893.5151/1–649: Airgram

The Consul General at Shanghai (Cabot) to the Secretary of State

A–26. Inform Commerce. Free public sale of gold bullion and silver dollars resumed Jan. 5th, following suspension on Dec. 24 upon death 7 persons and 105 injured in Shanghai gold buying panic on Dec. 23 (See ConGen’s telegram 2889, Dec. 247 to Department). Revised regulations introduced designed to prevent future mob disorders. Gold selling localities in Shanghai increased from 4 to 8 banks.

Price of gold to public remains unchanged at GY 1,000 per ounce (US$50 based on official exchange rate of GY 20 to US$1.) plus previously introduced deposit of GY 1,000 (refundable after one year). New regulations now provide for additional payment of so-called “equalizing fund” based on official overseas remittance rate in order reduce black market operations in public gold, and for continued purpose of stabilizing market by recalling idle capital out of money market in Government’s last measure efforts to stem inflation and rising commodity prices. Public will be permitted to purchase one ounce gold each 3 months’ period.

Selling price of gold to public is now computed at US$50 per ounce multiplied by overseas remittance rate. If remittance rate is quoted at GY 120 to US$1, computation is GY 6,000 per ounce of gold. Equalizing fund payment in this case is GY 4,000. New regulations require the deposit and price and equalizing fund to be handed over to the banks on same day application forms are issued. Banks will appoint a date, after a 7–day period, for collection of the gold purchased.

Equalizing fund will be fixed daily by committee consisting of Vice-Minister of Finance, Deputy Governor of Central Bank and General Manager of Bank of China.

It is significant that the formula of multiplying the ounce price of gold (US$50) by the overseas remittance rate in determining the public price of gold was a realistic attempt to bridge the wide gap between the black market price and the publicly sold price of gold. Principal contributing factor to the economic failure of initial public sale of gold and accompanying fatal mob disorders was the black market (GY 6,000) versus the public gold price of GY 2,000 per ounce. Obviously much publicly purchased gold quickly found its way into the black market especially through the media of organized gangs, thereby completely defeating the Government’s anti-inflation motive [move?] of tightening the local market.

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The formula adopted on Jan. 5th to equalize the black market and public price of gold already appears doomed to early failure, as on Jan. 6th black market gold price quickly advanced to GY 8,000 per ounce. Some slight official retaliation became evident when the authorities cautiously advanced the overseas remittance rate to GY 130.

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