Office of the Historian

893.51/6–745

Memorandum by the Chinese Minister for Foreign Affairs (Soong) to the Secretary of the Treasury (Morgenthau)

[Washington,] May 9, 1945.
I.
The Chinese Government notes with great satisfaction the views of the Treasury that any program to stabilize currency and check inflation should comprise a broad series of monetary, fiscal and administrative measures. As is perhaps known to the Treasury, I am charged during this trip to arrange for American expert advice on budgetary procedure, on taxation, banking, currency stabilization and administrative reforms.
II.
The Chinese Government also appreciates the constructive attitude of the Treasury in exploring the possibility of a Currency Stabilization Fund. However, pending the ratification of the Bretton Woods Agreement56 by all the Governments concerned, it wonders whether this is an opportune moment to bring forward a bilateral stabilization agreement between China and the United States.
In addition, as has been pointed out by the Secretary of the Treasury, the proposed Fund would be effective only when the war is over, or when a Chinese port is opened and through that port overland contact established with the Free China area.
III.
As I pointed out yesterday, whatever we may do about the future, we must take care of the immediate crisis, since without the present there can be no future. In view of China’s immediate crisis, measures that are immediately effective should be undertaken. Consequently, the Chinese Government takes the following position on the sales of gold:
1.
By the promise of President Roosevelt, the United States Government has agreed to make available to China $200 million in gold out of the $500 million loan. The promise was confirmed by the [Page 1084] letter of the Secretary of the Treasury to the Chinese Ambassador in Washington, dated July 27, 1943.56a This is a definite commitment of the United States and represents, as I said yesterday, water over the dam.
2.
The credit of the Chinese Government must be maintained by an immediate delivery of gold to meet its outstanding commitments. The United States Treasury has been daily informed of these sales and no exception has ever been voiced by it.
3.
In view of the fact that the sale of gold is the only effective measure so far found to absorb large blocs of currency, the stoppage of such sales, precisely at the time when the inflationary spiral is gaining momentum, would be disastrous. For instance, from April 1st to May 4th, this year, in little over a month, the Chinese Government absorbed 10.8 billions Chinese National Currency by gold sales. If the price of gold is further increased, which we contemplate, we might well absorb more than half of our present monthly increase in circulation. If in addition, we carry out the proposal of the Secretary of the Treasury to tap a wider market and to insure wider distribution by selling token coins of small unit weights, even larger quantities of Chinese National Currency could be absorbed.
The Chinese Government is indeed anxious to secure textiles and other goods to help combat inflation, but the volume of goods available, as well as the transport facilities, is limited, so it is clear that such an effective and proven instrument to combat inflation as is represented by our gold sales cannot be abandoned.
IV.
Upon the assurance of immediate and substantial shipments of gold to China, the Chinese Government is anxious to reinforce its gold sale policy in the following manner:
1.
To increase the price of gold, making it more in line with the level of general prices, so as to yield more to the Government.
2.
With gold stocks on hand in Chungking, to discontinue forward sales, but to sell exclusively for cash delivery, doing away with the big differential between the official and open market prices of gold.

In addition, the Chinese Government desires to devise a method of retroactive taxation on forward buyers of gold, so as to tax windfall profits arising from the rise in the price.

The Chinese Government is also ready to discuss with the representative of the Treasury on the best method of conducting gold sales, and would indeed be glad to invite such a representative to sit on the Gold Sale Committee in Chungking.

Unless the promise made by President Roosevelt and the Treasury to make gold available be fully implemented, a disastrous financial [Page 1085] collapse in China is plainly indicated, which will inevitably be followed by a military collapse.

T. V. Soong
  1. Signed at Washington, December 27, 1945, Department of State Treaties and Other International Acts Series No. 1501, or 60 Stat. (pt. 2) 1401.↩
  2. For substance, see telegram No. 1005, July 31, 1943, midnight, to the Chargé in China, Foreign Relations, 1943, China, p. 439.↩