Foreign Relations of the United States, 1951, Korea and China, Volume VII, Part 2

794A. 5 MAP/9–1451: Telegram

The Chargé in the Republic of China (Rankin) to the Secretary of State

secret   priority

Taipei, September 14, 1951—4 p. m.

367. This is joint message to State, Defense, ECA from Rankin, Moyer, Chase. Ref Ecato 611 June 30 and Toeca 701 July 26.¹

Part A.

1. Chi Govt making serious effort solve its financial difficulties, close gap between revenues and expend and act on US memo of July 20² re effective controls over expenditures.

2. In attempt meet cash budget deficit period August thru December reported Toeca 701 Chi Govt anticipates reducing certain budgeted and other items of expend saving total perhaps NT $12 to 13 million monthly. Also negotiating sale govt owned textile plant and obtained loan US $2 million New York agency Bank of China.

3. This leaves substantial uncovered portion which Chi Govt now planning meet thru compulsory savings plan with goal NT $150 million. Present plan requires collection NT $30 million from Prov Importers and Exporters Assn, NT $60 million from other business enterprises, balance NT $60 million from public with distribution based on existing household tax. Propose set aside stocks in govt industries as security for loans on which repayment begins 1954, giving holder option take shares such stock in repayment at anytime. As now stands Chi Govt expects put plan into effect within one week.

4. Consequences savings plan feared are:

a. Serious popular dissatisfaction this measure which comes on top heavy taxation and other levies, especially groups readily imposed on, as farmers.

b. Decreased confidence in govt on grounds breaking earlier promise not force further levies this kind during 1951.

c. Serious econ drain on public affecting their will and ability build up essential agric, industrial production.

d. Criticism by Formosans of this levy for US which will receive partial blame its undesirable effects.

5. Therefore Emb, ECA and MAAG strongly recommend:

a. Immediate action by ECA outlined under part B in conjunction other Chi Govt measures as alternative to compulsory savings plan.

b. US efforts obtain Chi acceptance of control measures in line purposes July 20 memo as outlined under part C.

6. Our opinion time appropriate make approach on two problems together. When approaching Chi Govt on steps proposed part B wld exert every effort make it appear Chi Govt itself proposes withdrawal compulsory savings plan due potentially serious econ, social polit consequences and requests US consideration measures available to it. Believe psychologically good strategy US attempt accede this request and apply advantage against current efforts obtain satis agreement outlined part C.

Part B.

1. Besides bad effects proposed compulsory savings levy outlined part A, Emb, MAAG, ECA agree such alternatives as resumption gold sales or substantial use printing press wld lose appreciable ground gained on econ stabilization front recent months and shld be avoided if at all possible.

2. Prolonged consideration here indicates most effective and desirable stop-gap measure available to ECA is estab in cooperation with Bank Taiwan of additional fund of not less than US $4 and not more than US $7 million of our ECA appropriation to enable increase fon exchange sales available private importers and to industrialists on Formosa to import prescribed categories commodities, indus equip. Our judgment adequate MR for sales such exchange exists.

3. Mission proposal contemplates ECA taking over financial average US $1 to 2 million monthly of essential import applications presently financed by Bank Taiwan from own resources. ECA-provide fon exch allocation wld be made avail to importers by sub-auth thru regular fon exch screening procedure in which ECA now represented. Such arrangements wld enable Bank Taiwan use own funds thus freed to finance additional import certificate sales, also under regular screening processes now in effect. Present bank policy on sale import certificates requires 100 percent NT dol payment fon exch purchases soon as application granted. Present fon exch sales Bank Taiwan average approx US $6 mil monthly. Proposed ECA action shld enable total sales to increase by approx US $1 to 2 mil monthly, with result prompt increase local currency availabilities which wld then be loaned by bank to govt. Plan wld use existing PA’d to fullest extent possible but might require some new PA’s covering essential imports to be worked out after consultation with Chi.

4. Counterpart deposits wld be required by ECA on usual basis incl present timing which means notification to deposit in special acct three months after notification of payment by ECA controller. De facto result wld be Chi Govt wld receive NT dols proceeds or fon exch sales for several months prior to counterpart deposit obligations.

5. Believe advantages far outweigh presumed impossibility exercise close control local sales prices goods imported this prog or manner of handling by importers since local currency advanced before receipt of goods and other factors make difficult fol goods as closely after arrivals as presently done most ECA items. Mission cld and wld check fully on actual receipt of goods for which fon exch allotted and watch for possible attempts re-export.

Part C.

1. US agencies now discussing with Chi Govt concrete arrangements for effective control expenditures rqstd in July 20 memo. We propose US work toward gen understandings as fol in paras 2 and 3.

2. Emb and ECA wld seek informal understandings estab basis for ESB auth control budget according Ecato 611 incl arrangements for participation by Amers as observers and advisers in providing guidance, using to maximum extent ESB, its subcomites and other machinery. ECA of course retains right make end-use checks. Understandings wld incl provisions covering ESB auth in budget planning; controlled handling any proposed deviations from budget plans, monthly govt reports to ESB of revenues and expenditures incl reports from Treas, Bank Taiwan, and govt enterprises; certain organizational changes related partic to Bank Taiwan and govt enterprises.

3. MAAG wld work out formal arrangements with MND for which Gimo’s approval wld be obtained providing full MAAG participation in budget preparations and plan for expenditure of avail Chi and US resources for mil use, based on mutually agreed plan for defense island and requirements accomplish it. Budget, after joint approval by MAAG and MND, wld require review and recom by ESB.

4. Informal arrangements under C–2 wld depend upon successful conclusion formal arrangements under C–3.

Part D.

1. Urgently rqst auth act immed on recoms part B, and approval our attempts secure Chi Govt agreement control arrangements proposed part C. Due intent Chi Govt act within week on compulsory savings plan must have reply soonest on part B by telecon to ECA mission if feasible.

2. MAAG will submit separate cable requesting personnel required meet MAAG responsibilities budget making and accounting assumed under part C. Essential MAAG personnel requested separately by Gen Chase arrive quickly. Request State and ECA top level approach Def on this.

Sent Dept 367 rptd info Tokyo (PolAd pass SCAP) 45. [Rankin, Moyer, Chase.]

Rankin

1. For text of the former, see p. 1724; the latter is not printed.
2. See telegram 42 to Taipei, July 13, p. 1750.