893.51/7659
The Ambassador in China (Gauss) to the Secretary of State
[Received December 14.]
Sir: I have the honor to enclose as of possible interest to the Department, copies of memoranda95 on the price problem in China prepared for the Chinese Government by Dr. Arthur N. Young, the American advisor to the Ministry of Finance, who, in making the copies available to me requested that should they be communicated to the Department they be treated as strictly confidential as to their source. I ask that that request be respected.
While exact measurements of the price rise in China are difficult because of faults in available data and widely varying conditions, it is conservatively estimated that in Free China the average price level is now at least 35 times the 1937 level. The figure for Chungking in August 1942, is given as 5627; while for Kunming, in Yunnan Province, the August level was 9843—the highest recorded in any area. The rate of increase in prices is tending to grow; prices have increased about threefold in the past year. This rate of increase is described as alarming. Dr. Young anticipates that if the rate of increase does not slacken, average prices throughout China will reach 100 times the 1937 level before the summer of 1943 and 200 times that level by the last quarter of 1943. In the memorandum sent as enclosure 1 with this despatch, Dr. Young compares this situation with that which existed in Austria, Germany, Hungary and Russia during and after the First World War. He points out the dangers to be feared from a similar situation in China.
Enclosure 1 discusses the combination of causes which has brought about this increasingly dangerous situation in China. Dr. Young states that the total National Government deficit in the first five years of the Sino-Japanese war was $26,470,000,000* while the increase in note issue was $21,568,000,000*—or over 80% of the deficit. Other [Page 546] chief causes are the issuance of new currencies by the Japanese and their bogus regimes, the shortage of goods, enemy interference with internal trade by seizure and destruction of goods and means of production and by blockade of roads, rivers and railways; and the blockade of international trade.
In discussing remedial measures, Dr. Young points out that (1) the best psychological check to inflation in China would be the reopening of Burma, while in China, for example, the recapture of Ichang would reopen the flow of goods over to important inland trade route; (2) there must be every possible curtailment of government expenditure—involving re-examination particularly of the military items in the budget and expenditures on civil projects not essential to the war effort; there should be an efficient and honest tax service; and the sales of bonds and savings certificates should be pushed; (3) the sale of gold might be undertaken on an experimental basis; (4) care should be taken to avoid holding rice and other food supplies off the market; (5) effort should be made to increase the production of essential goods; and (6) there should be a relaxation of restrictions on internal transport.
Dr. Young asserts that but little can be expected from measures of price control and he discusses this subject in his second memorandum (enclosure no. 2). Following press reports of price control action in the United States there has been an indication that the Generalissimo desires that similar measures be adopted in China, where the situation is such as to promise no substantial results. China is not organized administratively to permit of the successful employment of the western technique of price control, price ceilings, et cetera.
The third memorandum accompanying this despatch has to do with the financial situation in Yunnan, where the price index has reached the highest recorded in any province of Free China (wholesale price index at Kunming in August, 9843; retail price index for September, 11, 908).
In my conversations with Dr. Young he has particularly emphasized that the most important measure that can be taken to meet the China situation is the recapture of Burma and the reopening of this route for international trade. This, of course, is a problem involving military considerations the importance of which cannot be overestimated. It is my opinion that while the Japanese may have, for the time being, postponed any projected offensive against India or Australia, they are nevertheless prepared to resist in force any attempt to retake Burma and reopen the land route to China. There are various reports current that consideration is being given to retaking Burma with Chinese and Indian forces from India. Viewed from Chungking, the possibility of success in any such move is remote unless the British can [Page 547] concentrate an overwhelming force, with naval and air support, for that purpose. Such overwhelming force with necessary naval and air support does not appear to exist at this time in the Indian-Burma theater of the war.
Respectfully yours,