Messrs. Sullivan & Cromwell to the Secretary of State

Dear Sir: Referring to the matter of the Loan Contract of the Pacific Development Corporation with the Government of China, dated November 26, 1919, we have to advise you that an additional arrangement has been made with the American Group of the Chinese Consortium, as embodied in a letter of Mr. Bruce, President, to Mr. Thomas W. Lamont, Acting Chairman, a copy of which letter is enclosed herewith.76

You will note that the substance of this arrangement is that on April 1, 1921, the Pacific Development Corporation paid to the American Group $1,000,000., thereby reducing to $4,000,000. the loan which the American Group had heretofore made to the Pacific Development Corporation on the collateral of the Chinese Government notes and in consideration of the option on its position which the Pacific Development Corporation has been extending in favor of the American Group. In connection with this $1,000,000. payment on account the American Group is continuing the balance of the loan until December 1, 1921 (the date of maturity of the Chinese Government notes), and in additional consideration for this partial renewal the Pacific Development Corporation is continuing until this same date the option on its position in favor of the American Group and has reduced the price at which the American Group may take over the notes and agreed that the American Group will receive any profit that the Pacific Development Corporation may make through a sale or payment of the notes.

Having concluded this arrangement with the American Group, we now desire to secure the cooperation of the Department of State in securing from the Chinese Government such performance of the Loan Contract of November 26, 1919 as will permit of the payment of the $5,500,000. of Chinese notes at their maturity date, namely December 1, 1921. The Chinese notes are secured, principal and interest, by a direct charge upon the Wine and Tobacco Revenues of the Republic of China. In order to make this charge effective, the Loan Contract under which the notes are issued,77 and a copy of which is on file with the Department of State, provides by Article Tenth as follows:

Article Tenth: The Chinese Government hereby declares it to be its earnest desire that the entire Wine and Tobacco Taxes and [Page 388] Administration throughout, the Republic of China shall be reorganized, with the effective assistance of an American, and to that end it agrees that it will appoint, on December 1, 1919, for a period of at least three years, an American to the position of Associate Inspector-General of the Wine and Tobacco Administration, who shall be satisfactory to the Corporation and who shall possess no less degree of authority than that heretofore given by the Chinese Government to the Associate Chief Inspector of the Salt Administration of China.”

The Chinese Government has appointed Mr. C. L. L. Williams as Associate Inspector-General of the Wine and Tobacco Administration, but the Chinese Government has heretofore failed to confer upon Mr. Williams “no less degree of authority than that heretofore given by the Chinese Government to the Associate Chief Inspector of the Salt Administration of China”. Mr. Williams’ position is in fact wholly nominal, and he exercises no control over the actual collection or disbursement of the Revenues of the Wine and Tobacco Administration.

The Revenues of the Wine and Tobacco Administration are ample to maintain unimpaired the credit of China involved in the various securities issued against these Revenues. If the Chinese Government had been performing its contract with us, there would have been collected in the hands of the American Associate Inspector-General funds ample to pay interest upon both the Pacific Development Corporation Loan and the Continental & Commercial Bank Loan and to amortize these loans in considerable part by their maturity, and the balance could readily have been refunded. In view of the lapse of time which has occurred without the Chinese Government conforming to its contract obligation, it now has become more difficult to assure the payment of the $11,000,000. of obligations secured by these Revenues which mature—one-half on November 1st and one-half on December 1st of this year. However, if Mr. Williams could promptly be installed, so that he would be functioning smoothly by the time of the above maturities, this would doubtless permit of a refunding of the maturing obligations because the refunding obligations would be secured not so much by the direct credit of China but by revenues of a permanent nature, which are being directly collected and applied by an American. This is the situation which the Chinese Government has contracted to create with the Pacific Development Corporation, and we now bespeak the active support of the Department of State in securing compliance with this undertaking.

The Pacific Development Corporation has not felt disposed to press this matter until now, because it has been almost daily expecting that its position would be taken over by the American Group, [Page 389] which could far more appropriately take the steps necessary to insure proper control of the pledged Revenues. The recent negotiations with the American Group, however, have developed that the American Group, which has already had our position under option for approximately a year, expresses no expectation now of exercising that option. Accordingly it becomes urgent for the Pacific Development Corporation itself to take up this matter actively, as its ability to discharge its note of $4,000,000. to the Consortium due December 1, 1921 will be largely affected by whether the Chinese Government notes, which mature on that same date, can be paid off by a refunding obligation or otherwise. This in turn, as we have pointed out, depends upon whether the Chinese Government in the interval lives up to the terms of its contract with the Pacific Development Corporation, which contract, it will be recalled, was approved by the Department of State in its undated letter to Mr. Dulles78 of July, 1920.79

Mr. Dulles will be glad to take up and develop this matter with you at any time.

We are [etc.]

Sullivan & Cromwell
  1. Not printed.
  2. Foreign Relations, 1920, vol. i, p. 606.
  3. John Foster Dulles, member of the firm of Sullivan & Cromwell.
  4. Not printed; see letter to the American group, July 24, 1920, Foreign Relations, 1920, vol. i, p. 650.