The Chargé in China (Briggs) to the Secretary of State

No. 293

Sir: I have the honor to refer to the Embassy’s telegram no. 533, March 29, 2 p.m.,37 regarding a program for retarding Chinese inflation drawn up by Mr. Solomon Adler, Treasury Attaché, in collaboration with Brigadier General George Olmsted, Assistant Chief of Staff, G–5, United States Army Headquarters, and Mr. Calvin N. Joyner, Acting Special Representative of FEA.

There is now enclosed a copy of Mr. Adler’s memorandum dated March 19, 1945, a summary of which, and the Embassy’s comments thereon, were given in the reference telegram.38 The suggested program was discussed in detail by its authors with Dr. T. V. Soong, Foreign Affairs Minister, Dr. O. K. Yui, Finance Minister, and other influential Chinese, as well as with Mr. A. T. Kearney, Deputy of Mr. Donald M. Nelson,39 and with the Embassy. According to Mr. Adler, the Chinese at first objected to the recommendation that the anti-inflation program should precede and be divorced from any currency stabilization plans, but later withdrew their objections after Mr. Leon Henderson expressed his views on the subject.

Mr. Henderson is understood to have expressed general approval of Mr. Adler’s program and the measures proposed therein. The Embassy’s comments on Mr. Henderson’s visit were reported in telegram No. 585, April 7, 8 a.m.

Respectfully yours,

Ellis O. Briggs

Memorandum by the Treasury Representative in China (Adler)

A Program for Retarding the Inflation in China

I. The magnitude of the problem.

Prices are now well over 1,000 times their 1937 level and are rising at a rate of not less than 25% per month. The rate of increase in prices continues to gather momentum.
The net deficit—i. e. expenditures minus revenues from taxation and receipts from gold sales—averaged between CN$20 and 25 billion per month in the first two months of 1945. If past experience is any guide, even assuming no sharp increase in the virulence of the inflation, the net monthly deficit will reach CN$50 billion by the end of the year.
The average monthly expansion of note circulation in January–February was almost CN$20 billion. In existing circumstances, it is bound to keep pace with the net monthly deficit.
The inflation has already reached the stage where there is gross distortion of the price structure and where barter forms of conducting business and making payments are resorted to more and more frequently. The demoralization of the administrative apparatus and a further diminution of confidence in the currency are inevitable concomitants of this process.

It is clear from the above that the inflationary situation has reached such advanced stage that:

There is no simple panacea which will bring the inflation to a halt.
No one palliative measure will by itself exert any significant retarding influence on the inflationary process. Thus, the pouring out of gold unaccompanied by any other measures would be merely throwing “chicken feed into the maw of the dragon” of inflation.

The inflation is already seriously impeding China’s war effort and the operations of the US Army in China. And if it continues apace, the military effort will be positively endangered by the threat of disintegration. We are committed to do all we can to mobilize the China Theater in order to hasten the defeat of Japan and to save American lives. The problem of the Chinese inflation is, therefore, immediately relevant to the American war effort in the Far East. We cannot ignore it, and we must consider all the possibilities for effective action designed to retard the rate of deterioration in the Chinese economic situation. Such action, even if only moderately successful, would directly assist us in the war against Japan, quite apart from other longer range considerations. It will have to be many-sided and to be waged on the goods front and the money front simultaneously. A program comprising a combination of measures to be applied as soon as possible is outlined below.

II. The Program.

1. The abolition of price control, except perhaps for a few strategic commodities whose supply and distribution are comparatively centralized. This measure is essential if production, both agricultural and industrial, is to be increased and if the wheels of commerce are [Page 1069] to move more smoothly. In the long run it will assist in retarding the increase in prices and in diminishing hoarding; it will also enable the government to curtail unnecessary staff.

The attempts at price control in the last few years have been unsuccessful: they have resulted in a decrease in production, as in the case of cotton, and an increase in hoarding and in the size of the government bureaucracy. The abolition of price control is, therefore, indispensable to an anti-inflation program.

With the adoption of this measure, it may be advisable for the government to pay its officials increasingly in kind. But as this tendency is growing in prevalence, no excessive complications should ensue.

2. Anti-hoarding measures. Drastic action against public and private hoarding must be adopted.

Public hoarding.
Where government enterprises stock materials or have machinery needed by private firms engaged in the production of war and essential goods and which the government institutions are not using or are not likely to use in the near future, they should immediately be made available to private enterprise on reasonable terms. No vested interests should be allowed to interfere with this process, without which the work of the War Production Board will be seriously handicapped.
Government institutions such as the Ministry of Food or the Cotton Yarn Administration (the need for the existence of the latter should be reconsidered) should be discouraged from holding on to supplies for as long as possible. They should throw their supplies on to the market, particularly where there are local shortages and where such action would serve to bring out private hoards.
Private hoarding. Measures to curtail private hoarding will constitute one of the most difficult and at the same time most crucial parts of the program. Penal measures including confiscation and imprisonment will in all probability be necessary. Little if anything will be gained by going after the small offenders, and efforts should be concentrated on the big hoarders of food and essential consumers’ goods.

3. The import of cotton textiles (and later when logistics permit other key commodities) should be expedited. The inflow of such imports will increase both the supply of goods and government revenues, and thereby reduce the need for expanding note issue. The urgency of the need for textiles cannot be overemphasized and everything possible must be done to assure their inflow in the near future.

4. Continuance of the sale of gold with a drastic revision of gold sales policy.

The policy of pegging the price of gold at an artificially low level—it is now less than 50% of the black market price—must be abandoned. There is every reason why the Government should get [Page 1070] the maximum benefit in receipts from gold sales and no reason why some of the benefit should go to speculators.
Gold must not be sold indiscriminately. It must be an objective of sales policy to keep the price of gold in fairly close relationship with the trend of general prices; otherwise the sale of gold will become a losing proposition subject to rapidly diminishing returns.
In order to tap a wider market and to ensure wider distribution, gold should be sold—or at least part of it—in much smaller unit weights than at present. For this purpose, token coins weighing ¼, ½ and 1 ounce should be sold and also be used as indicated in d.
Gold should not only be sold direct to the public but also used for meeting current government expenditures. When so used, its value should be calculated at the current market price.

The effects of such a gold sales policy as an integral part of a broad anti-inflationary program might well be considerable and serve to keep the net monthly deficit within manageable proportions. But to rely on gold sales alone would be futile. Gold sales by themselves will not reduce monthly expenditures and may raise only a small proportion of the monthly deficit. If expenditures and prices keep mounting at present rates, it would require an enormous amount of gold to make a dent on the deficit. Nobody knows when the saturation point in the demand for gold, at prices making it worthwhile for the Government to sell, will be reached. And China’s foreign exchange assets are too valuable for her to waste them.

5. Reform of the Government Administration. An excellent start has already been made in this direction, which should be continued by the abolition and fusion of redundant government agencies and further reduction in the number of government employees.

6. Fiscal Reform.

All expenditures on projects which are not likely to yield immediate returns should be drastically pared.
The procedure of tax collection must be revised. It is difficult for the tax collecting officials to be honest when their salaries are insufficient to cover living expenses. Their salaries must be raised, but at the same time greater efficiency and honesty in tax collection must be enforced. Greater use should be made of the Customs officials in this connection. This measure alone should result in a substantial increase in revenues.
At the same time, parallel measures must be applied to the disbursement of expenditures.
The tax structure should be simplified. Again, an excellent start has been made so that the part to be traversed is not an untrodden one.
Existing direct taxes should be more efficiently collected and direct taxes on the higher income brackets increased. Many speculators and hoarders have made profits which have often escaped scot free. Taxes based on capitalization several years old are bound to be nominal when prices are rising so rapidly.

[Page 1071]

The effective application of these measures would undoubtedly produce a sizeable improvement in the budgetary picture.

7. Continuance of the start made by the W.P.B. to increase production.

8. Reduction in the size of the Chinese Army. This measure has everything to commend it both from a military and an economic point of view.

III. Should the Anti-inflationary Program include a Plan for Currency Stabilization?

While detailed plans preparing for the resumption of foreign trade and for the replacement of puppet currencies by fapi40 in occupied areas as they are reconquered should be drawn up as soon as possible, there would appear to be a strong case against tieing up even the first phases of a currency stabilization program with an immediate anti-inflationary program.

The question of the level at which the external value of fapi should be fixed is still problematic. Any decision made now is bound to be arbitrary in the nature of the case. At the same time, the adoption and enforcement of an anti-inflationary program is so urgent that it cannot be made to await the time when a rational decision can be made as to the external value of fapi.
Even more important, the conditions under which internal stabilization can be achieved are still remote from attainment. While the process of attaining internal financial and economic stability cannot be deferred until the establishment of budgetary equilibrium (which of course will be the end-product of the process), one of the pre-conditions of a successful stabilization program is a budgetary situation in which the gap between expenditures and revenues plus genuine borrowing is much narrower than it is at present. In other words, until there are definite prospects for a reduction in government expenditures and for an increase in government revenues, it is idle to talk of currency stabilization. The success of the anti-inflationary program combined with the reconquest of a substantial part of occupied China would be the best contribution that could be made in present circumstances for making possible the initiation of a currency stabilization plan. In fact, it is not too much to say, a broad anti-inflation program is the first step toward the inauguration of currency stabilization.
Currency stabilization should be deferred until there has been time to replace most of the puppet currency in circulation with fapi.
Finally, stabilization is going to be a painful and costly process. It would be a mistake to start it before the time is ripe to ensure [Page 1072] success. For failure will make ultimate stabilization still more difficult and costly.
  1. Not printed.
  2. In this telegram, the Embassy reported its belief that the “program is basically sound and that vigorous implementation by Chinese Government would probably be very helpful, if not definitive, in present situation and would undoubtedly result in considerable improvement in current Chinese attitude of resignation and helplessness in the face of rising inflation.” (893.51/3–2945)
  3. Personal Representative to China of President Roosevelt, Mr. Nelson headed a group of American technical experts known as the “Nelson Mission” which helped establish the Chinese War Production Board in November 1944 and thereafter served as the “American Production Mission” to advise that body. For further documentation on this subject, see pp. 1425 ff. See also Foreign Relations, 1944, vol. vi, p. 247 ff.
  4. Chinese national currency.