Foreign Relations of the United States, 1949, The Far East: China, Volume IX

893.5151/5–1749

Memorandum by the Director of the Office of Financial and Development Policy (Knapp) to the Director of the Office of Far Eastern Affairs (Butterworth)

[Washington,] May 17, 1949.

Problem

With the Chinese Communists in control of Nanking and surrounding Shanghai, the Department is confronted with the problem of deciding what treatment should be afforded both public (i.e. Chinese Government) and private Chinese assets in the United States. In a memorandum dated April 27, 1949 from the Acting Director of the Office of International Finance,⁸² the Treasury Department has inquired what action, if any, should be taken by it, in respect of Chinese assets in the United States, under the powers of the Secretary of the Treasury⁸³ stemming from Section 5(b)⁸⁴ of the Trading with the Enemy Act.

In a memorandum handed to officers of the Department in January 1949,⁸⁵ the attorneys for the National City Bank indicated concern with the problem and a desire for guidance of some sort from the Department. With the fall of Nanking and the fall of Shanghai a matter of time, the National City Bank is apprehensive that it may receive orders from Central Bank offices in Communist held territory drawn on the Central Bank’s accounts. National City attorneys are already aware from informal contacts that there is no disposition at present in either State or Treasury to freeze but that State is tentatively prepared to receive requests for certification under Section 25(b) of the Federal Reserve Act.

The Washington representative of the Chase National Bank has informed the Department that Chase has heard indirectly from the Chinese that they anticipate the possibility of freezing action by Treasury. The N.Y. Journal of Commerce under Washington May 11 dateline carried a story to the effect that Treasury and State are seriously considering a blocking order.

Recommendations:

The following recommendations are made:

1. Treasury should be informed that the Department is not at this time prepared to invoke the foreign fund control powers of the Secretary of the Treasury in respect of public or private Chinese assets in the United States. In view of the accelerating pace of political developments in China, this recommendation is subject to reconsideration at any time, particularly if it appears that the public assets are being dissipated into private hands.

2. The Department should inform the U.S. banks with Chinese official accounts (including Central bank accounts) that it is prepared for the time being to issue certifications covering the authority of properly designated Nationalist officials in Nationalist territory or in the U.S. to draw on the accounts. The Department should leave to the discretion of the banks the question whether they will request the present Chinese Government to apply for certification. (The Chinese may well be reluctant to ask for certification, particularly so long as the U.S. banks continue to pay out, in view of the possibility of their obtaining summary judgments in the event of refusal by the N.Y. banks to pay.) For the time being at least any certifications issued by the Department should not be limited as to amount. Any certifications issued should be withdrawn if it appears that the funds are being improperly dissipated.

Discussion:

Discussion of this problem should distinguish between (1) Chinese Government and Central Bank assets in the United States and (2) assets held by private persons resident in China. Possible procedures include (a) blocking by the Treasury Department, under the authority of Section 5(b);of the Trading with the Enemy Act; (b) certification under Section 25(b) of the Federal Reserve Act, which applies to Chinese Government and Central Bank accounts and possibly to the accounts of other Government-owned banks; and (c) State Department suggestions to courts in the United States which may request guidance in cases involving adverse claims.

There are several objectives that might be furthered by one or another of the procedures described above. In connection with private assets, blocking might be imposed either to assist the Chinese Government in mobilizing such assets for its own use (such action has several times been requested by the Chinese Government but refused by the United States), to deny the use of such assets to the Communists, or to protect the interests of the private holders against possible Communist expropriation. In connection with Chinese official assets action might be desired (1) to deny the use of such assets to the Communists and preserve the power of the Chinese Government to dispose of them, or (2) to prevent their dissipation by officials of the Chinese Government into private accounts, or (3) to protect U.S. banks against adverse claims.

It is the consensus of the concerned divisions of the Department that blocking of private Chinese assets in the United States is not called for, partly because the bulk of such assets are so well concealed as probably not to be available to the Communists, partly because the reasons for previous refusals to block are still valid, and partly because blocking might be regarded; as inconsistent with our general economic and trade policy vis-à-vis Communist China.⁸⁶

With respect to Chinese official (including Central Bank) assets it is agreed that it is first of all of utmost importance to deny the use of such assets to the Communists while the Nationalist Government is recognized. It is perhaps also important that these assets be preserved from improper dissipation. Blocking would perhaps be the most effective method of accomplishing both objectives, but such action would probably be regarded as a hostile gesture by the Communists and perhaps also by the Nationalists and might impede the attainment of our other economic objectives in that area. The advantages of blocking depend partly on the nature and value of the assets which are thus denied to the Communists. At the moment it is believed that Chinese Government and Central Bank assets in U.S. banks amount to a little more than $100 million.

The only way to protect U.S. banks against adverse claims (other than freezing) is the certification procedure, but this can be applied only if certification is requested by the foreign government concerned. Attorneys for the National City Bank have indicated that the Chinese Government may well resist any suggestion that it seek certification, and that if the bank refuses to honor payment orders the Chinese will probably seek a court order requiring the bank to continue to make payments to the designated representatives of the Nationalist Government as the recognized government. Such a court order may not carry the same protection for the bank as certification of the account under Section 25(b). It is not believed, however, that assuring such protection is sufficient reason for a freezing order.

82. Not printed; George H. Willis was Acting Director.
83. John W. Snyder.
84. The foreign funds control powers of the Secretary of the Treasury were based on Section 5(b) of the Trading with the Enemy Act as amended by Title III of the First War Powers Act, approved December 18, 1941; 55 Stat. 838.
85. Not printed.
86. For correspondence on this subject, see pp. 817 ff.