Silver and Lead

"Senso wa zuibun aku-eikyo wo atae-ta," said many a Japanese citizen in private last week. The sentence had to be said in private because it was a grave admission: "The war hits us pretty heavily." The Japanese have come to realize all too well that their adventure in China is now primarily a currency war rather than an orthodox military engagement. Last week they began to take official notice of the fact that in the currency war, China has both natural advantages and allies with cash, while Japan has neither.

According to Tokyo's Nichi Nichi, Japan's Cabinet finally concluded last week that "overwhelming military victories" were insufficient to offset the constant flow of foreign money and materiel into China. In the near future they will: 1) enlist the active assistance of Germany and Italy in bringing "diplomatic pressure" against U. S., French, British and Russian aid to China; 2) sharply curtail the interests of those four nations within China.

What presumably made Japan conscious of China's allies was the announcement last week from London that Britain was earmarking $15,000,000 for a loan to Nationalist China. This was the latest of a long series of loans which have bolstered China's economy. Britain had previously loaned $2,500,000 and $25,000,000. The U. S. put up $25,000,000 last December. Fortnight ago Finance Minister H. H. Rung announced that a Belgian firm had agreed to a $100,000,000 loan and that Russia may help soon with a "huge" one. Japan, on the other hand, has not been able to wring a single yen from her busy but broke allies, Germany and Italy.

Japan has been made conscious of China's natural advantages--most important of which were a huge silver reserve and a national instinct for cozenage--by the way every Japanese move in the currency war has turned out:

> As far back as 1935, when Japan tried to corner enough of China's silver currency to control her trade, China cleverly countered by withdrawing silver as legal tender and issuing notes which could be of no use to Japan.

> When Japan tried to force the conquered areas of China to trade only with her, Chinese merchants literally strapped their goods to their bellies, tucked them in their coat sleeves, packed them in false-bottomed baskets--and smuggled them out to the same old customers.

> Last February Japan established the Federal Reserve Bank of China, issued paper currency (the yuan), convertible only into Japan's own sickly paper yen. The yuan was declared the only legal currency in Japanese-held China, and six weeks ago Japanese puppets began meting out severe punishments for so much as possessing Chinese dollars. In the northern port of Tsingtao, one piece-goods firm was recently fined $8,000 (U. S.) because it possessed a single outlawed $5 (Mex.) banknote. Despite these penalties, foxy Chinese merchants have kept right on using their own dollars, which, being backed by China's silver, are not mere fiat currency. Meanwhile, Japan has had to get along without either natural advantages or allies. To obtain the raw materials for war from abroad, she has depended on selling her meagre gold reserves ($261,000,000 when the war began, down to almost zero now) and on trade. Her trade with dependencies (Korea, Formosa, Manchukuo, Kwantung, North China) has rapidly increased, but her exports to foreign countries, which in the absence of gold are her only source of new cash, have shrunk. From January 1936 through August 1938, Japan's export trade with foreign countries was almost exactly halved.

Meanwhile, accumulated stocks of foreign raw materials have also dwindled. Her stores of cotton, wool, and U. S. lumber are 80%, 70% and 60% depleted. And when Japan has no foreign raw materials, she has almost nothing to manufacture, no clever little toys to sell at clever little prices.

All this does not mean that Japan cannot win. By the end of the summer she hopes to and probably will control most of China's important centres and lines of communications. She hopes by then to have set up a really potent puppet government. She may be able to impose her paper currency by force, in which case all foreign-trade competition would be cut out of China. She probably can pull her own national belt tighter. If she becomes desperate for oil, scrap iron, tin, copper, lead, nickel, rubber, she may have to strike out for them in the fashion of her European allies--seize The Netherlands Indies, French Indo-China, the Philippines, Malaya. Meanwhile, she has learned that in modern war, silver billets can be just as important as lead bullets.

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