893.50 Recovery/2–1748

Memorandum of Conversation, by the Chief of the Division of Investment and Economic Development (Havlik)

Participants: Mr. Tsuyee Pei, Chinese Technical Mission
Mr. Havlik, ED
Mr. Walker, ED
Mr. Ringwalt, CA
Mr. Doherty, FN58

Mr. Pei came to my office on invitation pursuant to instructions from the Secretary to make known to him the contents of the program for [Page 476] aid to China. Mr. Ringwalt and I told Mr. Pei that we wished to lay before him the contents of the Chinese Aid Program, but since a message was to be sent by the President to the Congress on the 18th recommending a program of aid for China, the information was now being given to him in the strictest confidence and was not to be disclosed to any but the highest officers of the Chinese Government. Mr, Pei stated that he would forward the information received to his government to the attention of the Generalissimo, the Prime Minister, and perhaps one or two other persons of similar importance.

I stated that the President would send forward a draft of the legislation together with a message discussing various aspects of it. The program would be submitted in detail a little later and we would then discuss it further with Mr. Pei. I emphasized that this program had taken into account the information which the Chinese Technical Mission had made available as well as the information which Dr. Kan Lee had provided in the last few months. I stated that the program had been carefully considered in the Executive Branch of the government, and that it represented all that we felt that we could now appropriately recommend to the Congress.

I then outlined the program, indicating that it was divided into two major parts, the one recommending $60 million for urgent reconstruction of projects, the other $510 million for currently needed commodities. With respect to the reconstruction part I pointed out that the draft legislation does not list specific projects; while it would be necessary to refer to various possible projects in the discussions before Congress, the full responsibility for selecting projects would rest with the administrator of the program. Mr. Pei inquired as to what projects might be cited as being worthy of consideration and I replied projects such as the Canton Hankow Railway line, Shanghai Power, some coal projects, fertilizer, sugar refineries, etc. I stated that it was recognized that the sum recommended would not be sufficient to carry on a full program of reconstruction in China, it was our objective to undertake certain urgently needed projects as an indication to the Chinese people of our genuine interest in reconstruction. However, this did not commit us in any way to any further reconstruction programs and, of course, the projects themselves would depend upon the availability of material and equipment required.

I read the list of commodities included in the act and pointed out that this list could be expanded or contracted. I did not indicate the amounts which we had in mind for each, commodity.

I indicated that the legislation contained requirements to be incorporated in a bilateral agreement with the Chinese Government governing the terms under which aid was to be provided. I cited examples [Page 477] and pointed out that they were largely standard requirements appearing in Interim Aid and ERP legislation. I emphasized that the U. S. Government was deeply concerned with the steps that the Chinese Government would take in the matter of self help as well as the steps it would take to clarify and correct questions concerning the commercial practices and policies. I pointed out that while satisfactory action on the latter was not made a pre-condition of aid, it would, nevertheless, be regarded by this government as an essential concomitant of the aid program and the subject would be one to which we would pay continuing attention. Mr. Pei indicated that he understood the meaning of my remarks on this point.

Pursuant to questions raised by Mr. Pei, I indicated that the program did not contain anything for munitions as such because it was felt that the Chinese Government would have available to it certain reserves of gold and holdings of foreign exchange, which, together with the accruals from exports, could be used to cover the purchase of essential commodities including munitions. Furthermore, to the extent that Chinese exports were increased over the moderate figure that was stated in the program, the Chinese would have additional foreign exchange at their disposal. Mr. Pei was particularly concerned with the absence of a specific provision for currency stabilization and he asked whether his recommendations on this point59 had been considered in drafting the program. I assured him that his presentation had been considered and that the question of a currency stabilization fund had been considered at the highest financial policy levels in this government. It was our firm view that we could not provide any funds specifically for currency stabilization or currency reform at this time in view of the conditions now prevailing in China; I called attention to the fact that no recommendation had been made for funds for currency stabilization in the European Recovery Program even though the report of the CEEC countries indicated the desirability from their point of view for some such provision. I indicated to Mr. Pei, and he appeared to consider it a matter of considerable importance, that one of the conditions laid down in the legislation and to be covered by the bilateral agreement was that the Chinese Government should initiate, so far as practicable, financial monetary and budgetary measures with a view to creating more stable currency conditions. This, I pointed out, was an indication of our recognition of the importance of trying to achieve some stability in China. I added further that the program itself, by providing substantial quantities of materials, should have some effects in this direction.

[Page 478]

Mr. Pei inquired whether funds appropriated by Congress could be used in the form of a fund to be held by the Chinese Government in China in order to create conditions of confidence on the part of her people. I stated that the legislation was flexible but that, while it could be interpreted to permit some such provision, we did not contemplate this method of handling the funds. In our view the psychological impact of the program would be just as great if the funds were on this side of the water rather than the other. In response to further questions by Mr. Pei, I indicated that the legislation was flexible enough to permit channeling programmed goods through private channels but that we could give no assurances as to procedure since this would depend upon the administrator who would take into account all the conditions under which he had to discharge his responsibilities for efficient use of the funds. He would doubtless keep in mind the general desire of this government to establish and maintain private trade channels.

In the course of further conversation it was indicated that the method of determining financial terms would be the same as that of the ERP legislation. Mr. Pei asked whether the legislation foreclosed using the Export-Import Bank as a source of credits in addition to the program. I stated that the legislation did not by its terms do so but that there was no assurance that the views of the Expert-Import Bank with respect to credits would be different from those it has entertained so far.

Mr. Pei expressed appreciation of the efforts of the Department in developing the program and of the assistance proposed; he indicated that expressions of gratitude in China might be mixed with some criticism owing mainly to the absence of currency stabilization provisions. In response to a further question I stated that the Department had not recommended an interim appropriation under Public Law 389 as previously suggested by Mr. Pei, because such action might delay the Chinese program, particularly in view of the present situation on legislation on foreign aid.

[For statement by the Secretary of State, February 20, presenting the China program to the House Committee on Foreign Affairs, see United States Relations With China, page 983, or Department of State Bulletin, February 29, 1948, page 270.]

  1. Edward W. Doherty, Assistant Chief of the Division of Financial Affairs.
  2. Contained in one of 10 reports submitted informally to the Department by Mr. Pei; see footnote 44, p. 464.