893.50 Recovery/4–1949: Telegram
The Consul General at Shanghai (Cabot) to the Secretary of State
[Received April 19—4:02 a. m.]
1242. For Treasury, State, ECA from Parker. Finance Minister called Treasury Attache57 April 18, advised President requested him develop plan continuation financing Government operations in expectation imminent outbreak extensive military operations. Cabinet sees little hope satisfactory outcome peace talks and expects breakdown leading to full warfare within week.
Liu proposes shifting to hard currency basis probably end of month. Everyone admits gold yuan will not be effective except as fractional currency for longer 2 or 3 weeks. Emphasis will be centered on paying Army and procurement Army supplies. Silver now in China will be sufficient finance minimum emergency program possible 2 months after April but no longer. Stocks on hand consist (millions silver dollar coins) 17 Amoy now being sent Shanghai, 3 Shanghai, 30 in special emergency fund held by military (this fund never before officially disclosed). Minimum requirements per month 7 military supply procurement, 5.5 for troop pay. From stocks on hand 12.5 will be paid military next 3 days for April requirements.
Liu made formal request for lend-lease of silver from US Treasury stocks to be repaid silver purchased by Chinese Government on basis availability and world market conditions. Chinese Government would buy silver from US now but unwilling pay monetized price. Commercial silver markets too thin meet Chinese Government’s present emergency requirements.
Chinese Government willing establish in US Treasury an escrow account on which Chinese Government to draw only for purpose procurement silver for repayment loan. Assets contemplated such deposits include (a) 245,000 ounces gold now with FRB of New York, (b) assignment to Treasury with permission ECA and RFC outstanding balance due Central Bank for pol procurement, (c) proceeds exports cotton products from stocks Shanghai amounting approximately [Page 762] $35,000,000, (d) additional required to bring total to $70, 000,000 either from government’s foreign exchange balance or as last resort additional gold from Taipei stocks although this would require negotiation with Gimo. Amount silver advanced against these assets to be determined by Treasury although Liu hopes it might be at rate between 50 and 70 cents ounce against escrow assets.
Silver would be minted into Chinese dollars by Treasury mints Philadelphia and San Francisco. This constitutes separate request to Treasury. Coins to be held San Francisco until needed in China with Chinese stocks maintained only one month ahead. If Treasury should insist Chinese Government would agree not export coins until replacement silver deposited Treasury although would of course prefer being given extended period at least 2–3 years for replacement. Coins would each contain .752 ounces silver and Chinese Government would supply copper and other alloys. Hope US Navy could provide transportation.
Use in China of silver once proposal accepted would be at rate 70,000,000 pieces per month: 40 for troops on basis all silver pay, 20 for auxiliary military supply and 10 for other Government functions and possibly partial redemption silver dollar notes. Expects taxes could be collected silver dollars with expected return of 20,000,000 pieces per month making net outlay 50.
Gold yuan currency will be kept going as long as possible and thereafter be retained as subsidiary currency. Silver dollar notes will be issued and used finance Government operations as long as effective. Government may introduce notes end April on limited basis with full redemption in coins for initial period as attempt generate confidence. Another consideration is use Taiwan gold stocks later time for minting small gold coins but Finance Minister undecided what ratio between silver and gold most advantageous.
While Finance Minister now admits frankly access to Government’s gold denied by Gimo, states gold will be made available to Government in event resumption military operations.
Proposal discussed with Merchant, Griffin, Cabot, who agree it is most reasonable presented thus far and appears offer some possibility meeting financial requirements military operations. Risk to US is slight and offer means most advantageous method use Chinese Government’s own resources help themselves. This has not yet been discussed Ambassador but Liu will discuss with him Thursday morning. Griffin suggested (but not to Liu) ECA should do everything possible facilitate use as requested of ECA’s pol credit.
No response of any kind has been made Chinese Government other than agreement that request will be transmitted Washington soonest. Liu requests that consideration be given as expeditiously as possible [Page 763] and hopes some indication US attitude can be obtained within 3–4 days. Pei will be advised this proposal April 19.
In response to direct question Liu replied he still wants approval gold purchase request. Will continue gold dumping policy so long as any hope using gold yuan notes and this shipment essential maintain that program after April 24.
Sent Department, repeated OffEmb Canton 286, pouched Nanking. [Parker.]
- Paul C. Parker.↩