Memorandum by the Secretary of the Treasury ( Morgenthau ) to the Chinese Minister for Foreign Affairs ( Soong )

1. This memorandum does not deal with the questions of textiles and trucks which were included in the program which was presented to this Government. The urgency of China’s need for these items and their bearing upon inflation are recognized. They are omitted because our supply authorities are in the process of making an over-all determination of requirements and supplies and are not yet in a position to make a decision respecting China’s requests.

2. We are agreed that any program to stabilize the currency and to check inflation should comprise a broad series of measures in the following categories:

Monetary and banking rehabilitation.
Foreign exchange stabilization.
Fiscal and administrative reforms.
Increase of supplies and improvement in their distribution.

3. We are anxious to give full support to an effective anti-inflationary program for China. It is therefore recommended that a Currency Stabilization Fund of $500 million be constituted for this purpose from the remaining $240 million of the United States loan to China [Page 1082] and from China’s existing dollar balances. Such an allocation of this remainder of the United States loan would be in strict accordance with the spirit and the letter of the 1942 financial agreement.55 The Fund would be set aside with firm mutual commitment on the part of China and the United States as to its purpose and availability.

It is envisaged that the uses to which this Currency Stabilization Fund would be put would be part of a broad concerted program for combating inflation and for currency stabilization and these uses would be subject to joint agreement. The time at which the Fund’s operations would start would be discussed at a later date.

The Treasury stands ready to advise and consult with the Chinese Government on the content and timing of such anti-inflationary and stabilization program. We are strongly of the opinion that the initiation of a Currency Stabilization Fund would strengthen the financial position of the Chinese Government and would inspire confidence both at home and abroad in its future economic and financial stability. The existence of such a fund would give the Chinese people a real sense of security with respect to their ability to cope with their grave problems of reconstruction.

It should be noted that this proposal relates to only one portion of the foreign exchange assets presently available to China and that it would leave a relatively large amount of dollar exchange for helpful intermediate measures and for meeting China’s current foreign exchange requirements.

4. We believe that the Chinese Government should terminate the program of forward sales of gold. As you know, the U. S. Treasury was not consulted when this program was initiated. In view of the difficulties of shipping gold, the limited effects of sales upon price rises in China, the public criticism of such sales and the desirability of using foreign exchange resources to achieve maximum effects, this program is ill-advised.

5. The Treasury will endeavor, as in the past, to make available limited quantities of gold for shipment to China during the next few months, having due regard to the need for restricting gold shipments where these endanger lives or use scarce transport facilities. However, in consideration of points 2 and 3 above, it is believed that further shipments should be financed out of foreign exchange assets other than those proposed to be earmarked for currency stabilization.

6. China should investigate and cancel sales to speculators and illicit purchasers and insure that only bona fide purchasers will receive such gold as is available. If gold arrivals are still not sufficient to meet [Page 1083] past commitments, it is suggested that China may offer to place dollar credits (at about $35 per ounce) for the time being from her existing assets to the accounts of purchasers of gold to whom she cannot temporarily make delivery.

7. It is most unfortunate that the impression has arisen in the United States that the $200 million of U. S. dollar certificates and bonds and the gold sold in China have gone into relatively few hands with resultant large individual profits and have failed to be of real assistance to the Chinese economy.

  1. Signed at Washington, March 21, 1942, Department of State Bulletin, March 28, 1942, p. 263; or Department of State, United States Relations With China (Washington, Government Printing Office, 1949), p. 510.