893.51/7709
The Chargé in China (Atcheson) to the Secretary of State
[Received September 18.]
Sir: I have the honor to refer to the Embassy’s telegram no. 1184, July 14, 1 p.m., in regard to the rate of currency expansion (which [Page 445] in China closely approximates the rate of inflation), and to enclose, for the Department’s information, a copy of a report dated June 24, 194361 submitted to the Ministry of Finance by Dr. Arthur N. Young, American adviser to that Ministry, which was furnished us by Dr. Young in strict confidence. While the report was written two months ago, the observations which Dr. Young makes in it are as applicable now as then, especially as the economic deterioration in China has continued to progress at about the same rate as that of the time at which the report was written.
Dr. Young points out that the financial and economic situation in China continues to worsen; that while at the time of writing there was no apparent tendency for the general rate of price increase to grow, in some areas the rate had lately increased under influence of bad crops or other adverse events; that the steady rise averaging 7 or 8% monthly was inexorable and that the average of retail prices was close to one hundred times the pre-1937 level (a figure applicable to Chungking but not, for example, to Kunming where the average rate has reportedly reached almost two hundred times the pre-1937 level).
Included in the report is a table showing the upward course in China compared with that in Austria from 1914 to 1923 and showing that so far the pattern has been similar except that in 1943 the level in China had risen in seven years to a greater height (9,680%) than after seven years of inflation in Austria (5,552%) and that in the next three years in Austria the level rose to 1,743,000%. Dr. Young does not predict a similarly fantastic acceleration in China during the next three years (he states that continuation of the recent trend will lead to a doubling about every 8 or 10 months). In this connection it may be mentioned that economic and financial experts seem in general to be in agreement that inflation of itself will not result in economic collapse in the near future because of the circumstance that the great majority of China’s population is agricultural and lives off the land. In this sense the British Embassy’s statement (Department’s instruction no. 351, July 27, 194362) that the present situation in China seems “to depend more on crop prospects than on anything else” is correct—provided other imponderable factors remain more or less as they are.
Dr. Young considers that the determining factors as regards the future are: the extent of the Government’s deficit; the state of confidence which largely depends upon the military situation especially in and adjoining China; and the crops.
Dr. Young mentions among the results of the price increase: insidious undermining of China’s governmental structure; impairment [Page 446] of the war effort; weakening of the internal position of the Government; and serious adverse effects upon the prospect for political and economic construction. He mentions that many of the Chinese troops are undernourished and lack stamina and reserve strength for serious fighting; that military officers are tempted to engage in trade and other gainful activities, to collect money upon the movement of goods, and to “squeeze” the troops under them; that many civil employees suffer malnutrition with resultant reduced efficiency; that many good Government employees are resigning; that concurrent posts are being multiplied; that employees indulge in partial absence from duty in order to engage in outside gainful activities; and that in many cases there is recourse to corrupt practices.
Beginning on page 3 of his report Dr. Young makes a number of suggestions for remedial action, especially in the field of government including the military service. These suggestions would seem to be largely of academic interest only, as there does not appear to be any prospect that they will be carried into effect.63
Respectfully yours,
- Not printed.↩
- Not printed, but see despatch No. 9973, July 6, from the Ambassador in the United Kingdom, p. 70.↩
- In a memorandum dated October 7, Troy L. Perkins of the Division of Far Eastern Affairs observed: “Dr. Young makes a number of sensible suggestions to remedy the situation, most of which have been made before and, as the Embassy indicates in its comment, are not likely to be followed. Most of the suggested reforms are not impractical even under the present war conditions: postponement of long-range public works which do not contribute to the war effort, economies in civil government, rationalization of the tax system, and removal of onerous restrictions on the movement of goods. Remedial action related to the Army would probably be more difficult to carry out, although equally simple measures in this direction would benefit the economic situation enormously.”↩