5-347 Draft Statement, February 4, 1946

Publisher: The Johns Hopkins University Press
Date: February 4, 1946

Subject: Postwar, China

Draft Statement

[February 4?, 1946] [Chungking, China]

Statement on Surplus Property, Lend-Lease, etc.1

There are many items pending between China and the United States for which a financial settlement must be arranged sooner or later. The U.S. owes China for CN dollar advances to the U.S. Army and Navy in 1945 and presumably 1946. This is an item on the debit side.2 There are many more items on the credit side of the U.S. ledger.

Details are not the important considerations at the present time. But there is one general principle which I think must be establish[ed] as quickly as possible. This principle is that the Chinese Government should immediately agree to offset Chinese financial obligations on account of lend-lease and the purchase of surplus property against U.S. Army and Navy financial obligations to China, and thus permit the rapid transfer to China of vitally need materiel before it is otherwise disposed of.3

I don’t know what the total of China’s obligations to us and of our obligations to China will come to. No one knows at present. But we can be reasonably sure that China’s obligations to the U.S. will far exceed our obligations to China. It would therefore appear to the American public and the Congress highly unreasonable to expect the U.S. to make a settlement in which it would end up by paying China cash for our smaller debt to you and settling your much larger debt to us on credit. Such a procedure would be politically impossible for President Truman to carry out.

On the other hand there is everything to be said in favor of the offsetting principle. It is sound common sense and accords with normal financial practice. What is more, I am certain that it accords with China’s self-interest.

She would more speedily acquire a large amount of vitally needed supplies from our stocks of surplus property, transfer of which is being held up by higgling over the terms of payment. I particularly have in mind the Calcutta trucks and the dockyard equipment, both of which China urgently needs.4 And soon we will have to deal with the ships, machines, electrical equipment, etc., which China may wish to acquire from our Pacific surplus property stockpile.

It would facilitate the cleaning up of the lend-lease slate. I am told that it would help, not harm, China’s foreign exchange position. For China would have to pay out much less cash and would be able to get better terms of payment with the acceptance of this principle in the overall settlement than if there were protracted negotiations in which each single item were treated separately and independently. And China would most probably end up by having more real wealth in the form of road and river transportation, machinery, etc., to show for it.

The principle is no less desirable from the U.S. point of view. Without it the President could not defend any financial settlement with China to the Congress and the people. People in the United States and consequently the members of Congress are now aggressively economy-minded in complete contrast to their attitude throughout the war. They would ask many searching and embarrassing questions.

They would demand to know why we should be paying cash to China for goods and services received during the war of the very same kind that were rendered to us everywhere else among the allies as reciprocal aid when we were selling large lots of valuable material to China after the war on very long term credits. They would also ask what we had done about all the lend-lease we had given and were giving to China.

I seriously doubt whether we could put such a deal over. I know that it would place Mr. Truman in a most embarrassing political position, though his real desire is to lend assistance to China in every way possible. He wants to proceed on a generous basis and to do this he must not be exposed to the inevitable and bitter repercussions and political recriminations that would follow the policy now insisted upon by China.

But suppose for the sake of argument that we could proceed in that manner. The net result would be that it would seriously prejudice China’s economic and political prestige in the United States. It would make the American people that much less willing to help China in the future. And it would make it just that much harder for the American Government to lend China the help it genuinely desires to give.

Therefore, it seems clear to me, that from every point of view, whether of China’s short or long-range economic interest, as well as of the broad considerations of future Sino-American relations, China has everything to gain by accepting the principle of offsets to the Chinese financial obligations referred to.

The surplus property administrators are pressing for action to clear up their responsibilities and unless action is promptly taken, rather than long drawn out negotiations, the material desired and so badly needed by China will go elsewhere.

Document Copy Text Source: Records of the Department of State (RG 59), Lot Files, Marshall Mission, War Department, Originals, National Archives and Records Administration, College Park, Maryland.

Document Format: Typed draft.

1. The copy-text for this document is a typed, triple-spaced, edited draft. The editors have neither found a final version nor ascertained that Marshall ever gave this statement to anyone. Documents on U.S.-China financial arrangements between the end of the war and early February 1946 are in Foreign Relations, 1945, 7: 1125-1205, and Foreign Relations, 1946, 10: 911-34.

2. On February 13, Marshall asked the Treasury Department for an “extremely tentative and absolutely secret” estimate of the total amount needed to settle U.S. Army and Navy debts in China. Treasury replied on the twentieth that the amount was in the range of $125,000,000 to $150,000,000. (Foreign Relations, 1946, 10: 938, 947.)

3. As early as mid-August 1945, then-Ambassador Patrick Hurley reported, with “great reluctance,” his disappointment with Chinese government financial expert T. V. Soong’s demanding attitude concerning U.S.-China financial negotiations. In mid-October, the United States proposed that an agreement be reached with China on “offsets”—crediting the sale price of surplus U.S. property in China (i.e., mainly lend-lease supplies not yet signed over to China) against the money advanced by the Chinese government to cover U.S. Army expenses in that country. By November 28, when Marshall’s mission was beginning, U.S. negotiators were complaining that the value that Soong placed on the surplus U.S. property was too low. In mid-December, Marshall had all negotiations between the U.S. and China put on hold in order that they not compromise his own mission or that they serve as potential bargaining chips. (Foreign Relations, 1945, 7: 1125-28, 1168-69, 1177- 78, 1183, 1187, 1193.)

In a lengthy message dated January 17, the State Department told Marshall that the U.S. “wishes to inaugurate discussion with the Chinese leading to settlement” of the various outstanding financial matters, although the timing was left to Marshall. He replied on the twenty-fifth that “it appears better not to institute negotiations at present,” and asked if the department thought such an over-all settlement should “await initiation of discussions on further loans to China.” It was clear, Marshall thought, “that Soong is doing his best to avoid acceptance of the offsetting principle.” The State Department told Marshall on February 4 that it did not believe that the settlement of surplus property, lend-lease, and other such matters “should await initiation of negotiations for further credits.” (Foreign Relations, 1946, 10: 912-19, 924-26, 933-34.)

4. When the war ended, the United States had accumulated thirty-five thousand tons of materi

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