102.1/7–1647: Telegram
The Ambassador in China (Stuart) to the Secretary of State
[Received July 16—9 a.m.]
1535. To State and Treasury from Adler. RefEmbtel 1532, July 15, 8 p.m. Saw K. P. Chen on morning of July 11 and in reviewing the proposal to introduce a new silver currency he admitted it would be a gamble and a move undertaken out of desperation.
He further admitted many of the longer run disadvantages of the proposal, as for instance the dubious value of silver as a means for settlement of international balances. However, he claimed that one great advantage was that the peasants would use silver coin instead of food as a hoarding medium and thus the injection of silver coin into circulation would fulfill the same function as the gold-selling policy in 1946. Between 300 and 400 million ounces of silver would be needed.
(For your information K. P. Chen made following observation.) The Generalissimo is hemmed in and has had little freedom of political maneuver. In the period when the British were the dominant power on the lower Yangtze valley, they were realistic and did not ask him to do things which it was impossible for him to carry out. “You Americans are straightforward and direct” and are asking him to do the impossible. He was obviously alluding to United States antipathy to the extreme reactionaries. I replied that the United States is realistic in its awareness that Generalissimo cannot save himself unless he moves on certain lines, however difficult it is for him to do so.
Evening of July 11 I attended a 3-hour conference with Governor,6 K. P. Chen, Li Ming and Tsuyee Pei. Conference was discouraging as it revealed their inability as a group to face up to unpleasant facts which as individuals and privately they readily acknowledge. Pei acted as spokesman and built up a rosy picture with only tenuous relations to the actual situation, though he did reveal that Generalissimo wants restoration of silver dollar. Pei argued that China is faced with two major economic problems: its unbalanced budget and the deficit in its balance of payments. As the former could not be tackled now, it was best to concentrate on the latter. Rectification of deficit could, he claimed, be achieved by institution of a free exchange [Page 1161] market, with Central Bank only granting exchange at official rate for good cotton and Government imports; for rest importers would have to get exchange themselves at free market price as best they could. He admitted that free exchange market would necessitate tightening of trade controls and elimination of current large-scale smuggling, but argued nevertheless that consequent increase in exports and inflow of overseas remittances would bring China’s international payments approximately in balance in about 3 months.
Then would [be] propitious time for introduction of silver coinage, especially if there had been one or two military victories, as some confidence in Government would have been restored. China would need between 200 and 250 million ounces of silver, in addition to the 45 million ounce stock in her possession. It would be best if she could have around 150 million ounces of silver coin on hand at time of its introduction, but there might not be time for that. He would like to see the silver coin introduced as unlimited legal tender, but there would not be enough on hand and it would have to be injected gradually through the main financial centers. The introduction of silver coin would be conditional on the Generalissimo’s taking measures to reduce expenditures so that it would be utilized to move toward a balanced budget. I then proceeded to raise a number of questions:
- 1.
- The establishment of free exchange market would accentuate the flight of capital. Moreover, prevention of smuggling would be a major political problem, as most smuggling is via Hong Kong, which depends on entrepôt trade for its existence, and Kwangtung, where it would be hazardous for Central Govt to try to strengthen its political authority at this time.
- 2.
- The Central Govt would run the risk of rapid depletion of its stock of silver coin if it started with only 45 million ounces of silver coin. It was admitted that around another 100 million ounces would be needed, upon which I asked where this 100 million ounces and the balance needed eventually to make up the 250 million ounces would come from. The Governor again alluded to the possibility of an arrangement with Mexico through American good offices and to a purchase of silver from the United States. With respect to Mexican silver I tried unsuccessfully to pin him down on possible terms. With respect to U. S. silver he indicated that he had a 10-year credit in mind, and K. P. Chen suggested that repayment might be in the form of commodities such as tin and wolfram ore, with repayment to begin 3 or 4 years from now. When I pointed out that such an arrangement would in fact be a loan, this was generally agreed to. When I mentioned the obstacles in the way of a loan, K. P. Chen intimated that the “silver bloc” might support such a loan, citing the late Senator Pittman who said to him 11 years ago: “Come to U. S. 6 years from now and we will give you all the silver you want.” However, he confessed that the silver bloc might raise certain difficulties as to price. Another suggestion was that China might make an arrangement similar [Page 1162] to that made by the United Kingdom and India during the war, when we lend-leased silver to them on condition that repayment be made in silver.
- 3.
- Would the silver coin be maintained at a fixed or a fluctuating price in terms of fapi? After some discussion of the advantages and disadvantages of both courses, Pei said it would be best to regulate the price of silver coin in such a way that it would exceed the value of its silver content in terms of the free market exchange rate, but no definite answer to the question was given.
- 4.
- The introduction of silver coin would accentuate the flight from fapi and significantly increase its velocity of circulation.
- 5.
- How would it be possible to resist pressure of military to obtain silver coin for their appropriations?
- 6.
- Finally, judging from Pei’s analysis it would appear that silver coin was going to be introduced on the basis of the expectation that the economic situation was going to improve and not deteriorate. K. P. Chen speaking for the group as a whole said that was correct.
After further discussion Governor asked me to transmit over the week-end request contained in section 1.7
Saw Li Ming on July 12. He confessed that Pei had been too optimistic in his analysis of the impact of a free exchange market and that the silver proposal was the product of a desperate situation but claimed that hard money would act as a curb on military extravagance and contribute to fiscal sanity. K. P. Chen later joined us and also confessed that the establishment of a free exchange market, which he has supported for some time, would be a gamble. [Adler.]