893.51/7120
The Adviser on Political Relations (Hornbeck) to the Secretary of the Treasury (Morgenthau)
Dear Mr. Morgenthau: With reference to my call on you on March 6, 1940, at which time at Mr. Hull’s direction I spoke to you in regard to the question of possible use of the Stabilization Fund in connection with the situation in China, I enclose for your information a copy of a confidential letter, dated March 15, 1940,57 which I have received from Dr. Arthur Young in Chungking, China. I think you may be interested in noting Dr. Young’s further views in connection with this matter.
In the fourth paragraph of his letter Dr. Young mentioned two messages which were telegraphed by Mr. Peck at the end of February. In the longer of those two messages58 it was suggested that the exchange situation might be relieved to some extent if the United States should supply free of charge to China not exceeding 15,000,000 bushels of wheat for relief purposes. A copy of a memorandum, which was prepared in the Department,59 containing comment on this suggestion was transmitted to the Treasury Department on March 16. The briefer of the two messages59a quoted Dr. Young as saying inter alia that, although the Chinese Stabilization Fund may be able to cope with the debit balance of payments growing out of the seasonal demand for imports which extends to early summer, the Chinese Stabilization Fund does not possess reserves adequate to protect the currency against such adverse developments as further attacks upon the currency by the Japanese, the creation of a new central “government”, serious military reverses, or further repressive action by the Japanese military forces against foreign settlements and concessions in China. According to Dr. Young, the most critical period in the entire conflict will be reached in the next few months because there will be little foreign exchange available for currency support after early summer (unless fresh funds for currency support are obtained) and because a decisive factor in the outcome of the conflict will be maintenance of the exchange value of the Chinese currency at a period when increasing difficulties are causing the Japanese program to fail.
Yours sincerely,