Mr. Harry Dexter White, Assistant to the Secretary of the Treasury (Morgenthau), to the Assistant Secretary of State (Berle)

Dear Adolf: I am enclosing a copy of a memorandum submitted to us by Dr. Kuo32 relating to the withdrawal of gold by the Chinese Government from the United States. We have discussed this matter with the Chinese representatives and have informed Mr. Perkins of the Par Eastern Division of the facts.

We can’t very well refuse to sell the Chinese gold for the dollars they have, though we feel that the resultant loss to China of foreign exchange resources is hardly outweighed by the advantages of the step. In any case the operations would have to be very skillfully handled by China if any significant contribution toward checking inflation is to be achieved.

Sincerely yours,

Harry D. White

Substance op a Cablegram Received From Dr. H. H. Kung, July 8, 1943

During the six years of our war of resistance China’s military expenditure has been increasing continuously. According to the national budget of the current year, the estimated expenditure was originally placed at 362,000,000,000 yuan, while the estimated income was given as 232,000,000,000 yuan, representing about 65% of the total expenditure. The remaining 35% is entirely met by increased note issue.

Owing to military requirements and the requests made by the American Military Mission, the Chinese Government has undertaken to build, or improve, the airfields in various parts of the country and to increase their equipment, as well as to improve the Yunnan–Burma highway and other necessary highways and railways. Each enterprise often necessitated the expenditure of 4,000,000,000 to 5,000,000,000 yuan, making a total of additional requirements amounting to over 30,000,000,000 yuan.

[Page 424]

Furthermore, owing to the difficulties of transportation and the small volume of supplies received under the American Lend-Lease Act,33 the Chinese Government has been obliged to provide ways and means of increasing the production of military supplies in order to meet the demands of the war. All such expenses are beyond what is provided by the budget, and the Chinese Government is compelled to further increase its note issue in order to meet the situation. For these reasons there has been constant tendency toward inflation. In order to remedy the situation and to stabilize the price of commodities, it is necessary to adopt measures having the effect of checking inflation. Through increased taxation and other means, the Government has withdrawn a certain portion of the notes in circulation, but there is still by far the larger portion in the hands of the people which is being used toward the purchase and accumulation of commodities, resulting in the further rising of prices and in making livelihood increasingly difficult.

The chief purpose for the proposed purchase and sale of gold is to withdraw large quantities of notes now in circulation. The fact that each ounce of gold is worth now about 8,000 yuan shows the psychology of Chinese people toward gold. To obtain the desired result, it is only necessary for the time being to have bullion which can be handled easily. However, the question of coinage is being given careful study and can be best taken up at the time of reorganization of Chinese currency.

According to Madame Chiang, the proposal which we are making—that is, the purchase of 200,000,000 dollars’ worth of gold with the United States loan—has received the approval of President Roosevelt and Secretary Morgenthau in principle. It is earnestly hoped that it can be realized at an early date. We always appreciate and welcome suggestions and advices from Secretary Morgenthau and Dr. White, but in this particular case we are influenced by actual conditions in China, and we feel that it has to be done in the way we suggested in order to reap the desired benefits. It is earnestly hoped that we shall not lose this good opportunity of checking inflation.

  1. P. W. Kuo, representative of the Chinese Ministry of Finance.
  2. Approved March 11, 1941; 56 Stat 31.