893.48/1026
Memorandum by Mr. Raymond C. Mackay of the Division of Far Eastern Affairs
The Chinese Ambassador at Washington, by letter under date November 18, 1935,57 requested of the Farm Credit Administration a material revision of the schedule of payments covering the obligations of the Chinese Government incurred in connection with its purchase in 1931 of certain quantities of wheat and flour. A similar request, also under date November 18, 1935,57 was made by the Chinese Ambassador of the Reconstruction Finance Corporation in connection with the obligations of the Chinese Government incurred in connection with its purchase in 1933 of certain quantities of cotton and wheat.
The Department has now received for transmission to the Chinese Ambassador letters from the Reconstruction Finance Corporation and the Farm Credit Administration58 in reply to the aforementioned communications from the Chinese Ambassador.
In the case of the R. F. C. cotton and wheat credit of 1933, the Corporation has indicated that it is prepared to grant to the Chinese Government, in addition to the period provided for in the covering agreement, a further period of two years in which the account may be liquidated. This concession was envisaged but not guaranteed by the R. F. C. in its agreement with the Chinese Government under date May 29, 1933.
In the case of the wheat credit of 1931, payments in regard to which, under the existing agreement, should be completed on December 31, 1936, the F. C. A. has offered to make a very material concession by extending the period within which the account may be liquidated to September 30, 1939. It has also agreed to a sliding scale of payments which, for example, would call for a payment on December 31, 1935, of only $250,000 as compared with $3,070,942.18 called for under existing arrangements.
Before informing the Chinese Ambassador of the concessions which the R. F. C. and the F. C. A. are prepared to make to the Chinese Government, it would seem highly desirable that further thought be given to the question of those certain obligations of the Chinese Government to American creditors which, notwithstanding repeated protestations on the part of the American Government, have remained in default—with little or no indication by the Chinese Government of concern—over a period of many years. In some cases, notably in connection with indebtedness incurred on large purchases of American [Page 652] railway materials by agencies of the Chinese Government, new agreements, greatly in the favor of the Chinese Government, have been accepted by American creditors in order that they might obtain at least some payment for goods thus supplied. However, in one case, that of the so-called “Chicago Bank Loan of 1919”,59 the Chinese Government has, since the date of the loan’s maturity in 1921, failed to effect any payments whatsoever, either by way of principal or of interest.
The “Chicago Bank Loan” was made to the Chinese Government by the Continental and Commercial Trust and Savings Bank of Chicago, Illinois, under the provisions of a loan agreement and a supplemental agreement bearing the date October 11, 1919. It was issued in amount of $5,500,000 U. S. currency and was evidenced by “Republic of China Six Per Cent Two-Year Secured Gold Loan Treasury Notes of 1919”. It was secured by the Chinese Government in respect both to principal and interest “by a direct charge on the Revenues of the Tobacco and Wine Public Sales Tax of the Chinese Government”; by a direct charge on the “Goods tax receipts from the provinces of Honan, Anhwei, Fukien and Shensi, whether receipts be in the nature of likin taxes, transportation taxes or other taxes or imports of like nature”; and, in the event of a deficiency of funds derived from the Tobacco and Wine Tax, by agreement on the part of the Chinese Government to “make good such deficit from other sources of its revenue”. The Chinese Government has not only failed to effect liquidation of this loan but, in disregard of the loan agreement, it has not obtained the bank’s assent to the extinction of the likin taxes pledged. Furthermore, upon its effecting of such extinction, it failed to provide other and satisfactory security.
It would appear that the Department bears a special responsibility toward the holders of the Chinese Treasury Notes which were issued to the American public in connection with the loan under discussion. This responsibility arises from the fact that the Department on October 21, 1919, complied with a request of the Continental and Commercial Bank for a statement which was so phrased as in effect to attract the investing public to the Chinese loan issue to which it referred and which statement was in fact made a part of the prospectus issued by the bank. That the Department’s statement contributed toward inducing the investing public to purchase the Chinese Treasury Notes offered by the bank is evidenced by testimony in the Department’s files of which a typical example appears in a letter addressed to the Department on November 19, 1935, by one of the note holders who refers to himself as a purchaser who was “induced in large measure to buy these notes on account of a letter furnished by [Page 653] your department to the Chicago bank when it sold us the loan”.
Parenthetically it may be stated that, insofar as the Department is aware, the Chinese Government has never denied its responsibility in connection with, or the validity of, the Chicago Bank Loan—an attitude in sharp contrast to that which, until recently, has characterized the viewpoint of the Chinese Government in regard to the notorious Nishihara Loans60 which were of Japanese origin. Notwithstanding this fact, the American loan remains completely neglected whereas, according to a despatch under date November 13, 1935, from the American Embassy at Peiping,61 the Chinese Government is reported to have decided upon payment of 4,500,000 yen in settlement of one of the Japanese loans under reference.
Under these circumstances and in view of the foregoing, it is believed that the Department should, by the use of all appropriate and practicable means, continue in its endeavors—and make special effort—to cause the Chinese Government to proceed toward fulfillment of its admitted obligations in connection with the Chicago Bank Loan. To this end, it is suggested that the Chinese Ambassador at Washington be informed orally to the effect that, whereas the American Government, in conformity with its constant desire to afford, whenever appropriately possible, assistance to the Chinese Government, would wish to comply, insofar as the circumstances may permit, with the Chinese Government’s request for a postponement of payments due on the wheat credit of 1931 and the cotton and wheat credit of 1933, it seems desirable, before final consideration is given to the matter, to ascertain whether the Chinese Government would be prepared to give positive assurance that it will proceed toward liquidation of the Chicago Bank Loan. It is suggested that the Chinese Ambassador be further informed that, in view of the disturbed political and financial situation in China, it is not expected that the Chinese Government will, at this time, effect payment in full of the loan under reference; that it is expected, however, that the Chinese Government will provide adequate security to replace that which was withdrawn in contravention of the terms of the loan agreement: that, although the Department observes with gratification the apparent improvement in the financial position of the Chinese Government which has rendered possible the reported settlement, among other outstanding obligations, of at least one of the Nishihara loans, there exists in sharp contrast to such developments the fact that American holders of the Chinese note issue under reference have, over a period of many years, been shown by the Chinese Government no consideration; that the Department bears a special responsibility toward the holders of the Chinese Treasury Notes which were issued to the American public in connection [Page 654] with the loan under discussion; and that, although the American Government should not be expected to provide special inducements to cause the Chinese Government to meet its just obligations to American creditors, the material concessions which the American Government may, under the conditions named, be in position to grant in connection with the postponement of payments due on the wheat credit of 1931 and the cotton and wheat credit of 1933 would in effect free for other uses substantial sums of money which should, in the opinion of the Department, be utilized at least in part to effect a prompt initial payment and to make provision for later payments at periodic intervals on the Chicago Bank Loan.