893.48/1033
Memorandum by the Chief of the Division of Far Eastern Afairs (Hornbeck)
On December 19 the Chinese Ambassador called and Mr. Hornbeck made to the Ambassador a statement in the course of which Mr. Hornbeck said: [Page 661]
“Conceivably, such responsiveness might, in the case of the Reconstruction Finance Corporation credit, take the form of an extension by two years and, in the case of the Farm Credit Administration credit, of an extension by approximately three years of the periods within which the respective accounts may be liquidated. It might also be found possible to arrange in connection with the Farm Credit Administration credit a sliding scale of payments which, for example, would call for a payment on December 31, 1935, of as little as $250,000 as compared with $3,070,942.18 due under existing agreements.”
Mr. Hornbeck continued with a statement calling attention to certain facts connected with obligations of the Chinese Government to American creditors. Mr. Hornbeck then said:
“Under these circumstances, it is to be hoped that, if the American Government should be in position to comply, in the manner suggested, with the requests under reference of the Chinese Government for a postponement of payments due on the American credits of 1931 and 1933, the Chinese Government would wish to give positive assurance that it will proceed toward liquidation of obligations to American creditors. To that end it would not seem too much to expect of the Chinese Government that, although it may not at this moment be in position forthwith to effect payment in full of such obligations, it will nevertheless provide adequate security in place of securities which have been withdrawn in contravention of the terms of the loan agreements and will begin making payments on such loans and will make provision for later payments at periodic intervals until the obligations are liquidated.”
Mr. Hornbeck handed the Ambassador specimen schedules of the possible plan of payments for the two items of indebtedness under reference.
On December 27 the Chinese Ambassador called and made to Mr. Hornbeck an oral statement in the course of which the Ambassador said:
“…69 but it is found that the schedules proposed by the American Government are somewhat inadequate to meet the present situation.
“It is the desire of the Minister of Finance to have a longer extension than that proposed so as to take care of the heavy principal payments maturing within the next five years.
“Pending negotiations, the Ministry of Finance will pay on December 31, 1935, to the Farm Credit Administration a quarter million dollars United States currency.
“As first step toward the settlement of the debts to American nationals the Minister of Finance desires to have contact with some representative authorized to negotiate with reference to the Chicago loan with a view to its settlement as soon as practicable.”
In reply, Mr. Hornbeck stated
“… that the American Government, in the discussions which have followed upon the presentation of the Chinese Embassy’s two notes [Page 662] of November 18, 1935, has not proposed any schedules. The Chief of the Division of Far Eastern Affairs of the Department of State orally informed the Chinese Ambassador on December 19 that it might be possible to arrange for certain modifications of the existing agreements, along certain lines; but at the same time, he stated that the American Government sought an indication of a definite disposition on the part of the Chinese Government to take appropriate steps toward the liquidation of various of the outstanding obligations of the Chinese Government to American private creditors. As matters stand at present, there will be due to the Farm Credit Administration on December 31, 1935, the sum not of a quarter of a million dollars United States currency but of something over three million dollars United States currency.”
Mr. Hornbeck further stated that it did not seem to him that the statement that the Chinese Minister of Finance desired to have contact with some representative authorized to negotiate with reference to the Chicago loan afforded any clear evidence of a sympathetically responsive attitude on the part of the Chinese Government to the suggestion conveyed in the conversation of December 19. He queried whether the creditor should be called upon to proceed to China and whether, if the creditor did so proceed, there would not be likely to ensue developments embarrassing to the Chinese Government. The Ambassador gave clear indication that he shared the doubt which these queries suggested. Mr. Hornbeck suggested that there were more practicable and obvious methods by which evidence could be given of the Chinese Government’s good intention.
There followed a lengthy conversation between the Ambassador and Mr. Mackay in the course of which the Ambassador evolved and put forward certain ideas with regard to the possible handling of the question of the Chicago Bank Loan. In consequence of this, after a telephone coversation with Mr. Hornbeck, the Ambassador on December 28 asked Mr. John Abbott of the Continental Illinois National Bank and Trust Company of Chicago to come to Washington and on December 30 Mr. Abbott conferred with the Ambassador and later with Mr. Hornbeck and Mr. Mackay.
On the morning of December 30, Mr. Hornbeck received through the Shanghai Consulate General a personal telegram from Mr. Arthur Young, adviser to the Chinese Ministry of Finance, in which Mr. Young made a personal plea for acceptance by the American Government of payment on December 31 of $250,000, and in the course of which Mr. Young made the statement:
“Moreover China cannot establish a precedent of payment on particular obligations which could not be applied, with appropriate regard to different circumstances, to defaulted obligations as a whole (,) since it would become discrimination.”
On the afternoon of December 30 information was received by the Farm Credit Administration that the Central Bank of China had instructed the Chase National Bank of New York to proffer on December 31 $250,000 and, if this sum was not accepted, to pay the whole sum of $3,000,000 plus due on that date. The Farm Credit Administration informed the Department of this fact and asked the Department’s advice.
Also on the afternoon of December 30, the Chinese Ambassador called Mr. Hornbeck on the telephone and said that on the basis of conversations which he had had with Mr. Abbott, he had telegraphed his Government making recommendations with regard to a plan of payment for the Chicago Bank Loan.
Mr. Hornbeck then telephoned to Governor Myers of the Farm Credit Administration and suggested that the F. C. A. ask the Federal Reserve Bank in New York whether they could arrange to receive a payment on December 31 of $250,000 as a “part payment” on the amount then due and have the Chase National Bank retain and hold on deposit the remainder of the sum of $3,000,000 plus which was due, pending the concluding of arrangements which were under consideration by the F. C. A. for an extension of time with a new schedule of payments. The F. C. A. undertook to make this attempt.
On the morning of December 31 at 9:30 Mr. Hornbeck (Mr. Mackay being present) called the Chinese Ambassador on the telephone and informed him that “arrangements have been made in New York whereby it will not be permitted that the Chinese Government be put in default.” The Ambassador asked whether Mr. Hornbeck had received a telegram from Arthur Young. Mr. Hornbeck replied that he had. The Ambassador said that H. H. Kung had asked Dr. Arthur Young to send that telegram, urging acceptance of payment of $250,000. The Ambassador further said that Kung had telegraphed to him suggesting that, with regard to the Chicago Bank Loan, there be made an offer to give to the bondholders new bonds on a basis which would disregard outstanding interest and would provide for payment of interest on the new bonds at a rate of four per cent. The Ambassador said that he did not like this suggestion and that he had telegraphed back expressing his view that this suggestion was of doubtful value and would not be acceptable and urging that the suggestion which he had telegraphed yesterday be given serious consideration.
At 11:10 on December 31 Governor Myers called Mr. Hornbeck and said that he was advised from New York that the Federal Reserve Bank must receive definitively either the sum of $250,000 or the sum of $3,000,000 plus. Governor Myers asked again for advice.
A conference was immediately held among officers of FE, and the facts in the case were laid before the Secretary of State. The conclusion [Page 664] was reached that, all of the above recorded developments being taken into consideration, together with other factors, it would be advisable for the F. C. A. to take payment of the full amount due and enter negotiation later for an extension of time in connection with payments later due.
At 11:45 Mr. Hornbeck called the Chinese Ambassador on the telephone and inquired whether the Ambassador had known that the whole amount was lying in the bank in New York ready for payment. The Ambassador stated that he had known that, but that, on the basis of the statement which Mr. Hornbeck had made to him this morning, he had at once telegraphed to the Chase National Bank to make payment of interest due and $250,000 (only) on principal. Mr. Hornbeck pointed out that the statement which he had made had been nothing more nor less than that “arrangements had been made in New York whereby the Chinese Government would not be permitted to go into default.” The Ambassador stated that if payment of the whole sum was required it would put him in a very embarrassing position. Mr. Hornbeck said that he would discuss the matter with the F. C. A.
At 11:55 Mr. Hornbeck (Mr. Mackay being present) called Governor Myers on the telephone and stated that we had given the situation consideration and had talked it over with the Secretary, and that, although we felt that the decision should be and must be that of the F. C. A., we leaned to the view that, all circumstances being considered, it would be our suggestion that the F. C. A. take the full amount due and prepare a new offer with regard to the balance later due. Governor Myers said that if we had no objection he felt that the F. C. A. would better take the full amount. Mr. Hornbeck said that we certainly would have no feeling of objection.
- Omissions indicated in the original memorandum.↩