The Ambassador in China ( Johnson ) to the Secretary of State
[Received March 14—7:30 a.m.]
159. Following from Buck8 for Secretary of the Treasury.
“With reference to the new currency regulations, following interpretation is based on conversation with Young9 of Central Bank.[Page 5]
Government mandate regarding foreign exchange results from North China situation. Prospective issuance of notes by so-called Federated Reserve Bank generally impaired confidence because it was feared forcing notes into circulation would drive out national currency which might be collected by the Japanese and presented to obtain foreign exchange. Since over $300,000,000 notes circulate in North China, potential loss of reserve equivalent to United States no [sic] dollars. Moreover acquisition of substantial reserves by North China régime would not promote Japanese program by furnishing backing for their new notes.
Fear of this situation created acute worry in Shanghai and other centers resulting in the last month in very heavy demand for foreign currencies notwithstanding gentlemen’s agreement whereby foreign banks undertook to purchase exchange only for legitimate demand. Nothing in balance of payments warrants the heavy demand which resulted chiefly from fear of effects of North China defense.
Government’s action was adopted after most careful consideration as most practical means to meet such a situation. It was felt that ordinary type of exchange control would be impractical. Measures are designed to cause least possible interference with previous system and it will be noted [they?] expressly state that exchange will be sold at existing levels since it is desired to continue maintenance of currency stability despite all difficulties. It is believed that the Administration will be centered in the forwarding office at Hong Kong. [Buck.]”