The Ambassador in China (Gauss) to the Secretary of State
[Received April 13—3:05 a.m.]
396. Following from Adler for Fox, [care] Secretary of the Treasury.
“TF–27. 1. Chairman and Secretary of Board saw Y. C. Koo and Tai44 of Ministry of Finance this morning. Minister not present. Zabo [Koo?] emphasized gravity of economic and financial situation, frankly admitting position desperate. He felt reduction in exchange rate to 5 cents imperative to insure sales of savings. Chairman indicated that if reduction necessary now perhaps better to make it 4 cents at once to avoid need for subsequent reduction or reductions. Tai insistent that reduction to 5 cents enough and both Koo and he pledged that Board would not be appealed to later to lower rate if sales of saving certificates and bonds lag. Meeting ended with understanding that we were to send formal letter to Board recommending lowering rate to 5 cents. All Board members except Hsi45 agreed to act favorably.
2. Knowing your feeling on matter I saw Dr. Kung in the afternoon and raised advisability of a 4-cent rate. He told me many people including the Generalissimo [thought?] existing rate too low (!). He [said he?] would favor 4 cents because it would make Government’s United States dollars go further were it not for fact that it would weaken confidence in fapi and that merchants and dealers would immediately mark up their prices proportionately, therefore he felt 5 cents sufficient. When I pointed out disadvantages of lowering to 5 cents now and having to resort to lowerings later, he replied [Page 506]he did not think it necessary. He indicated that it is intended to give discount on United States dollar-backed bond flotation in form of a 6-cent rate which would gradually be lowered to par to put a premium on early buying.
3. Immediately afterwards I called upon Y. C. Koo, and O. K. Yui.46 Zabo [Koo?] again stressed gravity of economic situation. Circulation of fapi had risen from $15,000,000,000 at end of December to 16,500,000,000 at end of February. Volume of fapi in circulation plus Government bank deposits increased from $23,000,000,000 to just under 26,000,000,000 in same period. Excepting change in prices, value of fapi in circulation plus Government bank deposits at end of February only one-fourth of the value in July 1937. (While safe to assume what is now occupied China then accounted for more than half fapi and Government bank deposits, proportion is now to be reversed. On the other hand, there has been significant increase economic activity in Free China since then. Even by assuming these factors to cancel each other out above drop in value ominous.) Chungking wholesale price index, Koo continued, which rose from 2700—Institute of Wartime Economic Research January–June 1937 equals 100—at end of December to 3,000 at end of February jumped to 3,700 in March. He said that sales of saving certificates insignificant and reduction of exchange rate to 5 cents would stimulate them. Again I pointed out better to make a bigger reduction now than to tamper with exchange rate again later in order to force these sales and again Koo agreed that latter should not be done.
However, he did so half-heartedly, even invoking purchasing power parity to justify half-heartedness. In [the opinion of?] competent observers, too much confidence cannot be placed in “pledge” not to resort to further reductions to stimulate sales of government securities in case of unfavorable developments. Position of Board would then be weak since if it were reluctant to lower rate, whenever Ministry of Finance insistent that securities sales campaign would benefit by so doing, Board would be convenient scapegoat and alibi.
4. One factor in failure of savings certificates campaign which Ministry will not admit is fact that many potential investors feel government may not recompense in United States dollars when they fall due and are disappointed that certificates do not have direct guarantee of United States Treasury. Perhaps Ministry missed an opportunity in not bringing in a semi-foreign [sic] like [apparent omission] in which investing public would undoubtedly have greater confidence. It appears same thing is going to happen with United States dollar-backed bond issue.[”]