Messrs. Sullivan & Cromwell to the Secretary of State

Sir: We have the honor to acknowledge your communication of May 9th (FE–893.51/3366)82 with reference to the Loan Contract of the Pacific Development Corporation with the Government of China of November 29 [26], 1919, and enclosing paraphrase[s] of telegrams exchanged between the Department and the American Legation at Peking with reference to the status of Mr. C. L. L. Williams as Associate Inspector-General of the Wine and Tobacco Administration, pursuant to such contract.

We note that the Legation reports that Mr. Williams “has never been vested with authority of any kind”, and that the “Inspectorate General has never been established”. This information confirms that which we had ourselves received, and seems to us to establish conclusively that the Chinese Government has wholly failed to comply with its obligation expressed in paragraph Tenth of the Loan Contract. In view of this situation, we beg to submit the following:

The period of option on future bonds to be secured by the wine and tobacco revenues (Article Eleventh of the Contract) was intended to begin to run only with the appointment of an American to the position of Associate Inspector-General of the Wine and Tobacco Administration with “no less degree of authority than that heretofore given by the Chinese Government to the Associate Chief Inspector of the Salt Administration of China” (Contract, Article Tenth). The relationship between these two articles has heretofore been explained to the Department, and we understand that the Department has heretofore concurred in the view above expressed, and has so notified the Chinese Government. It would accordingly appear that the seven months’ option, referred to in Article Eleventh, has not yet begun to run, and that the Government of China is not in a position to offer additional bonds secured by the Wine and Tobacco Administration without first affording the Pacific Development Corporation, or its assigns, an opportunity to exercise its option. This particular point is not, perhaps, of great value to the Pacific Development Corporation itself, as that corporation is not at the moment in a position to consider exercising such an option. We believe, however, that from the general viewpoint of American interests, it is important that the Department maintain this position so that no other foreign groups or interests can acquire a lien on the wine and tobacco revenues without American interests first [Page 392] being advised. This feature might be of especial interest to the American Group which, under certain conditions, still has a contingent interest in the Pacific Development Corporation loan contract.
We earnestly and especially solicit the vigorous support of the Department of State in securing immediate compliance by the Chinese Government of the terms of Article Tenth of the contract. Such compliance is quite independent of the question of extension or exercise of an option under Article Eleventh. The agreement under Article Tenth is unqualified and absolute, and is to appoint and confer the requisite powers upon such an Associate Inspector-General “for a period of at least three years.” In view of the approaching maturity of the bonds issued under the Pacific Development Corporation Loan Contract and of the Chinese bonds brought out by the Continental & Commercial Bank of Chicago, which are likewise secured by the wine and tobacco taxes, it is of the utmost importance that, well in advance of these maturities and at the earliest possible date, an American assume effective control of the pledged revenues, so that real information can be obtained as to the importance of these revenues, and so that these pledged revenues can actually be reduced to possession and applied for the service on the bonds which these revenues are pledged to secure. Only on such terms could a refunding issue be brought out to take care of the approaching maturities of next November and December, aggregating $11,000,000, and thus avoid very serious loss to American investors, as well as a serious impairment of the credit of China.

The undertaking of the Chinese Government to appoint and confer authority upon an American Associate Inspector-General of the Wine and Tobacco Administration is clear and unambiguous. It is expressed in a contract, which has been approved by the Department of State. In reliance on this undertaking of the Chinese Government, large sums of money have been advanced, and unless the Chinese Government complies with its obligation very heavy loss will result. In view of all of these circumstances, we respectfully urge that the Department of State take up vigorously with the Chinese Government the matter of securing compliance by that Government of its contractual undertaking.

We are [etc.]

Sullivan & Cromwell
  1. Not printed.