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

893.5151/10–2848: Telegram

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

Nanking, October 28, 1948—3 p.m.
[Received October 29—9:58 a.m.]

2025. On October 26 Finance Minister Wang Yun-wu in reply to Merchant’s⁹⁶ query stated that Prime Minister had reluctantly agreed that morning to the institution of a special exchange rate for US Government expenditures in China (reference Embtel 1950, October 20, repeated Shanghai 963). Finance Minister went on to say all conversions would have to be centralized in Shanghai and that rate would be 8 to 1. Following brief discussion, Finance Minister was informed that this rate was inadequate to meet our problems and would be entirely unacceptable to Washington.

Morning October 27 Casaday and Merchant discussed matter further with Dr. Hsu Po-yuan, Vice Minister of Finance, flatly stating that while appreciative their efforts 8 to 1 rate was not realistic and in consequence we were being driven to unpalatable but necessary alternative of making our own arrangement. We pointed out that our objective from outset was to assure continuous receipt by Chinese Government US dollars arising these transactions. We reemphasized reason for seeking local rates and further appealed to his cupidity by informing him imminent arrival Task Force 38 Tsingtao containing 11,000 sailors with US dollars 2 million burning hole in their collective pocket. With surprisingly little further argument Dr. Hsu asked what we would consider a satisfactory rate which we described as full open market rate as agreed by Central Bank Governor and US Treasury Attaché for each important locality. Dr. Hsu thereupon asked us to discuss the matter same evening with Dr. S. Y. Liu, Acting Governor Central Bank (O. K. Yui has been ill and not expected return to work for week or longer). In our presence Dr. Hsu set appointment hour with Liu and we inferred from his conversation that he was being instructed to reach agreement with US.

Evening October 27 Casaday and Merchant discussed matter with Dr. Liu who quickly met our main points. Substance agreement follows:

1. All conversions to be concentrated Shanghai with exception Tsingtao where, as convenience to US Navy, local Central Bank manager will exchange US currency on spot for gold yuan at rate agreed for that post in Shanghai.

2. Effort will be made minimize multiple rates by original experiment setting separate rates for 3 areas, i. e. north, central and south. We left open increase beyond 3 rates if wide discrepancies develop making averaging inequitable.

3. Mukden to continue make its own local arrangements.

We are preparing circular instructions all posts re mechanics and we have informed Service Attachés, AAG⁹⁷ and ECA successful conclusion agreement and its general outline. We recognize arrival of agreement with Central Bank on rate at each separate future conversion may entail difficult negotiation particularly in view inadequate and at times conflicting reports as to black-market rate at any time. Attitude Government officials including S. Y. Liu, however, appears reflect genuine desire to accommodate us. Moreover, having established principle full rate applicable we do not plan in individual future negotiations to haggle over pennies. Despite these apparent risks and disadvantages, we nevertheless are satisfied arrangement more satisfactory than link to Hong Kong cross rate or any complicated percentage formula.

Chinese Government understandably sick over necessity this special arrangement which is acknowledgment failure currency reform August 19. We will make every effort ourselves to maintain secrecy its existence and similarly enjoin other beneficiaries.

In foregoing we have not specifically brought in applicability to surplus property funds because (1) we felt to do so might imperil success this negotiation and further extend period extreme hardship re staff and operating expenses, (2) we believed successful conclusion this agreement would lay irresistible groundwork for later extension to surplus property and (3) surplus property program currently inactive in so far as present need for additional gold yuan funds are concerned.

We will exchange letters with Central Bank and Finance Minister confirming our agreement.⁹⁸

Please pass Treasury.

Sent Department 2025, repeated Shanghai 1002.

Stuart

96. Livingston T. Merchant, Counselor of Embassy in China.
97. Army Advisory Group.
98. In telegram No. 2036, October 29, 5 p.m., the Ambassador in China reported that the arrangements would apply to ECA gold yuan expenses in China (893.5151/10–2948).