The Minister in China (Johnson) to the Secretary of State
Peiping, March 4, 1935—4 p.m.
[Received March 5—4:45 p.m.57]
[Received March 5—4:45 p.m.57]
106. Department’s No. 56, February 28, 6 p.m.58
- The financial situation in Shanghai is, according to all responsible people with whom I talked, most acute because there now exists in Shanghai a scarcity of monetary silver. The reason for this is that during late summer and early winter bankers and others sold or otherwise disposed of their stocks of the silver in order to take immediate advantage of large profits. They are now under the necessity of meeting pressing local obligations and to that end must buy silver on a [Page 552]rising market thus losing earlier profits. Situation has been made additionally acute because of cheap silver which having come to Shanghai for investment in Chinese Government securities and Shanghai real estate has now gone thus wiping out an important factor in Government’s financial policy and leaving Shanghai real estate (in which I believe members of Government have been deeply interested) in a precarious condition.
- Above situation temporarily steadied by sundry local expedients make it hazardous for the Government to ship silver in large quantities from Shanghai for the present. Kung informed me that, rather than risk this hazard, he attempted buying silver in London but silver prices there rose at once threatening severe loss to Government.
- It is thought that bankers and others in Shanghai were lacking in judgment when they disposed of their stocks of silver in the face of a certain local demand but the straits in which they now find themselves threatens a collapse of the financial structure of Shanghai upon which the policy of the Ministry of Finance has been very largely dependent and in their desperation bankers and government officials are blaming the United States silver policy for their plight.
- I believe that it would assist Minister of Finance to steady situation if Treasury could authorize Chase National to leave silver in Shanghai until crisis has passed or more permanent measures have been taken. Such a step would be concrete evidence of our desire to assist. I understand Chase National is cognizant of Kung’s desires in this matter.
- I should add in this connection that certain bank has begun a campaign intended to tap large supplies of industrial and ornamental silver now scattered throughout country in the hands of silversmiths and private citizens. This silver apparently had not yet begun to react on the strength of present high price of silver. If China can avail itself of these domestic supplies it can, without drawing upon general market, meet its contract with Federal Reserve and of course carry out plan which I understand Kung has proposed officially through Chinese Legation at Washington.
- With reference to Kung’s request that American Government encourage National City and Chase National to bring funds to Shanghai I can only state my belief that he hopes thereby to obtain aid of American banks in his efforts to encourage silver to return to Shanghai to revive confidence and free capital now locked up in real estate loans. His idea appears to be that American banks in question lend money on Shanghai real estate through Chinese banks as guarantors. He stated that he was willing to guarantee such loans to the American banks if they would not accept sole guarantee of Chinese banks. This proposal is related directly to situation described in paragraph 1 and [Page 553]represents a desperate effort to break present deadlock and start a flow of silver back to Shanghai.
- With reference to the proposal which Kung has laid before United States Government, I came into possession of the details of this proposal only on February 27th when Kung gave to me copies of two informal memoranda purporting to have been presented to the Department on February 1st59 and February 5th60 with an appended note giving memorandum presented January 21st61 and verbal note of February 5th.62
- I am not in possession of sufficient facts upon which to base an opinion as to the ultimate feasibility of such a plan as that outlined in the documents referred to. Any plan for a change in, or reform of, Chinese currency must be fraught with difficulties not only in China where the Government has never exercised any control over the currency used by the people but also in countries adjacent to China where silver enters into towns across the borders. In this connection, I shall only mention difficulties now being experienced by Japan because of the appreciation of the Manchukuo silver in terms of Japanese yen.
- I am of the opinion that such a proposal should not be discussed with China nor any attempt made to carry it out without the friendly cooperation of powers interested in the consortium who formerly proposed a currency loan. In this connection, and with reference to the Department’s telegram 53 , March 2, 2 p.m., British Minister informed me yesterday that last November T. V. Soong to whom Minister of Finance had entrusted matter approached him in regard to a sterling loan of 20 millions to cover impending financial situation in Shanghai. Further details he did not give me. He stated that he referred the matter to the British Government which replied that such a loan was not possible from Great Britain because under present rulings British Treasury is unable to make loan except under conditions which China could not meet and in any case loan would be but temporary makeshift. British Minister stated that under constant importunities of Soong British Government recently instructed its representatives at Paris, Tokyo, and Peiping to discuss international cooperation in showing financial assistance to China and said that he, pursuant to instructions, has informed the Chinese Government of these steps and has stated that British Government is not optimistic regarding possible assistance but that in any case assistance can only be given provided Sino-Japanese relations are put on a better basis and presumably with the friendly cooperation of Japan. I [Page 554]understood him to say that he had requested Chinese Government to put forward a concrete proposal regarding such international financial assistance for discussion with the powers concerned. British Minister stated that in his opinion these discussions were not likely to be fruitful of results but he did believe that the British Government’s action in the matter might ward off independent action of Japan.
- With reference to paragraph 5, Chinese Government doubtless may be able to tap large supply of privately owned industrial and ornamental silver but may be forced to use methods of coercion which would damn every one, foreign and Chinese, connected with the scheme. Private Chinese hoarders of silver are not likely to part willingly with this silver merely for paper or for other minted silver dollars.