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

893.50 Recovery/8–549

The Chief of the Economic Cooperation Administration China Mission (Lapham), Recalled to Washington, to the ECA Administrator (Hoffman)⁴¹

Washington, June 30, 1949.

Dear Mr. Hoffman: This letter records a general account of the China Mission’s activities to date; and it outlines the more important events which took place between my first arrival in China, June 7, 1948, and my final departure, May 24, 1949.

At the outset I knew little about the events leading up to the passage of the China Aid Act (approved April 3, 1948)⁴² nor was I familiar except in a most general way with what had happened in China during the war years and since VJ Day. I had spent several weeks in Shanghai and Peiping, in June 1937, and a few days in Shanghai and Nanking on a trip around the world in June 1947; other than that, I had had no first-hand knowledge of the country.

One year on this job has not made me an “old China hand”, but in that short time I have had most unusual opportunities to meet, in many parts of China, many Chinese leaders in government, business, and education. Until recently the Mission maintained its operating headquarters in Shanghai, official headquarters in Nanking. It has had regional offices in Peiping, Tientsin, and Tsingtao, and still maintains regional offices in Canton, Swatow, and Taipei (on the island of Taiwan, old name Formosa). During the year, I have flown well over 30,000 miles within China (flying miles in all since joining ECA, over 100,000 including three round trips between China and Washington); and have seen China by train, steamer, and automobile as well.

The Mission has kept close relations with Ambassador Stuart and the Embassy staff (I visited Nanking eighteen times). Contact between the Mission and our Consular offices in different cities has been frequent, almost continuous. I have consulted Vice Admiral Badger⁴³ and other Navy officers on numerous occasions; and, while the Army Advisory Group commanded by Major General Barr remained in China, the Mission kept contact with that group. We have talked many times with our military and naval Attaches. In short, the Mission has done its utmost to consult and advise with all Americans in China, whether in government, business, missionary, medical, or educational fields—not to mention American newspaper correspondents. Our aim has been to gain all information possible from all sources.

At no time has the Mission had more than 100 Americans on its staff in China. Today there remain only twenty or so. Because of the great size of the country and its inadequate transportation and communication facilities, our Mission has had to face and overcome many unusual difficulties and, of course, these difficulties were progressively multiplied by civil war conditions.

I record my thanks to my Deputy in China, Colonel Robert Allen Griffin, as well as to all members of the Mission Staff—some who spoke Chinese and many who had had previous experience in China. Without their loyal help and willingness to work all hours of the day and night, the Mission could never have accomplished as much as it has, handicapped by the relatively small amount of dollars allowed for organization overhead. I shall ever be grateful to the men and women who served me in conducting what I term “a successful failure”.

Nor am I unmindful of the difficult task you, as Administrator in Washington, have faced; and the assistance rendered by the China Program staff ably directed by Mr. Harlan Cleveland. It is never easy to coordinate ideas and thinking when separated by over 10,000 miles, and with a handicap of coded cables. The necessary contact with the State Department has been well maintained in Washington, as well as the essential contact with the Congress.

Studying the China Aid Act of 1948, Section 402 clearly indicated to me that our Mission was expected to strengthen and uphold the Republic of China—the Nationalist Government—by any legitimate economic means. I was aware that $125,000,000, over which this Mission had no control, had been voted for military aid; and I assumed that the $275,000,000 appropriated for economic aid not only could but should be used to assist the Nationalist Government in resisting attempts of the Chinese Communists to overthrow it.

When I first met Ambassador Stuart on June 8, I asked him how economic aid might be used to supplement military aid. His one suggestion was to include Tsingtao in our food rationing program, along with other cities. This was done.

Much of my time the first few weeks in China was devoted to organizing our staff, arranging to take over some of the activities of the China Relief Mission as of June 30, and generally familiarizing myself with the many details involved. We spent some time also with the Embassy staff, working on the bilateral agreement signed in Nanking on July 3.

In late July and early August, I flew to Tientsin, Peiping, and Kalgan, and into the beleaguered cities of Taiyuan and Mukden for a brief visit. At that time most of the Communist military activities were centered in North China and Manchuria. The mission was supplying part of the food rations and petroleum products for Peiping, Tientsin, and Tsingtao, and raw cotton for the textile mills in Tientsin and Tsingtao.

During this visit to North China I learned that strong feeling existed, not only among the Chinese but also among the Americans in that area, that the Nationalist Government was not giving proper military or other assistance to that region. Right or wrong, the feeling was that Nanking had written off North China, and that far more material and moral support was called for than had been received there.

In both my first and subsequent visits to that area, I stated that ECA wanted to give it the greatest support possible; and I emphasized publicly how important it was that the Nationalist Government render greater assistance to North China, both economic and military. Ambassador Stuart fully supported my position.

Probably the most important part of our Mission’s program was the Food Ration Plan (initiated by the China Relief Mission in the spring) in Peiping, Tientsin, Nanking, Shanghai, Canton, Swatow, and extended later to Tsingtao. With the cooperation of the municipal authorities, every resident of these cities received a ration card entitling him to a certain amount of food per month, at a stated price. Also free food to refugees was supplied in limited amounts, especially in Tsingtao.

One of the most annoying problems in dealing with the Nationalist Government through CUSA (China’s ECA counterpart) was to fix the prices at which rationed food was sold as well as to secure the local food supplies promised by CUSA to supplement the food imported by ECA.

Due to incredible currency inflation and the fact that rationed food prices were at first fixed but once a month, the public received this rationed food at far below the open market price. The unwillingness of our CUSA associates to agree on rationed prices close to open market prices was always a bone of contention. This unwillingness to accept realistic prices arose largely from fear of political repercussions—“Please keep food prices low. We might precipitate civil riots if they were marked up to keep pace with currency inflation.” We had good reason to blast publicly the Nationalist Government for its failure to agree on food prices sufficiently high—an essential means of checking currency inflation—but we felt compelled to temporize and compromise, fearing on broad grounds that public criticism of the Government would only weaken support of its efforts to down the Communists.

The failure of the Nationalist Government to supply its agreed share of rationed food was largely inexcusable, due to the incompetency and lethargy of those charged with food procurement. At least 50% of the food necessary to ration the larger cities was supposed to have been supplied by CUSA from local food surplus areas—this to supplement the food imported by ECA. In practice, ECA was compelled to furnish much more of the total ration stocks than was originally contemplated. We experienced less difficulty in establishing prices and end use disposal with our cotton, petroleum, and fertilizer programs, although we had many annoying setbacks due to the unwillingness of our CUSA associates to accept their share of responsibility.

Chinese currency inflation caused endless complications. When our Mission first arrived in China US$1 could buy 1,400,000 Chinese dollars. Some two months later, a US$1 could buy almost 12,000,000 Chinese dollars. It is almost impossible to describe how difficult it is to live from day to day under such conditions. Our alien personnel were paid with Chinese counterpart funds, as were the living expenses of our American personnel. Unless the money received was spent almost immediately, it became worth but a fraction of its value within a few days. When by agreement with CUSA, counterpart funds were voted for certain projects (mentioned later), by the time money was actually secured and spent, double, triple, and maybe ten times the amount of counterpart currency was required to complete the job. The problems arising from currency inflation were a constant pain in the neck.

Meanwhile about 70% of the Nationalist Government income was spent to maintain its military forces. The Government did very little, if anything, to secure additional revenue through increased taxation or by cutting down its budget. In a radio talk I made in Nanking on July 22, I pointed this out and said:

“It stands to reason that if China expects our Congress to vote additional American aid next year, then China must do more on its own initiative to help itself than has been evident to date. China has an inflation problem—and that is putting it mildly—but it is my impression that China is not collecting the revenues it might if the public was required to pay the prices it should for commodities and services that depend on foreign exchange.

“There is the belief, confirmed by many sources, that the Chinese farmers in effect subsidize the big cities—that there are many in the cities who could afford to pay more than they do in meeting their country’s expenditures.

“If you can fly from Shanghai to Nanking for the equivalent of an American dollar or two, it stands to reason that air travelers could and should pay a great deal more for air transportation when such transportation depends on foreign exchange to cover much of its operating costs. In the United States such a trip would cost at least five times as much.

“There is no reason why there should not be some restrictions on the use of gasoline for pleasure travel. Gasoline has to be paid for with foreign exchange. Why not a realistic gasoline price as well as restrictions on pleasure driving such as apply in European countries? There are many other things which could be done to help meet China’s budget deficit. Why not a strong self-help program to find and enforce them?”

Speaking of the inflation problems, I should mention here the various projects initiated by the China Relief Mission, many of which were left to ECA to complete after it took over from CRM on June 30. These projects, ranging from construction of dikes to reclaim farmlands and development of irrigation projects to assistance for medical centers and hospitals and aid of a welfare or relief character, were financed by Chinese counterpart funds. Many applications for assistance were filed with and considered jointly by ECA and CUSA. By joint approval, certain funds were allocated to such projects as were deemed worthy. Due to the rapid deterioration of the Chinese currency, supplemental funds had to be approved from time to time to finish approved projects. As can be imagined, the difficulties encountered in completing these projects were innumerable.

Mention should be made of the work involved in the distribution of medical supplies. Some US$5 million of China Relief Mission funds had been used to purchase medical supplies in the United States. These supplies did not arrive in China until after the CRM had discontinued its operations and the burden of sorting these supplies and distributing them to various areas in China had to be undertaken by our Mission. Distribution costs were financed by our counterpart funds.

The China Aid Act of 1948, Section 407(a) called for the establishment of a Joint Commission on Rural Reconstruction in China, composed of two Americans appointed by the President of the United States and three Chinese appointed by the President of China. It provided that the Commission should, subject to the direction and control of the Administrator, formulate and carry out a program for reconstruction in the rural areas of China, including such research and training activities as might be necessary or appropriate for such reconstruction purposes. This Commission held its first organization meeting in Nanking on October 1.

Due to threats of Communist occupation of Nanking, the Commission was compelled to move its headquarters to Canton on December 5; it has since been operating from that base. Should Canton fall under Communist control in the near future, the Commission plans to move its headquarters to somewhere in the province of Szechuan and to conduct its operations from there as long as possible. Meanwhile, the Commission is establishing a subsidiary base in Taiwan and planning a program for that Island in the near future. Mr. Chiang Mon-lin, Chairman; Mr. T. H. Shen and Mr. Y. T. “Jimmy” Yen (well known for his leadership in the Mass Education Movement) are the Chinese members of the Commission. Mr. Raymond T. Moyer and Mr. John Earl Baker are the American members.

During the short time it has functioned, the Commission has initiated and financed in various rural areas such projects as building dikes to control floods, thus reclaiming lost farmlands; by building and repairing irrigation systems to make more land available on which to grow food; and by programs for seed multiplication and distribution, for fertilizer and pesticide distribution, for cattle rinderpest control and for anti-malaria campaigns. It has supplied funds for a Mass Education Movement, giving thousands of Chinese an opportunity to learn to read and write their own language.

The cost of these projects to date has been largely financed by counterpart funds with all the accompanying troubles due to currency deterioration. To date, only about US$600,000 has been spent to finance the Commission’s work; but from now on, with little counterpart funds available, more U.S. dollars will have to be used.

This type of aid to the Chinese people is well worthwhile and costs relatively little. The Commission has done a very creditable task under most trying circumstances. The five members are working as a team with one objective—to better the living standards of the great mass of Chinese who live in the rural areas.

On August 19, the Nationalist Government initiated its so-called currency reform, issuing new Gold Yuan currency and fixing the rate of GY4 to US$1; at the same time prices and wages were frozen by decree. Of course, an across-the-board price freeze is always unworkable except as a momentary arrangement. Maladjustments between costs and prices and changing conditions in markets make it impossible for such decrees to load to anything but widespread violation and the stifling of production and distribution. Enforcement of these decrees varied in different sections of the country. In Shanghai where enforcement was strict and accompanied by the death penalty, the final result was cessation of trading between the city and the surrounding country. Refusal of farmers to ship their locally grown rice to Shanghai brought about serious food shortages in early November. It was about this time the Americans had been warned by our Embassy and Consular authorities to leave the Shanghai area. The situation was tense but fortunately the danger of food riots was averted by the immediate shipment of rice from Hongkong pending delayed arrival of ECA rice ordered from Burma, the Governor of Hongkong having graciously responded to our request for a loan of rice, afterwards repaid.

When the new currency was established, the Generalissimo called upon everyone to turn in their gold, silver, and foreign exchange for the new GY notes. An appeal was made to the people on patriotic grounds but penalties were fixed for failure to comply; and simultaneously the Nationalist Government promised that every effort would be made to balance the national budget or at least to reduce the budget deficit. The response was encouraging. Many loyal Chinese turned in their bullion and foreign exchange; but no real attempt was ever made by the government to carry out its promises. No new taxes were imposed and nothing was done to cut down the government’s overhead.

Meanwhile the Communist military forces became increasingly and successfully active. The important Shantung city of Tsinan fell to the Communists in late September. Mukden collapsed a month or so later, with the Nationalist army offering no real resistance, surrendering en masse, and turning over a great store of arms and ammunition.

Following Mukden’s surrender, the threat of further Communist advances north of Nanking as well as along the Peiping–Tientsin corridor precipitated fear and unrest. Warnings from our own Consular authorities for Americans to evacuate Communist-threatened areas accentuated the growing tension. About the same time, the Nationalist Government lifted its restrictions on wage and price controls as well as on currency. Trading was resumed between the cities and the countryside; but the GY exchange rate declined rapidly. By December 1, 1948, US$1 could buy GY40; by February 1949, it could buy GY2,000; and by the middle of April, US$1 could buy GY12,000. From then on, the spiralling rate became astronomical. Many patriotic Chinese who had turned in their gold, silver, and foreign exchange for Gold Yuan suffered a total loss; and, to put it mildly, confidence in the government was shaken to the limit. Under such circumstances, the difficulties our Mission faced with its payrolls, its Chinese counterpart funds, as well as differing exchange rates in the various cities in which it operated, may be readily imagined.

Tientsin was occupied by the Communists about the middle of January. On hand there at that time were ECA food, cotton, yarn, and medical supplies valued at about US$4,500,000. Our Tientsin office had orders to continue to distribute these supplies in the usual way provided the Communists would allow it to do so without interference and with freedom of movement to its staff; but the supplies were seized on the ground that they had been the property of the Nationalist Government.

I should mention here the trying situation faced by Mr. Ritchie Davis, Director for North China, and his staff at Peiping, as well as by Regional Director James Ivy and his staff at Tientsin, when these two cities were occupied by the Communists. All concerned stuck by their guns, and did the best that could be asked for under trying conditions. Tientsin came under shell fire; and there was plenty of tension in both cities. We were all relieved when, after two months, nothing remained for the staffs to do and the Communists permitted them to leave. All arrived in Shanghai, reporting for further duty.

The Nationalist armies suffered decisive defeats on the fronts north of Nanking in early December. It appeared then that, if the Communists really wanted to push forward, Nanking could be occupied in ten days or two weeks. Meanwhile the military situation along the Peiping–Tientsin corridor grew rapidly worse for the Nationalists. There were rumors that the Generalissimo should step out as President, and turn over his office to the Vice President. Nationalist reverses both on the military and economic fronts developed sentiment for a change in leadership. In late December and early January, the Communist military advance north of Nanking slowed down, although the Communist pressure on the Peiping–Tientsin corridor became greater than ever. And there were increasing signs of dissatisfaction with the Generalissimo and an ever-growing feeling that the Nationalists should make an effort to conclude some kind of peace with the Communists.

Finally, on January 21, 1949, word came that Chiang Kai-shek had left Nanking to retire to Chekiang, and had turned the Government over to the Vice President, Li Tsung-Jen. On January 25, I conferred with the latter in Nanking, with Ambassador Stuart interpreting. The Vice President considered the Nationalist military situation hopeless north of the Yangtze and believed that efforts should be made to contact the Communists, to ascertain what kind of peace might be effected. General Fu Tso-yi,⁴⁴ following the departure of the Generalissimo, had had to negotiate a peace on his own; and Peiping was occupied by agreement a few weeks later.

Meanwhile the exodus of the Nationalists to Taiwan was beginning. Shortly before his retirement, the Generalissimo had appointed a new Governor for Taiwan, General Chen Cheng, Chiang’s former Chief of Staff. I spent three days on that island, February 3–6, then conferred with Ambassador Stuart and Vice Admiral Badger at Tsingtao on February 7. I flew down to Canton on February 9, to attend a CUSA meeting presided over by Prime Minister Sun Fo; returned to Shanghai; and departed for Washington on February 16.

You will recall my visit to Washington in late February and March when the Congress was considering further economic aid to China. The China Aid Act was amended extending the time ECA should spend the $275 million originally appropriated, from April 3, 1949 to February 15, 1950. It was estimated then that we would have left to spend about $54 million. However, prior to April 3, commitments had been made to take care of commodity programs, food, cotton, and petroleum products sufficient to secure their continuance for some three months.

I should mention at this point that when you were in China last December, we discussed what should be done about the $70 million Replacement and Reconstruction Program, recommended by Mr. Charles Stillman and the consultant group working under him. This group of well chosen experts had spent three or four months in various parts of China, making an extensive survey of railroads, power plants, fertilizer plants, sugar mills, etc., calling for capital funds to be spent over a period of years. They had submitted exhaustive reports accompanied by specific recommendations for various projects in various areas. Some pre-project engineering costs of a minor nature had been incurred but no decisions yet made on final commitments. You asked whether or not, if these were our own moneys, we would commit them, knowing it would take several years to complete many of the projects. My answer was, because of all the uncertainties, military and political, fearing that areas held by the Nationalists might soon fall to the Communists, I would not now risk any capital funds. You very properly said, “Then we should not spend American taxpayers’ money where we would not be willing to spend our own.” As a result, except for the completion of pre-project engineering, none of the $70 million tentatively allocated for replacement and reconstruction has been spent. Unfortunately, the thorough job undertaken and completed by Mr. Stillman’s group can now be classed as “Love’s labor lost”.

I returned to Shanghai on April 21, and learned that British war vessels in the Yangtze River had been shelled by the Communists, the day before. I flew to Nanking at once, conferred with Ambassador Stuart, and returned to Shanghai a few hours before the Nationalist forces abandoned their capital. After consulting with Vice Admiral Badger, we decided to transfer Mission headquarters immediately to Canton, leaving only a small regional staff in Shanghai. With the Navy’s cooperation, the move south was accomplished within a week.

I have already paid tribute to Colonel Griffin and to the efficiency and loyalty of the Mission’s staff; but particular mention is due to the extraordinary task accomplished at both ends when our headquarters were transferred. On forty-eight hours’ notice, not only was the staff and office equipment loaded at Shanghai but at Canton, Regional Director H. T. Sampson and his staff unearthed housing and office space—an almost incredible achievement due to the already frightfully crowded conditions existing in Canton.

On May 11, I paid another visit to Taiwan; and flew into Shanghai the next day for a few hours’ conference with our Regional Director, Mr. George St. Louis, and others, flying back to Canton the same night. On May 15, accompanied by Mr. Moyer and Mr. Shen of the Rural Reconstruction Commission, as well as several members of their staff, Colonel Griffin and I flew to Szechuan Province to familiarize ourselves with some work the Rural Reconstruction Commission was doing or proposed to do in that province. We returned five days later. I left Canton on May 24, spending a night in Hongkong, proceeding thence to Tokyo where I spent three days discussing China matters with some members of SCAP’s⁴⁵ staff. I reached San Francisco May 29 and flew to Washington to confer with you for a few days.

Meanwhile on May 25, the victorious Communists took over Shanghai, the Nationalists having offered very little resistance and having evacuated most of their troops by water. Although ECA had been trying to maintain a 30-day food supply in Shanghai for rationing purposes, very little of our food stocks were left in Shanghai when the Communists entered. However, we did have substantial stocks of raw cotton, not only in the godowns but being processed in the mills. While many raw cotton shipments had been diverted to Japan prior to Shanghai’s downfall, we had felt it essential to keep the textile mills going as long as possible. This is the most important industry in the city and employs upwards of 250,000 people. We had in Shanghai also about two weeks’ supply of petroleum products. The total value of all stocks now in Shanghai is approximately US$13,000,000. Prior to the Communists’ entry, our regional office, in charge of Mr. George St. Louis, was staffed with only four Americans. To date, the Communists have not attempted to take possession of any stocks to which we still hold title and present indications are that we perhaps may be permitted to distribute those commodities in the usual way. To date, the Communists have maintained law and order within the city as well as could be expected.

Within the next few weeks our American staff in China, including four temporarily assigned to Japan who will arrange for the disposal of diverted cotton cargoes, will not exceed twenty. We plan to maintain customary food distribution for rationing purposes in Canton and Swatow as long as those cities remain in Nationalist hands. And I am sure Mr. Norman Meiklejohn, now left in charge of the Mission to China, will handle well the liquidating task assigned to him.

In a separate letter I am reporting on the situation in Taiwan⁴⁶ where presently we are maintaining a staff of five Americans headed by Regional Director Loris Craig.

Some four months ago, after receipt of numerous inquiries and au official request from the Chinese Government for a $500,000 allocation to aid Chinese students studying in the United States, we undertook in consultation with the Department of State to see what might be done under authority granted by the Congress to ECA. Many of those students because of Civil War and inflation had been deprived of financial support from their homeland; if they were to complete their studies, they needed aid from some outside source.

As a result, you authorized an emergency allocation of $500,000 from our appropriated funds to the State Department to be used as a working fund from which grants would be made to Chinese students engaged in certain scientific and technical studies in this country. To date, the total funds expended or earmarked amount to about $460,000, and some 500 students have so far been assisted.

I have referred previously to our Mission as a successful failure. On second thought, that is a misnomer for what we have really been doing is fighting a rear guard action against tough odds. I do not feel that the funds spent and the efforts made have been wasted. On the material side, people have been fed, employment has been continued in the textile mills, rioting and civil disturbances have been averted more than once. Listing the intangibles is more difficult. Each person has his own ideas of what they are; but I would like to name mine:

First—I would place the real friendship of many high-class and truly patriotic Chinese, and

Second—I would name the respect that grew slowly with every individual and group with whom the Mission organization came in contact, for the honesty of purpose and complete integrity of the organization.

Personally I feel it has been not only a rare experience but a privilege to have served as Chief of the ECA China Mission. One thing the year has taught me—you cannot afford to hold to fixed ideas. You must keep fluid, face things as they are and not as you would like to have them.

Sincerely,

Roger D. Lapham

41. Copy transmitted to the Department by Mr. Cleveland on August 5.
42. 62 Stat. 158.
43. Vice Adm. Oscar C. Badger, Commander, United States Naval Forces, Western Pacific.
44. Then Commander in Chief of Bandit Suppression Forces in North China.
45. Supreme Commander, Allied Powers in Japan.
46. Not found in Department of State files.