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893.48/1050: Telegram

The Consul General at Shanghai (Gauss) to the Secretary of State

SHANGHAI, February 27, 1936-4 p. m. [Received February 27-7:25 a. m.]

120. Reference Department's 16, February 26, 5 p. m., to Nanking.17 The Department's reply 18 was communicated by me to Kung on the morning of February 24th. He received the information without comment.

From other sources I learn quite confidentially that K. P. Chen, Shanghai banker, is to leave for Washington early in March to confer on monetary matters with the Secretary of the Treasury on behalf of the Minister of Finance, and that he has been advised to familiarize himself with the flood relief loan and the cotton and wheat credit. It is the expectation of those interested in the reinstatement of the cotton and wheat credit that the proposal will be revised and reinstatement consummated during Chen's visit to Washington.

Repeated to Nanking.



Memorandum by the Chief of the Division of Far Eastern Affairs


[WASHINGTON,] March 4, 1936.

I called up the Chinese Ambassador this morning and inquired whether he had any new information with regard to Mr. K. P. Chen's mission.

The Ambassador said that Mr. Chen is scheduled to sail from Shanghai on March 9, for Honolulu; at Honolulu he will transship and will arrive on the steamship Lurline at San Francisco on March 26. He will be accompanied by Mr. Y. C. Koo, a banker and an expert on monetary matters, and Mr. P. W. Kuo (Kuo is well known in this country; he is an educator and publicist and was for some time connected with the China Foundation, with his offices in New York).

I asked whether the Ambassador had any new specifications with regard to Chen's mission. The Ambassador said that Chen was coming on the invitation of the Secretary of the Treasury; that Mr.

17 Not printed.

18 See Department's telegram No. 15, February 21, 5 p. m., p. 464.

Morgenthau had at first asked that T. V. Soong 19 come; that Soong had countered by suggesting that C. T. Wang be sent; that Mr. Morgenthau had said that he wanted not a diplomat or politician but a financial expert; that the Chinese had then offered K. P. Chen and it had been arranged that Chen should come; that Mr. Chen was to talk with Mr. Morgenthau about monetary matters but that he, the Ambassador, had been informed that in addition Mr. Chen would be prepared to talk about matters relating to the outstanding credits and that he, the Ambassador, had suggested to his Government that Mr. Chen be informed about certain of China's outstanding financial obligations. The Ambassador said that Mr. Morgenthau had informed him that he, Morgenthau, was keeping Mr. Phillips 20 informed. I inquired whether Mr. K. P. Chen would have an official status. The Ambassador replied that Mr. Chen had been given an official passport but not an official title, and that it had been agreed that there should be no publicity. I said, "Is it to be understood that Chen will be regarded by his Government as an official?" The Ambassador replied, "Yes".

The Ambassador then said that Mr. Bartz 21 had called on him recently, subsequent to a conversation which Mr. Bartz had had with me. See memorandum entitled: "Proposed reinstatement of canceled portion of the cotton and wheat credit of 1933." 22

893.48/1050: Telegram

The Secretary of State to the Counselor of Embassy in China (Peck) WASHINGTON, March 4, 1936-7 p. m. 18. For the Ambassador. Shanghai's 120, February 27, 4 p. m., last paragraph.

Background: Department has been given to understand that Chen is coming here on the invitation of the Secretary of the Treasury to give the Treasury information with regard to monetary matters; that the Chinese Government has given Chen an official passport but no official title; and that no publicity is to be given at either end.

Action: Referring expressly to the information given in Shanghai's telegram under reference, Department feels, in the light of conversations with Reconstruction Finance Corporation officials, that interested Chinese officialdom should be discouraged from entertaining any expectation of reinstatement of canceled portion of cotton and

19 Former Chinese Minister of Finance.

20 William Phillips, Under Secretary of State. "C. F. Bartz & Co., cotton merchants.

"Dated February 18; not printed.

wheat credit. Chen presumably will be permitted to raise any appropriate questions and make any appropriate inquiries which his Government may wish to authorize him to put forward, but Department feels it would be neither to this Government's nor to the Chinese Government's advantage for him to arrive here with any preconceived expectation of success in seeking loans or credits. Such questions as possible revision of schedules of payments on outstanding obligations may perhaps be susceptible of discussion.

Department desires that you discreetly communicate the substance of the above orally, informally and in friendly manner to Kung and that you suggest to him that these considerations should be fully understood by the Chinese official personnel most concerned.

You are authorized to do this yourself or through Peck or Gauss. Telegraph Department when you have acted.


893.48/1062: Telegram

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

SHANGHAI, March 6, 1936-1 p. m. [Received March 6-4: 33 a. m.]

139. Your 18, March 4, 7 p. m., to Nanking.

1. According to press reports in connection with Chen's departure on Monday 23 on a tour of inspection of the United States and Europe he has been appointed High Adviser to Ministry of Finance.

2. I communicated orally Department's message to Kung yesterday at Nanking. I inferred from the way he received the message that he was disappointed as he inquired casually in the course of the conversation as to whether Treasury Department or State Department was responsible for deciding question of loan. I replied that ultimate responsibility would lie with the President in considering financial policies of the Government.

3. Gauss tells me that he has learned in confidence from Hunt that K. P. Chen received advice from the Treasury Department that he should come prepared not only to discuss monetary matters but that he should also familiarize himself with the Flood Relief Loan and cotton and wheat credit. This may explain Kung's attitude.


23 The Consul General at Shanghai in his telegram No. 156, March 14, 10 a. m., reported that K. P. Chen and party had sailed the night before on the S. S. President Pierce, accompanied by P. W. Kuo, Director of Bureau of Foreign Trade of the Ministry of Industries; Y. G. Koo, submanager of the Chung Foo Union Bank and Counselor of the Executive Yuan; and Mrs. Koo (893.48/1066).


Memorandum by the Chief of the Division of Far Eastern Affairs



[WASHINGTON,] March 26, 1936.

This brings us back to the question raised earlier in this memorandum: Would a dissolution of the China Consortium 24 be of advantage, or of no concern, or of disadvantage to the United States?

The advantage, concern, or disadvantage of the United States should be considered in terms of policy and of political and diplomatic interest and concern in the field of our Far Eastern relations.

The chief advantages to us of the Consortium Agreements have been, first, that they are in line with one of the underlying principles for which we have contended, that of cooperative action and individual and collective self-restraint on the part of the powers in the carrying on of public business in and with regard to China where there exist certain rights and obligations which are common to the powers; second, that, whereas if the field of making loans to China and of doing business in and with China of types which require special action by the Chinese Government be left to free and unrestricted competition, the United States and American nationals stand little chance (because of the more emphatic methods used by foreign governments and foreign nationals supported by their governments in dealing with the Chinese Government), by contrast, where the principles of cooperative action and of individual and collective self-restraint are agreed upon and observed the United States and American nationals stand an approximately equal chance of doing with and in China some of this type of business; and, third, the assumption of a collective interest and responsibility by the banking groups of the several major powers which groups constitute the membership of the Consortium has effectively prevented irresponsible loaning (with a mixture of economic and political objectives) by certain powers to China and acquisition by irresponsible groups of politicians in China of funds borrowed by such irresponsible groups in the name of China and applied by the borrowers to wasteful enterprises (sometimes of greater or less public interest and sometimes of purely personal interest). The American Government and the American people sincerely believe in the principle of equality of commercial opportunity; they also believe that the achievement by China of real political and economic progress, in the direction of stability of national strength, would be in the best


See agreement signed at New York, October 15, 1920, Foreign Relations, 1920, vol. 1, p. 576.

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interest of all concerned; they do not believe in and they try to discourage action calculated toward or tending to perpetuate and increase civil strife and economic disorder in China; they do not believe in cut-throat competition among the powers toward the securing of special political or economic advantages in or at the expense of China; they believe in an effort on the part of all the powers to be helpful to the Chinese and to promote progress in China.

Ever since the early 1850's, the American Government, having from time to time experienced and observed the relative difficulties of régimes in which the principle of free competition has prevailed and régimes in which the principle of cooperative action has prevailed, among the powers, in relations with China, has weighed the advantages and disadvantages of the two régimes and has decided repeatedly in favor of the principle of cooperative action. Since the days of John Hay, thirty-five years ago, the American Government has most of the time been the foremost proponent of the principle. At the Washington Conference this Government played a leading part in bringing about general agreement that that principle was desirable and should prevail. Since then each Administration in this country has been guided by and has made frequent reference to the Washington Conference treaties and agreements. The present Administration for more than three years has persevered on the same line. The long and the short of the matter is, there is no other possible course which the American Government might follow with any prospect of advantage and with any likelihood of other than disadvantage. Free and unrestricted competition among the powers in relations with China cannot possibly be to our advantage. Already, activities of Japan in disregard of the cooperative principle and the Washington Conference agreements in regard to China has resulted in political difficulties and economic disadvantage to this country. Already, activities of the British Government, more forceful than the methods which the American Government-American commercial interests being somewhat apathetic and American public opinion being adverse to a vigorous diplomacy for the promotion of American interests in the Far East-is in position to use, have obtained for British commercial interests in China a position of technical advantage in competition with American commercial interests. If the principle of cooperative action passes into the discard, it is going to be increasingly difficult for American commercial interests to hold their own, to say nothing of making progress, in China.

The break-up of the China Consortium would be a step in that direction.

The moment is fast approaching when the banks, both in this country and in others, which have had their confidence if not their foundations shaken by the economie and financial debacle which set in in

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