Foreign Relations of the United States, 1948, The Far East: China, Volume VIII

893.50 Recovery/9–2248: Telegram

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

Nanking, September 22, 1948—6 p.m.
[Received September 22—8:59 a.m.]

1748. We believe time has arrived for Department urgently and seriously to consider action it should be prepared to follow itself and recommend to ECA in event gold yuan should collapse with spectacular and explosive suddenness within next month or two.

We realize that historically in China the inevitable has often been staved off for a surprising length of time. We also recognize that safety valves, as yet not in existence, can be administratively improvised to moderate impending economic disaster. Nevertheless, collapse of the gold yuan is a possibility which must be reckoned with and against which plans should be prepared in advance.

As we and Consul General Shanghai have been reporting, superficial price stability has been achieved during past month largely by means of stringent enforcement campaign, the most dramatic aspect of which has been that conducted by Generalissimo’s son, General Chiang Ching-kuo, in Shanghai. During this month, however, underlying inflationary forces have continued at work and Executive Yuan has been able to show no progress in reduction of budget deficit. In effect, police power has pent up and concealed the continuing economic deterioration. Last reports from North China, which bellwethered CNC slide toward oblivion, reveal Tientsin black market rate for GY has been as high as 5.75 to US dollar 1 on limited transactions against parity of 4 to 1, and the price of gold in Mukden is twice the official price. Spurt in exports sputtered up [out] after first 10 days despite original hopes that legitimization of August 19 black market rate for US dollar would produce impressive and enduring export results. China-wide reports received by Embassy indicate trade stagnating as semi-terroristic enforcement acts and inflexible official adherence to August 19 price levels have caused withdrawal of goods from shelves and production declines in many lines. Slash in import quotas has further reduced volume of goods available within China for sopping up Chinese currency, outstanding issue of which has more than trebled in past 4 weeks.

One highly disturbing aspect price policy referred to above has been slow-down or stoppage of rice shipments from producing areas to coastal cities and other deficit points. Although any precise prediction of timing GY collapse is impossible, we cannot escape conclusion that it might coincide with serious rice shortages and attendant food rioting in Shanghai and other coastal centers. In Canton, and probably Shanghai, rice stocks will fall dangerously low within a month. Taken in conjunction with scattered evidence previously reported by Embassy of growth in anti-American feeling and past publicity regarding CRM⁸² and ECA role in rice rationing in certain cities, all elements of nasty situation would be present.

Ability of Chinese Government to cope with chaotic economic and financial situation would be gravely impaired by fact that it had on August 19 shot its wad on currency reform with all attendant fanfare. A second attempt at substitution new currency within matter of months would scarcely invite widespread confidence or patriotic fervor, every effort to capture which has already been made. Reliability of troops, procurement of whose needs with paper once more approaching worthlessness, is another factor to be taken into account. This possibility lends some credence to rumors current in Shanghai that Generalissimo’s son has broken into several godowns loaded to rafters with cotton yarn which, when cloaks had been penetrated, was found to be personal property of several important field commanders allegedly held as rainy-day payment in kind for troops and confiscation of which Nanking prevented.

If foregoing situation should develop, we believe US Government should immediately throw all available economic resources into effort further to support present Government, to which there is in sight no acceptable alternative. Possible steps would include:

(1) Using total available ECA China aid funds for food purchase for priority shipment to China in anticipation that Congress in January might be prepared to vote on emergency basis additional funds.

(2) Granting China an immediate silver loan, although Embassy is unaware of legal authority on which such action might rest. Such a limited silver loan may be required for payment in form of coins or specie to troops. A hard currency with traditional acceptability would be essential for payment of troops and procurement food and other essential supplies to Army as only effective alternative to valueless paper in period of crisis. This proposal would apply only for temporary period of no more than a few months and be strictly emergency measure to keep armies in field and discourage defection. It is not in any sense a suggestion that China be placed back on the silver standard.

We recommend immediate preparation for action along these lines, since the only other alternative would seem to us to be withdrawal to the maximum extent practicable from diplomatic, economic and military support of the present regime until the situation had stabilized as a result of the interplay of domestic forces.

Consul General please pass to Lapham personally. Department please pass to Treasury and ECA.

Repeated Shanghai 838.

Stuart

82. China Relief Mission.