893.50 Recovery/1–548

Memorandum by the Chief of the Division of Chinese Affairs (Ringwalt) to the Director of the Office of Far Eastern Affairs (Butterworth)

Attached is a statement prepared by Mr. Magill13 setting forth what I understand to be the FE14 position on issues involved in formulation of the China Aid Program. It occurs to me that it might be useful in any decision that is being reached by the Secretary. We [Page 448] stand ready to put it in any form you think necessary. In any case, it furnishes a record of FE’s views.

A[rthur] R. R[ingwalt]

Memorandum by Mr. Robert N. Magill of the Division of Chinese Affairs

The manner in which an economic program for China is formulated is likely to determine whether or not the Department will have to meet openly in the near future the issue of direct military assistance to China. It can be anticipated that Congress will draw that issue squarely if it finds that the economic aid program does not make it possible for China to purchase substantial imports of munitions without exhausting its official foreign exchange reserves. It might, of course, be logical for the Department to support direct military aid if the amount required to accomplish agreed upon objectives were subject to approximate measurement, and if the U. S. were willing to bear the magnitude of aid required and to accept the consequences which might accompany or follow the success or failure of the endeavor. However, none of these assumptions are given, and it is therefore important that the U. S. not become committed to a program of military assistance for China. It is also important, for reasons of domestic and foreign policy, that neither the Department or the U. S. Government openly repudiate the possibility of military aid.

Considerations which should determine the issue of military assistance should also apply, at least in part, to policy decisions regarding the extension of economic aid to China. However, the question of economic aid for a limited period has already been decided. Fortunately, the political consequences of extending economic aid are not likely to be so serious as those which might accompany a policy of military involvement, particularly since a program of economic aid can be presented in such a manner that responsibility for its success and justification for its continuance or renewal lies primarily in the degree to which the Chinese Government rises to the requirements of the situation.

It is apparent that an economic aid program, the size of which is measured in terms of China’s ability to meet essential civilian imports out of its export proceeds, will not satisfy those elements of Congress which are concerned with China’s military requirements. Moreover, insofar as there are possibilities for holding the economic line and initiating economic reform measures within China, such possibilities [Page 449] may well be denied if the military position of the National Government continues to deteriorate rapidly or if panic results from the exhaustion of the Government’s foreign exchange holdings. It appears essential, therefore, that an economic aid program be devised which takes account of these considerations, although its public presentation should minimize any implied commitment by the U. S. to underwriting China’s military requirements.

A program which undertakes to provide a cushion for military imports by using admittedly generous estimates of China’s foreign exchange expenditures and receipts probably would be labeled a fraud and slashed by Congress, in which case the Department would be held to blame. Use by the Department of an estimate of Chinese military imports, to be procured with current Chinese foreign exchange earnings, would require its justification before Congress and thus imply that the Department is committed to making its realization possible.

The only alternative appears to be the adoption of an approach which would result in an aid figure substantially larger than that thus far proposed, and which might be difficult to put through Congress. Essentially, the presentation of this alternative would recognize that the Chinese Government inevitably will apply its export proceeds to certain major expenditures for which it is undesirable that the U. S. assume responsibility by including them in a balance of payments projection underlying an estimate of American financial aid. These expenditures fall into two categories. The first consists of such items as maintenance of diplomatic and consular functions, foreign debt service and banknote imports, all of which Congress would be delighted to ignore. The second consists of direct military imports, requirements for which are not subject to approximate estimate. It could then be pointed out that, while the low level of Chinese exports could not be expected to cover both Government and commercial transactions, nevertheless their proceeds would be adequate for expenditures in the first category and should be sufficient to permit China to purchase such military imports as it would and could procure.

More important, however, it could be argued that China would thus have entirely within its own power of exertion and decision the possibility of increasing, through promotion of exports, its purchases of munitions or, alternatively, of civilian imports necessary to combat inflation and to aid reconstruction, provision of which under the U.S. aid program is admittedly on the basis of austerity requirements. A variant to this argument might be that any surplus acquired from increased exports could be used in building up China’s foreign exchange reserves for eventual currency stabilization, although such a proposal might not fare so well with a Congress concerned with eliminating surpluses. It would be recognized, of course, that prospects [Page 450] are poor for an increase in China’s exports and that only by strenuous efforts and effective use of American aid could progress be made.

This approach would call for an aid program to cover all of China’s essential civilian imports calculated on an austerity basis, which would bring the total amount of aid for 18 months to about $700 million, plus whatever funds are included for reconstruction projects—possibly $75 million. This program could be justified publicly entirely in terms of its economic assistance to the Chinese Government and people as affording them a respite from immediate crises during which they might initiate the measures necessary to lay the basis for eventual recovery. It would be held that responsibility for these measures, for normal foreign transactions of the Chinese Government, and for military procurement abroad and the course of the civil war rests entirely with the Chinese.

The program would have the added advantage of skirting altogether in its presentation a balance of payments analysis, thus avoiding the implication that the U.S. is committed to meet continuously China’s deficit in its international transactions. The magnitude of aid proposed would represent a realistic appraisal of what is required merely to give some assurance of preventing further economic retrogression in China. This would have desirable educational effects in Congress and elsewhere, and responsibility for any failure to provide the funds required would then lie clearly with Congress.

  1. Robert N. Magill, of the Division of Chinese Affairs.
  2. Office of Far Eastern Affairs.