893.515/9–645
Memorandum of Conversation, by Mr. John D. Sumner of the
Office of Financial and Development Policy
[Washington,] September 6, 1945.
| Participants: |
Mr. Clayton |
|
Mr. Sumner |
|
Mr. Pei Tsu-yee |
Mr. Pei stated that he had talked with Mr. Harry White of Treasury concerning
China’s tentative plans for rehabilitation of her currency. The purpose of
his visit to Mr. Clayton was to outline those plans in order to solicit the
advice of the Department of State. He left with Mr. Clayton a copy of a
memorandum “China’s Financial Problems and Policy”, with an appended
“Outline of a Plan for Reconstruction of Chinese Currency and Finance”;
copies of these are attached. (According to Mr. Lockhart,29 the main memorandum at least was
prepared by Arthur Young, Financial Advisor to the Chinese Government,
approved by Dr. T. V. Soong, and left with Mr. Pei for presentation and
discussion in Washington.)
Problems of Puppet Currencies: Mr. Pei called
attention to the difficult problem of replacing puppet currencies with
Central Government currency. He stated that it was intended to exchange
Chinese currency for puppet currency to the degree necessary to prevent
Chinese in former Japanese occupied territory from being destitute. Large
balances of puppet currency, however, would be frozen, subject to the
completion of two steps. First, it would be necessary to determine which
Chinese were collaborationists; second, it would be necessary to see what
could be obtained by way of Japanese reparations in order to cover the cost
of redeeming puppet currencies or balances held by those Chinese who were
not collaborationists.
A New Chinese Currency: It is intended ultimately to
issue a new Chinese currency, to be exchanged for existing currency at a
predetermined rate. It is tentatively believed that the new currency, in
relation to the American dollar, should have a value of approximately 1 to
4. (The value of the Chinese dollar before the war was approximately U. S.
$.30.)
[Page 1138]
Before issuing a new currency, however, China hopes approximately to
stabilize domestic prices in terms of the old currency. As a corollary, it
is believed that the new currency should not be issued until ports are
opened and foreign trade has been resumed in something like normal volume.
If these conditions could be established, it would permit a more careful
determination of a desirable rate of exchange between the proposed new
currency and existing currency, as well as providing a more accurate basis
for determining the rate of exchange between Chinese and foreign currencies.
Pei also mentioned that before deciding upon a fixed rate of exchange, it
might be necessary to do a certain amount of experimentation. He expressed
the hope that following a short period of experimentation a relationship
might be established with the American dollar which would be stable over a
long period of years.
Continued Control of Foreign Funds: Mr. Pei believes
that while China wishes ultimately to abandon all exchange controls, it may
be necessary for a short time to continue to control Chinese overseas
balances in order to prevent either a flight of funds, or a waste of those
funds (presumably through unnecessary expenditures). He is concerned,
therefore, lest the Treasury be unable or unwilling to continue the freeze
of Chinese balances in this country. He talked somewhat vaguely about the
possibility of reinstituting some joint Sino-American-British control
commission which might perform functions similar to that of the commission
of 1940–41.30 When I
asked whether it was his thought that such a group would control rates of
exchange as well as the use of Chinese funds overseas, he replied that his
Government was considering the problem of the exchange rate but is not yet
in a position to make definite proposals.
Reference to Bretton Woods: Mr. Pei stated that it
was China’s desire to become a full-fledged member of the Bretton Woods
institutions. However, it is not now clear just when these institutions will
become going concerns; it is also not clear how long it may be before China
is able to stabilize prices quoted in terms of her existing currency. Mr.
Pei seemed to wish American advice as to whether the plans outlined above
would fit into the Bretton Woods framework (or might endanger Chinese
ability immediately to become a full-fledged member of Bretton Woods
institutions.)
At the close of the meeting, Mr. Pei indicated that he would like to obtain
Mr. Clayton’s reactions to these tentative proposals, and
[Page 1139]
gave the latter a copy of the attached
memorandum. Mr. Pei stated that he is leaving Washington this week-end. He
will be in the United States for another week before going to England and
would be glad to return to talk the matter over with Mr. Clayton any time
next week. Mr. Clayton stated that he hoped it would be possible to arrange
such a meeting. (Dr. Soong plans to leave this Sunday for London.)
No mention was made of American financial assistance in the form of loans or
credits.
[Annex 1]
Memorandum on China’s Financial Problems and
Policy
[Washington,] August 31, 1945.
1. Budget. For the month of July, 1945, total
actual expenditures of the National Government, excluding advances to
the United States Army, were C$74 billion, of which C$54 billion was
advanced by the Central Bank of China. About half of the remainder was
realized from taxes and the rest from gold.
Prior to the end of the war, expenditures for August–December, 1945, were
estimated at C$868 billion, including advances of C$100 billion for
costs of the United States Army but excluding payments in kind of rice,
wheat, etc. Receipts, other than in kind, were estimated as follows:
|
C$ billions |
| Taxes |
100 |
| Sale of cotton cloth |
100 |
| Sale of gold |
200 |
| 40% of previous gold purchase to be contributed |
200 |
| Issue of ₤10 million of bonds |
100 |
| Advances from the central Bank |
168 |
| Total |
868 |
Revised figures following the end of the war have not yet been completed.
While military costs will decline there will be unavoidable heavy costs
for demobilization and for relief and rehabilitation, which the
Government will have to meet by use of local currency until the flow of
adequate supplies of imported food, clothing and other necessities is
established. Moreover, the taking over of liberated areas entails heavy
additional expenditures for rehabilitation of Governmental offices and
public services.
2. Currency. The total note issue as of July 31,
1945, was C$462 billion. Lately the budgetary deficit and consequent
increase of circulation
[Page 1140]
has
been larger than before, in view of heavier fighting and preparations by
the Chinese forces and by the American forces in China for driving the
Japanese from China. The increase in the six months ending July 31,
1945, was about 130% compared with about 60% in the corresponding period
in 1944. On account of the continuing heavy expenditures resulting from
liberation, and also because of the currency vacuum in liberated areas
to be filled by national currency in place of greatly depreciated puppet
and enemy currencies, a further exceptional increase in the volume of
national currency must be anticipated during the remainder of 1945.
Nevertheless, there are favorable factors that should help to steady the
price situation while fundamental measures to restore fiscal equilibrium
are being taken, namely:—(a) increased demand for
currency in liberated areas and because of the increase of internal
economic activity; (b)improved internal transport
and production and trade, owing to the freeing of routes of
communications and opening of access to sources of production and to
markets; (c) improved confidence resulting from
the end of the war and China’s improved international position; and (d) it is hoped because of prompt progress with
relief and rehabilitation.
The situation is greatly complicated by the Japanese-sponsored currency
issued during the war—mainly puppet currency, although some military yen
may be still in circulation. There were three different currency areas
in occupied continental China: Manchuria, with the Manchurian yen
nominally at par with the Japanese yen; the so-called Federal Reserve
Bank currency in North China; and the so-called Central Reserve Bank
currency in Central and Southern China. These areas were separated from
each other and from Japan by exchange control. Also there is the
Japanese yen currency in Formosa. Detailed measures to deal with the
enemy and puppet currencies must await obtaining and analyzing data
concerning actual conditions in these areas.
3. Central Bank. The Central Bank of China during
the war has remained chiefly a fiscal agency of the Government, in which
capacity it has rendered valuable services. It is fully realized,
however, that the functions of the Central Bank in relation to the
banking system and the money markets have to be developed.
Reorganization and strengthening of the Central Bank have now become
urgent in view of the need for monetary reform and to prepare for
China’s participation in the International Monetary Fund.
A few days before the outbreak of war in 1937 the Chinese Government had
approved after long discussion a plan for converting the Central Bank
into a Central Reserve Bank with the functions generally exercised by
such banks. This law however was not promulgated
[Page 1141]
on account of outbreak of war. Existence
of these plans will facilitate the reorganization of the Central Bank
now that the war is over.
4. Banking. The reorganization of the banking
system is specially urgent in view of the fact that the Japanese
liquidated or interfered with the banks in the occupied areas and
created various puppet financial institutions which must now be
eliminated. The situation is further complicated by the strain on the
banking system of Free China during the war. Clearly it will be wise to
rehabilitate the banking system fundamentally, in order to encourage
economic recovery and promote the expansion of production and trade
within China.
5. Trade. Controls of trade were enforced
beginning in 1938, and since 1941 exchange has been controlled. Private
foreign trade has been practically non-existent since December 7, 1941,
in view of the blockade. Imports into Free China have consisted almost
entirely of official supplies, while exports have consisted of strategic
materials for the United States, Great Britain and Russia.
With the ending of the war, measures will need to be adopted to provide
for the promptest possible resumption of ordinary private trade. For a
transitional period, however, while China’s balance of payments is
seriously out of equilibrium and the currency still suffering from the
effects of the war, temporary measures to control imports are necessary.
Export trade, however, can be freed without delay. Objectives in this
transitional period should be on the one hand to obtain the needed
imports while preventing a waste of foreign currency resources, and on
the other hand to encourage exports and obtain the maximum exchange
therefrom while the balance of payments is being restored to
equilibrium.
An outline of a plan for reconstruction of China’s currency and finance
is attached.
[Annex 2]
Outline of a Plan for Reconstruction of China’s
Currency and Finance
[Washington,] August 31, 1945.
The first objective of the plan is to check inflation by vigorous action
in the fields of expenditures, revenues, currency and banking and by
rehabilitation of China’s economy. The program also involves
stabilization of prices at the earliest possible moment, and also
stabilizing exchange at a level avoiding either over-valuation or
under-valuation, in order to establish as soon as practicable a free
exchange market, as contemplated in the Bretton Woods agreement. The
program
[Page 1142]
further aims at the
creation of a sound financial system to promote China’s economic
development.
A. Public finance
1. After meeting the heavy emergency outlay that is unavoidable in the
immediate post-war period, military and civil expenditures to be
readjusted at the earliest possible moment.
2. Revenues to be built up by rehabilitation, with appropriate reform
where needed, of
-
a.
- Customs.
-
b.
- Salt tax.
-
c.
- Other internal commodity and excise taxes.
-
d.
- Direct taxes on incomes and profits.
-
e.
- Land tax.
3. Borrowing from the Central Bank to be reduced as soon as conditions
permit. Meanwhile internal funds to be raised by use of foreign
resources, especially by sale of imported goods, including realization
of the proceeds of commercial imports for which the Government may
provide foreign exchange through the banks; and, to the extent feasible,
by Japanese reparations.
4. The railways, telegraphs, posts and other governmental enterprises to
be organized, as before the war, on a self-supporting basis as soon as
conditions permit, financial help from the Government being limited in
principle to such costs of rehabilitation as these enterprises cannot
themselves defray.
5. The debt structure to be reorganized, the measures to include:
-
a.
- Lightening the near-term burden of scheduled debt payments so
far as practicable.
-
b.
- Gradual resumption of service of the pre-war external debt as
soon as conditions permit.
-
c.
- Unification of railway debt.
-
d.
- Debts to Axis Governments to be cancelled; these Governments
to be required to assume Chinese Government debts to Axis
nationals.
B. Currency and banking
6. Prices and exchange to be substantially stabilized first in terms of
the existing currency, but a new currency to be issued as soon as
sufficient progress has been made with fiscal measures and restoration
of confidence to permit a successful currency reform.
7. The value of the new currency unit to be a little lower than the
pre-war unit in terms of U. S. dollars, e. g., at US$0.25 instead of at
about US$0.30 before the war. In determining the value of the new unit,
the value of the Japanese and other competitive currencies to be taken
into account.
8. New coins to be issued of the following denominations: 50, 20, 10, 5,
1 and ½ cent.
[Page 1143]
9. The existing currency to be converted into the new at a fair rate,
taking account of pre-war and current price levels in China and abroad
and also foreign exchange values. The rate of conversion to be
determined after the old currency and its exchange value are
substantially stabilized.
10. Enemy and puppet currencies of specified denominations to be
permitted temporarily to circulate since they are the de facto money in large areas. Eventual disposal of these
currencies to be determined after investigation of actual conditions. If
they are given a fixed value in relation to Chinese currency, safeguards
are to be adopted against benefits to enemies and collaborationists.
Japan to be held accountable for these currencies.
11. Enemy and puppet financial institutions in liberated areas to be
liquidated.
12. Return as soon as practicable to a free exchange market, with market
operations to prevent undue fluctuation of rates. This involves:
-
a.
- Abolition of exchange control.
-
b.
- Modification of freezing of assets abroad (see next
paragraph).
-
c.
- Abolition of the import controls that will be necessary for
the transitional period.
-
d.
- Freeing of export trade and ending of monopolistic
trading.
13. Exchange and trade control to continue temporarily for a transitional
period, until the restoration of more normal financial and economic
conditions. This temporary trade control to involve:
-
a.
- A prohibited list.
-
b.
- A licensing list.
-
c.
- A list of essential goods that may be freely imported.
14. Freezing of Chinese assets abroad to be temporarily continued, and to
be modified or abandoned only after consultation with China.
15. The Central Bank of China to be reorganized and strengthened on the
general lines planned in 1937, in order to help to carry out the
currency reform.
16. The banking system to be reformed, with the following measures:
-
a.
- Support and strengthening of sound institutions.
-
b.
- Liquidation of unsound institutions.
-
c.
- Development of an adequate system of credit institutions
comprising commercial banks, savings banks, agricultural credit
institutions, and intermediate and long-term credit
institutions.
-
d.
- Revision of the general banking law, including provisions to
facilitate the functioning of foreign banks, and laws regarding
negotiable instruments.
