893.48/1111
Memorandum by the Chief of the Division of Far Eastern Affairs (Hornbeck) of a Conversation With Mr. William P. Hunt
The record states that Mr. Hunt stated that he was “acting on behalf of the Chinese Government”. Query: As we have been given no information with regard to this from Chinese sources, there is warrant for presuming that, if “acting on behalf of the Chinese Government”, Mr. Hunt’s authorization is on a commission or contingency basis.
Mr. Hunt’s project amounts to this: that the American Government [Page 497] advance China a credit of $30,000,000; that, against this credit, China purchase American cotton; that this American cotton be shipped directly from the United States to Germany, on sale of it by China to Germany; that German interests pay the Chinese Government, probably on a thirty-day basis, for the cotton; and that the Chinese Government pay the American Government, on a credit extended, over a period of six or seven years, with interest at four and one half or five per cent, with Chinese consolidated taxes as the security.
This project, if consummated, would constitute in effect a loan by the American Government to the Chinese Government of $30,000,000 (Chinese $90,000,000). It would contribute toward sale abroad of American cotton to the amount of $30,000,000.
China would get the $30,000,000; Germany would get the cotton; the United States would get China’s promise to pay.
Any loan to China at this time from abroad would, as to proceeds, go directly or indirectly into the military exchequer of the Nanking Government. It would arouse the antipathy of those factions in China which are opposed to that Government. It would be regarded as a taking sides by the lending country in China’s internal affairs. It would probably elicit criticism from various quarters in each of the countries which have been interested in the principle of international cooperation for public financing in China, especially the Consortium powers. It would most of all meet with disapproval in Japan and probably elicit angry criticism from that country. It would have a tendency to cause the Japanese military to increase the pressure and hasten the tempo of their activities against and toward coercion of the Nanking Government.
Thus, approval of this project by the American Government, and the consummation of this loan (a loan in fact though a credit in form), would be likely to have unsatisfactory political consequences both for the United States and for China.
Additional pressure by Japan upon China would have a tendency to undermine the ability to pay of the present Chinese Government in regard both to the outstanding financial obligations of that Government and to newly incurred obligations thereof. Long since badly impaired, the ability to pay of the Chinese Government has been constantly subjected during the past three or four years to increasing strains. No one can with warrant say today that a loan to the Chinese Government, no matter what the security, would be a good risk for any lender not in position to collect by use or threat of force. Any loan which might be made in disregard of objections by Japan would be in itself a very bad “risk” and would tend to encourage developments in consequence of which China’s ability to pay would be further diminished. We have definite knowledge that high Japanese officials [Page 498] have stated that any rendering of financial assistance to China from abroad without approval (and participation?) by Japan will be regarded with disfavor by Japan. It therefore would seem that, as a business proposition (or from the economic point of view), a transaction such as is under reference would not be a sound business transaction.
The question arises: What advantage does a three-cornered transaction like this offer to the German interests concerned as compared with a direct purchase of cotton by them from the United States? A reasonable surmise would be that the Chinese expect to offer the Germans this cotton at a price less than that which the Germans would have to pay if making the purchase direct. There is also the question: What advantage does the project offer to Mr. Hunt? It is a reasonable surmise that, if consummated, it would give him a substantial commission. If these surmises are correct, the transaction would be expensive to China: the discount given to the Germans and the commission given to Mr. Hunt would diminish the amount received by the Chinese Government as compared with the $30,000,000 of indebtedness to the United States which it would incur. Might it not seem that, if the American Government wishes to loan money to China, it would be better to make the loan direct and let the Chinese receive the full benefit (?) of the full amount thereof?
Reference is made to various memoranda here attached46 in which there has been discussed in earlier stages the project, in slightly different form, which Mr. Hunt now brings to our attention in a somewhat simplified form. In these memoranda it is shown that various agencies of this Government have not been in favor in principle of a transaction of this type. Reference is also made to Tokyo’s despatch No. 1905, June 16, 1936,47 in which there is given us the latest evidence with regard to the attitude of Japan on the question of financial assistance to China.
Reference is also made to an item which appears in the “Washington Post of July 21, by the Associated Press, with date line Tokyo, July 21, which gives an indication of Japanese attitude in the presence of a report that the United States is extending a credit to China.
It is believed that this Department should take a definite position of categorical opposition to this project. This could be done in a negative form: “This Department believes that this Government should not become involved in this project.”48