Foreign Relations of the United States, 1947, The Far East: China, Volume VII

Nanking Embassy Files, Lot F79, 824 Surplus Property

Minutes of Meeting at Residence of the Ambassador in China (Stuart), Nanking, January 13, 1947, 2:30 p.m.

Nanking, January 13, 1947, 2:30 p.m.

Persons Present:	Dr. Stuart (for part of meeting)
	Mr. Butterworth15
	Mr. Adler16
	Mr. Turner17
	Col. Underwood18
	Mr. Stetson, FLC, Manila
	Mr. Kendall, FLC, Washington
	Maj. Gen. Brown,19 FLC, Manila

Mr. Stetson stated that he had come to Nanking to discuss with Embassy officials the following three problems: (a) the so-called Nanking Agreement of 22 June 1946,²⁰ (b) the rate of exchange²¹ to be used in financial transactions growing out of the over-all surplus property agreement of 30 August 1946, (c) the administration of the fund of $35 million equivalent covering the acquisition of and improvements to real estate and government expenses, the $20 million fund covering cultural activities, and (d) the $30 million fund covering shipping and engineering costs. FLC was most anxious to solve these problems immediately, but wished to coordinate the matter fully with the Embassy prior to contacting the Chinese.

Mr. Butterworth stated that when Chinese Customs authorities seized $1 million worth of Socony Vacuum Oil Company imports, the Board of Supply defended this action on the ground that under the “Nanking Agreement” all proceeds of surplus property sales in the Pacific after 22 June 1946 to other than China accrued to the National Government. The Board of Supply had requested Socony to place $300,000 in escrow with the Board before it consented to unfreeze these imports. A meeting was held with General Marshall, which also included Donald Davis and General Johnson²² from FLC, Shanghai in order to clarify the situation, and it was agreed that although the “Nanking Agreement” had no legal validity, the Chinese would appear to have some moral grounds for making certain claims under the “Nanking Agreement”. At the same time, Mr. Davis was told to try and settle the issue promptly on the basis that the United States accepted only the August 30 Agreement.

Mr. Stetson stated that Mr. Davis had written a letter to the Chinese Government²³ stating that the United States Government did net recognize the “Nanking Agreement” as a legal instrument, and that the only official document was the over-all surplus property agreement of 30 August. The National Government had neither replied to nor acknowledged receipt of Mr. Davis’ letter. Privately, however, Mr. Stetson understood that the Chinese did not intend to alter their position.

Mr. Butterworth asked Mr. Kendall if the “Nanking Agreement” had been discussed during negotiations leading to the 30 August Agreement. Mr. Kendall replied that Mr. McCabe had brought it up quite specifically. Mr. McCabe had informed the Chinese that the so-called “Nanking Agreement”, which was in fact nothing more than a tentative understanding to serve as a basis for a subsequent agreement, had been rejected as such a basis by the War and Navy Departments which had flatly stated that it would be impracticable for them because of inescapable budget and man-power restrictions. For this reason, Mr. McCabe added, it was decided to send out a mission with authority to negotiate a definitive agreement on a new basis. Mr. Kendall felt quite certain in his own mind that at the time the 30 August agreement was concluded, the Chinese clearly understood that the “Nanking Agreement” was null and void.

Mr. Adler stated that it was unfortunate for us that both Mr. Howard and Mr. Vogelback²⁴ had initialled the “Nanking Agreement”. Moreover the instrument itself was headed “Nanking Agreement” when, in fact, because of its preliminary and tentative character, it should have been headed “Proposed Nanking Agreement”.

Mr. Butterworth asked if General Johnson had not been told prior to 30 August to inform the Chinese that the Nanking Agreement was a dead issue. The consensus of opinion was that he had been so instructed, but that he had only done so orally.

Mr. Stetson referred to his understanding of General Marshall’s connection with the matter. By way of clarification, it was stated that General Marshall’s chief interest all along had been that a fair surplus property sale to China be concluded at the earliest moment. He had agreed with FLC that the 30 August agreement was the only legal and valid agreement. At the same time, he recognized that there was a possible moral claim on the Chinese side because of the awkward way in which the “Nanking Agreement” had been handled. However, his major interest was in a prompt and equitable settlement of the issue.

Mr. Kendall referred to the Socony Vacuum problem and stated that the principle involved applied to some $6 million worth of sales to other parties during the 22 June–30 August period.

Mr. Butterworth asked again how clearly the Chinese negotiators of the 30 August agreement understood that the Nanking Agreement was null and void. Mr. Kendall replied that he was morally certain the Chinese negotiators fully understood the situation. This understanding was attested by the price difference in the final agreement and the exclusion of property in the Philippine Islands. However, he felt that by making some minor concessions, FLC could negotiate a settlement with the Chinese which would completely reconcile all issues arising out of the abortive “Nanking Agreement”. He stated that, if agreeable to the Embassy, FLC would hold that the 30 August agreement was the only legal agreement, but that as a matter of being practical and realistic, FLC would then proceed to liquidate the legacy of the “Nanking Agreement” by making suitable minor concessions. Mr. Butterworth stated that such a course was completely agreeable with the Embassy. Mr. Stetson then stated that FLC would proceed on the basis outlined by Mr. Kendall.

Mr. Butterworth gave background material on the rate of exchange problem. When the 30 August deal was made, the legal rate of exchange (CN $3,350 to US $1) and the open market rate for U. S. currency were about the same. However, as time went on, a spread developed between the legal and the open market rates. Accordingly, the Embassy applied to Dr. T. V. Soong²⁵ for an adjustment in the matter. Dr. Soong finally agreed in principle that [in] the final audit of the surplus property financial transactions, China would adjust the values from the $3,350 rate to a more reasonable one. Mr. Butterworth emphasized that Dr. Soong was in a difficult position in this matter, as acceding to our request meant the settlement of transactions between the Chinese Government and a foreign government at a rate other than the official rate, which would make him vulnerable to internal criticism. At the last discussion Dr. Soong stated that further action should be taken with the Governor of the Central Bank of China²⁶ and Embassy was proceeding accordingly.

Mr. Adler referred to his discussions with Mr. Pei, the Governor of the Central Bank. Mr. Adler had pointed out to Mr. Pei that the rate of exchange problem not only cut across the surplus property agreement, but also the American Army and Navy need for CN²⁷ to meet current operating expenses. He had made a frank statement of the American position. He had mentioned that the United States was much more economy-minded than it had been during the war, that the Army and Navy could not get deficiency appropriations now as they could then, and that they therefore urgently needed an arrangement which would enable them to meet their CN expenditures from their available appropriations. Moreover, he had indicated that an unfavorable settlement might well have undesirable repercussions in the present delicate overall situation. Mr. Pei had stated he would discuss the matter with Dr. Soong and would report finally to Mr. Adler in a few days.

Mr. Stetson asked if we were legally bound to observe the official rate of $3,350 to $1 in the absence of any specific understanding to the contrary. Mr. Butterworth replied affirmatively. He stated that the Embassy believed that Mr. Adler should meet periodically with the Governor of the Central Bank of China and agree on the rate of exchange to be used for short intervals for transactions arising from the implementation of Article 6 b 2 of the August 30 Agreement and for Army and Navy expenditures. Mr. Stetson asked what formula should be used in arriving at the agreed rate. Mr. Butterworth replied that no fixed rate could be used and that the best method was simply to review prevailing open market rates every two weeks. He stated that the Embassy would coordinate its efforts fully with FLC. Mr. Adler would go back to Shanghai with the FLC party for this purpose.

Mr. Stetson then asked if all funds related to the surplus property deal would be covered by the agreed conversion rate which Mr. Adler would obtain semi-monthly. Mr. Butterworth replied that the example used for basis of discussion had been acquisition of real property and that question, for example, of the cultural relationship program had not yet arisen. However, he believed there would be established in China a Sino-American Institute which would spend the equivalent of $1 million a year.

Mr. Butterworth then raised the question of the degree of Embassy interest in the fund to be established to meet shipping and engineering costs in accordance with the surplus property agreement. Mr. Adler stated that the Embassy had a strong policy interest. The Embassy did not wish FLC to make this fund available to the Chinese before satisfactory settlement had been obtained on the “Nanking Agreement”, the rate of exchange, and the handling of other funds under the surplus property program.

Mr. Stetson stated that shipping funds could only be used for United States flag shipping, but that the Chinese might ask to use part of the funds to meet United States dollar obligations arising out of the use of Chinese shipping. The FLC had no objection to this proposal. Mr. Butterworth stated that the Embassy agreed with FLC.

Mr. Stetson stated that the FLC did not propose to make available to the Chinese any part of the shipping and engineering fund until documented bills had been received. The reason for taking this position was to keep the Chinese from dissipating funds before the property had been moved to China. Mr. Butterworth expressed Embassy’s agreement with Mr. Stetson’s view.

Mr. Butterworth then repeated a point which he had made several times during the meeting: namely, that maximum effort should be exerted to complete arrangements at the earliest possible moment for the acquisition of real estate, the defraying of government expenses, and the establishment of the cultural relations program. These all represented tangible assets to the United States. It was imperative that these matters be formalized before the surplus property had been consumed in China. Otherwise, the United States would wind up with a book credit which it would be very difficult to realize.

15. W. Walton Butterworth, Minister-Counselor of Embassy in China.
16. Solomon Adler, Treasury Representative in China.
17. William T. Turner, First Secretary of Embassy in China.
18. George V. Underwood, Executive Officer, Embassy Liaison Office. This Office was successor to the staff maintained by General of the Army George C. Marshall, Special Representative of President Truman in China, December 1945–January 7, 1947.
19. Philip E. Brown, Deputy Central Field Commissioner, Pacific and China, OFLC.
20. See memorandum of agreements, June 22, 1946, Foreign Relations, 1946, vol. x, p. 1041.
21. For correspondence on other problems involving the rate of exchange, see pp. 1030 ff., passim.
22. Brig. Gen. Bernhard A. Johnson, predecessor of Donald B. Davis as Field Commissioner, China and Eastern Area, OFLC.
23. Dated October 29, 1946, Foreign Relations, 1946, vol. x, p. 1095.
24. John K. Howard, Central Field Commissioner, Pacific and China, OFLC, and William E. Vogelback, his appointed successor at the time of the Nanking “Agreements”.
25. President of the Chinese Executive Yuan.
26. Pei Tsuyee.
27. Chinese national currency.