893.51/2–547: Telegram

The Ambassador in China (Stuart) to the Secretary of State

206. In conversation with Butterworth, Adler and me on February 4, Blandford again raised the issues discussed by Soong in his conversation with Butterworth reported in Embtel 204, February 4, 10 p.m. Blandford expressed genuine alarm at the rapid deterioration in the economic situation. He stated his belief that China represented the last lifeline of the western democracies in the Far East, that the position of Britain, France and The Netherlands in the Far East was slipping, and that if the Central Government fell as a result of economic collapse, there would be nothing left. Blandford was also asked what new elements had emerged in the situation since your departure. He did not say explicitly that the purpose of his projected visit to Washington was to assist China in obtaining loan and to sound out attitude to China in official and other quarters in Washington, but such would obviously be the case. He explained it in terms of: (a) his own personal position, his responsibility to report to the President on the progress of his mission and his desire to clarify the question of whether another American adviser and/or group of advisers is to come out to China; and (b) the need for clarifying the procedures to be pursued by China with respect to possible Export-Import Bank and International Bank loans. But he was obviously skating on thin ice.

Upon reference to imminence of Moscow Conference,44 Blandford said the Moscow Conference might last 3 or 4 months, and by the time of its conclusion the position of the Central Government might be [Page 1049] beyond remedy if no clarification of the loan situation had previously occurred. In this connection he emphasized the discouragement and damage done by seemingly inspired articles from Washington as to nonavailability of Export-Import Bank 500 million loan (see Embassy’s 186 [–A], February 245). The reorganization of the Government and progress along democratic lines were jeopardized as long as the Central Government’s prospects were so clouded. Groups and individuals were afraid to be associated with it unless it had some evidence of American backing. In his opinion Soong, whom he spoke of as a man of outstanding ability, could not carry on his fight with both the CC group46 and the militarists without American support. Blandford indicated that in its present weakened position with dwindling foreign exchange resources, it was impossible for Government to plan reasonable course of economic and financial action until more knowledge of American willingness to make commitments and its minimal requirements for such commitments. This is the most pertinent and valid point in the Chinese case and is worthy of attention.

Butterworth indicated that although developments in China were of great importance to us, they must be considered in the framework of the general world situation, and now [not] particularly in the light of the forthcoming Moscow Conference.

Blandford read a personal written appraisal of the present Chinese scene which will be transmitted in a separate telegram.47

I indicated my feeling that Blandford’s trip to Washington was premature at this time. It was true that the Government had handled its last peace offer to the Communists quite smoothly, that it was regrettable it had not handled its previous offer as effectively, and that the prospect of American assistance to the Central Government would increase the chances of the Communists entering into peace negotiations. I emphasized that from the Government’s point of view the best thing it could do was to press forward with the organization of the State Council on a broad basis with room left open for the Communists and with reorganization of the Executive Yuan. These should go forward in any case. I would do my best to be of service in this connection.

There was also some discussion of Chinese foreign exchange policy in which Butterworth and Adler expressed grave doubts as to the wisdom of the Chinese Government’s policy of domestic sale of substantial amounts of gold and its refusal to adjust exchange rates; it [Page 1050] was indicated that the measures China is proposing to adopt as a substitute for such adjustment were both ineffectual and not in accord with our world trade program. Butterworth suggested to Blandford that he draw up a statement on Chinese economic-financial situation which will be transmitted48 with documents when received.

Chinese pressure for a loan can be expected to continue with increasing force. Soong is in a desperate mood, and he and his entourage are showing all the symptoms of incipient and partly self-engendered panic. This is not to minimize current acute difficulties and eventual gravity of situation, which will be summarized in a later message.49

  1. Council of Foreign Ministers; for correspondence, see pp. 609 ff.
  2. Not printed; it quoted a United Press story that “there was ‘absolutely no chance’ that China would ever receive all the $500 million loan from the Export-Import Bank.” (893.51/2–247)
  3. Group in the Kuomintang led by the brothers Chen Li-fu and Chen Kuo-fu.
  4. See telegram No. 215, February 6, 6 p.m., from the Ambassador in China, p. 1056.
  5. See Embassy’s telegram No. 213, February 6, 4 p.m., p. 1053.
  6. See Embassy’s telegram No. 264, February 12, 7 p.m., p. 1059.