893.24/2–1846: Telegram
The Counselor of Embassy in China (Smyth) to the Secretary of State
[Received 12:54 p.m.]
320. From General Marshall for Colonel Davis: It is still too early to make definitive recommendations on timing, method of handling, and basic principles with respect to over-all settlement. (Reurtel 263 of February 11.) China’s needs for rehabilitating railroad, inland waterway and some coastal transportation so desperately urgent that I feel this should be made first call on FLC sales to China and on par with food for preventing famine as far as UNRRA is concerned; in fact, without more transport facilities famine cannot be averted. This work of rehabilitation of transport must go forward rapidly, as without it political stability jeopardized. Therefore, I have strong feeling that these requirements should be met from FLC sales both to UNRRA and to Chinese Govt as far as possible, and that FLC should sell on as generous terms as possible until sales begin to approach amount at which we propose to settle our yuan indebtedness. There may be some objection to exhausting amount we owe China by FLC sales, but transportation must be given top priority and we cannot afford to be niggardly in this matter. Failure in rehabilitation of transportation could prejudice my whole mission. We also do not want to find ourselves in a position where effect of loan to China will be reduced by substantial cut in her foreign exchange assets through her purchases from FLC.
- 2.
- If my tentative impression that the whole of our debt to China might be offset by her FLC purchases is correct, then it would appear that we might as well forget about even bookkeeping reimbursement of items 5 and 6 of Urtel 101, January 17. As for items 3 and 4, they could be on 3–c or British settlement terms. Item 7 has now been [Page 944] disposed of with sale of Calcutta stockpile on offset principle at 66⅔% of cost plus 25% for cost of transportation to Calcutta, $15.00 a ton for transportation from Calcutta to China, with loading and unloading to be done by China; these terms appear pretty fair and reasonable. Item 9 of Urtel 101 is being dealt with as an exception in which China will repay us with services to be rendered over a 30–year period with the equipment she acquires.
- 3.
- I am aware of possible political repercussions of kissing item 6 of Urtel 101 goodbye without even token compensation, and would welcome any suggestions you have to make after discussions with State and Treasury in which paragraph 2 of my 155 of January 25 should be emphasized. There is one possible line of approach which might be worth considering. If our settlement of yuan indebtedness is sufficiently generous, it might excess [exceed?] the total of China’s purchases from FLC. This excess could be used as an off-set to item 6, which could be dealt with in one of two ways. Either it could be off-set against part of item 6, or if it were more expedient, we could ask China to pay a percentage—say 20 to 25 percent—of item 6 as her total contribution for item 6 and have the excess allotted to this purpose.
But a settling of our yuan indebtedness on terms generous enough to cover FLC purchases and to leave a margin to dispose of item 6 in either of above ways might create other problems. Which is why I desire Washington’s reactions before making any definite recommendations. [Marshall.]