Foreign Relations of the United States Diplomatic Papers, 1938, The Far East, Volume III

693.002/640: Telegram

The Ambassador in Japan (Grew) to the Secretary of State

Tokyo, May 7, 1938—1 p.m.
[Received May 7—8:35 a.m.]

300. Department’s 159, May 5, 6 p.m.,⁸⁹ Chinese Maritime Customs. In further discussion yesterday with my British colleague he brought out the following points.

1. His main purpose in his negotiations with the Japanese Government has been to produce an arrangement which would stand some chance of working satisfactorily in practice.

2. To depend on the Japanese to furnish the foreign exchange necessary to pay the foreign obligations of the customs would be illusory simply because the Japanese do not at least at present possess or command in North China the foreign exchange necessary for servicing the northern quotas. The Vice Minister in their discussions said that with the best will in the world they could not at present do so in practice and Craigie is convinced that this statement is correct.

3. The Chinese have up to the present produced sufficient foreign exchange to meet these obligations and in the opinion of the British experts they can continue to do so. If however it should become known in China that we were pressing the Japanese to produce this foreign exchange, this, in Craigie’s opinion, would be tantamount to an invitation to the Chinese to refuse to furnish the foreign exchange necessary for the quotas of the areas in North China.

4. With reference to our 294, May 5, 7 p.m., paragraph 1, Craigie has now modified his previous statement to me (McGurk⁹⁰ was present and we agree as to what we understood Craigie to say) that the Japanese had consented in the event the Chinese Government should refuse to provide the foreign exchange necessary to remit for loan and indemnity services the 2 million yuan contributed from the customs in areas under Japanese control to furnish foreign exchange from the customs revenues collected in foreign currencies at Shanghai. Craigie now says that he had discussed this matter with Horinouchi and that while he had nothing in writing to confirm the latter’s agreement to such an arrangement it was his understanding that the question was to be left for further discussion here or in Shanghai to ascertain whether such procedure could be worked out.

5. Craigie states that it would not necessarily embarrass him if I were to make the approach to the Japanese Foreign Office outlined by the Department so long as it was done orally and without publicity but for Craigie himself to take parallel action would be merely to repeat what in effect he has been saying to the Japanese Government during the past several weeks. He considers that his negotiations over the past few months concluding with the arrangement of May 2 fully cover his side of the question and he is doubtful if the French, having approved the arrangement, would feel that they could ask for further assurances. I have not consulted my French colleague but I am inclined to agree with Craigie’s estimate of the French attitude.

6. Craigie acknowledges that his arrangement may not work but he believes that it was the very best agreement that could be concluded. He hopes that we will wait to see if it does work.

Our comment follows.

7. It seems to us that the first step in considering the Department’s proposed approach to the Japanese Government would be to decide whether there is available in the Japanese occupied areas other than Shanghai foreign exchange for the remittance to Shanghai in foreign currencies of quotas for servicing foreign loans and indemnities. Craigie affirms that such foreign exchange is not available and that view is substantially confirmed by reports emphasizing the difficulties which the North China régime is having on this score. The Japanese presumably cannot be persuaded to place at the disposal of the North China régime their own limited reserves of foreign exchange. For the time being, therefore, it appears improbable that the North China quotas could be remitted in foreign currencies even if the Japanese were agreeable to the proposition in principle. However, with prospects of revival of exports in North China there should be accumulated a reserve of foreign exchange which could be available in the course of time for quota remittances.

8. The British are committed to try out the arrangement which they have just made with the Japanese and Craigie made it clear to me that he could not recommend that the British Government go along with us on the proposed approach to the Japanese if made now. The French, according to Craigie, have by approving the arrangement associated themselves with the British.

9. It is therefore our view that we should withhold the proposed action while carefully watching the operation of the recent arrangement. If then the conditions envisaged by the Department should threaten to arise, our representations when made would rest on a firmer basis than they would, we believe, if made now.

10. If, however, the Department feels that some tactical advantage is to be gained by making the suggested approach now, I can see no important objection.

Grew

89. See footnote 86, p. 700.
90. Joseph F. McGurk, First Secretary of Embassy in Japan.