Memorandum by the Chinese Minister of Finance (Kung)36

The Chinese Government had thought the situation here was made clear but in view of the inquiry of January 26 desires to summarize, supplement, and bring up to date the data furnished heretofore.

The Chinese Government was greatly disturbed for the past year over the effects of the American Silver Program on the Chinese economic and financial situation. On February 16 in connection with the ratification of the London Silver Agreement for Stabilizing Silver the Chinese Government through the American Consulate General at Shanghai informally communicated the following views:

“China entirely sympathizes with the purpose of the London silver agreement on the stabilization of silver prices and Minister Kung has personally urged ratification which is now pending. Since China’s currency is silver, China is of course vitally interested in measures affecting its value and international exchange but of course has no desire to intrude upon questions of purely American internal concern. In view of reports here, it may be observed that any action resulting in a rise of China’s currency out of relation to other currencies and especially out of relation to world commodities would have deflationary effects in China, further decrease her already reduced exports and so impair her ability to purchase goods from abroad. It would also probably increase the present serious tendency towards heavy silver exports as necessary means of settling large adverse balance. In view therefore of China’s vital interest, it is hoped that the Government of China will be consulted in advance if measures concerning silver that might materially affect China’s currency and exchange are in fact being contemplated.”

Again immediately after the American nationalization of silver in August the Chinese Government made the following further communication:

“The London Silver Agreement of July 1933 received the signature of China’s representatives and has more recently been ratified by the National Government of the Republic of China with the understanding that its major purpose was to secure the stability of the price of silver which was thought menaced by the large surplus stocks held by the Governments of India and Spain. The preamble of the agreement states in part that ‘it is to the advantage of China that sales from monetary stocks of silver be offset by purchases as herein provided, with a view to its effective stabilization’.

“It now appears that under the Silver Purchase Act of 1934 the stability of the price of silver and the interests of China are as much menaced as by the previous situation of potential sellers. China would therefore appreciate an indication of the probable policy of America [Page 531]in the future purchase of silver in order that China may properly safeguard her currency, which has recently been flowing out of the country to a degree that is potentially alarming”.

These views were substantiated by results as detailed in a memorandum communicated to the American Minister on October 5.37 Moreover full information furnished Professor Rogers38 here and subsequently concurrently furnished the American Treasury representative, the Commercial Attaché and the Consulate in Shanghai is presumably available both to the State and the Treasury Department. Nevertheless the following further statement is submitted:

Net silver export in 1934 not including smuggling was 257 million dollars of which five sixths in less than four months from the adoption of the Silver Purchase Act to October 15 when China was obliged to enforce restriction to protect the currency reserve from this extraordinary drain. In 1934, the silver export was five times the previous high record in 1907.
The Shanghai silver stock declined from 544 million dollars at the end of June 1934 to 312 million dollars now. Also the stock of other leading centers declined proportionately.
Till July last money was easy and financing plentiful but accompanying the silver drain money became extraordinarily tight. Since the first half of 1934 interest rose from the equivalent of six percent per annum charged by native banks to customers to 26 percent about January 1. Since arranging the financing of new year settlement lower rates have been nominally quoted at the instance of the Government but this does not represent real improvement since it is practically impossible to borrow at any rate regardless of security. As a consequence tightness of money led to the sale of foreign exchange for cash at a premium over forward delivery worked out to be 27.4 percent per annum yesterday for one month loan.
Notwithstanding the tendency to world wide recovery deterioration of China’s situation increased alarmingly the last six months and the condition now is at the lowest point since depression began. The total foreign trade for the second half of 1934 is thirteen percent below the first half and sixteen percent below the second half of 1933. Although the adverse merchandise balance has declined the drain of both gold and silver the last three years makes the situation here precarious unless the conditions causing the adverse balance of payment are counteracted. Since July last Government and industrial bonds declined by ten percent; property of the Center District of Shanghai declined about fifteen percent; industrial stocks declined seven percent. There are widespread business failures in all regions including numerous important industrial and mercantile establishments. Recently Government-supporting banks and enterprises through the Central Bank of China, Bank of China and Bank of Communications try to prevent further increase of unemployment and [Page 532]wholesale collapse. New year settlement is only about fifty percent of the normal as banks tear pressure would precipitate numerous bankruptcies which at this time would cause general collapse. As a consequence notwithstanding their own difficulties banks feel obliged to grant loan extensions even to practically insolvent concerns. In order to ease money and sustain confidence during new year settlement the Government is obliged to bring back silver from Hongkong at 19 percent loss in the small driblets which the financial situation permits but the present impaired credit structure and the inordinate interest rate due to the silver drain are destroying trade.
Tight money gravely impairing Government finance is making practically impossible further financing by banks. The reserve [revenue]39 particularly that of the customs is seriously threatened by the present tendency. Reconstruction activities are checked; for example the loan for the important project of bridging connecting railways near Hangchow and extending the railway to Ningpo cannot be floated though already contracted for.
All evidences confirmed the rising of currency value which [evidence confirms that rising currency value]39 has proved disastrous to China because involving parallel deflation. For detailed discussion supported by statistics see a recent report of the Ministry of Industries Commission of which Professor Buck40 has preliminary copy which however contains figures only to early 1934. Since then the conditions have become greatly aggravated.

  1. Copy transmitted to the Department by the Chinese Minister under covering letter of February 1.
  2. See telegram No. 462, October 11, 1934, noon, from the Counselor of Legation in China, Foreign Relations, 1934, vol. iii, p. 446.
  3. Dr. James Harvey Rogers, professor of political economy at Yale University; special representative of the Treasury Department in China, Japan, and India in 1984.
  4. Correction made on basis of the Chinese Minister’s note of April 8; not printed (893.515/519).
  5. Correction made on basis of the Chinese Minister’s note of April 8; not printed (893.515/519).
  6. Dr. J. Lossing Buck, professor at the University of Nanking.