893.51/7754: Telegram
The Ambassador in China (Gauss) to the Secretary of State
[Received March 9—2:19 a.m.]
434. (1) We have apparently failed to make clear to officers handling this matter in the Department the magnitude and far-reaching seriousness of the problems involved in the financing of our military projects and of effectuating our military plans in this country. This refers to Department’s 297, March 3, in reply to our 374, February 24.
It appears that we have failed to make clear specifically (a) that because of huge money expenditures and corresponding increase in Chinese currency issue involved, great displacement of farm labor, widespread chronic shortage of materials and supplies including food, there is reason to fear that China’s already tottering economy may be threatened with collapse under the cumulative impact of our present and projected activities; and (b) that economic collapse, creation of economic crisis or development of a runaway inflation such as occured in 1919 Russia (then also largely an agricultural country) may have the further disastrous result of making it physically impossible to carry out here our military projects and plans.
We have also apparently failed to make clear that there is little prospect that the rulers of China will enter into realistic, reasonable and equitable arrangements for conversion of funds or other assets into Chinese currency for our military expenses except under firm (if friendly) pressure involving or threatening to involve curtailment of our present postwar aid to China in the military, political and economic fields. I have previously emphasized the very evident intent to exploit existing situation to build up China’s postwar foreign currency reserves. I have also suggested the desirability of lighting a fire under those who would thus exploit us by intelligent and controlled publicity in the United States to which the Chinese are extremely sensitive.
(2) As regards question of placing greater responsibility upon Chinese Government for Army construction enterprises, apparently War Department does not know or has not informed State Department that this has been procedure followed, except as to certain operational structures their equipment obtained by Army under direct contracts and of course at high prices now prevailing which always increase several-fold whenever Army comes into area. All major work on all projects is responsibility of Chinese Government. After approval of the project by Gmo, work is entrusted to Ministry [of] [Page 895] Communications whose engineers work under that Ministry and National Military Council in collaboration with our Army engineers.
We understand own [Ministry of] Communications has instructions so far [as] possible to use labor corps and similiar organizations but all projects are urgent, have time limits for completion, and require labor forces many times the size of any labor corps on the spot or in nearby areas. No machinery whatsoever is available; everything is hand labor; vast amount of transport is by coolie carrier; truck transport is scarce. Labor has to be conscripted. Pay is so meagre that labor does not come forward willingly. Labor and food and materials must be on cash basis and when Chinese Treasury does not provide funds promptly, as is so frequently the case, work is delayed or stopped and labor disappears. On projects in Chengtu area about 300,000 laborers are required. This will give idea of magnitude of work and dislocation of economy resulting. It would be impossible for our Army to recruit labor and undertake projects on its own. General Hearn concurs in foregoing.
We understand General Stilwell has for long unsuccessfully endeavored to persuade the Gmo to disarm some 100 of his poorest and worst equipped divisions and convert them into labor corps for construction [of] military roads and other projects. A strong obstacle in way of accomplishment of any such plan even if Gmo were willing would be the natural reluctance of concerned Chinese generals to relinquish the troops on which their position and influence depend. In any case conversion and organization would require months and movement of labor corps from area to area would require transport facilities which do not exist.
As to financing, prior to March 1 Chinese Government was to provide such facilities as air fields including those on which little or nothing has been done since November last year principally for reason Chinese Government has failed to furnish funds but not including Chengtu projects for which I understand we undertook to pay. From March 1 Chinese expect us to reimburse them for all projects—with funds obtainable at Government rate of exchange. Only concession [which] thus far has been offered by Kung [would] supplement exchange rate and in effect give us 30–1 instead of 20–1 charging the supplement as Reverse Lend-Lease. Black market rate for U. S. dollars is now about 220–1 in Chungking.
The problem for the Army—largely handled by Dr. Acheson as financial adviser—has been to persuade Ministry [of] Finance to provide the funds to keep the Chengtu project moving and to finance the separate building and equipment contracts of the Army itself. The question of conversion rate from U. S. currency to reimburse Chinese [Page 896] for their currency advances—question on which Embassy has been working in cooperation with Army vis-à-vis Chinese authorities—is yet to be solved. Acheson thinks we may have made some headway on this problem. Embassy believes strong pressure will be necessary from Washington to effect its solution.
(3) As there is little [evidence?] that Chinese are capable of doing [anything] to counteract the acceleration of the inflationary process resulting from our war effort here in addition to the general economic deterioration the problem presents [itself] as to what U. S. Government can do to assist. We believe use of U. S. currency to hand down and partially control black market rate is worth trying. We believe Kung’s proposal for importation of certain commodities would if implemented have beneficial effect upon prices by helping to restore confidence and also by forcing hoarders to disgorge commodity holdings. These measures would of course only be useful palliatives and could not be expected to go farther in alleviation [of] situation than to retard the rate of acceleration of inflation.
(4) Fundamentally and irrespective of our employing such meagre means as may be available to us toward holding the situation in check, the larger overall problems which we outlined in our 374 remain. We believe that in formulating our strategic requirements careful consideration must be given each case to the impact on China’s economy and the possible ultimate effect thereof on our future military operations and long range political objectives. At the same time measures must be taken to press the Chinese to cooperate realistically in the financing and accomplishment of our plans. We believe that these are questions requiring the most serious attention of the high authorities of our Government.