File No. 893.51/1755

The American Group to the Secretary of State

Sir: In accordance with your suggestion, on the occasion of the visit this morning to you of Mr. Schiff and Mr. Davison, we enclose herewith a copy of the cable from London which was exhibited to you and which was the subject matter of our informal conversation then.

You will remember that the Six Power Group was formed on June 18, 1912, to undertake a so-called Reorganization Loan to China in the aggregate amount of 60,000,000 pounds sterling, and that the group was to terminate when this entire amount had been issued, when a majority of the six groups should decide not to go farther with the business, or when five years should have elapsed, whichever should first happen; the group would therefore expire by limitation of time on June 18 of this present year, if not before terminated.

A £25,000,000 series of the Reorganization Loan was issued by the British, German, French, Russian and Japanese Groups in May of 1913, the American Group not participating for reasons with which you are familiar;16 the American Group retained and still retain their membership in the Six Power Group however.

As security for this £25,000,000 loan, the Chinese Government pledged the salt gabelle, which the Government obligated itself to reorganize in the manner precribed in the Loan Agreement; as a matter of fact, we understand that this reorganization has been so effective that the present annual collection of the salt gabelle far exceeds the amount required for the services of this loan, and of all other loans charged against the gabelle.

You will observe that the proposal of the British, French, Russian and Japanese Groups, as contained in the cablegram from London which we have enclosed, is that a supplementary Reorganization Loan in the amount of £10,000,000 to £20,000,000 be undertaken by these four groups in conjunction with the American Group, that a new Inter-Group Agreement be formed by the five groups thus undertaking the new supplementary Reorganization Loan, and that issue be made of the new loan, one-half in Japan and one-half in America; as security, it is proposed to ask for the surplus of the salt gabelle, and, in addition, for the land taxes, which it is proposed shall be administered under the supervision of a Japanese chief inspector. The details, as you will note, have not been more than suggested in the cablegram, but are left to a conference to be arranged if the invitation of the British, French, Russian and Japanese Groups commends itself to the American Group in principle.

Doubtless the proper administration and collection of the land tax would yield a large and regular income to China, additional to and possibly equalling that which has been secured by the reforms in the collection of the salt gabelle which were insisted upon by the lenders at the time the £25,000,000 loan was made by the banking groups of the five Powers; and doubtless this new revenue (together with any increase in the customs which may now be permitted by the interested Powers) would increase the country’s borrowing power to [Page 127] an extent which might enable her safely to provide for her financial needs for many years to come. The American Group, however, having in the past expended a great deal of effort and some money in the endeavor to establish a permanent American business interest in China, would not, in view of these past experiences, be interested in the present proposals were it not that they believe them to offer an exceptional opportunity again to promote the legitimate commercial aspirations of our country in the Far East, and that they fear, if this opportunity be not availed of, that it will be more than could be hoped for that such favorable circumstances for the promotion of American commercial prestige in the Orient will again present themselves. We do not believe that a participation by the American Group in the international Group about to be formed is essential to the latter’s success, and we believe that if the American Group declines participation the business will proceed, although, perhaps, to a smaller present amount; if this should prove to be the case, and if the available borrowing securities of China should be pledged to a new international Group not including the American Group, we fear that the successful promotion of an American interest in China in the future will be rendered very difficult.

For such reasons, then, and if the Department agrees with us in the opinions which we have stated, the American Group would be willing to signify to the other groups their acquiescence in principle to the suggestion contained in the cablegram now under discussion, hoping that a satisfactory procedure as to detail might be worked out at the conference which would then be called. The American Group would hope that during the course of the negotiations it might be arranged that the securities of the Hukuang Loan (a part of which was issued in the United States by the American Group in June of 1911) would be made more definite by the Chinese Government for the better protection of the American bondholders; also, the American Group would think it proper to propose, since the United States and Japan would be expected to provide the funds in the new supplementary Reorganization Loan, that they should share equally in the administration of the land taxes; and there are various other points of detail which we should hope to work out satisfactorily. Should we join the proposed new International Group it is probable that we shall deem it advisable to reconstitute our Group and invite others to join us.

If for the reasons above stated and with the expressed approval of our Government the American Group should eventually undertake a portion of the new supplementary Reorganization Loan, there would have to be no doubt either then or at any future time of our Government’s sympathetic interest in and support of the project.

J. P. Morgan & Co.
Kuhn, Loeb & Co.
First National Bank of New York,
Charles D. Norton, Vice President

The National City Bank of New York,
I. H Perkins, Executive Manager
[Page 128]

Morgan, Grenfell & Co., London, to J. P. Morgan & Co., New York

At conference British, French, Russian, Japanese Group held London, January 30, consider proposals for supplementary issue of the Chinese reorganization loan it was agreed embody these proposals in a series of resolutions to be submitted to principals of the French, Russian, Japanese Group for approval. Resolutions having now been confirmed, I have pleasure on behalf of British, French, Russian, Japanese Group convey to you an invitation to the American Group to participate in proposed issue in terms of following minute:

“It was proposed by the representatives of the Japanese Group, seconded by the French representative and unanimously agreed to that Messrs. J. P. Morgan & Company should be asked to reconsider the withdrawal of the American Group from the reorganization loan and to participate in the issue of the supplementary loan and also in the contemplated new Inter-Group agreement or failing that to designate some other American Group to take their place.”

Main proposals are that loan should be for £10,000,000 to £20,000,000 to be issued half Japan, and half America and that in addition to surplus salt revenues the land taxes be pledged as security under the supervision of Japanese Chief Inspector. If invitation of the four groups commend itself to the American Group in principle, I would suggest a conference be immediately convened to discuss details.