893.50 Recovery/9–949

The ECA Administrator (Hoffman) to the Secretary of State

My Dear Mr. Secretary: This is written in reply to your request of August 23 for comment by the Economic Cooperation Administration on the Chinese Government’s latest proposals for economic aid to China, as contained in a letter and an accompanying memorandum sent to you by the Chinese Ambassador under the date of August 15.

We have examined the copies of these documents which were enclosed with your letter. Before commenting on them, it may be well for me to review briefly the scope of our recent economic assistance [Page 688] to China, conducted in accordance with controlling legislation and with decisions reached at a meeting between us on May 19, 1949.84

Aid has been limited to the areas remaining free from Communist domination. With successive Communist advances, and particularly following the occupation of Shanghai, economic aid to the China mainland has declined precipitately. Continuing support has been given, on a minimum stock basis, to established food rationing programs in Canton and Swatow. Small fuel shipments have been made to south China. However, no new commitments for commodity programs have been undertaken. There has been no revival of the industrial replacement and reconstruction program which was suspended on December 21, 1948. Although suggestions have been made from time to time by Chinese representatives that a part of appropriated China Aid funds should be used for the purchase of silver to be used in support of the Chinese currency, it has been the view of the ECA that, apart from other considerations, the legislative history of the China Aid Act of 1948 and of Section 12 of Public Law 47 (81st Congress) precluded the use of appropriated China Aid funds for purposes of monetary stabilization or to meet the Chinese Government’s budgetary deficits.

The only aspect of economic assistance to the China mainland which has received somewhat expanding support during recent weeks has been the program of the Joint Commission for Rural Reconstruction.

Aid to Taiwan,85 conducted on a somewhat more flexible basis than assistance for the mainland, has included: Substantial importations of fertilizer and general supervision of its distribution; deliveries of crude petroleum for the Kaochsiung Refinery and of other petroleum products in small quantities; utilization of the services of J. G. White Corporation engineers for advice with respect to various aspects of the Island’s economy; approval of limited aid for expansion of indigenous fertilizer production; and, finally, continuing support for JCRR activities in Taiwan.

The proposals now advanced by the Chinese Government for economic aid would entail the use, in a re-expanded program, of funds remaining from the $275 million appropriated for the purposes of the China Aid Act (which are estimated by the Chinese Ambassador at $90 million but are, in fact, nearer $100 million) and an additional $36 million to be obtained through a new appropriation. The period of time envisaged for the help proposed is approximately the next six months.

[Page 689]

The purposes of the aid requested are described under a “stopgap program” and an “interim program” which together call for:

$40 million to be earmarked for the acquisition of silver for use in financing (a) purchases of export commodities such as wolfram, antimony, tin, tung oil and bristles, and (b) purchases of indigenous products, particularly food for ECA rationing and distribution;

$12 million for coarse cotton fabrics and perhaps other commodities to be obtained from Japan through the barter of ECA cotton diverted to Japan from the China Program;

$12.5 million for continuing support to the food rationing programs in Canton and Swatow and for the initiation of new rationing programs in the principal cities of Hainan Island;

$5.5 million for fertilizers to be used in Taiwan;

$8 million understood to be already earmarked for the operational expenses of JCRR;

the balance of the estimated $90 million (or about $4 million) to be held as a reserve for other emergency uses; and

$36 million, at the rate of $6 million per month which would represent “about one-half” of the Government’s monthly fiscal deficit, to be matched by an equal amount from the Chinese Government’s own shrinking reserve—both amounts to be used for stabilization of the Government’s recently inaugurated silver standard currency.

A first question, in the consideration of such a program, is whether it is capable of realization. Economic aid to China through the ECA, since it was first authorized by Congress 17 months ago, has inevitably depended, for its effectiveness and continuity, upon military security in the areas receiving assistance. The steady succession of territorial losses by the Nationalist Government has led to continuing contraction in the areas accessible for aid and, therefore, in the volume of aid provided. This basic condition, rather than any intention of reducing economic assistance to China, accounts for the fact that during the first year of the program it was not feasible to expend for aid to China more than about three-fifths of the funds appropriated by Congress for the purpose during that year, and the further fact that contraction in the aid provided has continued during recent months until it has now reached a relatively low level.

If the military and political situation should be altered in such a way as to offer reasonable security for a reinvigoration of the ECA aid program in any substantial portion of the China mainland, proposals such as those now advanced by the Chinese Government would appear more realistic than they do under present circumstances when Communist forces are reported to be continuing their advances in both south and northwest China without encountering any decisive opposition in either area.

Pending advice from the Department of State or the Joint Chiefs of Staff which might indicate a significant change in the military and [Page 690] political outlook in China, it is the view of the ECA that a continuation of economic assistance to the China mainland, on the present basis, represents as much as should be attempted at this time. This involves the fulfilling of existing commitments with respect to commodity programs, without incurring any new commitments, and the provision of as much assistance as can be efficiently administered to the program of the Joint Commission on Rural Reconstruction in areas remaining free from Communist domination.

Procurement, in substantial quantity, of silver bullion with which to purchase in China commodities for export and for internal distribution under ECA supervision might, under more stable conditions, afford a significant means of providing assistance. However, with areas in which such commodities are produced and through which they would have to be transported coming increasingly under Communist control or subject to mounting administrative and economic chaos, there is little prospect that such a program could be put into effect in the manner envisaged in the Chinese proposals.

The same considerations apply to the proposed extension and enlargement of the current commodity import programs.

It is the view of the ECA that the provision of silver to China for use in support of the present Nationalist currency, aside from its questionable validity under present legislation, would have only a temporary and limited effect. It would treat the symptoms rather than the causes of financial instability in China. The basic causes are, of course, the unbalanced budget and the scarcity of goods. Only in combination with major measures to combat these causes, supported by some real hope of political stabilization, would silver imports amount to more than a short-range palliative. Moreover, the scarcity of goods in Nationalist-controlled China is now such that any significant increase in available silver would soon tend to increase commodity price levels in terms of silver, with the end result that it would take progressively more and more precious metal to accomplish the same budgetary effects.

The program of the JCRR has been regarded as being in several respects exceptional. It is not dependent upon extensive supply movements. Its projects are designed to produce early and lasting benefits to rural populations in the areas where they are conducted. These projects do not require heavy advance investments and they can be terminated as and when any area falls under or is threatened by Communist domination or control. They seem to offer the best available means of helping to improve the lot of China’s rural people, in the process of which valuable experience is being gained. And they leave in China, while the opportunity of doing so remains, a record of unfailing interest on the part of the American people in helping the people of [Page 691] China. For these reasons, ECA supports a continuation of the JCRR program in south and southwest China for as long as such a continuation remains feasible.

The Chinese proposals under consideration do not reflect any general demarcation between aid to the China mainland and to Taiwan. As indicated above, however, our economic assistance to Taiwan has been kept on a somewhat more flexible basis than aid to the rest of China. The question whether it is to the interest of the United States to accelerate and expand its present economic assistance to the Island, which up to now is relatively remote from current military activity, remains subject to political and strategic considerations which lie beyond the competence of ECA. If in the light of such considerations, however, it should be determined that a vigorous program of economic aid to Taiwan should be developed, it is the view of the Economic Cooperation Administration that with reasonable collaboration from administrative authorities on the Island, such a program involving an expansion of agricultural, industrial and commercial activity, could be conducted to the substantial benefit of the Taiwan economy in a manner which would render it progressively more viable.

In accordance with your suggestion I should be happy, after you have had an opportunity to consider the above comments, to meet with you for a discussion of them.

Sincerely yours,

Paul G. Hoffman
  1. See memorandum of May 19 by Butterworth, p. 646.
  2. For correspondence on this subject, see pp. 261 ff., passim.