893.51/7219½
Memorandum by Mr. Arthur N. Young, American Adviser to the Chinese Ministry of Finance 73
Now that China for the first time has the prospect of receiving large supplies of modern weapons from the United States, it would be tragic if China’s financial and economic front were to be gravely impaired. Yet the danger on this score seems greater than in the military sphere. China’s most immediate problem is inflation, which is causing grave deterioration of the economic situation and contributing to political unrest and war weariness. The problem is made worse by a general shortage of rice in Asia, and of course by the destruction and disruption inseparable from war.
On a time basis, China stands where Europe was in the Spring of 1918; but whereas Europe then had only six months more of war ahead, China faces a much longer struggle. Available data indicate that present inflation in China is more acute than was inflation in France, Italy or Germany in the Spring of 1918, but less acute than it then was in Austria. Roughly China’s note circulation increased about five-fold and the general level of wholesale prices more than seven-fold up to the end of 1940. The corresponding ratios of increase in Austria* were 7.5 and 8.3 respectively as of the end of 1917. By the end of 1918 the ratios in Austria were about 14.5 and 28.5, and a year later had risen to about 28 and 46; but meanwhile Austria had lost the war and its prospects were correspondingly dark.
China’s economy can be sustained in part by the psychological factor of effective external help both in financial and economic matters and in military affairs. Fullest use of this should be made in internal propaganda. But China now is so cut off from large-scale economic help that the problem is primarily one of internal action by the Chinese Government. Unless wise action is promptly taken, there is grave danger of growing disintegration and the growth of internal political discontent and friction that might threaten effective organized resistance against Japan.
Too often the tendency has been to turn to expedients such as new currency measures; “paper” reforms not meaning much in practice; palliatives such as price control and rationing not accompanied by effective control of the economy; Government monopolies; et cetera. The remedies rather are to be found in an “all-out effort” involving greater sacrifices by the Government and the people behind the front [Page 648] as well as the sacrifices of the troops; the giving up of the notion of business as usual; the dropping of schemes of reconstruction or expansion of expenditure not essential to the war effort; the raising of more revenue from taxation and from borrowing from the public and from banks other than the four Government banks; coordination of external financial assistance with internal policy in order to strengthen China’s war economy most effectively; possible revision of methods of army recruitment and sustenance in order to ease the strain on the economic situation, especially on agriculture; and in general, avoidance of unwise expedients that shock confidence. Back of all is the need for improvement of the administrative machinery of the Central, Local and Provincial Governments.
The taking of wise action is extraordinarily difficult and complicated under existing conditions. Assistance to China in giving effect to urgently needed reforms can best be given through an Economic Mission to China with American and British participation.