Memorandum by the Commercial Attaché in China (Colder) to General Wedemeyer
Subject: Analytical Comment on the Problem and Suggestions for Possible Solution. (Further to previous exposition of the problem.)
Summary: Mindful of the fact that the over-all problem is one of conflict between the USSR and USA, with the Soviets and Chinese Communists holding food surplus areas and leaving deficit areas as [Page 722] the problem of the USA, fertilizer supplies for Japan, South Korea, Taiwan, and selected areas of non-Communist mainland China may be the reasonably quick answer to the food phases of the problem.
Since it seems that a military success over the Chinese Communists is doubtful and would probably not be permanent, the victory probably will have to be economic—a better life in non-Communist China than in Communist-held areas. The fertilizer-food blitz would be part of our strategy.
A reasonably quick partial cure for China’s other economic ills would lie in the adoption of a positive American policy backing the Chinese Government with its moral support, technical advice and guidance, and a minimum amount of monetary aid, to be advanced only upon assurances that various measures recommended would be carried out. It would have to be made clear that we should be granted certain controls over the employment of our funds and of means for repayment, and that continuing aid would be contingent upon Chinese good faith and satisfactory performance in the joint program.
When it was known that the U. S. were backing China and that cooperation was genuine, probably US$500,000,000 of Chinese escape capital would return, workable conditions would encourage an inflow of American private capital, remittances from Chinese overseas would increase, exports would gradually turn toward normal. China’s purchasing power would recover, but China’s basic deficit status could probably not be overcome for a time, so imports might still have to be restricted. American moral support would be worth far more than monetary aid, would make only a minimum of U. S. monetary aid necessary, the program to be based mainly upon Chinese self aid. Certain near-term objectives could be blitzed—stabilization of currency (largely with Chinese held gold, U. S. Notes, and U. S. deposits) to form the basis for speedy return of confidence.
We would have to turn a deaf ear to numerous appeals for immediate Export-Import Bank financing for projects promoted by Chinese multi-millionaires who will not risk their own money in their own country, but rather we should help to lay the security basis whereby they will repatriate their capital—then try to guide it into channels which will mean most for the country’s economic recovery.
1. A Food Strategy.
Soviets and Communist Chinese penetrate or take surplus areas, and cut off fuel supplies. They don’t want deficit areas. But they do grab and hold strategic areas or spots. Obviously they regard North Korea, and Port Arthur and Dairen as strategic—barriers against outside penetration or control of Manchuria—insulation against egress of [Page 723] goods to would-be recipients or takers. The Soviets can depend upon Chinese Communists to keep the line between Tientsin and Mukden intermittently cut so China can get very little beans or other products out. By thus blocking off Manchuria and North China they can ruin the economy of 80 million Japanese, 7 million Koreans, 350 million Chinese in non-Communist areas, and leave the United States the responsibility for making up the deficit. Just as in Europe they hold all food surplus areas, particularly rich grain areas of Rumania and Hungary—Europe’s bread basket—while they watch the United States struggle to make up the food and other deficits of the British Isles, France, Western Germany and Italy—maybe 150 million people—so do they operate in the Far East.
Thus it is a food war to a considerable extent, with the USSR holding or reaching for the food surplus regions of the Euro-Asia Continent, leaving for the United States the deficit areas with which to struggle.
2. The Solution to the Food War in the Far East May Be Fertilizer.
We should explore the feasibility of quickly bringing adequate supplies of fertilizers to Japan, South Korea, Formosa, and the non-Communist areas of China.
China’s food deficit is only 2,000,000 tons per annum (total consumption 160 million tons)—offset mainly by imports of grain. Yet the little island of Formosa (13,800 square miles, one quarter arable) produced more than 2,000,000 tons of surplus foods (sugar 1.4 million tons, rice 780,000 tons) under Japanese management annually, using only 250,000 tons of fertilizer. This was in 1937, 1938, 1939, and 1940, with concentration on the arable land in Formosa between 1500 and 1800 per square mile. Japanese, South Koreans, and Formosans know how to use fertilizers. Technical advice should be supplied with the fertilizer to Yangtze Valley, South China, Central China (Hankow region), along with cheap financing for farmers for fertilizer purchases, in order to blitz results in all food deficit areas.
Maybe Chile’s aid in this would be necessary—loans by Chile to the areas mentioned, under U. S. or UNO99 guarantees. Part of our own production of surplus fertilizers could be shipped to China. Less shipping space would be required to bring fertilizers than to bring foodstuffs.
3. Victory by Better Economy.
The Chinese Communists can probably only be beat definitively by economic means, by making a superior economy in non-Communist areas, which would thus gradually break down any division line between [Page 724] the two areas. The Communist idea can obviously thrive only in conditions of adversity and want. Confidence would be re-established if it were known that the U. S. has a positive policy and is backing China. The establishment of a stable currency would enable the Chinese to go a long way toward helping themselves and would require a minimum of monetary aid from the U. S. (see Nyi plan, Despatch No. 1556 from the American Consulate General, Shanghai1), once their outlook is made secure. We should combine our aid and Chinese self aid to set up the stability and to blitz the moves which will make for recovery in order to win the economic war, not only with food, but in all other avenues of the economy. We would have to insist in a friendly but firm manner that our ideas (including land reforms) should be followed if we are to supply the needed aid and back China with our moral support, our technical guidance, and a minimum of monetary aid. We would have to maintain controls and make continuing aid contingent upon compliance on the Chinese Government’s part. Our moral positive backing would be worth more than our cash and should result in early repatriation of US$500 million of Chinese flight capital, now deposited abroad, in the influx of US$100 million of cash remittances from Chinese abroad annually in the form of foreign exchange, and in an influx of new American, Chinese-American, and other private capital. If the conditions for private investment are not good, how can loan money from the Export-Import Bank or the World Bank do anything except further pauperize China? Exports would pick up and would to a greater degree finance imports. Even returning Chinese capital should not be encouraged to go into pure money-making schemes at the ports but be directed into improvement in transportation and into essentially productive channels. A few years of this effort would set China so far ahead on the road to recovery that the line of demarcation between non-Communist and Communist areas in China would gradually fade out.
4. China’s Multimillionaires Seek Loans.
There are scores of Chinese projects now seeking Export-Import Bank Loans. The prospective borrowers in many cases have tens of millions of US Dollars stowed away in New York. If they are not willing to risk their own money in their own country, isn’t it a bit “thick” for them to be asking the U. S. taxpayer to take that risk? They have one argument on their side. There is no stability or security in the outlook in China. They will keep their capital abroad and smuggle out their current profits in continuous capital flight until that basis of security is re-established. If we, in collaboration with [Page 725] Nanking, can set up that security, then China’s rehabilitation can proceed with Chinese capital to a large extent. Let us stop pampering and pauperizing the Chinese but help them to earn their own way and pay their own way to success. They are beginning to swing to this view themselves. The British crisis shows them that there is large demand elsewhere upon the U. S. for aid, and that there is at least a psychological bottom to the American barrel if not a real bottom.