File No. 893.811/254

The American International Corporation to the Secretary of State

Sir: We have the honor to acknowledge receipt of the Department’s letter of the 2d of April,4 giving for our confidential information a paraphrase of a cable message received from the American Minister at Peking.

We regret to note that the Chinese authorities have apparently been misinformed and that they, as well as the American Minister at Peking, should have been unduly disturbed by an erroneous interpretation of an arrangement made between the American International Corporation and the Industrial Bank of Japan.

We have the honor to transmit herewith for the Department’s confidential information copy of the agreement entered into between the American International Corporation and the Industrial Bank of Japan, together with the texts of cables exchanged with our Peking representative with regard to this entire matter.4

We have the honor to call the Department’s attention to the fact, clearly shown in the accompanying documents, that the American International Corporation has from the outset taken the position that our contracts for the improvement of the Grand Canal were made with the Chinese authorities and that we could not, without their specific approval, make any arrangement for cooperation with other interests or admit other interests to participation in the contemplated loan.

As the Department will appreciate, the arrangement between the American International Corporation and the Industrial Bank of Japan provides the basis for negotiations to be undertaken either by the American International Corporation with a view to ultimate association with the Industrial Bank of Japan, or jointly by the American International Corporation and the Industrial Bank of Japan. The provisions of this arrangement do not concern the Government of China except in so far as they are referred to in the contract it is proposed to negotiate with the Chinese Government.

We also have the honor to call the Department’s attention to the fact that our agreement with the Industrial Bank of Japan provides that the American International Corporation shall take all steps possible to recommend and secure the appointment of a Japanese assistant engineer and assistant auditor who will respectively rank [Page 212] second to the American chief engineer and the American chief auditor, only if and when the action shall be agreeable to the Chinese Government.

Furthermore, the agreement provides that

wheresoever in the judgment of the Siems-Carey Railway & Canal Company the interests of the Chinese Government may best be served and the progress of the work be facilitated, subcontracts shall be awarded to Japanese subcontractors to be recommended by the Industrial Bank of Japan.

We should be obliged to the Department if it would bring these matters to the attention of the American Minister at Peking, in order to remove, if possible, his present apparent misapprehension regarding this situation.

We have [etc.]

Charles A. Stone,
President
[Inclosure]

[Untitled]

Agreement between the American International Corporation and the Industrial Bank of Japan for cooperation, with the approval of the Chinese Government, in undertaking the improvement of the sections of the Grand Canal in the Provinces of Shantung and Kiangsu in the Republic of China.

Whereas, the American International Corporation, through its representatives in China, on April 10, 1916, concluded with the Government of the Province of Shantung a contract for the issue of $3,000,000 seven per cent (7%) bonds, the proceeds from the sale of which were to be utilized for the improvement of the section of the Grand Canal in the Province of Shantung, and

Whereas, the American International Corporation, through its representatives in China, on May 13, 1916, concluded with the Central Government of China a contract for the issue of $3,000,000 seven per cent (7%) bonds, the proceeds from the sale of which were to be utilized for the improvement of the section of the Grand Canal in the Province of Kiangsu, and

Whereas, it is now proposed that, if the Chinese Government in principal approves such cooperation, the American International Corporation and the Industrial Bank of Japan shall associate themselves together, as hereinafter provided, in the carrying out of this work of Canal improvement, and through the negotiation of a single contract providing for the improvement of the sections of the Grand Canal in the Provinces of Shantung and Kiangsu, and the issuing of bonds to furnish the funds for such improvement to cover the projects and contracts above described and to supersede such contracts,

It is now agreed, by and between the parties hereto, as follows:

Art. I. The American International Corporation will jointly with the Industrial Bank of Japan negotiate with the Chinese Government for a single contract providing for the improvement of the sections of the Grand Canal in the Provinces of Shantung and Kiangsu, or if the Chinese Government prefers, the American International Corporation will alone conduct negotiations for the contract contemplated, stipulating in such contract that financial interests other than the American International Corporation may, with the consent of the Chinese Government be admitted to a participation in the issue of bonds thereunder, it being understood that the Industrial Bank of Japan shall, with the approval of the Chinese (government, be so admitted, in which case the American International Corporation through its representatives will keep the Industrial Bank of Japan advised as to the terms of the contract under discussion.

Art. II. The American International Corporation, jointly with the Industrial Bank of Japan or alone as the case may be, shall propose to the Chinese Government as a basis for negotiations, a contract which shall follow the general lines of the contract for the improvement of the Kiangsu section of the Grand Canal, and the American International Corporation and the Industrial Bank of Japan agree, as between themselves, that the draft contract (copy of such suggested draft being appended hereto), set forth the general principles upon which they are willing jointly to undertake to issue the bonds contemplated thereunder, it being understood by and between the American International Corporation and the Industrial Bank of Japan that: [Page 213]

A.
Of the total contemplated issue of U. S. gold dollars $6,000,000 (or approximately gold yen 12,000,000), the American International Corporation shall purchase and arrange for the issue of U. S. gold dollars $3,500,000 and the Industrial Bank of Japan shall purchase and arrange for the issue of U. S. gold dollars $2,500,000 (or approximately gold yen 5,000,000).
B.
Bonds are to be issued simultaneously in Tokyo and New York, the American International Corporation and the Industrial Bank of Japan to agree as to the issue price of the bonds in their respective markets.
C.
The American International Corporation and the Industrial Bank of Japan are to issue, or to arrange for the issue of, bonds of the Chinese Government in their own markets, without responsibility to each other.
D.
All profits to be derived from, and all expenses incurred in connection with the issue of bonds in New York and Tokyo respectively, are to be received and paid by the American International Corporation and/or its associates, and the Industrial Bank of Japan and/or its associates, independently and without responsibility to each other.
E.
The American International Corporation (or its associates through whom the issue on the New York market may be made) is to endeavor to arrange that the entire issue of U. S. Gold dollars $6,000,000 (or approximately gold yen 12,000,000) shall be listed on the New York Stock Exchange, and the Industrial Bank of Japan, and/or its associates, to endeavor to arrange that the entire issue of U. S. gold dollars $6,000,000 (or approximately gold yen 12,000,000) shall be listed on the Tokyo Stock Exchange.
F.
The bonds are to be engraved or printed to meet the requirements of the New York and Tokyo Stock Exchanges.
G.
The American International Corporation is to endeavor to arrange that the Chinese Government shall for this transaction make a fixed rate of exchange as between U. S. gold dollars and gold yen on the basis of two gold yen to one United States Gold Dollar. The Industrial Bank of Japan shall join in such endeavor if the contract is negotiated jointly.
H.
Loan proceeds are to be deposited in New York and Tokyo in proportion to the amounts issued in the United States and Japan respectively, and are to be transferred to China in proportionate amounts to meet expenditures for improvement work. Funds so transferred to China are to be held in China by the International Banking Corporation and a Japanese bank to be designated, until such funds are withdrawn for the purpose contemplated and in the manner provided by the contract.
I.
Principal and interest of the bonds are to be payable at the offices of the National City Bank in New York or of the Industrial Bank of Japan in Tokyo, in dollars and yen respectively.

Art. III. (a) The American International Corporation and the Industrial Bank of Japan agree, as between themselves, that the loan shall be for a par value of U. S. gold dollars $6,000,000 (or approximately gold yen 12,000,000).

(b) An American chief engineer shall have charge of the improvement work and an American chief auditor shall have charge of all receipts and disbursements contemplated thereunder.

(c) The Siems-Carey Railway & Canal Company shall be designated as contractors to undertake the improvement work, and shall have entire charge of the personnel of the contracting and construction staffs.

Art. IV. By virtue of its issue of bonds under the loan agreement to be concluded, whether such loan agreement be negotiated jointly by the American International Corporation and the Industrial Bank of Japan or by the American International Corporation alone, participation thereunder of the Industrial Bank of Japan being subsequently arranged, the American International Corporation will cooperate with the Industrial Bank of Japan in all matters arising under the contract.

In order that Japanese industry may have an opportunity to profit in proportion to the amount of capital subscribed by Japanese investors in the bonds to be issued for the improvement of the Grand Canal, Japanese material shall at equal price, quality and delivery be given equal preference with American materials and wheresoever in the judgment of the Siems-Carey Railway & Canal Company the interests of the Chinese Government may best be served and the progress of the work be facilitated, subcontracts shall be awarded to Japanese subcontractors to be recommended by the Industrial Bank of Japan.

If and when the action shall be agreeable to the Chinese Government and the Industrial Bank of Japan requests that such action shall be taken, the American International Corporation agrees to take all necessary steps possible to recommend [Page 214] and secure the appointment of a Japanese Assistant Engineer and a Japanese Assistant Auditor who will respectively rank second to the American Chief Engineer and the American Chief Auditor.

Art. V. The Industrial Bank of Japan agrees that the Siems-Carey Railway & Canal Company shall receive for their services as contractors for the Canal improvement, the ten per cent of the total cost of such canal improvement work provided for under the original agreements referred to in the preamble hereof.

Moreover, since the Industrial Bank of Japan is to share, with the American International Corporation, those financial obligations imposed by the canal contracts, it is hereby agreed that the Industrial Bank of Japan shall participate in the benefits derived from the construction profits of the contracts, and that to carry out this participation the Industrial Bank of Japan shall receive a sum equal to five-twelfths of the total amount of the canal construction profit dividends declared and payable to the Corporation by the construction company, such amounts to be paid when and as the canal construction profits are distributed, and such payments to constitute the sole participation due or to be claimed by the Industrial Bank of Japan in such benefits.

It is further understood and agreed by and between the parties hereto that this contract does not give and shall not be construed to give to the Industrial Bank of Japan, any right, title or interest whatsoever in stock of the Siems-Carey Railway & Canal Company, which is now owned or which may be hereafter acquired by the American International Corporation, and that this contract does not give and shall not be construed to give to the Industrial Bank of Japan, any rights or interests whatsoever or any voice in the control, management, or disposition of such stock so owned or acquired, or in the affairs of the Company itself.

Art. VI. When, subsequent to the conclusion of the contract between the American International Corporation and the Chinese Government for the improvement of the Grand Canal hereinabove referred to, the American International Corporation shall arrange with the Industrial Bank of Japan for the issue in Tokyo of a portion of the bonds contemplated for the improvement of the Grand Canal, the Industrial Bank of Japan shall reimburse the American International Corporation in the proportion of 7 to 5 for all expenses incurred by the American International Corporation in conducting the negotiations for the two contracts referred to in the preamble of this agreement, in the negotiations for the single contract for a loan for the improvement of the Grand Canal, in arranging for the participation of the Industrial Bank of Japan in the new contract now contemplated, and in perfecting all arrangements for the issue of the bonds, including the drafting, framing, printing, et cetera, of the bonds wherever and whenever such arrangements are of use to both the American International Corporation and the Industrial Bank of Japan.

In witness whereof, the undersigned, being duly authorized by the American International Corporation and the Industrial Bank of Japan respectively, hereunto affix our hands and seals, this eighth day of March 1917.

American International Corporation
Charles A. Stone President

Witness:
Joseph S. Lovering

Yeijiro Ono
Vice President of the Industrial Bank of Japan

Witness:
Willard Straight
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