Nanking Embassy Files, Lot F 73
Memorandum by the Treasury Representative in China (Adler)
[Chungking,] August 17, 1945.
- 1.
- The Treasury has repeatedly indicated to the Chinese authorities its views that the sale of gold in China was not an effective anti-inflationary weapon. Ambassador Hurley’s confirmation of the Treasury’s views was conveyed in cable No. 74 of January 17, 1945. Acting Secretary Grew in a letter of May 16, 1945 to Secretary Morgenthau expressed agreement with the Treasury that the sale of gold in China had not proved and was not likely to prove a very effective device for the curbing of inflation. He also fully endorsed the desirability of the Chinese setting up a $500 million fund for combatting inflation and stabilizing the Chinese currency, as proposed by Secretary Morgenthau in his memorandum of May 8, 1945, to Dr. Soong. Ambassador Hurley indicated his support of this proposal in cable no. 1312 of August 9.
- 2.
- Dr. Soong in a memorandum of April 20 to Secretary Stettinius stated
that “the continued sale of gold will be the most important single
factor in blotting up large issuance of banknotes.” He indicated in a
memorandum of May 9 to the Secretary of the Treasury that the credit of
the Chinese Government must be maintained by the immediate delivery of
gold to meet its commitments now outstanding. “Such an effective and
proven instrument to combat inflation as is represented by our gold
sales cannot be abandoned.” If the Chinese Government were assured of
immediate and substantial shipments of gold to China, it would reinforce
its gold sales policy by:
- a.
- Increasing the price of gold so as to bring it more into line with general prices and secure a greater yield to the Government. (The [Page 1123] price of gold was raised from CN$35,000 to CN$50,000 per ounce on June 8.13)
- b.
- Discontinuing the forward sale of gold and eliminating the differential between the official and black market price for gold.
- c.
- Instituting a scheme for taxing the windfall profits of gold purchasers.
- d.
- Discussing with Treasury representatives the most desirable method of conducting gold sales and inviting a Treasury representative to sit on a Gold Sale Committee in Chungking. (As virtually no gold has been sold since June 26, presumably there would not be any point in extending such an invitation.)
- Dr. Soong concluded his memorandum with the following dire prediction: “Unless the promise made by President Roosevelt and the Treasury to make gold available be fully implemented, a disastrous financial collapse in China is plainly indicated, which will inevitably be followed by a military collapse.”
- 3.
- On June 19 Dr. Soong returned from Washington. On June 26 all sales and deliveries of gold were suspended.
- This action seemed all the more startling in view of Dr. Soong’s frequent assertions in Washington that discontinuance of the sale of gold would bring about financial collapse. The explanations14 offered for this action were not very convincing.
- 4.
- On July 31 the official price of gold was raised to CN$170,000 per ounce, and deliveries and sales were officially resumed. Actually, however, the sales have been only nominal and the black market price is now only about 60 per cent of the official price.
- 5.
- On the same day a 40 per cent tax on gold, payable either in kind or at the prevailing official price of gold, was instituted. Dr. Soong assured Mr. Adler that this tax was imposed in conformity with his promise to the Secretary of the Treasury that there would be retroactive taxation on forward buyers of gold in order to tax windfall profits arising from the rise in prices. The tax has created much controversy and criticism on the grounds of its lack of equity and the breach of contract involved. Since the institution of the tax about 100,000 ounces of gold bought forward have been delivered.
- 6.
- It is clear that since the receipt of large amounts of gold there has been little pretense of using it as an anti-inflation weapon. Dr. Soong in his memorandum of May 9 to the Secretary of the Treasury stated that China would sell gold at the rate of 1,000,000 ounces every three months. Actually about 700,000 ounces were sold in May and June and virtually none has been sold since. Moreover, the Minister of Finance informed Mr. Adler on August 3 that he contemplated selling about a million ounces by the end of the year, i. e., in a five-month [Page 1124] and not a three-month period. Even if this plan were carried out, China would still have over 2,000,000 ounces of gold at the end of the year, assuming all deliveries are made and all past commitments are met, and not allowing for receipts of gold from the payment in kind of the tax on gold.
- 7.
- The Minister of Finance raised the question of the price of gold with Mr. Adler on August 16. Mr. Adler asked him what the effect of the termination of the war would be on his budgetary plans and he said it was too early to know yet. Therefore the whole question of the price of gold would be left open until the Government’s budgetary plans had become clear.
- 8.
- To the best of our knowledge, no reply has been received from Dr. Soong or any other representative of the Chinese Government on the Treasury’s proposal that a half billion dollar currency stabilization fund be instituted. The timeliness of this proposal is even more evident now than when it was first made.
S[olomon] A[dler]
Addendum, August 22. On August 20 the Ministry of Finance temporarily permitted the use of gold as collateral in interbank loans. With the adoption of this measure the last anti-inflationary vestige of the gold policy disappears. (SA)