File No. 893.51/1670

The American Group to the Secretary of State

Dear Sir: At a meeting of the American Group this afternoon earnest consideration was given to the request which you made through our representative, who called upon you yesterday in response to your suggestion, that the American Group at once loan or advance to the Chinese Government, to relieve their present administrative necessities, the sum of $4,000,000 or $5,000,000.

Because of our strong desire that our position should be clearly understood, we are taking the liberty of rehearsing briefly the circumstances attending our entrance into the field of Chinese business, as well as those which attended our withdrawal; it is, of course, true that all these matters are of record in your Department, but, nevertheless, it may not be inappropriate to refer to them again at this time in connection with the particular proposal now under discussion.

The American Group (consisting of our respective houses and institutions) was formed at the direct instance of the United States Government during the Taft administration. At that time (in 1909) British, French and German banking groups had practically completed and had initialed a loan agreement with the then Chinese Imperial Government designed to provide funds for the construction of the so-called Hukuang Railways.9 Our Government, on its own initiative, suggested to the Chinese Government that the American Group be invited to participate in this Hukuang Railways loan. [Page 135] Finally, after direct telegraphic communication between President Taft and Prince Ching had been resorted to, it was arranged that American capital should have one-fourth participation in the financing of the railways to be built under the Hukuang loan agreement. The American Group was then formed, at the request of our Government, to undertake this financing.

After long and complicated negotiations, dealing largely with the question of the allocation of engineering rights on the various sections of the Railway among the several interested powers, final agreement with the Chinese Government signed by the four banking groups was reached on May 20, 1911, and, on June 15, 1911, the first series of the Hukuang Railways loan was issued to the public, one-fourth of the total amount, the equivalent of £1,500,000, being issued in America and being taken in the first instance by American investors, The issue price of these bonds was 99%; they are now quoted in the market at a fraction over 72. Various other loans were discussed by the American Group with the Chinese Government, but none came to fruition until finally, in 1912, just after the revolution in China, the new Chinese Government approached the four banking groups who had been signatories of the Hukuang loan with a request that they enter into an agreement with the Chinese Government to loan £60,000,000 for administrative and reorganization purposes. Very soon after this request was made, the four banking groups referred to were approached by Russian and Japanese banking groups, who, with the support of their Government, suggested that they be included in a new six-power group to be organized for the express purpose of making the above referred to £60,000,000 reorganization loan. Such a new group was formed under an agreement dated June 18, 1912, the provisions of which were that the six members of the international group so formed should consider themselves bound to each other not to do singly any administrative loan business in China until the entire £60,000,000 of the reorganization loan had been issued, until a majority of the group should decide not to go further with the reorganization loan, or until a period of five years had elapsed, whichever should first happen. This mutual obligation which we entered into with the knowledge and approval of your Department was designed to protect the Chinese Government from the onerous terms which their necessities might otherwise have exacted; only to this extent was the six-power agreement intended to limit or curtail Chinese borrowing facilities, and we believe that the provision preventing separate action of the bankers of any one power was considered by our Government the provision best calculated to strengthen the hands of those governments like our own which were seeking an open door on equal terms to all the powers.

A total of £25,000,000 only was loaned by this International Group, or has been loaned to date (the American Group, however, were not signatories of the £25,000,000 loan agreement with China because of circumstances to which we shall refer later) and four years of time have elapsed. We consider, therefore, that this six-power agreement is binding upon all its members until June 18, 1917, or until the remainder of the £60,000,000 reorganization loan shall [Page 136] have been issued, unless a majority of the subscribers shall in the meantime decide not to proceed further with the business.

The Department of State was kept fully advised of our negotiations both with respect to the Hukuang Railways and the reorganization loan; all cables received or sent were submitted to the Department; advice of the Department was taken in all matters in which our group was concerned in any way involving the international relations of the United States or in the remotest degree affecting the welfare of China; and no step was taken by the American Group in any instance except with the approval of the Department of State, secured in advance. Our representative in Peking participated actively in the negotiations for the £25,000,000 loan above referred to, initialed the agreement for this loan in its final and definitive form along with the representatives of the other five interested groups.

After the agreement for the £25,000,000 loan had been initialed, but before it was finally signed, the administration in the United States changed, and shortly thereafter there was issued to the public press by President Wilson his statement of March 19, 1913, in which he made clear that he was not in accord with the fundamental policy of the international group as organized.10 Promptly upon the appearance of this statement in the public press, we notified the other parties to the six-power agreement, our colleagues, and the Chinese Government that under the circumstances we felt compelled to withdraw from all further negotiations in connection with the £25,000,000 loan. After our withdrawal, the participation of the American Group in the loan was taken up among the other five banking groups who had initialed the loan agreement, the loan agreement was promptly completed, and the loan was issued in the foreign markets. One of the securities specifically assigned to this £25,000,000 loan was the Salt Gabelle, the administration of which was reorganized under a plan advised and proposed by the lending bankers and approved not only by the Chinese Government but by our own State Department and by the other Governments interested.

At once, after withdrawing from this £25,000,000 loan, we closed our offices in China, sold our property there, and withdrew our representative. Since our withdrawal the Chinese Government has negotiated loans with others in this country, and, indeed, established a fiscal agency here. While, by reason of our part in issuing the Hukuang Loan we felt that we could not completely dissolve the American Group, divesting ourselves of all interest in Chinese affairs, nevertheless, we expected not to undertake any new Chinese business; the work had been burdensome because of the obligations incident to its international character and because of the frequent conferences in Europe which we were called upon to attend at short notice and without regard to our engagements and responsibilities at the time at home.

As we have pointed out, we have considered that we, like the other members of the six-power group which we entered into with the approval of our Government, are still bound by our mutual obligations under the agreement of June 18, 1912, above referred to. The provisions of this agreement are not entirely clear, but we believe that [Page 137] we cannot conclude singly any administrative loan to China unless it can be shown to be a loan which is not in the scope of the reorganization loan which was the object of the six-power agreement, and unless its purposes are not the purposes contemplated and mentioned in the £25,000,000 loan agreement signed by the banking groups of the other five powers; in the case of an administrative loan which could be shown not to be within the scope of the reorganization loan or the purposes contemplated in the £25,000,000 loan agreement, we conceive that we are permitted by our mutual arrangements with the other banking groups to make such a loan, but only with the understanding that the covering loan agreement shall provide that participation is open to all the other five powers interested in the six-power agreement, and that we must offer such participation to them either at the time of making the loan or subsequently.

You did not state to us in the interview which our representative had with you yesterday for what specific purpose the present loan of $4,000,000 or $5,000,000 is intended, or whether it is contemplated by China that it will be taken up and repaid from a larger administrative loan to be negotiated and made later. In our opinion, the loan now requested would be unavailing unless followed by a larger reorganization loan which would aid China to rehabilitate her financial position. If such a larger loan were to be undertaken by the members of the six-power consortium, the American Group would be called to consider taking our share of it, but we realize that certainly weeks and perhaps months must elapse in the present conditions of the world’s finances before any proposition of the kind could be seriously developed by the foreign banking groups. If, on the other hand, the present loan or advance of $4,000,000 or $5,000,000 is to be considered as a separate venture, without any definite plan looking toward the rehabilitation of the finances of China, it would become necessary to know just what specific security the Chinese Government is prepared to offer, how and for whose benefit such security is to be administered, by whom it would be collected in case of default, and various other details which have not yet been made clear to us.

As your Department was informed, we, some weeks ago, started negotiations with other interests in New York having offices in Peking to take our position in the Hukuang contract, which, if accepted, would have enabled us to dissolve the Group. For your information, it was not until today that we felt ourselves in a position to consider that the interests with whom we were negotiating had definitely decided not to consummate the negotiations. We now respectfully suggest that, if the present designated fiscal agent of the Chinese Government in this country or if any other American bankers desire to undertake the loan or advance to the Chinese Government now suggested, we shall be very glad to place at their disposal all the data and information with respect to the Chinese business which we have at hand.

However, if it is the desire of our Government that the American Group undertake negotiations with the Chinese Government with respect to this $4,000,000 or $5,000,000 loan now desired, we shall, of course, be prepared to do so. We should expect the Chinese Government to offer a loan of such a character, not only as to yield but as to security and method of administration of the security, that we [Page 138] would be justified in offering it to American investors. We think it fair to say that in view of our present commitments to the European groups as indicated above, the present condition of the world’s money markets, and the uncertain economic and political situation in China itself, we are not hopeful of a favorable outcome of such negotiations.

We are [etc.]

J. P. Morgan & Co.
Kuhn, Loeb & Co.
First National Bank,
Charles D. Norton
, Vice-Pres.)
The National City Bank of N. Y.,
J. H. Perkins
, Vice-Pres.)