893.51/6828: Telegram
The Ambassador in the United Kingdom (Kennedy) to the Secretary of State
[Received March 3—6:20 p.m.]
294. With reference to the Embassy’s 268, February 24, 7 p.m., Sir Frederick Leith-Ross states in confidence that the British Government plans to make a public announcement on Monday, although the details have not been completed and cannot then be made known. Leith-Ross is concerned about the flight from the Chinese dollar which the recent Japanese measures to enforce their exchange control in North China have precipitated. The latest British telegraphic advices from China indicate that the Chinese banks lost the equivalent of £800,000 of foreign exchange last week and £2,000 on Monday and that the run is continuing. It is hoped that the announcement may stem the tide, for the Hong Kong-Shanghai Banking Corporation and the Chartered Bank of India are unwilling to start operations under the scheme until the legislation guaranteeing them against loss has at least passed the House of Commons.
Leith-Ross hopes that the formal documents will be completed towards the end of next week. They will consist of an agreement between the British and Chinese banks, an agreement between the British Government and the British banks and a declaration by the Chinese Government affirming its desire to preserve the value of its currency. The British Government will not require of the Chinese Government an indemnity against losses. Leith-Ross stated that this course was decided upon in the hope that it would produce a good psychological reaction in the Far East; in Parliament the line will be taken that this currency measure has been undertaken to protect British interests. Leith-Ross frankly added that if Japan should [Page 651] achieve her purposes in China a Chinese obligation would be worthless and if Japan did not succeed, the Chinese dollar which is undervalued would appreciate and the exchange fund could probably recoup losses. The exchange control committee will be constituted as set forth in the Embassy’s 268, February 24, 7 p.m., and Rogers will be a member nominated by the British Government with the approval of the Chinese Government and act “as a watch dog for both sides”. The amount involved has not yet been definitely fixed. The Cabinet authorized the Chancellor of the Exchequer99 to go up to £5,000,000. The Chinese banks are prepared to put up a similar amount. Sir John Simon has not yet committed himself as to whether he will authorize £3,000,000 with an increase of £2,000,000 if required or do the whole £5,000,000 at once. It is apparently due to Rogers’ persuasion that the original scheme for only £3,000,000 was revised upward. Leith-Ross hopes and trusts that £5,000,000 will be the sum particularly in view of the present flight from the dollar which makes even that amount look less formidable than it did and would prove insufficient if the movement continues.
In this general connection Leith-Ross stated that the British Government’s advices from Tientsin from both official and unofficial sources indicate that with two exceptions the foreign banks in that area are not facilitating the flight or disposed “to play the Japanese game”. The exceptions are the Mercantile Bank of India and the National City Bank of New York. Through the Bank of England steps are being taken respecting the Mercantile Bank. Leith-Ross stated that while he had no official request to make it would be helpful if we made an approach to the National City Bank which in recent days had been the largest Tientsin seller of Chinese dollars in the Shanghai exchange market and was also according to his information inclined to cooperate with the Japanese at least in North China. While emphasizing the informal character of his suggestions he equally emphasized the importance of the matter.
Leith-Ross went on to comment on the recent Japanese moves to enforce their exchange control in Northern China, indicating that he did not think their system a good one or likely to be successful. However, he feared that they might bring trade in that area to a standstill by withholding ship clearances unless shipping documents were produced indicating that goods were being exported in compliance with the Japanese regulations. He also commented on the action of the Japanese in turning the Concessions into “concentration camps” and said that in his opinion if Japan continued to take such an aggressive line, he felt that the British and American Governments should reconsider whether they should not supplement their assistance to China by taking retaliatory measures directly against Japan. In his opinion [Page 652] the Japanese regard this as a possibility and decidedly fear it as an eventuality.
The approach to the French referred to in the Embassy’s 268, February 24, 7 p.m., was made by Rogers in his capacity as an employee of the Chinese monetary authorities. Due to the difficulty between the British and French over the Czech gift and loan1 the British have not directly approached the French but are urging the Chinese to press strongly for action and will give their support when the suitable moment occurs. But it is not expected that the French would become a party to this arrangement; the mechanical arrangements would be too difficult. Furthermore the French have not been informed of Monday’s announcement since the British do not wish a leak to occur.
The Department may care to apprise the Treasury of the appropriate parts of this conversation which Butterworth had with Leith-Ross.