124.936/7–945
The Ambassador in China (Hurley) to the Seceretary of State
[Received July 26.]
Sir: The twenty-eighth meeting of representatives of United States agencies in Chungking was held at the Chancery June 12, 1945 at 10:00 a.m., with the Minister-Counselor of Economic Affairs, Mr. Walter S. Robertson, presiding. Mr. Edwards94 acted as Secretary.
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Inflation: Statement by Dr. C. F. Remer
Dr. C. F. Remer, Division of Financial and Monetary Affairs, Department of State, summarized the conclusions of his study of inflation in China (see Report No. 77, June 12, 1945, Chungking95). He cited evidence to show that the rate of inflation was sharply accelerated during the first four months of this year. From January to April prices rose at the new rate of twenty percent per month—a more rapid increase than for any equally brief period since 1937. Prices doubled during this four month period, the index for wholesale prices in Chungking rising from 762 to 1592 times their pre-war level. In this rise, food prices played an important part and led the way, but the prices of raw materials were not far behind. The cost of living rose by 100 per cent, and the cost of food by 125 percent.
The public finances of this period are not known in detail. It was estimated that note issue increased by about CN $70 billion and that the total issue rose to well over CN $250 billion. This large total does [Page 1111] not include advances to the United States Army in China, which Dr. Remer estimated at no less than CN $55 billion for the first four months of 1945.
It is possible that the total expenditures of the Government during the first four months of this year reached a total of CN $130 billion of which taxation brought in around CN $25 billion and sale of gold the large sum of CN $35 billion.
New Factors Responsible
New factors in the 1945 situation include greatly increased payments to the Chinese army. A table of payments of salaries and allowances to officers and men in Chungking shows a general increase in food allowances from CN $190 a month in the last quarter of 1944 to CN $400 a month during the first quarter of 1945, and to CN $2800 a month from April 1, 1945. A soldier of the class which received CN $290 in monthly pay and allowances before January 1, 1945, was paid CN $500 after January 1, 1945, and CN $4,000 after April 1.
The new Chinese Service of Supply is buying supplies for thirty Chinese Divisions. Its expenditures, and the sums required for military operations, explain a considerable part of the increased note issue of the Chinese Government.
The situation created by the Japanese advance in 1944 has required the expenditure of a substantial but unknown amount in relief and immediate rehabilitation in Kweichow province. The activities of the War Production Board have increased, but the total advanced by the Board has not been a large factor.
Loans by the War Production Board to 77 industrial and mining units are reported to have been CN $2.5 billion in March, 1945 (the Board came into existence on November 16, 1944) and CN $4.5 billion in May. The four government banks reported an increase in industrial loans from an average of about CN $1.5 billion in January and February 1945 to CN $5 billion in March and CN $8.8 billion in April.
As already indicated, advances to the United States Army for expenditures in China were placed at no less than CN $55 billion during the first four months of 1945. The fact that these advances constitute a claim against the United States Government may justify their exclusion from China’s budget deficit, Dr. Remer stated, but the effects of these notes upon prices and inflation in China is not any less because of such a bookkeeping operation.
A First Interpretation of China’s Economic Position
Two possible interpretations were offered of China’s current economic position. According to the first, super-inflation or runaway inflation—if it has started or when it comes—is an indication that the [Page 1112] capacity of China to wage war has been fully reached. A persistent effort to go beyond this capacity must finally result in a breakdown, or economic collapse, which will be severe in its consequences. In this view, China has attempted to do more than its economy can sustain, and it was these efforts that produced the strain on its economy which doubled prices in early 1945 and threatens more trouble in the future.
Under this interpretation, the chief obligation of the United States Government is to discover as quickly and as accurately as possible how much of a burden the Chinese economy can carry. A second obligation is to work out, if possible, a continuous index of China’s capacity. A third and related obligation is to adjust the demands upon the Chinese economy, insofar as the American Government can do so, to the possibilities that have been discovered.
A Second Interpretation
A second, though related, interpretation finds the key to understanding China’s situation not in the ultimate capacity of the Chinese economy to wage war, but in the degree of effectiveness of the financial machinery of the Chinese government. From this point of view, the significant matter is the weak position of the Government in the Chinese economy, and the fact that the Government does not have at its disposal the financial means to translate its great needs into really strong pressure upon the Chinese economy. Runaway inflation, it might be said, is an indication that the pump is failing to work, and does not indicate that there is no more water in the well.
If, under this interpretation, inflation is pushed to the extreme, the result will be not a collapse of the Chinese economy, but a collapse of the method of taxation by inflation. The Chinese government will be required to find a different way forward, by a more extensive use of direct levies, such as taxes-in-kind, by rice allowances to soldiers, by direct assignment of raw materials to plants engaged in war production, and by similar devices.
Under this interpretation, according to Dr. Remer, the Government of the United States is called upon by its obligations to an Ally to assist in making as effective as possible the financial machinery at the disposal of the Chinese Government. The detailed methods would require full examination from the Technical point of view in collaboration with the Chinese Government.
Dr. Remer concluded by stating that political considerations would play an important role in any interpretation of Chinese inflation which turns upon the effectiveness of the government’s financial machinery, especially since the failure of financial machinery may threaten political stability. In this sense, the politics of inflation might well be more significant that [than] the economics.
[Page 1113]Discussion
Following a comment by Mr. William T. Stanton, Foreign Economic Administration, that the breakdown mentioned under the second interpretation—if it occurred—might not lead to any very great chaos, Dr. Remer said that one Chinese view sees relief coming from the reacquisition of lost provinces. As more territory is brought under the Central Government’s control, currency will be spread thinner. It is thought that if as much as one-third of the currency then comes back in taxation, the system will not break down.
Colonel Young,96 Theatre Judge Advocate, asked how a reverse Lend-Lease Agreement might affect the inflationary situation. The Chairman, Mr. Robertson, replied that unless increased demands were made upon the Chinese economy under Lend-Lease, the mere execution of a Reverse Lend-Lease Agreement formalizing and giving due credit for the reciprocal aid now being furnished by the Chinese, would have no effect on the situation one way or another. Mr. Joyner, Foreign Economic Administration, concurred.
Mr. Kearney, Deputy in Charge of the American Production Mission, was inclined to agree that poor economic mobilization was a very important factor in explanation of China’s present economic situation. Granting that the potential of the economy is limited according to our standards, much more could be done with the resources at hand than actually is being done. He cited the high percentage (50 per cent) of rejects in foundries and other industrial establishments, the way in which cotton was allowed to leak out into enemy territory in 1944, and other matters. He warned against the defeatist attitude of many Chinese. Citing fuel alcohol as a case in point, he stated that production in a number of lines could be increased if inertia could be overcome and an opportunity given to solve particular problems of production or financing. In concluding his remarks, Mr. Kearney commended FEA on its endeavors to have the Chinese themselves provide as much as possible of the materials of war production.
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Respectfully yours,