893.51/8–3047
The Secretary of the Treasury (Snyder) to the Secretary of State 34
Dear Mr. Secretary: I have your memorandum of June 18, attaching a copy of a cable of June 1435 from Mr. Adler, the Treasury Representative in Nanking, and requesting an opinion concerning the informal Chinese proposal for a silver loan.
The Chinese have proposed the minting of 45 million ounces of silver owned by the Central Bank in Shanghai, and a long-term advance by this government of 100 million ounces on terms to be worked out. This would provide an initial stock of coins which the Central Bank apparently would introduce gradually for the purchase of crops, payment of wages to industrial workers and of government salaries. Proponents of the plan hope that the silver would circulate side by side with the existing paper currency, presumably at a fluctuating ratio. An initial rate of 25,000 to one has been suggested. It has been estimated by the Chinese authorities that upwards of 400 million ounces of silver would be required to replace all the paper currency now in circulation. The Treasury feels that this may well be an underestimate.
As you know our two Departments advised the Embassy in Nanking in July36 that a credit as suggested by the Chinese would require Congressional action and that it was considered here that no monetary measure could have an appreciable stabilizing effect in the face of the continued deficits being incurred by the government. Despite our negative response the Chinese subsequently made inquiries concerning the minting facilities of the United States Treasury. They are now negotiating with our Bureau of the Mint for the preparation of dies, although only the 45 million ounces of silver owned by the Central Bank are now available for a new silver currency.
The Treasury Department is of the opinion that there is little merit to the proposal to introduce silver currency in China under existing conditions. Opportunities for graft and favoritism are involved in this proposal such as were afforded under the gold sales program of 1942. The depreciation in the value of the paper currency would occasion a drain upon the government stocks of silver coins, a large part of which may go directly into hoarding. It is our view that the [Page 1183] completion of the program of substituting silver coins for paper currency might involve an impossibly large volume of silver coins under such circumstances. It is also possible that the introduction of silver coins on a partial scale such as is proposed by the Chinese Government might actually bring about a situation where the paper currency would depreciate in value faster than it would without the silver coins, and accelerate the deterioration in Chinese fiscal conditions. Any association on the part of this Government in the provision of an initial stock of silver coins might involve it in a moral responsibility to provide much larger amounts of silver which would be required for the development of a new currency.
In the presently thin world silver market, any program for the remonetization of silver in China would inevitably drive up the price of silver, and entail an outlay on the order, possibly, of half a billion dollars. Even if the presently circulating paper currency were completely replaced by silver coins there is no present indication that the Chinese government’s budget would be balanced and that the government would not again resort to the issuance of paper currency to finance its deficit.
China’s basic economic difficulties are a cause rather than a result of the increasing instability of her currency. I do not need to elaborate on this theme—the heavy government deficits which are being met by continuous expansion of the paper currency, and the lack of internal peace are at the root of China’s troubles. In our opinion, the appropriate time for a revision of the Chinese monetary system will come when a broad program of internal reform is developed. A remonetization of silver at that time would have advantages and disadvantages which would need to be reviewed in the light of existing circumstances, and other possible financial and monetary measures which might be taken.
From such information as we have received, it would appear that plans of the Chinese government for the reintroduction of silver coinage are tentative, and that many details of the programs would still have to be worked out. There are indications that some of the Chinese officials who have discussed the proposal with Mr. Adler feel that a silver loan to China would receive strong support from the “silver bloc” in Congress, which would be less interested in any other form of aid to China. This consideration may well be the principal reason for the attention that is being given by the Chinese government to the reintroduction of silver, since recent attempts at obtaining other forms of assistance from this government have been generally unavailing.
Very truly yours,