The Director of the Office of War Mobilization and Reconversion (Steelman) to the Acting Secretary of State

Dear Mr. Acheson: Attached is a copy of a memorandum from me to the President, and a copy of the President’s reply, regarding the proposed mission to China to negotiate a sale of our uncommitted Pacific surpluses to the Chinese Government.

You will note the President’s direction that Mr. McCabe, in addition to his authority to determine whether and on what terms a sale should be made, should also be fully authorized to deal on behalf of the United States with any matters relating to the various phases of our war account with China, following relevant policy decisions wherever they have already been made. You are respectfully requested to take the necessary steps to carry out the President’s direction.


John R. Steelman
[Page 1046]
[Annex 1]

Memorandum by the Director of the Office of War Mobilization and Reconversion (Steelman) to President Truman

At the request and with the support of General Marshall, negotiations were initiated last April with the Chinese Government looking toward the sale to that Government of a large part of the Army and Navy surplus property in the Pacific Theaters. In view of the compelling political reasons for rendering economic assistance to China and the cost and difficulty of removing unsold surplus and disposing of it in the United States, it has been generally agreed by the agencies of this Government having a concern with the matter that all surplus property not otherwise committed should, if possible, be disposed of to the Chinese Government. It was also generally agreed that the price asked would probably have to be low if the Chinese Government were to be induced to enter into the transaction. After preliminary discussion of the estimated amount of surplus property available (approximately one billion dollars in procurement cost) and the price, the Chinese Government indicated a desire to proceed with the purchase on certain terms. The return of surplus from the Pacific to the United States for sale through domestic disposal agencies was accordingly halted approximately July 1st.

At the present point in the negotiations a major issue has arisen as to the form the purchase agreement should take. There are three possible forms of such a purchase agreement, which I summarize below:

The Chinese Government would accept surplus property as made available to it for transfer, and would pay a purchase price to be computed as a percentage of the original procurement cost of the property actually transferred. This is the plan so far discussed with the Chinese, and one which it is assumed they would prefer, since under such an agreement they would not be required to assume a major financial obligation in advance of adequate information concerning the assets they would acquire. Some of the interested U. S. agencies, however, feel that this plan would be exceedingly burdensome, and would involve elaborate and protracted checking and accounting operations this government is hardly in a position to perform.
Wherever possible, as an alternative to Plan 1 above, representatives of the Chinese and the U. S. Governments would negotiate an over-all price to be paid for each lot or base designated for transfer. This method would involve a number of separate negotiations, but it would eliminate a large part of the laborious accounting which would be required by (1), would permit the Chinese to gain a fairly accurate conception of what they were getting before they made a price commitment, and would give to the Chinese an incentive to take prompt possession of property once it had been designated to them.
An agreement incorporating an over-all price for all our surpluses in the Pacific (less prior commitments), whatever they may turn out to be, would be negotiated with the Chinese. The amount would be offset against our cash obligation to the Chinese on account of the Yuan advances for U. S. Army expenditures in China, and some additional payment would be sought in the form of grounds and buildings, funds for cultural purposes, and other property or services desired by the U. S. No separate settlement would thus be required for Yuan advances as would apparently be required under either (1) or (2). This plan is unanimously favored by the interested U. S. agencies.

The State, Treasury, War and Navy Departments in consultation with this Office are agreed that further negotiations looking toward a settlement of the outstanding issue cannot effectively be directed from Washington while they are being conducted in Nanking. My recommendation, supported by the Departments concerned, is that a mission consisting of Mr. McCabe, the Foreign Liquidation Commissioner, representatives of the War Department, the Navy Department and the Treasury Department, proceed to China to conclude the negotiations. Each member of this mission should carry with him authority to act for his Department and the Foreign Liquidation Commissioner should carry with him the authority of this Office and be authorized with Presidential approval to conclude an agreement, after due consultation with General Marshall and our Ambassador31 and with his associates on the Commission.

If you approve this recommendation, I will request these men to depart as promptly as possible. In the meanwhile, the State Department will notify General Marshall and our Ambassador of this plan and our negotiators will be instructed to await the arrival of the mission rather than any further cabled instructions.

[Annex 2]

President Truman to the Director of the Office of War Mobilization and Reconversion (Steelman)

Dear Mr. Steelman: I agree with your recommendation that a mission should proceed immediately to China to conduct on the spot negotiations for a sale of our uncommitted Pacific surpluses to the Chinese Government. Mr. McCabe, as the Foreign Liquidation Commissioner, should take part in the mission; and because the problems involved in such a sale affect the interests of several government departments and agencies, he should be accompanied by high officials [Page 1048] of the War and Navy Departments and of the War Shipping Administration, each of whom should carry with him full authority to act for his department or agency in any matter of concern to such department or agency which may arise in the course of the negotiations. In addition, a representative of the Treasury should accompany the mission as an adviser. As the Foreign Liquidation Commissioner, Mr. McCabe is of course responsible for the ultimate decision as to whether a sale should be made, and as to its terms and conditions; and his decision after due consultation with his associates on the mission, as well as with General Marshall and with Ambassadors Stuart and McNutt,32 will carry with it the authority of your office and will be supported by my approval.

For Mr. McCabe’s guidance, I think it well to reiterate my conviction that General Marshall’s mission in China is of tremendous importance to our national welfare. Considerations affecting the success of this mission should be paramount in any decision whether and how to sell our Pacific surpluses. Second only to the considerations affecting the Marshall mission, weight should be given to effecting a speedy roll-up of our military and naval operations in the Pacific, and to bringing home promptly the largest possible number of our soldiers, sailors and marines and reducing the number of civilian employees of our armed services overseas. These considerations cannot of course supersede the statutory injunction to secure as nearly as possible fair value in the sale of surplus property, but they should be taken heavily into account in deciding just what is fair value in all the circumstances.

Although the primary purpose of Mr. McCabe’s mission will not relate to the various phases of our war account with China, such as lend-lease, the 1942 credit,33 or the obligations of our Government on account of yuan expenditures and advances by the Chinese Government, yet it is apparent that successful negotiation of a surplus sale may well call for negotiation and settlement of some one or all of these additional outstanding items. Mr. McCabe should be fully authorized to deal with these matters on behalf of the United States, following relevant policy decisions wherever they have already been made.


(Harry S. Truman)
  1. J. Leighton Stuart.
  2. Paul V. McNutt, Ambassador to the Republic of the Philippines.
  3. For correspondence on this subject, see Foreign Relations, 1942, China, pp. 419 ff.