893.5151/10–2347: Telegram
The Consul General at Shanghai (Davis) to the Secretary of State
[Received October 23—7:02 a.m.]
2496. Dr Arthur N. Young, financial adviser to Chinese and acting as special adviser to the Foreign Exchange Equalization Fund Committee, states delicate situation has developed as result recent attacks by C–C clique on exchange policy in form of statements in press alleging rise in black market rate due to committee action in raising open market rate and otherwise attempting make public blame policy for sharp rise in cost of living. Objective apparently is to discredit Political Science group, particularly Chang Kia-ngau, K. P. Chen and ultimately the Premier.
Policy under immediate attack is that of having flexible official open market rate of exchange making frequent adjustments as contrasted with maintenance of rigid official exchange rate prior August 18. Dr. Young says new policy has given reasonably good results but is threatened when rate too far out of line with export prices. The open market rate is in effect an export rate and if political pressure is developed to prevent it from being realistic it will necessarily cease to be effective, exports will decline, black market exchange transactions will increase, and another crisis might result.
Dr. Young emphasized that a situation of such delicacy has developed as to make exchange and commodity market extremely sensitive to news that is transmitted as favorable or unfavorable. He cited as illustration the improvement in and comparative stability of market conditions for some weeks after news of Wedemeyer Mission came out. The slight improvement which has taken place during last 3 days is attributed in financial circles, to some extent at least, to anticipation that an important statement on policy affecting China [Page 1199] will be made soon in Washington and that it will involve some measure of assistance to this country. He feels in present circumstances any statement made would have exaggerated effect. If favorable, it might put the authorities in such a strong position that attacks above-described would cease and immediate danger of crisis would be removed. If, on other hand, news should be unfavorable, reaction here might be as violent as that of last February which led to resignation Dr. Soong and prosecution of high Central Bank officials for alleged improper handling of gold sales.
Dr. Young said he would appreciate having any advance items which could properly be given him in his present status in event early release official statement contemplated. He takes serious view of situation feeling anything could happen. He says if C–C politicians succeed once again in discrediting honest officials and competent technicians in order to achieve local political ends, result might be grave. He doubts whether critics have technical personnel capable of handling exchange operations in these difficult times if they should have to assume responsibility. He thinks in any case it would not take much to precipitate runaway inflation, which could not be checked and which would have disastrous consequences.
Sent Department 2496; repeated Nanking 1700.