033.1100 Rogers, James H./37: Telegram
The Consul General at Shanghai (Cunningham) to the Secretary of State
[Received May 17—9:25 a.m.]
226. For Morgenthau from Rogers. Further study Chinese balance of international payments reveals serious financial difficulties ahead: (1) Adverse trade balance continues large; (2) emigrant remittances, the largest single source of inflowing funds, are greatly reduced, first, by unseasonable conditions abroad and, second, by higher price of silver in terms of foreign currencies used by emigrants; (3) gold which by export in the past 3 years has yielded annually at least $200,000,000 of general payments is according to best estimates almost exhausted; (4) because of unstable political conditions and uncertain currency conditions the inflow of private foreign capital is at a minimum; (5) hence in the absence of greatly increased foreign credits or effective governmental restrictions against export further silver outflows are likely; (6) while the silver holdings of the Shanghai banks are very large there is little question that any great outflow will be followed by a general curtailment of credit and very likely by a subsequent crisis in Shanghai; (7) the interior banks are largely subsidiary to Shanghai, hence credit difficulties are apt to spread rapidly and add to the already pronounced silver drain from the interior; (8) under such circumstances a further raising of the price of silver unless accompanied by liberal foreign credits to China will be very damaging.
In the past 3 weeks I have talked at length with Marshals Chiang Kai-shek, Chang Hsueh-liang, and Li Tsung-jen. In my opinion there is a growing centralization movement between Nanking and Southwest. However, this movement is seriously threatened by dialects, depressed agricultural conditions and by unemployment leading in each case to increased recruits for rival generals. To avoid civil war these generals must be paid off and the resulting drain on the Nanking Treasury is very great leading to serious budget difficulties.
Temporarily because of their very plentiful reserves the Shanghai banks are financing a great part of the Government’s needs. This cannot continue in the event of heavy silver outflows.
To combat the serious agricultural situation Chiang Kai-shek has undertaken far-reaching farm rehabilitation program including Government credits to farmers on easy terms. He states that this program will be seriously retarded by higher silver.
On Minister of Finance Kung’s invitation I spent 2 days with him privately on customs yacht early this week. He proposes rehabilitation [Page 437] loan by American Government to Chinese Government, proceeds to be spent on highway construction, flood control, currency reorganization and other unifying projects. In this way he argues not only will national unification be hastened but by employing the destitute among farmers and laborers usual incentive to join rival military chiefs will be largely removed. He assures me of satisfactory security provisions which he will submit soon. I have agreed to receive from him detailed proposals.
My firm conviction is that higher silver at this time will add greatly to the difficulties of Nanking Government and may even destroy the slight but increasing unification of China which it has been able to accomplish. The only economic counteractive which would seem effective for China is some kind of foreign credits on a large scale.
On assumption that a unified China is of high importance to the United States I suggest that if the silver price is to be further raised simultaneous consideration be given to a Government loan to China. [Rogers]