893.51/2–647: Telegram

The Ambassador in China (Stuart) to the Secretary of State

213. Dr. Soong sent for me late last night and handed me the memo to which reference was made in Embassy’s telegram 204, February 4, 10 p.m. and 206, February 5, 10 p.m. At same time he gave me an aide-mémoire of an oral statement which reads as follows:

“I am not trying to be an alarmist. Last summer when people were freely predicting that economic collapse would come in a matter of weeks, I told General Marshall and yourself that it would be a question of many months before the eventuality had to be faced.

Even as General Marshall was leaving I expressed the hope that [although?] the economic situation in China is particularly difficult to predict, while 1947 will be a year of terrific difficulties, it might be possible to hold through because there was then visible signs of improvement particularly in efforts and in prospects of increased agricultural production. The rapid turn for the worse during the last few weeks as evidenced by the figures I have given you have radically altered the picture.

We had all hoped that we would not have to approach the United States Government for financial assistance until the State Council and the Executive Yuan have been reorganized. The economic situation, however, has forced our hands.

In fact, the economic situation has led the minor parties to sit on the fence, as they would naturally not like to be identified with a Government that might collapse. Moreover, this situation has undoubtedly [Page 1054] stimulated the Communists to greater efforts to weaken the Government and refuse to be in a concilatory mood.

I am convinced that only one thing will steady the economic situation and improve the political outlook and that is some concrete form of American assistance and support. Perhaps the simplest, most helpful form of assistance would be an immediate credit of $150 million for cotton or cotton and wheat for a term of 10 years as it would immediately favorably affect our balance of payments, secure the withdrawal of fapi53 as the products are sold, assure the people of concrete American assistance. Politically it will encourage the wavering elements in the minor parties to join the Government, and it would encourage the progressive members of the Government to press forward for a speedy reorganization. A smaller sum than the figure mentioned will not have the effect necessary in this emergency.

On the other hand the nature of this credit goes as far as possible from any charge of direct aid for military use.

In addition if someone like Mr. Blandford, in whom the Chinese Government had confidence and had given access to all economic information could visit the United States immediately before General Marshall leaves for Moscow, he would be able to explore what further American financial and advisory assistance might be given and under what circumstances this aid might come.

I consider this particularly important as it would mean continuing aid with a definite program of action for both China and the United States.”

The memo is as follows:

“The economic and financial situation has entered upon a most critical phase which gives cause for grave concern.

Without any allowance for future price inflation it has been determined that minimum budgetary requirements will call for expenditures of almost $10,000 billion in 1947. Against this revenues on the most optimistic estimate will probably not reach $7,000 billion after including large allowances for the sale of properties which will not materialize substantially until the second half of 1947.

The Government is forced into this spiral of increasing monthly deficits and increasing monthly note issues especially in the first half of 1947, at a time when all economic factors point to a serious bad turn in the trend of steady deterioration.

For example, during 1946, despite a drive for increasing revenues including large sales of capital assets, expenditures continued to increase at a faster pace with the result that the average monthly deficits for the four quarters were as follows in billions of dollars: 197—247—278—473. This mounting monthly deficit trend continues in 1947 with a January deficit of $680 billion.

These increasing deficits are reflected in the rapidly rising note issue which at the end of January was 4,510 billion, i. e. 4 times that [Page 1055] 12 months previous. During 1946 the average of the monthly increases was approximately 12 percent. In January this year the increase has accelerated to 21 percent.

The inseparable inter-relation of note issue and prices is reflected in the Shanghai wholesale index (January-June 1937—100) which shows the following movements: 1946—June to September monthly percent increase (average) 12 percent: October and November—no percent: December—13 percent: January 1947—30 percent.

In the first 4 days of February, there has been a further increase of 10 percent.

Prices in the interior, which in the past have lagged behind Shanghai, are now being dragged upward at an increasing rate. The wholesale index in Chungking at the end of June 1946 was 40 percent of that in Shanghai. At the end of January 1947, the Chungking index stood at 55 percent of the Shanghai index and during January alone had risen by as much as 60 percent.

The flight from the currency of which the above disturbing price movements are a manifestation is most clearly seen in the following rise in the open market price of gold and U. S. dollar notes. 1946 June—gold (per oz.)—198,000—U. S. notes 2,650: October—227,000—U. S. notes 4,300: November—gold 272,500 U. S. notes 4,950: December—gold 348,000 U. S. notes 6,500: January 31, 1947—gold 406,000 U. S. notes 7,900: February 1—gold 408,000 U. S. notes 7,700: February 2—gold 436,000 U. S. notes 7,800: February 3—gold 476,000 U. S. notes 8,800.

These increasing prices have taken place despite official sales of gold undertaken with the object of retarding the impact on prices which habitually move in a path with the price of gold in the open market. Sales of gold are an important deflationary measure in that they result in a contraction of currency approximately equal to three times that from the sale of an equivalent amount of foreign exchange. The inflationary pressure of money flowing into Shanghai from the interior in an ever growing flood has led to the following inroad on the Central Bank’s holding: 1946 March 4—5,800,000 oz.; 1947 January 31—2,400,000 oz.; total 11 months sales 3,400,000 oz.

Of these sales, approximately one-half were made during the last 3 months.

Along with these declining gold holdings, the Chinese Government faces exhaustion of her other foreign exchange resources during the current year. Allowing for a minimum program of essential imports, China shows a deficit of at least $380 millions in her estimated balance of payments for 1947 (submitted to Washington with reference to the possibility of post-UNRRA relief allocations). This figure has to be seen in relation to China’s exchange resources of U. S. dollars 282 millions on January 31, 1947 (including 48 million ounces in silver).

The prospects for expending exports are steadily improving but the results would not come quickly enough to affect the current year’s balance of payments.”

  1. Chinese National currency notes.