Memorandum by the Director of the Office of Far Eastern Affairs (Butterworth) to the Under Secretary of State (Lovett)
In the light of recent developments, both within and without the Department, I should like to expand somewhat on the suggestion [Page 455] contained in my memorandum to you of January 3, 1948. I have discussed this line of reasoning fully with Mr. Thorp and Mr. Wood.
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.
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 preventing more rapid economic disintegration and for initiating economic reform measures within China, such possibilities 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 underwrite China’s military requirements.
The proposed $510 million aid program for current imports, as revised recently by OFD, would provide $50 million more than the estimated 18-month deficit in China’s balance of payments, which has been calculated on the basis of a severely restricted level of foreign expenditures. It is intended that this $50 million would release an equivalent amount of Chinese export proceeds for military procurement and that this “cushion”, together with China’s existing official gold and dollar exchange holdings, would represent resources adequate to deal with the military problem. Such a position does not meet the argument that existing assets should be retained as a currency reserve for maintenance of confidence and for eventual use in currency stabilization. It is rapidly becoming untenable as Chinese official assets continue to be depleted to the point at which only gold [Page 456] and working balances will remain. Moreover, incorporation in a balance of payments presentation of any precise figure for military imports would entail its justification by the Department, and a figure on the order of $50 million would invite severe criticism as to its adequacy.
I believe that an acceptable alternative would be to abandon altogether, so far as public presentation is concerned, the balance of payments approach and to consider China’s current foreign exchange receipts as being entirely available for special payments of the Chinese Government, including the purchase of munitions. This approach would recognize that the Chinese Government will inevitably employ a substantial portion of its foreign exchange resources for military procurement. However, it would argue that Chinese military import requirements are not subject to approximate estimate, and that expenditures therefor, as well as for such government items as debt service, foreign service functions and banknote imports, should be the exclusive responsibility of the Chinese Government. It should be pointed out that, while the present low level of Chinese exports and other current foreign exchange receipts is inadequate to provide for essential civilian imports, it would be sufficient for special government payments and for such military imports as the Chinese Government would and could purchase.
More important, it could be maintained that China would thus have within its own power of exertion and decision the possibility of increasing, through promotion of exports, its purchases of munitions and 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. It would be recognized, of course, that prospects 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 provide funds for all of China’s essential civilian-type imports calculated on an austerity basis—estimated at $650 million over 18 months—plus a proposed $60 million for reconstruction projects, or a total of $710 million. In the absence of further serious military reverses, China’s foreign exchange receipts over 18 months should be sufficient, after itemized government expenditures have been met, to provide about $116 million for munitions procurement, civilian imports in addition to those scheduled under the aid program, and unitemized financial services. If developments are favorable and vigorous efforts are made, it is possible that about $176 million might be realized for these purposes.
Such a program should be justified publicly entirely in terms of [Page 457] 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 magnitude of aid proposed would represent a realistic appraisal of what is required merely to give some hope 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.