893.5151/945: Telegram
The Chargé in China (Atcheson) to the Secretary of State
[Received July 21—3:58 p.m.]
1209. TF–141. From Adler to Secretary of Treasury only. State Department’s 882, July 9,37 part II.
Section I:
A. The institution of an effective scheme for this use of gold in China—with adequate controls—would undoubtedly have beneficial effects in checking inflation. It is clear that if the scheme is to yield significant advantages the gold would have to be sold in China at a price or prices never falling below approximately CN dollars 5000 per oz. At the same time it is impossible on the basis of existing information to make even a rough estimate:
- 1.
- Of the scale on which the Chinese public would absorb gold at price or prices which would make the project worthwhile from the point of view of combatting inflation; it is tentatively suggested that it would not be worthwhile selling gold at less than say seven to ten times what the price would be at U. S. dollars 35 per oz. converted at the official rate of exchange;
- 2.
- Of therefore how far the current prices of gold (see D [B?], 2 below) would fall under the impact of substantial imports of gold.
It follows that a rational scheme for selling gold in China would necessarily be experimental in its initial stages.
For this reason and in order to enhance the chances that maximum advantages accrue to China, I would suggest that the Treasury before agreeing in principle and certainly before making any specific commitment to sell sizeable amounts of gold to China wait until the Chinese Government submits a concrete plan to the Treasury. From the information available here it appears that no such plan has as yet been worked out by the Chinese authorities. Perhaps it would be possible for the Treasury discreetly to ask the Chinese Government what its plans are specifically.
B. 1. Your B, 1. My impression is that it is somewhat vaguely contemplated that the gold would be sold to the banks and bullion dealers as well as to the public.
- (a)
- From the point of view of obtaining the maximum anti-inflationary effects, it would be desirable to prohibit the Government banks from buying gold except as intermediaries for its resale to the public, for the Central Bank could expand the note issue for the [Page 430] specific purpose of acquiring gold which would defeat the whole point of the sale of gold to China, while the other Government banks could use their facilities for borrowing from the Central Bank in order to acquire gold, a process which would also lead to the Central Bank’s increasing its note issue. It is probable that the Chinese Government would be reluctant to adopt a measure prohibiting all Government banks from buying gold to hold, especially in view of the current trend first to strengthen all Government banks vis-à-vis commercial and private banks and second to strengthen the Central Bank vis-à-vis the other Government banks. While the Government banks could circumvent the prohibition by having private agents buy the gold for them such a prohibition might to some extent serve as a deterrent.
- (b)
- The above objection does not apply to the sale of gold to modern style commercial banks and native style private banks or to the bullion dealers and a fortiori to the sale of gold to the public.
[2?] Your B, 2. It would be impossible to adopt watertight controls to prevent any of the gold from reaching Jap hands. However, such leakage could be kept to fairly low levels given the wholehearted cooperation of the Central Government special service and of the various provincial government authorities though it is doubtful how far such wholehearted cooperation would be forthcoming, especially from such provincial governments as that of Yunnan. An additional suggested check is the registration of all purchasers but this would tend to discourage prospective purchasers who would be afraid that the authorities might subsequently use the information in the registration records to extract the gold from them on terms advantageous to the authorities and disadvantageous to themselves.
For your information: (a) I am reliably informed that small amounts of gold have recently been smuggled from India to Yunnan and then into Indochina. (b) There is a report current that Chinese in Shanghai have recently sent an agent or agents into Free China with GST dollars 25,000,000 with which to purchase US dollar backed savings certificates.
3. Re your B, 3. Again there is no clear view here as to whether gold should be minted into gold coins or sold in form of gold bars. It would appear that the latter course would be preferable in view of the difficulties of giving gold coins a fixed CN dollar value and in view of danger arising from probability that coins would be in smaller denomination than bars and that coins would tend to displace fapi as a medium of circulation and exchange.
It would be most appropriate if there were imprinted on the gold coins or bars some indication that they constituted part of U.S. financial aid to China.
[Page 431]Section II:
A. In view of the fact that a satisfactory scheme would be experimental in its first stages and in view of the need for checks and safeguards I would like to submit the following for your consideration.
- 1.
- The Treasury if and when it decided to agree in principle to sell gold to China might suggest that Chinese Government make a beginning by selling the 48,000 ounces of gold now in possession of the Central Bank plus such other amounts of gold as Government has acquired from current production (see D, 3, below37a).
- 2.
- While the gold now in China was being sold, the Treasury might agree to sell say U. S. dollars 10,000,000 of gold to Chinese Government and [then wait?] and see how the sale of this gold was going in China before making any further sale of gold to the Chinese Government. To save transportation expenses, it would be desirable to make a swap with preferably the Indian authorities and alternatively the South African or Australian authorities whereby the gold would be sent to China from either India or South Africa or Australia and the same amount would be placed in earmark for the sender with Federal Reserve Bank of New York.
- 3.
- It might be possible and it certainly would be desirable from the point of view of China’s interests to tie up Board with any arrangement for sale of gold in China and give Board power to fix price or prices of gold and to exercise some supervision over its sale. It will be recalled that paragraph 1 (c) of 1941 agreement gives the Board power to deal in gold for account of the fund; perhaps this power could be broadened to enable Board to exercise above functions in any revision of 1941 agreement.
The advantages of bringing the Board into the picture are obvious as the Board’s participation would increase the chances of success of any scheme that is worked out and curtail abuses. If Chinese Government objected to the Board’s participation in any plan for selling gold in China on the grounds that the sale of gold had nothing to do with the British member, perhaps this objection could be overcome by having a committee of the Board consisting of the Chinese member and the American representative function for this purpose.
Section III:
I have been collecting all available information on gold market in China but it is scanty and does not throw light on main question how much can be absorbed at a price or prices which would make the project worthwhile. Any further data that can be obtained will of course be transmitted. The following is a summary of the main items of interest.
[Page 432]1. Gold markets exist in Chungking, Kunming, Chengtu, Kweilin, Kweiyang and Sian.
2. The current “agreed” price of gold in Chungking is CN dollars 11,500 buying, CN 13,000 selling per sueliang or Chinese oz. (which equals 1.00471 oz. troy). The price of gold in Kunming is about the same as in Chungking while in Kweilin it is lower. In Chengtu it is now CN 12,000 buying and CN 15,200 selling per Chinese oz. There has consequently been a drain of gold from centers to Chengtu.
It can be safely assumed that the price of gold in Free China will continue to rise concomitantly with rising prices, unless and until either news leaks out of the impending import of sizeable amounts of gold or gold is actually imported for sale.
According to recent reports from Shanghai, the Japs have lately relaxed their control of the Shanghai gold market which has consequently become more active. The price of gold at Shanghai is CUB dollars 6500 per Chinese oz. The CRB dollar was last reported to be exchanging for CN dollars 1.4 in Shanghai.
3. There are no estimates available on the amount of gold that is traded in Free China, but it is quite small absolutely and negligible in comparison to the amounts China contemplates purchasing; nor are there any estimates on the actual supply of gold in Free China.
A. The gold that has gone into the markets comes from private hoards of gold bars and jewelry and from what can be smuggled from current production. There has also been some smuggled from India.
B. According to an article by the head of the Chinese Geological Survey published in December 1942 in the magazine Mining and Metallurgy, a translation of which is being forwarded by pouch,37b the gold production of Sikang, Szechwan, Kwangsi, Kweichow and Yunnan rose from 39,200 Chinese ozs. in 1935 to 68,200 in 1939. In addition gold is purchased in Hunan, Kiangsi, Fukien, Hupeh, and the northwestern provinces. The author states that as a result of Government efforts to encourage gold production after 1937, annual gold production was reported to have reached 300,000 Chinese ozs. in 1939 and 1940, but does not indicate whether this figure includes the production of Shanghai and Sinkiang where control of gold supply was and has remained the exclusive monopoly of the provincial governments. Since the outbreak of the Pacific war gold production has fallen off as a result of the maintenance of the official price of gold while all other prices were rising, but—the author suggests—with the lifting of the old official price annual production might again reach 300,000 Chinese oz.
According to the same source, the Government banks have bought about 1,000,000 oz. of Chinese gold in the last few years which he [Page 433] assumes to be at the Government’s disposal in China now. This assumption, however, is contrary to the statements of a number of responsible officials according to which the only gold now at the Government’s disposal is the 48,000 oz. in the Central Banking Division. According to these officials, the remainder of the gold was transported prior to the outbreak of the Pacific War, and little or none has since been purchased by the Government.
C. For your information I learn from a reliable source that Dr. Kung feels quite confident that the Treasury will sell large amounts of gold to China and that the basis of his confidence is that the President is purported to have given his consent to Mme. Chiang Kai-shek when she submitted the proposal to him that China purchase large amounts of gold from the United States. [Adler.]