Foreign Relations of the United States, 1947, The Far East: China, Volume VII

102.1/6–1447: Telegram

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

Nanking, June 14, 1947—noon.
[Received June 14—8:53 a.m.]

1301. For State and Treasury from Adler. In a series of conversations with me in Nanking this week Gov. of Central Bank informally raised possibility of silver loan to China. He first sent Li Ming, member of National Economic Council, Vice-Chairman of Import Advisory Board of Central Bank, and Chairman of Chekiang Industrial Bank, to broach subject with me. (K. P. Chen and Li Ming, the two leading private bankers in Shanghai, are the men Chang Kiangau relies on most heavily for advice and support in financial and economic matters.) Li Ming informed me that both Governor of Central Bank and Minister of Finance had informed Premier in his presence earlier in the week that even putting aside the politico-military situation the economic and social fabric of China was being threatened by the hyperinflation and that some currency measure was needed to arrest this threat. While it was true that currency stabilization was premature, some measure of “partial” or “intermediate stabilization was required, which would both ease immediate pressure of currency depreciation not only on economic fabric but also on national finances and at same time facilitate movement towards eventual balancing of budget and stabilization of currency. Governor of Central Bank had accordingly suggested to Premier possibility of using silver to be obtained from U. S. for this purpose. Silver would also have additional advantage that it could be used as subsidiary coinage with eventual currency stabilization.

2. Governor in his subsequent discussions with me elaborated above without, however, adding much detail. He admitted that farmers had not yet refused to accept fapi for their food and that while gold would be even better for intended purposes he preferred to sound U. S. out on silver because of China’s past record in handling gold obtained from U. S. and because of greater value of gold to U. S. While, of course, making no comment on the political implications and problems of his informal request, I did make one or two purely technical comments to the following effect:

(a) The monetary use of silver might accentuate the flight from fapi.

(b) While it might be his intention to introduce silver gradually, first for purchase of food from farmer, then for payment of wages to industrial workers, and then for payment of salaries to Govt employees, he might well be confronted at the beginning of his experiment with strong pressure from the army for payment of troops in silver.

(c) The monetary habits of the people had to be reckoned with. The fact that silver had been withdrawn from circulation in 1935, that the people had become accustomed to paper currency, and that in times of pressure farmers and other groups in the lower Yangtze valley had been able to obtain gold for some of their products or services, first from the Japs and then from the Central Bank, might militate against the acceptability of silver at a price which would make it a worthwhile proposition for the Govt, As a result of this comment Governor made inquiries through Post Office and Postal Savings Bank and discovered that in fact silver was now readily acceptable in relatively backward rural areas in Szechuan, Kansu, Yunnan and Sikang, and also in Manchuria, but that there was little available information on its acceptability in the lower Yangtze valley. On the other hand, it must be noted that in view of the rapidity with which prices are rising there is a strong probability that silver could easily become an acceptable medium even in the more advanced parts of the country.

(d) In view of (a) above, the Governor had to decide whether his proposal was designed to meet an imminent collapse of the currency so that accentuation of flight from fapi as a result of introduction of silver would not make any substantial difference, or whether his proposal was designed as a measure of so to speak intermediate stabilization. Governor did not commit himself on these alternatives but on whole seemed favor latter. Actually his case would be stronger on basis of former alternative.

(e) Was it intended to have a fixed or a flexible price for silver in terms of fapi? Governor on whole favored latter.

3. Governor emphasized throughout discussions that whole proposal was purely tentative and informal, that no detailed plans had been worked out, and that he would prefer to await Washington’s informal response before drawing up more specific plans. In our final conversation on evening of June 13 [12], he gave me an undated and unsigned “memorandum on the Chinese currency” for transmittal.⁷² Memorandum, substance of which is being forwarded by pouch, is a hasty and rough job which somewhat cursorily disposes of some of technical comments I raised. It is suggested that your reply to Governor’s request for an informal response be on lines that it is preferred to withhold comment until a detailed plan is submitted. At same time while it is difficult in Nanking to assess implication for U. S. domestic and international monetary policy of Governor’s proposal, it is suggested that in view of deterioration in Chinese currency situation careful consideration be given to any reasoned proposal concerning use of silver which Governor advances. [Adler.]

Stuart

72. Copies of this memorandum and of Mr. Adler’s comments were transmitted to the chief of the Division of Chinese Affairs by David Jenkins of the Treasury Department on July 8. The memorandum was summarized in Embassy’s telegram No. 1302, June 14, 1 p.m., not printed.