Memorandum of Conversation, by the Assistant Chief of the Division of Chinese Affairs (Freeman)

Participants: Dr. Kan Chieh-hou, Personal Representative of Acting President Li Tsung-jen
Mr. Rusk, Deputy Under Secretary
Mr. Butterworth, FE
Mr. Freeman, CA

Dr. Kan Chieh-hou called this afternoon at his request and launched immediately and with vigor into the subject which he had in mind. He referred first to Senator Connally’s statement51 with regard to the Generalissimo’s having “absconded” with $138 million of the Chinese Government’s foreign exchange and stated that he had received a written request from Senator Knowland52 for the facts in the case. Dr. Kan indicated that his reply to Senator Knowland had been somewhat non-committal and that he had referred to Ambassador Koo’s statement53 in reply to Senator Connally. He added, in typical Chinese fashion, that he could not very well do otherwise than to support Ambassador Koo’s remarks.

Dr. Kan continued that he had now received a telegram from Acting President Li giving the “facts” in this matter and showing why Li had up to now been unable to take effective action, institute reforms, clean house, etc. The sole reason for Li’s inaction, according to Kan, was lack of control over the purse strings of the National Government. Kan stated that at the time that Li was designated as Acting President, the total National Government financial resources—both at home and abroad—amounted to approximately US$270 million. At the outset, however, none of this foreign exchange was available for independent use by Li, he said. At the time54 of the introduction of the new silver certificates in south China, Kan stated, Li made a strong plea to the Generalissimo for silver to back the currency and maintain free convertibility. As a result of this request, Kan stated that Li was permitted to purchase 20 million ounces of silver from Mexico using funds of the Central Bank and the Bank of China on deposit in the U.S. Kan stated that the Generalissimo also agreed to furnish from Formosa C$15 million per month in silver to offset government expenditures. [Page 719] Li indicated, however, that National Government expenditures in south China were now averaging from C$45 to 60 million per month; that by the middle or end of October all silver reserves and other funds available to Li would be exhausted; that the C$15 million per month from Chiang would obviously be inadequate; and that, unless additional funds were received by that time from some outside source, Li would be forced to turn over the government to the Generalissimo.

At this point Kan again emphasized the impotency of Li in his present position: (1) Without funds he can take no independent action unless approved by the Generalissimo, and (2) no one will obey Li in crossing the Generalissimo because they realize that he has no funds to back up his orders. Kan stressed that Li, as Acting President and Commander-in-Chief of Chinese forces, has the necessary legal authority and titular power to carry out extensive changes, but he reiterated that such authority is valueless without the requisite funds.

Kan stated that the objectives of the U.S. and Acting President Li were identical in one respect: They were both desirous of getting rid of the Generalissimo. Given the necessary funds, Kan continued, Li would immediately clean south China of the CC Clique, fire incompetent military and civilian personnel, install “liberals”, institute radical reforms, and establish effective resistance to the Communists. In the U.S., Kan asserted, Li would remove Ambassador Koo, together with his Military and Naval Attachés, principal UN55 personnel, and, he implied, most of the high Chinese officials in this country. Kan also made a point of stating that Li would take such an opportunity to wipe out the pro-Generalissimo and anti-State Department lobbies and pressure groups in the U.S. which were threatening the continuation of good Sino-American relations and on which the Generalissimo was presently spending large sums.

Kan then referred to the imminent passage of the discretionary $75 million appropriation for the Far East under MAP56 and stated that this was the opportunity to take the action Li so urgently needed. He urged that, as soon as the legislation was passed,57 a commission of three or five Americans be sent to China with complete authority to spend money where it could best be used, whether in paying silver to troops, supplying small arms and ammunition, supporting the currency, etc. Kan stated flatly that Li did not desire to handle the money personally and that he would have no objection to controllers or even if the National Government itself were not given the funds for the armies but support given directly to individual armies or groups having the best [Page 720] promise of resisting the Communists. Kan also indicated that, if such aid were forthcoming, Li would “take over” Formosa, remove General Chen Cheng,58 install General Sun Li-jen59 as governor, and leave the Generalissimo powerless. Questioned as to how this could be accomplished, Dr. Kan was more than vague. In this connection, Kan stated that the U.S., through negative action and failure so far to assist Li, was actually supporting the Generalissimo and keeping Li in an intolerable and untenable position. The passage of the $75 million legislation, he indicated, would give the U.S. an opportunity to make amends and save the situation.

In response to Mr. Rusk’s question whether such assistance would enable the Nationalists to hold Canton, Kan stated that Li and General Pai Chung-hsi were in a position to hold out without outside assistance for an additional three months. (This statement was in direct conflict with his previous indication that Li would be forced to turn over the government to the Generalissimo by the end of October if outside aid is not forthcoming.) Kan asserted, however, that if U.S. assistance could be provided which would enable Li and Pai to hold out for six months, the Chinese Communist regime would collapse from internal pressures. He stated that he had received information from China to the effect that the large-scale requisitioning of crops by the Communists had left the farmers without sufficient means to buy necessary fertilizer and seed; also that the drafting of manpower from the countryside had further reduced the capacity of the peasants to produce the necessary foodstuffs. Kan predicted that the result would be a wide-scale peasant uprising—if the National Government could continue to hold out for another six months. He pleaded, therefore, that the U.S. assist Li as a six-month gamble and suggested that if the results were not satisfactory at the end of that period the U.S. might wash its hands of China.

Mr. Butterworth inquired what the saving to the National Government would be if its support of lobbies and pressure groups in the U.S. were removed. Kan replied with appropriate gestures that the saving would be “millions”, and added that Li was planning to cancel the passports of all undesirable Chinese in the U.S. and thus “force them to return to China”.

Dr. Kan was characteristically vague in replying to Mr. Freeman’s question as to how the supplying of additional funds to Li would enable him to gain control of Formosa where the Generalissimo already has adequate funds and forces for a prolonged stand. Kan stated that Li had been all prepared to appoint Sun Li-jen as governor of Formosa [Page 721] when the Communists crossed the Yangtze, but that the resultant chaos and moving of the capital to Canton had made such a shift impossible. He added, however, that Sun was absolutely loyal to Li and indicated without further explanation that there would be no difficulty in gaining control of Formosa if Li had the requisite financial backing.

Kan concluded the conversation with a dramatic plea that the U.S. “do something” immediately; that plans be drawn up forth with along the lines suggested by Li to utilize the $75 million appropriation as soon as it becomes law; and that time was of the essence if Li is not to be forced to capitulate to the Generalissimo.

Mr. Rusk and Mr. Butterworth were non-committal throughout in their responses to Dr. Kan and did not give him cause for optimism that his proposal would be acted upon favorably.

  1. Chairman Tom Connally of the Senate Foreign Relations Committee on September 7 made a speech on the floor of the Senate, Congressional Record, vol. 95, pt. 10, p. 12640.
  2. William F. Knowland, of California.
  3. September 8, New York Times, September 9, 1949, p. 10.
  4. In July.
  5. United Nations.
  6. Military Assistance Program.
  7. Mutual Defense Assistance Act of 1949, approved October 6; 63 Stat. 714.
  8. Governor of Taiwan (Formosa).
  9. Commander of Taiwan Defense Headquarters.