800.48 FAA/l–2148

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

On January 21, the basic issues of the China Aid Program were considered and discussed by Mr. Lovett, Ambassador Douglas,30 Mr. Thorp, Mr. Wood, and myself. At the conclusion of the meeting, Mr. Lovett gave instructions to proceed with the program formulated by A–T, as he felt that, despite the considerations set forth in my memorandum of January 21 (copy attached, Tab A31), it would be unwise to approach Congress with an aid program of greater magnitude than that proposed by A–T ($510 million to cover certain essential [Page 460] civilian-type imports over an 18-month period and $60 million for reconstruction projects—a total of $570 million).

It is important, of course, that we present this program with full awareness of its implications in the light of probable developments, both in China and in this country. While $510 million is a large sum, it will enable imports into China at considerably less than the level prevailing during the last two years. The effect of these imports will not be to reduce the rate of inflation, but merely to prevent the economic situation from deteriorating as rapidly as it otherwise would. Economic conditions, however, are as dependent upon the course of military developments as they are upon the level of Chinese imports. The present rate of deterioration of the military situation (see attached memorandum, Tab B32) is likely to be accelerated and result in increased economic disintegration despite the economic aid provided in this program.

It is intended that, in the presentation of the aid program, reference be made to the availability for military purposes of China’s official foreign exchange holdings, and of such resources as might be acquired by China through increased exports. However, the facts are that China’s gold and U. S. dollar holdings on January 1, of about $200 million consist largely of minimum working balances, and gold held in China, the export of which might produce panic repercussions, and that the estimate used in projecting China’s exports is about the best that actually can be expected. Furthermore, it has been recently learned informally from the Department of the Army that military stocks surplus to the Army’s needs and available and suitable for transfer to the Chinese are very small. Therefore, the Chinese will of necessity be compelled to purchase military matériel at high market prices. Extensive cannibalization is now being practiced in the Chinese Army.

Thus it is apparent that the proposed program is more in the nature of an expanded post-UNRRA33 relief program than it is analogous to ERP34 or the Greek-Turkish aid program. The fact that it takes little or no account of the military situation is likely to have serious repercussions, both in China and in this country. In the former, its inadequacy will have a generally depressing effect and might contribute at a certain point to a Chinese attempt, as a move of desperation, to arrive at some kind of an understanding with the Soviets, despite their unfortunate experiences in the recent past (see personal telegrams to you from Dr. Stuart, Tab C35). In the United [Page 461] States, the nature of the program will lay you open to frontal attack for failing to recommend adequate assistance. An economic aid program designed merely to hold the line in China has already been widely discounted. This attack may also develop into a determined attempt to force, as a complement to the proposed economic aid program, a Military Aid Bill which if passed would shift to the U. S. responsibility for the course of the Civil War in China. Attached is newspaper comment illustrative of a current partizan attitude (Tab D36).

Accordingly, I have informed Mr. Kennan37 of the character of the program and of the implications of the situation as I see them, and suggested that the Policy Planning Staff make a draft for you of a statement which you might make at the initial Congressional hearing. Alternatively, it might be embodied in the Presidential message forwarding the program to Congress. I have not seen Mr. Kennan’s draft which is under preparation.

  1. Lewis W. Douglas, Ambassador in the United Kingdom.
  2. Ante, p. 454.
  3. Not printed.
  4. United Nations Belief and Rehabilitation Administration.
  5. European Recovery Program.
  6. Probably telegrams Nos. 2436, December 22, 1947, noon, Foreign Relations, 1947, vol. vii, p. 412, and 59, January 9, 1948, 2 p.m., ibid., 1948, vol. vii, p. 21.
  7. Not attached to file copy.
  8. George F. Kennan, Director of the Policy Planning Staff.