[Enclosure]
Memorandum by the Secretary of the Treasury
(Morgenthau) to President
Roosevelt
[Washington,] December 18,
1943.
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.
I
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.
II
China has tried two similar monetary remedies for alleviating
inflation without marked success.
- 1.
- 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.
- 2.
- 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.
Recommendations
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:
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- 1.
- 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.
- 2.
- 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.
