The Ambassador in China (Gauss) to the Secretary of State

No. 397

Sir: I have the honor to transmit herewith two memoranda60 of conversation held by members of my staff with Mr. Solomon Adler of the Stabilization Board of China and Dr. Y. C. Koo, Vice Minister of Finance, concerning recent restrictions imposed by the Government upon the business of commercial banks in China. There is also transmitted a translation of a lecture61 delivered by the Director of the Monetary Department of the Ministry of Finance in which the new regulations are outlined and discussed.

[Here follows survey of banking history in China.]

The new regulations covering the operations of commercial banks consist largely of measures designed to limit the flow of capital into speculative activities and to divert it toward the financing of productive enterprise and the distribution of commodities. If this were accomplished, some of the burden now resting upon the Government banks would be removed and the creation of new money could be curtailed. Production would thus be increased further restricting inflationary tendencies. In as much as the Government is unable and perhaps to some extent unwilling to reduce its present level of expenditures, the increase of production and the diversion of money into productive rather than speculative purposes would appear to be the only method open for combatting inflation.

At present there appears to be in the Government a strong desire to strengthen the reserve position of the commercial banks which finds expression in certain of the new regulations. Though the aim in itself is praiseworthy, there may be a certain overemphasis on this aspect of the banking problem at a time when the entire monetary system is in danger. …

… A partial solution of the problem of inflation might lie in the drastic taxation of those most able to pay, namely speculators, hoarders and landlords, together with measures to compel these classes to buy Government bonds and savings certificates in large amounts. Such measures might have the effect of forcing these classes to disgorge hoarded goods. It is noted, however, that hoarding of foodstuffs is already legally punishable by death, but that the Government nonetheless prefers to adopt indirect means to discourage hoarding, such as the banking regulations, rather than to enforce this and similar laws. It is, on the whole, doubtful that the Government, which is [Page 517]itself closely allied to banking and land-holding interests, will undertake to place sufficiently severe pressure upon those elements to induce any marked release of commodities and diversion of capital to the uses of the Government.

Respectfully yours,

C. E. Gauss
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