File No. 8.93.51/1316.

The American Minister to the Secretary of State.

No. 725.]

Sir: I have the honor to report that the question of applying the surplus maritime customs receipts to the payment of accrued indemnity installments has been the subject of earnest discussion among the members of the Diplomatic Body. * * *

Before stating the issue involved, I will briefly recite the history of the events which lead up to it. As you doubtless know, a number of foreign loans were negotiated by the Chinese, before the Boxer trouble of 1900, for which the receipts of the maritime customs were pledged as security. This indebtedness remains in force, less the annual payment of amortization and interest charges. In addition, under the Protocol of 1901, the indemnity payments were also made a charge upon the customs receipts, but the lien of the latter is subordinate to that of the prior loans.

Under the old régime the customs receipts were paid direct to the local customs Taotai, a Chinese official, and became a part of the general funds of the Imperial Government. When payments on the loans and indemnity matured, the Chinese paid them out of their general funds without reference to the source from which they were derived; so that no question ever arose as to the relative rights of the loans and the indemnity, and no accounting of the customs receipts in reference thereto was ever made.

Soon after the revolution broke out, some of the treaty ports passed under the control of the revolutionists and others remained under the control of the imperialists. This condition of affairs threatened to demoralize the customs revenues and to divert the receipts, in whole or in part, from the payment of the debts for which they were pledged. The Diplomatic Body made an arrangement with the Imperial Government, whereby the current customs receipts were collected by the inspector general of customs and by him held and deposited in certain foreign banks in Shanghai for the account of the maturing payments on prior loans and indemnities. The revolutionists were not parties to this arrangement, but they respected it by their non-interference with the customs authorities or with the [Page 203] revenues collected. Under this arrangement the inspector general collected the revenues and deposited them in the Hongkong & Shanghai Banking Corporation, the Deutsch-Asiatische Bank, and the Russo-Asiatic Bank, at Shanghai.

At the time, it was thought that, by reason of the disturbed conditions through which the country was then passing, the customs receipts would fall off; and a contingency might arise wherein they would not be sufficient to take care of the maturing payments of the prior loans; and the three banks aforesaid were made depositaries for the customs receipts by common consent, because they were interested in the service of the loans as well as in the indemnity. No official report of the customs receipts for the year 1912 has yet been made, but it is unofficially reported that the increase over last year amounts to some Hk. Tls. 3,500,000.

The three banks aforesaid paid the loan obligations for the year 1912, as they matured, out of the receipts of that year, and on December 31st had on hand a surplus of some $10,273,682.09. These banks continued to hold this surplus, on deposit, in practically equal amounts, which gave them a marked advantage in the local financial market. This fact excited some unrest on the part of the other banks which are interested in the service of the indemnity, but are not interested in the prior loans. These banks claimed that the continued deposit of the surplus in the three depositary banks gave the latter a predominance in the local financial market to which they were not entitled. Therefore the dissenting banks complained to their respective Ministers and asked that the surplus be divided among and deposited with the indemnity banks, so-called, including the three depositary banks, in proportion to the respective national interests therein.

The French, Japanese and Belgian Ministers especially were active in supporting this demand of their banks, and at their suggestion a meeting of the Diplomatic Body was convened on January 16th to consider the question. * * *

The discussion continued through three several protracted meetings and, for a time, it seemed impossible to reach an agreement. Finally it was agreed to distribute the surplus reported on hand on December 31st, or as much thereof as will cover an even number of months, together with four per cent compound interest thereon, and leave the procedure for the year 1913 the same as it was during the year 1912; that is, the inspector general of customs will continue depositing the customs receipts in the three depositary banks as before. The British Minister said he thought that by September, or soon after, the accumulations will be enough to take care of the loan obligations for the year, and the subsequent receipts may be deposited, as collected, among the indemnity banks for the indemnity account.

We then formulated an identic letter to be sent to the respective banks and also a communication to be sent to the Foreign Office by the Dean, asking its consent to the arrangement and that an order be given the inspector general to distribute the surplus to the indemnity account in the manner agreed upon. My letter was sent the International Banking Corporation on January 18th, and on January 23rd I was notified by the Peking branch of the bank that a deposit of [Page 204] $757,900 had been made therein at Shanghai for the account of the American Government. I have since received a reply to my letter to the International Bank at Shanghai. * * *

I have [etc.]

W. J. Calhoun.