Memorandum by the Second Secretary of Embassy in China (Boehringer)20


The twelfth weekly meeting of representatives of U. S. agencies in Chungking was held at the Embassy at 10:30 a.m., February 20, 1945. Mr. Atcheson, Chargé d’Affaires a. i., presided over the meeting which was attended by the following:

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After he had introduced Mr. Meiklejohn,21 Mr. Atcheson called on Mr. Adler to discuss the inflationary trend in free China. Mr. Adler stated that the rate of increase in prices in 1944 compared with 1943 was not very marked but that the rate of increase in early 1945, which was partly seasonal, was disturbing and was much greater than in early 1944. He stated that, according to preliminary reports, the increase in prices in Chungking since the beginning of 1945 was about 50 percent while the increase in Kunming was nearly 100 percent. Mr. Adler went on to say that the rate of increase in the Chinese currency note issue advanced sharply toward the end of 1944. He said that up to the end of 1942 the expansion in the note issue and budgetary expenditures coincided but that since then the expansion in note issue had exceeded the budgetary deficit. He said that the actual budgetary deficit during 1943 approximated CN$2.5 billion a month but that in 1944 this figure had increased to between CN$8 to CN$10 billion and was liable in 1945 to reach CN$20 billion per month.

Mr. Adler stated that the effects of the inflation had become cumulative and that further increases in note issue and budgetary deficit would increase the strain on free China’s economy. He said that the positive factors unfortunately were external and that the increasingly favorable war news and appreciation of approaching victory had a good psychological effect.

He said that the inflation had produced an epidemic of hoarding, characterized not only by large scale but also by small scale hoarding, and that the small scale hoarding was considered significant as indicating the general psychological attitude of the Chinese people towards their currency. He stated that, as the hour of victory approaches, the Chinese may commence to dehoard and that this was all [Page 1061] to the good. He said that, contrariwise, dehoarding might cause popular confidence in the currency to deteriorate further and might actually intensify the flight from the currency.

Mr. Adler stated that the expansion of the note issue was the predominant method adopted by the Chinese Government for the purpose of acquiring a significant part of its national income with which to operate. He said that the Chinese inflation represented a simple and crude form of currency inflation and that in an industrialized country it would be far more dangerous than in China which was composed largely of atomistic, agricultural economic units. He said that the centering of Chinese economy in villages and rural areas had heretofore retarded the diffusion of inflation. Mr. Adler said that more and more evidence was available to show that the diffusion of inflation in free China had become more rapid. He said that prior to 1943 prices in all cities, with the exception of Kunming, lagged behind those in Chungking but that since 1943 this was no longer the case although there was still considerable divergence in prices in various parts of free China.

Commenting on price trends, Mr. Adler stated that prices in Chungking were now anywhere from 600 to 1,000 times higher than in 1937 and that, in contrast, prices in Kunming were now approximately double those in Chungking. He said that such a difference in prices in two cities would be inconceivable in the United States because of its highly developed transportation system. He said that, just because Chinese economy was not unified, price data could not be so accurate as in a more advanced country and that there existed no single index which approximately reflected the situation in the country as a whole. Mr. Adler concluded his remarks by stating it was impossible to see anything favorable in the internal financial position of free China.

General Olmsted stated that General Wedemeyer, the Theater Commander, was very much concerned over the inflationary situation which, he said, constituted almost as great a threat to U. S. Army operations in China as the Japanese. He said that in 1945 the U. S. Army would probably purchase locally between 100,000 to 200,000 tons of goods per month, consisting primarily of alcohol and foodstuffs and including supplies for the U. S. Army sponsored Chinese divisions. General Olmsted went on to say that the U. S. Army Headquarters here had done some preliminary thinking about a plan, the details of which would be discussed with the Embassy, whereby the Army would send representatives to rural areas to barter such consumers’ goods as cotton cloth for certain necessary supplies, especially foodstuffs. He cautioned against premature discussion of the plan and stated that, inter alia, the U. S. Army would like to use articles for barter which would stimulate dehoarding.

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In response to a question by Dr. Sumner22 whether there was any tendency on the part of the Chinese Government to use more direct methods for price control, Mr. Adler said that such a tendency did exist some time ago and that he considered it to be injurious and irrational because price control without adequate rationing was impossible of enforcement in free China.

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Carl H. Boehringer
  1. Copy transmitted to the Department by the Chargé in China (Atcheson) in his despatch No. 181, February 27; received March 17.
  2. Norman Meiklejohn, Chief of the Intelligence Section, Foreign Economic Administration in China.
  3. John D. Sumner, Economic Adviser to the Embassy.