Foreign Relations of the United States, 1955–1957, China, Volume III

103. Memorandum of a Conversation, Taipei, November 21, 1955¹

Taipei, November 21, 1955

PARTICIPANTS

• President Chiang Kai-shek
• Ambassador K. L. Rankin
• Colonel S. K. Hu, Interpreter

SUBJECT

• Economic Situation and Chain of Military Command

After meeting Admiral and Mrs. Felix B. Stump at the Taipei airport late yesterday and escorting them to Shihlin, where they are the house guests of President and Madame Chiang, the latter asked us all to stay to tea. Following the usual pleasantries we rose to leave but the President asked me to stay and talk with him. I did so for about half an hour. In addition to those mentioned above, Madame Chiang remained and listened attentively but took no part in the conversation.

The President began by asking if I had been busy, and made reference to my recent talks with various Chinese Government officials regarding the economic situation. He noted that there were several economic experts in his Government, such as Premier O.K. Yui and Finance Minister P.Y. Hsu. The President hoped that I could help them straighten things out and put the economy on a sounder and more systematic basis.

I replied that I was no wizard and that the economy was in good shape in important respects. Agricultural and industrial production were large and increasing. The foreign exchange position was much better than a year ago. However, we were experiencing inflation, due chiefly to the Chinese Government’s excess of expenditures over revenues. There were other factors contributing to the recent rise in commodities, but these were largely seasonal or accidental, and correspondingly less significant. Some of the price inflation was a direct result of prosperity, particularly in the field of building construction where shortages of cement, brick, steel and skilled labor had contributed to a substantial increase in costs even when measured in United States dollars.

One remedy, it seemed to me, might be found in a more definite fixing of financial responsibility as between various Chinese agencies, and also between Chinese and Americans connected with our joint efforts. Although the military program was much larger than the economic, it was also simpler in many ways and easier to understand. On the economic side we had to deal with many factors, including intangibles, and responsibility had become too diffused. Under such circumstances, if something went wrong it was only natural for the Chinese to blame the Americans, while the Americans blamed the Chinese.

I ventured to cite two examples of diffused responsibility involving both military and economic factors and to propose, very tentatively, a remedy. The Chinese Government was now purchasing large quantities of crude oil abroad and the substantially increased requirements in prospect for the coming year were causing great anxiety on financial grounds. Much of this increase would be for military needs and the Chinese Petroleum Company would expect reimbursement from ICA counterpart funds (local currency), but the drain on foreign exchange would be serious. At the same time, the Chinese Government was paying for most of the food requirements of its armed forces. To a large extent this was accomplished by obtaining rice below cost from the Food Bureau, which was then forced to borrow from the bank and was running ever further into debt. Meanwhile the United States was also supplying petroleum products and certain items of food, such as soya beans, for the armed forces. This diffusion of responsibility produced confusion, uncertainty, financial irresponsibility and waste.

Whether it would be practicable I was not sure, but it seemed to me logical economically and preferable psychologically that China should assume full responsibility for the feeding of its armed forces (along with such items as their pay, clothing and administration), while procurement of petroleum from abroad, involving as it did large amounts of foreign exchange, seemed more properly an American responsibility under present conditions. I repeated that this was only a tentative proposal, put forward for purposes of illustration, but that I was persuaded of the importance of more definite fixing of responsibility. I felt that the United States should concentrate on a smaller number of major projects in Free China; this did not imply any reduction in total aid.

The President again expressed the desire that the Americans here should help his government to straighten out its current economic difficulties and put the economy on a better basis.

Reference was made to Admiral Stump’s present visit and I expressed the hope that President Chiang would find occasion to discuss the defense of the offshore islands and the question of command relationships with the Admiral. I said that I usually tried to keep out of purely military matters, but that I was disturbed by apparent serious differences of opinion between some Chinese and American officers, and between certain Americans for that matter, as to the best methods of defending Kinmen and Matsu. I was not aware of any significant differences of opinion between Admiral Pride and General Smythe on this subject, but we had a situation in which all of the Americans on the islands were under Smythe and …, who in turn were not under Pride although the latter was our responsible operations head in this area. Only Admiral Stump had general authority, I said, and his visit provided an opportunity to iron out any important differences that might exist. I referred specifically to the central fortress now being constructed on Kinmen, which some thought a good idea and others regarded as a serious mistake.²

1. Source: Department of State, Rankin Files: Lot 66 D 84. Secret. Drafted by Rankin. This memorandum was sent to the Department as an enclosure to a letter of December 7 from Rankin to McConaughy, which also enclosed a memorandum of a conversation on November 19 between Rankin and Governor Yen; neither printed.
2. Telegram 272258Z from CINCPAC to CNO, November 27, transmitted a message from President Chiang to Stump and Radford that the Chinese Government would like very much to have Admiral Pride as the overall commander of all U.S. military activities on Taiwan and the offshore islands and that Chiang expected the Chinese Communists to complete the highway and airfield systems on the mainland opposite Taiwan by June and to have the capability for attack on the offshore islands by April. The telegram stated that Defense Minister Yu would be in Washington soon and wished to convey the message to Radford and it reported on Stump’s conversations with Yu in Taipei. (JCS Records, CCS 381 Formosa (11–8–48) Sec. 30)