Memorandum by the Chief of the Division of Financial and Monetary Affairs (Collado)47

Chinese Finance

Position of Chiang Kai-shek

The Generalissimo presents two alternatives:

A loan to China of $1,000,000,000 which would enable China to cover through reverse Lend-Lease the construction of airfields, the feeding of the United States Army, and the transportation of war materials. This is the equivalent of saying that the United States Army would be granted Chinese exchange at a rate approximating the market rate. The Army estimates that its expenditures would total approximately $25,000,000 a month on this basis.
If no loan is feasible, the United States will bear all its expenses at the official rate. This might result in the dollar expenditure being increased as much as five times.

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The Generalissimo has indicated that a decision on these points must be reached by March 1 and that if no favorable determination is made, China will discontinue its present direct assistance (probably very small) to the United States Army and insist on the maintenance of the official rate of exchange.

Position of the Army

It is the Army’s position that it cannot afford to run the risk of Congressional criticism if it has to continue to acquire Chinese exchange at the official rate. If the entire $25,000,000 a month of proposed expenditures had to be converted at the official rate the additional cost to the Army might run as high as $1,000,000 [$100,000,000] a month. At the same time it is apparent that the Army’s calculations are vague as General Clay yesterday stated that of present expenditures of $17,000,000 only $6,000,000 had to be converted at the official rate, the remainder covering principally soldiers’ pay, which was made in dollar currency which the individual soldier in part returned to the United States and the rest converted into Chinese currency in the black market. General Clay was not clear what proportion of the $25,000,000 might fall into this latter category, and consequently the estimate of $100,000,000 additional costs would require further scrutiny. The Army is also prepared to bear, at a suitable rate of exchange, all costs of its own war effort, including housing and subsistence of troops as well as construction. This secondary problem raised by the Generalissimo and emphasized by Madame Chiang may thus be disregarded.

Position of the Treasury

The Treasury sees no economic justification for a loan to China, agrees with the Army that we should insist on a fair rate of exchange, and feels that the Generalissimo is bluffing.

The Treasury and the Army both would like to send the attached message as from the President.48 It makes no reference at all to Chiang’s request for a loan, makes the argument from the United States point of view that although we are willing to bear all costs of the United States operations we are unwilling and unable in the face of our Congress to agree to conversion of dollars at the official rate of exchange, although we are prepared to give reverse Lend-Lease credit for the cost to China involved in the differential between the actual rate of exchange at which we would receive Chinese exchange and the official rate. The Treasury and the Army urge immediate action in view of the March 1 deadline included by the Chinese, and have obtained the informal approval of the President to their message.

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Economic Aspects

There can be no doubt that the Treasury’s point of view is correct from a strictly economic standpoint. A dollar loan at a time when China has large dollar credits available plus increased dollar balances as a result of United States expenditures in China can serve no direct immediate economic purpose. It has been observed that there has been a very close correlation between prices in China and the currency circulation, and there is no reason to believe that the existence of an additional large dollar credit would have any economic effect that would tend to stabilize or decrease prices.

It is likely that Chiang Kai-shek views this situation as an excellent opportunity to get his hands on a large dollar credit which would lie virtually idle until after the war and which would place him in a position to have large dollar funds available for postwar purposes without the types of strings which this Government might be expected otherwise to try to attach to postwar reconstruction credits.

Political Aspects

It is obvious that the granting of a large credit might have important results in strengthening the Generalissimo’s political position, quite apart from any real economic consequences. This would be the result not only of the immediate evidence of support but the real fact that he would be placed in funds for important acquisitions of capital goods in the United States in the immediate postwar period.


There is attached a suggested message48a which the President might send to Chiang which follows the suggestion made last evening by Mr. Acheson. This suggestion would postpone the immediate decision which Chiang is trying to force and might permit two or three fair-minded and cool-headed persons such as Will Clayton49 to work out a more practicable solution, recognizing both the immediate and postwar aspects of the problem and in granting a loan completely free from any conditions as to its postwar utilization.

If the President and the other agencies do not believe that this temporizing course is appropriate, the following immediate suggestion is made:

United States Army to agree, as it has indicated it is prepared to do, to meet all of its own war costs in China.
The Chinese to agree to furnish Chinese exchange on the following basis which has many precedents in other countries:
A limited percentage, say 10%, at the official rate of 21 to the dollar.
The remainder at a “free” or market rate—now 80 to 100 to the dollar.
The United States to agree that under the reverse Lend-Lease arrangement the differential on part 2(b) above to be credited to Chinese Lend-Lease account.
The question of a loan to be considered strictly as part of the program of postwar reconstruction.

It is believed that sections 2 and 3 above offer a basis on which Chiang Kai-shek could, if he so wished, maintain confidence in the Chinese currency and that he need not lose face if such a proposal were made and accepted.

Emilio G. Collado
  1. Addressed to the Secretary of State and the Assistant Secretary of State (Acheson).
  2. For text of message, see p. 850.
  3. Not attached to file copy of this document.
  4. William L. Clayton, Deputy Federal Loan Administrator.