894A.00–R/4–751: Telegram

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

secret

1362. To State and ECA from Rankin and Moyer. Re Deptel 1035, Apr 4 and Ecato 319 Mar 31.1 Gratifying note progress in finding means obtain addit funds ECA or other US sources to offset increased dollar and local currency requirements arising from MDAP. Fol comments inspired by certain points in reftel:

1.
Proposed $65 million for ECA FY 1952 program almost certainly inadequate preserve econ stability even assuming optimum effort by Chi Govt, no further rise world commodity prices and full provision for econ impact MDAP outside regular econ program. $85 million more likely figure for requirements under such circumstances.
2.
If Formosan econ had to support only police force and coast guard and contribute one Chi province’s “normal” share to national defense, this probably wld require little or no outside econ aid today in maintaining modest balanced development. Presence on Formosa of armed forces totaling some 600,000 men is immed cause of present econ imbalance yet without these forces island wld today be in Commie hands. Present US aid programs both econ and mil, are in case of Formosa therefore almost entirely mil in broad sense.
3.
Without knowing precise cost and nature mil equipment likely reach Formosa in any given fiscal year impossible estimate closely addit dollar and local currency expenditures required this connection. Rule of thumb wld be to add 30 percent to value of mil equipment provided assuming POL already covered. On this basis at least $20 million addit needed to complement FY 1951 MDAP. This shld be made available soonest in preparation for arrival mil equipment coming months, more particularly view serious inflationary sitn in prospect due other factors.
4.
US Govt position set forth para 2 Deptel 1035 will be communicated to Chi Govt and precise text used will be telegraphed to Dept. Most of points raised already emphasized to them many times in past and will be repeated frequently in future. However, cannot expect them do impossible and fullest sense of responsibility can be inspired only by realistic and coordinated politico-econ-mil program worked out in advance. MDAP details already known in general terms to Chi Govt promise build up mil strength on Formosa to point beyond their expectation and employ indefinitely large amts supplemental aid to effectuate mil program. Moreover, inclusion in MDAP of considerable quantities offensive weapons such as tanks (presumably not needed to supplement capabilities of Seventh Fleet in defending Formosa) is further encouragement to any elements inclined toward financial irresponsibility or politico-mil recklessness.
5.
“Escalator arrangements” for addit aid occasioned by MDAP shld not be ad hoc in character except rare cases. Both to facilitate planning by US and Chi Govt officials and to avoid impression among Chi that more funds can be had any time new need develops it considered essential make lump sum or percentage provision in advance.
6.
Economic Stabilization Board appears to date to be curbing any tendencies toward unbridled mil expenditures and working seriously to minimize consolidated budget deficit and foreign exchange deficit. Given size of present mil establishment there are limits to what can be done in economizing no matter how serious their efforts. Mil aid in amts under discussion in Washington without far greater supporting econ aid than indicated Deptel 1035 imply uncontrolled inflation within next eight months. Such outlook wld contribute to attitude of hopelessness and destroy constructive ESB foundation already created.
7.
Chi Govt shld not be expected abandon dream of return to mainland, without which it wld fall apart polit, yet any MDAP unavoidably fosters such dream. Moreover, perfecting purely defensive power of armed forces on island is at same time essential first step toward preparing them for possible offensive operations in future. Periodic lecturing of Chi on this subj far less effective than practical approach [Page 1623] of supplying only mil aid clearly needed for island’s defense plus econ aid essential to preserve its stability.
8.
Suggest any mil equipment allocated to Formosa on basis possible needs for future offensive operations in general conflicts shld be stockpiled on US controlled territory somewhere in FE. [Rankin and Moyer.]

Rankin
  1. See footnote 1, p. 1597.