893.51/7459½

Memorandum by the Assistant Chief of the Division of Monetary Research, Treasury Department (Coe) to the Secretary of the Treasury (Morgenthau)46

Subject: Secretary’s Proposal for Loan to China.

I. The proposal of the Secretary is that the United States should assist China in financing her military expenditures, and particularly the pay and maintenance of the Chinese soldiers.

Preliminary examination indicates that a loan to China along the above lines can achieve the major objectives which should be the goals of this government in relation to the present loan. It would be desirable, if the President agrees, to tell the Generalissimo that the Secretary is ready to discuss this proposal, among others, and to make a public announcement that negotiations have begun.

However, there are a number of different ways in which the Secretary’s proposal might be carried out, and each of them needs to be explored.

In view of the fact that a good deal of information essential for a decision is lacking, and that each of the possible ways for carrying [Page 436]out the Secretary’s proposal has its strong and its weak points, it would seem desirable that the announcement should be general, and not be confined to a specific proposal.

II. Some of the possible ways whereby the United States could finance Chinese military expenditures are the following:

1. Shipment of United States’ currency to China and its issuance there as pay for soldiers and other military expenditures.

2. Shipment of United States’ currency to China and its issuance there for the purchase of rice and other products for distribution to and use by the army.

3. Giving China dollar accounts in the United States, against which she could issue bonds, the fapi proceeds of which could be used for military expenditures.

4. Giving China earmarked gold, against which bonds could be issued as above.

In order to evaluate these and other proposals, we ought to know more than we do as to how the Chinese Government is now paying its soldiers.

Our present information is only that some yuan payments are made and some rice payments are made, and that there is considerable variation in the amount and method of payment. Particularly with regard to the proposal to distribute United States currency in China, either for pay or for supplies, it is necessary to obtain more information as to how the people and the Government would react to this procedure.

III. A preliminary listing of the pros and cons of the most novel of these proposals, (proposal number 1 above) is given below.

IV. Advantages of using United States’ currency to pay soldiers and to meet other military expenditures in China.

1.
This proposal is in accordance with the political aim of the loan—to assist Chinese military effort.
2.
This kind of loan would meet the political necessity of making a large and spectacular loan. By relating the size of the loan to the size of Chinese military expenditures, this proposal helps to settle the question of how large the loan should be.
3.
The Secretary’s objective of paying out the money in installments, while fighting was going on, would be achieved.
4.
This loan should secure the good-will toward the United States of the soldiers, ordinary people and the Government. This would be particularly true, if the amount paid out to the army meant that the effective purchasing power of the average soldier was increased.
5.
This proposal is in the direction of attempting to make the U.S. dollar currency into an international money.47
6.
In so far as the soldiers and suppliers of military goods would accept U.S. dollars, the fight against inflation would be helped, since the need to issue more Chinese currency for these purposes would be eliminated.
7.
Because the dollars would be hoarded by some people, the tendency to hoard goods would probably be diminished. Not only because of the inflation, but also because Chinese traders and merchants have had considerable experience with various currencies, it would be more feasible in China than elsewhere to introduce a foreign currency into the monetary system.
8.
It would be possible to meet these payments from Lend-Lease, if this method is thought preferable to use of the Stabilization Fund or to an authorization from Congress to lend to China.
A number of the above advantages could also be achieved by the issuance of bonds, payable, when due, in U.S. dollars. The use of U. S. currency to pay for rice to be distributed to the troops would also share in some of the above advantages. If it proves to be true that the amount of yuan now paid to the troops is not large, and if it is doubtful that the troops would accept pay in U.S. currency, the proposal to buy rice and other supplies with U.S. currency may be more feasible than proposal II 1.

V. Disadvantages of the proposal.

1.
Chinese soldiers and ordinary people might be unwilling to accept United States’ dollars, because all their purchases are made in yuan; because of the novelty of the currency; and because the denominations which could be eventually shipped, would be too large for their purposes. Accordingly, the government would have to provide yuan equivalent and there would be no diminution in the amount of Chinese dollars printed.
2.
The United States’ dollars which were issued would be hoarded and speculated in only by the wealthy. There would be thousands of black markets with rates different from the official one.
3.
The Chinese people might interpret the issuance of the new currency to mean that the yuan were to be recalled, or abandoned. Therefore, the confidence in the Chinese currency might be still further undermined. The Japanese, along with the Chinese speculators, would want to obtain United States’ dollars for the plentiful stocks of fapi which they held. Their throwing of these fapi on the market would further decrease the value of Chinese currency.
4.
The difficulties of safe transport would be large. $10 million worth of $1. United States’ notes weigh over ten and a half tons, or, just about what the same value of gold would weigh. $10 million worth of $5. notes weigh over two tons. Shipment of this amount of small notes by air would, therefore, be a considerable undertaking, [Page 438]at a time when much precious cargo must be flown. The transport of this precious cargo over the Burma Road would require a good deal of armed protection. Both governments would use up a good deal of energy and administrative ability on this problem of a safe transport. (The transport difficulties could, of course, be greatly reduced if the United States’ currency were used to purchase supplies, and not for the pay of soldiers.)48
5.
Payment of United States’ dollars to the troops might increase corruption in the army. There might be, in addition to the incentive to profiteer on the soldiers, a large number of spurious supply contracts.
6.
Dissatisfaction of the soldiers with the rate of purchasing power of their pay might be deflected from the Chinese to the United States’ Government.
7.
Speculators, exchange traders and sharpsters of all sorts, would prey upon the poor persons who receive the United States’ dollars, and would deprive them of the benefits which the dollar payments are intended to secure.
8.
The Generalissimo and many other Chinese might regard this proposal as a method of making China dependent upon the United States through depriving her of a separate monetary system.
  1. See memorandum of January 13 by the Adviser on Political Relations (Hornbeck), infra.
  2. Marginal notation by the Adviser on Political Relations (Hornbeck): “Were H[enry Morgenthau?] and C[ordell Hull?] enthusiastic about this?!”
  3. Marginal notation by Mr. Hornbeck: “Tonnage on cargo is not measured by weight”.