In discussions which my colleagues have had in the past with the government
agencies here, they sometimes found either a failure to appreciate the
urgency of the situation or, if they did understand, the fatalistic belief
that nothing could be done to hold the line.
For these reasons, my memorandum is longer than I originally intended, but I
hope you will have time to go through it and give it your usual kind
assistance.
[Enclosure]
Memorandum by the Chinese Minister for Foreign
Affairs (Soong)
After eight years of war and blockade, China is in the throes of
galloping inflation. The rate of inflationary increase reached within
the past few months is so alarming that it threatens the very stability
of government. Unless effective counteractions are taken immediately,
the authority of the Chinese Government, and the future of the joint
Sino-American military operations in the China Theatre, will be
inevitably stymied. General Wedemeyer, Ambassador Hurley and the U. S.
Army and Embassy staffs in Chungking, Mr. Donald Nelson and the
representatives of the W. P. B. and F. E. A. in China are fully aware of
the gravity of the situation.
There are, however, some relatively simple measures which we confidently
believe can bring an immediate improvement in the inflationary
situation. This is by adoption of a 3–point program, viz., (a) the sale of gold, (b) a
modest amount of textiles and other consumer goods, and (c) a limited number of trucks for internal
transport as will be presented hereinafter.
The direct cause of the difficulties has been, of course, the huge and
steadily increasing budgetary deficits arising from the war. These
averaged between CN$25,000,000,000 to CN$30,000,000,000 a month for the
first two months of 1945 and have necessarily been met by the inflation
of currency and credit. Note circulation without backing is increasing
at the rate of CN$20,000,000,000 a month.
The inflationary pressure has been further compounded by an acute
shortage of goods because of the enemy blockade, the loss of resources,
the limited capacity to produce and the fast-developing distrust of the
currency which reflects itself in hoarding and speculation. Prices are
now between 1,500 and 2,000 times their pre-war level and are increasing
at the rate of 30 per cent a month.
This has increased the difficulty of local procurement of military
supplies in China. Since approved military plans call for more, not
[Page 1074]
less, supplies from China’s
slender resources, it is imperative that inflation be prevented from
paralyzing the war effort.
Under such circumstances, while the funds for the American army
expenditures advanced by the Chinese Government have doubled in the last
three months, averaging CN$7,000,000,000 to ClSr$8,000,000,000 a month
the real purchasing power of even the United States dollar has rapidly
dwindled.
Deeply concerned with the implications of the ruinous inflation and
keenly anxious to stave off its grave consequences the Chinese
Government has recently taken strong measures in an attempt to bring the
situation under control. Many Government offices have been abolished
outright and services that do not bear directly on the war effort have
been drastically curtailed. The Army, which directly or indirectly is
responsible for over 90% of the budget expenses, has been reduced from
5,300,000 to 4,800,000 and is being reduced monthly to reach the final
figure of 3,500,000 men by the end of September this year. This
reduction has been made so that the soldiers could be better fed and
equipped in preparation for the counter-offensive, which will be
spearheaded by American equipped and trained Chinese armies. In
addition, with technical personnel available from abroad, China is
prepared to apply measures of administrative reforms, strict budgetary
control, increased revenue, closer supervision over banking institutions
and business units, more effective use of transportation facilities, and
a rationalization of price control.
But it is overwhelmingly clear that all these measures could not prove
effective unless in the meanwhile, as an organic part of the plan,
inflation is retarded.
The Chinese Government therefore requests immediate aid from the United
States in the following directions:
1. Gold. In the summer of 1943 President Roosevelt
agreed, with the knowledge of the Secretary of the Treasury, that $200
million of the $500 million U. S. loan to China would be made available
in gold. So far only $7 million of the $200 million has been shipped,
and the Chinese Government forward sales of gold are rapidly falling
due. Unless gold is shipped immediately to fulfill commitments beginning
in May, which the Chinese Government made on the strength of the U. S.
Government promise, there will have to be a default. In a few months,
the sales of gold have realized for the government CNS$44,300,000,000,
thus absorbing surplus cash which might otherwise have accelerated
inflation and commodity speculation. The continued sales of gold will be
the most important single factor in blotting up large issuance of
banknotes. The U. S. Government is therefore requested to implement the
late President’s promise by making immediately available the balance of
the $200 million gold.
[Page 1075]
2. Cotton Piece Goods and Other Essential
Supplies. The shortage of certain essential goods due to the long
blockade also has been, and continues to be, a basic factor in
inflation. A relatively small amount of tonnage, say 4,000 to 5,000 tons
monthly from all sources and of all categories of goods will greatly
relieve the shortage. Accordingly, it is requested that the U. S.
Government make available to China cotton cloth, medicines, certain
indispensable chemicals, and other essential items.
Cotton cloth is specially important to China. Japanese attacks have
forced the Chinese Government to fall back on the Western part of the
country which is predominantly a farming community. Here an acute
shortage of clothing exists, as evidenced by the fact that clothing
prices are double the general retail price level. Cotton cloth is
required to exchange for local food stuffs which are indispensable to
the military personnel, and to break prices in certain military
areas.
Specifically, the U. S. Government is requested to move up the W.P.B.
priority for Chinese cotton requirements of 3,000 tons monthly in order
to insure early delivery. It is recognized that a world-wide shortage of
cotton goods exists, but, while the war in Europe cannot be lost through
a deficit of cotton goods, the war yet to be won in China will be
materially affected by their supply.
3. Transportation Facilities. Up until a month ago
there remained only 4,000 trucks operating in all of Free China. The U.
S. Government has agreed to ship into China 15,000 trucks, but most of
these will be used for military purposes, so it is requested that an
additional allotment of trucks be made available to replace the worn-out
trucks which are running on borrowed time.
In connection with the above measures it cannot be over-emphasized that
the situation is urgent, and time is of the essence. From the economic
and military standpoint the next six months are the most vital and it
will be the months of July, August and September when the attack on
inflation should already be in full swing.
Finally, it should perhaps be emphasized that it is no part of our
intention to solicit loans or credits. We are asking for an
implementation of the late President Roosevelt’s promise with respect to
gold, a top priority allotment for cotton goods, and some additional
replacement trucks for the transportation of essential civilian supplies
within China.
It is realized that the supply of gold, cotton goods and other essential
supplies, which could be transported over the Hump, will not be
sufficient to break inflation. However, these supplies, taken together
with administrative and financial reforms, will slow down the present
alarming acceleration of the inflationary process, especially in the
critical areas along the military lines of communications until relief
can finally come with the opening of a port in China.
