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DIARY
Book 20-A
China
Report (White) giving
4/9/36
Book 20-A
a) Political background
b) Economic background
e) Foreign trade
d) Possible future developments
in United States-China trade
Et cetera
Regraded Unclassified
Treasury Department
Division of Research and Statistics
Date April 9
1936
Confidential
To: Secretary Morgenthau
From: Mr. Haas MR
Attached is the report on China
which has been brought up-to-date by
Mr. White and his assistants.
The table of contents should
facilitate your referring to those
parts of the report which are of
particular interest to you.
China
Division of Research and Statistics
April 9, 1936
Regraded Unclassified
THE NEW MONETARY POLICY OF CHINA
CURRENCY RESERVE BOARD
SHANGHAI
JANUARY 15. 3936
NOTE
This booklet contains the English translations of important
documents relating to the monetary reform adopted on November
3, 1935, namely, the statement issued by His Excellency Dr. H. H.
Kung, Minister of Finance, on November 3, 1935; the decree of
November 3, 1935; and regulations issued in pursuance thereof.
Every effort has been made to give in English the correct sense
of the Chinese texts, but only the latter are authoritative.
Currency Reserve Board
Shanghai, January 15, 1936.
Regraded Unclassified
MINISTER KUNG'S STATEMENT*
With the abandonment of the gold standard in recent years
by many leading nations, and the rapid rise in the world price of
CONTENTS
silver, China's currency has become seriously overvalued. There
has been severe internal deflation, with growing unemployment,
widespread bankruptcies, flight of capital abread, fall in govern-
Page
ment revenues and an adverse balance of payments. For the
1. Minister Kung's Statement
1
three and a half months commencing July 1934, exports of silver
amounted to more than 200 million dollars and it was evident
2. Decree of November 3, 1935, regarding the
that unless immediate measures were taken, the country would be
National Currency
4
drained of its silver stock. Accordingly, on October 15, 1934, the
Government imposed a duty and an equalization charge on the
export of silver, which by checking the rise in the exchange rate
3. Regulations governing the Currency Reserve Board
8
and the exodus of silver through legitimate channels, averted an
immediate calamity.
4. Regulations governing the branches of the
It was, however, clear at the outset that the measure adopted
Currency Reserve Board
10
could only be temporarily effective; as long as the value of the
currency remained high, deflation would continue and with in-
5. Regulations governing the exchange of silver
creased severity; should the value fall and create a wide disparity
for legal tender notes
11
between the domestic and foreign price of silver-as in fact has
happened—extensive smuggling of silver would result.
6. Regulations governing the use of silver in the
In order to conserve the currency reserves of the country and
manufacture of silver articles
14
to effect lasting measures of currency and banking reform, the
Government, following the precedents of many countries in recent
years, has decreed, with effect from November 4, 1935, as
7. Regulations governing the inspection of note issues and
follows:-
reserves by the Currency Reserve Board
17
1. The banknotes issued by the three Government banks, i.e.,
The Central Bank of China, The Bank of China, and The Bank
8. Regulations governing subsidiary coins (Fu-Pi-Tiao-Li) 19
of Communications, shall be full legal tender, and the banknote
Issued on November 3, 1935
- 1 -
Regraded Unclassified
reserves of the three banks shall be placed under a unified control.
improve the security of mortgage deeds.
The notes of all other issuing banks will continue in circulation,
but will gradually be withdrawn and replaced by notes of the
Plans have been completed by which the National Budget will
Central Bank. No new notes are to be issued by these banks and
be balanced within a period of eighteen months. The Govern-
all their unissued notes as well as their bank note reserves are
ment is determined to avoid inflation and will take energetic
to be deposited with the Central Bank.
measures to deal with speculation and attempts to bring about
unwarranted increases in prices.
2. All debts expressed in terms of silver shall be discharged
by the payment in legal tender notes of the nominal amount due.
This constructive programme for the rehabilitation of the
financial and economic condition of the country will be inaugu-
3. All holders of silver are required to exchange their silver
for legal tender notes.
rated immediately and carried through as rapidly as possible.
The Government is confident that the nation will wholeheartedly
4. The exchange value of the Chinese dollar will be kept
support it in these measures to relieve depression and promote
stable at its present level, and for this purpose the Government
national prosperity.
banks will buy and sell foreign exchange in unlimited quantities.
The Government-owned Central Bank is to be reorganized as
the Central Reserve Bank of China and will be owned principally
by banks and the general public, thus becoming an independent
institution, devoting itself chiefly to maintaining the stability of
the nation's currency. The Central Reserve Bank of China will
hold the reserves of the banking system and act as depository
of all public funds and will provide centralised re-discount facili-
ties for the other banks. The Central Reserve Bank of China
will not undertake general commercial business, and after a
period of two years will enjoy the sole right of note issue.
Measures have also been prepared for strengthening the
commercial banking system and giving increased liquidity under
sound conditions to the commercial banks so that they may have
resources available to finance the legitimate requirements of trade
and industry. These measures will include the creation of a
special institution to deal exclusively with mortgage business, and
steps will be taken to amend the present legal code 80 as to
- 2 -
- 3 -
Regraded Unclassified
DECREE OF NOVEMBER 3, 1935, REGARDING
discharge of all public and private obligations shall be effected by
THE NATIONAL CURRENCY.
legal tender notes. No use of silver dollars or bullion for cur-
With the abandonment of the gold standard in recent years
rency purposes shall be permitted; and, in order to prevent smug-
by many leading nations, and the rapid rise in the world price
gling of silver, any contravention of this provision shall be
of ailver, our currency has become seriously affected, resulting in
punishable by confiscation of the whole amount of silver seized.
severe internal deflation, with growing unemployment, wide-
Any individual found in illegal possession of silver with intention
spread bankruptcies, flight of capital abroad, fall in government
to smuggle it shall be punishable in accordance with the law
revenues, and an adverse balance of payments. For the three and
governing acts of treason against the State.
a half months commencing July, 1934, exports of silver amounted
2. Banknotes of issuing banks, other than The Central Bank
to more than 200 million dollars, and it was ovident that unless
of China, The Bank of China and The Bank of Communications,
immediate measures were taken, the country would be drained of
its silver stock. Accordingly, on October 15, 1934, the Govern-
whose issue had been previously authorized by the Ministry of
ment imposed a duty and an equalization charge on the export
Finance, shall remain in circulation, but the total outstanding
banknotes of each bank shall not exceed the amount in circulation
of silver, which by checking the rise in the exchange rate and
on November 3, 1935. The outstanding banknotes of these banks
the exodus of silver through legitimate channels, averted an
immediate calamity.
shall be gradually retired and exchanged for Central Bank of
China banknotes within a period to be determined by the Ministry
It was, however, clear at the outset that while the measure
of Finance. All reserves held against the outstanding banknotes,
adopted could only be temporarily effective, it was not a funda-
together with unissued or retired notes of these banks, shall be
mental solution, During the past year numerous petitions were
handed over at once to the Currency Reserve Board. Notes pre-
received urging the Government to devise appropriate remedies.
viously authorized and in process of printing shall also be handed
Recently, internal deflation became even more severe, and the
over to the said Board upon taking delivery by the banks.
business depression more acute, If continued, conditions would
3. A Currency Reserve Board shall be formed to control the
become intolerable.
issue and retirement of legal tender banknotes, and to keep
In order to conserve the currency reserves of the country and
custody of reserves aginst outstanding banknotes. Regulations
effect a stable monetary and banking reform, and to prevent a
governing the said Board shall be separately enacted and pro-
financial catastrophe, the Government, following the precedents
mulgated.
of many countries in recent years, has decreed, as follows:
4. As from November 4, 1935, banks, firms, and all private
1. As from November 4, 1935, the banknotes issued by The
and public institutions and individuals holding standard silver
Central Bank of China, The Bank of China, and The Bank of
dollars, other silver dollars, or silver bullion, shall hand over the
Communications shall be full legal tender. Payment of taxes and
same to the Currency Reserve Board or banks designated by the
I
5
Regraded Unclassified
Board in exchange for legal tender notes, at face value in the
about unwarranted increase in prices, and with any action
case of standard silver dollars and other silver dollars which
intended to hamper the execution of the measures set forth in
conform to the terms of previous monetary legislation of the
this decree.
Government, and in accordance with the net silver content in the
case of silver bullion or other forms of silver.
5. All contractual obligations expressed in terms of silver
shall be discharged by the payment of legal tender notes in the
nominal amount due.
6. For the purpose of keeping the exchange value of the
Chinese dollar stable at its present level, The Central Bank of
China, The Bank of China and The Bank of Communications shall
buy and sell foreign exchange in unlimited quantities.
The measures set forth above are designed for economic
rehabilitation. The Central Bank of China will be reorganized to
function as a bankers' bank. The general banking system will be
strengthened, giving increased liquidity to the commercial banks
under sound conditions, so that they may have resources available
to finance the legitimate requirements of trade and industry.
Measures have been prepared to create a special institution to
deal with mortgage business; and steps will be taken to amend
the present legal code affecting real estate mortgages so as to
make real estate more acceptable as security for loans.
Plans of financial readjustment have been made whereby the
National Budget will be balanced. Also with the centralization
of note issue, the provision of adequate reserves against the legal
tender currency, and a system of rigorous supervision, confidence
in the currency will be strengthened. It is hoped that the nation
will whole-heartedly support the Government in measures to
promote the national prosperity. The Government will take
drastic measures to deal with speculation and attempts to bring
- 6 -
- 7 -
Regraded Unclassified
REGULATIONS GOVERNING THE CURRENCY
Art. 6 The Board shall designate the Central Bank, the
RESERVE BOARD.
Bank of China and the Bank of Communications as depositories
Art. 1. The Currency Reserve Board is specially created by
for the custody of the reserve funds. The apportionment of the
the Ministry of Finance for the purpose of centralizing the issue
funds to be deposited in each shall be determined by the Board
and consolidating the credit of legal tender notes. Branches shall
and reported to the Ministry of Finance for record.
be established in the various commercial centres at the discretion
Art. 7. The Board shall inspect the reserve depositories
of the Broad.
once a month and announce to the public the amounts of note-
Art. 2. In accordance with the order of the Government, the
issue, as well as the kinds and amounts of the reserves, and shall
Board shall have custody of the reserves against legal tender
report to the Ministry of Finance for record.
notes, and shall control the issue and retirement of such notes.
Art. 8. The Board is authorized to employ a staff in order to
Art. 3. The Board shall be composed of the following
carry on its work.
members:
Art. 9. The Board may draw up its rules and regulations,
1. Five representatives appointed by the Ministry of Finance.
subject to the approval by the Ministry of Finance.
2. Two representatives each appointed by the Central Bank
Art. 10. These regulations shall become effective from the
of China, the Bank of China and the Bank of Communications.
date of promulgation thereof.
3. Two representatives appointed by the Bankers' Asso-
cistion.
4. Two representatives appointed by the Native Bankers'
Guild.
5. Two representatives appointed by the Chamber of Com-
merce.
6. Five representatives of other banks of issue, specially
designated by the Minister of Finance.
Art. 4. The Governor of the Central Bank of China shall be
ex officio Chairman of the Board and the Board shall elect a
Standing Committee of five to seven of its members for the
execution of routine work.
Art. 5. The Board may invite leading financiers, both
Chinese and foreign, to serve as advisers.
Promulgated on November 3, 1935
to I I
- 9 -
Regraded Unclassified
REGULATIONS GOVERNING THE BRANCHES OF
REGULATIONS GOVERNING THE EXCHANGE OF
THE CURRENCY RESERVE BOARD s
SILVER FOR LEGAL TENDER NOTES .
Art. 1. In accordance with Article 1 of the regulations
Article 1. All banks (both modern and native), shops, busi-
governing the Currency Reserve Board, branches shall be estab-
ness houses, public organizations, and individuals throughout
lished in various commercial centres upon the recommendation of
the country, having in their possession silver coins, mint bars,
the Board and subject to the approval by the Minstry of Finance.
raw silver, silver ingots, silver bullion, and all other forms of
Art. 2. The Board shall entrust the branches with the
silver and/or silver articles, shall turn them over to the nearest
custody of reserves against legal tender notes in their respective
local exchange office in exchange for legal tender notes (fa-pi)
localities.
within three months, beginning from November 4 of the 24th
Art. 3. The members of each branch shall be appointed by
Year of the Republic (1935), with the exemptions enumerated
the Ministry of Finance on the recommendation of the Board.
below:
The Ministry of Finance shall designate one member as the
(1) Silver absolutely indispensable as raw material for indus-
chairman of each branch.
trial, artistic or other lawful purposes, the use of which has
Art. 4. The members of each branch shall elect a standing
been authorized by the Government in accordance with the
committee of three to seven of their members for the execution of
Regulations governing the use of silver in the manufacture of
routine work, the names of such members to be reported to
silver articles,
the Ministry of Finance for approval and for the records of the
(2) Ancient coins, rare coins, or ancient silver relica having
Currency Reserve Board.
cultural value.
Art. 5. Each branch of the Board is authorized to employ
(3) Silver utensils and ornaments manufactured and in
a staff in order to carry on its work.
possession of owners, prior to the promulgation of these Regula-
Art. 6. The branches of the Board may draft rules and
tions.
regulations governing the execution of their duties, subject,
Article 2. The offices for the exchange of legal tender
however, to the Currency Reserve Board recommending them to
notes consist of the following:
the Ministry of Finance for approval and record.
(1) The Central Bank of China, The Bank of China, and
Art. 7. These regulations shall become effective from the
The Bank of Communications, their branches and authorized
date of promulgation thereof.
agents.
(2) Banks, (modern and native). pawnshops, post offices,
railway offices, steamship offices, telegraph offices, and other
public organs or organizations authorized by the above-mentioned
Promulgated on November 28, 1935.
three Banks i. e., The Central Bank of China, The Bank of
"Promulgated on November 15, 1935
- 10 -
- 11 -
Regraded Unclassified
China and The Bank of Communications.
Article 7. In the exchange of silver dollars in current cir-
(3) Offices for the collection of national and local revenue
culation for legal tender notes, no difference whatsoever shull be
throughout the Country.
permissible, i.e., the exchange shall be dollar for dollar. In case
(4) The District (Hsien) Governments.
of violation of this provision, in accordance with the degree of
Article 3. When exchanged for legal tender notes, all silver
the offence committed, the legal tender notes or the silver
articles, other than silver coins or mint bars in current circula-
dollars involved, or both the legal tender notes and the silver
tion, shall be evaluated on the basis of the degree of their fine-
dollars involved, shall be confiscated. Persons receiving, pur-
ness (percentage of silver content).
chasing or exchanging silver coins or silver articles at a premium
with or without intent to smuggle the same shall be dealt
Article 4. In districts where no legal tender notes are in
with in accordance with Articles 2 and 5 of the Provisional
circulation, persons in possession of silver dollars, silver bars,
Regulations governing Punishment for Interference with the
raw silver, silver ingots, silver bullion or other forms of silver
National Currency.
and/or other silver articles shall have them exchanged for legal
tender notes in the offices stipulated in Sections 2, 3 and 4 of
Article 8. These regulations, having been referred by this
Ministry to the Executive Yuan and circulated, shall be observed,
Article 2.
by all persons and organizations, and shall be in effect from the
Article 5. The offices enumerated in Sections 2, 3 and 4
date of promulgation.
of Article 2, after receiving silver dollars, silver bars, raw
silver, silver ingots, silver bullion, or other forms of silver
and/or other silver articles (in exchange for legal tender notes),
shall immediately turn them over to the nearest branch or
authorized agent of any one of the three banks i. e. The Central
Bank of China, The Bank of China, and The Bank of Communica-
tions, in exchange for legal tender notes. Hoarding, conceal-
ing or using the above-mentioned silver for other purposes
shall be construed as criminal acts.
Article 6. Acts of extortion by threat, committed during the
period of exchange (of legal tender notes for silver), against
persons in possession of silver dollars, silver bars, raw silver,
silver ingots, silver bullion or other forms of silver and/or
other silver articles, shall be construed as acts of obtaining
goods of value under false pretences.
121 I I
- 13 -
Regraded Unclassified
REGULATIONS GOVERNING USE OF SILVER IN THE
conditional upon a written guarantee being furnished by the local
MANUFACTURE OF SILVER ARTICLES.*
Silversmiths' Guild or the Chamber of Commerce to the effect that
Article 1. The use of silver in the manufacture of silver
the Guild or the Chamber of Commerce will be jointly and severally
articles shall be governed by these Regulations.
responsible for any violation of these regulations.
Article 2. Beginning from the date of promulgation of these
Article 6. The maximum amount of silver to be purchased by
Regulations, only silver alloy shall be used as the raw material for
manufacturers of silver artícles shall not exceed 30 per cent of the
the manufacture of silver utensils and ornaments. Where the use
average amount of silver contained in the silver utensils and orna-
of silver is necessary the content of pure silver shall not exceed 30
ments sold by them over a period of three years before the promul-
per cent.
gation of these Regulations. In the case of ailver shops which have
Article 3. Silver utensils and ornaments manufactured before
been established for less than three years, the maximum shall not
the promulgation of these Regulations may continue to be sold for
exceed 30 per cent of the average amount of silver contained in the
the time being, until disposition of existing stocks has been effected.
silver utensils and ornaments sold by them during the year before
Silver bullion not yet manufactured into articles shall not be sold
the promulgation of these Regulations.
without consent of the proper authorities.
Article 7. At the end of every six months, manufacturers of
Article 4, Manufacturers of silver articles shall, within one
silver articles shall submit reports on the total amount of pure
month from the date of promulgation of these Regulations, report
silver contained in the silver utensils and ornaments manufactured
the kind and number of such silver utensils and ornaments together
by them within the period covered by the reports, through the local
with the amount of silver contained therein and also the amount of
Silversmiths' Guild or the Chamber of Commerce, to The Central
unused bullion on hand, through the local Silversmiths' Guild or the
Bank of China, or The Bank of China, The Bank of Communications,
Chamber of Commerce, to the nearest branch of The Central Bank
or their authorized agencies for examination and subsequent
of China or the nearest authorized agent of that bank, for exami-
transmittal to the Ministry of Finance.
nation and subsequent transmission to the Ministry of Finance.
Article 8. In case of suspension of their business, manufac-
Where the Central Bank of China has no Branch, the reports
turers of silver articles shall exchange their silver utensils, silver
shall be submitted through the Bank of China or the Bank of
ornaments, and silver bullion in stock, for legal tender notes,
Communications or other agencies, for examination and subsequent
through The Central Bank of China, The Bank of China or The
transmittal to the Ministry of Finance.
Bank of Communications, their value being assessed on the basia
Article 5, Raw silver or silver bullion required by manufac-
of their silver content.
turers of silver articles shall be purchased through The Central Bank
Article 9. Any manufacturer of silver articles found guilty
of China, The Bank of China, The Bank of Communications or
of violating these Regulations shall be ordered to suspend business.
specially designated agencies. However, the purchase shall be
Any manufacturer of silver articles, found guilty of smuggling or
of attempting to smuggle silver shall be dealt with in accordance
Promulgated on November 15, 1935.
- 14 -
- 15
Regraded Unclassified
with Articles 2 and 5 of the Provisional Regulations governing
Punishment for Interference with the National Currency.
REGULATIONS GOVERNING THE INSPECTION OF
Article 10. With regard to the provisions of Articles 2 to 8
NOTE ISSUES AND RESERVES BY THE
inclusive, the banks selling silver shall despatch representatives
CURRENCY RESERVE BOARD
.
from time to time to conduct inspections. Any case of violation of
Article 1. These regulations are formulated in accordance
Article 9 shall be reported to the local civil or judicial authorities
with Article 7 of the Regulations governing the Currency Reserve
for action.
Board.
Article 11. The use of silver for artistic, pharmaceutical, or
Article 2. The Board shall inspect once a month the total
other industrial purposes shall also be governed by these Regula-
amount of note issue as well as the kinds and amounts of reserves
tions. However, in cases specially approved by the Ministry of
therefor.
Finance, the 30 per cent restrictions stipulated in Artícles 2 and 6
Article 3. The Board shall inspect both the cash and security
shall not be applicable.
reserves.
Article 12. These Regulations shall come into force from the
Article 4. Note issues shall be fully secured by 60% cash and
date of promulgation thereof.
40% securities. Cash reserves shall consist of gold, silver and/or
foreign exchange, and security reserves shall consist of securities
(bonds, notes, etc.,) issued or guaranteed by the Government,
and/or other assets acceptable to the Ministry of Finance, and/or
acceptable short-term commercial papers.
Article 5. Cash reserves in the form of silver dollars and/or
silv: r and/or gold held in vaults shall be examined and checked,
and those held in branches or banks abroad shall be proved by
documents.
Article 6. Security reserves in the form of securities and
other assets held in vaults shall be examined and checked, and those
held in branches or banks abroad shall be proved by documents.
Article 7. In the case of districts in which the Board is
represented by branches, inspection of note issue as well as the
kinds and amounts of reserves shall be made by such branches and
reported to the Board. In districts having no branches, such
inspection shall be made by the local office of the Central Bank of
4
Promulgated on December 23, 1935.
- 16 -
- 17 -
Regraded Unclassified
China, or of the Bank of China or of the Bank of Communications,
REGULATIONS GOVERNING SUBSIDIARY COINS*
and the result shall be reported to the Board through their
(FU-PI-TIAO-LI)
respective head offices.
Article 1. Subsidiary coins (Fu-pi) are to be minted exclu-
Article 8. The Board shall announce to the public the result
sively at the Central Mint, and circulated by the Central Bank
of each inspection, giving the total amount of note issue, as well as
of China.
the kinds and amounts of reserves, and shall report to the Ministry
of Finance for record.
Article 2. Subsidiary coins shall be classified as follows:
Nickel Coins:
Value
Article 9. These regulations shall become effective from the
Weight
Fineness.
20 cents
date of promulgation thereof.
6 grams
100% nickel
10 centa
4.5 grams
100% nickel
5 cents
3 grams
100% nickel
Copper Coins:
1 cent
6.5 grams
95% copper and
5% tin-zine alloy.
1/2 cent
3.5 grams
95% copper and
5% tin-zine alloy.
Article 3. Subsidiary coins shall be calculated on a decimal
basis. A $1.00 legal tender note (Fa-Pi) shall be equivalent to:
five 20-cent nickel coins, ten 10-cent nickel coins, twenty 5-cent
nickel coins, one hundred 1-cent copper coins or two hundred
1/2-cent copper coins,
Article 4. The designs of the subsidiary coins shall be de-
termined by the Ministry of Finance, and submitted, through
the Executive Yuan, to the National Government for promuga-
tion.
Article 5. The nickel coins shall be legal tender for pay-
ments up to the amount of $20, and the copper coins up to the
amount of $5 National Currency. This provision however shall
not apply in the payment and collection of taxes or in currency
exchange at the Central Bank of China.
*Promulgated on January 11, 1936.
- 18 -
- 19 -
Regraded Unclassified
Article 6. Existing subsidiary coins shall be withdrawn from
circulation by the Ministry of Finance, and shall be destroyed
by melting and recast. However, during a specific period, they
shall still be permitted to circulate at their respective market
value. The detailed measures for the enforcement of this provi-
sion as well as the aforesaid time-limit shall be determined by
order of the Ministry of Finance.
Article 7. Subsidiary coins, which through wear and tear
over a long period have lost 5 per cent of their legal weight,
may be exchanged for new coins at the Central Bank of China.
However, if the coins are intentionally damaged or debased
through heavy stamping of seals or otherwise, resulting in the
loss of weight or the alteration of their original form, they shall
become null and void, be prohibited from circulation, and shall
not be exchangeable for new coins.
Article 8. Any person who counterfeits subsidiary coins or
impairs the credit thereof, shall be punished in accordance with
law.
Article 9. These regulations shall come into force from the
date of promulgation thereof.
- 20 -
Regraded Unclassified
Contents of Report on CHINA
Page
Summary
I to I
A. Political background
1. China is melting away.
1
2. Who controls what is left?
1
3. The Republic of China retains little of the
democratic principles she started with.
2
4. China is torn by internal strife.
2
5. What is China's foreign policy?
3
6. What is Japan doing to China?
3
7. Religion in China has helped to keep the masses docile
under extreme poverty.
4
8. The family unit is all-important in China.
5
9. Shanghai is not China!
5
B. Economic background
10. China is not rich in natural resources.
6
11. Is China's population growing?
7
12. Transportation and communication are terribly inadequate.
7
13. China is predominantly an agricultural country, yet
is a net importer of food!
8
14. Bulk of the population keeps only two jumps ahead of
starvation.
8
15. Industrialization of China is in its infancy.
9
16. Labor is cheap, inefficient, unorganized, and badly
exploited.
9
17. With such extremely low wages and long hours, why doesn't
China capture a greater share of foreign markets?
10
Regraded Unclassified
Contents of Report on China - 2 -
Page
18. China's Government finance is in EL bad way.
11
19. The British and the Japanese have large sums invested
in China.
12
20. China has always had an "unfavorable" balance of trade,
but a "favorable" balance of payments.
12
C. China's foreign trade.
21. China imports much more than she exports.
13
22. The U. S. is China's most important customer, and
most important source of supply
13
23. From 1929 to 1934 our share of sales to China in-
creased considerably.
14
24. Complete reversal in our Chinese trade in 1935.
14
25. Why did this sudden reversal in U.S.-China trade occur?
15
26. Latest data show China's imports continuing to decline
and her exports to increase.
15
27. What are China's chief exports and imports?
16
28. What do we buy from and sell to China?
16
D. Possible future developments in our trade with China.
29. Is China cutting into our raw cotton market?
17
30. Will the U. S. be out out of other foreign markets if
China becomes further industrialized?
18
31. What will happen if Japanese brains, organization, and
capital combines with low-paid Chinese labor?
19
32. An industrialized China will mean more not less
foreign trade for China.
19
33. Will we sell a Japanese dominated China as much as
we would a free China?
20
34. China at present is more competitive than complementary
with Japan.
21
Regraded Unclassified
Contents of Report on China - 3 -
E. Monetary and banking system prior to 1935.
Page
35. What connection, if any, is there between business
conditions in China now and the world price of silver? 22
36. What was peculiar about China's monetary system?
22
37. What improvements were made in the circulating media?
22
38. What change did these improvements actually make in
the circulating media by November 1935?
23
39. Some important changes effected in the banking
system in 1931.
24
40. Banks of China are made up of six separate types.
25
41. There are no underwriting or investment banks in China.
27
42. Interest rates are very high in China.
27
F. The price of silver and China's economic condition.
43. Why was China's monetary situation especially different
from that of any other currency?
28
44. What had these two characteristics of China's monetary
system to do with China's economic situation from
1933 to 1935?
29
45. Why did not the Chinese Government call in the silver
coins and replace them with notes dollar for dollar
just as the U. S. called in the outstanding gold?
30
46. Couldn't China check all exports of silver by placing 8.
tax on silver, or making it illegal to export silver?
31
47. What then did China do when the price of silver kept
rising in March, April, and May of 1935?
31
48. Why didn't China employ her stabilization fund to
keep the yuan exchange rate stable?
32
49. Was the U. S. silver policy responsible for the
appearance of the depression in China?
32
50. It was England's departure from the gold standard in
September 1931 that started the rise in the world
price of silver.
33
Regraded Unclassified
Contents of Report on China - 4 -
Page
51. Why did so much silver flow into Shanghai before the
passage of the Silver Purchase Act, and out of
Shanghai after that date?
34
52. Did the imposition of the silver equalization fee
help matters?
34
G. Economic events in China since abandonment of the silver standard.
53. What new monetary and banking measures were
introduced since November 1, 1935?
35
54. What monetary changes have occurred since China
abandoned the silver standard?
36
55. Will the new Chinese coins contain silver?
37
56. How much of the outstanding silver has been turned
in to the Government banks?
37
57. What has happened to business conditions since the
nationalization of silver?
38
58. How has the United States been affected by the trend
of business in China from 1933 to 1936?
39
H. Monetary problems that confront China now.
59. Will a fall in the price of silver force China back
on the silver standard?
40
60. Will the Nanking Government be able to keep the
sterling-yuan rate at the present level of 14 d.?
42
I. Monetary programs China must choose from.
61. What alternatives in monetary policies confront
China now?
46
62. If China is determined to continue a "managed"
currency, she has a choice.
46
63, Will China return to the silver standard?
48
64. Would China adopt a gold exchange, gold or
bimetallic standard?
52
Contents of Report on China - 5 -
Page
64. Which course would we prefer China to take?
53
65. Why would England like to have the Chinese yuan
joined to sterling?
53
66. Would not the U. S. obtain similar benefits if China
tied the yuan to the U. S. dollar?
54
67. What difference does it make whether the yuan is
linked to the dollar or to sterling?
54
68. What would China like to obtain from the U. S. now?
55
69. Why should we buy silver from China?
55
70. What has China to offer us?
56
Regraded Unclassifie
CHINA
SIBERIA
is
MANCHUKUO
<
of
Paking
N
WE
Manking
Shanghei
of
Hankew
2
D
A
Centon
The area colored on the my given only
at rough approximation of the territory
no Longer under the offective control
FRENCH
of the Fational Government, and La net
INCOCHINA
to be talcen as representing an accurate
political boundary Time.
Mo of the Secretary of the Transury
- . - - -
PO-124
Regraded Unclassified
Regraded Unclassified
A large colored copy of this chart
is available in the Division files.
1678 - 1422
ЗДАЯТ ИО13Я07 - AMIHD
CHINA - FOREIGN TRADE
1929 to 1935
Trade By Countries
MILLIONS
or
FUAN
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.
IM
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THE
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/
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE April 9, 1936
TO
Secretary Morgenthau
FROM
Mr. Haas 9014
Subject: China
SUMMARY
A. POLITICAL BACKGROUND
Area. China, once twice the size of the United States, is now smaller
than our own country. The huge outer ring of provinces has been irre-
trievably lost to England, France, Russie, Japan. The Great inner ring
is as good as lost, the provinces being under foreign domination. It
is only the core of the Chinese Empire that remains, and within this
core there is neither peace nor unity.
Political set-up. The Central Government, with its headquarters at
Nanking. (near Shanghai) is under the leadership of the military dio-
tator Chiang Kai-shek. The general, however, has effective control
over only a part of China. A left wing faction of the Government is
in control of a. section around Canton (in the southeast) and cooperates
with the Central Government merely on a voluntary basis. A portion of
China, varying in size from day to day with the fortunes of war, is
in the hands of the Communists, against whom Chiang Kai-shek wages
incessant warfare.
The people. Population uncertain; probably about 425-450 million.
Very high birth rate but death rate almost as high due to widespread
poverty, ignorance, infanticide, famine, flood, and civil war. The
family system which is largely responsible for the static character of
the people is yielding only very slowly to Western ideas and political
radicalism.
The family still plays the dominant role in Chinese life. This
factor together with a combination of religions and the ethical teach-
ings of Confucius has made the Chinese a. people of peculiar stoicism.
They accept for the most part with a bewildering fatalism the indescrib-
able misery of their lives. Their religious and ethical beliefs foster
superstition, help keep the birth rate high, farms small, tradition
strong, and the peasant in debt for expenditures on ceremonials.
Regraded Unclassified
Secretary Morgenthau - Summary, 2.
B. ECONOMIC BACKGROUND
Natural resources. China has less land fit for cultivation than has
the United States. She is poor also in minorals, having little copper,
lead, zino, and silver. Her iron is of a low grade and widely scattered,
her large coal resources are not readily accessible. She is, however,
the leading world producer of antimony and tungsten. How much oil China
has is a matter of dispute, some estimates being low, others extrava-
gantly high.
Transportation and communication. Except for trails, there are alto-
gether only 25,000 miles of roads in China. Railroads -- 7,000 miles,
most of them in poor repair -- are 8 less important carrier than water
transport, but man and animal power are the means principally relied on.
Communication is desperately bad, so that it is possible for hundreds
of thousands to die of famine in one region while only a few hundred
miles away there in plenty.
Agriculture. Predominantly an agricultural country with tiny farms,
intensively cultivated with painstaking but unscientific hand labor.
Though China grows very large crops of rice, wheat, corn, beans, sweet
potatoes and other foodstuffs, she is not a not food exporting country.
Her imports of foods are usually greater than her exports.
The peasants are exploited on every hand, and barely manage to exist
from one harvest season to the next. Inadequate fertilizer and un-
scientific farming reduce the crop yield, while high marketing costs,
hopeless transportation facilities, and burdensome land taxes keep
return from the small crop pitifully small.
Industry. Mostly confined to small shops, and households. Less than
one per cent of population connected with large-soale factories. Only 8.
few industries -- textile, cigarette, match, oil crushing, paper making
and flour milling -- chiefly under the management of foreigners, have
reached the large factory stage. Rate of industrialization very slow.
Labor. There are always great masses of unemployed and pertially em-
ployed, especially in the large coastal cities to which thousands of
refugees flee after every flood and famine. The wages are extremely
low -- 15 to 50 cents a. day, and the hours are long. The costs of pro-
duction are high notwithstanding; capital is scarce and interest rates
high, workers are illiterate and untrained to machine production,
transportation costs are high, business organization is poor, stand-
ardization is unknown, and large-scale methods of production are con-
fined to few industries.
Public finance. Budget deficits each year of 100 to 150 million yuan
are met with loans from Government and private banks at very high
Regraded Unclassifie
Secretary Norgenthau - Summary, 3.
interest -- 8 to 12 per cent. Government bonds call at yields of 10 to
15 per cent. Outstanding debt is about 4/2 billion yuan (including old
loans) almost half being in default. Almost half the total revonue of
800 million yuan is for military expenditure, and about a. fourth for
loan service.
Balance of payments. China has always had an "unfavorable" balance of
trade which she paid for by remittances from Chinese abroad, imports of
capital, and expenditures by foreigners in China, and had enough left to
obtain large silver and gold imports. In the last few years her excess
of importa remained large, but her means of payment have dwindled, with
the result that for the first time in 20 years there occurred a heavy
outflow of gold and silver.
C. CHINA'S FOREIGN TRADE
China's balance of trade is normally unfavorable. China's annual
imports almost double her exports. The United States is China's most
important customer, taking about one-fourth of China's exports (exclud-
ing Hong Kong trade which is really domestic trade). Japan is e. close
second and Great Britain E. poor third. The United States is also in
the lead as 8. source of supply to China. We supplied 19 per cent of
China's imports. Japan, Germany, and Great Britain next on the list
furnish 15, 11, and 10 per cent of China's imports.
Since China was accorded by foreign governments the right to impose
duties (1931) she has raised rates far above the 5 per cent formerly
allowed. This has had the double effect of giving rise to the amuggling
of much goods, and establishing protection to numerous agricultural
crops (0.5., rice and wheat) and to many industries.
China's chief items of export are cotton yarn, metals and minerals,
chiefly tin, tungsten and antimony: eggs and 088 products, raw silk,
silk piece goods, and raw cotton. Her chief imports are metals and
minerals, raw cotton, rice, machinery and tools, chemicals, tobacco and
kerosene oil.
Why does China with such extramely low wage rates have as her most
important source of supply a country with wage rates 5 to 20 times as
high? We sell her cotton, tobacco, kerosene, wheat, coal tar, iron and
steel manufactures, tin plate, machinery, automobiles, etc. China has
the raw material, soil and climate necessary to produce these and almost
every other item we export to her. But she lacks capital, power, tech-
nical equipment, mechanical skill, transportation facilities, business
organization. Therefore, though her wage rates are very low, her costs
of production would be higher because her output per hour per man
would be very much lower than ours.
Regraded Unclassified
Secretary Morgenthau - Summary, 4.
What happened to our trade with China between 1929 and 19347 In ab-
solute amounts, our exports to China decreased from 479 to 413 million
yuan, but in per cent of China's imports we gained materially on the
others. Tie increased our share (exclusive of Manchuria) from 19 to
27 per cent, while Japan dropped from 18 to 11 per cent. We continued,
however, to take the same proportion of China's exports.
Has the situation altered in 1935? Yes. Very considerably. Instead
of the customary large excess of exports we have an import balance. In
1935 our exports to China dropped almost half as compared with last year,
while our imports from China increased almost half. These changes also
represent a decrease in our share of China's total imports and an
increase in our share of purchases of China's total exports.
How explain the drastic reversal in United States-China trade? Partly
because of our agricultural policy; partly because of the general economic
conditions in China, and partly because of the special nature of the
specific commodities that bulk large in our trade with China, Fluctua-
tions in the price of silver have been only one of several factors con-
tributing to the trade reversal.
China's January trade figures. They show continual marked increase in
total exports as compared with January 1935, and greater decrease in
total imports. For the second consecutive month and the first time in
many decades -- China has an excess of exports.
D. POSSIBLE FUTURE DEVELOPMENTS IN OUR TRADE WITH CHINA
Is China's cotton production responsible for our decline in raw cotton
sales? No. Though her output has increased considerably in the six
years before 1935, she buys -- or did buy before 1935, more from us than
she did in any of the three years 1928, 1929, or 1930. Her cotton exports
remained unimportant. In the past year, however, our cotton exports to
China have dropped sharply, not because she produced more cotton herself --
in fact her crop last year, owing to bad weather dropped sharply -- but
because she consumed much less. In the next decade her cotton output is
likely to increase, and she may even begin exporting significant amounts.
What will happen to our exports to China if or when Japan adds her
capital and brains to China's low wages? It will take many decades before
Japan can supply China with enough capital to make much difference in
China's output per man hour. Besides, while progress was in the making
in China, our own technique and capacity to produce would be improving.
China's gain must be 6. relative one if she is to produce more cheaply
than we do. In certain industries the effect will be quickly felt -- but
those industries will be just the ones which now constitute Japan's
exporting industries.
Regraded Unclassifie
Secretary Morgenthau - Summary, 5.
If Japan attempts to industrialize China, her own nationals will feel
the competition more keenly than we will. Therefore, Japan is more likely
to confine her efforts to developing China's natural resources and im-
proving her transportation.
The more capital that is poured into China, the more goods will China
import, though numerous articles she imports now will be replaced by
others as time goes on. Our Southern States (for example) purchase much
more per capita from the industrialized New England than they did when
the South was less developed.
China may import more but if Japan controls China, will China import
more from us? Japan, if she can, will doubtless give her own products
preferential treatment and some of our industries would suffer accord-
ingly. However, for a long time to come, China will compete more with
Japan than with the United States. Until she becomes supplementary --
through the development of her soil, transportation and natural re-
sources -- our total trade to China would probably increase.
E. MONETARY AND BANKING SYSTEM PRIOR TO 1935
The monetary system. Until 8. few years ago China's monetary system
was chaotic, Copper coins (40 to 50 billion copper "cash"); subsidiary
silver (400 million yuan of mostly .20 yuan pieces), circulated at &
discount varying from time to time and from place to place. Bank notes
issued by all sorts of institutions, without any reserve requirements,
circulated at par or at discounts verying according to the reputation of
the issuing bank. About 1.6 billion old silver dollars of various
designs and slightly different weights, and scores of varying sized bars
of silver "sycee taels" transacted the bulk of the wholesale financial
transactions.
Two important improvements were introduced in 1931 und 1933.
(1) In 1931, the right to issue bank notes was restricted to banks,
and to only those banks fulfilling necessary requirements. & reserve
of 60 per cent silver and 40 per cent in securities against noto issues
was also imposed.
In 1933, a new standard unit of Chinese currency was established --
the yuan or Chinese dollar. The troublesome sycee taels wore all with-
drawn, but only 8. few of the new dollars wero minted.
The banking system. Before 1931 there were virtually no national
laws controlling banking. Each province had its own bank which never
published statements and which frequently over-issued its own notes.
Almost any institution or person could receive deposits, issue notes,
or lend money without having to comply with any regulations as to
specie or cash reserves, maximum loans, etc. Banks seldom lasted more
than 10 years; even the larger ones undergoing frequent reorganization.
Regraded Unclassified
Secretary Morgenthau - Sumary. 6.
A new bank law passed in 1931 was designed to bring all banks under
the regulation of the Central Government and to introduce reserve re-
quirements against note issue, and numerous modern devices against
customary banking abuses. Owing to the weakness of the Central Govern-
ment, the reforms could not be enforced in many areas in China.
The banks of China now consist of (a) the Government owned and con-
trolled Central Bank of China and two semi-Soverment banks which are
virtually controlled by the Government; (b) Provincial banks, several
of which act independently of Nanking; (c) "Native or old-style" banks
which do most of their lending business to the Chinese miall merchant;
(d) the modern-style commercial banks which operate for the most part
in Shanghai and which make loans on collateral rather than personal
security and (e) finally the foreign banks which deal largely in foreign
trade financing and international capital movements,
Interest rates are very high in China and there are no facilities for
the flotation of bonds and stocks to investors. The banks supply long-
term credits for capital expenditures. Rediscounting and B. bill market
are quite undeveloped in China. The Central Bank and semi-Govermment
banks with their several hundred branches scattered throughout China
issue a large share of the total notes and also absorb 6, large portion
of the Goverment bonds.
F. THE PRICE OF SILVER AND CHINA'S ECONOMIC CONDITION
Did China's foreign trade hold up while that of all other countries
declined? Yes and no. Her exports dropped almost 15 per cent in 1930,
and by 1934 they had dropped to one-half. But her imports continued to
rise through 1930 and 1931. The reason is simple. Her exports reflected
conditions abroad which were growing worse; her imports reflacted her
domestic conditions which were not.
When did the depression become marked in China? In 1932. Almost two
years after it appeared elsewhere, but a year and a half before the Sil-
ver Purchase Act of 1934 was passed. England abandoned the gold stand-
and in September 1931 and mumerous other countries followed. The price
of silver (and what is almost the same thing - Chinese exchange) in
terms of those currencies consequently rose. China's balance of pay-
ments became unfavorable in 1932, exports dropped more than one-third,
imports one-fourth, prices fell, industrial activity declined, unem-
ployment increased, and large sums of silver flowed from the interior to
Shanghai. The depression was in full swing. The Sino-Japanese conflict
also broke out about that time, the effects of which were further de-
structive to business in China.
What did the price of silver have to do with the state of business in
China? The increase in the world price of silver caused the yuan exchange
Regraded Unclassified
Secretary Morgenthau - Summary, 7.
rise. Appreciation of Chinn's exchange with its repercussions on inter-
national capital movements and prices turned her balance of payments --
normally favorable -- unfavorable. An unfavorable balance of paymenta
was accompanied by an outward movement of specie from China which helped
the depression by deflating prices, stimulating hoarding, and accentuating
the contraction of credit.
Why did not China take steps to prevent the rise in the price of silver
from affecting her domestic situation? She did, but owing to the peculiar
nature of China's monetary and banking system, her attempt could at most
be only partly successful.
What was there especially peculiar about China's monetary system?
(1) China was virtually the only country on B, silver standard (Persia
and Ethiopia who also had been on EL silver standard were unimportant
factors in the situation). The consequence was that the price level in
China was influenced more by the world price of silver than was the world
price of silver by the purchasing power of silver in China, i.s., price
level in China.
(2) China was a hard money country. Her circulation includes about
115 billion silver Chinese dollars, 400 million subsidiary silver coins
and 40 to 50 billion copper cash. The subsidiary coins and copper each
circulated at their metallic value compared to the silver dollar and not
at their nominal value.
(3) The Central Government in China could not effectively administer
her money and banking legislation throughout China. She feared she would
be unable to enforce B. regulation calling in all coins to be replaced by
token coins of the same nominal value.
What have these peculiarities in China's monetary and banking system
to do with China's difficulties? A good deal. With the price of silver
rising abroad, China could not out her price level off completely from
its effects. She tried to prevent the outflow of silver by placing an
export duty and equalization fee on its exportation, but this obstacle
could be effective only if the price of silver did not rise beyond 60
cents or 80. Above that level the profit from amuggling because so
great that the export prohibition lost much of its effectiveness.
She could not suspend convertibility without sending the silver coins
to a premium -- or notes to a discount, and give rine to three measures
of price -- one in notes (1 and + yuan notes also circulate) and one
in silver, and one in copper cash. Moreover, the suspension of con-
vertibility would cause losses to the note holders but not to the coin
holders. The effect of suspension of convertibility she felt would be
hoarding, amuggling of silver, and for a time at least monetary chaos.
She felt she could not call in silver coins and replace them with
either notes or debased coins because of the strong preference the
Regraded Unclassified
Secretary Morgenthau - Summary, 8
Chinese have for coins, and the lack of effective control of the Central
Government over the monetary habits of the people.
Did our silver policy bring the depression to China. No. It could not
have done so since the Silver Purchase Act was passed in June 1934, and
the depression in China was in full swing during 1932. It was England's
departure from the gold standard in September 1931 that started the rise
in the price of silver in terms of an important currency.
G. ECONOMIC EVENTS IN CHINA SINCE ABANDONMENT OF THE SILVER STANDARD
New monetary and banking measures. On November 3rd China completely
abandoned the silver standard. Convertibility of notes was suspended.
All holders of silver were required to exchange their silver for legal
tender notes at face value. Future note issues were restricted to the
three Government banks. Central Bank functions were modified to resemble
more closely those of Central Banks in other countries. (A Chinese
group are supposed to be in the United States now studying our Federal
Reserve System as a likely model.)
Monetary changes since November. Official sterling rate was kept
pegged at 142 d. but dollar rate WE.S moved a few per cent twice. The
premium on silver in China disappeared after silver prices dropped.
New coins of nickel and of copper (1, 1, 5, 10, and 20 cent pieces)
are beginning to be put into circulation to replace the silver coins,
and there is talk of minting 50 cent and dollar coins with some silver
content.
Has the outstanding silver been turned in? Only e. little of it. It
is estimated that there is still outstanding about 1% billion out of
the 2 billion or so of yuan silver coins out on November 1st.
How has business been in China since November? Conditions have im-
proved slightly; wholesale, stock and bond prices have turned upward.
Exports are higher than last year and imports are lower, so that for the
first time in many decades China is experiencing a favorable trade balance.
Has the United States lost much by the trend of business in China? No
have doubtless lost some trade, both direct and indirect, but the extent
of the loss is easily exaggerated, The total loss sustained by the United
States cannot be all, or even mostly, allocated against our silver policy.
World-wide depression, currency depreciation, political disruption,
Japanese aggression, and civil strife were important contributory factors
to China's depression.
H. MONETARY PROBLEMS THAT CONFRONT CHINA NOW
Will a fall in the price of silver force China back on the silver
Regraded Unclassifie
Secretary Morgenthau - Summary, 9
standard? It is a possibility, but only B. slim one. It would occur if
the pressure on the yuan would be no great BE to engender a sharp de-
preciation. In that case, it is possible that a return to the silver
standard right be necessary to check the decline, though it is not cer-
tain that the check would be effective.
Will she be able to keep the sterling-yuan rate at the present level?
Her chances are only fair. It depends partly on the political situation
in the Far East and upon our decision with regard to China's silver.
Underlying economic conditions are not unfavorable to the maintenance of
the present rate, but her reserves which can be used to support the yuan
are not large enough to stand a great deal of pressure.
Would China be better able to keep the sterling-yuan rate at the present
level if the United States purchases more silver from China? Yes, it
would help somewhat. Her foreign reserves would be somewhat greater, con-
fidence in the future of the yuan would be strengthened a little, some
more silver would be turned in to Government banks, some of the capital
which has left China in the past year might return, and, finally, for-
eigners might look with less disfavor on investments in China.
I. MONETARY PROGRAMS CHINA MUST CHOOSE FROM
There are three course open to China.
(a) She can peg her exchange to some loading currency or pursue an
independent course, altering her exchange rate 8.5 she deems such action
necessary.
(b) She can return to the silver standard either in the form used
before November 1935 or in some modified form.
(o) She can adopt a gold or gold exchange standard, or a gold and
silver standard - 1.0., bimetallism.
If China is determined to continue a managed currency, she is likely to
continue to peg her exchange to sterling, though it probably would be
more advantageous to her -- barring special concessions -- to peg her ex-
change to the dollar.
China is unlikely to return to 8. silver standard as she feels that the
arguments against such B. course are more weighty than those in favor.
The situation might be different, however, if China were to receive
satisfactory assurances that the price of silver would be kept stable.
China would probably prefer to adopt a bimetallic standard than a
silver standard. But again, she would doubtless want some assurance
that the price of silver would not drop below selected mint price.
Regraded Unclassified
Secretary Morgenthau - Summary, 10.
What course would we prefer China to take? On political grounds, from
our point of view it would be preferable for China to decide to return
to the silver standard, but on economic grounds el better case could be
made for her return to the bimetallic standard. The next best alterna-
tive is that China should either peg her yuan to the dollar or unpeg it
from sterling and keep it somewhere between sterling and the dollar.
What difference does it make whether the yuan is linked to the dollar
or to sterling? It would enhance the prestige of the currency selected,
increase slightly brokers' earnings, and possibly trade. It would also
increase the international monetary influence of the currency selected.
The advantages would be approximately the same for the dollar B.S for
sterling except that more Chinese trade, more prestige, and more inter-
national financial business in New York means less to the United States
than to England.
Linking of the yuan with the dollar at our request would involve us
c little more in Far Eastern politics.
What would China like to obtain from us now? Probably more purchases
of her silver, possibly some assurance of support of the yuan at current
rates, or even at a more moderately altered one. She may also be hoping
to obtain a loan like the 1933 wheat loan, and perhaps is also seeking
additional political or economic advantages by maneuvering the United
States into the position of increasing our interest in Chinese affairs.
Thy should we buy silver from China? For the following reasons: (a) It
will help improve business conditions in China; (b) it will help keep
the yuan from depreciation; (o) it will decrease our gold holdings and
increase gold holdings elsewhere; (a) for every ounce of silver pur-
chased at a low price, the United States Government makes a handsome
seigniorago profit; (e) silver at current (foreign) price is not a bad
investment; (f) we should got some concession in return for our pur-
chases.
That could China offer in return? In order of attractiveness to the
United States, China might adopt the following courses: (a) Return to a
silver or binetallic standard; (b) link the yuan to the dollar; (c) unper
the yuan from sterling.
Together with any of the above three, China could increase the minting
of coins containing silver, as well as the silver content of those coins,
and finally could give the United States additional assurances that no
measures which in effect discriminated against American economic
interests in China will be taken by the Chinese Government.
Regraded Unclassifie
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE April 9, 1936
TO
Secretary Morgenthau
FROM
Mr. Hass YOA
Subject: China
A. POLITICAL BACKGROUND
1. China is melting away.
Formerly twice the size of the United States, China is rapidly los-
ing great slices of her domains. Burna WELB out off by the British piece
by piece from 1826 to 1886; Hong Kong was taken in 1842; Indo-China
was added to the French Empire from 1861 to 1882; territory North of the
Amur went to Russia in 1858; Formosa, Pescadores, Korea and a whole
chain of islands were absorbed by Japan by 1910, and Manchuria came
under Japan's control in 1932. In the past few years, the Japanese
army has acquired virtual control over Jehol, Hopei, Chahar provinces,
and the Peiping-Tientsin area in the North. The Soviet Union dominates
Outer Mongolia which regards itself as an autonamous state. British
trained Tibetan troops are occupying large sections of "Inner" Tibet,
while Yunnan on the southern border is under the thumb of France, and
the adjoining Kwangtung and Kwangsi are virtually independent.
In the accompanying map the area in blue, though usually included
among China's thirty provinces, is either completely out off from the
National Government or, for the time being at least, virtually inde-
pendent. In many spots the actual boundaries marking regions where
Central Government authority ceases are uncertain and shifting.
2. Who controls what is left?
The National Government at Marking, though nominally the Government
of China, actually exercises effective control only over a part of China.
The control of the remainder is divided between the left wing of the
Kuomintang Party with headquarters in Canton, and the Communists who had
recently been driven from South-Central China to their western strong-
hold in the fertile and populous province of Szechuen, but are now
reported spreading North into Shensi and southeast into Hunan and
Aweichow. Only in the dosen or so provinces around Kaingsu (the province
in which the two important cities, Nanking and Shanghai, are located)
can the Central Government be said to exercise effective control, and
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Secretary Morgenthau - 2 -
oven in same of those provinces the degree or that control is not to
be compared with that exercised by central governments in most other
countries.
S. The Republic of China retains little of the
democratic principles she started with.
The democratic ideals of Sun Yet Son, who in 1911 brought about the
revolution which overthrew the Manohu dynasty, and who became the pro-
visional president of the newly created Republic, are no longer in
ascendancy. Chiang Kai-shek in virtual dictator, though his actual
power is more limited than that of either Hitler or Mussolini.
The Oovernors of the Provinces exercise a good deal of local
autonary, the degree of autonomy varrying from province to province and
depending upon the extent of loyalty to the Central Government and the
strength of military forces. Provincial independence, which has al-
ways been considerable in China, and which flourished unrestrained for
ten years after the death in 1916 of President Yuan Shih-kai, in the
stumbling block to the establishment of a strong and united administra-
tion. This modern feudalism cramps the revenue of the National Govern-
ment, divides responsibility, and makes difficult a unified foreign
policy.
4. China is torn by internal strife.
From 1928 to the present, the Wanking Government has waged an
incessant struggle, both political and military, to hold together its
shaky realm. The Communists have been a constant source of difficulty.
Communist influence was dominant in the Government until 1927, when a
split occurred between Michael Borodin, the Russian adviser and leader,
and Chiang Kai-shek, generalissimo of the Kuomintang forces. The split
resulted in victory for the General, whose first act was B. ruthless
purge of the Communist eloments in the Government.
But this act did not dispose of the problem. Though driven under-
ground in most parts of the country, a few able leaders in the Communist
faction by the latter part of 1927 had gathered together in South-
Central China a considerable army, and established dominion over an
area that varied with the success of their arms and their propaganda.
Their appeal has been mainly to the pensants, based upon E. reapportion-
ment of the lands, elimination of the crushing land taxes, cancellation
of debts, and abolition of absentee landlordism. But Communist rule in
this area came to an abrupt end in the winter of 1934, when, in his sixth
major of fensive against the Communist forces, Chiang Kai-shek forced
them to evacuate the Kiangsi area. Then began a dramatic forced march
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Secretary Morgenthau - 3 -
to the West, across two thousand miles of intervening provinces to
Szechuen, where the Eastern Communist army joined a group already en-
trenched in the northern part of this province. In recent months, the
Communists have again extended their area of control, and as bitter
opponents to Japanese expansion in China are gaining a little in
prestige and influence.
The National Government is further confronted by a split in its
own ranks. An independent and well-armed wing of the Kuomintang Party
has been in control in the South for several years. Though cooperating
loosely with the Central Government, it has done so on an entirely
voluntary basis, more or less subject to change without notice.
5. What is China's foreign policy?
China's foreign policy consists now, as it has in the past, chiefly
in keeping foreign nations from taking still further slices of China.
The Washington Conference of 1921-22 gave Chins, in the Nine Power
Treaty, partial realization of this simple policy of political inde-
pendence. Control over her tariffs was returned to her in 1931, as
well as many other foreign concessions, through treaty revisions. These
developments were furthered by the sympathetic attitude of Great Britain
and the United States. Since 1931, however, D. reversal of the trend
toward China's independence has set in, inaugurated by the aggressive
action of Japan in Manchuria.
8. What is Japan doing to China?
The cartoon which portrays Japan swallowing piecemeal the Chinese
dragon paints the picture accurately. First Formosa, Korea, Pescadores,
then Manchuria, Jehol, now Chahar, Hopei and the Peiping-Tientsin area.
Japan is at present flourishing on the diet, but indigestion is likely
to ensue in the event of war with Russia. China today appears to be
facing 8. program of what the Japanese call "cooperation", which may
eventually involve the end of the "open-door" policy in China, and would
place supervision of forei economic agreements (loans, construction,
concessions, etc.) virtually in the hands of the Japanese Government,
as it has been in Manchuria. Hor is Japan likely to content herself
with economic comination of what is left of China. Within the past year
Japan has imposed a degree of censorship on the Shanghai press that
augers ill for China's political 8.8 well as economic sovereignty.
Japan has informally pressed upon the Central Govermment of China
three denands which provide nn ever open channel for an extension of
Japanese control over China. These demands are: (a) the suppression in
China of anti-Japanese agitation, (b) the prevention - with Japanese
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Secretary Morgenthau - 4 -
assistance if necessary - of the spread of Communist influence in North
China, and (a) the acceptance of Japanese co-operation in the promotion
of economic welfare of China. Whenever Japan wishes she can employ any
or all of the three denands ns an excuse to either send armed forces
further into China, or by the threat of such action force the Nanking
Government to accede to Japan's program.
Regardful also of the threat to her ambitions presented by the
close proximity of Soviet Russia, Japan is moving to protect her posi-
tion in the Northwest. The predacinantly Mongol Northwest portion of
Manchuria has been organized into a separate province, with a consider-
able degree of local autonomy. This move has created a rallying point
for the supporters of traditional Mongol ways and thus & bulwark against
Soviet propaganda.
In the Southeast seaconst province of Pukien, Japan is employing,
with some success, surreptitious and devious means to place the Chinese
peasant under Japanese control. In the South, Japan works hand in
hand with French imperialism. France effectively dominates one of the
Southern Chinese provinces, extends her sphere of influence over two of
the neighboring provinces, and has a close understanding with Japan
(treaty of 1907) pledging mutual support to sustain each other's ter-
ritorial rights in Asia.
Thus, in the North, Northwest, East and Southeast Japan is busy
whittling away at China's independence.
7. Religion in China has helped to keep the masses docile
under extreme poverty.
Several religions in China have undergone a partial synthesis in
which the lines of demaroation have been blurred. Buddhiam, the most
important of Chinese religions in number of adherents, has for its central
doctrine salvation through righteousness, and this ideal, although some-
what obscured by later growths, still remains a very potent source of
influence in Chinese life. Taoism, the most important of the indigenous
religions, is today in large part a system of magical rites. Confucian-
iam is not e. religion but a body of ethical precepts, having to do with
the individual in family and governmental relationships. Christianity
in various doctrinal forms has been known in China for centuries, but
because of its exclusive and non-compromising character has mot the
hostility of the State as subversive of the State religion, and has been
under suspicion as an entering wedge for imperialism. Mohammedanism,
Judaism, and Lamaism (Thibetian and Mongolian forms of Suddhism) have
also considerable bodies of adherents.
The dominant religions in China are superimposed upon D. basis of
superstition and geomancy -- B. cross between astrology and sorcery, with
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Secretary Morgenthau - 5 -
B dash of black magic. The spirite of earth, water and air are care-
fully consulted in all undertakings, and 8. very elaborate system of
divination is practiced. This applies to the bulk of people, not, of
course, to the educated.
These various elements in Chinese religion have resulted In the
evolution of 11. people with a peculiar combination of mystical stoicism,
ethical precepts, ignorant superstition, religious tolerance, ancestral
veneration, and ceremonial behavior. They help keep the birth rate,
high, the farms small, tradition strong, women in n. low legal status,
and expenditures on funerals, births, weddings and religious practices
extremely great, while adversity, poverty, death and exploitation are
nocepted with B. fatalism bewilderin to the Western mind.
8. The family unit is all-important in China.
The fundamental unity of Chinese life is based upon the sanctity of
the family group. Chinese society is a social democracy of myriad family
corporations, whose relations are determined by an elaborate social code.
The local government is thus a patriarchal association of elders, heads
of families, and this fact secures the perpetuation of a remarkably
stable local overment even in troubled times.
The family system, promoted by Confucian teaching, emphasizes
respect and obedience of children for the parents, and the obligation of
parents to have as many male offspring as possible. It also calls for
B. division of the inherited holdings among the males. These precepts
have helped maintain B. high birth rate and have been responsible for
ever-increasing subdivision of land.
9. Shanghai is not China!
In discussion conditions in China, it is well to remember that
Shanghai is not the whole of China. Too frequently what is happening
in Shanghai -- by far the wealthiest and most important city finan-
cially, industrially, and commercially -- is erroneously assumed to be
true of China. The error is made easy by the fact that so much of what
appears in English and in the foreign press is written in Shanghai or
Nanking. There are very large areas in the interior of China with
teeming population which are largely primitive and isolated economic
units. Transportation and communication are so poor that economic
changes occurring in one part of China may not have any reperoussions
on other parts for e very long time, or never. Enormous distances (not
to be measured in miles, but in transportation facilities) exist between
the coast and the interior. It takes a lon time for the repercus-
sions of economic changes to percolate through the interior and rural
areas, and there are doubtless numerous communities in China whose
primitive economic life has remained unaffected by fluctuations in the
price of silver in 1934 and 1935.
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Secretary Morgenthau - 6 -
2 glance at the chart on the next page, for example, shows how
dangerous it is to speak of "China" 0.5 though it were as homogeneous
economically 35 the United States, Japan, or any European country. in
the chart are the prices in terms of per cent of the farm price of B.
staple like rice prevailing in each province in October 1933 as compared
with January 1931. The variations are in some cases enormous; from a
drop of 51 per cent in the Western province of Chinghai to EL rise of
19 per cent in the adjoining province of Sinkiang. Variations almost
0.8 great could be shown for wheat prices. If these variations existed
for such highly standardized, staple and transportable commodities, it
is clear that one must speak with caution of price movements, wage
rates, business conditions in "China".
On the other hand, it would be incorrect to assume that the bulk
of Chinese people remains unaffected by trends in foreign trade, or
expansion or contraction of credit, or changes in the price of exported
and imported commodities. The farmer has to sell his surplus crop --
no matter how small that may be -- to merchants who in turn sell to
larger merchants. The price of those crops is inevitably influenced
by conditions prevailing in the larger centers, and in the world. The
interest rate paid by the small merchant, and the amount of credit he
may obtain is likewise affected by conditions prevailing in the com-
mercial centers. So c. drain of silver from the interior to Shanghai,
or out of Shanghai to foreign countries, or alterations in yuan exchange
rates, sooner or later affect with varying degrees of intensity large
numbers of communities in China.
B. ECONOMIC BACKGROUND
10. China is not rich in natural resources.
The extent of China's mineral resources is B. matter of much dispute
and widely different ostimates. Complete surveys with modern technique
have never been made. It is possible, therefore, that there is more
rather than less mineral wealth than is now known to exist. Mineral
wealth is chiefly concentrated in the rough, high, and sparsely popu-
lated parts of the country. Coal, it is agreed, is the most important
resource, but since the transportation is poor the fields are not
readily accessible and China imports more coal than she exports. The
iron resources made up of low-grade ore are smell and widely scattered
and, therefore, do not lend themselves to modern large-scale mothods of
extraction. In the other common metals, such as copper, lead, zine, and
particularly silver, China is very poor. She is, however, the leading
world producer of both antimony and tungsten, producing today about
70 per cent of the world production of the former, and about 50 per
cent of the latter. She also produces considerable quantities of tin
and manganese ore.
Regraded Unclassified
FARM PRICE OF RICE IN CHINA
OCTOBER, 1933 IN PERCENT OF JANUARY, 1931
68
57
49
58
49
64
56
68
119
110
115
93
75
Secretary Morgenthau - ? -
The divergence of opinion as to the petroloum resources is puzzling.
According to several authors there is little oil in China; others claim
there is a moderately good supply of oil (located in the provinces of
Sinkiang and Kansu); and a recent report by an American expert states
that the supply of oil in China is enough to supply the whole world for
300 years! The author who quotes this estimate admits that existing
wells have failed, but he attributes this to the inadequacy of the
survey work.
Much of China consists of stoppes, desert and mountainous territory.
Even were the outlying provinces of Mongolia, Tibet, and Sinkiang to be
included, there would be less land fit for cultivation than there is in
the United States.
11. Is China's population growing?
Nobody knows! The authorities disagree but the concensus of opinion
among those who have studied the question is that China's population is
increasing. Even the approximate population is unknown. Despite fre-
quent government censuses, the authorities differ widely in their esti-
mates. Some claim the population to be as low 5.6 300 million, and
others as high as 480 million. The majority of scholars place the
figure near 425 to 450 million.
The birth rate is very high, but so is the death rate. The birth
rate is estimated around 45 per thousand. Even in Japan it is only 32,
while in the United States it is almost half that of Japan - 18. Only
in Russia does the birth rate probably equal China's. But the popula-
tion in China is kept down by a very high death rate -- much higher than
in any country we know of. Famines, floods, civil wars, pestilence,
mal-nourishment, infanticide, unbelievable ignorance, scanty medical
facilities, ruthless exploitation and extreme poverty make the infant
death rate enormous and the average span of life short. A Chinese
writer recently reported that last year -- and past years -- 24,000
dead infants were picked up in the streets of Shanghai alone.
12. Transportation and communication are terribly inadequate.
Transportation facilities away from the coast and rivers are so
primitive, so inadequate that it is not unusual for a famine to exist
in one region with literally hundreds of thousands starving to death,
while only B. few hundred miles away the crops are adequate. There are
only some 7,000 miles of railroad (compared with 250,000 in the United
States), most of it built 20 to 30 years ago. The roadbeds, equipment,
rolling stock, and management are for the most part in very bad shape.
Good highways are likewise scarce. Except for trails, there are in that
huge rugged country only about 25,000 miles of roads altogether. (The
United States has 100 times more than that in paved roads alone.) Water
transport -- coastal vessel, river boat, caral barge -- carries a con-
siderable portion of China's comerce, but over most of China's area,
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Secretary Morgenthau - 8 -
goods are carried by man or animal power. It has been stated that 20
per cent of China's population are engaged in transport in one form or
another! Even allowing for much exaggeration, it 18 evident that poor
transportation is a serious obstacle to a higher national income.
The present Government is making strenuous efforts to improve the
railroads and highways, but two-thirds of the heavy railway debt (about
1 billion yuan) is in default, and, therefore, it is very difficult to
attract the capital so sorely needed for repairs and new construction.
The railway construction that is going on is financed almost wholly
with domestic capital. It is reported that a Cerman concern is supply-
ing 10 million yuan of railroad material on credit, taking 7-year bonds
for security, but such sums are insignificant compared to what is needed.
13. China is predominantly an agricultural country, yet is
a net importer of food!
Over 80 per cent of the people are engaged in agriculture. The
farms are tiny -- in the denser areas about 1 acre per holding -- and
are cultivated very intensively by primitive yet most painstaking
nethods. Despite irrigation and fertilization, much of the soil has
become impoverished and yields are comparatively poor.
Nevertheless, there are so many old and young, women and children
engaged in farming that the total agricultural output of China is high.
The output has to be high to keep 400 million people alive, since China
produces only & relatively trifling amount of surplus raw materials and
manufactured goods with which to purchase imports. China ranks high in
the production of rice, corn, wheat, millet, wood oil, beans, sweet
potatoes, peanuts, and walnuts. It, is third in the production of cotton
(producing one-fourth of the United States' output), and grows large
quantities of tobacco, sugar cane, bamboo, ginger, mushrooms, licorice,
sesame, rapeseed, etc.
China does not produce a surplus of foods. Notwithstanding the
large areas of cultivatable land in China, and the large number of
people engaged in farming, China is not a food exporting country. She
exports some and imports others, but on balance she is a not importer
of & small amount. Though producing more than one-third of the world's
huge rice crop, and 600 million bushels of wheat, China imports each
year large quantities of rice (90 million yuan in 1935), and of wheat
and wheat flour (40 million yuan in 1935).
14. Bulk of the population keeps only two jumps ahoad of starvation.
Despite the fact that China cultivates a large area with an inten-
sive application of hand labor, there is rarely an abundance of food for
Regraded
Secretary Morgenthau - 9 -
the entire population. The peasant farmer is ummercifully exploited on
every hand. Each year great numbers of them have to pawn some of their
neagre property in order to obtain funds to carry them through till
harvest, or for B. funeral or wedding, and the interest charges may be
as high no 10 per cent a month. The average farm family consumes almost
half its output and the other half of the small crop passes through the
hands of so many middlemen, and is subject to such high transportation
costs that the farmer receives very little for his produce. Even that
little is reduced by burdensome taxes.
The crying need in China is not for more land, but for greater
yields on the land already cultivated, and a larger share of the returns
to the peasant for his product. Better seeds, more fertilizer, protec-
tion against plant diseases, extension of irrigation and dykes, are
sorely needed to raise the output per acre, while better transportation
racilities, removal of some of the very burdensome taxes, improvement of
raral credits, and better marketing facilities, will give the peasant B.
chance to improve his inconceivably low standard of living.
15. Industrialization of China is in its infancy.
Only some 20 years ago virtually all industry was confined to the
cottage variety. Most of it still is. Even in cotton weaving, the most
advanced of the modern manufacturing industries in China, it is estimated
that four-fifths of the cotton cloth consumed in China is made on hand
looms. Less than 1 per cent of the population of China is connected
with large-scale industry, and there are only some half dozen mines
equipped with modern machinery. The only industries that have reached
the large factory stage are the textile, cigarette, match, oil crushing,
paper making, and flour milling -- with cotton spinning and weaving far
in the lead.
Foreign companies have taken the initiative in the industrializa-
tion and either nanage or control most of the large factories. More
than half the cotton textile mills, for example, are owned by the
Japanese, who operate their mills much more efficiently than do their
Chinese competitors. In the past few years, e. much heightened tariff
against imports has counteracted the keener competition of foreign pro-
ducers of certain items, and has been responsible for the establishment
of several hundred factories. Yet it will take many decades at the
rate China is progressing now before industrialization of China will
reach even adolescence.
16. Labor is cheap, inefficient, unorganized, and badly exploited.
The wages of labor in industry are extremely low, ranging from
4/) yuan (or 15 cents in United States money) per working day in the
mines and cotton spinning, to double that for carponters and masons,
Regraded Unclassified
Secretary Morgenthau - 10 -
and triple that for shipbuilding. A recent investigation showed the
average wage of industrial workers in Shanghai in 1934 to be .55 yuan
A day (i.e., 17 U. S. cents) for IL 10% hour day. The hours of labor
are long, 10 to 12 being common, and though there are laws regulating
working conditions, minimum wages, etc., no employer seems to obey them.
Mages have been falling in the past three years and unemployment in-
creasing.
Unemployment and under-employment are the gravest of China's many
social problems. In rural districts the farmer is partially employed
for most of the year, while large numbers obtain only occasional work.
In the large cities conditions are even worse. Every disaster, flood,
drought, civil disturbance, sends hordes of people to the large coastal
cities seeking some sort of work, at any wages whatsoever. In Shanghai
alone it is estimated that several hundred thousand of such people live
in mud huts hastily thrown up by themselves.
Then the Communists dominated the Kuomintang, 1924 to 1927, unionism
was encouraged, but since then the number of unionists has fallen con-
siderably. The present Government though recognizing the legality and
desirability of unions oncourages organization of employers and has sub-
jected labor unions to definite political control. l/uch more wide-
sread than labor unions are local guilds, of ancient origin, which
regulate apprenticeships, prices and master workman relationships in
the handicraft industries, much as they did in England and France before
the Industrial Revolution. But, as to be expected, it in the modern
labor union that is active in the growing struggle for better working
conditions. Several hundred strikes took place last year, many of them
successful. Yet the number of unionized workers is so small 8. propor-
tion of the population that the effect on the total situation is
negligible.
17. With such extremely low wages and long hours, why doesn't
China capture a reater share of foreign markets?
Low wages do not make low ocsts of production. The important
measure is the productivity of that labor, i.e., the cost of production
por unit of output. Chinese labor has extremely low productivity be-
cause:
(1) Capital is scarce and interest rates are very high. The
Chinese are, therefore, at a disadvantage whenever much
capital 1s needed in production.
(2) Workers are ignorant, illiterate, and haven't even 871
elementary scientific knowledge or appreciation of
mechanical methods of production.
(3) Transportation facilities are very bad, and the expense of
securing any raw material from the interior is high.
Regraded Unclassified
Secretary Morgenthau - 11 -
(4) Efficient business organization, scientific research, stand-
ardization of equipment, are almost unknown. There is no
general use of weights and measures, and local customs vary
greatly.
(5) Notwithstanding fl domestic market of 350-450 million people,
large scale production is not promoted, because of the low
income, poor transportation, inter-port duties, monetary con-
fusion, civil wars, and lack of communication.
The consequence of all these handicaps is that China imports, for
example, automobiles and machinery from the United States despite the
fact that China has iron and coal and the American worker gets 20 to 50
times more wages!
18. China's Government finance is in a bad way.
The problems of public finance have always constituted a source of
major difficulty for the Central Government. Constantly recurring civil
warfare has necessitated heavy expenditures, while the strength of
local governments has seriously limited Nanking's revenues. The source
of the Central Covernment's revenues is almost entirely indirect taxes.
The beginnings of an income tax has been recently instituted. Some rev-
enues are shared with the provincial governments, in proportions which
vary with the power of the Central Government to compel their remission.
Customs, by far the most important source of revenue, yields between
55 per cent and 65 por cent of total revenue receipts of the Central
Government, but most of it is already pledged for specific debt service.
Difficulties of collection are great. Not only do costs run as high as
10 per cent of receipts, but smuggling is very common, especially into
areas controlled by the Japanese. Revenue from salt taxes are also
important, constituting n. third of the national revenue.
Less than 10 per cent of the total revenues go toward what we oon-
sider ordinary governmental functions. Almost a half the total revenues
-- a. proportion equalled in few countries -- is for military expendi-
tures. Loan service accounts for another 25 per cent and subsidies
take an additional large slice. Expenditures rose from 435 million yuan
in 1929 to 898 million in 1934.
Inevitable deficits, amounting in recent years to about 100-150 mil-
lion yuan have to be met by borrowing at the very high rates of 8 to 12
per cent. The total indebtedness of the Central Government is roughly
estimated to be between 4/2 and 5 billion yuan, if old loans are included,
but service is not being met on almost half of it. Several of the
important foreign debts amounting to some 700 million yuan have a lien
on specific sources of revenue, so interest is being paid, but on most
other foreign loans payment is in arrears. The Government bonds sell
at yields ranging from 10 to 15 per cent.
Regraded Unclassified
Secretary Morgenthau - 12 -
The national debt is extremely small when reduced to per capita
amounts, but the national income 10 GO low, and the source of national
revenue no restricted, and the portion allocated to payment abroad so
large, that the total debt constitutes B. heavy burden on the National
Government. The Government is unable to finance its loans by direct
sales of its bonds to the people, so it borrows from the Central and
semi-Goverment banks and also from the modern-style banks, leaving as
security its bonds which are accepted at only 50 per cent face value.
The banks sell securities from time to time and credit the Government
with the proceeds.
In February 1936 the Central Dovernment announced the consolidation
of 33 internal loans (totaling about 1.5 billion yuan) into one loan.
By lengthening the maturity dates, the annual redemption charge has been
reduced and somewhat relieved the pressure on the Government finances --
fl pressure that was aggravated by the sharp decline in customs receipts
during the last four months.
19. The British and the Japanese have large sums invested in China.
Of the 3½ billion yuan roughly estimated to be invested in China by
foreigners, England supplied more than a third, and Japan a little less.
Part of the Englishman's annoyance at our silver program originated in
his belief that rising price of silver was bad for his holdings of
Chinese investments. Japan's interest in China also is enhanced by the
fact that more than three-fourths of her foreign investments are in
China. Americans have about 200,000,000 yuan (i.e., about 60 million
U. S. dollars) invested in China.
No foreign capital has been flowing into China during the last few
years (except the United States cotton-wheat loan). On the contrary,
there has been a movement of capital out of China, due chiefly to the
disturbed political situation. China needs capital very badly, but
prospects of borrowing large sums abroad are not cood unless same
government gives her a loan in exchange for same concession, or a
Consortium again begins to operate in return for further restriction
of China's sovereignty.
20. China has always had an "unfavorable" balance of trade,
but B. "favorable" balance of payments.
China has for the last 20 years imported much more than she ex-
ported and met the payments for her import excess with remittance from
Chinose abroad, by expenditures in China of foreigners and foreign
institutions, and by imports of foreign capital. She even received
enough to pay for a constant excess of imports of silver and usually
some of gold.
Regraded Unclassified
Secretary Morgenthau - 13 -
In the last few years the situation has radically altered. Her
import excess remains large (344,000,000 yuan in 1935), but her capacity
to pay for that excess has declined seriously. (a) Immigrant remittances
which used to be a very important source of foreign revenue (some
380 million yuan in 1930) have fallen owing to the world depression;
(b) capital is flowing out instead of in because of the political
disturbance, monetary uncertainty and depression in China; and (c)
foreigners are spending less in China. The consequence has been a
heavy outflow of silver and gold for the first time in 20 years, 0.0-
centuated by rising price of silver abroad. In the years 1932-35-34-35,
600 million yuan of silver and gold left the country legally while
Chinese writers estimate that at least half as much was smuggled out.
C. CHINA'S FOREIGN TRADE
21. China imports much more than she exports.
China has had an excess of imports for 20 years. The loss of Han-
churia, which in the late twenties had developed a large export balance,
reduced the exports greatly. It was only because of the heightened
restrictions on imports, and because of the drop of incomes in China
after 1931 that the import excess was prevented from skyrocketing. As
it was, China's total foreign purchases in each of the past five years
were almost double her sales.
(China's foreign trade for the past six years is shown in some
detail in one of the accompanying large colored charts, "China - Foreign
Trade, China's trade balance since 1926 is plotted among other data
on the other large colored chart, "China - Economic Situation".)
22. The United States is China's most important customer,
and most important source of supply.
& sixth of China's exports is recorded as going to Hong Kong. In-
asmuch as British controlled llong Kong is little more than an important
port which taps the Southeastern portion of China, trade with Hong Kong
is in a sense domestic rather than foreign. Of the purely foreign
countries, the United States is Chinn's chief customer, with Japan
second, and Great Britain third. No purchase about one-fourth of China's
exports, and Japan (including Korea) purchased in 1935 one-sixth. British
India, Germany, France, and the Netherlands purchased 8 to 5 per cent each.
In sources of supply the United States ranks first, though the ex-
tent of her lead dropped sharply in 1935. We supplied 19 per cent of
China's imports, and the nearest competitors for the leading position
were Japan with 15 per cent, Germany with 11 per cent, and Creat Britain
Regraded Unclassified
Secretary Morgenthau - 14 -
with 10 per cent. Netherland India and British India followed with
about 5 per cent each.
25. From 1929 to 1934 our share of sales to China increased considerably.
In the six years, 1929 to 1934, we supplied n constantly growing
share of China's imports, but purchased only the same proportion of her
exports.
We increased our share of China's business (exclusive of Manchuria)
from 19 per cent to 27 per cent of her imports, while Japan's dropped
from 18 to 11; Great Britain's share increased from 9 to 12 per cent,
Germany's rose from 5 to 9 per cent, and British India held her own.
in purchases from China we continued to take about the same propor-
tion - 18 per cent of her exports. Great Britain's share increased
slightly (7 per cent to 9 per cent) if Hong Kong is not included; if
Hong Kong exports were included in China's export trade, Great Britain's
share would have shown a very large drop. Japan's share declined from
17 to 15 per cent, and France dropped from B to 4 per cent. British
India doubled her share, as did the Netherlands, while Germany's in-
creased slightly.
24. Complete reversal in our Chinesa trade in 1935.
The United States has for many years sold to China 50 per cent
more than she purchased from China. But in 1935 a complete reversal
took place. Instead of selling China 50 per cent more than we bought,
we bought almost double the amount we sold to China. In 1934, for
example, our sales to China were $69 millions and our purchases
$44 millions; whereas in 1935 our sales were 38 millions and our pur-
chases $64 millions. For the first time in at least ten years we had
& large import excess instead of a large export excess in our trade with
China.
This marked shift in trade was due not to any general situation,
but chiefly to conditions peculiar to the trade between the United
States and China. This is evidenced by the fact that while our total
exports in 1935 were 7 per cent greater than in 1934, our exports to
China were 44 per cent less. On the other hand, whereas China's total
exports in 1935 were only 8 per cent more in 1935 than in 1934, she
sold the United States 46 per cent more in 1935 than she did in 1934.
Our share of China's imports dropped from 27 per cent in 1934 to
19 per cent in 1935, while Japan's share increased from 12 per cent to
15 per cent, and Germany's from 9 to 11 per cent. Great Britain's
share suffered along with that of the United States, but not nearly 50
much, dropping only from 12 to 10 per cent.
Regraded Unclassified
Secretary Morgenthau - 15 -
In contrast to the drop in the share of China's business obtained
by American producers, we increased the proportion we took of China's
total exports from 17 to 23 per cent, while Japan did not increase her
share, and Great Britain decreased hero from about 10 to 9 per cent.
In short, from the point of view of our trading relations, China
has every reason to be thankful for the role played by the United States
in China's foreign trade of 1935.
25. Why did this sudden reversal in United States-China trade occur?
Fartly because of our agricultural policy; partly because of
Chinese conditions, and partly because of the nature of commodities
that bulk large in our trade with China.
China purchased 11 per cent less imports in 1935 than in 1934,
but her imports from us dropped 36 per cent (in terms of yuan). The
bulk of our decreased sales to China in 1935 were in raw cotton, leaf
tobacco, and wheat. But it was only in wheat that we lost to some
other country (Australia). Thereas China bought 3 million yuan more
of wheat in 1935 than in 1934, she bought 20 million less - or almost
none - from the United States:
In the case of cotton, however, we sold them 28 million yuan less,
but that was no greater proportionate loss than suffered by other cotton
exporting countries to China. We still sold her almost half her cotton
imports. This does not mean, however, that our cotton program may not
be partly responsible for China's total decrease in cotton imports.
Leaf tobacco presents a somewhat different picture. We furnish
China practically all her imports, and therefore the decrease in her
total imports of leaf tobacco of 22 million yuan all came out of our
exports.
Our increased purchases from China in 1935 can be explained chiefly
on grounds of the particular commodities dealt with. The bulk of our
increased purchases was in tung oil, raw silk and wool, sesame seed,
peanut oil, and 966 albumen. On three of these items - raw silk and
wool, peanut oil, and tung oil - our total imports from all countries
increased much more than our imports of those items from China, and
was due to causes independent of movements in exchange rates or prices
in China. Though our imports of sesame seed came chiefly from China,
the increase in its importation also had little to do with changes in
yuan exchange or prices.
26. Latest data show China's imports continuing
to decline and her exports to increase.
In January 1936 her exports were 28 per cent greater than in
Regraded Unclassified
Secretary Morgenthau - 16 -
January 1935 (but no greater than in December 1935), and her imports
33 per cent less than in January 1935 (but 7 per cent less than in
December 1955). We lost our proportionate share of her imports (1.0.,
her imports from the United States decreased 33 per cent), but our pur-
chases from China increased 90 per cent, though China's total exports
to all countries increased only 28 per cent.
For the second consecutive month -- and the first time in many
decades -- China had an excess of exports. If the trend continues, she
will end the year with an excess of exports -- for the first time in at
least 20 years. This would greatly help remove the pressure against
her balance of payments and yuan exchange.
27. What are China's chief exports and imports?
There is no single item, or classification, which dominates China's
imports or exports. The two items we customarily associate with China --
tea and raw silk -- constitute together only about 10 per cent of her
exports. Both have declined in importance because China's chief tea
and silk competitors in India, Ceylon, and Japan, have steadily improved
the quality and fostered standardization of grades, B. program China
has failed to adopt.
Other important items of exports are cotton yarn; metals and min-
erals, chiefly tin, tungsten, antimony; 865° and egg products; furs and
skins, wood oil, raw silk; silk piece goods; raw cotton. Each of these
classifications constitutes about 5-6 per cent of China's exports. One-
fourth of China's exports consist of food, drink, and tobacco, and one-
half of raw materials and semi-manufactured goods, and only about one-
sixth of manufactured goods.
China's imports, as to be expected of an agricultural country, con-
sist chiefly of manufactured and semi-manufactured goods, though her
imports of food, drink, and tobacco bulk large. They constitute about
one-fifth of her imports. Chief items of import were metals and min-
erals, principally iron and steel; raw cotton; rice; machinery and tools;
chemicals and kerosene oil. Together these few categories make up
almost 40 per cent of China's imports.
28. That do we buy from and sell to China?
lie buy almost exclusively raw materials -- furs, tung oil, carpet
wool, bristles, tin, goat and kid skins, tea and raw silk. Our pur-
chases of tea and raw silk from China, however, amounted to a smell
proportion of our total consumption. Last year imports of both items
Regraded Unclassified
Secretary Morgenthau - 17 -
together from China were less than $6 millions, while our total imports
of raw silk amounted to $96 millions, and of ten 317 millions.
We sell China raw material and manufactured goods. Rew cotton is
our most important export, tobacco next; kerosene, wheat, coal-ter pro-
ducts, iron and steel manufactures, automobiles, and electric machinery
are poor thirds. Over a fifth of our total exports of airplanes went
to China in 1933 and 1934, about a. sixth of our kerosene exports, and a
tenth of our tobacco exports, but in 1935 the proportion of the latter
two was much less.
Though we are China's chief customer and source of supply, she is
quite unimportant in our foreign trade except in a few agricultural
items. She ranked in 1935 seventeenth in our list of customers, and
eleventh in the list of countries we buy from. China took only 1.7
per cent of our exports, while our imports from China constituted less
than 3 per cent of our total imports.
D. POSSIBLE FUTURE DEVELOPMENTS IN OUR TRADE WITH CHINA
29. Is China outting into our raw cotton market?
Only potentially, by growing more for her own consumption -- not
by selling more to other countries. In fact her purchases from the
United States in 1933 and 1934 were greater than they were in 1928,
1929, or 1930, though much lower than in 1931 and 1932, notwithstanding
a very substantial increase in her cotton crop. In 1928-1929 cotton
exports to China averaged 100 million pounds; in 1933-34 they averaged
155 million pounds, but in 1935 they dropped to 46 million pounds.
Part of the imports in 1933-34 were a consequence of the 10 million
dollar cotton and wheat loan extended by the United States to China
in 1933.
China's 1934-1935 cotton crop was about S.1 million bales, or
30 per cent of our crop for that year, but her 1935-36 crop will be
about 25 per cent of ours. She has been increasing her crop fairly
steadily. From 1930-31 to 1935-36 China's output would have in-
creased about 400,000 bales (while over the same period our output
Regraded Unclassified
Secretary Morgenthau - 18 -
decreased eight times that amount) were it not for very unfavorable
weather -- flood and drouth -- in cotton raising areas. As it is,
though the cotton acreage planted in China was slightly greater
than it was last year, her cotton crop dropped from 3.1 million
bales to 2.6 million. Ours, on the contrary, increased 1 million
bales.
China's exports of raw cotton are not a factor in the decline
of our cotton exports. Though her exports were 50 per cent greater
last year than in 1934 (but 25 per cent less than in 1933) their
total was only 70 million pounds, or only 2 per cent of our raw
cotton exports! Her exports go chiefly to Japan. Last year China
increased her exports to both Japan and Germany, but the totals in-
volved are as yet too small to warrant fears that China will soon
become 8. serious competitor of ours.
There is the frequently expressed opinion in China that with
moderate improvement in the methods of raising cotton and in seed
selection -- such as has been already made in two of the provinces
-- China will easily become self-sufficient in cotton and even have
a surplus for export. If crop conditions had been the same in 1935
as in 1934, her output would have been some half million bales
greater, en amount much larger than her total imports during 1934
and 1935.
She has been importing from two to five times the amount she
exports, but her imports - which come chiefly from the United States
and India - constitute a steadily decreasing proportion of her con-
sumption. Though it is true that China herself can consume 8. great
deal more cotton if the standard of living there rises, it is likely
that unless cotton prices remain much lower than they have China
will increase her output in the near future more rapidly than her
consumption.
30. Will the United States be out out of other foreign markets
if China becomes further industrialized?
Not for many decades, if ever, will the Chinese cut into American
Regraded Unclassified
Secretary Morgenthau - 19 -
foreign markets for anything other than cotton textiles and some minor
items. The rate of industrialization in China will be no slow, and the
progress to be made before mass production methods can be developed is
so much, that even if Japan were to subjugate China and turn all her
efforts toward developing China, many decades would elapse before China
could produce for export most of the manufactured items we now export.
When Chinese labor becomes more effective -- because of additional
capital, or better technique, or lower transportation costa -- China will
not necessarily undersell American exporters. To undersell them in
foreign markets, China must progress almost 8.8 rapidly as the United
States, else her improvement will prove no advantage in competitive
markets. She must accumulate much more capital than she now has, her
transportation facilities must improve considerably, etc., etc. Japan,
for example, is much further advanced in industry than is China, and
has wages that are very low compared with the United States, yet we
sell Japan EL host of manufactured items.
Those who are gravely concerned lest the Japanese or Chinese over-
take us in technical and business efficiency apparently overlook the
fact that progress is continually being made here. There is surely no
indication that the rate of technological advance has slowed down in the
United States, nor can it be reasonably claimed that no further progress
is to be expected from our engineers and business men in the technique
of production and marketing.
31. What will happen if Japanese brains, organization, and
capital combines with low-paid Chinese labor?
There will be an increase of China's exports of those manufactured
goods which require the least technical skill on the part of operators,
the greatest proportion of labor to capital, and which are made of raw
materials with the least transportation costs.
Textiles of the cheaper grade will doubtless show the greatest in-
crease among the industrial goods. But much of the foreign capital and
ability, in the event of Japanese penetration, will go into transporta-
tion facilities and mining, with the result that grains and raw materials
will be cheaper and the worker will have more to spend on manufactured
goods. With increased capital and improved management, in China, her
national income will increase, and she will be 8. better market for foreign
goods.
32. An industrialised China will mean more not less foreign
trade for China.
It cannot be too frequently stated that increased productivity on
the part of EL people results in more trade, not less -- providing markets
Regraded Unclassified
Secretary Morgenwhau - 20 -
are kept open. Illinois and Massachusetts exchange much more goods per
capita with each other now than they did when Illinois was far less
industrialized. llor is it necessary that markets be wholly free in
order for trade to increase; it is merely essential that the barriers
be not absurdly heightened. A more prosperous China will consume more
automobiles, more machine tools, more copper, sewing machines, cotton,
oil, etc., just as B. more prosperous United States will consume more
toa, ginger, tin, furs, and raw silk.
If ever the stage be reached in which the advantage possessed by
the United States will rest only in natural resources, it will be be-
cause other countries have as much capital, ILS good organizing ability,
as high mechanical skill in all lines, etc., as Americans have. When
that willennium arrives -- world productivity will be so great, and
standards of living so high it will hardly matter if trade is confined
to raw materials. In the meantime, Americans can rest assured their
foreign trade will increase -- unless nations pursue an extreme program
of economic nationalism, and sacrifice standards of living in order to
become more nearly self-sufficient.
Our own trade with China will, in the long run, likewise increase,
though whether much or little depends largely on the commercial and
exploitation policy Japan will pursue if, or when, China comes to be
completely under her thumb.
33. Will we sell BL Japanese dominated China as much as we
would B. free China?
Probably not. China under the "open door" policy will provide a.
much better market for American products than China with a door opened
wide only to Japanese producers. It is not certain whether other
countries will stand for less favorable treatment in China than Japan
would "receive", yet probably sooner or later Japan would find ways to
give her own producers preferential treatment, notwithstanding the fact
that such action would be in violation of existing treatics. Preferon-
tial treatment would secure for her producers a larger share of China's
business.
Nonetheless, until China increases her agricultural and mineral
output, she will continue to need cotton, kerosene, oil, and tobacco,
and these she will be likely to purchase from the United States whether
Japan controls China or not. On the other hand, Japan exports to China
mmerous items -- cotton manufactures, iron and steel, machinery,
chemicals, dyes -- in which the United States, Great Britain and Germany
all compete more or less closely. Japan will doubtless secure 8. greater
share of business in those categories es time goes on, but if Japan is
going to obtain a larger portion of China's business, she must buy much
more from China. If she doesn't buy more from China, Japan must buy
more from other countries, while making it possible for China to sell
more to other countries.
Regraded Unclassified
Secretary Morgenthau - 21 -
To the extent that the two countries are complementary rather than
competitive, Japan can successfully increase trade with China at the
expense of other countries -- but neither as A source of food, nor
mineral, nor metal wealth can China supply much of Japan's needs in
addition to her own -- at least, not until the long and expensive task
of substantially improving transportation and agriculture in China has
been carried out. Japan cannot simply increase her own exports to
China at the expense of other countries and expect those countries to
continue to purchase B.S much from China as formerly.
34. Chine at present is more competitive than complementary with Japan.
China with her undeveloped natural resources is competitive with
Japan and not complementary. The one thing China has to offer Japanese
capital and brains, aside from the opportunity of developing transporta-
tion, public utilities and mines, is a cheaper and muoh less intelligent
labor supply than Japan has at home. If the Japanose should attempt to
utilize this cheaper labor in industry, they will find that China will
out into Japan's own domestic and foreign markets more than into those
of any other nations. Japanese capital and organization ability would
flow (as it already has, 6.6's in the cheap cotton textiles) into just
those industries which the Japanese have been most successful at home
with low-grade labor.
(England's cotton-goods industry is now suffering from the develop-
ment in India of cotton manufacturing by British capital seeking to take
advantage of low wages in India.)
The safeguard of our trade lies in the fact that if China expands
industrially, Japan's industries will benefit least, or suffer most;
whereas if public utilities, transportation, etc., are developed,
China's foreign trade with other countries will be greater.
One point must not be overlooked. If Japan is going to invost
large sums of capital in China, then Japan's exports to China will In-
crease, but the additional exports to China will not be at the expense
of other countries' exports to China. To the contrary, if Japan puta
much capital into China to build power stations, railroads, bridges,
ebc., & portion of that capital will be expended in countries other
than Japan. (We are speaking of main currents and trends. Clearly,
there will be EL large number of exceptions.)
Altogether Japanese domination of China is not likely to reduce
our total exports to China much, though it may well prevent it in the
long run from being nearly so large as it would be with an independent
China. This is true only under the assumption that an independent China
will be as peaceful and as economically progressive 8.8 a China dominated
by Japan. Otherwise our trade might be greater with a Japanese policed
China than with a war torn China.
Regraded Inclassified
Secretary Morgenthau - 22 -
E. MONETARY AND BANKING SYSTEM PRIOR TO 1935
35. What connection, if any, is there between business conditions
in China now and the world price of silver?
Was the U. S. silver policy responsible for the appearance
of the depression in China?
The answers to these questions will be more easily understood 1f
the peculiar nature of China's monetary and banking system before
November 1935 is briefly examined first. Because the alterations made
in the past few months have not yet been effective throughout China, it
is necessary to understand what the situation was before, as well as
since, November 1935.
36. What was peculiar about China's monetary system?
Until n. few years ago it was a Resterner's nightmare.
(a) Conper coins, the chief hand-to-hand circulating medium of the
bulk of the people were not only depreciated (in terms of silver), but
fluctuated in value from day to day and from lace to place in terms of
silver.
(b) Subsidiary silver coins likewise circulated at depreciated
rates, in terms of the silver bars and silver dollars.
(c) Silver "dollars" consisted of a collection of foreign dollars,
and come half dozen varieties of domestic dollars varying in weight,
fineness, and value as much as 3 per cent.
(d) Bank notes issued by banks, exchange dealers, pawnshops, fac-
tories, public utilities, and individuals, circulated some at par, and
some at discounts varying according to the reputation and record of the
issuing bank or person.
(e) "Sycee tael". Finally, most confusing of all, the silver
"tael" consisting of bars of silver that varied in weight, fineness,
and exchange value from town to town. These "sycee taels" constituted
the unit of account and means of settling business end larger transac-
tions. There were Shanghai taels, and Canton taels, and Peking taels,
and Hankow taels, etc., etc., but no matter what tael a man possessed
he had to exchange it in the "cash shops" or at the money changers for
the local currency -- at a fee -- if he wished to spend it. It has
been said that 8. traveller could start out on a journey in China with
a large sum of money and in S. short time expend the bull of his funds
in exchange fees.
37. What improvements were made in the circulating media?
Two changes were instituted which made Chinese currency much less
Regraded Unclassified
Secretary Morgenthau - 23 -
chaotic than it had been previously.
(a) In March 1933 the yuan (or Shanghai "dollar"), containing
.768 ounces of pure silver, was made the standard unit of Chinese our-
rency, to be coined exclusively by the Shanghai mint. All accounts are
required to be kept in yuan. The confusing and most inconvenient
"sycee taels" were to be completely withdrawn from circulation.
(b) Since 1931 the right to issue bank notes was restricted to
banks only, and to only those banks fulfilling necessary requirements.
A reserve of 60 per cent silver and 40 per cent in securities against
notes WELS required.
The changes which have taken place in the past few months will be
taken up later.
38. What change did these improvements actually make in
the circulating media by November 1935?
Not B. great deal. The note issue was somewhat improved, and the
"taels" were eliminated, but the coins in circulation remained about
the same.
(a) The copper coins remained. Copper coins were minted by local
communities, as well as by the Central Government. There being no re-
quirement that a fixed ratio be maintained between token and subsidiary
coins and a given weight of silver, the provinces had been quick to
seize the opportunity of a seigniorage profit and vast quantities were
minted. Some 40 to 50 billion of "copper cash" have been minted in
the past 40 years, and as a consequence they depreciated to about one-
third their value. Nominally 10 cash - 1 cent; and 100 cents 1 yuan,
but actually the exchange value was about 340 cash 1 yuan. Many
wages and retail prices in rural areas and even in urban districts
were set in terms of copper "cash" and not in silver.
(b) Silver subsidiary coins likewise remained unaltered. They were
also minted in various provinces without any requirement that their
value be kept at a fixed ratio with a given weight of silver. Not
being legally redeemable in any fixed unit of silver, they too were
minted in such large quantities as to cause their depreciation. About
400,000,000 yuan of subsidiary coins (almost all of 20-cent denomina-
tion) were outstanding. They circulated at the value of their metallic
content -- about 20 per cent discount of their nominal value -- and
(with silver dollars) were used in payment of taxes, rent, loans and
wholesale transactions, all stated in terms of yuans.
(c) Silver dollars in circulation were virtually unchanged. Few
new dollars were minted and the old silver dollars - about 13 billion
of them -- continued to constitute a very important element in the
Regraded Unclassified
Secretary Morgenthau - 24 -
circulating media. The troublesone "sycee taels", however, were mostly
withdrawn from circulation and placed in the vaults of the Shanghai banks.
(a) Bank note circulation improved. Issues by numerous small
agencies ceased and those legally issued obtained wider circulation and
inspired more confidence. Notes were issued by the Central Bank, semi-
Government banks, and several of the large "modern-style" banks. Some
of the foreign banks also issued notes but their total was very small,
The Central Bank of China (the Government bank) and the Bank of China
(n semi-Government bank) had the largest amount of notes outstanding.
Together they issued 225 million yuan or more than half of notes of
all Shanghai banks. & survey made of sample areas indicated that the
amount of bank notes circulating in China rapidly increased in the last
five years so that by November 1935 they more than equalled the number
of silver dollars in circulation. (The banking system of China is
briefly described in Sections 39 and 40 below.)
Not all note issues were under the jurisdiction of the Nanking
Government. Certain provinces are only under nominal control of the
Central Government; in many others the small banks, virtually "pawn-
shops", ignored the Government regulations, while because of the extra-
territorial rights the foreign banks are not subject to control by the
Hanking Government at all. Nevertheless, on the whole, bank notes of
the leading banks in China became a stable and safe circulating medium
which before the change in November 1935 were kept (except for isolated
cases) redeemable in silver on demand.
In the few months previous to suspension of specie payments in
November there developed less certainty with regard to the continued
redemption of the outstanding notes at their face value in current
weight dollars, but the maintenance of high reserve ratio and the assump-
tion recently of Central Bank control over many of the note issuing banks
helped to keep its own notes and the notes of the larger banks circu-
lating at par.
(e) The Haikwan tael ceased to be used. It had been the unit of
account in which customs figures were computed, but did not exist in
either coin or ingot form. In February 1930, it WBS replaced by the
Customs Gold Unit, equal to 40 cents of the old U. S. gold dollar. All
customs duties were payable in these customs gold units. Therefore,
when silver rose in terms of gold it was equivalent to B. reduction in
import duties and vice versa.
39. Some important changes effected in the banking system in 1931.
China's banking system was modernized five years ago. Before that
year there were virtually no national laws controlling banking. Each
Regraded Unclassified
Secretary Morgenthau - 25 -
province had its own bank, which never published statements and which
frequently specialized in over-issue of its own notes. Almost any
institution or person could receive deposits, issue notes, float
securities, or lendmoney without having to comply with any regulations
as to specie or onoh reserves, maximum loans, etc. Banka seldom lasted
more than 10 years; even the large ones undergoing frequent reorganiza-
tion.
In 1931 a banking law was passed designed to bring all banks under
the regulation of the Central Government and to introduce reserve re-
quirements against note issues and some modern devices against customary
banking abuses. Beside the reserve requirement for note issue already
referred to, numerous provisions respecting periodio examinations,
reports, limitations on inter-bank loans and 50 on were included in the
now law.
It must be remembered that the laws of the Hanking Government can
be effectively enforced only in the provinces around the lower Yangtze
Valley. Several of the more distant provinces are more or less inde-
pendent from the Nanking Government control, especially with regard to
monetary and banking regulations, while in many more the new bank laws
of the Central Government are winked at. The Provincial Banks,
particularly, do much B.S they please. Nevertheless, Shanghai being by
far the most important financial market in China, the new provisions
have done much to bring about order out of the previous chaotic condi-
tions.
40. Banks of China are made up of six separate types.
The banks of China consist of (a) the Government owned and con-
trolled Central Bank of China; (b) two semi-Government banks -- the
Bank of China and the Bank of Communications; (o) Provincial banks;
(d) "modern-style" commercial banks; (e) "native" or old-style banks;
and (f) the foreign banks.
(a) The Central Bank of China, created in 1928, corresponds in
organization and powers to the usual Central Bank. It issues notes,
accepts deposits both from banks and individuals, and nots as the
Government fiscal agency. It is owned and controlled by the Government,
has many branches, and operates in the interests of the business can-
munity of China. The volume of note issue by the Central Bank consti-
tuted about one-fourth of the note issue of all Shanghai banks. The
major portion of the Government funds are deposited with the Central
Bank and these constitute the bulk of the bank's deposits. The loans
made by the Central Bank are mostly loans to the Government (chiefly in
the form of over-drafts) and are secured by deposits of Government
Regraded Unclassified
Secretary Morgenthau - 26 -
bonds, or pledges of certain fiscal revenues. There are no Legal restric-
tions on the amount the bank may lond to the Sovernment.
(b) The semi-Government banks, the Bank of China and the Bank of
Communications, with their 250 branches scattered throughout China,
function not only as semi-Government institutions, but 8.5 the leading
modern-style Chinese commercial banks. These two banks are also
important lenders to the Government; slmost half of their loans being
for the account of the National Government. Part ownership and power
of appointment of the Chairman, and some of the board members, gives the
Central Government E. considerable measure of control over the policies
and operations of these two banks. An indication of their importance in
the banking community may be judged from the fact that both banks to-
gether have about a billion in yuan deposits, which is over two-thirds
of the total deposits of the 25 largest modern-style Chinese banks
combined and the Bank of China issues more notes than the Central Bank.
In April of last year the National Government extended its investment
and its control over these two banks.
(c) Provincial banks. Almost every province had its government
bank, a notable one being the Kwantung Provincial Bank at Canton. These
issued notes, coined silver and copper money, and in several instances
conducted usual banking functions. Same of them operated with complete,
and many with considerable, independence of Wanking control.
(a) Chinese native banks. Though the old-style, so-called native
banks are steadily losing ground to the modern-style Chinese commerc
banks, they still play a very important role in providing credit for the
Chinese business men. It has been stated that they do 90 per cent of
the total lending business done in China. There are probably about
1,500 banks of the larger type. Almost all their loans are extended on
the basis of personal credit and not on collateral. This is one of the
chief reasons why rediscounting has not developed as yet in China.
Their rates of interest (figured per cents, per day, per thousand) vary
considerably from borrower to borrower and from region to region. None
of them have the right to issue notes, but this prohibition 10 not
offective throughout China. They can, however, obtain notes from the
note-issuing banks by depositing with these institutions a minimum of
60 per cent cash and the remainder in marketable securities, chiefly
National Government bonds.
The record of native benies has been a bad one, marked with very
frequent failures. Rarely do the individual banks endure for more than
of decade. The large part of their deposits payable on demand belong to
the modern-style commercial banks who are eager to deposit surplus funds
with them, inasmuch as the native banks guarantee a minimum rate of 2 per
cent or more. The native banks, in turn, use the funds at 8. profit in
granting small unsecured loans at high interest rates. Individuals,
except for some comparatively well-to-do persons, usually do not make
deposits in native banks. This reloaning of modern-style bank funds
Regraded Unclassified
Secretary Morgenthau - 27 -
makes the volume of loans to business by native banks very vulnerable
to any outward drain of funds from the Shanghai banks.
(e) The "modern-style" Chinese banks. These differ from the native
banks in that they are joint stock corporations instead of unlimited
liability partnerships and many more of their loans are made on collateral
rather than on personal security alone and that in general their banking
business resembles more closely the modern bank to be found in any
country. There are some 80 of these modern-style Chinese banks with
head offices, for the most part, located in Shanghai.
They, too, go in heavily for National Government loans, one-fourth
of their portfolios consisting of such assets.
(f) The foreign banks. Some 20 foreign banks obtain their charter
and are under the control of their respective governments. Because of
the existence of extraterritorial rights, the Nanking Covernment is
presumed to have no control over their operations. Their business is
largely confined to dealings in foreign trade and international capital
movements. They are practically the only banks that deal to any extent
in commercial paper.
41. There are no underwriting or invostment banks in China.
A peculiar feature of banking is the extension of long-torm credits
by banks for capital expenditures. In European countries, or in Japan,
these expenditures would be financed by flotations of bonds or stocks
to investors, but in China there are practically no Chinese institutions
and a very few foreign ones that are equipped to handle issues of bonds
or stocks. The large loans are frequently to provinces and municipalities
and are usually secured either by & deposit of provincial government
bonds or by pledges of specific provincial receipts such as salt taxes,
or farm taxes. Many of the louns made for these capital expenditures
are shared by the leading banks who form frequent consortiums. On loans
to farmers they frequently accept commodities -- wheat, rice, etc. --
for collateral. They keep these stores in numerous warehouses they
have built in scattered regions for the purpose, and sell the stocks
when the market is favorable.
42. Interest rates are very high in China.
Capital is scarce in China, and because of the disturbed political
conditions and weak Central Government, the risks involved in lending
are high. As & consequence, interest rates are much higher than in other
leading countries. Government domestic bonds sell at yields of 10 to 15
per cent, while the rates on six-month Government loans range from B to
12 per cent! Rates on short-term commercial loans may run as high as
Regraded Unclassified
Becretary Morgenthau - 28 -
12 per cent. Banks pay interest on demand AS well as time deposits.
lintes of 3 or 4 per cent on demand deposits, and 6 or 8 per cent on time
deposits are not uncommon in native banks outside of Shanghai.
F. THE PRICE OF SILVER AND CHINA'S ECONOMIC CONDITION
43. Why was China's monetary situation especially different from
that of any other currency?
For two reasons: China was on a silver standard, and China was 8.
"hard" money country.
(a) China had for her standard unit a silver coin, Therefore, the
value of her exchange in terms of the currency of any country varied
with the price of forei silver in that country. This, however, is
also true of the French franc or the Dutch guilder or any other coin
that is fixed in terms of gold. But whereas several countries have
a gold unit as their standard, only China (and two minor countries,
Persis and Ethiopia) had & silver unit as the monetary standard. The
consequence of this fact was that the price level in China has less
effect on the price of silver in foreign countries than had the price
of silver in foreign countries on the price level in China. Another
way of stating the situation is that China's exchange (which was approxi-
mately the same as the foreign price of silver) had a strong influence
on prices in China, but price movements in China had only n. slight
effect on the world price of silver.
The above was true so long as China did not interfere with the
export or import of silver. When silver was not permitted to move
freely, China no longer was on the silver standard, and her price level
was severed (not wholly cut) from the influence of changes in the world
price of silver. China, in October 1934, placed restrictions on the
export of silver, which action was made necessary -- and at the same
time made difficult to enforce -- by the second important difference
between China's monetary situation and all others.
Before turning to the second difference it is worth noting that
analler transactions, and even many wages were set in terms of oopper
"cash" which have a value that was not fixed to silver. A rise in the
value of silver (I.e., drop in silver prices in China) was accompanied
by a relative fall in value of copper "cash" (i.e., rise in prices set
in copper "cash"). The inverse relationship was not exact but it was
close enough to be significant. It reduced sonowhat the adverse reper-
cussions that a rise in the value of silver had on Chinose labor whose
wages were in terms of copper"cash"
(b) The second important difference was that China TTELS B. "hard
money" country.
What is meant by a "hard money" country? Simply that the full
wei-ht standard unit coins constituted an important element in the
Regraded Unclassified
Secretary Morgenthau - - 29 -
circulating medium, and that all other coins were valued in terms of that
standard unit at their metallic content. In China there were about
13 billion silver dollars (almost all of former coinage, but their silver
metallic content was almost the same B.S the new standard yuan), about
400 million yuan of subsidiary silver coins, and about 40 to 50 billion
copper "cash".
44. What had these two characteristics of China's monetary
system to do with China's coonomic situation from 1933 to 1935?
A good deal: both business notivity and prices in China were involved.
The price of silver in foreign countries determined the price of
Chinese exchange in those countries (within a range of 5 per cent caused
by expenses incidental to shipping silver between the East to the West).
Variations in the rate of exchange affect the trade balance; and the
prices of imported and exported commodities in China. Variations in
the balance of trade affected the flow of silver.
In China an outward drain of silver was apt to be particularly
serious, because there is no such elasticity of deposit credit on B.
given amount of cash as prevails in check using countries. An expansion
of credit calls for much more circulating medium than it would in England
or the United States. Bank notes were used to some extent, but not
enough to compensate for the lack of check using habits. Furthermore,
B.S was pointed out earlier, much of the credit extended to business
men -- particularly the smeller ones -- throughout the larger communities
of China is by "native" banks who frequently use funds left with them
for that purpose by "modern-style" banks located chiefly in Shanghai.
If silver was withdrawn from Shanghai banks either for hoarding or
export, there appeared pressure on loans in many parts of China. The
banks reduced their balances with the native banks, and these in turn
would be forced to call in as many loans as possible.
Along with, as well as a consequence of the influence of the price
of silver on China's credit structure, her price level was much in-
fluenced by the price of silver. Though the closeness of that relation
-- i.e., prices in China and silver prices - is frequently exaggerated,
it is true that there was a tendency for prices to rise in China when
the price of silver was falling, and vice versa. The chart of Shanghai
prices on the following page shows that clearly.
The price of silver rose from 17 pence an ounce in January 1933, to
24 pence - an increase of about 40 per cent, while in terms of U. 3.
cents to 53 cents). Wholesale prices in China over that period decreased
dollars the price rose over 100 per cent during that period (from 25
12 to 16 per cent, depending upon the area referred to, In Canton,
Regraded Unclassified
29a
WHOLESALE PRICES IN SHANGHAI, PRICE OF SILVER AND CHINESE EXCHANGE RATE IN N. Y.
1926 = 100
PER
1928
1929
1930
1931
1932
1933
1934
1935
1936
PER
CENT
CENT
120
120
WHOLESALE PRICES
100
100
80
80
YUAN RATE IN STERLING
PRICE OF SILVER
60
60
YUAN RATE IN DOLLARS
40
1928
1929
1930
1931
1932
1933
40
1934
1935
1936
Regraded Unclassified
Secretary Morgenthau - 30 -
and in North China, the decrease was 16 per cent, and in Shanghai dis-
trict the decline was only 11 per cent. Though the decrease in prices
was by no means large, it reflected an intensification of the depres-
eton, and at the same time contributed to that intensification.
The extent of the adverse effect on business, to judge from the
various indices published, appears however to have been exaggerated by
the press in China and by critics of American silver policy. Prices
declined, banks were failing, and unemployment increasing, but the
extent of the change is not to be compared, for example, with our own
experience of 1931 and 1932. In fact, a crude production index compiled
by the Central Bank of China actually shows an increase in production
from January 1933 to October 1934. Yet banking data, stock and bond
prices, and other data do, on the whole, support the claim of commentators
in China that the depression Was growing worse.
The expectation of further silver price increases was, moreover,
accentuating hoarding, credit contraction, and reduced business activity.
To avoid further price declines and to stem the growing depression, the
Chinese Government wished to out her monetary system free of the world
price of silver just as gold countries did with the world price of gold
when confronted with D. similar situation.
But China could not easily cut herself off completely -- as did
the United States, England, and others from gold -- because of the
second difference, namely, because China was e. "hard money" country.
Thereas the United States could suspend inconvertibility or change the
gold content of the dollar merely by passing a law to that effect,
inasmuch as most of the gold in circulation was in the form of gold
certificates, China would find that course of action difficult. Having
a very large circulation of silver, China felt she could not suspend
convertibility without causing a contraction of her circulating medium
through: (a) hoarding of her silver dollars and subsidiary coinage,
(b) an outflow of silver when the foreign price of silver in the Chinese
dollar exceeded the exchange rate (plus transportation and melting
charges). Or, to put it in other and less precise terms, when the
Chinese silver coins had an "external" value greater than its "internal"
value, silver coins were exported.
45. Thy did not the Chinese Government call in the silver coins and
replace them with notes dollar for dollar just as the United States
called in the outstanding gold?
She was afraid to try it. Chinese authorities felt that most of
the people having silver would not respond to the call. The Central
Government believed itself too weak to enforce EL demand of that kind.
The result of such an order, they feared, would be an increase in
hoarding and in anuggling of silver out of the country.
Regraded Unclassified
Secretary Morgenthau - 31 -
46. Couldn't China check all exports of silver by placing a tax
on silver, or making it illegal to export silver?
No: She could check the legal exports of silver, but not the
smuggling. China tried to do both, but succeeded in checking only legal
exports. To stop the legal export, and out her monetary system at loast
partly free from the effects of rising world price of silver, she imposed
(October 1954) an equalization fee and export tax on silver exports.
This step in effect was equivalent to a departure from the silver stand-
ard and enabled her to per yuan exchange (at rates altered from time to
time) and prevent e profit from the legal export of silver by altering
the equalization fee. The fee was adjusted to equal the discrepancy
between the internal and foreign value of silver.
The effectiveness of the check was diminished as silver rose in
price. The more silver rose in price abroad and the higher the equaliza-
tion fee necessary, the greater became the profit to be obtained through
amuggling silver out of the country.
For China particularly, because of the vast emounts of silver out-
standing, and because of her weak Central Government, and the great
attraction to many poor Chinese of n. chance to carn et few dollars as
risky go-between, the ease of anuggling is such that the Chinese Govern-
ment felt it was futile to permit the gross profit to rise higher than
20 per cent or 80, They even found it necessary to announce a death
penalty (or imprisonment) on those caught smuggling silver out of the
country, even though the profit was less than 20 per cent.
47. What then did China do when the price of silver kept rising
in March, April, and May of 19357
China did not increase the equalization fee further because she
felt It would be rendered ineffective by an increase in smuggling. Nor
was she ready or apparently willing to attempt at that time any important
change in her monetary system. On the contrary, in order to allay un-
certainty and hoarding and stimulate confidence in the convertibility of
the bank notes in standard weight yuans, the Government reiterated her
intentions of not devaluing or debasing the yuan. She, therefore,
adopted the only other course open, namely, permitted her exchange to
appreciate. It went from 34 in January to 41 in May.
Even then the rise in exchange did not wipe out the profit possible
from shipping silver legally. Examination of the chart on the following
page shows that from the middle of April on B. profit of 10 per cent or
80 could have been made on silver shipments (the distance between the
middle ourve and the top curve). Their published trade statistics record
virtually no silver exports at that time. If no logal exports took place
it was either because the banks were keeping their promise to cooperate
EFFECT OF MAMLIZATION FRE: ON CHINESE EXPLANGE
OUT
-
I
DEC
JAB
FEB
MAR
$
-
JUNE
ANY
-
SEPT
OCT
MOV
ass
-
FEE
1
i
50
M
54
X
a
52
so
2
40
#
MARKET PRICE, YUAR PLUS
BILVER EXPORT FIE - TAX
E
4d
44
44
&
to
or
N.Y. PRICE, BILVER CONTENT IN YEAR
38
30
36
*
34
SAMET PRICE YEAR in V.S. CENTS
&
a
5
3.
:
I
I
I
|
--
-
-
I
I
SEPT
OCT
-
-
I
1934
1933
Regraded Unclassified
Secretary Morgenthau - 32 -
with the National Government by not shipping silver even when a profit
was possible -- or the "moral persuasion" employed by the Government
against the banks WD.5 being effective.
The Government assumed control over exchange transactions in the
fall of 1934. The foreign banks, by virtue of their extraterritorial
rights and the location of some of them in cities not under Nanking
control could do much as they liked with regard to their exchange trans-
actions. Since they are important dealers in exchange, their freedom
from control of the Government made its control over exchange rates
more difficult than would otherwise be the case. Yet even were there
absolute control over exchange transactions, the Government could only
have permitted the rate to rise unless it were willing to have smuggling
increased.
48. Thy didn't China employ her stabilization fund to
keep the yuan exchange rate stable?
When China imposed the tax on silver to keep the exchange rate
down and preserve Her silver holdings, she also created a stabiliza-
tion fund of 100,000,000 yuan and placed it under the control of a
committee made up of representatives of the three banks (one of them the
Central Government Bank and the other two semi-Government banks) which
supplied the funds and who were also iven power to alter the equaliza-
tion fee. The object of the fund was stated to be the usual one of
preventing undue fluctuations in exchange rates. (Any loss sustained
by this fund was to be made good by the National Government.)
Why then did she not keep the equalization fee at 6.751, and use
her fund to keep the rate stable at (say) 35?
For the obvious reason that the stabilization fund could lower the
price of silver only by parting with her silver in exchange for gold,
and her 100 million yuans pledged to the stabilization fund were equal
only to a month or two supply of American purchases. After she had sold
that amount she would have been powerless to exert further restraint on
the upward rise unless she were willing to put up more funds or abandon
the silver standard completely. As she could not check the price of
silver from rising except at the sacrifice of her silver holdings, she
could not let the exchange rate remain at the low level because to have
done so would have resulted in an increased flow of silver.
49. Tas the United States silver policy responsible for the
appearance of the depression in China?
No, it could not be. The Silver Purchase Act was passed in June
1934, but the depression in China was in full swing during 1932. From
Regraded Unclassified
Secretary Morgenthau - 33 -
1931 to 1932 exports (excluding Manchurian figures) fell more than one-
third; wholesale prices fell about 11 per cent and export prices about
15 per cent; over one hundred million yuan of cold flowed out of the
country legally, and almost as much illegally (only the Central Bank had
the authority to permit gold exports); while the customary inflow of
40 to 100 million yuan of silver ceased and a net outflow appeared for
the first time in 15 years; industrial activity in Shanghai dropped
markedly; bank note issues of Shanghai banks declined 20 per cent
(without allowance, Purthermore, for the upward secular trend in note
issues); bank clearings dropped one-third; large sums of silver flowed
into Shanghai banks, chiefly because opportunities for sound loans
were dwindling. Everything pointed to declining business activity dur-
Inc 1932.
From January 1932 to January 1933, the price of silver in the United
States fell from 30 cents an ounce to 25.7 cents (monthly averages) --
a decline of 15 per cent! Insofar 0.5 the United States price of silver
exercised any influence at all in China during that period, It was in
the direction of relucing rather than intensifying the depression in
that country.
50. It was England's departure from the gold standard in September 1931
that started the rise in the world price of silver.
While the price of silver in the United States was falling, it WD.D
rising in England. The price of silver in dollars, in sterling, in yen,
and other currencies moves together so long as those currencies maintain
a fixed ratio with each other. But when, as has happened after 1930,
the currencies of various countries change in relation to each other, the
price of silver moves differently in various countries. Under those
circumstances, we no longer can speak of B. world price of silver. We
must speak of a sterling price of silver, or of dollar price, or yen
price, etc. The chart on the following page shows how the dollar price
of silver and the sterling price of silver diverged in 1932.
For China, the most important prices of silver are the dollar,
yen, sterling prices, because it is with those countries that China con-
duota most of her foreign trade and other international transactions
(with the exception of liong Kong and Manchuria). The gold price of
silver is also important, but not nearly so much as the others mentioned
(except when the dollar, sterling or yen are tied to gold). More than
three-fourths of Chinese foreign trade is conducted with countries whose
exchange rate either closely follows Chinese rates or moves with dollar,
sterling, or yen. In the light of these facts, it would be very mis-
leading to judge the effects of changes in the price of silver on
China by changes in the gold price during the years 1930-34.
The price of silver in terms of virtually all currencies (and,
Regraded Unclassified
Secretary Morgenthau - 34 -
therefore, in terms of cold since the exchanges of most countries were
then tied to sold) dropped sharply from the middle of 1928 to the spring
of 1931. From then on, we must speak in terms of leading currencies.
In the fall of 1931, an important number of countries, including
Jepan and sterling countries, depreciated their currencies, and conse-
quently the price of silver in those countries -- or what is almost the
same thing, the price of yuan exchange in those countries -- rose,
Numerous other currencies depreciated during 1932, raising the price of
silver in more currencies, The United States joined the procession in
1933 and the dollar price of silver mounted rapidly.
51. Why did so much silver flow into Shanghai before the passage of
the Silver Purchase Act, and out of Shanghai after that date?
From December 1931 to May 1934, the stocks of silver in the Bank
in Shunghai mounted from 275 million yuan to 570 million. This silver
came from the interior and wes B. consequence of declining internal trade
and growing insecurity, and large numbers of native bank failures in
outlying districts. The drain of silver from the outlying districts into
Shanghai, and the growing depression which accompanied it and helped
it along, was in no way due to our silver policy, which did not
materialize until 1934.
After July 1934 -- or two years after the depression in China was
in progress -- silver began to flow out of Shanghai to foreign countries
because of the growing adverse balance of trade, the flight of capital,
and rising price of silver. In the 3 months preceding the inauguration
of the equalization fee and duty on silver exports, more than 150
million yuan left Shanghai banks. During this period, it will be re-
membered, the legal exports of silver amounted to almost 200 million
yuan. The legal exports dropped sharply during November and December,
then virtually disappeared. How much silver was smuggled out since
October 1934 is unknown, but as stated earlier, there is evidence that
considerable smuggling went on.
52. Did the imposition of the silver equalization fee help matters?
It appeared to do so at first, yet the change was certainly not
marked. Wholesale prices in Shanghai and other areas rose a few per
cent. In the Canton area, however, prices continued to fall. Exports
showed no marked change, but imports - though subject to erratic monthly
movements - continued on a lower level than during the comparable nonths
of the previous year. Stock prices foll and snuggling of silver and
some legal silver exports continued. The crude index of industrial
activity published by the Bank of China remained at approximately the
same level.
Regraded Unclassified
Secretary Morgenthau - 35 -
In the late spring of 1935 China's situation grew somewhat worse.
The price of silver rose sharply, and with it the yuan exchange. Prices
began to decline, and by September had dropped about 5 to 10 per cent,
though the price of silver -- and with it the yuan exchange -- had
receded from its high level. On the other hand, stock and bond prices
remained about the same and exports showed some improvement, while
imports dropped sharply. There were more bank failures, but not enough
to give cause for concern.
Sentiment in favor of devaluation appeared to be gaining. The
Central Government, weakened in its control by the Japanese program in
North China and by internal disagreement on the policy to be pursued
toward Japanese aggression, despaired of effectively controlling
smuggling. Nor was there much hope of a cessation of our silver pur-
chase policy. Judging from the sharp break of yuan exchange in
October, memerous insiders must have known a monetary change Was
imminent. In fact, later some important personages in Government
circles were accused of having profited by the advance knowledge.
On November 3rd, 1935, China completely abandoned the silver
standard. Silver was ordered nationalized and convertibility of note
G. ECONOMIC EVENTS IN CHINA SINCE ABANDONMENT
OF THE SILVER STANDARD.
53. That new monetary and banking measures were
introduced since November 1, 1935?
(a) Only bankmotes issued by the three Government banks (1.e., The
Central Bank of China, The Bank of China, and The Bank of Communica-
tions) shall be full legal tender. The reserves against these notes
is to be placed under a unified control.
Notes of all other banks will be withdrawn gradually from circula-
tion to be replaced by notes of Central Banks. No new notes are to be
issued by them.
(A cable of February 14 from our Commercial Attaché reports that
a decree of November 4 gave the "China Farmers' Bank" a bank not listed
and about which we can find no information except a cabled report
dated December 26, 1935, which stated that the Government contemplated
the establishment of an^agricultural bank permission to issue up to
100 million yuans. The cable reports the bank had on February 14
50,000,000 yuan notes outstanding.)
(b) All contractual obligations expressed in terms of silvor are
to be discharged by payment of legal tender notes, yuan for yuan.
Regraded Unclassified
Secretary Morgenthan - 36 -
(e) All holders of silver are required to exchange their silver
for legal tender notes at face value.
(a) The Government in to stabilize the exchange value of the yuan
(in what unit is not specified) by buying and selling foreign exchange.
(e) Central Bank is to be reorganized into the Central Reserve Bank
of China; its ownership by public increased; and its functions altered
to resemble those of Central Banks elsewhere.
54. What monetary changes have occurred since China
abandoned the silver standard?
(a) The official sterling-yuen rate (1.e., the Shanghai official
rate quoted by the Central Bank of China) has been kept at 141 de, but
the official U. S. dollar-yuan rate has been altered twice (from
293 cents to 30, and from 30 to 29-3/4).
The market rates of both sterling-yuan, and dollar-yuan, varied
slightly from day to day, with sterling rate moving within a narrower
range than the dollar rate. Notwithstanding the fact that the market
rates in Shanghai of both dollars and sterling move, it is commonly
stated and is 80 regarded that the yuan is pegged to sterling and not
to the dollar. It is the fixing of the "official" rate which deter-
mines the currency pegged to. Small changes in the buying and selling
price on the market are always permitted - just na fluctuations occur
within the gold points in exchange rates between two gold currencies.
(b) The premium on silver in China -- which, despite the legal
prohibition on premiums, had been as high as 20 per cent in the months
following the nationalization order -- disappeared with the drop in
the price of silver. At present exchange rates, the silver in the
silver yuan is worth about 32 cents. Or, to put it another way, when
silver is priced on the world market at 40 cents an ounce, the bullion
value of the yuan coins approximates its normal value in the exchange
market. Sometimes this fact is referred to by the phrase that at
present pogged rates 40 cents is the parity of the silver yuan.
(c) The new coins (5, 10, and 20 cent nickel pieces and 1 cent
and cent copper coins) that were to replace the subsidiary silver and
copper cash in circulation have already made their appearance, but their
number is not yet largo.
(d) The note issue of the Government banks has increased by about
425 million yuan, and the cash reserves against these note issues are
reported to have increased 300 million yuan (February B, 1936 - latest
date about which we have received information).
Regraded Unclassified
Secretary Morgenthau - 37 -
(e) It is estimated that 100 to 200 million yuans of silver were
musgled out, and 100 million (excluding recent U. S. purchases) ex-
ported, while large sums of silver coins were hidden away.
55. Will the new Chinose coins contain silver?
It is not yet certain. The subsidiary silver, 10 and 20 cent
visces, are to be replaced with coins of pure nickel. No provision has
yet been made for coining 50 cent and dollar pieces, but there is talk
of coining such units with same silver in them. It was reported (in a
confidential cablegram of January 6, 1936, from the American Consulate
General at Shanghai): "According to n. reliable source, Leith Ross has
advised the Chinese Government to abandon existing standard of 880 for
silver coins" (presumably the 50-cent and one-dollar pieces) and to
substitute an alloy of .500 silver. It was also stated in the same
cablegram that Leith Ross made inquiries of London whether the blanks
could be promptly supplied. It further stated that "dies have been
or are about to be ordered from Philadelphia".
The large profit possible from counterfeiting 10 and 20 cent
pieces, and the lack of effective control possessed by the Hanking
Government in several of the provinces, may induce the Government
eventually to put some silver in these coins. Already counterfeit
coins have appeared, though of an inferior kind. Then the equipment
and technique of producing nickel coins is acquired somewhere in the
East, the number of counterfeited coins will reatly increase. On the
other hand, the Government makes so large a seigniorage profit out of
the nickel coins that it will be most reluctant to put any silver in
20 cent pieces.
How many 50 cent and dollar coins will be issued is very uncertain.
The less the silver content, the greater the seigniorage profit, but
the greater also the incentive to counterfeiters. On the other hand,
if 50 cent and dollar notes are used, the requirement of a 60 per cent
cash reserve and 40 per cent security would operate to eliminate any
seigniorage profit possible. The Central Bank finances would be
stronger if more 50 cent and dollar coins were minted with, say,
300 to 500 fine silver content in place of 50 cent and dollar notes.
That fact may induce the Goverment to risk counterfeiting, and the
slight chance of a price of silver high enough to make the bullion
value (at 30 cents yuan exchange) greater than the nominal value of
the coins.
56. How much of the outstanding silver has been turned
in to the Government banks?
Only a small portion of the total outstanding silver coins have as
yet been obtained by the Wanking Government. It is estimated that in
Regraded Unclassified
Secretary Morgenthau - 33 -
Shanghai less then 200 million yuans in silver have been receivod, but
the exact amount is not known as no figures are published. The note
issue of the Government banks (Central Bank, Bank of China, and Bank of
Communications) increased about 425 million yuan and its cash reserves
increased 300 million yuan, according to their published figures. But
on January 28 it was reported that those three banks had only 127 mil-
11on yuan in silver. Perhaps the remainder was in foreign exchange and
gold.
At the time the nationalization order went into effect there was
estimated to be about 300 million yuan of silver stocks in Shanghai
so that if the ri ure of 150 million in stocks on January 27 in at all
close, the amount of silver turned in by people and private banks must
have been very small, even allowing for exports.
About 20 million of the 40 million yuan of silver dollars held
by foreign banks of Shanghai have been turned over to the Central Bank
of China. None of the 10 millions held by Japanese banks have as yet
been turned in, but it is reported that it is expected they will soon do
80.
There is probably about 12 billion yuan of silver coins hoarded,
in circulation, and in non-Govermment banks throughout China. In some
areas the silver yuans still circulate freely, and almost overywhere
subsidiary silver coins are still used. With the price of silver as
low as it is, the incentive to smuggle out coins has ceased, but the
reluctance to exchange silver coins for notes or nickel coins remains
great, especially in the areas removed from strong Hanking control.
57. What has happened to business conditions since the
nationalization of silvor?
Conditions have improved in China since November, but the Improve-
ment is not marked. Prices of all kinds and in various parts of China
have risen from 5 to 15 per cent. Stock and bond prices turned upward
(bonds dropped precipitously in February, due, it is claimed, to bear
raids for political reasons, but have since recovered). Exports are
higher than last year and imports are lower -- 60 much so that for the
first time in many decades China is experiencing EL favorable trade
balance. As & consequence of the altered trade balance, the pressure on
yuan exchange is reduced and China has e. better chance to prevent her
exchange from slipping from its present mooring.
There has also occurred some increased activity in railway improve-
ment and new construction, and there is apparently a more optimistic out-
look in trade and financial circles. In Shanghai, however, retail busi-
ness is below the 1935 level, and new building construction reported
to be declining.
Regraded Unclassified
Secretary Morgenthau - 39 -
58. How has the United States been affected by the trend
of business in China from 1933 to 1936?
For the first time in a decade or more, we are having a large
excess of imports from China instead of a large excess of exports to
China. Our exports to China have suffered a sharp drop. As a conse-
quence of China's depressed state of business, WO lose also through
indirect trade. An impoverished China purchases less from other
countries, as well as from the United States, and those countries --
Japan, Great Britain, India, Germany -- in turn buy less from us as
well as from others.
In addition to this loss of direct and indirect trade, is the
hidden loss of future trade resulting from the establishment of trade
barriers that are seldom removed. China has found it necessary to
raise tariffs sharply on a great many items in order to reduce her
imports so as to keep her silver from flowing out. Once an industry
grows up behind tariff protection, it has proved very difficult to
remove the duty, and international trade is, to the extent the barriers
remain, reduced even after the depression disappears.
Further, the income from foreign investments in China has been
reduced, and that loss, whether by British, Japanese, or Americans,
has adverse repercussions on industry, American and foreign. The
rate of improvement in China's transportation system is slowed up --
because losses of investors discourage further loans. China's loss
of better transportation facilities is no other country's gain.
The losses sustained by the United States from the depression in
China cannot be all or even mostly allocated against our silver policy.
The depression in China is B consequence of several factors independent
of the rise in the price of silver -- world wide depression, currency
depreciations, political disruption, Japanese aggression, civil strife,
and climatic disasters. It began long before we developed e silver
purchase program and is continuing after the world price of silver
dropped to a low level. Yet it could hardly be gainsaid that the rise
in silver prices contributed to her difficulty.
30 far as the losses to the United States are concerned, they are
easily exaggerated. The portion of these losses allocatable to our
silver program seems important when itemized, but actually the quantita-
tive total constitutes a negligible portion of our national income -
even allowing for the erpercussion on agriculture.
Regraded Unclassified
Secretary Morgenthau - 40 -
H. MONETARY PROBLEMS THAT CONFRONT CHINA NOW.
59. Will a fall in the price of silver force China back on
the silver standard?
It is held in some quarters that any further fell in the price of
silver will drive China back on the silver standard. It is claimed that
just as the sharp increase in silver prices drove her off, so a marked
fall will force her back.
There are some grounds for this view, but they do not appear to be
strong ones. It does not at all follow that because B. high price forced
her to abandon silver a low price will force her back. The factors in-
volved with China off the silver standard differ materially from the
factors which are significant with China on the silver standard. The
effects in China of a fall in the price of silver now would not be the
converse of the effects the rise in the price of silver had there in
1934-1935. The Chinese monetary situation is essentially B. different
one today than it was when China WBS on the silver standard, and hence
a duplicate movement does not have a duplicate effect, nor an opposite
movement an opposite effect. The effects of a change has to be deter-
mined in the light of the now factors introduced into the situation.
Nevertheless, there is a possibility under the new (that is, the
present) situation in China that B. sharp drop in the price of silver
might force China back on the silver standard. But it is only a slin
possibility; slim because the exceptional sequence of events necessary
to bring it about is not likely to occur just because the price of
silver falls.
The sequence of events that might force China back would be as
follows:
(a) First, because the low price would induce many in China to buy
silver, either to hold in form of bullion as a. good investment, or to
be made into jewelry, plate, etc. (Something of that sort is apparently
going on in India right now.) The resultant demand for foreign exchange
might be great enough to break the present pegged rate because the
Government has at its disposal only B. relatively small margin of specie
and exchange reserves to use in support of the yuan. Furthermore, those
reserves, insofar as they consist of silver, would yield smaller anounts
of foreign exchange as the price of silver declined.
(b) Secondly, the fear, or expectation that the fall in the price
of silver would have such an effect would induce speculative raids on
the yuan and also a flight of sane capital.
The Government could, of course, attempt to relieve the pressure
against the yuan by imposing an import duty on silver high enough to
offset the fall in its world price. However, China's experience with
Regraded Unclassified
Secretary Morgenthau - 41 -
muggling out of silver during the past year doesn't offer much hope
that a duty on imports of silver would be effective in checking in-
ward muggling if the drop in price -- and hence the import duty --
were a sizeable one.
The pressure against the yuan might well be great enough to force
it to depreciate even though purchases of silver (by residents of China)
were discouraged through an import duty, and even though the purchasers
of foreign silver would not be able to dispose of their acquisitions to
the Government.
(c) Thirdly, a depreciation of such large dinensions might con-
ceivably follow a sharp break in the price of silver (or appear to be
in the offing after a short period of decline) as to create a very seri-
ous monetary situation for China. The pressure might be 50 great A6
to engender widespread flight from the yuan (into dollars, sterling,
gold and silver). This in turn might engender fear of inflation, and
thus stimulate further depreciation, and so on.
The Chinese Government might not object at all to a 25 or 33 per
cent depreciation, but most assuredly would not wish 8. precipitous and
sustained decline. In the event of such & decline, the ordinary opera-
tions of the international adjustment of balances -- 1.0., increased
exports from China, decreased imports, etc., etc. -- could not be de-
pended upon, in the case of China particularly, to move with sufficient
rapidity to check the sharp downward movement in exchange.
Would a resumption of silver convertibility of note issues at such
a time stop the decline?
(d) Fourthly, confronted with a decline of major proportions and
the accompanying danger of inflation, the Chinese Government in despera-
tion might attempt to stem the drop in yuan exchange by return to the
silver standard, at some rate near the then existing lowered level of
exchange rates. By offering to redeem outstanding notes with silver,
the depreciation would necessarily stop, as the yuan would then be
tied at a fixed rate to the price of silver in gold (or sterling, or
dollars).
That might solve her immediate problem, though it is possible that
at such a time her small reserves, which would already have suffered
some decline, might not be enough to check the flight from the yunn
even at B. low rate of exchange. The yuan would stop falling only if
the Government could obtain specie reserves to meet the demand for
foreign exchange, and the demand for redemption of notes. The low
rate of exchange which would then exist might stop the external drain
and even reverse the flow. The internal drain, however, would be more
difficult to stop. If domestic redemption were refused, pressure on
the yuan would continue, and increase the external drain.
Regraded Unclassified
Secretary Morgenthau - 42 -
Being aware that a drop in the price of silver might start such
at. sequence, would not the Nenking Government return to the silver
standard as soon as the price of silver began to fall?
If she returned to silver soon enough, would she not avoid the
danger of a runaway depreciation?
She might avoid those consequences, though it is not at all
certain that China's specie reserves are adequate to keep her on the
silver standard (see Section 60 below). But, in any case, she would
be at this time reluctant to return to the silver standard - especially
with silver at the lowered price of 30 cents an ounce or 80: (reasons
for her hesitation to return are outlined in Section 63). And unless
the Chinese authorities were convinced that B. silver standard were the
best for China she would not be warranted in returning merely because
of the fact that silver was falling in price so long as there existed
no immediate danger of a. precipitous decline in the yuan. The chances
of such a. decline occurring if silver fell in price 5 or 10 cents an
ounce are remote. It has never occurred in modern times except when
civil war, breakdown, invasion, or foreign war was in process.
If silver should slide down to 30 cents, China could let the ex-
change drop to the new parity (say 24 or so) and reasonably expect the
pressure on the yuan to cease. With a 24 cent yuan, the balance of
payments would in time even strengthen her exchange position. It is
barely possible that the drop in the yuan rate would not be enough to
stan the demand for foreign exchange, but unless internal political
disturbances occur, it appears unlikely that the downward pressure
would not cease at the lowered yuan rate.
60. Will the Nanking Government be able to keep the
sterling-yuan rate at the present level of 14% d.?
Her chances of keeping her exchange rate stable are fair. Much
depends on the political situation in the Far East and on our decision
with regard to China's silver.
Factors tending to strengthen the yuan.
Factors favoring stability of yuan exchange are:
(a) Her recent trade trond is toward 8. marked reduction in he"
usual unfavorable balance of trade.
(b) There is some talk in the press of a probable renewal of foreign
investments in China, both by Japanese and the British,
(o) Immigrant remittances to China should increase with world
recovery.
Regraded Unclassified
Secretary Morgenthau - 43 -
Each of these changes, if they take place, will increase the supply
of foreign exchanges.
(a) The shift in trade would be particularly important. Last
year China's unfavorable balance of trade amounted to 344 million
yuen. If this year China did not have to send that amount abroad, her
exchange position would be considerably strengthened. However, the
reduction in the import excess has been especially marked only since
November (February figures are not yet available). Seasonal varia-
tions are large in China's recorded trade, so it cannot yet be known
whether the noted change presages a definite shift or is due mainly
to unusual conditions.
The other two items mentioned are less important.
(b) If foreign investments to China are made they will most likely
be tied up with purchases of goods. They will, for the most part, in-
crease imports and not provide additional exchange (i.c., more than
enough to pay for the added imports). Besides, the amount of foreign
investments under existing troubled conditions, and with China's bad
record on loans, is not likely to be large this year.
(c) Immigrant remittances to China are a big item in her balance
of payments, but the increase likely to take place in 1936 could hardly
be more than 25 to 50 million yuan at best.
Altogether improvement in the balance of payments depends chiefly
on the shift in trade, and on the extent to which funds which have
flown from China in the past few years will return.
Factors tending to weaken the yuan.
Factors counting in favor of the possibility of further deprecia-
tion of the yuan are:
(a) The political uncertainty in China.
(b) The fact that the Government does not have much reserve to
work with.
Both of these factors give rise to & lack of certainty as to the
future course of the yuan.
(a) The domestic and international political conditions in Asia
are not such as to create confidence in the stability of the Nanking
regime, or in the prospects of peace. An important Southern group
refuses to co-operate with the Nanking group unless Chiang Kai-shek
adopts 8. much stronger program against Japanese aggression. Nor can
Regraded Unclassified
Secretary Morgenthau - 44 -
the Russian-Japanese-Chinese relationships be said to be growing less
aminous in their possibilities for conflict. To cap it all, large
Communist groups in China seem to have & disturbingly large amount of
vitality.
(b) Government cash reserves are small. The total cash reserves
of the three banks are only one-half billion yuans -- consisting of
silver, foreign exchange, and gold. Part of those reserves are silver
yuans recorded at this nominal value. Probably their gold and foreign
exchange reserves do not exceed 100 million U. S. dollars.
Moreover, e. large part of this reserve cannot, of course, be used
to support the yuan. Almost never (Brazil did it in 1930 during very
troubled political times) does a Central Bank let all its specie re-
serves go before permitting exchange to depreciate and/or restricting
exchange transactions. As the more of the 100 million ia used, the
greater will become the pressure both from speculative sources and
from those who wish to get their funds out of the country through fear
of inflation. China cannot control exchange operations with enough
effectiveness to peg the rate at the present level if the pressure
becomes very severe. She would be unable to stop bootleg operations
in exchange - evon if she did effectively limit the official opera-
tions. The task of successfully controlling exchange operations in a
difficult one for such highly centralized and highly organized states
as Germany and Italy. For the Nanking Government the task would be in-
superable. Once the exchange reserve began to decrease rapidly,
nothing except outside aid could stop the yuan from some decline in
actual rates - though obviously the normal or "official" rates could
be kept up.
A confidential cable did report that E. Kann "well known Shanghai
silver expert" stated in a private interview that one bear raid,
"understood to have been led by Japanese banks in Shanghai", was suc-
cessfully met with the payment of 30,000,000 U. S. dollars, It is
doubtful, however, if without support & raid of double or triple that
amount could be met.
Would it make any difference in the strength or weakness of the
yuan if the U. S. would purchase silver from China?
Yes, it would. It would have some influence on:
(a) The amount of outstanding silver people will turn into Govern-
ment banks in China.
(b) The value of those reserves.
(c) The degree of confidence speculators and others would have in
the yuan.
Regraded Unclassified
Secretary Morgenthau - 45 -
If we refuse to purchase any more of China's silver, the value of
her reserves, actual and potential, will drop. The psychological effect
of our refusal to purchase more silver, or convey scine assurance that
the foreign silver market will be supported by us (it would be diffi-
cult to keep such a decision secret in China for long) would be two-
fold. It would increase the pressure on the yuan in anticipation of
depreciation, and check the exchange within China of silver for notes.
There are still some 1 1/2 ro 2 billion ounces of silver outstanding in
China which the law requires to be exchanged for Government notes or
new coins. How much of it will be turned in during the next year do-
pends partly (only partly) on prospects of exchange.
If, on the other hand, we indicate a willingness to purchase more,
or give assurance that we will support the silver market, or the yuan,
the opposite effect will be induced. Her foreign reserve would be in-
creased by the conversion of silver to gold; confidence in the future
of the yuan will be sarewhat strengthened. As B. consequence, more
silver would be turned into the Government banks, some of the capital
which has left China in the past year might return, and foreign in-
vestors would regard additional investments in China less unfavorably.
It is possible that our refusal to aid China may be countered (for
a consideration - either economic or political) by British action in the
form of a loan, or assurance to China of support to the yuan. England
may even buy China's silver with funds from her Stabilization Fund in
the hope of some day selling it to India or the United States, if neces-
sary at a loss. England is eager to keep the yuan from falling, and is
also seeking political and economic plums in China. Since 40-cent
silver in low, she might feel such a venture worth while.
China's exchange applecart will, of course, be upset should
hostilities break out in the Far East, or should the political split
within China grow very acute.
Altogether it cannot be said that the outlook for yuan exchange
is more than fair. There was a runor of an impending drop in yuan ex-
change in the fall, but it is probably grounded not so much on economic
grounds, which are at the monent favorable to maintenance of the present
rate, but on political grounds, and decisions of foreign governments,
not yet clearly indicated. (A report of February 24, 1936, from the
Treasury Attaché at Shanghai contained the statement that BL local
Chinese broker had advised his friend Leigh (prominent in the pro-
Japanese group) to buy gold dollars as the yuan will depreciate 25 per
cent by September.)
Inclassified
Secretary Morgenthau - 46 -
I. MONETARY PROGRAMS CHINA MUST CHOOSE FROM.
61. What alternatives in monetary policies confront China now?
There are three courses open to China:
(a) She can continue to follow her present program of a. "managed"
currency - with a choice of minor variations. She can peg her exchange
to some leading currency, or maintain an independent exchange rate,
altering it as she deems such action necessary.
(b) She can return to the silver standard -- either in the form
used before November 1935, or in some modified form.
(c) She can adopt a gold or gold exchange standard, or a gold and
silver standard - 1.0., bimetallism.
62. If China is determined to continue a "managed" currency,
she has & choice.
She can peg her yuan (a) to the yen, (b) to sterling, (c) to the
dollar, or (d) she can plan to tie the yuan to none of them and shift
her peg from time to time as she sees fit.
(a) Will the Chinese dollar be tied to the yen?
Not by free choice unless a bargain is struck! The Japanese yen
is a relatively unimportant unit in world trade and finance, and it has
proved to be stable neither in its ratios with other currencies, nor in
its purchasing power at home. If China ties the yuan to the yen, it
will be only because she has been either forced to do so by Japan, 8.6
has probably been the case with the Manchoukucan currency, or bribed
to do so with a big loan or other concession from Japan.
(b) Will China join the sterling area?
During the past five months the official sterling rate in Shanghai
has been kept fixed. Therefore, it may be said that the yuan has already
joined the sterling area. Yet it is not certain thrt she will continue
to do so, especially if bargaining is possible. The Chinese Government
can alter the official rate whenever they wish. They are not yet - so
far as is known - committed to eny specific policy. The decree of
November 4th merely requires that "the rate be kept stable at its present
level" but doesn't specify in what currency.
Though China has nothing to gain by joining the yuan to the yen,
her situation is different with sterling. A good deal of China's
foreign financial dealings are transacted in sterling; England and
numerous (not all) other sterling area countries have maintained a
Regraded Unclassified
Secretary Morgenthau - 47 -
fairly stable price level in the last few years. By joining the yuan
to the British pound, China's price level -- after the initial adjust-
ment -- will have gained some stability from the steadying influence
of England's price level. Since the Japanese yen is more likly than
ever to stick closely to sterling if the yuan joins the bloc, China
will also be assured stable exchanges in a large number of currencies
important to her.
(c) How does China feel about the dollar?
The dollar, together with other gold currencies, is more important
in China's trade than are the sterling currencies. One-third of China's
trade is with gold currencies as against one-fifth with sterling our-
rencies. Moreover, the dollar is tied to gold, whereas sterling is
footloose. And finally -- at least prior to our silver program --
China regarded the United States as her best -- and only disinterested
friend, & powerful friend, and one possibly more dependably anti-
Japanese than is England. China might prefer -- offers of economic or
political assistance being equal -- to tie her currency to the dollar
rather than to sterling.
(a) Will she pursue an independent course, altering her peg from
one leading currency to another as the situation changes?
This is what China now claims to be doing, though, as stated above,
so far the official sterling rate has remained unchanged. The advan-
tage of this procedure is that it leaves China 8. relatively free hand
to alter her rates from time to time as she deems wise. The disadvan-
tage lies in the fact that if her currency is not linked to a leading
unit she may lose the steadying effect of that currency. It takes &
stronger and more experienced government to successfully manage B. cur-
rency not pegged to a leading currency than one that is so pegged.
Also she may be able to get some concession for linking her currency
to one or the other of the chief currencies.
A pegged rate is not en unbreakable tie.
Even if the yuan is pegged to one or the other currencies, she
remains -- unless commitments of some sort are made -- free to shift
her peg from one ourrency to another. There are difficulties in such
shifting, but they are not very important provided no commitments are
made, and provided the country to whose unit the yuan may be pegged
does not come to feel it has a vested interest in such a tie-up.
Therefore, even if yuan remained pegged to sterling, or shifted
to the dollar, the act would not necessarily be regarded as e. permanent
arrangement unless the step were taken with that understanding in re-
turn for some concession.
The above alternatives vary only very slightly from each other.
Regraded Unclassified
Secretary Norgenthau - 48 -
They are each B. form of "managed" currency. On economic grounds alone
it would not matter much to China which currency she tied her yuan to,
though it might make some difference in her international political
relationships.
The situation is different for the other party to the tie-up.
It would make same economo, as well as political, difference to the
country whose currency the yuan is pegged to. The economic effects
are listed in Sections 65, 66, 67 below. So far as China is con-
cerned, she would doubtless tie her yuan to the currency whose country
will offer her most for the "partnership". If no offer is fortherning,
she will probably continue her present course, inammuch as England
appears to be taking at the moment 8. sympathetic, and possibly helpful,
interest in China's economic predicament.
However, is China bent on maintaining a managed currency? May
she not wish to return to the silver standard, or adopt some other
form of metallic standard?
63. Will China return to the silver standard?
China is at present on B. "managed" currency standard. The Govern-
ment banks will give paper notes, or new nickel or copper coins in
exchange for silver coins, but the paper money is not convertible into
specie. Leading foreign exchanges are kept stable by operations by
the Government on the exchange market. Though her specie reserves
include silver coins and silver bullion, China is now definitely off
the silver standard.
Will she choose to return?
The arguments that might be advanced in favor of B. return are:
(a) The Chinese people have for centuries been in the habit of
using silver specie as money, and are most reluctant to part with their
silver pieces. A return to the silver standard would help restore con-
fidence and permit business to proceed on its accustomed path.
(b) For a. country so primitive in its economy, so lacking in ef-
fective centralized political control, and so inexperienced in modern
banking methods, and 80 beset with major domestic and foreign political
troubles, B metallic standard is the best safeguard against marked in-
flation, counterfeiting, irredeemable currency, exchange depreciation,
and other monetary disorders.
(o) The silver standard has its drawbacks, but for China it is
the traditional currency, and in the light of its history and possible
alternatives it is the best standard for China to adhere to - at least
Regraded Unclassified
Secretary Morgenthau - 49 -
until the time comen when it can adopt same other standard without the
dangers that such adoption would bring in its train now.
The arguments against a return -- many Chinese financiers and
economists believe -- are stronger:
(a) The silver standard at best operated passably only because
until the turn of the century foreign trade and international finance
played a very minor role in China's economy and because in the years
before 1873 silver had E. stable price in terms of gold. Since then it
has worked, on the whole, rather badly. China's exchange, being tied
to the price of silver, was subjected to broad monthly and annual
fluctuations. Even in the years before the depression, it WELB not
uncommon for yuan exchange to fluctuate 15 per cent during B. year. In
1926 it fluctuated over a range of 30 per cent!
Fortunately for China, the depression caused the price of silver
to fall, and with it, of course, fell yuan exchange. China, therefore,
had the benefit for the first few years of the depression of a. rising
internal price level (it rose about one-fifth), and a sharper falling
external price level (it fell almost one-half), at a. time when other
countries were experiencing falling internal prices and relatively
rising external prices. This happy combination lasted, however, only
a. few years, and then silver began rising in price and her troubles
grew.
Though China's internal currency situation has been - as described
earlier in the report - very chaotic, the cause has been the absence of
unified currency and banking laws, and the lack of centralized Govern-
ment control. However, the poor currency system cannot be allocated
to the fact that China was on the silver standard, nor will the
improvements -- described earlier in the report -- inaugurated in 1931
and 1933 be much affected by the standard China elects to adopt.
Long before China's acute monetary difficulties arose she was
advised to abandon the silver standard in favor of the gold exchange
standard (the gold exchange standard is now practically equivalent to
a dollar exchange standard). Five times - 1903, 1908, 1912, 1916,
1929 -- extensive reports were made by commissions (three of them
composed of foreign experts) recommending such & shift.
(b) The fact that China has long adhered to the silver standard
is not a weighty reason why she should continue to do 80 under funda-
mentally altered conditions. It is true that the people are accustomed
to coins, but the bulk of the peasants use copper coins and these they
will continue to use (though of altered denominations) under any stand-
ard. Feople in business, and in cities, are using notes more and more,
and the notes of the Government banks have wide acceptance and will be
used still more as the Nanking Government extends its power.
Regraded Unclassified
Secretary Morgenthau - 60 -
The danger of inflation always exists. It took place in numerous
provinces while China was on the silver standard, and it will doubtless
occur again if the Central Government is seriously weakened. But --
the Chinese hold -- the Nanking Government is fully cognizent of the
danger of inflation and are going to bend every effort to balance the
budget and keep her exchange stable. Were they to return to the silver
standard, there would be no additional guarantee that inflation would
not occur. The same forces that cause inflation when a country is off
EL specie standard, cause inflation when B country is on. The only dif-
ference is that in the latter case the government is forced to abanden
the specie standard en route,
The protection against inflation and depreciation, they feel, is
a strong Central Government, peace, end business recovery -- three
factors that are not necessarily introduced by adherence to the silver
standard, nor kept away by a "managed" currency standard.
(c) Most important of all the objections they have to B. return to
the silver standard now is that they have no assurance that if they re-
turn the price of silver will be kept stable in the near future. Silver
is now 40 cents and they fear the possibility of a rise to 50 or even
60 cents with recovery, or with an increase of American purchases.
Were that to happen after she had resumed the silver standard at the
40 cent parity, her monetary and credit structure would be subjected
to a repetition of 1934-35 monetary troubles.
Nor can she avoid that difficulty by putting less silver in the
yuan. Were she to do that, her yuan rate would depreciate now in pro-
portion to the silver content, and later appreciate when (or if) silver
rose in price.
Could she not avoid that difficulty by waiting until the price of
silver rose and then return to the silver standard?
The first effect of rising price of silver would be renewed smuggling
of silver our of China, and slowing down of exchange of silver coins for
notes within China.
Even if China were willing to let that happen, and even if she
adjusted the silver content of her yuan unit so that at 60 cents an
ounce for silver her exchange rate could remain 30 cents (by putting
1 ounce instead of 3/4 of an ounoe in her yuan), her exchange rate
would thereafter remain tied to the price of silver.
Would China be willing to tie her exchange to B. 60-cent an ounce,
or a 50-cent an ounce silver (with B. yuan content of 3/5 of an ounce)
without adequate assurance that the price of silver would be kept stable
at that level?
Regraded Unclassified
Secretary Morgenthau - 51 -
If such assurance were forthcoming, the program of a return to
the silver standard would not be subject to so many disadventages.
After the initial adjustment, the silver standard would become almost
equivalent to the gold standard, since the assumption is that the
price of silver in terms of gold (or dollars) was to be kept the
same. But can such adequate assurances be given?
Might China adopt a compensating silver bullion standard feasible
for China?
Very unlikely. China could - after more of the outstanding silver
were turned in - adopt 8. sort of fluctuating silver bullion standard,
and attempt to keep her exchange rates stable by altering the silver
content of the yuan in proportion to the change in the world price of
silver. Since there presumably would be no silver in circulation
(except in subsidiary coins with low silver content) the alteration in
the yuan buying and selling price of silver bullion, so far as was
necessary to keep the yuan exchange rate stable in terms of gold, would
create no significant domestic monetary difficulties, nor alterations
in the exchange rate.
It is very unlikely that China would adopt such a system. It has
little advantage over a "managed", or dollar, or sterling exchange
standard, which it resembles very closely, and has same important draw-
backs. For example, it presupposes that there is B. world price of
silver, whereas in effect there are only dollar prices of silver, or
sterling, or yen prices of silver, etc. Obviously, the price of silver
in terms of various currencies move no closer together then do the
respective currencies. The question of adequate assurances by the
United States of e stable price of silver at a pre announced level
is one that has political rather than economic consequences within the
United States. Though, if the price is much higher than the present
one, there arises the question as to whether even we could keep up
the price for many years. There is a statutory limit to our purchases,
and when that is reached - what then? Even at a low price, it is BL
step that needa careful political evaluation.
Though the Chinese authorities might not like to return to the
silver standard at all - or under the above conditions (unless some
concession, some political or economic gain is grented them), the
alternative to B. non-return might encourage them to do so. Were, for
example, the United States to find it necessary to withdraw completely
from the European and Asiatic silver market (1.e., buy only output of
American mines) the price of China's silver might fall sharply. This
would be even more likely to happen if the United States found it
necessary to make such 8. withdrawal known to the Chinese (as it would
be very apt to leak out). Such & move on our part might have interna-
tional political consequences that would need to be considered. It
would, however, reduce the value of China's silver holdings and might,
therefore, be a factor in her decision.
Regraded Unclassified
Secretary Morgenthau - 52 -
64. Would China adopt 8 gold exchange, gold or
bimetallie standard?
Gold standard a doubtful possibility.
The possibility of her adoption of B. gold standard without outside
aid is very slim. Her reserves are too small to justify such B. course.
The chance that she could not maintain it would encourage speculative
attacks, and an internal as well B.B external drain of gold. If she
wished to link the yuan to gold she would prefer the gold exchange stand-
ard and not the gold standard.
Gold exchange standard resembles dollar or sterling standard.
The gold exchange standard is much like the dollar standard, pro-
vided the United States would permit gold to flow to China if she
adopted such 8 standard. The merits and demerits are much like those
considered under the pegging of the dollar to the yuan, except that in
the latter case more prestige would be attached by the not to the
dollar, and a yuan linked to the dollar would have more political value
here than a yuan linked to gold, though in effect the process is almost
identical at this time. Another difference that makes it a little less
desirable from China's point of view at this time, is that B. gold ox-
change standard presupposes the legally established par value of the
yuan in terms of gold. It, therefore, is more troublesone to alter
the exchange value than would be the case if the yuan were merely
pegged to another currency.
Bimetallism presents some of the difficulties of a silver standard.
If China alone has to adopt bimetallion without satisfactory assur-
ance of a stable price of silver, she would be in danger of Pinding her-
self approximately in the name predicament as she would be if she re-
turned to the silver standard. If the price of silver dropped she
would have to spend what gold and foreign exchange she had to pay for
the silver offered her. With her gold and foreign exchange spent (for
silver) she would then in effect be on the silver standard.
Nevertheless, bitmetallism for China would have some advantages
over the silver standard, assuming she made the current market ratio
her official ratio. If the price of silver rose she could exchange
some or all of her silver for gold without subjecting her exchange
rate to alterations.
If she could be assured that the price of silver would not fall
below current levels, the danger of being forced back on the silver
standard would be removed. Bimetalliam (at current rates) might
provide her with an easy transitional period to a gold standard billion if, or
when, the price of silver would rise. With China's 1% or so
added to the potential market supply -- as would be the case
were ounces she to adopt bimetallism -- the world price of silver will have at
B. more difficult time rising above her mint (i.e., if established
the current market) ratio. If she could be reassured that silver would
not drop below her mint price, she might well give serious considera-
tion to its adoption.
Regraded Unclassified
Secretary Morgenthau + 58 -
Again the question arises as to the domestic political expediency
of giving China any assurances that the price of silver will not drop
below 40 cents, and at the same time be perhaps accused of encouraging
China to keep the price of silver down to 40 cents by adopting bimetal-
liam at that ratio. If, on the other hand, we first raise the price
of silver, we increase its chances, in China's view, of a. subsequent
drop which would force China back on the silver standard.
64. Which course would we prefer China to take?
(a) For obvious political reasons it would be preferable were
China to return to the silver standard. But on economic grounds, it
might be difficult to convince China (without some concession to her)
that such 8. course is in her best interests.
(b) A much better case could be made on economic grounds for her
return to the bimetallic standard. Two possible objections from our
point of view to bimetallism are: (1) China may want assurances that
the price of silver will be kept from falling, and (2) silver advocates
might object to stabilization of foreign silver at the low price of
40 cents and ounce. Since, however, the domestic price could be kept
up, and the possible alternative be a lower foreign price of silver, and
complete abandoment of the silver standard by China, the latter objec-
tion may not be serious.
(o) The third best alternative is that China should either peg her
yuan to the dollar, or unpeg it from sterling.
65. Why would England like to have the Chinese yuan joined to sterling?
There are several advantages that would accrue to England if China
definitely became one of the sterling-area countries:
(a) The more countries joined to sterling the less sensitive will
England's price level be to price changes occuring in the gold countries.
To illustrate by an extreme case. If all countries joined sterling
except the United States, England would be in a stronger position to
influence either the American price level or dollar exchange rate. In
other words, United States' position would be similar to that of China's
pre departure. China was in her monetary predicament not because she
had a silver standard, but because no one else was on silver. The
analogy is not perfect (for reasons we cannot go into here), but it is
close enough to illustrate the point.
(b) The prestige of sterling will be enhanced. More business
would be done in sterling, with the result that London would become a
little more important as 8. money market. Her bankers, bill brokers, and
Regraded Unclassified
Secretary Morgenthau - 54 -
insurance companies would have a little more business to transact.
Doubtless, too, she probably would enjoy the experience of insiruating
what she thinks is a well deserved rebuke to the United States for its
silver program.
(c) The more sterling countries there are, the stronger will be
England's position around a conference table with the gold countries
should an international monetary conference take place.
The sole disadvantage from England's point of view is that the
more currencies there are tied to sterling, the less autonomy can she
have in the determination of her price level and exchange rates. Not
as between sterling and gold (she would increase her power in that re-
lationship), but between herself and other sterling countries. How-
ever, the advantages enumerated above of getting China to join sterling
are doubtless more important.
66. Would not the United States obtain similar benefits if
China tied the yuan to the United States dollar?
Not as much as would England, but possibly enough to make it worth
while if we have to pay very little for it. The advantages would be
much the same, substituting New York for London, etc., except that more
Chinese trade, more prestige, more international financial business in
New York means less to the United States than it does to England. This
is true partly because of England's greater need for foreign trade, and
her traditional role in international finance, and partly because the
United States is 8. coming nation and England is a going one.
There are, however, political considerations that counsel caution
in any attempt to link the yuan to the U. S. dollar. Any action which
would strengthen the political and economic ties between the United
States and China is to be carefully weighed in the light of international
political considerations. In this evaluation the strong prospects of
war in China - either foreign or domestic - and the strong possibility of
either B. Japanese controlled China or a Communist controlled China, and
the reaction Japan would have to such a move on our part, must not be
overlooked.
67. What difference does it make whether the yuan is linked
to the dollar or to sterling?
The economic advantages have been listed above. The total value to
the American nation is not reat enough to warrant steps which will
involve the United States more deeply in the Far Eastern situation unless
it five in with our Far Eastern policy. Nor are the economic gains great
Regraded Unclassified
Secretary Morgenthau - 55 -
enough to justify an offer of large loans or other costly favors. But
if the price to be paid by us be small, it might yield a net economic
gain.
Internationally, the step would indicate to Japan that the United
States is not wholly unconcerned in her expansion program in Asia. The
step would encourage China and possibly cause Japan to proceed more
warily in her attempt to swallow China. Whether or not this would be
desirable depends, of course, on the diplomatic policy we wish to pursue
in the Far East.
68. What would China like to obtain from the U. S. now?
More purchases of her silver at as favorable a rate as possible, or
possibly some assurance of support of the yuan at current rates or even
at B. moderately altered one. She needs more gold or foreign exchange
with which to support her yuan.
The Nanking Government would also be glad to get the enhanced
prestige at home, and the somewhat increased political strength in her
relations with Japan and England that favored treatment by the U. S.
would give it. It would also be eager to secure the additional
financial support e. safer yuan would supply to the Government.
The Nanking Government may also try to interest the U. S. in pro-
moting more foreign investments in China, or in securing some long-term
credits, like the wheat loan of 1933.
It may be also that she may be hoping to maneuver the United States
in a position more favorable to China politically - in her difficulties
with Japan - by raising the issue of the Consortium, or renewing the
service payments on the defaulted loans, or a linking of yuan and dollar
at a price.
69. Thy should we buy silver from China?
(a) It will help improve business conditions in China and we will
secure some benefit from her recovery.
(b) It will help keep the yuan from depreciating, and thereby
protect our exporters who compete with China's producers end those who
sell to China. It will also prevent keener Chinese competition in our
domestic market. Furthermore, if the yuan should depreciate, Japan
might possibly feel it necessary to permit the yen to fall E little as
on some items competition between the two countries is very keen.
(o) Our purchases will decrease our gold holdings and increase the
gold holdings elsewhere. This is desirable at this time, though to be
Regraded Unclassified
Secretary Morgenthau - 56 -
sure the amounts involved in purchases of silver from China are too
small to be important.
(a) For every ounce of silver purchased at low prices, the United
States Government makes a handsome gniorage profit. A profit that
curiously enough is not at the country's expense, though it reduces
slightly the total interest payments the Government has to make to
certain groups by reducing the amount the Government needs to borrow.
(e) Silver at the current (foreign) price 16 not A bad invest-
ment. Until our purchase program ends it is not likely to go much
lower. After that it may drop, but the drop is not certain. It is not
yet clear what will become of China's 12 to 2 billion ounces, nor how
the Indian people will continue to react to low silver prices. More-
over, the current low silver prices may stimulate industrial uses enough
to maintain the demand for silver at a 40 cent level.
Besides, no matter what happens to silver, it will probably remain
in our monetary system at the book value of $1.29 an ounce. With so
much gold with which to settle any adverse international balance that
may develop, it is extremely unlikely that we shall ever be forced to
sell our silver stocks. It will remain part of our specie reserves,
end continue to be recorded at its monetary value after issue.
(r) We should get something in return for buying China's silver in
addition to her good will.
70. What has China to offer us?
(a) Return to the silver, or bimetallic standard (discussed above,
Sections 63 and 64).
(b) The yuan could be pegged to the dollar. The yuan is at present
linked to sterling - de facto, though not de jure. The official sterling-
yuan rate has remained the same, the dollar-yuan rate has not. If we
wished to have the yuan linked de facto to the dollar, China might offer
that. If, however, it be felt here that the economic and political gains
from such a step do not outweigh the international political objections
which may exist, China might offer to unpeg the sterling rate and pursue
an exchange policy that appears independent, as follows:
(c) The yuan could be pegged (de facto, not de jure) at a point
halfway between the movements of the sterling-dollar cross rate; or it
could be pegged to first one or then the other currency intermittently,
according to which was lower, or which higher, or midway, or some other
pre-arranged basis.
It were better for us if the yuan were not listed among the ster-
ling group for the very reasons that it would be good for England if it
Regraded Unclassified
Secretary Morgenthau - 57 -
were. China could follow the practice of Canada, and pog their exchange
neither to sterling nor the dollar, but move in between, when one or the
other moves in tenms of the other. In that way England would be deprived
of such political and economic strength that would adhere to it if the
yuan remained definitely in the sterling group. At the same time the
United States would not be saddled with the responsibility of helping
the yuan maintain its present level, nor with the odium of defeat if the
yuan slipped her moorings. We could support her exchange or not, as we
saw fit at the time, and not because we were under any specific or implied
obligations to do 80.
(a) New 50-cent and dollar coins could be minted with some silver, and
the amount of such coins issued could be expanded. It is true that the
coins cannot contain much silver without exposing her ourrency to a repe-
tition of her former difficulties in the event of 8. rise in silver prices,
but the coins could be put in circulation with e reasonably small propor-
tion of bullion - say enough to safeguard it in the event of $1.29 silver.
The advantages of getting China to put silver in her lerger coins
(and if possible in 8. new coined 25-cent piece) would be two:
(1) The administration would avoid the onus of having driven
silver out of China's monetary system by our silver policy, which
was designed to increase the world monetary use of silver.
(2) It would somewhat reduce the world stock of silver for
sale, and increase world monetary use, and also check such decline
in popularity of silver in China that might eventually result if
silver loses its monetary status there.
Inasmuch as China is already contemplating issuing such coins with
some silver content, they would hardly be adverse to increasing the
number enough to publicize the news that China is going to use consider-
able quantities of silver in her new circulating media.
(e) We could obtain assurance that nothing prejudicial to our economic
interests will be arranged with either Great Britain or Japan without our
acquiescence.
The order of attractiveness to the United States of the various
programs China could adopt are:
(a) Return to a silver or e. bimetallic standard.
(b) Link the yuan to the dollar.
(c) Unpeg the yuan from sterling, as described above.
Regraded Unclassified
Secretary Morgenthau - 58 -
(d) New silver coins, and (e) assurances of protection of our
economic interests in China could accompany any of the above three.
P. S. -
A report by M. B. Davis in Nanking, dated February 10th, just re-
ceived, states that he is informed the dies (for the new 50-cent and
dollar coins) which on January 6 had been reported to have been ordered
(See Section 55, page 37) from Philadelphia, are now being ordered in
London instead. For the past few years, according to Mr. Frantz,
Bureau of the Mint, China has been obtaining her dies here.
Regraded Unclassified
APPENDIX
Includes only tables on China's foreign trade.
Numerous other tables bearing on China are avail-
able in the Division files.
Regraded Unclassified
Foreign Trade of China, 1929 to date
(values in thousands of yuan)
:
:
Month
:
Gross exports
:
Gross imports
and
:
Including
: Excluding
: Including
: Excluding
year
:
Manchuria
:
Manchuria
:
Manchuria
:
Manchuria
1929
1,582,441
1,070,523
1,996,299
1,627,935
1930
1,394,166
944.414
2,069,385
1,747,215
1931
1,416,963
915,169
2,256,276
2,018,406
1932
768,077
569,464
1,655,558
1,541,583
1933
612,293
1,358,978
1934
535.733
1,038,979
1933 - Jen.
62,034
103,066
Feb.
50,311
114,450
Mar.
45.337
149,258
Apr.
37,193
148,558
May
51,576
153,026
June
50,230
110,971
July
62,612
104,168
Aug.
51,404
101,292
Sept.
48,651
89,841
Oct.
47.975
95.446
Nov.
54,239
96,801
Dec.
50,730
92,103
1934 - Jan.
50.796
106,214
Feb.
38,051
83,485
Mar.
40,211
100,115
Apr.
41,161
101,724
May
49,348
95,807
June
49,184
86,966
July
44,949
74,478
Aug.
44,077
75,042
Sept.
41,814
78,120
Oct.
42,711
79.745
Nov.
49,838
84,252
Dec.
43,595
73,031
1935 - Jan.
55,305
90,715
Feb.
41,546
67,428
Mar.
39,079
97.776
Apr.
41,595
104,348
Treasury Department, Division of Research and Statistics.
Regraded Unclassified
Foreign Trade of China, 1929 to date (Continued)
(Values in thousands of yuan)
:
:
Month
:
:
and
:
Gross Exports
:
Gross Imports
Year
:
:
1935 - May
40,814
96,689
June
41,253
91,942
July
45,975
64,790
August
45,378
56,459
September
45,972
54,695
October
48,516
61,581
November
60,276
72,737
December
70,590
65,534
1936 - January
70,773
61,199
Treasury Department, Division of Research and Statistics.
April, 1936.
Regraded Unclassified
China (excluding Manchuria) - Trade with United States - January 1933 to date
(Thousands of yuan)
Gross exports
=
1933
I
1934
:
1935
I
1936
: Total : Exports : Percents Total : Exports I Percent: Total : Exports : Percents Total : Exports : Percent
:
exports 1 to U. S. :of total: caports : to U. S. :of total: exports 1 to U. S. of total: exports : to U. S. 10f total
Total exports
612,292
113,146
18.5
535.735
94,435
17.6
576,299
136,411
23.7
January
62,034
11,118
17+9
50.796
9,923
19.5
55,305
12,460
22.5
70,773
23,664
33.4
February
50,311
7.744
15.4
38,051
8,385
22.0
41,546
9,667
23.3
March
45,337
8,219
18.1
40,211
11,157
27.7
39,079
11,296
28.9
April
37,193
6,265
16.8
41,161
7.961
19.3
41,595
10,688
25.7
May
51,576
10,544
20.4
49,348
8,073
16.4
40,814
10,791
26.4
June
50,230
11,016
21.9
49,184
7,413
15.1
41,253
10,066
24.4
July
62,612
15,418
24.6
44.949
6,800
15.1
45,975
10,599
23.1
August
51,404
11,480
22.3
44,077
7.247
16.4
45.378
8,596
18.9
September
48,651
8,919
18.3
41,814
5.569
13.3
45.972
10,071
21.9
October
47.975
7,212
15.0
42,711
6,822
16.0
48,516
11,563
23.8
November
54,239
8,359
15.4
49,838
7.374
14.8
60,276
12,559
20.8
December
50,730
6,852
13.5
43,595
7.711
17.7
70,590
18,055
25.6
Gross imports
:
1933
I
1934
#
1935
:
1936
: Total : Imports : Percent: Total 2 Imports $ Percent: Total I Imports 1 Percents Total 1 Imports 1 Percent
: imports :from U. S.1of total: imports ifrom U. S.tof total: imports :from U. S.10f total: imports :from U. S.1of total
Total imports
1,358,980
297,469
21.9
1,038,979
271,733
26.2
924,694
174,930
18.9
January
103,066
22,162
21.5
106,214
29,835
28.1
90,715
18,537
20.4
61,199
12,361
20.2
February
114,450
28,340
24.8
83,485
34,150
40.9
67,428
14,254
21.1
March
149,258
28,804
19.3
100,115
27,962
27.9
97,776
18,350
18.8
April
148,558
27,249
18.3
101,724
22,160
21.8
104,348
17,254
16.5
May
153,026
31,459
20.6
95,807
27,037
28.2
96,689
16,077
16.6
June
110,971
20,362
18.3
86,966
20,556
23.6
91,942
22,878
24.9
July
104,168
21,798
20.9
74,478
18,298
24.6
64.790
11,968
18.5
August
101,292
23,171
22.9
75,042
19,498
26.0
56,459
10,925
19.4
September
89,841
19,915
22.2
78,120
18,583
23.8
54.695
9,154
16.7
October
95,446
27,089
28.4
79.745
15,296
19.2
61,581
9,916
16.1
November
96,801
23,991
24.8
84,252
18,314
21.7
72,737
11,928
16.4
December
92,103
23,129
25.1
73,031
20,044
27.4
65,534
13,689
20.9
Treasury Department, Division of Research and Statistics.
March 27, 1936
China (excluding Manchuria) - Foreign trade by leading countries, 1929-1935
Value (millions of yuan)
Gross exports
:
#
:
=
:
#
:
1929
1930
1931
1932
:
:
1933
1934
1935
:
:
:
=
$
Total exports
1,070
944
915
569
612
536
576
United States
199
195
178
92
113
94
136
Hong Kong
260
236
219
116
121
101
95
Japan
189
154
165
104
96
81
82
United Kingdom
118
81
75
55
49
50
49
France
86
65
51
35
32
21
29
Germany
33
31
27
22
21
19
29
British India
27
28
88
33
29
22
20
U. S. S. R.
23
6
14
27
6
6
4
All other countries
135
148
158
85
145
142
132
Gross imports
Total imports
1,620
1,723
2,002
1,524
1,359
1,039
925
United States
318
329
479
413
297
272
175
Hong Kong
306
309
327
88
48
30
20
Japan
300
329
316
183
132
127
140
United Kingdom
170
151
179
183
154
125
98
Germany
91
88
122
110
108
93
103
British India
81
204
123
97
72
43
35
U. S. S. R.
4
4
16
23
22
9
8
Netherland India
83
$
82
91
79
63
58
All other countries
267
240
358
336
447
277
288
Treasury Department, Division of Research and Statistics.
March 27, 1936
Regraded Unclassified
China (excluding Manchuria) - Percentage distribution of value of foreign trade by leading countries,
1929-1935; percent change in 1934 and 1935 from 1933: end percent change in 1935 from 1934
Gross exports
:
Percent of total value
: Percent change from 1933:1935 percent
1
:
:
a
:
$
:
=
tchange from
:
1929
:
1930
:
1931
:
1932
1933
1934
1935
:
1934
1935
:
:
I 1934
Total exports
100
100
100
100
100
100
100
- 12.4
- 5.9
+ 7.5
United States
19
21
19
16
18
18
24
- 16.8
+ 20.4
+ 44-7
Hong Kong
24
25
24
20
20
19
16
- 16.5
- 21.5
- 5.9
Japan
18
16
18
18
16
15
14
- 15.6
- 14.6
+ 1.2
United Kingdom
11
8
8
10
8
9
9
+ 2.0
-
- 2.0
France
8
7
6
6
5
4
5
- 34-4
- 9.4
+ 38.1
Gormany
3
3
3
4
3
4
5
- 9.5
+ 38.1
+ 52.6
British India
2
3
3
6
5
4
3
- 24.1
- 31.0
- 9.1
U. S. S. R.
2
1
2
5
1
1
1
1
- 33.3
- 33.3
All other countries
13
16
17
15
24
8
23
- 2.1
- 9.0
- 7.0
Gross imports
Total imports
100
100
100
100
100
100
100
- 23.5
- 31.9
- 11.0
United States
20
19
24
27
22
26
19
- 8.4
- 41.1
- 35.7
Hong Kong
19
18
16
6
3
3
2
- 37.5
- 58.3
- 33.3
Japan
19
19
16
12
10
12
15
- 3.8
+ 6.1
+ 10.2
United Kingdom
10
9
2
12
11
12
11
- 18.8
- 36.4
- 21.6
Germeny
6
5
6
7
8
9
11
- 13.9
- 4.6
+ 10.8
British India
5
12
6
6
5
4
4
- 40.3
- 51.4
- 18.6
U. S. S. R.
-
-
1
2
2
1
1
- 59.1
- 63.6
- 11.1
Netherland India
5
4
4
6
6
6
6
- 20.3
- 26.6
- 7.9
All other countries
16
14
18
22
33
27
31
- 38.0
- 35.6
+ 4.0
Treasury Department, Division of Research and Statistics.
March 27. 1936
Regraded Unclassified
Chins (excluding Manchuria) - Trade with United States by principal commodities, 1933-1935
Net exports
:
Quantity
:
Value
:
Percent of
:Percent change from:1935 percent
:
:
(Thousends of yuan)
:
total value
1
1933
: change from
I 1933
:
1934
:
1935
: 1933
:
1934
#
1935
:
1993:
1934
I
1935:
1934
:
1935
1
1934
Total exports
I
I
- 113,146
94.435
136,410
100
100
100
- 16.5
+ 20.6
+
44-4
Tung oil (quint)
531,680
410,390
491,999
21,356
16,204
28,057
19
17
21
- 24.1
+ 31.4
+ 73.1
Hides, skins and furs
-
-
-
21,042
19,035
15,565
19
20
11
- 9.5
- 26.0
- 18.2
Haw silk (quint)
13,383
4.775
14,504
13,951
3,912
12,838
12
4
9
- 72.0
- 8.0
+ 228.2
Sheep's wool (quint)
132,950
132,300
187,752
11,211
11,199
13,489
10
12
10
- .1
+ 20.3
+ 20.4
Leces, embroderies, etc.
-
-
-
8,968
9,053
11,552
8
10
9
+ .9
+ 26.8
+
27.6
Raw cotton (quint)
80,347
22,296
25,010
5,754
1,601
1,803
5
2
1
- 72.2
- 68.7 -
+ 12.6
Bristles (quint)
15,592
13,240
15,179
4,561
5,126
6,365
4
5
5
+ 12.4
+39.6
+ 24.2
Segamm seed (quint)
146,223
178,062
685,476
2,259
2,151
9,901
2
2
7
- 4.8
+338.3
+ 360.3
Peanut oil (quint)
38,327
42,704
199,533
1,062
758
5,547
1
1
4
- 28.6
+422+3
+ 631.8
Cottonseed oil (quint)
-
4.978
89,416
-
79
2,183
-
-
2
+2,663.3
All other
-
-
-
22,982
25,317
29,110
20
27
21
+ 10.2
+ 26.7
+ 15.0
Net imports
Total imports
-
-
- 297,468
271,732
174,930
100
100
100
- 8.7
- 41.2
-
35.6
Raw cotton (quint)
769.743
583,748
275,902
66,550
52,946
24.245
23
20
14
- 20.5
- 63.6
-
54.2
Kerosene (1,000 liters)
351,160
234,644
180,914
51,159
21,368
17,606
17
8
10
- 58.2
- 65.6
-
17.6
Gasoline, fuel and lubri-
cating oils
-
-
-
24,776
18,433
18,884
8
7
11
- 25.6
- 23.8
+
2.4
Leef tobacco (quint)
241,805
287.097
66,791
26,213
30,585
7,468
9
11
4
+ 16.7
- 71.5
-
75.6
Timber
-
-
-
12,450
11,778
12,400
4
4
7
- 5-4
-
-4
+
5.3
Whest and flour (ouint)
607,079
3,441,584
220,852
11,382
24,920
2,417
4
9
1
+118.9
- 78.8
-
90.3
Iron and steel
-
-
- 10,636
14,562
10,364
4
5
6
+ 36.9
- 2.6
-
28.8
Automobiles, parts and
accessories
-
-
-
9.445
14,467
9,811
3
5
6
+ 53+2
+ 3.9
-
32.2
Aircraft and accessories
-
-
-
-
8,974
6,281
1,274
3
2
1
- 30.0
- -85.8
79.7
Paper and products
-
-
-
7,173
4,656
7,593
2
2
4
- 35.1
+ 5.9
+
63.1
Machinery and tools
-
-
- 7,039
9,241
9,926
2
4
6
+ 31.3
+ 41.0
+
7.4
All other
-
-
- 61,671
62,495
52,940
21
23
30
+ 1.3
- 14.2
- 15.3
Treasury Department, Division of Research and Statistics.
March B, 1936
China (excluding Manchuria) - Foreign trade by principal commodities, 1933-1935
Net exports
:
Quantity
:
Value
:
Percent of
:Percent change from:1935 percent
:
(In thousands)
:
(Millions of yuan)
:
total value
:
1933
change from
:
1933
:
1934
:
1935
: 1933
: 1934
: 1935
: 1933
:
1934
:
1935
:
1934
1 1935
:
1934
Total exports
-
-
-
612
535
576
100
100
100
- 12.6
- 5.9
+ 7-7
Raw silk (quint)
47
33
46
48
24
36
8
4
6
- 50.0
- 25.0
+ 50.0
Cotton yarn (quint)
327
270
146
40
31
19
6
6
3
- 22.5
- 52.5
- 38.7
Eggs and egg products
-
-
-
36
30
32
6
5
6
- 16.7
- 11.1
+ 6.7
Tea (quint)
420
471
381
34
36
30
6
7
5
+ 5.9
- 11.8
- 16.7
Hides, skins and fure
-
-
-
32
29
24
5
5
4
- 9.4
- 25.0
- 17.2
Tung oil (quint)
754
653
739
30
26
42
5
5
7
- 13.3
+ 40.0
+ 61.5
Raw cotton (quint)
438
209
315
30
15
22
5
3
4
- 50.0
- 26.7
+ 46.7
Tin (ingots and slabs) (quint)
96
64
92
20
14
20
3
3
4
- 30.0
-
+ 42.9
All other
-
-
-
342
330
351
56
62
61
- 3.5
+ 2.6
+ 6.4
Net imports
Total imports
-
-
-
1,346
1,030
919
100
100
100
- 23.5
- 31.7
- 10.8
Rice and poddy (quint)
12,954
7.711
12,964
151
66
90
11
6
10
- 56.3
- 40.4
+ 36.4
Rear ootton (quint)
1,206
1,163
549
98
90
41
7
9
5
- 8.2
- 58.2
- 54.4
Wheat (quint)
10,715
4,649
5,209
88
32
35
7
3
4
- 63.6
- 60.2
+ 9.4
Kerosene (liters)
708,865
450,549
388,177
87
40
38
6
4
4
- 54.0
- 56.3
- 5.0
Cotton piece goods
-
-
-
58
27
21
4
3
2
- 53.4
- 63.8
- 22.2
Chemicals and pharmaceuticals
-
-
-
51
42
37
4
4
4
- 17.6
- 27.5
- 11.9
Paper and products
-
-
-
49
41
46
4
5
- 16.3
- 6.1
+ 12.2
Machinery end tools
-
-
-
43
59
66
3
the
7
+ 37.2
+ 53.5
+ 11.9
All other
-
-
-
721
633
545
54
61
59
- 12.2
- 24.4
- 13.9
Treasury Department, Division of Research and Statistics
March 27, 1936
Regraded Unclassified
U.S. PRICE OF SILVER AND U.S. EXPORTS TO CHINA
1933
1934
1935
PER
J
M
M
J
$
N
J
M
M
J
S
N
J
M
M
J
S
N
PER
J
M
M
J
S
N
PER
J
M
M
J
S
N
PER
CENT
CENT
Price of Silver in U.S.
CENT
CENT
U.S. Exports to China
Total U.S. Exports
1926-100
1926-100
1926-100
100
100
100
100
80
July 22. 1933 Landon Silver Agreement
1934
November 4, 1935 Nationalization of Silver in China
80
80
80
60
June 19. 1934 Silver Purchase Act
August 9/934 Nationalization Order
October15,1934 Chinese Silver Tax
60
60
60
1935
1935)
1934
40
40
40
40
1933
1933
20
20
20
20
0
0
0
0
J
M
M
J
S
N
J
M
M
J
S
N
J
M
M
J
S
N
J
M
M
J
S
N
J
M
M
J
S
N
1933
1934
1935
-
U.S. PRICE OF SILVER AND U.S. IMPORTS FROM CHINA
1933
1934
1935
PER
J
M
M
J
$
N
J
M
M
J
S
N
J
M
M
J
S
N
PER
J
M
M
J
S
N
PER
J
M
M
J
S
N
PER
CENT
CENT
CENT
CENT
Price of Silver in U.S.
U.S. Imports from China
Total U.S. Imports
1926-100
1926-100
1926-100
100
100
100
100
80
July 22.1933 Lendon Silver Agreement
November 4,1935 Nationalization of Silver in Ching
80
80
80
60
June 19. 1934 Silver Purchase Act
August 9/934 Nationalization Order
October 15./934 Chinese Silver Tex
60
60
60
1935
1935
A
40
40
40
40
1 1/934
1934
1933
20
20
20
20
1933
0
0
0
0
J
M
M
J
S
N
J
M
M
J
S
N
J
M
M
J
S
N
J
M
M
J
S
N
J
M
M
J
5
N
1933
1934
1935
Office of the Secretary of the Treasury
Division of - and -
-