893.50 Recovery/1–348

Memorandum by the Director of the Office of Far Eastern Affairs ( Butterworth ) to the Under Secretary of State ( Lovett )

Since the Wednesday meeting on China in your office, certain adjustments have been made by OFD7 in the Chinese balance of payments estimates, particularly by the inclusion of such outpayments as for currency and by the scaling down of the export figure from $312 million to approximately $275 million. I understand that the adjusted deficit comes out at $510 million for 18 months, as compared with the previous estimate of $435 million. This adjustment meets the first point of my memorandum of December 30, namely, that we should use a more realistic export estimate in order to be more certain of covering the probable deficit in the balance of payments for nonmilitary transactions. It would also relieve to a minor extent the drain on official foreign exchange holdings by the inclusion in expenditures of banknote imports.

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However, this approach does not tackle the fundamental problem which, as you indicated at the meeting in your office, might best be met by some offset of munitions against Chinese exports. No acceptable justification for any particular military figure can be found. The application of a percentage offset equivalent to the ratio of domestic military expenditures to total budget has difficulties because there is no necessary correlation in China between the two. There is no figure available from the Chinese and to go to them for one would invite the impossible. The Department of the Army submitted on April 3, 1947 to a SWNCC8 working group an estimate of $336 million to “provide the weapons and equipment for 25 modern ground divisions, a strong air force, and the fuel and ammunition required for a year’s operation” sufficient “to drive the Chinese Communists out of Manchuria and eastern China”. It is not likely that the Army would furnish an estimate smaller than that if asked for one now.

Support before Congress for any quantitative estimate of China’s needs for munitions imports would carry the disadvantage of appearing to commit the U. S. to making possible their acquisition by the Chinese Government. It seems to me that this implicit commitment could be minimized if we were to maintain that no good estimate can be made in the circumstances and that all of China’s export proceeds should be available for special Chinese Government transactions (including diplomatic expenditures and debt service, as well as military procurement), and for building up foreign exchange reserves against the time when currency stabilization becomes a practical possibility. It would be reasonable to hold that these foreign exchange proceeds are adequate for such military expenditures as China would and can make. Moreover, this approach would emphasize the Chinese Government’s responsibility for military success or failure by making it within that Government’s power of exertion to increase its foreign purchases of munitions, and/or strengthen its reserves for ultimate currency stabilization.

The procedure suggested above would call for an aid program of about $700 million over 18 months, plus whatever funds we wish to make available for reconstruction projects. The Chinese Government would be responsible for expenditures out of export proceeds of about $150 million included in the earlier balance of payments and for the purchase of banknotes as well. Thus, export proceeds available for munitions imports and augmentation of foreign exchange reserves might range between $75 million and $150 million, depending on China’s success in promoting exports. The probability, of course, lies in the direction of the lower figure.

  1. Office of Financial and Development Policy.
  2. State-War-Navy Coordinating Committee.