Spies Determine China’s Future

In late 1944, John Service, a foreign service office (FSO) for the State Department returned from China, where he’d worked for several years, to Washington. His task in China had been to write reports about the domestic situation there; these reports were used to determine U.S. policy toward China and eastern Asia generally.

The situation in China was complex: a civil war, started in 1927, was halted by a temporary ceasefire so that both sides could offer resistance to the invading Japanese army. By 1944, it was clear that the Japanese would be defeated, and the two belligerents in the civil war - the communists led by Mao and the nationalists led by Chiang - were preparing to resume hostilities.

The USSR was supporting Mao, and the United States was somewhat supporting Chiang Kai-shek’s nationalists. The degree of enthusiasm with which the U.S. would support Chiang was in question.

In general, American was disposed to back Chiang, because, while not perfect, he represented the best chance for China to enjoy some amount of liberty. Americans were wary of Mao and his Soviet backers.

But inside the Roosevelt administration, there were officials planting seeds of doubt. They argued that Mao was likely to win the civil war, and that Chiang was corrupt.

FSO John Service was such a sower of doubt. His reports from China were not neutral evaluations of the situation in country, but rather enthusiastic propaganda pieces for Mao. John Service was not only a FSO for the State Department, but he was also secretly working for the USSR and for Mao’s communists.

Not only John Service, but an extensive network of Soviet operatives inside the State Department worked to undermine American support for a free China.

While Service and his fellow Soviet agents had their secrets, what they did not know was that the FBI was becoming aware of their spy network. When he returned from China in late 1944, the FBI learned that two other Soviet operatives, Max and Grace Granich, had been alerted to contact Service and get information about China from him.

Max and Grace were known communists, as was Max’s brother, Itzok Isaac Granich. Itzok went by the name “Mike Gold,” and all three had connections to the USSR. During the Cold War years, being a communist didn’t simply mean that one held a set of political beliefs, but rather it meant that one was dedicated to “violent” overthrow of the governments of western democracies.

The American Communist Party (CPUSA) insisted on seeking a “violent” revolution and on using that word in its printed materials.

A meeting between John Service and a member of Granich network was significant, and finding out about such a meeting in advance was an espionage coup. Historian Stan Evans writes:

Though omitted from the usual histories, this eye-catching bit of intel — gleaned from a mail intercept by Hoover’s agents — would be of keen interest to the Bureau and security sleuths in Congress. Max and Grace Granich were well known to the FBI, appearing in numerous other updates on subversion. They were also well known in China, where in 1936 and ’37 they ran a Moscow-funded news sheet called The Voice of China. Their activities in the United States were of like nature, including involvement with the pro-Red journal China Today, part of a tangled web of groups and periodicals that agitated the China issue.

Not only did John Service make contact with Grace Granich, but also with three other Soviet operatives: Harry Dexter White, Lauchlin Currie, and Harry Hopkins. Information was flowing in two directions: intelligence about the situation on the ground in China, and about the thinking of U.S. policymakers in Washington, was moved by Service, Granich, and the others to Moscow; and misinformation, designed to influence U.S. policy, was fed from Soviets to State Department officials via John Service’s reports.

Harry White and Lauchlin Currie were Soviet agents, as confirmed by the Venona project in which U.S. intelligence agencies decrypted Soviet communications about espionage activity. Harry Hopkins is somewhat more ambiguous: he may have been a Soviet agent, or he may simply have been a “dupe” who was tricked into shaping policy in ways favorable to the USSR.

Two former Soviet agents, Whittaker Chambers and Elizabeth Bentley, after defecting, also confirmed that Currie and White were employed by Soviet intelligence agencies. Stan Evans reports:

Whether the Service-Granich hookup occurred would be a topic pursued off and on by security forces — the results being inconclusive, but indicating Service probably met with Grace, though apparently not with Max. In the meantime, we know for certain he met with others who shared the Granich mission and stance on China, as he would himself reveal this. As he told it in a State Department hearing, two of his main contacts on this trip were Lauchlin Currie and Harry White (a third being Harry Hopkins). This was an intriguing pair of names to mention, as neither Currie nor White was an official of the agency where Service worked. Both were, however, pro-Soviet moles, according to the testimony of Bentley-Chambers and disclosures of Venona.

While in China, John Service had developed working relationships with several high-ranking communist officials, one of whom was Tung Pi-Wu (Dong Biwu), with whom Service would later meet in Washington. Service had also met with Mao. Gradually it became clear that instead of reporting about these leaders, he was speaking for them.

Granich’s decision to plead the fifth amendment when asked about John Service is significant. Stan Evans notes:

The doings of Max and Grace Granich, their connections in the United States and China, and their linkage to John Service would be explored in hearings of the House Committee on Un-American Activities early in 1952. When asked if he knew Service, Max said he didn’t, but Grace, when asked the identical question, took the Fifth Amendment. The House Committee was apparently in possession of information, obtained by the FBI, that Service had met with Grace, Tung Pi-Wu, and other Chinese Communists at a later date in Washington, D.C.

The presence of Soviet spies inside the State Department and other government agencies (White was in the Treasury Department and Currie worked as an economic advisor to FDR) explains, at least in part, the lukewarm support which the United States gave to Chiang, and the eventual fall of Chiang’s government to Mao.

Sadly, this is not merely an interesting story about spies. In the decades after Mao’s 1949 seizure of power, millions of Chinese were executed by the communist government.

While responsible historians do not speculate about events that never happened, it is tempting to wonder if these deaths could have been prevented if the State Department had not been infiltrated by agents like these.

John Service: Knowing Agent or Unwitting Dupe?

In the early 1940s, even as WWII raged, the international communist conspiracy was working vigorously to undermine freely-elected governments around the globe. This is evident, e.g., in the case of John Service, a foreign service officer (FSO) in the State Department.

He had been assigned to work in China, and send reports about the domestic situation there back Washington. His accounts of the internal dynamics would shape the policies of the United States toward China.

His bosses did not know, however, that John Service was feeding them, not accurate assessments of the conditions in China, but rather narratives designed to further the progress of the Chinese Communist Party (CPC). The ongoing civil war between the communists and the nationalists in China had started in 1927, but an uneasy truce had been declared in 1936, so that both sides could fight the Japanese invaders.

In the mid 1930s, John Service was assigned to be an FSO in China. He sent a steady stream of unfavorable comments about the nationalist leader, Chiang Kai-Shek (Jiang Jieshi), complaining about “the clap-trap of Chungking officialdom” in a report dated 28 July 1944. (The city of Chungking was Chiang’s headquarters at the time.)

Yet Chiang’s soldiers were doing the majority of the work in resisting the Japanese invasion.

By contrast, Service’s reports about Mao were enthusiastic, gushing that the CPC “has grown to a healthy and moderate maturity.” A few years later, Mao’s CPC would be executing millions of Chinese civilians.

How effect were Service’s propaganda-ridden reports? State Department officials, located in Washington and having never set foot in China, began to make plans for either a coup to overthrow Chiang, or even an assassination. Happily, these plans were never carried out.

The lingering question is whether John Service was actually in the employ of the international communist conspiracy, or whether he himself had been persuaded by the CPC’s propaganda and had internalized the CPC’s worldview. No certain answer can be given to this question.

The intensity of his reports increased until October 1944, when he wrote a series of memoranda from China, declaring flatly that Chiang was unnecessary and useless, and that the United States should welcome the collapse of Chiang’s government and the rise of Mao’s. Historian Stan Evans writes:

In the fall of 1944, having loosed his October thunderbolts at Chiang, John Service headed back to the United States for what was in essence a two-month furlough. The official purpose of the visit was to consult with his State Department bosses, which he did, but he also did some other things that would be even more critical for his future — and for the secret history of the Cold War.

Fresh from China, John Service would have much detailed and sensitive information, not only for the State Department, but also for a couple of known Soviet operatives, Max and Grace Granich. Service apparently met with Grace Granich.

He also met with other known Soviet agents, including Harry Hopkins, Lauchlin Currie, and Harry White. The USSR was, at this time, actively supporting Mao’s CPC.

Someone informed Max and Grace that John Service was returning to the U.S. from China, so that they could be ready to pump him for information. Stan Evans continues:

One revealing aspect of this trip was that it brought Service, for the first time we know of, to the notice of the FBI. According to the Bureau records, he was on his return to have supplied a link between pro-Red forces on the ground in China and their confreres in the United States. As one FBI memo relates: “A highly confidential source, which is completely reliable, has advised that Max and Grace Granich, both of whom have been engaged in Communist and Comintern activities for many years, were advised in the fall of 1944 that Service was returning to Washington details as to the latest developments.”

What was the outcome of John Service’s activities? The United States was remarkably half-hearted in its support of Chiang, even though Chiang was the only chance for something resembling political liberty for China.

Predictably, Chiang’s government fell, Mao’s CPC took control, and millions of Chinese died as a result. Was the savage butchery inflicted in the CPC’s “reeducation through labor” camps a direct result of John Service’s work?

Chiang’s fall, and Mao’s rise, were multifactorial, and certainly it would be a stretch to say that John Service caused them. But he was clearly a factor.

Had John Service not acted as he did, would Mao’s mass killings have been prevented? Historians should not speculate.

Inside the Secret Communist Conspiracy: Whittaker Chambers

Whittaker Chambers joined the American Communist Party (the ‘Communist Party in the USA,’ or CPUSA) in 1925. He would remain in organization for more than a decade.

Eventually he would become disillusioned with Soviet-driven operation and leave the party. He would provide valuable information to authorities who were looking to prevent any attempted overthrow of the United States government.

Sam Krieger, known as Comrade Krieger, directed young Whittaker Chambers, in addition to his service to the CPUSA, to attend meetings which would further his ideological formation. The CPUSA wanted to ensure that new members were ‘oriented’ or ‘orientated’ - Chambers recalls these as favorite words among the party’s leaders - to communist doctrine.

Chambers describes his entry into advanced communist indoctrination. Note the use of the word ‘violent’ - the CPUSA was explicit in its quest for a violent revolution:

He pressed me to join a study group to which he and his wife belonged, with some ten or fifteen others. The group was led by Scott Nearing. It met once a week, sometimes in the Rand School, the Socialist headquarters on East 15th Street, sometimes in a Communist office. Its members were trying to formulate (another favorite word) “the law of social revolution.” The members of the group, singly, or in teams, were writing papers on each of the great modern revolutions. When the papers were completed, the group would ponder upon the result and from it deduce the unifying law that underlay all violent political change. Scott Nearing and some of the more “developed” students would then formulate this revolutionary law in a study which would form a preface to the book that was to be made of all the papers.

As an extension of the USSR, the CPUSA hoped to bring an end - a violent end - to not only the United States government, but to civil liberties and property rights enjoyed by American citizens. The insistence on violence was meant to ensure the complete destruction of not only the form of government, but of the society and culture which had arisen around Western Civilization’s concept of individual liberty.

Alger Hiss was not only a key Soviet operative, but also a networking leader among scores of Soviet spies inside the United States. After Chambers left the CPUSA, he would offer evidence which confirmed Hiss’s guilt.

Hiss did not work for the famous KGB, which wasn’t formed until 1954, but rather for the GRU, a military intelligence agency in the USSR which had a clandestine New York office. Hiss would funnel confidential information out of the State Department to the Moscow, and then receive instructions from the USSR about how he should nudge U.S. foreign policy into one direction or another.

As an upper-level State Department official, Hiss met personally with FDR and was able to suggest or recommend policy options to the president. Robert Novak writes:

Hiss, as a senior State Department official, had in fact been a secret agent of the Fourth Section of Soviet Military Intelligence.

Because of his experience as a CPUSA insider, Whittaker Chambers was able to provide information about the underworld doings of criminals like Scott Nearing, Sam Krieger, and Alger Hiss. For his work, Chambers received the Presidential Medal of Freedom, posthumously, in 1984.

Who Was Not at Yalta?

In February 1945, the city of Yalta hosted the famous wartime conference which included U.S. President Roosevelt, Britain’s Winston Churchill, and the Soviet Union’s Joseph Stalin. Yalta is located on the southern end of Ukraine’s Crimean Peninsula on the shores of the Black Sea.

It was clear by this time that Germany would lose the war. The purpose of the conference was to organize the postwar environment in Europe.

Who accompanied FDR to Yalta? One might think that, because this meeting would set the international tone for years and even decades to come, America’s best diplomats and intelligence experts would be on hand to advise the president during the days-long event. Historians Stan Evans and Herbert Romerstein write:

With everything that was on the line at Yalta, one might suppose the U.S. government would have sent there a first-rate team of policy experts and negotiators to uphold American and free-world interests. Dealing with the tough and wily Soviets in such a context would have required the best that mid-century America had to offer. Such, however, was not to be the case at this world-changing summit.

Contrary to what might be a reasonable expectation on the part of the reader, the team FDR brought with him to Yalta was not an all-star list of foreign policy experts or intelligence geeks. His Secretary of State, Edward Stettinius, had been in office one month, hardly enough time to develop the agile negotiating skills needed vis-a-vis the USSR.

Stettinius would last less than six months as Secretary of State. It was during this narrow window of time that the Yalta conference occurred. Both his predecessor and his successor - Cordell Hull and James Byrnes, respectively - had more impressive resumes and gained experience from longer time in that office.

A neophyte Secretary of State was not the only weakness on the American team at Yalta. The delegation seemed designed for weakness at the negotiating table. Evans and Romerstein continue:

Few people familiar with the American delegation at Yalta would have called it first-rate, or even adequate to the challenge. On the military side, there was an impressive show of brass and braid, but the diplomatic group was different. Among his entourage Roosevelt had two staffers knowledgeable of the Soviet Union — interpreter Bohlen and ambassador to Moscow W. Averell Harriman — plus some support personnel to be discussed hereafter. But notably absent were ranking U.S. experts who knew a lot about the Soviets and diplomacy in general: top-line officials such as Undersecretary of State Joseph Grew, State’s European chief James C. Dunn, Russia specialists Henderson and Kennan. None of these would make the trip to Yalta.

In fact, the contingent from the United States was deliberately assembled to allow the Soviets to gain an advantage at the bargaining table. Advisors placed in high positions at the State Department, notably one Alger Hiss, personally advised the president on such matters.

What FDR didn’t know was that Hiss was on the payroll of Soviet intelligence agencies. Hiss was a spy, working for the communists. In addition to leaking classified information to the USSR, he also influenced the president’s policy decisions in ways which played into the hands of Moscow.

Churchill and Roosevelt made some bad agreements with Stalin at Yalta. Some were bad because they placed large regions of eastern Europe under a totalitarian regime, others were bad because they were empty promises which Stalin did not intend to fulfill. In the case, e.g., of Poland, Stalin told Churchill and Roosevelt that after the Red Army had pushed the Nazis out of the country, political liberty and free elections would follow. The Soviets, of course, did no such thing. Poland was overrun by the USSR and would remain a vassal state for the next forty-five years.

The deals made at Yalta were not only bad, but bad by design. Alger Hiss, and other Soviet operatives inside the Department of State, ensured that the American ability to negotiate would be hamstrung, and the Stalin could craft agreements to his liking.

Payroll Withholding: A New Evil Arises

The challenge facing those who would expand the powers of government, shrinking the liberty of the individual, is finding ways to take maximum money from ordinary citizens while provoking little or no reaction from them. How can you confiscate people’s money without making them angry?

To this end, many subtle plots and devices have been invented. One of them has been successful and goes by the name “payroll withholding.”

If a worker obtains his wages, and then has to pay his taxes, he is likely to be keenly aware that the government is appropriating the earned fruit of his labor. But what if a worker never received his full pay? What if part of it were siphoned off and sent to the government before it was transferred to him?

This is the genius of the withholding plan. People don’t miss what they never had. Rather than pay a worker $100 and ask for $25 in taxes, simply pay him $75. He may know, in some vague and abstract sense, that his property has been stolen from him, but he will not sense or perceive it in a concrete and direct way.

Payroll withholding arose when the government saw a sudden need to raise revenues because of war. While the citizens were willing to contribute to war effort, the mechanism of withholding was introduced because it would lower the degree to which voters were intuitively aware of amount being taken from them, and because it would allow the government to confiscate funds for other, less popular, purposes.

Until the advent of withholding, only Americans in the highest earning levels paid income tax. After withholding, almost everyone would pay it, as historian Amity Shlaes describes:

The father of the modern American state was a pipe-puffing executive at R.H. Macy & Co. named Beardsley Ruml. Ruml, the department store’s treasurer, also served as chairman of the the board of directors of the Federal Reserve Bank of New York and advisor to President Franklin Roosevelt during World War II. In those years Washington was busy marshaling the forces of the American economy to halt Japan and Germany. In 1942, not long after Pearl Harbor, lawmakers raised income taxes radically, with rates that aimed to capture twice as much revenue as in the previous year. They also imposed the income tax on tens of millions of Americans who had never been acquainted with the levy before. The change was so drastic that the chroniclers of the period have coined a phrase to describe it. They say that the “class tax” became a “mass tax.”

By means of withholding, the government was able to steal money from citizens without their noticing it so much. Ruml would devise the paycheck system by which a worker’s money was taken from him before he ever saw it.

It wasn’t so much that they’d pay more taxes; rather, they’d bring home smaller earnings. It was a simple but clever maneuver.

The rhetorical question has often been posed by those who study taxation: what would happen in twenty-first century America if workers had to pay their taxes outright instead of having them withheld? If, on April 15 each year, they had to write checks of $5000 or $10000 and mail them to the government?

This question reveals the evil genius of the withholding system. The government has been able to steal shocking amount of earnings from the workers, without the workers being fully aware of the crime.

Beardsley Ruml may be the mastermind, or at least an accomplice, behind the greatest theft in history.

Early Soviet Threats

Although the label ‘Cold War’ is often thought to apply to the years from 1946 to 1989, a similar mood prevailed in earlier decades. Shortly after the 1917 Russian Revolution, the Soviet Union worked influence the United States.

The Industrial Workers of the World (IWW), a communist front which presented itself as a labor union, orchestrated a general strike in Seattle, Washington, terrorizing the city and holding the ordinary citizens hostage. When the strike ended, many IWW leaders fled to the Soviet Union.

In the years prior to WWII, the Soviet Union made use of enlisted agents, who engaged in espionage by extracting classified information about national security and sending it to Moscow, or by influencing policymakers in their decision-making. The Soviets also used unwitting dupes, usually naive idealists, who might not have been aware of the extent to which they were being manipulated to act in the interests of the international communist conspiracy.

Evidence has emerged that the Soviet Union had large numbers of both employed spies and unsuspecting pawns in the 1930s in the United States. Samples from a long list of names include Philip Keeney, Mary Jane Keeney, Haldore Hanson, Dorothy Kenyon, and one of the most famous spies: Alger Hiss.

Although this era lies more than half a century in the past, historians are still reconstructing the plan of the vast Soviet espionage network which existed inside the United States. The task is huge, and as more evidence comes to light, the work grows. Historians Stan Evans and Herbert Romerstein write:

Of note in this respect, covert by nature and kept that way for decades, was the nonstop backstage warfare that was waged between the opposing forces even as peace in theory prevailed among the nations. Only by degrees have we come to understand the extent of this clandestine combat, and a great deal more is still waiting to be discovered. Even so, with the revelations of recent years we have enough data in hand to sketch the outlines of an astounding tale and fill in specifics about some matters long uncertain or contested.

Successive estimates at the scale of Soviet intelligence activity have proven to be too small. Each disclosure of new data reveals the efforts to undermine the United States government to have been larger than previously thought.

Historians will be processing this information for decades to come, and new troves of documents are probably yet to be discovered.

Coolidge and Taxes

President Calvin Coolidge and Secretary of the Treasury Andrew Mellon agreed that taxes were a burden to ordinary citizens, and that taxes should be reduced. Mellon held his post already under President Harding, so when Coolidge took office, Mellon was solidly in place.

Mellon had already worked with Harding to get one round of tax cuts through Congress. Coolidge and Mellon would introduce additional tax reductions for congressional consideration in 1924, 1926, and 1928.

Already by 1924, Mellon and Harding had largely removed income taxes from the ordinary working class. In that year, Mellon and Coolidge would work on reducing the tax burden on the middle class. Historian Amity Shlaes writes:

Now, on taxes, Coolidge and Mellon pushed forward. The men told themselves they had the angles covered. The Treasury was readying a plan to publicize the tax problem: a National Tax Reduction Week, scheduled for early April. Mellon, cheered to have the support of such an ally, even planned to market his ideas. Mellon’s deputy, David Finley, was pulling together statements by Mellon and the administration into a little book that Macmillan would publish. The regular worker did not pay the income tax, but, Mellon believed, the regular worker would benefit from the tax rate cut. Therefore he titled his book Taxation: The People’s Business. The book was remarkable in its clarity, and for what it did not contain: the word “tariff” appeared only once, and revenues from customs were described as “abnormally high.”

While Mellon saw tax cuts as an encouragement for economic growth, Coolidge saw them as a matter of justice. If it was possible to relieve the working and middle classes, and reduce their tax burden, then justice required that it be done. If high marginal rates caused the upper classes to find loopholes in the tax code, then lower marginal rates would free that money to flow through the economy and stimulate growth.

Coolidge’s sense of justice about these matters was not primarily a legalistic morality driven by a need to follow rules, or make sure that others followed them. Instead, his sense of virtue was forward-looking, and was about taking action to improve one’s community.

Economics was, for Coolidge, an outgrowth of his spiritual worldview. He steered between a legalistic religion of rules and a worldly worship of governmental power, avoiding either extreme. Historian David Greenberg writes:

Less a censorious Puritan than a pious man of sentimental faith, Coolidge shunned the era’s new secularism as well as its resurgent fundamentalism; he saw religion as a source of virtue, not of division, oppression, or intellectual limitation.

Although motivated by his concept of personal virtue, Coolidge was still a man who’d worked his way through electoral cycles. He understood that tax cuts would help him at the polls.

President Harding was slightly more than halfway through his four-year term when he died, nudging Coolidge into office. Coolidge knew that the voters would be wondering about who he was. A tax cut was a way to send a clear signal about his political identity.

With the election in November 1924, the spring of that year was a good time to send that signal. Historian Robert Ferrell writes:

Personal income tax rates were highly political propositions, both in recommendation and in passage through Congress, and it is noteworthy that Coolidge proposed the Mellon tax cut of 1924 in March of that year, in time for the Republican convention and the subsequent election. It immediately placed the president in the public eye.

Economic policy would define the Coolidge administration in the popular imagination.

He took significant actions regarding race relations: Coolidge snubbed the KKK, which had enjoyed presidential favor during the Wilson administration; Coolidge promoted anti-lynching laws; he was the first incumbent president to deliver a commencement address at a historically Black college when he spoke at Howard University.

He also laid the foundation for a decade of peace. Coolidge worked with Charles Dawes; the result was the Dawes Plan, which restructured the payment of war reparations in 1924. Coolidge selected Dawes as vice president later that year. Coolidge appointed Frank Kellogg to be Secretary of State; the result was the Kellogg-Briand Pact, a treaty designed to offer diplomatic negotiations in an attempt to resolve international conflicts before they turned into open warfare. Although the war had ended only a few years before, Coolidge saw that tensions between various nations were already rising and that another war could easily erupt.

Despite his impact on both race relations and world peace, it was Coolidge’s economic policy that most affected the daily life of the ordinary citizen, that formed the popular image of him in the collective consciousness, and that is most remembered.