The existing Consortium Agreement came into existence in 1920 in consequence of an initiative taken by the American Government, in the Wilson administration, in 1918.39 The Agreement was concluded between banking groups of four countries, with the blessing of their governments (American, British, French and Japanese) respectively, providing for cooperation in and sharing of loans to China. The Consortium has never made any loans, but the existence of the Agreement has prevented the borrowing by China of money from independent and irresponsible sources.

In this administration, in response to inquiries from the American banking group, we have taken the position that we favor continuance in existence of the Agreement, with the thought that at sometime the Consortium might be able to do some business as originally intended and the further thought that any move toward termination of the Agreement might have a disturbing effect as regards the general Far Eastern situation (in other words, we favored letting the matter of the Consortium remain in status quo).

During the past few months representatives of the British banking group have been in correspondence with the American banking group, proposing that certain business in China available to British interests be excepted from provisions of the Consortium Agreement or regulations which have been adopted by the banking groups thereunder. To this, the American banking group, with the Department concurring, has not been able to give assent, for the reason that such action would strike at the very root of the principle on which the Consortium is based. Now, the British Government comes forward with a memorandum in which, after pointing out various facts in the situation and affirming, in effect, that they would welcome the devising of some method by which at the same time the Consortium would be preserved and the safeguarding specifications of the Consortium Agreement be modified, they in conclusion propose definitely that the Consortium Agreement be terminated. Their memorandum is attached hereto.40 We have given the matter very careful consideration. We talked with representatives of the American group. We would gladly offer suggestions whereby the Consortium might be kept in existence and at the same time the practical issues be satisfactorily met. But we do not see how this can be done: the Consortium Agreement has both negative and positive features; a dropping of the latter with retention of the former would produce a resultant possessed of little value; and it would probably lead to new perplexities in place of those which it might resolve. We remain, however, open to suggestions. We therefore have drafted a telegram in which we accept

39

40

See Foreign Relations, 1918, pp. 169 ff.

Not printed; see telegram No. 57, February 10, 5 p. m., from the Chargé in the United Kingdom, p. 568.

the British Government's outline of the facts, express our confidence in the principle upon which the Consortium Agreement was based, and give assent, with expression of our regret, to a procedure on the part of the banking groups, if and when, directed toward termination of the Consortium Agreement; and, in connection with our formal reply, we instruct the Embassy in London to call attention to certain inconsistencies, as they appear to us, in the statements which the British have made in their approaches to us on the subject. A part of our effort is to make the record show clearly that the proposal that the Agreement be terminated did not originate in this country. We have informed representatives of the American Group of our position and of the substance of this draft and their views are in accord therewith.

I shall appreciate an indication from you whether the proposed telegram to our Embassy at London meets with your approval.

Faithfully yours,

893.00/14078

CORDELL HULL

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

No. 372

41

NANKING, March 9, 1937. [Received April 6.]

SIR: I have the honor to refer to correspondence with the Department in reference to particular phases of the present trend of the Chinese Government toward governmental direction of large scale industries and particularly to my telegram No. 87 of February 23, 2 p. m., giving the gist of the manifesto issued at the close of the Third Plenary Session of the Fifth Central Executive Committee of the Nationalist Party on February 22, 1937, which manifesto gave a general description of the government's policy of supervising light industries and controlling heavy industries, with the effect of introducing what approximates "State Capitalism" in China.

Taking everything into consideration, I am distinctly of the impression, already suggested by the Embassy in earlier reports to the Department, that the Chinese Government is strongly attracted by the idea that its current deficit, estimated by some at at least twenty million dollars Chinese currency each month, may in part be met by Government participation in the industry and foreign commerce of the nation, and that the motive of profit is just as strong an incentive to its launching into business as the desire to develop private earning power. This idea is disclaimed by Chinese officialdom. The Chinese

Government asserts, with a great deal of warrant, that during recent years it has greatly lessened the burden of taxation which previously hampered individual enterprise in China. In official utterances, including the manifesto already referred to, it has been emphasized that the aim of the government is to carry out the Kuomintang principle of "the livelihood of the people" and that the present program of Governmental assistance to industry and commerce is carried out, in many instances, at actual cost to the Government. The threat to private commercial enterprise, thus presented and denied, has become the subject of heated debate in China.

To offset the contention that the Government's objective in economic matters is solely to foster individualist enterprise, and to support the supposition that the Government intends to go into business for itself, one might plausibly attribute to Chinese statesmen a line of reasoning somewhat as follows:

The National Government is unable to meet its current expenditures; in the twenty-six years since the overthrow of the Manchu dynasty China has even yet not succeeded in setting up a stable government based upon purely political principles and the concept that economic development must be left to individual private initiative; other countries, for example, Italy, Germany and the Soviet Union, have been converted into integral economic enterprises; the proclivities of the Chinese people trend far more toward commercial enterprise than to achievements of a purely political nature; obviously, therefore, the Chinese Government should lead the Chinese people to political and economic regeneration by making itself the actual leader and brains of the whole scheme of economic development, with the result not only of improving "the livelihood of the people", but also of opening up for itself hitherto undeveloped sources of income. This incidental result would strengthen the Government in two ways, by solving its fiscal difficulties, and by attracting to the support of the Government the real talent of the Chinese people, that is, the talent for business development, as distinguished from the somewhat arid field of profitless political administration. Future developments may not support this tentative hypothesis, but I cannot but feel that its happy mingling of altruism and self-interest explains the efforts of the Government to effect economic reconstruction by taking over the management of various lines of production and commerce.

If it is true, as the Embassy strongly believes, that the Chinese Government is committed to the objective of excluding foreign merchants, and private enterprise in general, from certain important lines of commercial activity, or of imposing unpalatable conditions to their participation in such activity, it will be necessary for the American people to decide what, if anything, they wish to do about

it. The Department is aware that both the American and British Legations have found to be practically futile appeals to Article XV of the American Treaty of 1844 42 and other promises of an earlier Chinese Government to maintain freedom of private trade. The Chinese Foreign Office feels that treaty arrangements made almost a century ago can not reasonably be held to bind a Chinese Government faced with an entirely new set of world economic conditions. The question seems to arise whether better results would not be reached if the American and Chinese Governments were to discuss the matter of trade restrictions in the two countries on the understanding that "managed economies" are recognized systems at the present time. One of the difficulties met with in an argument based solely on the assertion of a right granted by China to the United States, is that it affords no opportunity to concede any reasonableness to the Chinese contention that their monopolistic programs are legitimate attempts to foster, by Government aid, domestic industries and promote the interests both of the producers and of the foreign consumers. The only outcome of an argument conducted on the present rigid lines would seem to be unconditional surrender on one side or the other, and a spirit of antagonism is engendered which is not conducive to a settlement. The discussions would be conducted in a better atmosphere if experts of the two countries were to discuss trade restrictions with the avowed purpose of ascertaining what the economic needs of both countries are and of adjusting trade relations to meet those needs. Government interference with export or internal trade is perhaps not so important in the United States as in China, but the regulations governing the exportation of tin-plate scrap would be a case in point (see Press Releases, December 12, 1936).

It is possible that the Department feels that such discussions might encourage the Chinese Government to press the request it made on December 23, 1933 43 for a new commercial treaty between the two countries and that the Department does not feel that the time has yet come to negotiate a new treaty. The Counselor of the British Embassy recently stated that the British authorities were reluctant to take up a fundamental restatement of treaty relations at this time, because this would include the thorny subject of extraterritorial jurisdiction and the British authorities still felt that the Chinese Government was not in a position to implement whatever undertaking it might give in such matters.

42

Treaty of Wang Hiya, signed July 3, 1844, Hunter Miller (ed.), Treaties and Other International Acts of the United States of America, vol. 4, pp. 559, 564.

43 See telegram No. 935, December 26, 1933, 7 p. m., from the Minister in China, Foreign Relations, 1933, vol. III, p. 567.

44

See pp. 634 ff.

The point I should like to suggest for the Department's consideration, without pursuing the ramifications of the subject, is that it would be useful to introduce a certain elasticity into our discussions with the Chinese authorities concerning economic relations, together with some of the spirit of give and take which characterizes current negotiations between the United States and other nations for reciprocal trade agreements.

Respectfully yours,

NELSON TRUSLER JOHNSON

893.51/6329

President Roosevelt to the Secretary of State

WASHINGTON, March 11, 1937.

I think this telegram 45 in regard to the China Consortium goes much too far. I have, therefore, struck out the paragraphs that seem to me unnecessary. I do not think it is necessary for us to give approval at this late date to the old Consortium agreement, especially in the way it has worked out.

FRANKLIN] D. R[OOSEVELT]

893.51/6329: Telegram

The Secretary of State to the Ambassador in the United Kingdom

WASHINGTON, March 12, 1937—6 p. m. 82. Your telegram 57, February 10, 5 p. m., and despatch 2850 of February 11 47 in regard to China Consortium.

1. It is the Department's desire that Atherton, unless the Embassy perceives objection thereto, hand to Cadogan, as the reply of the American Government to the Foreign Office memorandum of February 10, a memorandum reading as follows:

"The American Ambassador has the honor to refer to the memorandum of February 10, 1937, on the subject of the China Consortium which on the date indicated was handed to the American Chargé d'Affaires by Sir Alexander Cadogan.

The American Government is appreciative of the frank expression of the views of the British Government as set forth in the memorandum under reference and has given most careful consideration thereto.

45

See letter from the Secretary of State to President Roosevelt, March 2, p. 571; for telegram as sent to the Ambassador in the United Kingdom, see infra.

46 The Chief of the Division of Far Eastern Affairs in a letter of March 18 (not printed) informed Mr. Thomas W. Lamont, for the American Group, of the substance of this telegram.

47 Latter not printed.