The Secretary of the Treasury (Morgenthau) to President Roosevelt 3
My Dear Mr. President: I have received your memorandum of June 1, 19444 enclosing the Aide-Mémoire brought to you by General Shang Chen from the Chinese Ambassador. This same Aide-Mémoire was handed to me by Ambassador Wei on May 19, 1944 and it suggests an arrangement whereby we can sell gold and currency in China to meet our financial problems there. This proposal is being seriously considered by War, State and ourselves and may prove to be of some assistance, although it cannot be a solution to our financial problems in China.
I should like to take this opportunity to congratulate you, as Commander-in-Chief of our Armed Forces, upon having faced and passed an important military crisis. General Somervell informs me that the U. S. Army installations in China are now practically completed. Thus, the problem which you faced in January has been overcome and your major objective has been achieved.
The difficulties of financing our military program in China began, you recall, at the Cairo Conference, where the Chinese leader requested a $1 billion loan. You accepted my recommendation that this loan be denied, and the Generalissimo in January threatened that the Government of China would not make any further material contribution to the war effort, including construction of military works, unless we agreed to grant the loan, or alternatively, to purchase Chinese currency at the official rate of exchange for our military expenditures. We refused to accede to the Generalissimo and continued negotiations. However, during these negotiations, construction activities on behalf of our Army were going forward and have now been substantially completed, and we are now in the favorable bargaining position. Dr. Kung in a letter of April 19, 1944 informed me that the Chinese Government is “resolutely determined that nothing should be allowed to interfere with the present and contemplated operations of the U. S. Army in the China Theatre,” and that the Chinese Government [Page 929] renounces “any request for a new loan (i. e. the $1 billion loan requested by the Generalissimo at the Cairo Conference)Thus a most difficult situation has been bridged and our military installations in China stand ready for use.
The Secretary of War, in his letter dated May 26, 1944,4a has submitted to you an excellent account of the negotiations to date regarding the U. S. dollar costs of our military expenditures in China.
As you know, we have been informed that Dr. Kung will come to the United States soon as head of the Chinese delegation to the United Nations Monetary and Financial Conference. This will give us the opportunity to continue the financial negotiations with him in the United States.
That the position we have taken in these negotiations is justified is shown by the declining value of the Chinese yuan. The official exchange rate for Chinese yuan has been 5 cents since 1941; before China entered the war it was 30 cents. The unofficial or black market rate for yuan was only 2 cents by the end of 1942 and by the end of 1943 only 1 cent. At the present time the yuan is worth about one-half of a cent.
The rise in value of the U. S. dollar in terms of Chinese yuan is shown by some typical foreign exchange quotations in Kunming and Chungking since the latter part of 1942:
| Chungking | Kunming | ||
| 1942 | August | 36 yuan for $1 | 44 yuan for $1 |
| December | 45 yuan for $1 | 48 yuan for $1 | |
| 1943 | August | 80 yuan for $1 | 88 yuan for $1 |
| December | 85 yuan for $1 | 95 yuan for $1 | |
| 1944 | February | 175 yuan for $1 | 300 yuan for $1 |
| March | 250 yuan for $1 | 220 yuan for $1 | |
| April | 200 yuan for $1 | 205 yuan for $1 | |
| May | 175 yuan for $1 | 190 yuan for $1 |
Gold has always sold at a much higher value in terms of Chinese yuan. Thus, at the end of 1943 a U. S. dollar note sold for about 90 yuan while $1 worth of gold sold for about 300 yuan. In May, 1944, when the U. S. dollar sold for about 175 yuan in Chungking, $1 worth of gold sold for approximately 450 yuan.
You may feel assured that despite the financial problems which arose to disturb the cordial relations of this Government with the Chinese Government, the course of the present financial negotiations is satisfactory and moving in the proper direction.
I suggest that you may wish to address a letter to Generalissimo Chiang Kai-shek which will pay tribute to the Chinese people, and acknowledge the appreciation which is felt for their making possible [Page 930] the completion of the military projects. A draft of such a letter is attached for your consideration.5
Yours sincerely,