File No. 893.51/1976

The Ambassador in Great Britain ( Page) to the Secretary of State

No. 9710

Sir: With reference to the Department’s circular telegram of July 11, 1918, and previous correspondence respecting the formation of a new four-power group for the purpose of making a loan to China, I have the honor to transmit herewith enclosed a copy of a note I have just received from the Foreign Office setting forth certain points arising out of the correspondence communicated to the British [Page 189] Government which in their opinion call for further elucidation in order that they may be in a position to appreciate fully the scope of the proposals.

I have [etc.]

For the Ambassador:
Irwin Laughlin
[Enclosure]

The British Secretary of State for Foreign Affairs ( Balfour) to the American Ambassador ( Page)

Your Excellency: With reference to your note No. 971 of the 18th ultimo and to my reply of the 1st instant, I have the honour to inform your excellency that I have now received from Washington the full text of the confidential letters exchanged between the United States Secretary of State and certain leading American banks relative to the proposal to form a new four-power group for the purpose of making a loan to China.

His Majesty’s Government welcome the decision of the United States Government to encourage the formation of a group of American banks to cooperate with similar British, French, and Japanese groups in affording financial assistance to China and they are prepared to assent in principle to the proposal to constitute a new four-power group in the place of the existing international consortium.

There are, however, certain points arising out of the correspondence communicated to His Majesty’s Government which in their opinion call for further elucidation in order that they may be in a position to appreciate fully the scope of the American proposals.

In the first place it would appear that it was decided at the conference held in Washington prior to the exchange of the letters that it was desirable that a loan should be made to China by the proposed four-power group, and Mr. Lansing in signifying his acquiescence in that view in his letter of July 9 indicates that the object of such a loan would be to strengthen China and fit her for a more active part in the war against the Central European powers.

As your excellency is aware, the only loan to China which is now under consideration by the existing international consortium is a projected issue of a second or supplementary reorganisation loan of twenty million pounds for currency reform purposes in respect to which the Japanese group have already made two advances to the Chinese Government. It is not clear whether the American group contemplate participating in this loan which is now in course of negotiation with the Chinese Government and carrying the shares of the British and French groups by arrangement with the Japanese group or whether they have in view an entirely different financial transaction. The correspondence exchanged between the banks and the Secretary of State does not mention the amount of the projected loan, the revenues on which it is to be secured or the purposes to which it is to be applied.

Again, the scheme proposed by the United States Government and the American banks appears to contemplate not only the prompt issue of a special loan to China by the four-power group, but also the issue of other loans by that body. His Majesty’s Ambassador at Washington was accordingly instructed to enquire whether it was the intention of the United States Government to confine the activities of the new four-power group to making administrative loans to the Chinese Government or whether the new consortium would be empowered also to make loans for industrial and railway enterprises in China. Lord Reading has replied that he is informed by the State Department that so far as concerns the American group now forming under the agreement between the Department and the bankers it is the expectation of the Department that industrial loans will be made as well as those for administrative purposes.

I must explain to your excellency that this question of the scope of the four-power group’s financial activities is a matter of considerable importance in view of the decision taken at the intergroup conference held in Paris on the 26th September 1913 by the representatives of the British, French, German, Russian and Japanese groups in the international consortium when it was resolved and agreed that the provisions of the sextuple agreement should no longer apply to [Page 190] industrial and railway loans. The meeting was informed by the chairman that a communication had been received from the American group stating that they agreed to the unconditional elimination of industrial loans from the scope of the sextuple agreement. His Majesty’s Government were impelled to agree to the modification in this sense of the sextuple agreement of 1912 by the desire of the Japanese Government to resume their freedom in respect to industrial loans and also by pressure from independent banking and other interests outside the British group which made it impossible for them to continue to recognise the British group in the consortium as alone entitled to their official support for the financing of industrial enterprise in China. Your excellency will understand that in these circumstances it would be difficult for His Majesty’s Government, and presumably for the other Governments concerned, to agree to the revival of the sextuple agreement of 1912 in so far as it purports to prohibit the independent conclusion of industrial loans, supposing that it is the intention of the United States Government to renew the original six-power contract in the form of a four-power contract and to seek the consent of the participating Governments to the principle of guaranteeing exclusive official support to their respective groups for the negotiation of industrial as well as of administrative loans.

The letters exchanged between the American bankers and the Secretary of State also deal with the question of the relinquishment to China or to the four-power group as a whole of any options on loans now held by the individual members or groups. I have to observe that so far as administrative loans to China are concerned, which alone fall within the scope of the existing consortium’s activities, there is only one option held by individual members of that body, viz.: an option for a currency reform loan held by the British and French groups, and previous to China’s declaration of war on the Central powers, by the German group. The currency reform loan has, with the consent of the British and French groups, been incorporated into the supplementary reorganisation loan and should the American group agree to cooperate with the British, French, and Japanese groups in raising such a loan it would naturally participate in any advantages which the possession of this option confers on the original holders.

Should it be the intention, however, of the United States Government to invite the other Governments to induce their respective groups to agree to the relinquishment in favour of the new four-power group of options on industrial and railway loans held by those groups or their individual members, I fear that such a proposal would present considerable difficulty and the question would have to be examined very carefully in consultation with the British interests involved before His Majesty’s Government could express any opinion and still less signify their concurrence in the suggestion.

Finally, I notice that in his confidential answer to the American banker’s letter Mr. Lansing states that the United States Government would be opposed to any terms or conditions of a loan which sought to impair the political control of China or lessened the sovereign rights of that Republic. His Majesty’s Government presume that in making this statement the Secretary of State did not mean to imply that the United States Government would not entertain favourably any loan scheme submitted for their approval by the American group which provided for foreign control of the collection of the revenues earmarked as security for the loan, such as exists in the case of the loans secured on the Chinese maritime customs revenues and on the salt gabelle. Similarly His Majesty’s Government conclude that the United States Government would not consider, for example, the appointment under the terms of a currency reform loan of a foreign adviser to supervise the introduction of currency reforms in China as an infringement of that country’s sovereign rights. I venture to suggest that the favourable consideration of the American proposal would be facilitated if His Majesty’s Government and the other Governments concerned could be reassured as to the precise intentions of the United States Government in this matter.

There is one further point which, although it is not a matter of urgency or likely to impede in any way the realisation of the four-power group project, should, I think, be brought to the notice of the United States Government. Toward the end of last year, the British, French, Russian and Japanese Governments finally agreed to the inclusion of a Belgian group in the existing bankers’ consortium in China. It was, however, stipulated that the admission of Belgium into the consortium should only take effect after the war.

I have [etc.]

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