893.51/7744: Telegram
The Ambassador in China (Gauss) to the Secretary of State
[Received 9 p.m.]
236. 1. Yesterday’s conversation with Kung (Embassy’s 233, February 3) followed receipt by Brigadier General Hearn of message from Generalissimo for the President in which mention was made of decisions having been taken on our proposals. Kung presented a lengthy memo and conversation lasted almost 2 hours. Present in addition to Hearn and myself were Political Vice Foreign Minister,66 Political Vice Finance Minister (O. K. Yui), Dr. Edward Acheson and Counselor Atcheson.
Kung gave lengthy explanation of Chinese position, repeating long since familiar argumentation and desiderata, his central thesis being (1) any financial arrangement for joint U. S.-Chinese contribution in financing of our Armed Forces here involved equation which to the public would constitute change in official exchange rate and it was impossible for Chinese Government to alter official rate without “breaking China’s economic backbone”; (2) U. S. was furnishing Britain, Russia amounts of lend-lease aid that were astronomical compared to aid furnished China notwithstanding America’s principal enemy is Japan; (3) increasing expenditures by U. S. Army in China were increasing inflation and Chinese Government could not cover such expenditures because increase in note issue requires progressive [Page 869] increase in currency reserves. Kung also made extraordinary statement that American half billion dollar credit had been utilized in war effort and had in fact been repaid through expenditures by Chinese Government of CN dollars 10 billion for our military (see our 166, January 26) and he endeavored to correlate the problem presented with “promise of President Roosevelt” which he did not specify and with postponement of the Burma campaign.
2. In an addendum to Kung’s memo it is stated that cost of construction “and other expenses” for airfields now being built in Chengtu area will be paid by U. S. Government from U. S. lend-lease funds pursuant to understanding previously reached but that China will, as demonstration of desire to assist, bear the cost of land required for fields.
3. It seems clear to us that Kung’s remarks reflect the Generalissimo’s (1) disappointment and resentment at failure to obtain a further American loan and at postponement of Burma campaign and possible disappointment and resentment on other counts and (2) reluctance to cooperate arising out of such disappointment and resentment intermixed with characteristic stubbornness and ignorance in economic matters. We are giving careful study to the whole question, in consultation with Hearn, Acheson and Adler with view to formulating recommendations to Washington for our next move.
4. During the conversation Hearn pointed out that Chinese want us to increase our Air Force in China and in order to do so we must have air fields which cost money; thus to follow Kung’s remarks to logical conclusion only to avoid increasing inflation would be not to spend more money and build air fields but to cut down operations of U. S. Air Force. Hearn also said that Army was in urgent immediate need of CN 200 million to furnish barracks at air fields under construcion in Chengtu area (he mentioned that Army was for example having to pay U. S. dollars 95 for one wooden chair). Kung said that he could arrange to advance sum needed but that it was not available in China and would have to transport bank notes from India—which Hearn agreed to do. Copy of Kung’s memo and detailed report follows by airmail.67
5. While we do not consider it a matter of concern it should be reported that Kung, in speaking more lightly around tea table of possibility of China’s economic collapse some time in future, asked what would happen if China should make peace with Japan and commented Japs had been making “some very good offers.”
6. Generalissimo’s message to the President mentioned that Chiang and Madame Chiang were leaving for “Hunan Front”. There is at present no “Hunan Front” and according Chinese sources Chiangs are going to some mountain retreat ostensibly to give Madame a rest. [Page 870] Their departure just at this time raises question whether it is designed to avoid discussion of our problem or any immediate change in Chinese position, as Kung cannot of course act in matter without Generalissimo’s prior approval. (It is understood that Generalissimo’s message was sent forward by Hearn yesterday.)
1. Hearn requests that copy hereof be sent immediately to Somervell.