REPORT ON CHINA

Last July William C. Bullitt was dispatched by LIFE to China to see if he could find a sensible answer to the Chinese puzzle. This week in LIFE, the former U.S. Ambassador to Russia publishes his proposed solutions. Even as his report goes to press, the disastrous war news from Manchuria tragically confirms Mr. Bullitt's analysis of that situation and his plea for U.S. aid to the Nationalist forces there. Because of the importance of the subject, the concreteness and urgency of Mr. Bullitt's conclusions, TIME herewith reprints excerpts from his report:

To prevent the domination of China by any nation which might eventually mobilize the 450 million Chinese for war against us is a vital interest of the United States. . . . Can China be kept out of the hands of Stalin? Certainly--and at a cost to ourselves which will be small compared to the magnitude of our vital interest in the independence of China. By what means?

The Communist Objective

Today the Chinese Government holds firmly all China as far north as the Yangtze River. Small bands of bandits, some of whom call themselves Communists, hold remote areas south of the Yangtze; but the Shanghai fashion of calling the area south of the Yangtze "the zone of peace and reconstruction" is justified. The area from the Yangtze north to the borders of the Soviet Union is definitely a war zone.

The Communists use guerrilla tactics, moving swiftly and attacking at night, hiding in villages and resting in the day time. . . . They are attempting to bring down the Government not by destroying its armed forces but by wrecking the economic life of the country. Hence, they do not hesitate to burn towns and villages, destroy railroads . . . and blow up industrial installations, such as power plants, which they cannot carry away.

The Manchurian Crisis

In Manchuria the situation is altogether different. Government troops hold most of South Manchuria, except Dairen and Port Arthur which are occupied by the troops of the Soviet Union. But Communist troops hold all the rest of Manchuria, except a long finger-shaped salient from Mukden to Kirin. This salient follows what was once the major railroad of Manchuria, passing through Szepingkai and Changchun. It is a railroad no longer. Communists have destroyed every bridge north of a point 30 miles to the south of Szepingkai. Most of the ties have been burned, and many of the rails twisted by placing them across the blazing ties. . . .

Changchun is held by the First Army, perhaps the best of all the Chinese Government armies. It was trained, clothed and equipped in Burma by General Stilwell. . . . But behind their gallant appearance there is little of the strength they had under American command. They have only American equipment. They have been using it ever since they fought beside our men in Burma. It is worn out. . . . Their rifles have been used so much that they will no longer shoot straight. . . . They have excellent American artillery but are so short of ammunition that they cannot fire a single practice shot. Their trucks are for the most part broken down and, as we did not carry out our contract to deliver spare parts, they cannot repair them. They have not a single airplane even for reconnaissance since we did not carry out our promise to put through the Eight and One Third Air Group program. By persuading the Chinese Government to adopt American equipment and then refusing ammunition, we have put these soldiers on the end of a very long limb. ... If Manchuria should be abandoned to the Communists or should fall into their hands by conquest, a course of events fatal to China would follow.

"People's Republic of Manchuria"

It is not difficult to foresee that the Communists would at once proclaim the "independence" of a "People's Republic of Manchuria," or that this "republic" would soon be recognized by the "Independent People's Republic of Outer Mongolia," which is entirely controlled by the Soviet Government, and that the two "independent republics" would then enter into a mutual-assistance pact. And it is not difficult to imagine that the Chinese ambassador in Moscow would then be summoned by Molotov and politely reminded that the Soviet Union has a mutual-assistance pact with the "People's Republic of Outer Mongolia." Therefore if the Chinese Government should attempt by arms to regain its province of Manchuria, and Outer Mongolia should go to the assistance of the "People's Republic of Manchuria," the Soviet Union under its pact with Outer Mongolia regretfully would be obliged to use force to prevent the Chinese Government from inflicting injury on the forces of Outer Mongolia . . . the Chinese Government would be forbidden to attempt to recover its province of Manchuria.

The urgent need of the government armies in Manchuria for ammunition and spare parts to use in their American arms and equipment is one which cannot be filled in a leisurely manner. It requires immediate action. President Truman should act at once as President Roosevelt acted after Dunkirk, when the British and French were desperately short of munitions. President Roosevelt then had certain stocks of the U.S. Army declared no longer essential for use by the Army. They could then legally be sold, and vast quantities were sold to Great Britain at approximately 10-c- on the dollar. We have hundreds of thousands of tons of such stocks today, rotting and rusting throughout the world. . . . Such of those stocks as can be used in Manchuria should be released immediately and sold to China and their transport rushed.

President Can Act

President Truman can legally take this action at once. He does not need to wait for Congress to reconvene. He can act in time to keep Manchuria out of the hands of the Soviet Union. If he does not, one of the first acts of Congress when it reconvenes should be an investigation of our policies with regard to China. Such an investigation might at least fix responsibilities and reveal the names of the men in our Government and foreign service who are incompetent to preserve the vital interests of the people of the U.S. . . .

The High Cost of Living

China today is caught in the sort of vicious circle that has become familiar to Europeans since World War I. She has been at war since 1937. The sources of such wealth as she had were in Japanese hands. Therefore she could not finance her war against the invader by sales of bonds, and she could cover only a small portion of the cost of the war by taxation. In consequence, she covered her war costs by the only method open to her--the issuance of paper currency. . . .

This means that China's war was in reality financed at the cost of the middle class, and by reduction of the standard of living of such fixed income groups as schoolteachers, college professors, Government employees, and all who live on the income from securities bearing a fixed rate of interest. . . . The cost of living today expressed in Chinese dollars is approximately 30,000 times what it was in 1936, before Japan attacked China. . . .

In an effort to keep down expenditures for war purposes, the Government has kept down the pay of its soldiers and officers. A private has been receiving in pay the Chinese equivalent of $1.50 a month. A major general receives the equivalent of $17 U.S. a month. . . . For purposes of raising morale, pay in the Army should be quadrupled. But there are more than 4,000,000 officers and men on the rolls of the Army, and a quadrupling of pay would add such a sum to Government expenditures, which could be covered only by printing more paper money, that the steady rise in the cost of living would accelerated.

Why Graft Exists The salaries of all Government employees from Cabinet members to tax collectors are held down to fantastically low levels. The underpayment of Government employees in China has passed the limits of human endurance. . . . Soldiers who are grossly underpaid, and hear from their families stories of increasing poverty, are deeply affected. Officers who cannot possibly support their wives and children on their salaries, if they are men of strong character and patriotism, sell all they possess to keep their families alive, but, when they no longer have any possessions, must either see their children starve, or use their power to graft, or commit suicide. There have been many who have preferred suicide to dishonor, but many have turned to graft. . . .

In the Army, graft takes many forms. The simplest is the padding of pay and ration rolls. The Chinese customs service, which before 1937 was one of the most efficient and honest in the world, is now riddled with graft. . . . Tax collectors of all sorts graft. . . . The Chinese judges have for the most part endured their sufferings and kept their honor clean. But there are grafting judges also. . . .

Most of these men graft to live, and there is no possible way to stop this sort of graft until all Government employees, military and civilian, receive a living wage. But raising of Government salaries will increase the inflation, inflation will raise the cost of living, the rising cost of living will quickly absorb the raises in salaries, graft will start again--nobody will be better off. How can China break this vicious circle?

Where the U.S. Comes In

There is only one answer: Finish the war. This is where the U.S. comes in. We can break the vicious circle at several points, and at a cost to ourselves which will be small compared to the advantages to be gained for our own security.

The most astonishing facts to be found in China today are not in the realms of war or politics but in finance. Chinese Government expenditures, when translated into U.S. dollars at the prevailing rate of exchange, are on a Lilliputian scale. To govern the 450 million Chinese in a territory one-third larger than the U.S. and to carry all the expenses of the war, the Chinese Government now spends approximately the same sum annually as the municipal government of New York City.

It is a fact that the total Government expenditures for the year 1947, at the present rate of exchange, will amount to approximately $1 billion U.S. It is a fact that all the trillions of Chinese Government currency outstanding could theoretically be bought, at the present rate of exchange, for only $250 million. . . .

These figures are of the first importance for only one reason--they prove that the problem of giving effective aid to China is within dimensions that we can handle. . . .

The problem must be attacked at once on three fronts: 1) economic and financial, 2) military, 3) political. Since the essence of the problem is the ejection of every armed Communist from the soil of China, an intelligent project can be prepared only on the basis of an estimate of the time it will take to win the war. American military experts believe that this may take as long as three years. The Chinese are more optimistic. But let us accept the American estimate and try to sketch a Three Year Plan and estimate its cost. . . .

During the next three years China will need to import large quantities of American cotton, tobacco, wheat, oil, gasoline and many manufactured articles. She will therefore need credits. The highest figure for such necessary credits given by American and Chinese economic experts is $250 million a year--a tiny fraction of what is said to be Europe's requirements. Let us scale that down to $200 million and budget for our total Three Year Plan $600 million of credits for purchases in the U.S. from this autumn to the autumn of 1950.

To control the inflation China needs now a portion of the credits we have envisaged, perhaps $75 million. The remainder of the $200 million for the first year of our Three Year Plan can await action by the Congress; but either from the U.S. foreign relief program or the Export-Import Bank, or some other source, this $75 million must be obtained in the next 30 days. . . .

How to Fight Inflation

To combat inflation for the duration of our Three Year Plan, to curb speculators against the Chinese dollar and to maintain China's international balance of payments, another fund will be required.... All use of such a fund should require the countersignature of a representative of the U.S. Government and it should not be set up until certain corrupt practices are stopped. Let us assume that the Chinese Government will act rapidly and effectively against the speculators and budget a $150 million exchange-stabilization fund for our total Three Year Plan.

Let us now turn to the military side of the problem, remembering that it is absolutely essential that the President should release immediately certain stocks of munition and have them rushed. . . to the Government troops in Manchuria . . . or by next spring we shall find Manchuria a Soviet satellite. . . .

According to the estimates of the ablest American and Chinese military men, to drive out of Manchuria the 350,000 Communists will require the training and equipment in the American manner of ten new divisions. Furthermore, an efficient service of supply from the point of origin of the supplies to the front is essential. . . . American military men can and should run the service of supply in Manchuria.

In North China, where the Communists hold no large cities and are essentially raiders, the problem is one of cornering and capturing guerrillas. For this purpose light-armed, fast-moving troops are needed, equipped with jeeps, half-tracks, light trucks, small arms, machine guns and 75s. The estimates of the ablest American and Chinese officers indicate that 20 divisions of such troops should be able to clean up North China.

An air force, even of the smallest dimensions, would greatly facilitate operations. We have thousands of planes and millions of spare parts which are obsolete in terms of our air force but first-rate material for the Chinese air force. To release this material and turn it over to the Chinese would cost us nothing but a bookkeeping entry.... If we release the necessary munitions it seems unlikely that the costs could be more than $200 million a year--$600 million for the whole Three Year Plan.

If we add to that figure the $600 million envisaged for credits, and the $150 million for a monetary fund, we reach a total for the Three Year Plan of $1,350,000,000--$450 million a year for the next three years. As a price for preventing Stalin from taking over China and organizing its resources and man power for war against us, the figure is not high. . . .

What American has the military knowledge, political skill and personal magnitude to organize such cooperation?

We have in the Far East today a general of supreme stature who possesses all those qualities. If President Truman were to ask General MacArthur to add to his present duties and powers the title of Personal Representative of the President with the rank of Ambassador, and to fly to China to organize with the Generalissimo a joint plan to prevent subjugation of China by the Soviet Union, the whole Far Eastern horizon would brighten with hope. His military, economic and political proposals might well be those outlined in this report. He could establish rapidly with the Generalissimo the relations of two comrades in a front line trench. They would work together as brothers for their common cause.

The cause is a common cause. If China falls into the hands of Stalin, all Asia, including Japan, sooner or later will fall into his hands. The manpower and resources of Asia will be mobilized against us. The independence of the U.S. will not live a generation longer than the independence of China.

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