Sir Frederick Phillips of the British Purchasing Mission to the Secretary of the Treasury (Morgenthau)8

Dear Mr. Secretary: You will of course be aware that the question of further American and British assistance to China has been raised in the last few days and that in particular Chiang Kai-shek has suggested to the two Ambassadors that China ought to receive additional loan assistance to a total of $500 millions and £100 millions.

The British Government would be very interested to know what are your general reactions to this proposal. The sums mentioned are of course, enormous and it is the reverse of obvious how far large dollar and sterling credits could enable China to face her real problem, which is to check the enormous inflation of Chinese currency resulting from the war. It appears that the Chinese Budget is being met 90 percent or more by note printing. Nothing is being done to meet the situation by the borrowing of genuine savings, but in order to restrain a still greater rise in prices than has at present occurred it seems essential to make a decided effort in this direction. Prices have already risen over July 1937 by anything up to thirty times, mostly since June 1940 and the momentum is growing.

Sir Otto Niemeyer is pressing on the Chinese Government certain obviously needed reforms such as controlling the grant of credit by private banks and rates of interest, and measures to make more effective transport control, particularly on the Burma Road, and to check rice prices. We hope that it may be found possible for the U. S. Ambassador to give support to these ideas, which however by themselves are clearly inadequate.

I am not aware how far it would be possible for you to give further financial assistance through channels already established but as a practical matter the problem seems to be not to give China more foreign exchange (need for foreign exchange must have been greatly [Page 422] reduced by the closing of Shanghai and Hong Kong, reducing Chinese imports to what she can get over the Burma Road, and most of the latter is covered by lend-lease) but to check the enormous increase in the internal circulation of bank notes. To deal with this latter point Niemeyer proposes that the Chinese Government should be urged to issue an internal gold loan for say fifteen years secured on customs receipts after existing loans, repayments to start five years hence, and principal but not interest to be guaranteed as to one tranche by the United States, and as to the other by the United Kingdom, amount not exceeding say £10 millions ($40 millions) for each tranche. The proceeds of this loan would be used to redeem local currency and reduce the circulation. I mentioned this proposal recently to Dr. White,9 and I should be glad to learn whether in general principle it appeals to you.

Yours sincerely,

F. Phillips
  1. Copy transmitted to the Department in letter of January 3 from the Third Secretary of the British Embassy (Wade) to H. Merle Cochran of the Board of Economic Operations and concurrently Technical Assistant to the Secretary of the Treasury.
  2. Harry Dexter White, Assistant to the Secretary of the Treasury and Director of the Division of Monetary Research.