The Minister-Counselor of Embassy in China (Clark) to the Director of the Office of Far Eastern Affairs (Butterworth)72

Dear Walt: In recent weeks the Chinese political scene has been characterized by obscurity. Trends and developments which had been clear and traceable became less evident, and the various definite patterns of political activity which we had been watching became ill-defined and indistinct. It became evident, however, that certain stabilizing factors are beginning to retard the recent rapid decline in the Government’s position. We do not feel that these factors will be permanently effective in the sense that they will halt once and for all the general deterioration pervading Nationalist China. Disintegrating forces are still dominant. However, we feel that the Government [Page 433] is in somewhat less danger of collapse than was the case a month or six weeks ago. In fact, the Gimo and his new Cabinet under Wong Wen-hao are showing signs of determination to survive.

The principal dangers to the Government continue to be the progressive deterioration of the military situation, the prospect of a breach in Nationalist ranks through the formation of regional political associations, the crisis in the national economy and the inability of the Government to exercise effective political controls in many spheres of public and private activity. The Government is well aware of the gravity of this situation, and, in its own way, is developing means for meeting it.

The most important recent event, of course, is the series of financial and economic measures promulgated by the Executive Yuan on August 20.73 A new currency called the Gold Yuan is established, the bank notes themselves being the so-called Sun currency which was actually printed about three years ago. CNC74 is to be converted to the Gold Yuan at the rate of three million to one, and the Gold Yuan itself has a gold content valuation which works out at four to one U.S. dollar. The Government announced that this currency will be backed by holdings of bullion, specie and foreign exchange amounting to US$200,000,000 and the pledge of securities in Government-owned enterprise, on which latter a valuation of US$300,000,000 has been placed. There is a provision that the Gold Yuan cannot be issued in an amount exceeding the value of this backing. At the moment this is academic since it is calculated that the U. S. dollar value of total CNC and NEC75 outstanding is only in the neighborhood of US$70,000,000. The difference between that sum and the total “backing” is the authority to the printing presses to meet the deficit in the coming months. So much for the highlights of the currency measures.

The currency reform was accompanied by a series of measures designed to accomplish the near-balancing of the Government’s budget, and the reduction of the export-import deficit. Many of these measures involve future executory acts, clarifying regulations, and the establishment of enforcement machinery. Exports are to be stimulated, imports cut, wages and prices frozen as of the August 19 levels, strikes banned, and holdings of gold, silver, and foreign currency, at home and abroad, are to be nationalized. In connection with the latter, there is a whale of an informer’s fee; to wit, 40% of the Government’s recovery in any individual case.

All of this represents Wong Wen-hao’s supreme effort. It has been received so far with complete skepticism by sophisticates and some [Page 434] genuine expressions of hope and relief by rickshaw boys. Real effort is being made to appeal to the patriotism of all the Chinese people and the Gimo has thrown his full influence behind it. It might work, but if it does it will only be because the Government executes the program with ruthlessness, courage and effectiveness.

So far as the future of the Gold Yuan is concerned, it seems to us the only real change is, first, the acceptance and legalization of the black market rate as the new official exchange rate. If internal prices can be, in fact, frozen as is the intention, this should have a highly beneficial effect on exports. The second accomplishment is nominal. It is the removal of the daily inconvenience which has been entailed in handling bales of CNC for even minor transactions. Otherwise, the basic factors remain just what they were before the measures were promulgated; there is no more backing to the new currency than existed for the old, and the budget of the Government is just as hopelessly out of balance today as it was last week. We don’t want to appear unduly pessimistic, but our guess is that we will have a very few weeks of relative stability in prices and then the new Gold Yuan will start sliding in terms of the US gold dollar, picking up where the late, unlamented CNC left off.

In the military field the Government’s efforts continue ineffectual. The bulk of its field commanders have proven themselves incompetent in battle, and ignorant or neglectful of the primary objective of military operations—the destruction of the enemy. The Government can still compel and entice its armies to continue resistance, but it does not appear able to mobilize its military and other resources and use them in the offensive effort necessary to restore the military situation to its own advantage. A case in point is now shaping up in the Hsuchow area. The Government has been anticipating strong Communist attack on Hsuchow and has been concentrating troops in that area. As matters now stand, General Chen-yi, with his strong Communist columns, is manoeuvering in the area around Yingchow in Northwest Anhwei. He has gotten himself into such a position that it would be a not too difficult task for the Government troops to encircle him and annihilate his forces. This they planned to do, yet our experience cautions us to anticipate that inability of the Government to compel obedience to its commands, lack of uniform command in the theater, unwillingness of one Government General to cooperate with another or come to the aid of another, and the traditional Chinese inclination to leave an avenue of escape open so as to avoid real battle if possible, will all result in much manoeuvering, little actual fighting, and the retirement North of Chen-yi’s forces practically intact.

If the Government troops should surprise us and actually encircle and annihilate Chen-yi, which we are informed by competent authority [Page 435] is within their capability, such an action should change the course of military events for some time and might serve as the inspiration needed to spur others on to victory.

Until we are convinced, however, that Government troops are capable of taking strong offensive action, we feel that were it not for the fact that the Communist armies themselves have difficulties, a general military collapse on the part of Government forces would likely occur. It does not appear at the moment, however, that the logistic services of the Communists are such that they can support a massive, protracted assault of sufficient weight and duration to reduce and take any of the more strongly garrisoned Nationalist centers. Under these conditions, the Communists must perforce keep to their strategy of containment, attrition, and limited attack. Changchun is now starving and will fall of its own weight one of these days. This strategy will bring them no quick victory unless there should intervene political and economic factors which contribute to break the will of the Nationalists to continue their resistance; but, as the battle now goes, their victory will be delayed beyond what might have been expected several months ago.

The steps which the Government can take to improve the military picture continue limited. The sheer inertia of a war-weary populace, plus the fact that the Government cannot control many of its own members who place self-interest above the welfare of the nation, militate against the development of an all-out war effort. Given the complex personal and political relationships of the Officer Corps, it is all but impossible to remove incompetent Officers of high rank, or to reward the few men of merit with suitable promotions and authority.

The threat of the formation of independent regional governments appears less imminent than was the case a month ago, when well-founded reports indicated that the forces of disintegration were actively at work. While there is little doubt that regional leaders, and such dissident organizations as the KmtRC, are still thinking in terms of separatism and still planning to that end, it looks very much as though they have come to think that an overt break with Nanking is not feasible at the present time. This is not to say that the dissidents and potential dissidents have effected any sort of a reconciliation with Nanking, or that they have abandoned the thought that they must prepare to set up their own regime or regimes against the day when the present government disappears. Their liking for the Gimo has not increased, nor has their confidence in his leadership. However, it seems at the moment that they do not intend to influence the course of events by an overt move which would help unseat the Gimo. Rather, it appears that they intend to wait for what they regard as the inevitable collapse of the Nanking Government before venturing on the establishment of their own independent political associations.

[Page 436]

If this appraisal is correct, we believe that the reluctance of the dissidents to make an open break very likely stems from a new realization that the present Government still performs for them certain indispensable functions. Principal among these at the moment is Nanking’s role in channeling American aid to the Provinces. We have made it abundantly clear that we support the Nanking Government. We have also made it plain that we intend to consult the Nanking Government on the allocation of our economic aid, and it is a well-known fact that the disposition of military aid is Nanking’s responsibility. In this situation, the potential dissident, who cannot dispense with American aid, is bound to Nanking by very strong ties. Also, Nanking continues to supply such vital necessities as air and sea transportation, money and civil governmental organization.

It seems patent, for example, that Marshal Li Chi-shen cannot at the present time implement his threats to set up an independent provisional government, though he still maintains that he intends to do so. As we have previously reported, the Marshal could not be expected to move until he was assured of the support of certain individuals with organized political and military followings. It appears that he has been unsuccessful in acquiring support of this kind. In the first place, his insistence on a negotiated settlement with the Communists could scarcely be expected to appeal to any political or military leader who still retained some hope of standing off the Communists. Also, there are indications that he counted on support from Lung Yun,76 and that he hoped to trade on Lung’s dislike for the Gimo. However, it appears that Lung may be returning to Yunnan under the Gimo’s auspices, possibly to resume his old position as Governor of the Province. If this is the case, and Lung proposes to believe that it is, whatever grounds may have existed for agreement between Lung and Marshal Li have vanished. Finally, despite the claims of Marshal Li that he has an “understanding” with Li Tsung-jen, we believe that the understanding involves little or nothing more than a common dislike for the Gimo, and a common inclination to wish him ill. While we do not know what the Vice President may have led the Marshal’s representatives to believe, we do not think that the Vice President has, for the present, any intention of associating himself with the Marshal in an overt move against the Government in Nanking.

The potential separatist movement in the North, involving Li Tsung-jen, Fu Tso-yi and certain others, seems to have gone no further than consultation between the parties concerned. These individuals still cherish their dislike for Chiang, continue to mistrust his intentions, retain their doubts as to the quality of his leadership and still [Page 437] believe that he does not have their interests at heart. However, as they speculate on the hard facts of an independent political existence, they are forced to conclude that they can get on better with him than without him, and so are willing to continue to cooperate with him as they have done in the past.

Manchurian regionalism also appears quiescent. The Northeastern politicos cannot move without the concurrence of Wei Li-huang, and Wei cannot dispense with the supplies and air transport that he receives from Nanking via Chinchow. Thus, he is even less likely to favor a break with the Gimo than Fu Tso-yi. In this connection, for the past several days the vernacular press has been quoting unidentified “informed sources in Government circles” to the effect that the Young Marshal77 is soon to be released. Government spokesmen, including Hollington Tong,78 make no comment on the report. This story appears at irregular intervals, generally when the Northeastern leaders become restive, and is doubtlessly designed to quiet them. We have no reason to believe, however, that the Gimo has changed his hitherto adamant refusal to release the Young Marshal under any circumstances.

The picture remains still black. Yet it is not as black as it has been and there is some evidence that the Government has obtained a new lease on life. If the economic measures can afford the breathing spell required and if the Government succeeds in taking even a part of the drastic action planned for reform, and if, by some miracle, it can bring a real victory in the military field, collapse of the Government may be postponed indefinitely. As we have said so often in the past, the bulk of the Chinese people does not want to be Communist and would cooperate heartily with any regime which gives promise of an efficient alternative. On the other hand, as one Chinese intellectual remarked to us recently:”You can’t deny the lessons of history, and history will show that in China, periods of chaos are inevitably followed by periods of tyranny.” We are certainly experiencing a period of chaos.

Very sincerely yours,

Lewis Clark
  1. Letter summarized in memorandum of September 9, which was submitted to the Secretary of State and initialed by him.
  2. For correspondence, see vol. viii , “Financial Relations”.
  3. Chinese National currency.
  4. Northeast currency.
  5. Member of the Military Strategy Advisory Committee; former Governor of Yunnan.
  6. Chang Hsueh-liang (son of Marshal Chang Tso-lin, Manchurian war lord), leader of the Sian Coup in 1936, sentenced to 10 years’ imprisonment.
  7. Director of the Government Information Office.