893.50 Recovery/7–848: Telegram

The Secretary of State to the Ambassador in China (Stuart)

1004. In view reasonable presumption Durdin based story (Deptel 959 repeated Shanghai as 1178) on conversations U.S. officials, Dept offers comments below. Problem disposition Special Account concerns unencumbered balances remaining after withdrawals or commitments made for administrative expenses ECA, rural reconstruction program, and distribution private relief goods, as specified Article V bilateral agreement.26

Question is not disposal proceeds sale aid goods, as under USFRP Special Account, but disposal ChiGovt deposits Special Account [Page 632] in value “commensurate” aid goods. While proceeds sale could be used make such deposits, ChiGovt has alternative deposit any income or funds borrowed from Central Bank. Under Act,27 U. S. has no control over proceeds sale per se.
“Sterilization” could not be accomplished by releasing Special Account funds to Chinese Treasury for regular Govt expenditures. This would represent active use funds. Meaning “Sterilization” Special Account funds present context is refusal draw them for expenditure any purpose.
True that rate of increase note issue would be no less if account released for regular government expenditures than if account were sterilized. However, implication above observation in Durdin story is that consequently account should be used special relief and rehabilitation projects as though such alternative would also have negligible effect amount currency otherwise issued. This, of course, not the case. Expenditure entire account extraordinary purposes would increase total Govt inflationary spending significantly.
Allegation that advocacy sterilization is result pessimism and desire avoid US involvement is irrelevant to major issue presented by Durdin, which is one of financial policy. Equally possible for proponents sterilization believe that such policy most effective means provide maximum respite permit Chinese measures self-help.
Punch line re efforts Chinese negotiators minimize US supervision and control contains interesting implication that proponents sterilization are playing into Chinese hands. This revelation to Dept since previous Emb, Congen and CRM comment to effect that, insofar as ChiGovt interested rehabilitation projects, it favored, in general, U. S. supervision. Unwary readers, however, likely associate Durdin’s reference “supervision and control” with similar references contained Lieberman’s article (Deptel 883, June 1528) in which such references were related to problem effective distribution U. S. aid goods rather than to operation projects financed exclusively ChiGovt funds from Special Account.

Dept concerned at indication U. S. policy considerations relating to diverse and unresolved issues have been made available press. Published presentation in such distorted manner further confuses situation. Dept trusts that foregoing comments 1–5 will help clarify any misconceptions held by U. S. representatives China.29 (Sent Nanking as 1004. Repeated Shanghai as 1232.)

  1. Economic Aid Agreement of July 3, 1948.
  2. Foreign Assistance Act of 1948, approved April 3, 1948; 62 Stat. 137.
  3. Not printed; it summarized news despatch by Henry R. Lieberman in the New York Times on June 15 (893.50 Recovery/6–1548).
  4. In telegram No. 1311, July 19, 6 p.m., the Ambassador in China asserted that the two newspaper despatches were “not based to best Emb’s knowledge on any statements made by Emb or ConGen officers.” (893.50 Recovery/7–1948)