Foreign Relations of the United States, 1949, The Far East: China, Volume IX

893.50 Recovery/1–2949

Memorandum by the Director of the Office of Far Eastern Affairs (Butterworth)⁵

[ Washington , undated]

Problem: What ECA proposals to Congress for continuation of U.S. aid beyond April 3, 1949 to non-Communist areas of China should be supported by the Department?

Discussion:

Section 404(a)⁶ of the China Aid Act of 1948 authorized appropriation of $338 million to be administered by the ECA, such appropriation to be available until April 3, 1949. The Congress appropriated $275 million⁷ pursuant to this authorization, leaving $63 million unappropriated. The Act did not specify the purposes for which the appropriation should be used, except that it provided that not more than 10 percent of the appropriation, either in Chinese or U.S. currency, might be used for a program of rural reconstruction in China. In the course of Congressional hearings, however, it was indicated that $60 million would be set aside for industrial reconstruction projects.⁸ The balance of the appropriation, approximately $200 million, was programmed for cereals, cotton, petroleum, fertilizer and coal for current consumption primarily in the major cities of east China and in Taiwan.

A prompt decision is required on the problem since Congress can be expected to call for an early presentation by ECA on the matter and review by the Bureau of the Budget will be necessary before final recommendations can be made to Congress. ECA has taken the position, concurred in by the Department, that the present degree of deterioration and uncertainty in China makes it inadvisable at this time to request legislation for any part of the fiscal year 1950, but that Congressional authorization should be obtained to enable continuation of the program until June 30, 1949. It is anticipated that before that date the Chinese situation would clarify itself sufficiently so that if Congressional action were required for fiscal year 1950 it could be obtained before adjournment.

In order to enable continuation of the program until June 30, 1949, ECA has proposed to the Department that the following recommendations be made to Congress.

(1) Amendment of the China Aid Act of 1948 to permit expenditure of unobligated funds through June 30, and to authorize the President to direct ECA aid to either the National Government of China or to such other beneficiary in China as he might determine; (2) Appropriation of $63 million now authorized but unappropriated under Section 404(a) of the Act, and provision for an RFC⁹ advance pending such appropriation.

Representatives of the Department and ECA are agreed as to the desirability of recommendation (1) above. Almost all of the $60 million which was earmarked initially for industrial reconstruction in China remains unobligated as a result of Mr. Hoffman’s¹⁰ recent decision to suspend procurement under that phase of the ECA China program. If, in view of the legislative history of the Act, ECA could in the course of its presentation obtain concurrence of the Congressional Committees concerned for diversion of these earmarked funds, in whole or in major part, into procurement of basic consumption commodities, these funds, together with other unobligated appropriations under the Act, might well constitute as much as $70 million with which the aid program could be carried on between April 3 and June 30. As a result of the inaccessibility of North China, these unobligated funds should be sufficient to enable ECA to (a) continue procurement of consumption commodities for central and south China and Taiwan at substantially the present rate, (b) complete part or all of ECA’s present industrial program for Taiwan (approximately $14 million), and (c) continue the program of the Joint Commission for Rural Reconstruction in China.¹¹ It is quite possible that before or during the April–June period Shanghai and Hankow as well as Nanking will come under Communist control, in which event commodity requirements would be more than cut in half. Such a development would permit considerable expansion of aid with existing funds for Taiwan and South China if desirable. Recommendation (1) would also provide the President with sufficient discretionary authority so that aid could be extended, if necessary, to cities of the Chinese mainland or to Taiwan in the event that such areas were no longer under the control of the recognized National Government of China but had not come under Communist control.

Beyond this, however, ECA has urged that the Department support recommendation (2)—appropriation of the $63 million authorized but unappropriated. ECA proposes that this appropriation be requested as a “contingency fund” and that, although its expenditure could not be programmed definitely for the April-June period, the request should be justified in executive session Congressional hearings by reference to the following possible contingent uses:

(1) It may be necessary to provide food for the entire population of Shanghai if the Communists should by-pass that city and cut off its access to indigenous food sources.

(2) It might make possible the completion or expansion of ECA’s industrial projects in remote areas, such as Yunnan Province, which might achieve a degree of local autonomy as a result of unpredictable political alignments in China. The continued availability of funds for industrial reconstruction on the Chinese mainland might provide significant moral support to non-Communist Chinese since ECA’s industrial projects represent the only constructive aspect of the China aid program.

(3) It could be used to support the programs of private American relief agencies operating in Communist-controlled areas of China. The U.S. could, in this way, demonstrate its continuing interest in the welfare of the Chinese people without incurring the disadvantages of a direct U.S. Government operation in Communist areas.

(4) It might be used for an expanded program of aid to Taiwan.

ECA representatives have argued that unless the U.S. Government indicates a continuing interest in aid to China by making available the $63 million “contingency fund”, which could be useful as a “diplomatic weapon”, it will be evident that the U.S. is merely winding up its China aid effort, and that this would call into serious question the advisability of extending the aid program beyond April 3 at all.

The analysis and appraisal of the situation in China contained in reports from the Embassy, the consular offices and the U.S. military representatives present a picture which would make it extremely difficult, if not impossible, in turn to present any factual justification to the Bureau of the Budget or Congress for appropriation of a $63 million “contingency fund” to be available for expenditure before June 30 in addition to the $70 million that should remain unobligated as of April 3, 1949. Mr. Lovett¹² read the pertinent portions of certain of these reports to the Senate Foreign Relations Committee and it can be assumed, therefore, that Congressional leaders are not unaware of the current prospects for the Chinese National Government. (See Problem Statement—“Background”—Tab A)¹³.

It is not believed that the particular uses suggested by ECA for the $63 million “contingency fund” could be supported by the Department for the following reasons:

(1) ECA may regard its participation in the food rationing program of Shanghai, and Mr. Lapham’s¹⁴ public assurances regarding U.S. support for this program, as in effect obligating the U.S. to meet Shanghai’s food requirements in the event of an emergency. American interests in Shanghai, however, are not such as would warrant a commitment by the U.S. to provide the entire, or the major portion of Shanghai’s food requirements if that city should be cut off from its hinterland. The British, who have many more nationals in Shanghai than the U.S. and who could provide food from sterling sources, and Chinese residents of the city, many of whom undoubtedly have substantial foreign exchange holdings, should be expected to participate in the procurement of emergency food supplies. U.S. aid to Shanghai during a period of transition from Nationalist to Communist control probably should not exceed pre-existing ECA programmed deliveries of food and petroleum to that city.

(2) There is little, if any, prospect that remote provinces on the Chinese mainland will remain free of direct or indirect Communist control more than temporarily. U.S. aid for industrial reconstruction in such areas would, in all probability, become a gift to the Communists. Such justification as existed for U.S. aid to industrial reconstruction on the Chinese mainland when the present ECA program was formulated is now entirely lacking.

(3) Provision of U.S. Government funds to private American relief agencies for operations within Communist-controlled areas of China would differ only in form from direct extension of aid in such areas by a U.S. Government organ. While this particular type of operation may not have been considered by the Cabinet in its discussions of aid policy towards China, it is evident that such a proposal would be inconsistent with the principle of the President’s recent decision regarding discontinuance of ECA aid to areas of China that come under Communist control. (see Tab B¹⁵.)

(4) Experience thus far in ECA planning of industrial projects under the China aid program indicates that it would not be possible within three months to plan and conduct engineering surveys for Taiwan industrial projects in addition to those currently planned, so as to enable obligation of $63 million for such purposes by June 30, 1949. Moreover, public justification at this time of the entire $63 million “contingency fund” by reference to Taiwan would entail serious political disadvantages.

With respect to ECA’s general position on the political significance of a “contingency fund”, it would appear extremely doubtful, considering the limited time period and purposes for which aid would be authorized, that an increase of $63 million in U.S. funds available for China under this authorization would make a significant difference in the political implications and psychological effect of the program. If a “continency fund” were requested and granted and did, in fact, bolster the expectations of non-Communist Chinese regarding the possibility of continuing and increasing U.S. aid, it might well prove to have been a misleading gesture which served merely to delay a clear resolution of the Chinese political situation in the light of which the U.S. could formulate a more realistic policy.

Finally, while it is of course difficult to justify even the continuation beyond April 3 of commodity assistance to non-Communist areas of the Chinese mainland, it would be even more difficult to justify abrupt cessation of aid on April 3 to the Chinese National Government that the U.S. continued to recognize, if that Government maintained control over significant areas of China at that time and provided that its non-Communist political complexion had not been altered. More important, only by obtaining limited authority to continue extension of aid to non-Communist areas of China can the U.S. Government ensure the availability of funds with which to carry forward important projects in Taiwan. The isolated position, limited area and potential economic viability of Taiwan offer some prospect that that island might be able to withstand Communist domination. It is desirable that existing U.S. funds continue to be available to assist the governing authorities of Taiwan in an effort to create stability which would tend to thwart Communist infiltration, and that the U.S. Government be in a position to extend such assistance while avoiding, in so far as possible, public demonstration of a special interest in Taiwan.

Recommendation

The Department should support an ECA request for amendment of the China Aid Act of 1948 to (1) extend its authority until June 30, 1949, and (2) provide the President with discretionary authority as to the recipients in China of aid extended under the Act, but should not support an ECA request for an additional “contingency fund” appropriation. The Department should be prepared to support, if necessary, an ECA request to appropriate Congressional Committees for their concurrence in the diversion, in whole or in major part of the $60 million earmarked for industrial reconstruction to procurement of expendable commodities. The Department should advise ECA and maintain, if necessary, in executive session hearings before Congress that a primary consideration in the expenditure of such funds would be the completion of ECA’s presently projected industrial replacement and reconstruction program for Taiwan.

W. W[alton] B[utterworth]

5. In a conversation with ECA aides on January 29, Mr. Butterworth asserted that the Department’s views were as recommended in this memorandum. The ECA concurred.
6. 62 Stat. 159.
7. Public Law 793, approved June 28, 1948; 62 Stat. 1054.
8. Foreign Aid Appropriation Bill for 1949: Hearings before the Sub-Committee of the House Committee on Appropriations, 80th Cong., 2nd sess. (Washington, Government Printing Office, 1948), pt. 2, p. 374.
9. Reconstruction Finance Corporation.
10. Paul G. Hoffman, ECA Administrator.
11. For correspondence on negotiation of agreement establishing the Commission, see Foreign Relations, 1948, vol. viii, pp. 601 ff.
12. Robert A. Lovett, Under Secretary of State.
13. Memorandum of January 14, supra.
14. Roger D. Lapham, Chief of the ECA China Mission.
15. Memorandum of January 25, p. 616.