893.51/6–645
The Navy Department to the Department of State
NCR 1832. ComNavGroup China80 sends this secret and urgent message for the Secretary of the Treasury from Ambassador Hurley. Copy to the President and Secretary of State.
Your message No. 766 [761] date May 20 was received in garbled form. Our code room asked for repeats and did not get legible until May 31. This delay is in no way attributable to you. Thank you sincerely for the information contained in your telegram. The subject has been constantly discussed by Chinese here since your commitment of May 16. I have not participated in any of the discussions, since until May 311 had no official information on the subject. You asked my reaction to the proposal that China institute a $500,000,000 fund from her existing assets to stabilize currency and combat inflation. I am heartily in favor of any measures that will serve these worthy purposes and protect China’s foreign trade balances against ill-advised dissipation. However I am interested in knowing what practical steps will be taken to achieve these objectives. The present situation demands immediate action and merely setting aside the fund will in my opinion have little material effect. It is strongly [Page 1101] maintained by the Chinese that the sale of gold to absorb large amounts of currency issued to cover budgetary deficits is an essential part of the anti-inflationary program. I agree with you that there is little evidence to support such a claim and until there is a radical change in the present policy little can be expected. For the Government to sell gold at a figure far below the open market price is a denial of the objective to absorb printing press currency in the maximum amount and furthermore it has given rise to vicious speculation and much unfavorable publicity in the so-called gold scandals of which you have been advised. When the official price of gold was raised from CN$20,000 to CN$35,000 on March 30 the open market price was approximately CN$50,000. Notwithstanding your announcement some 3 weeks ago that gold in the amount of 200,000,000 United States dollars would be shipped to China over the next few months the open market price has been spiraling upwards. According to the Commercial Daily News of June 3 after (brisk trading) gold closed at CN$101,500 per ounce on June 2. The official Government price is still CN$35,000 per ounce. Thus those now fortunate enough to be able to make Government purchases derive an immediate book profit of approximately 190 percent on their investment, an unconscionable benefit which should accrue to the Government.
This is a demoralizing situation. It appears that the United States has reserved no power to control the situation in its gold commitment to China. The dollars gold 200,000,000 commitment was apparently made without condition. You state that the Treasury has committed itself on the $200,000,000 in gold to China without having procured a commitment for the establishment of a $500,000,000 fund to combat inflation. But you state that you suggested the establishment of such a fund. My reaction to that part of the transaction is that if you wanted a stabilization fund to be instituted you should have made that a condition precedent on which you would supply the dollars gold 200,000,000 to China. Then you would have been in a position to trade or not to trade. Now you ask me to advise you what my reaction is to your reiteration of your suggestion that China constitute $500,000,000 fund for combating inflation and stabilizing currency. No one has more respect for the power of suggestion than I. In this instance, however, I would have relied on the power of dollars gold 200,000,000. I am convinced of China’s friendship for the United States. I believe that China intends to repay the United States in the years to come. China dreads becoming what her leaders refer to as “a beggar nation”. I am satisfied that there must be some good reason for having made the commitment without having obtained China’s agreement to constitute a $500,000,000 fund for the purpose suggested by you. This is reinforced by the fact that you state the [Page 1102] decision was made after full discussion with the State and War Departments and the FEA. I say to you frankly, however, and without criticism that I would have felt much better about the situation if you had asked my reaction on your suggestion before you were committed to the transaction81 rather than after it had been completed. If you will furnish me with sufficient background to enable me to formulate an intelligent opinion I will certainly cooperate with you. [Hurley.]
- Commander of the U. S. Naval Group in China.↩
- Marginal notation: “Morgenthau committed himself to the gold transaction a year previous, and so had no bargaining power.” This referred to Mr. Morgenthau’s letter of July 27, 1943, to the Chinese Ambassador, Foreign Relations, 1943. China, p. 439.↩