Memorandum by the Director of the Office of Far Eastern Affairs (Butterworth) to the Assistant Secretary of State for Economic Affairs (Thorp)
I believe that the proposed magnitude of balance of payments aid to China ($435 million) should be weighed very carefully and seriously on two counts. One is its probable inadequacy to accomplish the minimum objective of the program—to prevent further rapid deterioration in China. The other, is its evident inadequacy to enable the Chinese Government to purchase indispensable imports of munitions [Page 443] and banknotes without exhausting its foreign exchange reserves.
Congress will be inclined to accept the Department’s assurances that aid of the proposed magnitude will hold the economic line in China. If such aid fails to achieve this objective, responsibility will be laid at the Secretary’s door. Since the level of imports projected under the aid program is substantially less than that which China has been receiving during the last two years, the proposed volume of aid per se affords no promise of improving the situation. Moreover, the export figure ($312 million over 18 months) used in calculating the balance of payments’ deficit is admittedly highly optimistic. Judging by past Chinese performance, exports should be no more than $255 million for the period, a difference of $57 million. In view of present prospects for continued military reverses, which will further stimulate inflation and retard exports, past performance probably is a poor guide to the future. Thus, the present export estimate appears unrealistic, and $255 million might well be regarded as a maximum. Under the present program, $57 million or more of essential imports would have to be purchased out of existing official assets, or not purchased at all.
The suggestion that aid funds earmarked for reconstruction projects ($50 million) should be transferable to balance of payments aid if the deficit is greater than estimated would provide a solution to this problem if we were willing to admit that there probably will be nothing available for reconstruction projects. However, the psychological and economic importance in China of making a start towards reconstruction indicates that this solution is undesirable. At the very least, I believe a more realistic export estimate should be used in calculating the deficit. It seems to me that it is much more important to apprise Congress of the actual dimensions of the China problem than it is to avoid criticism of inconsistency with the Secretary’s initial and tentative reference to $300 million.1
It can be anticipated that members of Congress will be concerned with the extent to which the aid program will make it possible for the Chinese Government to purchase imports of munitions without exhausting its foreign exchange assets. According to present estimates, $37.5 million of banknotes and at least $45 million of munitions will have to be purchased with official assets. If, in addition, the shortfall in exports is absorbed by assets, the total depletion of Government holdings over 18 months would be $139 million. This would reduce official gold and dollar exchange, estimated at about $200 million as of [Page 444] January 1, 1948, to roughly $60 million by the end of the program on June 30, 1949. While there is nothing sacrosanct about these holdings, this reduced level would represent their virtual exhaustion since it is a minimum requirement for working foreign exchange balances. Public knowledge in China of this depletion, which would require export of gold reserves, would probably produce panic reactions to offset positive effects of the U.S. aid program.
It is important that some means be worked out to forestall this course of developments. The adoption of $255 million as a maximum realistic estimate for exports would alter it only in part. There appear to be three possible procedures. One is to ask Congress to appropriate funds for a program of military assistance. A bill to authorize such assistance was introduced in the 79th Congress.2 However, the consequences of the adoption of such a program by the U. S. Government are too serious and too obvious to require elaboration. A second would be to include munitions among government imports in the aid program balance of payments. Although the economic character of the aid program would thus to some extent encompass this war material aspect, nevertheless, such a procedure would carry with it most of the political consequences referred to above. A third procedure would be to use an export estimate on the low side of the range of realistic possibilities, possibly $200 million, so that an improvement in exports would provide means for purchase of munitions on Chinese Government account. It could then be maintained that the Chinese Government had within its power of exertion the means of making possible the purchase of war materials from the U. S. and other sources. At the same time, the U. S. could ensure that surplus material was sold to China at generously low figures.
The third procedure would appear to offer obvious advantages. In any case, it is of great importance that we present a program which stands a good chance of accomplishing its minimum professed objectives. Responsibility for that minimum and anything beyond it would then rest primarily with Congress and the Chinese Government.
- Statement made on November 11, 1947; see Interim Aid for Europe: Hearings before the Senate Committee on Foreign Relations, 80th Cong., 1st sess. (Washington, Government Printing Office, 1947), p. 43.↩
- S. 2337, introduced June 13, 1946, and H. R. 6795, introduced June 14, 1946, Congressional Record, vol. 92, pt. 6, pp. 6773 and 6979, respectively.↩