The Ambassador in China (Johnson) to the Secretary of State

No. 1558

Sir: I have the honor to enclose for the information of the Department a copy of despatch No. 262 of February 7, 1938, from the Consulate at Tsingtao,5 in regard to the banking situation in that port.

Two main points of interest are discovered in that despatch: (1) there exists the report that the Japanese efforts to cause the release of Chinese bank notes into the market at Tsingtao is based on the desire to effect an exchange of those dollar notes for Japanese yen notes (at par?) with the purpose of subsequently purchasing foreign exchange in Shanghai with the Chinese notes; and (2) the head offices of the Bank of China and the Bank of Communications are evidently offering opposition to arrangements arrived at by the local branches of those banks.

It may be noted in this connection that the situation in the Peiping–Tientsin area differs slightly in this particular but is essentially the same in the general aspect. As has already been reported, the Peking Provisional Government has authorized the issue of an unknown amount of bank notes and subsidiary coins by its new banking organ, the Peking–Tientsin Joint Reserve Bank. Participating in that Reserve Bank are stated to be the local branches of the Bank of China and the Bank of Communications—two of the National Government’s three authorized banks of issue (omitting Chiang Kai-shek’s6 Farmer’s Bank of China). The authorities of those two banks have to date made no public denial of the reports of their participation, but it may perhaps not be without significance in this connection that the Tientsin managers of the two banks have recently been called [Page 3] to Hongkong for consultation with the head officers of those institutions. It is taken for granted that the Japanese, working through the Joint Reserve Bank, purpose the withdrawal of the note-issues now current in North China as the new note-issue goes into circulation, presumably by exchange at par. The old local note-issues would have to be retired, presumably, by destruction of the bank notes as they were replaced, but the notes of the Bank of China and the Bank of Communications could well be used, after having been obtained by exchange for paper of questionable value, in purchasing foreign exchange from the National Government’s own banks. One newspaper puts the Peiping-Tientsin note-issues of the Bank of China and the Bank of Communications at Y$115,161,000 and Y$55,840,000 respectively, with the Central Bank of China having a circulation of Y$32,343,000, and four other banks bringing the total note-issue of Shanghai banks in the Peiping-Tientsin area up to Y$207,264,000.* It is not certain that the figures given are reliable, and it is to be noted in addition that several of the banks concerned have important stocks of un-issued bank notes, the ultimate disposal of which is a matter of doubt, in their vaults; it is clear in any event, nevertheless, that the current moves directed toward the reorganization of the currency in North China carry an overt threat against the stability of the National Government’s financial system which must be added to the blows already given that structure in the shape of military action.

Respectfully yours,

For the Ambassador:
Frank P. Lockhart

Counselor of Embassy
  1. Not printed.
  2. Chairman of the Supreme National Defense Council of China and leader of the Kuomintang (Nationalist Party).
  3. The Peking Chronicle, February 9, 1938. [Footnote in the original.]