1929 and from which we are just beginning to emerge the banks, which have their vaults full of money which they have been afraid to put to work—will begin to respond to the demands of new opportunities. It will probably not be long before they will be eagerly looking about for opportunities. They will again scan not only opportunities in their own countries but opportunities abroad. With the Consortium gone, China will appear a field unattractive indeed for the investment of funds. Yet the traditional concept of China as a great potential market will continue to prevail. The Far East in general will still have a lure for merchants and financiers. The doctrine which Japanese propagandists have been preaching for twenty years: that the Occident should do business with China through Japan: will sound increasingly attractive. Wanting to place funds somewhere in the Far East, foreign bankers and merchants will tend to give ear to that idea. The Japanese will be encouraged to reiterate that business with China can be done, if at all, with promise of success only if done through Japan. If foreign funds be withheld from investment in China and be supplied in considerable amount to the Japanese-for no matter what purpose-the way of Japan toward the establishing of a Japanese hegemony in the Far East will have been made easier and the "open door" into and in China will have been narrowed and will be tending toward a shrinkage into nonexistence.

Hence, it is believed that a break-up of the Consortium would be to the disadvantage of the United States in that it would contribute toward a weakening of our general position as regards policy in relation to the Far East and would facilitate the attainment by other countries of ends which, if achieved, would put our trade with China in a position of increasing disadvantage. With regard to trade, the contention may be made that we would gain more by having our trade with Far Eastern countries pass through or be under the control of Japan than by having it continue in the natural channels which it now follows. That contention is one which must rest on considerations which are largely matters of opinion. In the opinion of the undersigned and his immediate associates in the Department, the adoption of and action in accordance with such a view would not be warranted. Experience of the past thirty years has shown that when control of commerce in any area in the Far East outside of Japan falls into Japanese hands, Japanese interests prosper relatively and the foreign interests, while there may accrue to them some absolute gains, do not prosper relatively and often are at last squeezed out entirely. Japanese trade, from point of view of production and export, is coming increasingly into competition with the trade of other nations, everywhere. Once make Japan a channel for trade to and

from China, the tendency will be for Japanese interests to get the cream and most of the milk of that trade.

It is believed that, as between China and Japan, the American Government should still proceed on the principle of playing no favorites. This country has of course no intention of using force for the preservation of the "open door" in China. At the same time, there would be nothing to be gained by our giving up of our advocacy of the principle of equality of commercial opportunity, in application to that region as elsewhere. We need not discontinue our diplomatic efforts on behalf of American policy and interests in the Far East. The existence of the Consortium is in line with our general effort on behalf of the principle of equality of commercial opportunity. The Consortium is an instrument in support of the principle of cooperative action. As between a break-up or a continuance in existence of the Consortium, our influence, if exerted, should be on the side of continuance.

It is believed that it would be warrantable and advisable for this Government to discuss this question informally with representatives of the American banking group in the Consortium. It is believed that in such a discussion we might reasonably intimate that we would regret seeing the Consortium broken up.

It is suggested that the Chief of the Far Eastern Division be authorized to discuss this matter in the sense indicated with Mr. Thomas Lamont.25

893.51/6128

S[TANLEY] K. H[ORNBECK]

Memorandum by the Chief of the Division of Far Eastern Affairs

(Hornbeck)

[WASHINGTON,] March 31, 1936.

At the close of a conversation which the Chinese Ambassador had initiated in regard to another matter, I took occasion to ask the Ambassador whether he had received anything new regarding negotiations in relation to Hukuang Railway bonds.28 The Ambassador replied that he had not.

I then said that I wanted to make an entirely informal and unofficial inquiry: I merely wanted the Ambassador's impression: what is the thought and feeling of Chinese officialdom nowadays in regard to

25 The Secretary and Under Secretary of State on March 30 authorized Mr. Hornbeck to discuss this matter with Mr. Lamont, of J. P. Morgan & Co., representing the American Group of the China Consortium.

26

For correspondence concerning the Hukuang loan, see section entitled "Efforts for consideration of American Claims Outstanding Against China", pp. 576-594, passim.

the China Consortium: do the Chinese still view the Consortium with antipathy: what would be their feeling if it were to go out of existence. I said that this must be regarded as an inquiry just between myself and the Ambassador and that his reply would be simply for the purpose of orienting me with regard to current Chinese thought. The Ambassador replied that he had not given this subject much consideration; that in the early days the Chinese had felt objection to the Consortium because of the restrictions which it tended to impose on their freedom of action in regard to borrowing; they had gradually come to look upon it as a negative instrument; in later years it had seemed to them an obstacle to any borrowing on their part-because the Japanese, being in the Consortium, always imposed some kind of a veto; but that, with regard to what they might think of a disappearance of the Consortium, he felt that such a disappearance at this time would have an upsetting and harmful effect on China's interests and he believed that many other Chinese would feel the same way about it.

893.51/6129

Memorandum by the Chief of the Division of Far Eastern Affairs (Hornbeck) of a Conversation With Mr. Thomas W. Lamont of New York

[WASHINGTON,] April 1, 1936.

Reference, FE 27 memorandum of March 26, subject: "China Consortium, Hukuang Bonds, Divergence of View between British and American Groups, and Questions of Major Policy", and Mr. Phillip's memorandum to Mr. Hornbeck of March 30.28

I talked with Mr. Lamont on the telephone yesterday morning, and, being in New York last evening, I had a few minutes' conversation with Mr. Lamont.

In the course of these conversations Mr. Lamont and I were in agreement that the American Group in the Consortium and the American holders of Hukuang bonds have warrant for dissatisfaction with the manner in which British interests and the Chinese Government have been proceeding in regard to the matter of the Hukuang bonds. Mr. Lamont said that if the British bondholders accept the proposal which the Chinese Government has made, the American interests will probably have no alternative but to accept the same terms. He read to me a cable from Morgan, Grenfell and Company, London, which, together with copies of previous correspondence which he has sent us, shows that since some time in January the American Group has

"Division of Far Eastern Affairs. 28 See footnote 25, p. 472.

been given more or less information, from Chinese and from British sources, with regard to developments in this matter. This correspondence also shows that the British interests and the American interests are now conferring with regard to the matter. Mr. Lamont also showed me a copy of a telegram which he had prepared but not yet sent, to London, indicating the views of the American issuing and Consortium groups regarding the Hukuang bonds.

In the course of the first conversation, I took the opportunity to say to Mr. Lamont that, in view of information which we had received from London indicating that there was some threat of a possible breakup of the Consortium, the question of this Government's attitude had been canvassed and I was authorized to say that we were not indifferent and that we would in fact view with regret a break-up of the Consortium. In the course of the evening conversation, I said that, the political situation in the Far East being what it is, and various problems of cooperation being what they are, it would seem to us that a break-up of the Consortium at this time might have unfortunate implications and occasion unsatisfactory inferences. Mr. Lamont indicated that he was of the same view. He said however that various of the American banks were skeptical if not indifferent with regard to Far Eastern possibilities and impatient of the expense which was involved in the American membership in the Consortium with, over a period of many years, none but negative effects, and that, with the irritation over the way the Hukuang matter is being handled, there would be an inclination on the part of some of them to advise letting the Consortium go to the board. He said that if the Government felt that it was worth while to have the Consortium continue, he wondered whether the Government would be willing in connection with the current developments to give a little assistance on behalf of the American Group. He was proposing to London some changes to be considered for proposal to the Chinese Government in that Government's offer. He said that all concerned felt that it would be better to have a new arrangement with regard to the bonds than to have no new arrangement; but, the American Group felt that the Hukuang bonds were entitled to better terms than the Tientsin-Pukow bonds. thought it would be very helpful if the State Department would instruct Ambassador Johnson to give support to the suggestion, if and when made by the groups on behalf of the bondholders, in that sense. He wanted to ask me to give consideration to that idea. I said that it sounded to me reasonable in principle but that I could not say just how far the Department might be willing to go: I would report the suggestion to the Secretary.

He

Mr. Lamont said that the British Bondholders Committee had inquired whether the American Group would have any objection to their conferring with Mr. Reuben Clark of the Foreign Bondholders Pro

tective Council, Incorporated, and that reply had been made that the American interests would have no objection. I asked Mr. Lamont whether this meant that the American interests merely would make no objection or that they felt no objection. Mr. Lamont replied that they were perfectly willing to have that procedure followed. I inquired what effect that might have in regard to use of channels of communication. Mr. Lamont replied that he had not thought about that. He said that he did not know whether Mr. Clark would be willing to take on this task, but that he and his associates saw no reason for replying otherwise than affirmatively to the British inquiry. I remarked that we had received a telegram in which it was stated that the British interests intended to confer with Mr. Clark.

Mr. Lamont gave me copies of papers, which are here attached.20

893.48/1062: Telegram

S[TANLEY] K. H[ORNBECK]

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

WASHINGTON, April 9, 1936-7 p. m.

84. Reference Ambassador's message as contained in Shanghai's 139, March 6, 1 p. m. K. P. Chen and party have arrived in Washington and begun conversations with officials of the Treasury Department in regard to, as announced by press, "mutual monetary problems."

When there is clarification or particularization of subjects and as developments of importance occur, Department will expect to inform Embassy.

Please inform Nanking and Shanghai.

893.48/1078

HULL

Memorandum by the President of the Export-Import Bank of

Washington (Pierson)

[WASHINGTON,] April 13, 1936. The Chinese Ambassador, Mr. Sze, accompanied by Messrs. Tswenling Tsui 30 and T. G. Koo, called at the Export-Import Bank this afternoon.

The Ambassador stated that it was the desire of his Government to arrange a modification in the payments due upon the loans assigned to the Bank by the Farm Credit Administration ($3,070,942.20 plus accrued interest at the rate of 4% per annum) and by the Reconstruction Finance Corporation ($13,537,387.79 plus accrued interest at the rate of 5% per annum).