Chargé Coolidge to the Secretary of State.

No. 1815.]

Sir: I have the honor to confirm my telegram of February 15, indicating the nature of the proposals which China now offers, informally, with a view to the settlement of all questions at issue connected with the payment of the indemnity.

When China refused the Belgian proposals, she offered to pay the indemnity as a gold debt at protocol rates if certain concessions were made regarding matters of interest on payments, and if an equitable system of fixing the rate of exchange were substituted for the arbitrary one which had prevailed. The powers, before considering this proposition, desired to know how much loss these concessions would involve, and various tables were drawn up on various bases by the bankers’ commission, with various results.

It soon became evident that the attempt to arrive at an agreement as to the exact sum would be productive of an indefinite delay, partly because the bases of calculation were essentially different and partly because inaccuracies were quickly discovered in most of the tables presented. Furthermore, the representatives of the powers concerned were not agreed as to the nature and extent of the concessions which should be granted in return for China’s offer to pay on a gold basis.

Finally, the Chinese Government, after conference with foreign representatives, decided to offer a fixed sum in payment of arrears to January 1, 1905, in the nature of a compromise between the amount payable if the concessions which they had asked for had been agreed to, and the amounts claimed as due according to the calculations based on the varying interpretations of article 6 of the protocol. For the future a new system of establishing the rates of payment was proposed, offering to each of the different governments concerned an independent choice between three different systems, all of them framed with the intention of removing from the hands of the voting majority of the bankers’ commission at Shanghai the power to establish an artificial rate of exchange.

* * * * * * *

The negotiations which are outlined in this dispatch are explained at some length in the inclosures herewith.

* * * * * * *

I have, etc.,

John Gardner Coolidge.

[Inclosure 1.—Translation.]

Conferences held with the Chinese Government with a view to obtaining the signature of the national bonds.

By a collective note dated July 26, 1904,a the representatives of the powers which signed the protocol of 1901, with the exception of the minister of the United States of America, presented to the Waiwu Pu the compromise proposition of which the Belgian Government had taken the initiative, relating to the payment of the indemnity.

[Page 147]

This proposition tended to authorize China to pay her debt, as she had been doing up to that time, in silver, at the rate of exchange of the date of each installment, and to pay off the whole indemnity in this manner.

The real value of the payments depending on the rate of exchange on silver, it was understood that every time the difference between the sums paid and the sums due the powers was in favor of the latter, this difference would remain due and would produce the same interest as the principal of the indemnity.

The rate of exchange had to be fixed every month, and not every six months as stipulated in the protocol.

After conferences, which continued during the months of August and September, the compromise proposition in question was not accepted by the Chinese ministers.

The objections made against it were that it would leave China in ignorance as to the amount which she would have to pay in 1940, and oblige her to pay compound interest on the differences due the powers up to the latter date.

Under these conditions no agreement was possible, and the Waiwu Pu transmitted to me officially the counter proposition which was submitted to the examination of the representatives of the powers by the circular of October 13, 1904.a

China acknowledged that the indemnity constituted a debt payable in gold, and consented to sign immediately the national bonds and to make the installments in gold, beginning January 1, 1905, on the following three conditions:

1.
Fixing of the rate of exchange according to the average exchange during the amount of the payment.
2.
Renunciation on the part of the powers of interest on arrearages.
3.
Deduction at the rate of 4 per cent on advanced payments, up to the date when these payments ought to have been made.

In the opinion of the Chinese Government, the first and the third of these propositions ought to have a retroactive effect. Unfortunately, the passage referring to the retroactive effect was omitted by error from the French translation of the Chinese note. Hence arose the necessity for several representatives of the powers, who had expressed a favorable opinion on the Chinese project, to demand new instructions.

It was important, above all, to ascertain the extent of the sacrifice which a consent to the Chinese project would involve for the powers as regards the past.

For this purpose I requested the Waiwu Pu to draw up a table showing the sums to be paid by China on December 31, 1904, in order to cover the deficit of the last three years.

The first two replies of the Waiwu Pu, which formed the subject of the circulars of October 27 and November 17, were vague and did not mention the sum of 9,000,000 taels, being the amount of the arrearages of the first six months. The reason was that the powers and China took a different standpoint regarding the payment of these arrearages. In point of fact, from January 1, 1902, to December 31, 1904, China allotted an annual sum of 3,000,000 taels for the extinction of the arrearages of the second half of 1901. The taot’ai of Shanghai made this known to the commission of bankers by a letter in February, 1902. However, inasmuch as, on the one hand, a period of three years had been granted to China to clear herself of these arrearages, and as, on the other hand, the value of the white metal had declined sensibly since the time when the protocol had fixed the equivalence of the haikwan tael with regard to the currencies of the various countries, the bankers devoted the total amount of the installment to the extinction of the debt of the half year which was due and of the interest on the 9,000,000 taels. The result is that, according to the bankers, China was a debtor to the powers, on December 31, 1904, not only for the total amount of the arrearages, viz, 9,000,000 haikwan taels, but also for a sum of 1,435,000 Shanghai taels for the arrearages of the three years elapsed.

On the contrary, China claimed that she had acquitted herself of the whole of her debt, but in silver. She consented, since she acknowledged her obligation to pay in gold, to make up the difference, but on condition that the interest on the 9,000,000 taels should cease to be placed to her debit proportionally to the quota of the principal which she had discharged. In other words, she was disposed to pay interest on 9,000,000 taels during the first year, on 6,000,000 during the second, and on 3,000,000 during the third and last.

Long conferences were necessary in order to induce the Waiwu Pu to prepare a table showing the exact amount of this debt.

The table, which was submitted to the representatives on December 11, 1904, had been prepared on the following bases:

(a)
Remission to China of the interest on payments in arrears.
(b)
Deduction at the rate of 4 per cent on the monthly installments.
(c)
Fixing of the rate of exchange according to the average price of gold during the month preceding the installment.
(d)
Allowance to China of the interest on the excesses of the semiannual installments.

Thus calculated, China’s deficit was reduced to £1,032,000, whereas it really amounted, according to the bankers, to £1,411,000.

The sacrifice required exceeded the extent of the concessions which the powers were willing to make to China. This impression is gained from the discussions to which the question of the indemnity gave rise on December 14, 1904. With a view to diminishing the loss, certain ministers proposed not to give a retroactive effect to the clauses relative to the remission of the interest on the arrearages and to the deduction of the interest from the monthly installments. Other representatives of the powers were inclined to divide the loss between China and the powers.

As to the future, the ministers were unanimously of opinion that it was proper to protect China against arbitrary rules in fixing the rate of exchange. They agreed to the principle of the average rate, but without being able to reach a conclusion as to the method of fixing it. They successively rejected the quotation published by the Shanghai newspapers, the quotation of one of the financial institutions of this city, and the average of the quotations of these various establishments. A simple means of settling the difficulty would have been to authorize the Celestial Government to negotiate the exchange itself; that is, to pay in drafts. Article VI of the protocol, which says, “The capital and interest shall be payable in gold or at the corresponding rate of exchange” did not seem to authorize it. It was then suggested to refer to the price of silver in London for the fixing of the rate of exchange.

The majority of the powers consented to allow China 4 per cent on the monthly installments, while others would have liked not to exceed 2 per cent, the rate corresponding to the interest allowed by the banks on the daily balance of their running accounts.

From my conferences with the ministers of the Waiwu Pu, I had reached the conclusion that they would be accommodating as regards the past, provided the powers were willing to accede to their demands with regard to the future.

Consequently I notified the Waiwu Pu that the powers would not admit the retroactive effect of clauses 1 and 3 of the note of October 13, 1904, and would not agree to the recalculation of the indemnity on the basis of the average rate.

The Waiwu Pu sent us its reply on January 25. It did not completely fulfill our expectations. For the past, it offered a sum of £1,000,000 with a view to covering the total deficit, whereas, as was seen above, the figure indicated by the bankers amountd to £1,411,000. In point of fact, China waived the remission of the interest on the arrearages and the deduction of the interest of 4 per cent on the monthly installments, but she did not adopt the method of calculating of the bankers, or, in other words, she rectified their calculations according to the indications that had been given her by the taot’ai of Shanghai concerning the rate of exchange.

However, it appeared equitable to give China credit, to a certain extent, for the profits which the bankers had realized to her detriment, and the proposition of 8,000,000 protocol taels or, £1,200,000, was generally well received.

For the future, the Chinese note said: “If the powers consent to the monthly fixing of the rate of exchange according to the average rate and to the deduction of 4 per cent on the monthly installments, the deficit of the last three years will not be regulated according to the propositions of the Waiwu Pu.” It appeared dangerous to accept this wording, which had the defect of not specifying the methods of payment to which China was having recourse with a view to discharging her indebtedness. Moreover, the average rate had not yet been agreed upon. Since the diplomatic meeting of December 14 certain powers had gotten over their prejudices against drafts, and inclined to accept them rather than to refer the matter to the price of silver in London.

In case it was permissible for China to discharge her indebtedness by means of drafts or telegraphic transfers—that is, to negotiate herself the exchange—the average rate lost its purpose.

The Waiwu Pu was given to understand that it should leave to the powers the choice between these two modes of payment, viz, drafts and telegraphic transfers, or the rate corresponding to the price of silver at London.

“As far as the future is concerned,” said the memorandum which I sent to the Waiwu Pu on January 27, “the powers authorize China to make monthly installments and to deduct 4 per cent interest on these installments. The latter shall be made on the basis of the price of silver at London, multiplied by the coefficient of charges. As regards the powers which would not accept this mode of discharging her indebtedness, China shall pay them in gold or by telegraphic transfers in money of their countries, which she may procure at her pleasure and according to her best interests.”

The Chinese ministers showed some hesitation about accepting the telegraphic transfers, but they finally resigned themselves to it. They asked to be allowed to discharge their indebtedness by means of drafts, it being well understood that these drafts would be at the disposal of the creditor power on the date of maturity. China finds a certain advantage in this system. If, on the one hand, she loses the interest during the time the draft is traveling, [Page 149]she can, on the other hand, procure drafts at the time the rate of exchange appears favorable to her, and it is known that the fluctuations of the rate of exchange are often greater than the rate of interest. Thus we see in Europe a rise in discount incites the bankers to furnish, unsecured, to their correspondents abroad long-dated bills of exchange, in order to profit by the difference between the rate of discount abroad and that of their own country.

It was very difficult to make the Chinese ministers understand the meaning of the words “coefficient of charges.” The rate of silver is telegraphed daily from London to Shanghai. It is increased by the price of sending, viz, the freight, insurance, and brokerage, or from 0.90 to 1 per cent. It may be observed also that the intrinsic par value of silver quoted at London is below that of the Shanghai tael and that the latter weighs more than a troy ounce.

In order to determine the rate of exchange at Shanghai according to the price of silver at London, there is therefore a computation to be made. It consists in multiplying the value of an ounce of silver at London by 1.182.

The reply of the Waiwu Pu dated from January 31. It did not yet appear acceptable. China did admit the drafts, the telegraph transfers, and the price of silver at London, but she did not say that the payments would be paid in the respective money of each country and directly into the hands of each power. Moreover, the Chinese Government raised the claim of proportioning the payment of the arrearages and was silent regarding the interest on these arrearages from January 1, 1905, up to the day of payment. Hence the necessity “of proposing new modifications to the Waiwu Pu.

Of this counter project, which I sent to the Waiwu Pu on February 1, the first part, referring to the manner of making the payments, was accepted, and the second part, relating to the interest, was rejected.

After urgent pressure, the Waiwu Pu yielded also on this question of interest.

These successive modifications led the Chinese Government to propose the method of settlement which formed the subject of the circular of February 6, No. 16.

[Inclosure 2.—Translation.]

Circular No. 16.

As a result of conferences which his excellency the minister of Belgium and other ministers have had with the Chinese ministers, the Waiwu Pu sent to Mr. de Gaiffier, officially, the draft of note and the inclosed table, which I have the honor to place in circulation with the French translation.

As this draft did not yet appear acceptable, Mr. de Gaiffier began new conferences with the Waiwu Pu with a view to determining in a clearer manner the mode of payment and to cause the 8,000,000 of haikwan taels of the protocol to bear interest at the rate of 4 per cent from the 1st of January, 1905, until the day of liquidation.

These conferences induced the Waiwu Pu to accept the draft of note hereto annexed with French translation.

In this project the offer of the Chinese Government for the past, which had been £1,032,405 8s. 10d., is brought up to 8,000,000 haikwan taels of the protocol (£1,200,000), which China declares herself ready to pay within a period of twenty-five days after the signature of the agreement, and which will bear interest at the rate of 4 per cent from January 1, 1905, until the day of payment.

It results from this figure, compared with that of H. T. P. 9,412,349.70 (£1,411,852 9s. Id.) which the bankers’ commission of Shanghai indicated to us as representing the entire claim of the powers on January 1, 1905, that the acceptance of the Chinese proposal would involve for the whole of the powers a loss of H. T. P. 1,412,349.70 (£211,852 9s. Id.). According to the new table which has just been addressed to us by the bankers’ commission and which I submitted to the examination of my honored colleagues by circular No. 15 of the 4th last, this loss would be diminished by H. T. P. 374,968.59 (£56,245 8s. 9d.) if the calculation of the bankers were made on a gold basis, as the diplomatic corps had asked, as a matter of information, in the telegram of His Excellency Baron Czikann on December 14 last.

As far as the future is concerned, China asks of the powers the authorization to make monthly installments and to deduct 4 per cent interest on these installments. These installments will be made at the option of the various powers, either on the basis of the price of silver at London or in drafts or in telegraphic transfers, which China may procure anywhere and in any manner, according to her best interests, and which she shall remit directly to the various powers in their currencies at the maturity periods. According to the oral statements of the ministers of the Waiwu Pu, each power shall make its choice as to the mode of payment once for all upon the conclusion of the new agreement.

[Page 150]

While requesting my honorable colleagues, as dean, to be pleased to express their opinions on the new Chinese proposition, I have the honor to add, in my capacity as minister of Germany, that, with a view to a definite settlement of the question of indemnity and in view of the recognition by China of the debt (payable) in gold, in her communication of October 14, 1904, I will recommend the acceptance of the Chinese proposition to my government.

As soon as this circular is returned to me I shall place it in circulation a second time in order that copies may be taken of the annexes.

A. v. Mumm.

Annex 1.

July 1, 1902.
Due: Interest, 9,000,000 protocol haikwan taels; interest on arrearages of 9,000,000 protocol haikwan taels, 180,000 protocol haikwan taels=9,180,000 protocol haikwan taels; at the protocol rate of exchange 3s
£ s. d.
1,377,000 0 0
Paid: Six monthly installments of 1,820,000 haikwan taels=10,920,000 haikwan taels=12,164,880 Shanghai taels; or at the rate of exchange of June 30 of 2s. 3.625d 1,400,228 7 6
Balance to China’s credit 23,228 7 6
January 1, 1904.
Due: Amortization, 829,500 protocol haikwan taels; interest, 9,000,000 protocol haikwan taels; interest on the arrearage of 9,000,000 protocol haikwan taels, 180,000 protocol haikwan taels= 10,009,500 protocol haikwan taels; at the protocol rate of exchange 3s 1,501,425 0 0
Paid: Five monthly installments of 1,820,000 haikwan taels; one monthly installment of 1,809,500 haikwan taels=10,909,500 haikwan taels=12,153,183 Shanghai taels; or at the rate of exchange of December 31, 1902, of 2s. 2d
£ s. d.
1,316,594 6 6
Surplus of the last payment period 23,228 7 6
Interest on this surplus for six months 464 11 4
1,340,287 15 4
Balance to the debit of China 161,137 4 8
July 1, 1903.
Due: Interest on 8,983,410 protocol haikwan taels; interest on arrearage of 9,000,000 haikwan taels, 180,000 protocol haikwan taels=9,163,410 protocol haikwan taels; at the protocol rate of exchange 3s 1,374,511 10 0
Deficit of last payment period 161,137 4 8
Interest on the deficit 3,222 14 10
1,538,871 9 6
Paid: Six monthly installments of 1,820,000 haikwan taels=10,920,000 haikwan taels=12,164,880 Shanghai taels or at rate of exchange of June 30 of 2s. 3.875d 1,412,900 2 6
Balance to debit of China 125,971 7 0
[Page 151]January 1, 1904.
Due: Amortization, 862,680 protocol haikwan taels; interest 8.983,410 protocol haikwan taels; interest of arrearage of 9,000,000 protocol haikwan taels, 180,000 protocol haikwan taels=10,026,090 protocol haikwan taels; at protocol rate of exchange 3s
£ s. d.
1,503,913 10 0
Deficit of last payment period 125,971 7 0
Interest on this deficit 2,519 8 6
1,632,404 5 6
Paid: Five monthly installments of 1,820,000 haikwan taels=1,809,500 haikwan taels=10,909,500 haikwan taels=12,153,183 Shanghai taels; at the rate of exchange of December 31, 1903, of 2s. 5.25d 1,481,163 3 7
Balance to debit of China 151,235 1 11
July 1, 1904.
Due: Interest, 8,966,156 protocol haikwan taels; interest on arrearage of 9,000,000 protocol haikwan taels, 180,000 protocol haikwan taels=9,146,156 protocol haikwan taels; at protocol rate of exchange 3s 1,371,923 8 0
Deficit of last payment period 151,235 1 11
Interest on this deficit 3,024 14 0
1,526,183 3 11
Paid: Six monthly installments of 1,820,000 haikwan taels=10,920,000 haikwan taels=12,164,880 Shanghai taels; or at rate of exchange of June 30 of 2s. 6.625d 1,552,289 7 6
Balance to China’s credit 26,106 3 7
January 1, 1905.
Due: Amortization, 897,188 protocol haikwan tael; interest 8,966,156 protocol haikwan taels; interest on arrearage of 9,000,000 protocol haikwan taels, 180,000 protocol haikwan taels=19,043,344 protocol haikwan taels, or at protocol rate of exchange 3s 2,856.501 12 0
Paid: Five monthly installments of 1,820,000 haikwan taels; one monthly installment of 1,809,500 haikwan taels=10,909,500 haikwan taels=12,153,183 Shanghai taels; or, at rate of exchange of December 31, 1904, of 2s. 9.125d
£ s. d.
1,677,392 8 11
Surplus of last payment period 26,106 3 7
Interest of this surplus 522 2 5
1,704,020 14 11
Balance to debit of China 1,152,480 17 1

Annex 2.

[Translation.]

Note.

According to the computations made by the Waiwu Pu regarding the arrearages of the indemnity for the three preceding years, the total of China’s debt to the powers amounted to £1,032,405 8s. 10d.

On the other hand, it is found from a note which was sent us by Mr. de Gaiffier that the sum due in order to cover the deficit of the last three years is £1,419,443 8s. 8d.

[Page 152]

In the opinion of the ministers at Peking the ministers of finance of the various countries have counted on the sums paid for the past years and have long ago allotted them for expenses, and it appears impossible to modify the accounts. Consequently the three points proposed by the Waiwu Pu can not be applied to China as far as the past three years are concerned.

We, ministers of the Waiwu Pu, have taken these considerations into account, but we must discuss anew the following two points, viz:

1. At each payment period the Shanghai bankers do not convert the silver into gold according to the current rate of exchange on the Shanghai market.

It is impossible for us to approve this procedure. The daily rate of exchange of gold and silver is notified to us from time to time by the taot’ai of Shanghai.

Herein below we reproduce for the five payment periods the rate of exchange fixed by the bankers and that which was notified to us by the taot’ai of Shanghai.

From a comparison of the two rates it is seen that the bankers reserve to themselves too great advantages on the occasion of the payment of the indemnity.

From the first to the fifth payment period.

Period. Bankers’ rate. Rate of the Taotai.
June 30. 1902 2.3¼ 2.3⅝
December 31, 1902 2.1½ 2.2
June 30, 1903 2.3 2.3⅞
December 31, 1903 2.4⅛ 2.5¼
June 30, 1904 2.5⅝ 2.6⅝

As regards the sixth payment period, the rate was fixed in the computation of Mr. de Gaiffier at 2.8. This was a rate which, having been fixed in advance, could not but be fictitious. We have since learned that on December 31 this rate was 2.9⅛.

2. China’s debt being a debt (payable) in gold, the account of the arrearages of each semiannual period should be drawn up in gold and not in Shanghai taels.

According to the table which Mr. de Gaiffier sent us and which was prepared according to the mode of calculation adopted by the bankers, the arrearage up to June 30, 1904, amounted to 1,468,758.63 taels. The computation was made in Shanghai taels, and comprises the deficit of the preceding years. These amounts were converted into haikwan taels of the protocol at the rate of exchange of June 30 of last year, and give a total of 1,280,665.96.

This operation can not be considered as correct and equitable. Thus, for instance, at the time of the arrearage of the second payment period the tael of Shanghai was worth 2.1½. This arrearage was carried over to the fifth payment period, when, according to the rate of exchange of June 30, 1904, the Shanghai tael had a value of 2.5⅝. In this manner a profit of 4 pence is derived from every tael.

It would not be fair to make the debtor sustain too great a loss when paying his debt.

We know the feelings of justice with which the ministers of the powers are animated, and we are sure that they will not approve the methods of the bankers.

Moreover, the two points set forth above enable the bankers to receive more white metal from China, without the government’s benefiting, however, when they receive the amount in gold of the sums thus calculated.

If the computations are corrected by taking into account the two points mentioned above, the deficit of the three past years will amount approximately to 8,000,000 haikwan taels, which China will pay in its entirety.

As far as the future is concerned, if the powers consent to China’s paying monthly installments and deducting 4 per cent interest on these installments, China will clear herself of her debt to them either by means of payments in gold or by drafts which she will purchase and remit on the date of the maturity or else by means of telegraphic transfers which she will procure and purchase by contract, according to her best interests and at the lowest price.

If there are any among the powers which desire to receive telegraphic transfers expressed in the currency of their countries, China can purchase them as well in Europe as in Shanghai. If, on the contrary, the powers wish to be paid in gold on the basis of the value of silver on the London market, China consents to that also.

As far as drafts and telegraphic transfers are concerned, China can buy them at all places, on all markets, and in any bank, provided the payments in gold or in the respective currency of each country be made directly into the hands of each power on the day of maturity.

The 8,000,000 protocol taels in question shall be paid within a period of twenty-five days after the signature of the agreement, and they shall bear interest at the rate of 4 per cent from January 1, 1905, to the day of payment.