893.51/7259: Telegram
The Ambassador in China (Gauss) to the Secretary of State
[Received 11:30 p.m.]
324. During a recent conversation, the Minister for Foreign Affairs mentioned to me confidentially that the British are proposing to send an economic mission to China probably headed by Otto Niemeyer or some equally prominent British economist, and that he understands that the British are now approaching Washington with a suggestion that the consonance should be Anglo-American. In reply to my inquiries he said that the mission would come as in response to an invitation extended about a year ago by the Generalissimo and that while he did not know what the mission could actually accomplish in a substantial way at the present time he thought that the coming of the mission might have a good psychological effect.
While we might find it advisable to join the proposed economic mission suggested by the British, if only to show solidarity in an Anglo-American [Page 691] attitude of assistance to and sympathy for China, I do not feel that such a mission could do much more than to point out the necessity for financial aid to China and recommend at least [some?] financial reforms which, however, would have but limited effect on the financial and economic position even if they could be adopted. Incidentally the suspicion arises that the British proposal may represent in some measure a further attempt to embarrass the present Minister of Finance.
It is true that China’s financial and economic position is most unsatisfactory and that inflation is progressing at the rate of approximately 400 million Chinese dollars new note issue monthly, that price levels are rising at an alarming rate, and that the Government has until recently done nothing to institute financial reforms. It must be borne in mind that China’s usual revenue sources, such as the customs and salt and consolidated taxes, have now fallen largely into Japanese hands; that military expenses cannot now be reduced; and that the economic and fiscal organization [which has?] the advantage under control of the national Government is such [that?] new revenue producing measures will be difficult if not impossible to introduce, and even when introduced will do but little to improve the actual financial [situation?].
The rise in price levels is due not alone to currency inflation. There is an actual and serious shortage of commodities which produces a highly competitive demand and hoarding! The loss of Ichang to Japan about a year ago blocked route of supply up the Yangtze River from Hunan and other areas. The recapture of Ichang by China would undoubtedly improve the food situation, but apparently it cannot be undertaken without artillery which China does not now possess.
As I see it, we are confronted with the distressing picture of Government expenditures in excess of income and available revenue, some estimates placing the ratio of expenditure to revenue as high as two to one, with inordinate resort to the printing press as the only available means of meeting the deficit. A foreign economic mission may recommend reforms and fiscal measures which, even if found practicable of introduction in this part of China, could bring about little real improvement in the situation in the near future. It seems to me the major recommendation of such a mission must be for outright financial aid to keep the Government operating and to keep China in a state of continued resistance to Japan. We are already giving substantial aid to China under the Lend-Lease Act and the stabilization loan and Import-Export Bank credits. If we join the economic mission we must do so with the expectation that additional substantial financial assistance to China will be found imperative [Page 692] and that we will likely be expected to furnish in principal measure. This may be one of the considerations which prompts the suggestion that we join the mission.
Sent to Department, repeated to Peiping.