893.51/5897
Memorandum by the Chief of the Division of Far Eastern Affairs (Hornbeck)65
The world has realized for a long time that there is little likelihood that there will be order and conditions of peace in China until there has been made substantial improvement in the economic situation in that country.
For substantial improvement of the economic situation in China, it is essential that the Chinese Government take part extensively in the planning and carrying out of a program of development involving, among other things, building of railways and other public utilities, laying down of roads, and various types of assistance to industry and trade.
But for such endeavor the Chinese Government has no funds. It has often been pointed out that the Chinese Government expends an undue proportion of its revenues upon military equipment and activities. If that be a fact, the pointing it out and complaining of it as a fact does not alter the equally or more important fact that for purposes of substantial constructive effort on the economic side the Chinese Government does not possess funds. Moreover, it is also a fact that the revenues of the Chinese Government are not extensive, [Page 389] and further a fact that the taxpaying capacity of the Chinese nation is not great, and finally a fact that, from the historical point of view, it has not been the practice of nations to finance large scale economic developments from current revenues. The economic developments which are called for in China can be carried out only by a process of borrowing by the Chinese Government. That Government cannot borrow at home the amounts necessary: the capital simply is not available in China. This points to the desirability, to the advantage both of the Chinese and of the world, for international financing in relation to China.
The League of Nations has entered upon a program of technical assistance to China. That program will get nowhere unless it is supplemented and complemented by financial assistance. T. V. Soong has made his effort to procure financial assistance from abroad by ways and means which would exclude Japan from participation. That effort has been unsuccessful and neither it nor any other effort based on the idea of excluding the Japanese will succeed.
This brings us to the international banking consortium. To the Consortium agreement which was concluded in 1920 banking groups of four powers were and are parties: the United States, Great Britain, France and Japan. That agreement is still in force. The Consortium has been able to do nothing positive toward lending money to China, partly for the reason that the Chinese have never been willing to apply to it and partly for the reason that other matters have absorbed the attention of the parties interested and/or concerned. Those countries are today the only countries which might be able to spare capital in amounts such as really would be called for if China and the Consortium went to work together in earnest.
The Japanese have been opposing efforts of other countries to assist China. Other countries object to and will oppose efforts of the Japanese to exclude them from types of economic assistance such as the Japanese may be disposed to render to China. The “way out” on this is a resurrection of the idea of joint and collective financial assistance to China. An instrument for that effort is in existence—the Consortium.
Three things are needed: first, that the groups of banks, especially the American and the British, be disposed to proceed with “China business” in case the opportunity develops; second, that the Japanese Government be disposed to permit the Japanese banking group to participate in such business, if and when; and, third, that the Chinese Government be disposed to call upon the Consortium—as it has not been disposed in the past to do—for assistance.
It is the feeling of the undersigned that the moment has arrived or is fast approaching at which this conjunction and coincidence of [Page 390] inclinations might, with a little diplomatic prompting, be caused to come about.
This idea was mentioned by the undersigned to the Secretary and the Under Secretary some two weeks ago, with the intimation that a memorandum on the subject might before long be forthcoming.
It now happens that, on Saturday last, June 9, in the course of a telephone conversation, about other matters, between Mr. Thomas W. Lamont and the undersigned, Mr. Lamont volunteered the statement that there were a number of matters about which he would like to have a talk, “especially the matter of the present status of the Consortium”; he said that some of the people who had been active in the creation of the Consortium, of whom he was one, had been trying to keep it alive, and that, expecting to leave New York for London on June 20, he was further expecting to talk over Consortium matters with his interested associates in London.
In the light of these facts, it is believed by the undersigned that it would be well for the Department and the President to give this question within the next few days some thought.
I feel disposed to recommend that the Administration adopt an attitude favorable in principle toward international action, through the agency of the Consortium, toward giving financial assistance to China. If the Administration adopts that attitude, I would suggest that I be authorized to call on Mr. Lamont (before June 20) and discuss with him, unofficially and informally (and of course in no way committing the Administration), various aspects and possibilities of this question.
- This paper bears the notation: “Mr. Phillips has seen and approved this. SKH VI–11–’34.”↩