893.516/697: Telegram
The Secretary of State to the Second Secretary of Embassy in China (Paxton), at Nanking
13. Reference your 111, October 25, 2 p.m. The Department’s principal considerations in the premises are as follows: (1) Only the National Government of China can legally authorize the issuance of currency in China, (2) a new currency, if it is to be successful, must either be freely convertible and backed by large reserves of specie and foreign exchange or it must be supported by trade and exchange controls. It is highly doubtful that the local regime possesses sufficient reserves of specie and foreign exchange to maintain a freely convertible currency or that it intends to maintain such a currency. On the other hand, it is quite likely that the new currency will be backed principally if not wholly, as in north China and Manchuria, by inconvertible Japanese yen and that the value of the currency, if issued, will be maintained by trade and exchange controls which will inevitably place Japanese trade and enterprise in a preferred position.
The foregoing considerations are not likely to appeal to officials of the Nanking regime and it is therefore doubtful that efforts to dissuade the local officials from establishing a new bank would serve a useful purpose. The Department desires, however, that you continue to keep yourself informed of developments and report them promptly to the Department.
[Page 546]Sent to Nanking. Repeated to Shanghai, Peiping. Shanghai please send code text to Tokyo by air mail.