Office of the Historian

893.5151/8–2146: Telegram

The Consul General at Shanghai (Davis) to the Secretary of State

Shanghai, August 21, 1946—1 p.m.
[Received August 21—8:05 a.m.]

1539. From Adler and Casaday to Secretary of Treasury.

1.
Response of leading American and Chinese bankers to adjustment of exchange rate neutral on whole. Adjustment had been anticipated for some time. Bankers feel that pegged rate has been and remains undesirable and that it would be better for Central Bank to follow open market with sales of gold to check undue short term and speculative fluctuations. Pei, however, in conversation this morning insisted that such policy would be most dangerous in present inflationary situation, [Page 999] and in highly sensitive Shanghai market, particularly as Central Bank would be vulnerable to criticism that it was engaged in speculation.
2.
While banks report immediate fillip to exports, general consensus is that adjustment is insufficient to bring about any real improvement in export situation, especially as rise in leading prices in Shanghai in last 24 hours has been only slightly less than adjustment in exchange rate. However, Government is counting on its ability to pour sufficient rice into market and prevent its excessive hoarding to keep domestic prices in hand. Pei insisted that depreciation below present level would have been too risky, pointing out that even the adjustment made has resulted in disorganization of markets which he hopes will be ironed out by end of week. He said that Central Bank could maintain present rate, and that his instructions from the Generalissimo were to hold the line until November when a definite clarification of overall situation could be expected.
3.
Adjustment in exchange rate appears to have been inspired by political as much as economic motives in answer to criticisms of Government.
4.
Pei stated that Central Bank sold 46,000 ounces of gold on Monday to support the market. Central Bank tactic for the moment appears to be to sell sufficient gold to narrow [spread?] between its rate for US dollars and open market rate for US currency.
5.
Closing quotations on Tuesday, August 20, were: gold CNC $218. 5,000 per oz buying and CNC $219. 5,000 per oz selling and US currency CNC $3,400 per US dollar buying and CNC $3,440 selling.

Repeated Nanking as 879. [Adler and Casaday.]

Davis