893 51/7502: Telegram

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

732. Your 510, June 10, 7 p.m. It is true the monetary and economic situation in China continues to deteriorate. In connection with failure of American credit favorably to influence situation, reference is made to despatch No. 266 of January 8.73

In April currency circulation totaled 18,500,000,000, thirteen times [Page 525]prewar figure. Present rate of issue about 800,000,000 monthly. In June last year circulation was about 10,500,000,000 while in January this year it was close to 15,000,000,000.

Government expenditures to date are said to be within budget estimate of 17,000,000,000 for the year. Tax revenues have shown improvement and it is estimated will reach 6,000,000,000 or 7,000,000,000, including land tax in kind.

Wholesale price index Chungking in April reached roughly 4,300 against 2,400 last December and 1,400 in June last year. Base figure is 100 for first half 1937.

So far only use of American loan has been as backing for issues of American dollar bonds and savings certificates. It was hoped that sale of these securities would retard inflation but so far sale[s] have been too small to affect situation. Several reasons have been given for limited demand, including failure to place the American dollar security in trust fund, large profits to be had from speculative ventures, suspicion that ultimate holders of American dollar credits will be subject to Chinese Government controls on foreign trade and exchange transactions and failure to place any time-limit on availability of bonds at present advantageous exchange rate. Action could be taken to remove some of these criticism[s].

Some measures similar to those recommended in Niemeyer memo74 have been undertaken. Gasoline is being rationed and private stocks requisitioned. Inventories of some essential commodities are being undertaken.

A credit of 100,000,000 Chinese dollars will probably be granted to the industrial cooperatives, but government encouragement to small-scale productive enterprises is halfhearted. Increased production of consumer goods should be undertaken.

Hoarding and speculation continue practically unchecked. Chinese legislation in these fields is ineffective as well as with regard to price control and national mobilization in general. Enforcement is not in expert or competent hands. The fact is China has not reached a standard of administration organization and efficiency permitting of national demobilization and controls required for a war economy. It is also a fact that landlords and bankers have considerable influence in the Kuomintang and Government with the result that measures against their interests are in large degree opposed or made ineffective.

From July 1 Central Bank is to take over the note issue of other Government banks. By this action it is hoped to check currency inflation through stricter control of note issues. Regulations for control bank credit have been adopted but interest rates have not been subjected to control. Restriction on speculative activities of private [Page 526]banks and cash shops should be undertaken but would be difficult of enforcement.

Competent observers commenting on economic situation point out social and political dangers from inflation tend to be less in this country than in more highly organized countries since over 75 percent of economy is agricultural and hence less sensitive to monetary difficulties. They admit, however, the situation is becoming more serious; but it seems to be general feelings, shared by Embassy, that China will continue for some time at least to get along as it has in the past using half measures avoiding collapse. The promise of bumper crops this year following good harvest last year is more encouraging than government activity.

No interest in a central banking expert has been expressed recently and no action should be taken except in response to an official request from Chinese Government.

It is assumed that the Department sees the weekly reports which Embassy has encouraged Adler to send through the Department to Treasury. They contain current information in regard to many of matters discussed above.

Embassy does not believe there are practicable measures that we could take to improve economic situation in China at this time and has impression that the Chinese do not expect or desire further assistance or advice from us now.

  1. Ante, p. 425.
  2. See telegram No. 516, December 21, 1941, 10 a.m., from the Ambassador in China, Foreign Relations, 1941, vol. v, p. 766.