893.51/7513: Telegram
The Ambassador in China (Gauss) to the Secretary of State
[Received July 16—5:16 a.m.]
841. TF–50. To Secretary of the Treasury from Adler. At the time of his death Mr. Fox was working on economic report mentioned in (1) of TF–40 of May 26.78 Following is write-up of draft he left.
(1) Conclusion. Economic situation has worsened since beginning of 1942. From January to May prices rose and note issue expanded at about the same rates as in last 5 months of 1941. Both revenues and expenditures are running at higher levels than last year, and while revenue side improved as a result of land tax, Government still has to rely on issue to cover two-thirds of current expenditures. Apart from beneficial psychological effects American loan has thus far contributed little to meeting China’s financial problems. Gravity of economic situation to some extent relieved by favorable prospects for 1942 harvest.
2. Prices. According to official data, Chungking general wholesale price level for May was 4790 and the retail 4300 (January–June 1937 equals 100). Increase since January 50–60 percent or about the same as between August and December 1941. Wholesale price of [apparent omission] in May 32 [apparent omission] retail 3940, retail jumping 80% from January to May or more than double increase of preceding 5 months. Price movements in cities outside Chungking parallel those in Chungking with considerable local divergencies. Rate of increase in prices has not accelerated in 1942 in the face of cutting off of foreign sources of supply and continued solely on expansion of note issue to finance deficits.
In spite of commodity administration national mobilization program and recent plans to control food prices, satisfactory mechanisms for prices control have not yet been established nor has any real progress been made toward their establishment. Definite tendency for greater resort to barter forms now evident.
3. Note issue in May CN dollars 20,032 million with 25% more than in January; increase from August to December 1941 27%. Prices are rising twice as fast as note issue.
[Page 531]4. Budgetary situation. Expenditures January–May CN dollars 7570 million or promiscuously [approximately?] 44% of estimates for the year and 80% of net expenditures 1941. Military expenditures insofar as assignable 62–66 of total. Revenue from taxes administration, et cetera, CN dollars 2359 million or about 30% of estimate for year and of current expenditures and nearly 80% above total revenues for 1941. Institution of land tax in kind and valuation of collections at CN dollars 100 per picul accounts for almost half 1942 revenues.
Current deficit of CN 5212 million met almost entirely by Government bank advances to Government against which they take up or hypothecate Government securities serving as backing for further issue of legal tender. Dark side of fiscal picture continues to be Government’s inability to induce public to purchase its securities voluntarily on significant scale. Net sale of United States dollar backed securities from April 1 to May 31 under Chinese national dollars 75 million. While certain improvements in terms and methods of their issue might have helped somewhat, it was Mr. Fox’s considered opinion they would not have made appreciable difference. Thus loan has not been of much value in ameliorating fiscal situation so far. In this connection there has been recently some discussion of advisability of using American loan to finance import of gold and establishing free gold market to sop up fapi.
5. Public debt. On December 31, 1941 (?) internal debt incurred in sterling, United States dollars, and custom gold units totaled equivalent of CN dollars 5.5 billion at present rate of exchange. Loans of 4 Government banks to the Government totaled CN dollars 16.2 billion, constituting 80% of all their loans and apparently 90% of the internal fapi debt.
6. Industrial production—on basis of incomplete and inadequate data—appears to have maintained itself in first quarter of 1942. Production of minerals for export and fuels somewhat higher than in first quarter of 1941, but shortage of imported materials and parts becoming apparent in manufacture.
7. Agriculture. Harvest prospects this year encouraging. Wheat crop estimated at 222,000,000 piculs (one picul equals 110 pounds), while preliminary estimates for all important rice crop are 85–90% of 1931–40 average. In agricultural country such as China favorable harvest prospects should help relieve immediate anxiety about admittedly grave economic situation.
Government expects to raise 43,000,000 piculs of cereals—or almost double 1941–42 collections through land tax—and 33,000,000 piculs—about the same as last year’s purchases—through compulsory [Page 532] purchases with which to feed army and civil servants and meet local food shortages. [Adler.]