893.51/3512 1/2

The American Group to the Secretary of State

Sir: We beg to acknowledge receipt of your letter of the 20th ultimo,84 regarding the note received by the American Chargé d’Affaires at Tokyo from the Japanese Minister for Foreign Affairs,84 with respect to the Pacific Development Corporation contract, and outlining the answer which the Department proposes to make to the Japanese Government.85 Your proposed reply in general covers the situation, but if we may be permitted to say so there are certain inaccuracies which may be cleared up by the following recital of facts:

At the time of discussing the Pacific Development Corporation contract at the Consortium meeting in October 1920, the Consortium did not feel justified in taking over the $5,500,000. Chinese Government notes purchased by the Pacific Development Corporation, but suggested that the American Group might see fit to do so with the intention of holding any rights acquired thereby for the ultimate benefit of the Consortium. The members of the Consortium, including the American representatives, were of the opinion that the contract did not furnish a workable basis for loans, and that if the contract were to be of value, it should be remodeled along the lines approved by the Consortium, which included the recognition of various fundamental principles to which the Chinese Government [Page 394] has not yet acceded. Incidently, the terms of the contract between the Pacific Development Corporation and the Chinese Government afford the basis for argument that the contract required the Corporation to purchase $20,000,000. additional notes in addition to giving them an option thereon; and the American Group was not prepared to accept whatever moral obligation attached to this clause in the contract, in view of the unlikelihood of placing such bonds with the investing public in this country.

We are quite in agreement with your view that the option granted to the Pacific Development Corporation, under the agreement of November 26, 1919, should be considered as still in force, but the Corporation’s freedom to enjoy all rights which originally belonged to it under such contract is to some extent modified by its agreement dated April 1, 1921,85a with the American Group, continuing until December 1, 1921 (or earlier payment of its $4,000,000. of indebtedness to the bankers in the American Group) the option in favor of the American Group upon the Corporation’s position, this position containing two factors:

—The option to take $20,000,000. additional notes from the Chinese Government, which option was not of value; and
—The right to exercise some supervision over the Wine and Tobacco Administration through the appointment of an Associate Inspector whom, so far as we know, has never been permitted to function.

With respect to the notification forwarded to the State Department by the American Group under date of February 18, 1921,86 that it had definitely decided not to take up the option offered to it by the Pacific Development Corporation, we beg to advise that such notification was given in accordance with the provisions of the agreement between the Corporation and the Group whereby the Corporation was to repay its loan from the American Group on April 1, 1921, and the Group was either to exercise the option on the Corporation’s position, or to notify the Corporation on or before February 15th if it decided not to do so.

Shortly before April 1st, the Pacific Development Corporation notified the American Group, through us, that it was unable to repay the loan, and a request was made that the Group renew the loan to the date of the maturity of the Chinese Government bonds pledged as collateral, viz. December 1, 1921. As particular consideration for such renewal, the price at which the American Group was given [Page 395] the option to purchase the hypothecated Chinese Government notes was changed from 100 and interest to 91 and interest, the latter being the cost thereof to the Pacific Development Corporation. Provision was made in the agreement renewing the loan that the Corporation was to be free to dispose of the notes pledged as collateral, but if it had an opportunity so to do, the American Group was to be given the right to make such purchase for its own account on not less favorable terms. This modification in the option was made in order to secure cooperation of members of the American Group who had already extended the loan once and who had been expecting to have it paid at its maturity on April 1st.

The American Group has never entertained any objection to taking over the option under the contract; in fact, it has had an option on the entire position of the Pacific Development Corporation except during those periods when relinquishment of such option was made in accordance with the terms of the loan agreement and prior to the maturity dates upon which the Group assumed the Corporation would repay its loan. It has not, however, seen its way clear to take over such position, involving, as such taking over would

the purchase of notes which the American Group did not consider set up along lines permitting their sale, and
assuming whatever moral obligation existed to purchase $20,000,000. additional notes of similar character.

As to the position of the loan with respect to its being included within the Consortium activities, we beg to advise that if the contract were remodeled along lines which permit of the public issue of securities to the investing public, such a loan would automatically become a subject for Consortium activities, and such intent is clearly evident from the phraseology of Minute 15 of the Consortium Meeting of October 15, 1920.87 Until the loan takes that form, however, it is not a matter of Consortium activity, although the Consortium members, other than the American, were given, but did not accept, an opportunity to join in the Group’s loan to the Pacific Development Corporation and to share in whatever benefits might accrue.

If there are further points regarding this contract upon which you would care to have comment, please advise us.


J. P. Morgan & Co.
For the American Group
  1. Not printed.
  2. Not printed.
  3. For the Department’s reply to the Japanese inquiry, see instructions of Dec. 28, to the Ambassador in Japan, p. 397.
  4. See letter of Apr. 9 from Messrs. Sullivan & Cromwell, p. 387.
  5. Ante, p. 386.
  6. Foreign Relations, 1920, vol. i, p. 586.