893.51/7750: Telegram
The Acting Secretary of State to the Ambassador in China (Gauss)
297. State, War and Treasury officials held conference on February 29 in regard to the general problem discussed in your 374.75b
General Clay stated that Hearn had been instructed to inform the Chinese authorities of the full extent of Army construction program and of the magnitude of the necessary expenditures. General Hearn will obtain Chinese reaction and at the same time discuss the problem of financing. He has been instructed to keep the Embassy currently informed.
General Clay also referred to a telegram from Hearn in regard to a request from Kung for 20 million dollars in US currency with which he expected to experiment in trying to reduce the black market rate for US dollar notes. General Clay, without being specific, expressed the opinion that this request showed a weakening on the part of Kung in regard to the exchange problem and that it might open the way for a settlement (Hearn had indicated in his telegram that a settlement might be reached within a month). It is Clay’s intention to authorize a transfer of 5 million dollars’ worth of notes to Kung, retaining 15 million in India until the effects of the sale of the 5 million are seen and the attitude of the Chinese toward the exchange rate problem becomes clearer. Treasury officials interpose no objection to the plan.
With regard to the billion dollar Chinese currency advance recently obtained by Hearn, Treasury interposed no objection to War Department’s depositing $25,000,000 here to the credit of China also without commitment as to the exchange rate.
The question of the effect of the expanded Army expenditures on Chinese economy was discussed with particular reference to means whereby presently nonproductive Chinese labor, such as Chinese Army labor corps, might be employed, thereby obviating the necessity of [Page 890] employing productive labor needed in farming and transport. Such an arrangement might also result in a reduction in total yuan payments for wages and subsistence costs, and thus in potential demand for scarce consumers’ goods, through having the work done by workers presumably entitled to and accustomed to obtaining an amount of pay and subsistence in line with normal Chinese standards of living, instead of by workers diverted from normal pursuits by U. S. Army or Chinese contractors whose only diversion instrument is the offer of higher and higher wages and standards of living. The question was raised whether it might not be advisable to place greater responsibility on the Chinese Government for construction enterprises; that is to make the Chinese Government responsible for furnishing laborers, the cost thereof to be reimbursed by the U. S. Army, while retaining technical supervision of the work in the hands of American Army engineers. It was thought that, by so doing, Chinese Army labor corps might be designated to do the work, whereas it was doubted that these corps would be made available for direct employment by the U. S. Army. Although General Clay was skeptical regarding the feasibility of such an arrangement, it was the consensus of opinion that, if a workable arrangement could be reached, one of the most serious effects on Chinese economy of the Army expenditures might be obviated.
In your discretion you might discuss the questions raised in the foregoing paragraph with General Hearn. It appears that the War Department desires to carry out the construction plans as contemplated and hopes that a relatively satisfactory solution of the exchange problem can be reached and means can be found which would minimize the effect of the expenditures on Chinese economy.
Please keep in touch with General Hearn and report developments directly to the Department.