Office of the Historian

893.51/6523: Telegram

The Consul General at Shanghai (Gauss) to the Secretary of State

Shanghai, December 1, 1937—2 p.m.
[Received 3:44 p.m.]

1052. The four paragraphs following comprise a digest of a confidential statement handed me by an informant in close touch with the financial situation:

1.
He emphasized the American interest both direct and indirect in preserving the position of internal as well as external loans of the Chinese Government. The China Foundation and the Tsinghua University have over 17,000,000 book value in Chinese currency funds representing 55 per cent of their total funds.
2.
The stability of the credit system is dependent on the position of the internal bonds. Of about 2,300,000,000 internal debt roughly two-thirds held by Chinese banks as note issue reserve, reserve against savings deposits, security for import duties to Government and as investment. Maintenance of these institutions or at least avoidance of other than slow change is important to all interests including Japanese. Some Japanese bankers apparently appreciate disadvantages of ruining currency and credit system which would entail financial collapse and ruination of many firms and individuals foreign and Chinese. It is not clear how influential their views may be.
3.
Cost of maintaining customs service is about $40,000,000 annually. In 1938 external and internal debt payments from customs will be about 88 and 130,000,000 respectively. Average revenue collections last 5 years 325,000,000 so that repudiation of internal obligations would permit substantial balance to party controlling funds for any use whatsoever.
4.
Situation not yet generally appreciated here or maintenance of exchange stability would be more difficult. Some of above argument might be used with Japanese but part of it if appreciated by elements wishing to wreck currency and financial structure might confirm them in their desire.
5.
Please see also recent New York Times [correspondent] Abend’s report of interview with General Matsui which was encouraging as indicating that Japanese might give some consideration to question of internal loans in breakdown of China’s financial structure.

Gauss