Office of the Historian

893.53/8–745: Telegram

The Ambassador in China (Hurley) to the Secretary of State

Chungking, August 7, 1945—4 p.m.
[Received August 8—6:20 p.m.]

1298. Secretary of Treasury, Washington, from Adler.

(1) In conversations with T. V. Soong, O. K. Yui, and Tsuyee Pei, recent and current gold policy was discussed. Following reasons were given for suspension of gold sales on June 26.

(a)
There was a very sharp rise in demand for gold in period immediately preceding suspension. On one day forward sales reached 70,000 ounces and the black market spot price rose to CN $120,000 to 130,000 per ounce, 140 to 160 percent above official price. A drastic rise in official price of gold in this situation would have itself created panic in money market and induced a steep rise in general prices. At same time raising price around 50 percent would not have restricted demand sufficiently to prevent rapid depletion of government gold.
(b)
Demand for funds to purchase gold and to speculate in gold deposit certificates, which were selling as high as 8 percent of black market spot price, was inducing a crisis in Chungking money market and the liquidity of the native banks was immediately threatened.
(c)
At same time publicity given to news that large amounts of gold were en route from United States served to reassure buyers that government could meet commitments and resume selling.

Accordingly, Soong and Yui decided to suspend sales temporarily. Decision was taken shortly after Soong’s return from United States.

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(2) On July 30 Supreme National Defense Council adopted Soong’s proposal that as from July 31 a 40 percent “contribution” be imposed on all unmet gold commitments, contributors to be given option of paying either in kind or at current official price which was fixed at CN $170,000 per ounce as of July 31. Purchases of one ounce are exempt from “contribution”. The measure has come in for much and severe criticism in financial circles and in the press ranking from Conservative to Extreme Left on grounds that:

(a)
It is discriminatory, leaving all gold purchasers who received their gold prior to July 3 untouched.
(b)
It is a breach of contract and therefore a blow to confidence.
(c)
A progressive rather than a flat rate should have been adopted.
(d)
The exemption is too low. It is reported that smaller purchasers have rioted on Central Bank premises in leading cities.

Soong asked me to inform you that even though the measure had been advised of being confiscatory and in the nature of capital levy, he had pushed it through both because of urgent need for exploring revenues and because of his assurance to the Treasury that inordinate profits of gold purchasers would be taxed. Yui was more lukewarm in his comments, indicating that he would have preferred a measure that would have taxed all gold, including gold already delivered, even though it would have been administratively cumbersome and would have required registration of all gold holders. He intimated that a progressive tax would have been ineffectual as large buyers made their purchases through numerous dummies.

(3) Tax is expected to yield around CN $150,000,000,000 by end of year. Since its imposition black market spot price for gold has fluctuated violently between CN $200,000 and 300,000 per ounce: Chungking money market tight owing to demand for cash to meet the tax for delivery of gold against past commitments has been resumed. There will be only nominal sales of new gold until bullion is melted down. [Adler.]

Hurley