Memorandum by the Director of the Office of Financial and Development Policy (Collado) to the Secretary of the Treasury (Morgenthau)

It is suggested that when you inform Dr. Soong at 11:30 this morning of the decision to deliver gold to China in so far as it is possible, in accordance with his time schedule, you take the opportunity [Page 1088] to make a strong statement regarding the way China has carried out its financial and anti-inflationary programs. It is further suggested that you indicate that you will “confirm” all of this in a subsequent letter which might include the following points:

The Treasury is prepared to meet his time schedule of gold deliveries in order to carry out the July 1943 commitment.
Nevertheless it is necessary and desirable to point out that the purpose of the $500,000,000 credit, and particularly of the $200,000,000 gold commitment, was to assist in an anti-inflationary program which would strengthen confidence in the Chinese Government and its financial situation and which would attempt to maintain the Chinese economic situation.
The sale of gold by China has not proved and is not in our opinion likely to prove a very effective anti-inflationary device. Moreover, the manner in which the gold sales have been conducted and the wide-spread public criticism thereof in China are not conducive to the strengthening of confidence in either the financial situation or the Government itself.
On the other hand, we continue to believe that the establishment of the $500,000,000 fund for combating inflation and stabilizing the Chinese currency proposed last week would be of considerable short and long run benefit to China and would inspire confidence in the Chinese Government’s handling of the difficult financial situation.
Since, however, the Chinese Government has determined to go forward with the gold sale program, the Treasury believes that it is imperative that there be eliminated the factors which have caused such wide-spread dissatisfaction in its handling.
The Treasury has noted with great interest the intention of the Chinese Government to effectuate various administrative reforms relating to fiscal matters, including stricter budgetary control, reorganization of the tax structure and closer supervision of banking institutions.

These efforts are commendable and important inasmuch as in my opinion the carrying out of the foregoing fiscal and administrative reforms will do more to engender confidence among the people and to give a measure of stability to the present economic and financial situation than the measures of assistance which you have requested. I should like, therefore, to urge as being very definitely in China’s best interests that further reforms be effected in governmental administration through the abolition and fusion of superfluous agencies and reduction of personnel; that taxes be placed on a more equitable basis and collection thereof be simplified and made more effective; that expenditures be rigidly restricted and controlled; that effective measures be taken against public and private hoarding; and that such other measures of reform be instituted as will stimulate public confidence and improve the financial position of the government.