The Secretary of the Treasury (Morgenthau) to the Secretary of State

My Dear Cordell: I am sending you herewith copy of a confidential memorandum on the Chinese situation, which I gave to the President yesterday afternoon. In drafting this letter for the President, unfortunately I did not have the benefit of the information contained in Ambassador Gauss’ cable of December 9th.4

Sincerely yours,

[Page 480]

Memorandum by the Secretary of the Treasury (Morgenthau) to President Roosevelt

Memorandum for the President

You have spoken of the request of Generalissimo Chiang Kai-Shek for an additional $1 billion of financial aid to China to be used to help control inflation and for postwar reconstruction.


The facts regarding inflation in China and the possibility of its control through the use of dollar resources are as follows:

Inflation in China, as you well know, arises from the grave inadequacy of production for war needs and essential civilian consumption. Supplies have been drastically reduced by enemy occupation and the cutting off of imports except the small amounts that come by air or are smuggled from occupied territory.

The Chinese Government cannot collect sufficient taxes or borrow from the people in adequate amounts. As a consequence, the Government has been issuing 3.5 billion yuan a month, twice the rate of a year ago.

The official exchange rate for yuan is now 5 cents; before China entered the war it was 30 cents. The open market rate for yuan in U. S. paper currency is one cent and in terms of gold one-third of a cent.

You have suggested the possibility of our selling dollar currency for yuan to be resold to China after the war at no profit to us. No doubt something could be done to alleviate inflation through the sale of gold or dollar currency in China. I have received the following message from Dr. Kung6 dated December 14:

“You will be pleased to hear that the recent gold shipment is one of the outstanding factors contributing to the strengthening of fapi, because people believe that the arrival of gold has increased the much needed reserve of our currency, thereby influencing the stability of prices. The action of the United States Government re-affirms to the Chinese people that, despite difficulties arising from the blockade and the cumulative effects of over six years of war against the invasion, China has a powerful friend desirous of strengthening China’s economy as conditions permit.”

However, while something could be done to retard the rise in prices, the only real hope of controlling inflation is by getting more goods [Page 481] into China. This, you know better than I, depends on future military operations.


China has tried two similar monetary remedies for alleviating inflation without marked success.

The Chinese Government issued and sold dollar securities for yuan, setting aside $200 million of the aid granted by this country for the redemption of the securities. (These securities were sold at exorbitant profit to the buyers. For instance, a person holding $100 in U. S. currency could have quadrupled his money in less than two years by selling the currency for yuan on the open market and buying the dollar securities issued by the Chinese Government.) I believe that the program made no significant contribution to the control of inflation.
The Chinese Government has recently been selling gold at a price in yuan equivalent to $550 an ounce, about fifteen times the official rate. We have shipped to China more than $10 million of gold and they have sold about $2 million of gold for yuan. This program has not been tried sufficiently to warrant any definite conclusion as to its possible effect.

China now has $460 million of unpledged funds in the United States and is getting about $20 million a month as a result of our expenditures. China could use these funds in selling gold or dollar assets for yuan, although in my opinion such schemes in the past have had little effect except to give additional profits to insiders, speculators and hoarders and dissipate foreign exchange resources that could be better used by China for reconstruction.

Under the circumstances, a loan to China for these purposes could not be justified by the results that have been obtained. It is my opinion that a loan is unnecessary at this time and would be undesirable from the point of view of China and the United States. Large expenditures on ineffective measures for controlling inflation in China would be an unwise use of her borrowing capacity which should be reserved for productive uses in other ways. On reconstruction, it is too soon for us to know the best use or the best form of the aid we might give to China.


For the past five years I have had a deep admiration for the valiant fight that the Chinese people, under the leadership of Chiang Kai-Shek, have waged against Japanese aggression. Therefore, I am in complete sympathy with your position that no stone be left unturned to retard the rise in prices. Using the tools we have at hand, I recommend the following: [Page 482]

All U. S. expenditures in China, currently $400 million yuan a month and rising rapidly, be met through the purchase of yuan with gold or dollar currency at whatever price we can get them for in the open market. This is equal to more than 10 percent of the present rate of issue.
Accelerate the shipment of gold purchased by China to twice the amount we have previously planned to send. It should be possible to raise gold shipments from $6 million a month to about $12 million. At the present price for gold in the open market this would be equal to the present 3.5 billion of yuan currency that is being issued.

The impact of this two-fold program should contribute to retarding inflation, always bearing in mind that the basic reason for inflation in China is the shortage of goods.

  1. Supra.
  2. H. H. Kung, Chinese Minister of Finance.