Foreign Relations of the United States, 1946, The Far East: China, Volume X

Marshall Mission Files, Lot 54–D270

Memorandum by Colonel James C. Davis to General Marshall

[Washington,] April 12, 1946.

I. Introduction. The following statement briefly summarizes the status of the various economic projects of interest to China on which you have been working as of the time of your departure for China.

II. Disposed of LST’s. Mr. Huntington Morse¹⁰ called me last night and read me a letter which has been signed by the Acting Chairman of the Maritime Commission¹¹ and transmitted to the Foreign Liquidation Commission, concluding that LST’s are not merchant vessels or capable of conversion to merchant use within the terms and intent of the Ships Sales Act. As a result, the Maritime Commission has disclaimed any interest in their disposal and has advised FLC that owning agencies may declare LST’s surplus directly to FLC, who may make disposition of them under ordinary surplus disposal rules. This will permit the Chinese to purchase LST’s at a price which they can afford.

III. Status of Military Advisory Group.¹²

A. Legislation. It will not be possible to accredit a Military Advisory Group to China until after the passage of enabling legislation. There are currently pending in the Congress companion bills (H. R. 5433 in the House and S. 1847 in the Senate). These bills were introduced by Chairman May of the House Committee on Military Affairs and Chairman Thomas of the Senate Committee on Military Affairs respectively. The House bill has been favorably recommended by the Committee. The Senate bill is still pending in the Committee. Before your departure from [for] China you addressed letters to Mr. May and Senator Thomas,¹³ stressing the urgency of favorable consideration of this legislation. As Tab A¹⁴ there are attached copies of the proposed House and Senate bills together with the House Committee report.

B. Negotiations with the Chinese Government. As you know there have been rather sharp differences in view between the State Department and the War and Navy Departments as to the terms under which the Group should be accredited to the Chinese Government. In the President’s directive authorizing the Group he specified the State Department as the agency to negotiate these terms. Attached Tab B is the latest draft of a proposed agreement prepared by the Department of State. This draft at working levels has now substantial agreement of both State and War Departments. The last two controversial issues were resolved yesterday when you, with General Wedemeyer’s concurrence, agreed that the channel from the Group to the Chinese Government should be through the Ambassador or, in his absence, the Chargé d’Affaires rather than solely through the Ambassador, as had been desired by the War and Navy Departments; and that any provision for compensation over and above normal pay and allowances of the Group should be covered by general provision only subject to the agreement of the Governments of China and the United States rather than by inclusion of a specific pay schedule as desired by the services. These propositions are covered in the attached draft in paragraphs 19 and 12 respectively.

Additional formal drafting changes may be required. For instance, the Treasury is now checking the tax exemption provisions and the method for handling reimbursement to the United States by the Government of China. As soon as these are completed, a copy of the proposed agreement will be furnished through official channels by the Secretary of State in order that negotiations may be formally conducted in China.

IV. Status of FLC Credit. You will recall that in preliminary conversations, consideration was given to the extension at this time by the FLC of a line of credit of $250,000,000 for the purchase of surplus materiel. As it was determined that it would be wiser to make the initial extension of such credit small with the possibility of increasing it if it became necessary, FLC has notified its field representatives, General Johnson at Shanghai and Mr. Howard at Manila, that they may sell surplus materiel, including small shipping under the control of FLC, up to a total sales price of $150,000,000. Authority has also been granted to extend this credit up to thirty years at 2⅜ percent interest per annum. General Johnson and Mr. Howard have been notified that you are very anxious that the Chinese receive the most favorable price terms possible and that any over-all contracts for disposition of surplus shall be submitted to you for approval before consummation.

V. Status of Chinese Shipping Program.

A. FLC Type Supplies. Dr. Soong, pursuant to your suggestion, has given Dr. Wang over-all authority to coordinate the procurement and development of requirements for Chinese shipping, including that to be provided by UNRRA. An over-all program, copy of which is attached as Tab C, has been submitted by the Chinese to FLC. Although final sales of the craft covered by this program will be consummated in the field, it is expected that basic negotiations looking to the finalization of the program will be conducted in Washington. This is necessary because FLC representatives in the field are cognizant only of those items which have already been declared surplus while in Washington by closer coordination between FLC and the War and Navy Departments it is possible to accurately forecast potential declarations which can be considered in the development of the Chinese program.

The Chinese have employed Morrison–Knudsen, a Portland, Oregon, contractor, to recruit and train the necessary personnel to operate this shipping. Morrison–Knudsen propose to send immediately to China an operating team of five or six experts together with one hundred men made up principally of diesel engine experts. They will continue to recruit as rapidly as possible. They will also provide the Chinese Supply Commission here in Washington with a shipping expert who can assist in maintaining daily liaison with FLC and the Army and Navy Departments until the program is consummated.

UNRRA has agreed through Deputy Administrator Jackson to designate one of its top officials to effect the necessary coordination between the UNRRA program for China and that of FLC.

B. Maritime Commission Type Craft. The Chinese have submitted to the Maritime Commission their requirements for the purchase of ships of the large type, sale of which is controlled by the Maritime Commission. Copy of this statement is attached as Tab D. Sales of this type craft must be consummated in accordance with the Ships Sales Act, copy attached as Tab E. This legislation rather rigidly establishes the price at which these ships can be acquired. The Maritime Commission has not yet promulgated regulations under which it will actually dispose of shipping pursuant to the Ships Sales Act. However, arrangements have been made to process informally the Chinese requirements in advance of promulgation of the formal regulations in order that their consideration may be thereby advanced. Colonel Carter¹⁵ will continue to expedite this problem.

VI. Status Over-all War Settlement. On 4 April 1946 the Acting Secretary of State, Mr. Acheson, notified the Chinese Ambassador, Dr. Wei, and Dr. Wang that this Government desired to initiate negotiations looking toward an over-all war settlement to include settlement of lend-lease accounts, settlement of Chinese advances on account of the United States, such as the yuan advances and expenditures, determination of surplus credits, and other various matters between the two Governments arising out of the war.¹⁶ The Chinese have not yet designated a negotiator. My judgment is that Dr. Soong should designate Dr. Wang to carry on these negotiations and supplement his work by sending to the United States such additional experts as may be required.

The United States at the working levels is pretty well agreed on principles which will guide our negotiators in this activity. The present American view is briefly summarized in Tab F attached.

Colonel Carter is thoroughly familiar with the general lend-lease problem, as its administration was his responsibility in the China Theater. He has arranged to follow the proposed negotiations closely.

James C. Davis

P. S. Further action on the $500,000,000 loan awaits your advice from China. J. C. D.

10. Assistant to the Administrator of the War Shipping Administration.
11. Capt. Edward Macauley.
12. For correspondence on this subject, see pp. 810 ff.
13. See letter of April 12, p. 827.
14. Annexes not printed.
15. Col. Marshall S. Carter succeeded Colonel Davis as General Marshall’s representative in Washington.
16. The relevant aide-mémoire is quoted in Department telegram No. 58, May 1, 3 p.m., p. 982.