102.1/7–1747: Telegram
The Ambassador in China (Stuart) to the Secretary of State
[Received July 18—12:40 a.m.]
1540. To State and Treasury from Adler. ReEmbtels 1532 of July 15 and 1535 of July 16. Herewith my comments on Urtel 845 of July 9 and on Governor of Central Bank’s request that (a) Treasury start minting 45 million ounces of silver coin for China on basis of a swap against 45 million ounces Central Bank has in Shanghai, and [Page 1164] (b) Treasury Department long-term credit of not more than 100 million ounces of silver to China on terms to be worked out.
- 1.
- While deterioration in financial and economic situation continues unabated and while certain prices particularly in larger commercial and financial centers are increasingly based on open market prices of U. S. dollar and gold, there is not an immediate threat to general internal acceptability of fapi. Granting a tolerable harvest, for which prospects are reasonably fair, and no drastic large-scale military reversals not already discounted, at present rate of deterioration this acceptability should be tenable for at least 6 months if not longer.
- 2.
- Pei’s proposal for the establishment of free exchange market has certain important advantages from point of view of China’s balance of payments and has something to be said for it, though his expectation that deficits on international accounts would be more or less eliminated within 3 months is quite unreasonable. At same time German experience would appear to indicate that in hyper-inflationary situation existence of free exchange market with widespread opportunities for exchange speculation and flight of capital intensified hyper-inflation and general economic instability. This factor alone would, of course, contribute to accentuation of flight from fapi.
- 3.
- The injection of silver coinage into circulation would undoubtedly dangerously accentuate flight from fapi. As it would be impossible to keep silver plans secret, expectation of move would have impact on flight from fapi even before move was initiated. More important, fact that move would be undertaken with only relatively small stock of silver coin on hand would further contribute to flight from fapi and loss of confidence in Central Government.
- 4.
- From fiscal point of view, injection of silver coin into circulation on a small scale would initially certainly not improve budgetary picture, as receipts would be paid in depreciating fapi and amount of silver remitted would be too small to make a sizable dent on the deficit.
- 5.
- Governor’s request for a swap of 45 million ounces of silver and for our immediately beginning preparations for minting this amount is a disingenuous request for a loan of silver up to the whole amount needed for a new silver currency—probably 400 million ounces—minus the 45 million ounces China has on hand. For once we committed ourselves to minting the 45 million ounces we would have a moral responsibility to China for the new currency, which in effect we would be underwriting. The Governor’s proposal, if acted on in its present form, would unnecessarily and inexpediently reduce what life there is left in fapi and would entail introduction of new currency under more unfavorable conditions than is necessary. Although fact that U. S. was associated with new currency would be psychologically beneficial [Page 1165] to the Central Government, this effect would be short lived and wholly uncommensurate with the cost. Therefore, it would be unwise to underwrite the new currency in such circumstances.
- 6.
- Therefore it is recommended that you instruct me to inform Governor as follows: Without prejudice to merit or demerits of plan for new silver coin, in opinion of State and Treasury it would not be feasible to embark on plan in 3 months.
Furthermore, following explicit information and details are needed for a considered evaluation of Chinese proposal:
- a.
- How much silver does China need for a new silver coinage?
- b.
- What is the minimum amount of silver coin China must have on hand at time of introduction of silver coin to leave her within margin of safety?
- c.
- Does China contemplate establishing a fixed or fluctuating rate between silver and fapi?
- d.
- Does China intend to replace fapi entirely with silver, and, if so, how long is process intended to take?
- e.
- What specific and concrete steps is China contemplating with respect to budgetary deficit in period both before and immediately after introduction of silver coin?
- f.
- Has China a plan for ultimate currency stabilization tied up with plan for new silver coin?
It would, of course, be made clear to Chinese that request for such information involved no commitment of any kind on part of the U. S. [Adler.]