Foreign Relations of the United States, 1947, The Far East: China, Volume VII

102.1/10–2747: Telegram

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

Nanking, October 27, 1947—5 p.m.
[Received 11:43 p.m.]

2144. For Treasury from Adler.

1. Recommend immediate reexamination of question of financing U. S. Government agencies’ expenditures in China. (Reference your telegram 1201, of September 26, and Embassy’s telegram 2059, of October 11.⁵⁵) Except for a trifling readjustment against the U. S. dollar on October 24 made to establish a 3 to 1 dollar-sterling ratio, open market rate has remained unchanged since October 9 in spite of rapid upsurge of prices and black market rates. While Exchange Equalization Committee’s function purports to be making realistic readjustments in open market rate, it is showing clear signs of being stultified in this task by political considerations. (See paragraph 2 Embassy’s telegram 2126 of October 23.⁵⁶) Chances of its making significant adjustment in open market rate in near future appear none too bright, and in any case political pressures will militate against its reducing gap between black and open market rates to reasonable dimensions over longer period. Moreover, most improbable that Central Bank would agree to special arrangement as in January and May in view of existence of open market rate. Finally near panic has subsided and it is reasonably safe at this time to make departure from present procedure.

On other hand Chinese Government would tend to ascribe undue significance to our recourse to black market, especially as it could not be kept secret. This factor must of course be evaluated in terms of our general China policy, but doubt whether it should be given undue weight.

2. Payments to American firms present no problems, as payment could be made to account of their banks in U. S. This procedure could later be extended to non-American firms with offices in the U. S. Use of U. S. currency for salary and wage payments to alien staff O. K. in Tsingtao, Peiping, and Tientsin which are virtually on U. S. dollar standard and possibly in outlying places, but not in Shanghai, Nanking, and Canton, where it would be preferable to make payments in CN dollars at black market equivalent. Purchases of CN dollar requirements can be made locally in Nanking by Embassy, Army and Navy from oil companies or via Shanghai against payment in United States. In outlying places same basis could be employed or where expenditures are small direct sales of U. S. currency could be made.

3. But bulk of U. S. Government expenditures, which run to over $500,000 per month, is concentrated in Shanghai. While State Department’s regulations with respect to purchase of foreign exchange at other than “official” rates permits of flexibility of procedure, Army requires purchase must be made from and certified by bank and Navy requires obtaining of three competitive bids and purchase from highest bidder. Both these requirements unrealistic in present situation, as purchase of CN dollars would not be necessarily made from a bank, while obtaining competitive bids an awkward and objectionable procedure when some secrecy of operation essential. Suggest should recourse to black market be decided on that:

a. All U. S. Government purchases of CN dollars made in Shanghai, including those made on account of Navy for expenditures in Tsingtao where market is thin, should be coordinated under supervision of Treasury and Assistant Treasury Attachés.

b. Purchases wherever possible should be made from American banks and reputable firms. List of clients could be drawn up in consultation with Consulate General [at] Shanghai. In view of disadvantages to Shanghai Chamber of Commerce of working even informally with a committee and need for avoiding to greatest extent possible accusations of arbitrariness, probably only course would be to purchase by rotation from a limited number of larger firms.

Establishment of rate a difficult procedure. As payment would in all cases be made in U. S., obvious that TT⁵⁷ rate which is higher than U. S. currency rate should be used. But market is not organized in sufficiently systematic way, and to disadvantage of lack of secrecy in asking for bids must be added possibility of coordinated bidding. Suggestion to me made by Consul General Shanghai that we name rate for each specific purchase worth serious consideration, as Shanghai is sellers’ market for U. S. dollars. This would of course be done on basis of close scrutiny of black market rates for U. S. currency, TT and gold in Shanghai and Hong Kong. Transactions would be consummated at rates as close as possible to best ascertainable current Shanghai TT rate, though as previously indicated given disorganized nature of market in Shanghai, perceptible fluctuations during the day and diversity of quotations even at same time of day, this is not an altogether simple task. As I usually visit Shanghai several times a month, Casaday and I between us should be able to handle coordination and supervision of purchases and I would of course spend some time in Shanghai in initiation of arrangement of this kind. While this procedure has certain drawbacks, they are not as serious as those of other alternatives.

4. In sum, unless Committee makes significant adjustment in open market rate before end of this week, recommend that we have recourse to black market for our purchases of CN dollars and that procedure above outlined is most feasible. Would appreciate Treasury’s opinions on above earliest, and particularly whether there are administratively objectionable features from Washington viewpoint, and if so possible methods of eliminating them. [Adler.]

Stuart

55. Neither printed.
56. Not printed.
57. Telegraphic transfers.