893.50/2–1747: Telegram

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

300. Generalissimo’s statement and measures adopted to cope with financial and economic crisis (re unnumbered Embassy’s telegrams of February 16, 8 p.m. and 9 p.m.90) are a forthright and statesmanlike approach to present crisis and will probably have immediate if only temporary effect of restoring degree of public confidence in Govt’s ability to meet present problems. Castigation of Communists is much milder than in previous statements by Generalissimo, but familiar pattern of asserting Communist responsibility for major national ills is followed implying lack of any Government responsibility. Generalissimo again dedicates himself to solution of Communist problem by political means. Generalissimo’s promise of [Page 1075] Government changes “within a few days” gives hope of reorganization of Government with broader base. During past few weeks, however, there has been a notable reluctance on the part of non-Kuomintang groups to assume partial responsibility for Government in a situation of crisis.

The following points are worthy of attention:

Readjustment of the exchange rate at 12,000 is relatively realistic. It is interesting in this connection that the Generalissimo favored a rate of 15,000 which would have been preferable inasmuch as it would have given Central Bank a little more leeway, but the Generalissimo yielded to Soong and his advisers.
Only cessation of civil war would create conditions for fiscal and currency stabilization. Measures to check transactions in gold and for prohibition of circulation of foreign currency notes are not likely to be more than temporarily effective. Chinese currency is so weak that insofar as these measures are enforced, flight into goods, which is already assuming significant proportions, will be encouraged. Sooner or later active dealings in gold and foreign currency will be resumed in private transactions, perhaps in a “blacker” market than previously. Mobilization of Chinese private foreign exchange assets abroad unenforceable.
The decision to restrict price control to one or two areas and to specific commodities seems wise but there will still be serious problem of enforcement. In fact real test of Govt’s ability to govern will be its success or failure in ensuring delivery of minimal essential supplies to key groups.
Point 5 of statement provides for application” of “rough and ready justice” in the collection of revenues, notably income tax, but on basis of past performance there is reason to doubt that this “justice” will be applied with the necessary impartiality and vigor to affect persons in high Government positions or their families and associates.
Reference to self-sufficiency in cotton and tobacco by 1948 presupposes stability of conditions which will encourage farmers to engage in the production of cash crops rather than food crops; traditionally the Chinese peasant in troubled times has tended to forsake the former for the latter. In any event bumper cotton and tobacco crops in the fields can have little effect upon the over-all situation in the absence of adequate transportation facilities to move produce. In spite of the statement that railways in operation show “an increase by 50 percent” since the Government reoccupation of Japanese-controlled areas, it is an unfortunate fact that no major rail line north of the Yangtze River has been maintained in continuous operation during the past 6 months.

In this connection all present indications are to effect that conditions are worsening rather than improving due to continuous Communist harassment.

  1. Neither printed.