The facts are quite clear. These measures which are being taken in North
China do not issue from a group of irresponsible Japanese officials in
North China but are being promulgated with the cognizance and the
approval of the Japanese Government. They are one of the means by which
the so-called Continental Policy is being implemented, and for that
reason I have not been too hopeful that the numerous representations
which we have both made to the Japanese Government on this matter will
lead to a substantial modification of the situation.
With regard to the question whether some way can be found to resist these
measures, my views are substantially those outlined by Mr. Williams in
paragraph numbered 7 of his memorandum. In my opinion, these problems of
currency and of exchange are matters of general, and not specific,
policy and they need to be “considered and dealt with inseparably from
the entire Far Eastern question”. It is possible that there may be
available some way of purely local application by which the Japanese
measures may be partially circumvented and the conditions in North China
thus alleviated to some extent, but I believe that you will agree with
me that our respective colleagues in China would be in a better position
than we could be to determine whether anything practicable along those
lines might be accomplished. You and I have discussed frankly the
possibility of resort to more far-reaching measures in order to resist
the further unfolding of Japan’s ambitions in China, and I confirm the
conclusion which I expressed to you orally during our conversation on
December 5th, that, as I do not believe that anything short of force can
[Page 100]
lead to substantial
moderation of Japanese policy in China, I cannot conscientiously
recommend to my Government recourse to economic sanctions.
[Enclosure]
Memorandum by the Commercial Attaché in
Japan (Williams) to the
Ambassador in Japan (Grew)
With reference to the letter addressed to you under date of December
1, 1938, by His Excellency, the British Ambassador,36e concerning the gradually
increasing pressure being exercised by the Japanese authorities in
North China to the detriment of foreign interests, I have the
following comments to make on the currency and exchange situation in
so far as it affects American interests.
1) You will remember that Japan’s reply to our Note of October 6th
evades the control of foreign trade and foreign exchange transaction
issues as raised in our Note, but deals chiefly with the necessity
of establishing the Federal Reserve Bank notes as the compulsory
currency in North China and the elimination of the “fapi” or Chinese
notes as currency.
2) As a forward step towards accomplishing this, the Japanese have, I
am informed on good authority, been exchanging the FRB notes in
North China for “fapi” and using the latter in the Shanghai market
to purchase foreign exchange under the limited weekly allotment
allowed by the Chinese authorities for legitimate commercial
purposes—this allowance being extended even to Japanese. The
pressure so exerted on the Chinese currency has been largely
responsible for its drop of 40% in terms of Sterling and the United
States Dollar (from 1/2½d. and 29½¢ to 8d. and 16¢).
3) Traders in China, including Chinese and Japanese, have no
confidence in the FRB notes as these have no gold reserves or
foreign currency backing except certain arrangements with Japanese
banks.
4) The prevailing low exchange value of “fapi” has increased the cost
of foreign imports other than Japanese into China by approximately
40%, but the use of FRB notes at par with “fapi” or even at the
present 10% discount in North China enables importers to obtain
Japanese goods in that area for practically the same price as paid
before the China hostilities began. In other words, the market in
North China is at present, to all intents and purposes, the same as
the domestic market in Japan and is destined to become even more so
as time goes
[Page 101]
on unless, of
course, something is done to stop these inequitable practices.
Furthermore, unless the FRB notes have a foreign exchange value and
the Japanese allow foreign exchange coverage to American traders,
our foreign import business will eventually be cut to a very small
figure or cease altogether.
As an indication of the extent to which Japan’s trade is profiting in
North China from virtually exclusive or preferential transportation
rights and facilities and a 40% price differential, Japan has
exported to that area during the first ten months of 1938 Yen
156,654,000 worth of goods against Yen 64,521,000 for the
corresponding period of 1937 and Yen 46,228,000 for the same period
in 1936. These figures represent an increase of 142.8% over 1937
business and 238.9% over 1936.
5) Prices of North China export commodities to foreign buyers have
risen commensurate with the fall of the “fapi”, but the Japanese
control prices and use FRB notes to pay for such goods on the basis
of Yen 1.00 for one FRB Yuan. No foreign exchange is involved. On
the other hand, foreign exporters must supply foreign exchange at
open market or arbitrary rates, thus making their prices
prohibitive. In addition these foreign merchants must pay open
market exchange rates on imports which likewise results in
prohibitive prices in competition with the Japanese.
From these few facts it is quite discernible that the Japanese are
gradually but surely closing the open door.
6) It is quite likely that the Japanese military authorities will
enforce acceptance of the FRB notes in North China by March 10,
1939, but if this is done it can be assumed from the statements made
in the second and third sentences of the fifth paragraph of the
Japanese Government’s reply to our Note of October 6th that the
Japanese Government is not only countenancing but most probably
initiating such a step. (As a matter of possible interest to you, in
the discussions of the question of Nationalist currency in China by
the tripartite conference composed of representatives of Japan,
“Manchoukuo” and China last week in Osaka, the spokesman of the
Peking regime reportedly counseled against taking any strong
measures to eliminate it from circulation as he stated that it has
much to do with the welfare of the people in general. Apparently
this attitude reflects that of the people of North China.)
7) As to what methods should be used for resisting this and other
measures mentioned by the British Ambassador, it seems to me that
this must be considered and dealt with inseparably from the entire
Far Eastern question. The matter of exchange, currency and trade
control is merely a branch of the now, let us say, half grown tree
“Changed Conditions in Asia,” whose roots run deep into the Asiatic
continent. If any pruning is to be successfully accomplished the
roots must first
[Page 102]
be
properly treated. My personal opinion is that only measures
envisaging extremely drastic steps backed by the determination to
resort to military and naval force, if necessary, will cause Japan
to deviate from her determination to exercise full and complete
economic control of China.
