Memorandum by the Director of the Office of Far Eastern Affairs (Butterworth) to the Secretary of State

The following paragraph of a letter from Livingston T. Merchant, Economic Counselor of the Embassy at Nanking, puts in concise form the inflationary situation which has been the subject of numerous telegrams and despatches:

“One last note on inflation. There is no doubt in my mind that the Central Bank is absolutely out of dollar exchange. The inflation is now taking on an explosive form with the first signs beginning to appear of the actual physical slowdown of the conduct of business which characterizes the final stages. For example, this morning CNAC33 announced the suspension of all flights on the Shanghai–Nanking shuttle simply because official approval of rate increases lags too far behind the almost daily rises in the cost of aviation gas. More and more stores in Shanghai and other cities are putting up their shutters rather than risk holding fapi even a few hours. The rate went over eight million in Shanghai yesterday and until this morning the largest denomination bill in circulation was worth only slightly over one cent gold. I must confess, with the war continuing I would be myself at wits’ end to know what durable constructive measures could be taken. Like all things in China, however, I imagine it will take longer to reach the end of the road than one might suppose.”

W. W[alton] B[utterworth]
  1. China National Aviation Corporation.