The Consul General at Shanghai (Cabot) to the Secretary of State
[Received May 12—9:22 a.m.]
1044. [To] ECA13 8. Treasury and State from Casaday. Central Bank official (Cyril Rogers14) in private conversation Saturday expressed serious concern re general economic-financial position and considerable pessimism re aid program in relation thereto.
He said “conditions have never been so bad” as now (a) with official foreign exchange completely exhausted (except for working balances) and Central Bank borrowing foreign exchange from Bank of China for past 6 weeks. In this connection he stated that American practice of including foreign exchange assets of so-called Government banks in estimates of China’s “official” exchange resources, although [Page 369]natural in view general practice other countries, is of dubious justification in China’s case. He deplored failure Chinese Government mobilize exchange resources these banks and termed “disgraceful” present necessity borrowing from them; (b) with April increase note issue 40% and budgetary situation “completely out of hand” (although no further figures given); and (c) with “shocking” ineptitude, indifference, fear and general low morale in high Government circles, all of which he says have become much worse past 3 months.
He said facts of rapidly deteriorating situation repeatedly presented to Governor15 with request Pei be informed while still in Washington but this never done except in personal letter from this official to Pei just before Pei’s departure from Washington and that consequently this official fears seriousness situation not fully realized in either American or Chinese Government circles. He said no evidence of really constructive thinking in Chinese Government as to best utilization American aid (except various “plans” proposed for sake of appearances) and deplored fact that Chinese Government through Pei had not been ready with detailed operating proposals by now. He emphasized this not Pei’s fault, but he fears that aid will not now become effective for two or three months and that this delay plus possible unwise administration may be “disastrous”. He strongly urged tough American policy and emphasized need for this policy to be tough in financial sense as well as in mere administrative.
Specifically this official very dubious of wisdom of 60 million for reconstruction projects and of rural reconstruction program. He says this not the time to “reconstruct” in China. He urges most careful selection and limitation of projects with view to quick productivity. He hoped no technicians in industrial, agricultural and transportation projects will have final authority as to what projects shall be chosen but a tough-minded financial man preferably from US Treasury or Federal Reserve.
This official stresses absolute necessity of tightening money and regrets difficulty doing this under aid program. He says monthly rate of withdrawing CNC from circulation under present aid plans will be only about half rate at which new currency being pumped into economy quite aside from uses to which CNC proceeds of sales of aid goods will be put. He wishes it were possible dump large quantities aid goods on market at once withdrawing equivalent CNC and then keeping that CNC from flowing back into economy. He suggests that if price and black market stability could be achieved for even 2 or 3 months, effect on confidence and public morale might be sufficient [Page 370]reduce hoarding and speculation and stimulate natural processes economic recovery. He admits difficulty achieving this by any means so long as military and other Government departments have carte blanche access to Government exchequer and the printing presses but feels aid program will not even make deflationary dent on present situation if goods dribbled slowly into economy over 12 months and with considerable portion used in directions where effect will be directly inflationary not deflationary.
This official evinced some sense of frustration in getting sufficient support for his views in Chinese Government and indicated his willingness discuss problems from time to time privately with US officials if matter kept confidential. This will be followed up as occasion offers.
Addendum: Subsequently in separate conversation with Agricultural Attaché16 K. P. Chen17 expressed similar views and in some respect more strongly. Stressed need for immediate restoration of confidence and stabilizing of speculative spiral in next 60 days. Much stability essential before important reconstruction projects can be successfully undertaken. Stressed need for dovetailing reconstruction projects with measures to retard present rapidly accelerating rate of inflation.
Sent Department 1044; pouched Nanking 814. [Casaday.]