893.00B/8–1649: Telegram
The Counselor of Embassy in China (Jones) to the Secretary of State
[Received August 16—11:41 a. m.]
1806. Movement to streamline government organizations and promote austerity now being vigorously pushed throughout Commie China illustrated financial crisis facing Commies. Rapid growth their army to present size some 4 million men and recent takeover many large cities have created enormous financial burden on their meager resources. In effort to avoid unlimited resort to printing press, which brought disaster to Kmt, Commies are adopting only feasible alternative—reduction in government expenditures, increase in government revenue and reduction population of large cities. Last measure in itself reduces pressure for increased note issue as need for currency less in rural areas than cities. Dispersal expenses held at minimum by relying on traditional Chinese social security system whereby relatives in villages and small towns expected assume support of bulk of former city dwellers. In their urgent need of revenue Commies will not hesitate squeeze upper and middle classes in cities until all are reduced to common minimum living standard as has already taken place in many country areas.
Advantage long held by Commies over Kmt has been their small budget, resulting from relative lack of corruption, limited number government employees and notoriously frugal mode of living of cadres all levels. However, Commie entry into cities and absorption Kmt armies brought about rapid increase in number government employees with consequent strain on budget. Hence current desperate efforts increase revenue coupled with streamlining and austerity program designed to bring country mode living into city.
There are indications that takeover cities has brought in its wake increasing problems of morale and discipline even in ranks of Commies. Recent resolution of CCP Central China Bureau stated “government organizations show signs of extravagance after entering cities” and decreed “steadily growing tendency among cadres to covet enjoyment and crave position”. Published self-criticism from other cities such as Peiping and Nanking demonstrate such tendencies exist generally although not yet to serious degree. Therefore, important subsidiary purpose of austerity movement is to maintain purity of revolutionary discipline against blandishments of city.
Kmt never had moral courage to carry out effective taxation and reduction of government expenditures. Result was financial debacle. Commie policy is ruthless and determined, apparently paying no heed to number of jobless former Nationalist Government employees or middle classes it may ruin. Immediate objective is to win war as [Page 491] quickly as possible. Chou En-lai frankly stated to recently-returned delegate to All-China Scientific Workers Conference that financial problem is most serious and that it is imperative to win war quickly in order be able demobilize army.
It seems unlikely, however, that even drastic measures employed by Commies can avert increasing budgetary deficits, greater resort to printing press and mounting inflation. Bare fact is impoverished Commie China can not afford civil war on present scale. The longer war continues the more taxable reserves will be depleted. Furthermore Commie efforts through police measures to continuous growing peasant resistance against heavy exactions will presumably continue cause heavy drain on CCP resources. In short Commies are facing financial crisis they feel they can surmount only by bringing early end to war and they are now employing every resource toward that end.
We are inclined to doubt that even end of war will in fact bring relief to tax-ridden Chinese. Demobilization is traditionally difficult in China and CCP will also probably feel continuing need of large army to maintain internal order and provide for national defense. Further clue to future contained in recent statement of CCP Central China Bureau that “after war is ended austerity must still be relied on to accumulate capital and enter on large scale industrial construction”.
Sent Department 1806, repeated Shanghai 1006, Embassy Canton 767.