The Chinese Minister (Sze) to the Secretary of State
The Chinese Minister presents his compliments to the Secretary of State and has the honor to transmit the following text of a cablegram which has been received from Dr. H. H. Kung, Minister of Finance at Nanking:
China greatly appreciates the American Government’s consideration for China’s difficulty in connection with the execution of the silver purchase program. However the Chinese Government feels that under existing conditions the present or higher price in an open silver market inevitably involves the loss of an essential part of China’s monetary reserve through legal and/or illegal exportation with resulting monetary chaos and social and political complications international in scope. China however cannot raise the exchange to the foreign silver parity and at the same time prevent disastrous deflation and conserve the silver reserve on the present basis. Lack of confidence in and present doubt about China’s currency resulting from uncertainty about the silver price and about the extent of the drain on China’s silver under the influence of American buying are ruinous to foreign and internal trade and seriously impair the Government’s revenue when the Government is making strenuous efforts to stamp out the communist threat in a western province and consolidate its position throughout the nation. China has therefore considered how it might adjust its monetary and financial policy and program to the American policy and program and harmonize the interests of both countries and has decided it has no choice but to seek feasible means to abandon the exclusive silver basis maintained by it alone and adopt a new currency system by using both silver and gold with a view to linking its currency to that of the United States and to freeing its exchange from uncertainty attached to the silver basis under present conditions.
American cooperation is essential to that end if China is to escape from the present impossible situation and pass safely through the trying transition to a new monetary system without a period possibly prolonged of inconvertible paper money accompanied with grave risks to internal if not external stability. The Chinese Government [Page 534]hopes the American Government will be able to act along the line indicated by the memorandum of January 2141a pending an arrangement whereby China would supply the American silver requirement in an endeavor to assist the American Government and would obtain American support in currency reorganization. To this end China outlines the following plan:
Section 1. Under existing circumstances China would prefer to supply the requirement under the Silver Purchase Act provided the extent thereof, the period of years for their fulfilment, and the sale price of silver supplied are mutually agreeable. Given time and facilities to get together sufficient silver in the hand of the Government China could provide for the entire requirement out of the country’s holdings. It is suggested that in the first year China sell 200 million fine ounces with tolerance to China of fifty million fine. Subsequent delivery is to be arranged as soon as the American Government indicates its requirement. The price is to be determined either on a gradually rising scale or at a flat valuation above the present price depending on how rapidly and to what valuation the American Government desires the silver price to be raised.
Section 2. In changing the currency of the entire country in a brief time from silver to a currency linked with the United States of America dollar China would require immediate resources so as to establish confidence during the transition and provide a sound basis for the new currency which would require protection against temporary adverse balance of payment consequent upon China’s silver exchange being out of line with the level of the world’s commodities and leading foreign currencies. Such resources further would tend to assist in repairing the serious damage to China’s economy resulting from the loss last year of 260 million silver dollars vital reserve plus the amount smuggled and consequent extreme tightness of the financial market.
Currency experts estimate that the minimum resources required would be a loan or long term fund amounting to United States of America dollars 100 million. In addition to this a credit of like amount against future delivery of silver to be drawn upon if and when required is desired so as to ensure beyond question the soundness of this currency reform. It is hoped that this credit would not be drawn upon at all because the reform based upon American cooperation and a settlement of the silver difficulty would itself command general confidence.
Section 3. It is understood that the above proposal is conditioned upon a final agreement on a feasible currency program. The Chinese Government earnestly hopes that the foregoing will receive favorable consideration with a view to promoting a solution of the silver difficulty and encouraging trade development.