The British Embassy to the Department of State

Reasons for which His Majesty’s Government believe that foreign loans or credits for China would not offer any real or lasting remedy.

China’s monetary difficulties appear to be due firstly to lack of confidence that the Chinese dollar can remain convertible into silver in face of the present high price of silver and the consequent flight of capital from China, and secondly to China’s adverse balance of payments. Both these causes lead to a desire to export silver, and consequently to smuggling and hoarding, and thus to a danger of a run on the banks. A foreign loan would not permanently remove these difficulties and when its proceeds were exhausted the present difficulties would recur, while a fresh burden of foreign debt would have been superimposed, and the available security would have been mortgaged for no lasting benefit.
It was suggested that a loan would enable China to return to a free silver standard; but this would now involve raising the value of the Chinese dollar to at least the equivalent of one shilling and eight pence (say 40 cents) with no assurance against further rises. His Majesty’s Government cannot but feel that the consequent internal deflation and the check to Chinese exports would necessarily have serious consequences in the absence of any corresponding rise in world prices.
In particular His Majesty’s Government fear that a foreign loan would be regarded both by speculators and by distressed sellers of silver as an opportunity to export silver quickly before the loan was exhausted, and would thus accelerate the evils which it is desired to avoid.

It is the British experience that disappointing results have usually followed—as in the British case in 1931—from attempts to maintain a threatened exchange position by means of foreign loans, unless the underlying causes of exchange weakness have first been removed.