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

893.50 Recovery/8–1549

The Chinese Ambassador (Koo) to the Secretary of State

Washington, August 15, 1949.

Dear Mr. Secretary: As you have been aware, the Chinese Government has been and is engaged in a strenuous effort to resist the Communist aggression carried on by a regime acting in the interest of a foreign Power which is bent upon achieving world domination. Although the Chinese Army has sustained a number of reverses in past months and been obliged to withdraw in several areas, the Chinese Government is firmly resolved to continue its struggle in order to preserve the independence of China and the freedom of the Chinese people. This purpose, my Government believes, is in full accord with the basic principles by which, according to your recent statement,⁷² the policy of the United States Government will be guided in regard to China and the Far East in general. Moreover, in recent weeks the morale of the troops has risen and their fighting has much improved.

2. The next six months, however, constitute a critical period in the continued efforts of the Chinese Government to stem the tide of Communist aggression. The success or failure of its struggle during this period may have a decisive influence and effect on the destiny of China and perhaps of Asia as well. The Chinese Government will continue to exert its utmost in the spirit of self-help but it is also in great need of aid and support from the United States.

3. No application for a continuation of military aid was made last March along with the request submitted for economic aid,⁷³ inasmuch as it was the earnest hope of the Chinese Government that with the lull at the time in fighting, a truce could be arranged with the Communist leaders to be followed by a satisfactory peace settlement.⁷⁴ But this objective was found to be unattainable due to the lack of good faith on the part of the Communists bent upon seizing control of the country by force and to their sudden resumption of hostilities against the Government troops.

4. At present, fighting is taking place in Kansu, Hunan, Kiangsi and Fukien Provinces. The line of defense which the Army is determined to hold extends from the Northwest down along the northern border of Szechwan Province and through Hupeh and Hunan into Kiangsi and Fukien to Foochow and the eastern coast.

5. The Chinese Government after a recent conference with the military leaders has adopted a unified system of command, an overall program of defense and attack, and a practical plan of coordinating the action of the various war areas as well as the action of the Navy and the Air Force with that of the Army. To help raise the morale of the armed forces, a part of the military pay is now being made in silver dollars. But with the limited financial and military resources at the disposal of the Chinese Government, there is a pressing need of American aid and support.

6. The special grants in aid⁷⁵ extended by the United States Government to China under the China Aid Act of 1948 are deeply appreciated. This aid has been used for procurement of arms, ammunition and military supplies. The first shipment under this aid program reached China toward the latter part of November, and the bulk of the supplies arrived in Shanghai and Formosa in the first months of 1949. These were used effectively in the fighting in and around Shanghai which broke out in April of this year. They have also been of much help to the Chinese armed forces in the fighting which has been raging in Central and South China and in the North-western Provinces. Less than 50% are left and will soon be used up as the fighting becomes more intense and widespread. For this reason, more military aid, especially in the form of light arms and ammunition, aircraft and certain kinds of naval materials are urgently needed to enable the Chinese armed forces to continue the resistance against the Chinese Communist forces of aggression. The sum proposed for this purpose is $287 million.

7. Of this amount, $50 million is to cover costs of purchasing silver and coining silver dollars to be used as part of the military pay for Chinese troops and for a portion of their subsistence expense. This measure is highly desirable in order to raise the morale of the Chinese armed forces, as experience with the fighting of the Chinese forces in recent weeks has attested the importance of paying the soldiers, sailors and airmen in silver. Owing to the limited financial resources of the Chinese Government, it has not been possible to apply this practice to all the armed forces. But in the interest of sustained effective resistance to the Communist aggression, the need of the proposed item of military aid is both pressing and essential.

8. In order to promote confidence that the new aid, in whatever form it may be, will be put to the uses for which it is intended as effectively as possible, the Chinese Government proposes that a mission of military experts headed by a top-ranking representative be sent to China to assist the Chinese Government and the Chinese Army in the distribution and employment of the equipment and supplies thus procured. The Chinese Government considers this cooperation to be highly desirable and will welcome it.

II.

9. As regards the need of economic aid, it will be recalled that on March 31, 1949, 1 addressed a letter to you submitting a program for continued economic aid. Although not having a reply yet to my letter, I understand that Congress has by Section 12 of Public Law 47⁷⁶ (81st Congress) approved an extension of the period for using the balance of the China aid fund through February 15, 1950, and authorized the President to determine the manner, terms and conditions for using this aid. It is estimated that as of August 1, 1949, approximately $90 million out of the original $275 million fund for economic aid to China remains unobligated.

10. The economic situation, in the view of the Chinese Government, is as important as the military situation. The two fronts are intimately linked together and react upon each other. On account of the unfavorable developments in the military situation and the transfer of the seat of the Chinese Government from Nanking, revenue has considerably fallen off, while reductions in expenditure cannot be correspondingly great, thus enhancing the difficulty of balancing the budget. New measures and radical reforms have been carried out to cope with the financial stress, such as the considerable reduction of the personnel of the different departments of the Government and the reintroduction of the silver currency standard,⁷⁷ thereby curbing to some extent the inflation of prices and the economic distress of the people. Nevertheless, economic aid is indispensable to tide over the situation for the next six months during which fighting to stop the Communist advance is expected to intensify.

11. It is therefore proposed that the balance of the economic aid fund be made available to further carry out the purposes of the China Aid Act of 1948 as extended and modified by Public Law 47 (81st Congress). In addition to a practical commodity program to help efforts toward economic stability, there is also an urgent need of using a part of the balance, namely, $40,000,000 for purchasing silver bullion from Mexico for coinage into silver dollars to finance (a) exports of strategic materials to the United States, such as wolfram, antimony, tin, tung-oil and bristles, and (b) purchases of indigenous products, such as rice and other food products for ECA rationing and distribution. On several occasions in recent months, I ventured to urge approval of this proposal by the United States Government, more particularly the request to use a portion of the balance for the purchase of silver for coining silver dollars. The Chinese Government continues to believe that this proposed use is within the purview of the China Aid Act of 1948 and, by virtue of Section 12 of Public Law 47 (81st Congress), it falls within the discretionary powers of the President.

12. It is the hope of the Chinese Government that the stop-gap program based upon the proposed availability of the unobligated balance of the ECA China aid fund will be accompanied by an interim program of aid for a period of six months from September 1, 1949, to sustain as a special measure the newly adopted silver currency standard. The reintroduction of the silver dollar as the currency has helped to restore public confidence to a considerable extent and to raise the morale of the fighting forces as well as that of the civilian population. In order to conserve and enhance this satisfactory result, it is necessary to relieve the drain on the dwindling reserve arising from the fiscal deficit by an interim aid program calling for US$36,000,000 for the above-mentioned period of six months.

13. In the event of the United States Government wishing to obtain fuller and more direct data regarding the financial, economic and currency situation in China before giving consideration to the proposed interim aid program, the Chinese Government will welcome a group of financial and economic experts to be sent to China as soon as possible. This group can be dispatched either as an independent unit or attached to the proposed military mission. This group, if dispatched, will receive the fullest cooperation of the Chinese Government in undertaking all necessary investigations and making recommendations to the United States Government regarding interim and post-interim aid requirements.

III.

14. Accordingly, by instruction of my Government, I beg to submit two Memoranda, one on military aid⁷⁸ and the other on economic aid,⁷⁹ for the favorable consideration of the United States Government. The reasons for the respective amounts proposed and the uses to which they will be put in each field are fully explained therein. If any further information is desired to facilitate consideration of the request, my Government will gladly furnish it to the best of its ability.

15. I beg to add that if Congressional legislation is required for granting the proposed aid, it is the hope of my Government that the United States Government will see its way to obtaining such necessary legislation before the present session of Congress goes into recess.

With high esteem,

Yours respectfully,

V. K. Welllington Koo

[Enclosure]

The Chinese Ambassador (Koo) to the Secretary of State

Memorandum on Stop-Gap and Interim Economic Aid to China

On March 31, 1949, the Chinese Ambassador addressed a letter to the Secretary of State, enclosing a Memorandum on the Continuation of U.S. Aid to China. Since the presentation of the Memorandum four months ago, vast changes have occurred in China both in the military and the economic fields. Reorientation of views and plans on what will constitute effective assistance to the Chinese economy is thus rendered imperative.

Perhaps the most important change that has recently occurred in the economic field is the reintroduction, since July 2, of the silver currency standard. The collapse of inconvertible currencies has left the Government with no alternative except to revert to a hard, metallic currency standard. Before the currency reform of 1935,⁸⁰ silver was the medium of exchange in China for centuries. In the minds of the people hard currency is still associated with stable price structure. The Chinese Government hopes that, through the introduction of hard money, a temporary halt may be called to the galloping inflation, and that the return of public confidence in the national currency may facilitate the introduction of measures of fiscal reform and bolstering the sagging morale.

As a corollary to the new currency measure, the Chinese Government is attempting to improve its fiscal position by overhauling old taxes and instituting new taxes, and by retrenchment in expenditure. In spite of such efforts, however, the Government faces a monthly deficit of between Silver $80,000,000 and $35,000,000. Governmental expenditure is estimated to be around Silver $45,000,000 per month, of which Silver $30,000,000 go to payment for soldiers and other military expenses. Revenue is approximately Silver $10,000,000 a month, but is expected to be increased to $15,000,000 a month when measures for fiscal rehabilitation take effect.

As an emergency measure, the current fiscal deficit is paid out of the Government’s reserve in gold, silver, and foreign exchange. In so doing the fiscal deficit is prevented from directly contributing to the devaluation of the currency, which would necessarily occur if increased issue is resorted to. It is obvious, however, that the drain upon the Government’s reserve cannot long continue without causing public alarm and loss of confidence. Also, as long as the war against the Communists continues, the probability of effecting a balance between governmental revenue and expenditure is remote. Furthermore, the calculated depletion of the Government’s foreign exchange reserve imposes further difficulties upon the Government in meeting foreign exchange requirements for urgently necessary purchases abroad. External economic assistance, therefore, will be needed for the continuous importation of essential commodities, for the replenishment of the governmental reserve, and for the provision of sufficient silver to maintain the newly adopted metallic currency standard.

I. Stop-Gap Program

It is estimated that, as of July 1, 1949, upward of 90 million dollars out of the original 275 million dollars fund for economic aid to China remains unobligated. Of this sum a part has already been covered by existent procurement authorizations, which, however, are inactivated for the moment by changes in the current military and political situation. Through cancellation and revision and refund from diversions, upwards of 90 million dollars are available for programming in the continued operation of the China Aid Program.

It is the desire of the Chinese Government that this fund should be immediately made use of to produce the maximum amount of benefit to sustain the Chinese national economy. To that end the following proposed stop-gap program is herewith submitted:

1. Silver bullion $40,000,000

It is proposed that the amount indicated should be earmarked for the acquisition of silver, chiefly from Mexico. The silver so acquired will be used to finance (a) purchases of export commodities such as wolfram, antimony, tin, tungoil and bristles, and (b) purchases of indigenous products such as rice and other food products for ECA rationing and distribution. ECA participation is requested in the effecting of all such purchases. After the products are sold, the foreign exchange and domestic currency proceeds will be used under the joint supervision of ECA and Chinese Government representatives.

As current movement of China’s export[s] is much hindered by the lack of ways and means of financing, the use of aid fund for such purposes will directly contribute towards the sustenance and revival of China’s export trade.

2. Coarse Cotton Fabrics$12,000,000

After the loss of Shanghai, there is a serious shortage of cotton fabrics and cotton yarn in the Government controlled territory. Some $12,000,000 worth of U.S. Aid cotton has previously been diverted to Japan. It is proposed that arrangement may be made with SCAP⁸¹ to barter this cotton for finished products, chiefly coarse cotton fabrics, to be distributed in Taiwan and other South China ports to meet the urgent local requirements.

3. Other Commodity Programs

Other ECA China Aid commodity programs may be continued as heretofore at a much reduced scale.

(a) Rice $12,500,000

50,000 tons for continuing the rationing program in Canton and Swatow, from September, 1949 to February, 1950.

25,000 tons for initiating the rationing program in principal cities in Hainan Island, from October, 1949 to February, 1950.

(b) Fertilizers$5,500,000

50,000 tons for Taiwan requirement. Agricultural production in Taiwan is still seriously handicapped because of shortage of fertilizers. Although the amount indicated is insufficient for Taiwan requirement, it is hoped that additional amounts will be acquired by Taiwan with the use of its own resources.

(c) Petroleum Products $8,000,000

It is estimated that the amount indicated will be sufficient to purchase South China and Taiwan requirements for the period July, 1949 to February, 1950.

Total $78,000,000.

Of the China Aid fund still available, $8,000,000 has already been earmarked for the operational expenses of JCRR.⁸² Whatever sum that may still be left over can be held as a reserve for other emergency uses.

It is the belief of the Chinese Government that all the proposed uses are aimed at achieving economic stability in China, and are thus generally consistent with the purposes of the China Aid Act of 1948. Furthermore, Section 12 of Public Law 47 (81st Congress), in extending the period during which the appropriated China Aid fund may be used, gives the President broad powers to determine the manner, terms and conditions of the aid.

II. Interim Program

The stop-gap program outlined above requires no further legislation. It can be put into effect immediately, provided, of course, the United States Government will agree to it. For a limited period of time, the program will take care of China’s essential import requirements, and will provide means to finance China’s exports or indigenous procurement. But to sustain the newly adopted silver currency standard, additional external aid is needed.

It has been stated that the Chinese Government embarked upon the silver currency standard not as matter of free choice, but as a matter of necessity. The reserve is inadequate. As long as the war continues, the Chinese Government cannot see its way clear to balance revenue with expenditure, although serious effort will be continuously exerted in that direction. For a six-month period, the fiscal deficit will amount to Silver $210,000,000. If the proposed Military Aid Program is approved, approximately Silver $90,000,000 of this deficit will be taken care of. The remaining deficit will thus amount to Silver $120,000,000, or roughly the equivalent of US$70,000,000.

On July 8, the Government’s total reserve, including gold, silver, and foreign exchange, amounted to the equivalent of US$220,000,000, the gold bullion being converted into U.S. dollars according to the market rate. If the conversion is made at the U.S. official rate, the U.S. dollar equivalent amount of the reserve will have to be reduced by US$50,000,000. Out of this reserve US$40,000,000 has been earmarked as reserve for the Taiwan currency. Furthermore, because of the stepping up of Communist attack upon South China, inroad has been made in the reserve since the first week of July to meet emergency military expenses, for which complete figure is not yet available. Continuous payment of the fiscal deficit out of the Government’s reserve, therefore, imposes a severe strain upon that reserve. If no external aid comes to the rescue, public confidence in the new currency cannot be long sustained.

It is proposed that, to sustain the Chinese currency and public morale in carrying on the war against the Communists, an interim aid program to the extent of US$6,000,000 per month be initiated to meet about one-half of the monthly fiscal deficit, to be matched by an equal amount from the Chinese Government’s own reserve. For a six-month period, the interim aid program will amount to US$36,000,000.

In making this proposal, the Chinese Government is not unmindful of the position hitherto taken by the United States Government, namely, that the United States aid is, as a rule, not meant to be used by recipient countries for fiscal purposes. The situation in China, however, requires special consideration and treatment. The Chinese Government has been under the strain and stress of the exigency of war, almost continuously since V–J Day. The Communists are relentless in their attacks upon all phases of national economy. Under the prevailing circumstances, the Chinese Government cannot see its way clear to achieve fiscal balance without substantial external aid.

If the United States Government desires additional fiscal data and on the spot investigation before final action is taken, the Chinese Government will welcome the immediate dispatch to China of an economic group, either as an independent unit or attached to the proposed military mission. This group may undertake all necessary investigations in China, and make recommendations to the United States Government on all matters pertaining to interim and post-interim aid requirements. In addition, the Chinese Government will welcome advice and constructive proposals from the group on currency, fiscal reform, and all related matters.

Washington, August 15, 1949.

72. Issued on August 5 as press release No. 604; for text, see Department of State Bulletin, August 15, 1940, pp. 236–237.
73. See the Chinese Ambassador’s letter of March 31, p. 671.
74. For correspondence on this subject, see vol. viii, “Political and military situation in China”, chapter II.
75. For correspondence on this subject, see Foreign Relations, 1948, vol. viii, pp. 73 ff., and ante, pp. 599 ff., passim.
76. Approved April 19; 63 Stat. 50, 55.
77. See telegram Cantel No. 683, July 3, from the Minister-Counselor of Embassy in China, p. 793.
78. For memorandum on military aid, see p. 529.
79. Infra.
80. See telegram No. 641, November 4, 1935, 9 a. m., from the Consul General at Shanghai (Cunningham), Foreign Relations, 1935, vol. iii, p. 629.
81. Supreme Commander, Allied Powers in Japan.
82. Joint Commission on Rural Reconstruction. For correspondence on the establishment of this body, see Foreign Relations, 1948, vol. vii, pp. 601 ff.