893.515/8–2348: Telegram

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

1557. Reference Chinese Government’s currency and economic reform measures. Complete English language text of four Chinese Government regulations released by Finance Ministry air pouched today.54 Embassy translation Chinese text completed and will go forward shortly.55

In summary, we can find no basis for optimism regarding gold yuan’s future.

Cabinet is staking its life on success of its currency and economic measures. If we assume vigorous, ruthless and effective Government action against hoarders, black marketeers and cheaters (in whose hands control of wealth of country largely lies), it would still seem that most this program can accomplish is 3 or 4 months’ surcease from upward flight of prices. In fact, there is surprisingly frank admission in official circles that Government’s eyes are glued to a sympathetic Republican Congress in January and that this program is plank thrown across intervening chasm.

Only important, concrete and immediate effect of currency reform is invigorating effect on exports which legalizing black market rate should produce. It is also true that physical inconvenience of lugging around bales of paper money is removed. Otherwise basic factors seem to us unchanged. Assets which are announced as backing present currency are same assets which in theory at least underlay the CNC. Government’s budgetary deficit, which is what keeps printing presses rolling out paper, remains with us and even given maximum economy [Page 391]where economy is possible, deficit will of necessity remain unmanageable as long as war goes on.

Measures appear calculated to take advantage of dramatic effect on Chinese public of physically new currency notes. Probable this sufficient temporarily to reduce velocity circulation calculated by Central Bank for early August at rate approximating 17 times per month. Simultaneously, CB56 and Central Trust reported to be releasing stocks of commodities in Shanghai and Canton, particularly cotton yarn, and restricting bank credit. Combined effect these measures should be at least temporarily stabilize prices and hereby reduce demand [for] dollars.

Remainder of program as now constituted consists largely declarations against: (1) increase in prices of goods and services over August 19 levels; (2) hoarding of commodities; (3) publication of black market prices of gold-silver foreign exchange or of “daily necessities”; (4) payment of wages and salaries on a cost-of-living index basis; (5) lock-outs or strikes.

Declarations also made requiring of all natural and juristic persons: (1) surrender of gold, silver and foreign currency held in China to Central Bank for GY57 notes or, at option of holder, for purchase Chinese Government US dollar gold bonds of 1947 or for dollar deposit with Central Bank to be drawn for payment licensed imports, etc.; (2) sale of all gold produced in China to CB; (3) registration of foreign exchange assets held abroad by Chinese nationals including current and fixed deposits, currencies, gold, stocks, bonds, debentures, land titles, insurance policies, etc.; (4) upon registration of foregoing, transfer of such assets to CB. Enforcement item 4 aided by provision payment 40 percent in former’s fee.

Announced reserve behind currency of $200 million in gold, silver and foreign currency does not in fact exist in that amount (refer Consulate General Shanghai telegram 1786 [1785?] August 1258). Already evidence public skepticism this part of program.

As previously reported, regulation limits total GY issue to 2 billion, equivalent approximately to 10 times present note issue. Difference between amount needed to replace outstanding CNC and NEC59 will be used by Central Bank to meet continuing budget deficit, which there will be even if promised increase in tax collections and other revenues and reduction expenditures are forthcoming. Unless extremely drastic decrease velocity circulation, no possibility apparent that Chinese economy can absorb such an increase within next few [Page 392]months without accelerating inflation. Out payments additional GY largely through wage and salary payments. No significant increase production anticipated and imports to be cut minimum 25 percent.

Black market, particularly for gold bars and dollars, cannot be eliminated by fiat. Assuming regulations achieve price stability and reduction demand for dollars for maintenance of value and liquidity of wealth, there can be only slight weakening of demand for dollars arising flight of capital from areas of military and political insecurity and for payment unlicensed imports. This demand alone sufficient to create black market for dollars which must be at premium over official rates and which inevitably will pull prices upward as well.

Against possible deflationary influence arising contraction money supply and reduction velocity, offsetting inflationary factors are reduction imports, undervaluation GY in terms dollars by 10–20 percent, inertia of previously rising prices, reluctance small entrepreneurs and farmers accept psychological effect prices their goods and services amounting to few GY cents when previously expressed millions and, finally, difficulties of enforcement. Refer however Mukden’s 347, August 20,60 reporting over valuation GY in local economy. Real danger exists that these inflationary forces may go out of control at which time all confidence in currency would be lost, since Chinese Government has promised so much in attendant publicity.

Please pass to Treasury and ECA. Sent Department 1557, repeated Shanghai 739.

  1. Despatch No. 366, August 23, not printed.
  2. Report No. 55, August 23, not printed.
  3. Central Bank of China.
  4. Gold yuan.
  5. Not printed.
  6. Northeast currency.
  7. Not printed.