893.51/7740: Telegram
The Ambassador in China (Gauss) to the Secretary of State
[Received January 28—8:50 a.m.]
180.64 [“]Pressing military requirements have to be met, but the impact of the whole program on the Chinese economy [cannot?] be ignored. Such large outpayments must inevitably be inflationary. Just as past heavy expenditures are the prime factor which pushed up Yunnan prices to almost double Chungking prices, so the Chengtu projects will undoubtedly intensify inflation in Szechuan. The one half million workers in Chengtu will need more than 1 million piculs of rice in 4 months. The Chengtu market learned about the projects at the beginning of the year, and the price has since risen two five [twenty-five?] percent with the stock piling of rice for the above purpose. I hope that in view of our difficult economic situation the American Army will, keeping to a minimum outlays on work deemed to be necessary whether met by my Government or from its own funds, do its best to aid us in checking this vicious inflationary process. And I hope that it will carefully contract for its expenditures so as to avoid unduly disturbing the markets for services and commodities.
It is impossible for me to share the Treasury’s opinion that these outlays have no relation to the amount of United States currency paid to China. Both the President and you have indicated concern over the Chinese inflation and desire to do whatever possible in helping to fight it. The position of our currency is considerably impaired by large American military expenditures. Although legally we cannot issue notes without being covered by a corresponding backing, our reserves have already fallen far below the requisite minimum. Confidence in the currency would be damaged should we continue to issue notes without provision for reserves. Thus to maintain confidence in fapi expansion of circulation requires larger backing, or else the loss of faith in fapi resulting from depleted reserves would cause a further increase in hoarding and in prices. It would become harder to maintain our war economy and China’s military and economic collapse might even ensue which is precisely the enemy’s wish. To ascertain a remedy would be indeed difficult should China suffer either defeat or economic collapse in the absence of further assistance. While the reasons for the black market rate being much above the official rate are complex, the fact that the supply of United States currency is still low is a significant factor. Undoubtedly, moveover, there are people here who acquire United States currency to hoard in the belief [Page 866] that there will be a further devaluation of the yuan. The main demand, however, arises from, firstly, Indian hoarders who pay high prices for United States notes as smugglers in India and China can make a profit by purchasing United States notes with which to bring gold and contraband from India, secondly, from puppets and Japanese in occupied China who have no confidence in their currencies. There is no need for me to ask whether there should or should not be encouragement of such illegal activities.[”]
- [Adler]
- Gauss
- Continuation of message in telegram No. 166, supra. ↩