should be eliminated the statement that a change in Chinese-American relations would be “disastrous” to both countries. The President asked that this be modified to “unfortunate”. The President had also directed that statement should be included that U. S. Army expenditure in China is expected to be about twenty-five million dollars a month during the next few months. He also desired inclusion of a statement that gold could be shipped in the amount of about twenty-five million a month.

We were told that the above conversation with the President had taken place today, that subsequently Secretary Morgenthau had left the city and that it was the understanding of the Treasury and the War Department that the President expected the draft message to go forward today.

The Department’s representatives promptly expressed at some length their personal apprehensions that the message if sent in the form proposed would have adverse results and would not accomplish the purpose desired. There ensued considerable interchange of views from which it developed that there was little likelihood of reconciliation of the opinions of the representatives of the other two Departments with the opinions of this Department’s representatives.

At one point General Clay said that the War Department’s draft of the message had been cleared with the Chief of Staff42 and with the Secretary of War43 both of whom fully realized its implications including possibility that it might result in the American Army’s pulling out of China completely. He said that the War Department has serious question as to whether its efforts in China are worthwhile. He said that in his opinion Chiang Kai-shek is bluffing and he remarked that if the United States Army were to stop shipping supplies to China Chiang Kai-shek would immediately fall. General Clay indicated [Page 849] a strong feeling that the dignity of the American Army and in particular the prestige of its representative in China, General Stilwell, are at stake. Among his reasons for urging immediate action was his apprehension that General Stilwell might not be informed of the Generalissimo’s position and would lose prestige in presenting the currency proposal set forth in the War Department’s instructions of January 15. Another reason given by General Clay for haste was his feeling that in order to prepare adequately for the changes in the supply situation for American forces in China which would occur under the March 1 deadline set by the Generalissimo, prompt determination would have to be made of whether or not the threat of that deadline was to continue.

It appeared that the Treasury officials are in rather close agreement with the position expressed by General Clay. Dr. White also said that he believed that Chiang Kai-shek is bluffing. The Department’s representatives received the impression that the Treasury officials were adamant in their view that no loan is warranted or should be made to China at the present time. Dr. White did not, however, feel that the message as then drafted would necessarily bring about an impasse in the event that the Generalissimo did not recede from his position.

The Department’s representatives stressed the large political issues involved both in the immediate and in the postwar sense. They said that in their opinion a smaller loan of say perhaps two hundred-fifty million dollars might prove acceptable to the Chinese, might result in the cooperation necessary for effective activity of the American forces in China, and might in the end prove no more costly to this Government than would a policy of continuing the present admittedly unsatisfactory arrangement of paying for a large proportion of our military expenses in China at the official rate of twenty to one, which would seem to be the most hopeful alternative choice in the event this Government refused to consider making a loan. They also pointed out that despite the inadequacy of current Chinese cooperation, the position of our forces in China would become radically worse and indeed impossible were the Chinese to launch upon a program of conscious obstructionism. It was indicated that it seemed quite likely that the real alternatives before this Government were a readiness to make a loan in some amount or to face an impasse in its relations with China with all that implied in a military and political sense. The draft message would clearly be interpreted by the Chinese, we felt, as an absolute refusal to consider a loan. We stated further that in our opinion the Generalissimo is not bluffing and that it is not at all certain that his internal position is dependent upon good relations with the United States. We said that we thought some specific reference should be made to the President’s suggestion of a Commission [Page 850] which we fully recognize would imply readiness to discuss the possibility of a loan.

We pointed out that it would be practically impossible for us to obtain the views of the higher officers of the Department including the Secretary before the following day. The War Department representative and the representatives of the Treasury Department agreed that the message need not go out until the next day but asked that our position be communicated definitely to them by noon tomorrow. They felt that if the Secretary could not agree to the draft message the matter would have to be taken up with the Secretary of War and the President, as General Clay and the Treasury representatives did not have authority to consider any major modification in the draft.


Treasury Department Draft of Reply to Generalissimo Chiang Kai-shek

The United States recognizes that China’s resolute war stand has rendered her financial situation acute. It is fully prepared to bear all costs of its own war effort in China including housing and subsistence of troops as well as construction. However, we cannot justify the use of a fixed exchange rate while prices are spiraling. Our people and our Congress would not understand the necessity for such large expenditures and American faith and confidence in China would be shaken. Such a change in our relations would be very unfortunate. This is not in the nature of a commercial venture, it is essential to mutual understanding and confidence. We welcome any arrangement by donation or under reverse lend lease in which, while we bear full costs in American dollars, sufficient Chinese dollars would be made available to give a fair and equitable return for our expenditures.

Dependent upon full cooperation in China, the United States Army expenditures in China are expected to be about 25 million U. S. dollars a month during the next few months. Incidentally, the Air Transport Command has agreed to make additional facilities available to Treasury for shipment of gold to China so that we hope to be able to ship about 25 million dollars a month.

  1. Emilio G. Collado, Chief of the Division of Financial and Monetary Affairs.
  2. Gen. George C. Marshall, U. S. Army.
  3. Henry L. Stimson.