893.50/4–2145

The Chinese Minister for Foreign Affairs ( Soong ) to the Secretary of State

Dear Mr. Stetttnius: Enclosed please find two copies of my memorandum requesting American assistance in meeting our economic difficulties.

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In discussions which my colleagues have had in the past with the government agencies here, they sometimes found either a failure to appreciate the urgency of the situation or, if they did understand, the fatalistic belief that nothing could be done to hold the line.

For these reasons, my memorandum is longer than I originally intended, but I hope you will have time to go through it and give it your usual kind assistance.

Yours sincerely,

Tse Vun Soong
[Enclosure]

Memorandum by the Chinese Minister for Foreign Affairs (Soong)

After eight years of war and blockade, China is in the throes of galloping inflation. The rate of inflationary increase reached within the past few months is so alarming that it threatens the very stability of government. Unless effective counteractions are taken immediately, the authority of the Chinese Government, and the future of the joint Sino-American military operations in the China Theatre, will be inevitably stymied. General Wedemeyer, Ambassador Hurley and the U. S. Army and Embassy staffs in Chungking, Mr. Donald Nelson and the representatives of the W. P. B. and F. E. A. in China are fully aware of the gravity of the situation.

There are, however, some relatively simple measures which we confidently believe can bring an immediate improvement in the inflationary situation. This is by adoption of a 3–point program, viz., (a) the sale of gold, (b) a modest amount of textiles and other consumer goods, and (c) a limited number of trucks for internal transport as will be presented hereinafter.

The direct cause of the difficulties has been, of course, the huge and steadily increasing budgetary deficits arising from the war. These averaged between CN$25,000,000,000 to CN$30,000,000,000 a month for the first two months of 1945 and have necessarily been met by the inflation of currency and credit. Note circulation without backing is increasing at the rate of CN$20,000,000,000 a month.

The inflationary pressure has been further compounded by an acute shortage of goods because of the enemy blockade, the loss of resources, the limited capacity to produce and the fast-developing distrust of the currency which reflects itself in hoarding and speculation. Prices are now between 1,500 and 2,000 times their pre-war level and are increasing at the rate of 30 per cent a month.

This has increased the difficulty of local procurement of military supplies in China. Since approved military plans call for more, not [Page 1074] less, supplies from China’s slender resources, it is imperative that inflation be prevented from paralyzing the war effort.

Under such circumstances, while the funds for the American army expenditures advanced by the Chinese Government have doubled in the last three months, averaging CN$7,000,000,000 to ClSr$8,000,000,000 a month the real purchasing power of even the United States dollar has rapidly dwindled.

Deeply concerned with the implications of the ruinous inflation and keenly anxious to stave off its grave consequences the Chinese Government has recently taken strong measures in an attempt to bring the situation under control. Many Government offices have been abolished outright and services that do not bear directly on the war effort have been drastically curtailed. The Army, which directly or indirectly is responsible for over 90% of the budget expenses, has been reduced from 5,300,000 to 4,800,000 and is being reduced monthly to reach the final figure of 3,500,000 men by the end of September this year. This reduction has been made so that the soldiers could be better fed and equipped in preparation for the counter-offensive, which will be spearheaded by American equipped and trained Chinese armies. In addition, with technical personnel available from abroad, China is prepared to apply measures of administrative reforms, strict budgetary control, increased revenue, closer supervision over banking institutions and business units, more effective use of transportation facilities, and a rationalization of price control.

But it is overwhelmingly clear that all these measures could not prove effective unless in the meanwhile, as an organic part of the plan, inflation is retarded.

The Chinese Government therefore requests immediate aid from the United States in the following directions:

1. Gold. In the summer of 1943 President Roosevelt agreed, with the knowledge of the Secretary of the Treasury, that $200 million of the $500 million U. S. loan to China would be made available in gold. So far only $7 million of the $200 million has been shipped, and the Chinese Government forward sales of gold are rapidly falling due. Unless gold is shipped immediately to fulfill commitments beginning in May, which the Chinese Government made on the strength of the U. S. Government promise, there will have to be a default. In a few months, the sales of gold have realized for the government CNS$44,300,000,000, thus absorbing surplus cash which might otherwise have accelerated inflation and commodity speculation. The continued sales of gold will be the most important single factor in blotting up large issuance of banknotes. The U. S. Government is therefore requested to implement the late President’s promise by making immediately available the balance of the $200 million gold.

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2. Cotton Piece Goods and Other Essential Supplies. The shortage of certain essential goods due to the long blockade also has been, and continues to be, a basic factor in inflation. A relatively small amount of tonnage, say 4,000 to 5,000 tons monthly from all sources and of all categories of goods will greatly relieve the shortage. Accordingly, it is requested that the U. S. Government make available to China cotton cloth, medicines, certain indispensable chemicals, and other essential items.

Cotton cloth is specially important to China. Japanese attacks have forced the Chinese Government to fall back on the Western part of the country which is predominantly a farming community. Here an acute shortage of clothing exists, as evidenced by the fact that clothing prices are double the general retail price level. Cotton cloth is required to exchange for local food stuffs which are indispensable to the military personnel, and to break prices in certain military areas.

Specifically, the U. S. Government is requested to move up the W.P.B. priority for Chinese cotton requirements of 3,000 tons monthly in order to insure early delivery. It is recognized that a world-wide shortage of cotton goods exists, but, while the war in Europe cannot be lost through a deficit of cotton goods, the war yet to be won in China will be materially affected by their supply.

3. Transportation Facilities. Up until a month ago there remained only 4,000 trucks operating in all of Free China. The U. S. Government has agreed to ship into China 15,000 trucks, but most of these will be used for military purposes, so it is requested that an additional allotment of trucks be made available to replace the worn-out trucks which are running on borrowed time.

In connection with the above measures it cannot be over-emphasized that the situation is urgent, and time is of the essence. From the economic and military standpoint the next six months are the most vital and it will be the months of July, August and September when the attack on inflation should already be in full swing.

Finally, it should perhaps be emphasized that it is no part of our intention to solicit loans or credits. We are asking for an implementation of the late President Roosevelt’s promise with respect to gold, a top priority allotment for cotton goods, and some additional replacement trucks for the transportation of essential civilian supplies within China.

It is realized that the supply of gold, cotton goods and other essential supplies, which could be transported over the Hump, will not be sufficient to break inflation. However, these supplies, taken together with administrative and financial reforms, will slow down the present alarming acceleration of the inflationary process, especially in the critical areas along the military lines of communications until relief can finally come with the opening of a port in China.