Foreign Relations of the United States, Diplomatic Papers, 1944, China, Volume VI

893.51/7750: Telegram

The Ambassador in China (Gauss) to the Secretary of State

Chungking, February 24, 1944—11 a.m.
[Received 2:55 p.m.]

374. Edward Acheson, Financial Adviser to Army HQ, has recently been obtaining data for overall estimate on financial requirements of our Army in China and, for first time, Embassy has now been given some indication of magnitude of projects approved and contemplated. Heretofore we have known only that Chinese currency requirements for next few months would be 500 million monthly, or that for next few months United States Government expects to spend about 25 million United States dollars monthly [in] this area.

This refers to our 288, February 12 and previous. Now on basis of estimates obtained by Acheson from Army Engineer Sand, SOS,⁷⁰ the monthly Chinese currency requirements for 4 months from March 1st will be about 6 billion Chinese dollars or a total of about 24 billion for the period.

At meeting at Embassy on February 21, including General Hearn, Dr. Acheson, Adler of Treasury and Counselor of Embassy and myself, this situation and its political and economic impact on China was discussed at length and it was agreed that the overall picture and the serious question and problems arising therefrom should be made known to War Department by Army. I have asked that State Department be furnished a copy of two Army messages to War Department sent February 23.⁷¹

Chinese Government budget for current year is estimated about 80 billion Chinese dollars and, while revenues are estimated at 35–40 billion, we believe they are not likely to total much more than 20 billion. Chinese Government is already issuing about 5 billion in new notes monthly. In order to provide Chinese currency for our projects and without regard to rate at which such currency can be obtained for United States dollars, China will have to provide more than double present new monthly note issue.

We have no estimate as to ultimate cost of our planned operations in China theater. While there was assumably to be considerable tapering off in expenditures after projects included in the 24 billion dollars estimate were completed, the consequent expansion and stepping up of our military effort in China can be expected to require further huge sums especially as the rate of inflation will be greatly accelerated.

Specific and pressing questions which are now arising include the following:

(1) With a minimum possible reserve of 10 billion in notes in China (about 2 months’ supply), can notes be printed and transported to China to cover the expenditures, providing we can come to some arrangement with China for purchase of Chinese currency at a reasonable rate and Chinese Government is willing for us to continue expenditures [of] such magnitude?

(2) At the rate of 20 to 1, we would be expending 300 million United States dollars monthly. At 100 to 1 (if we could persuade China [to] provide currency at such a rate) we would be spending 60 million United States dollars monthly, a far greater sum than the 25 million a month mentioned in the President’s message to Generalissimo contained in Department’s telegram 108, January 20 and 125, January 24. Are we prepared to make such expenditures, with every prospect that under probable plans for expansion and stepping up of our military in this theater, the costs thereof will inevitably be expanded at an accelerated rate? One may hazard the prediction that, in terms of monetary cost, the China theatre will ultimately become the most expensive theatre of the war.

(3) In 4 months the note issue for Chinese Government and our Army expenditures would equal half the total budget of the Chinese Government for the year. Prices at the normal rate of inflation, about 10% a month, had been expected to about treble during the year. With such currency inflation they will increase proportionately. In Chengtu area alone about 300,000 laborers are now employed, most of them taken from farms which will shortly require harvesting and planting. What will be the effect upon China’s already tottering economy (and upon internal political situation) of the huge expenditures planned, the doubling of the rate of note issue, the inevitable spiraling of prices, the dislocation of farm labor in an agricultural country which has been able to survive threatening collapse only because of its crops? This question should be examined in the light of the circumstances and conditions peculiar to China and the Chinese. It must be studied against background of an economy which has never thoroughly integrated and the loose structure of which has been badly mauled by 6 years of war; and of the background of the inflationary spiral caused by China’s war time commercial isolation from rest of the world; lack of adequate means of transportation and distribution of food and supplies; of the almost complete lack of governmental control over prices, material and wages; of the venal character of merchants, contractors and many officials whose cooperation is essential to construction and supply. We apprehend that this problem may well resolve itself into a vital question whether China’s strained and shaky economy can withstand the new burden which we are placing upon it and whether, if China’s economy should collapse, we would have to assume responsibility of rehabilitating it and whether meanwhile our forces would be able to carry on here their planned operations. The American adviser to the Ministry of Finance has already mentioned to me the serious dislocation of Chinese economy resulting from the Chengtu operations. Dr. Kung previously mentioned [apparent omission] Secretary of the Treasury? (Embassy’s 180, January 28, etc. [9 a.m.]) and in conversation February 3rd (Embassy’s 236, February 4, and despatch 213 [2184], February 7⁷²).

We have pointed out in previous messages that the question of pressing the Chinese Government to cooperate with us by finding some reasonable and equitable arrangement for the payment of our military expenses involved questions of high military policy (whether it is essential to the war effort to carry out our military plans in China irrespective of cost or similar considerations) and of political policy (whether we are prepared to force China to cooperate by offering the alternative of retrenchment in our military, diplomatic and other assistance to China such a support of the position China is endeavoring to assume as one of the Big Four nations, equipment of Chinese troops, non-military lend-lease aid and hoped for financial and other aid in postwar reconstruction). These questions come for decision in connection with the new questions of our preparedness to undertake the colossal costs and to risk the consequence upon China and the possible military, political and economic repercussions upon us.

I suggest that these problems will require the most serious consideration and early decision of the U. S. Government; with examination by State, War and Treasury and reference to the President.

I doubt whether the Chinese themselves realize extent of the overall picture of what our Army contemplates in China notwithstanding that most of the projects involved have had the Generalissimo’s approval according to our information. No action has been yet taken to present the overall picture to Dr. Kung pending reference by Army HQ for consideration and instruction of War Department.

Gauss

70. Services of Supply.
71. Not found in Department files.
72. Latter not printed.