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.
[Enclosure]
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taxation and other means, the Government has withdrawn a certain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.
