Memorandum of Conversation, by the Adviser on Political Relations (Hornbeck)

Participants: Mr. Charles E. C. Freyvogel } Vice Presidents of the Bankers Trust Company, New York, N. Y.
Mr. O. Parker McComas
Mr. Feis93
Mr. Hornbeck

Messrs. Freyvogel and McComas called by appointment (made at the instance of and by the Chinese Ambassador).

Mr. McComas referred to a project of which the Department already had some information, a project for a loan by the Bankers Trust Company to the Chinese Government. He said that he and Mr. Freyvogel had come to the Department with regard to political aspects of this project. In the course of the conversation he outlined the project as one whereby the bank would loan China $10,000,000; China would deposit silver to the value of $5,000,000 and the Bank of China would deposit securities covering the balance plus perhaps a 20 percent margin; and, the Bank of China would undertake to deposit additional security if and as needed to cover a proper ratio. Mr. McComas said that he assumed that the Chinese wanted this loan “for propaganda purposes.” He later explained this as meaning that the Chinese Government wished to be able to say to their own people, in [Page 529] connection with financing in China, and also to the world at large, that they were getting assistance from the United States (or from American sources).

Mr. Hornbeck said that in his opinion it is impossible to draw a clear line between economic qualities and political qualities in a matter of loans to foreign governments: he therefore wished to ask some questions which would bear on what might be regarded as the economic or commercial side of this project. He asked questions with regard to the proposed security, especially the part to be offered by the Bank of China, and with regard to activities of the Bankers Trust Company and other banks in New York in connection with or in relation to financing of Chinese and of Japanese business, both public and private, and financing of exports from this country to China and Japan. Mr. McComas and Mr. Freyvogel replied with apparent frankness to these questions. It was brought out that the project under consideration, if undertaken, would constitute the first making of an outright loan by American banks to either of the countries involved since the outbreak of the present Chinese-Japanese hostilities.

Mr. Hornbeck inquired whether Mr. Feis would ask questions or make comments. Mr. Feis expressed the view that there could be no advantage or profit to China from a loan of the character described.

The point that China was seeking this loan “for propaganda purposes” was again brought up, and the observation was made that the Chinese Ambassador envisaged this loan as an entering wedge or a stepping stone to the making of other and bigger loans.

Mr. Hornbeck said that the Chinese Ambassador had spoken to him about this project and had described it as involving from $10,000,000 to $25,000,000. Mr. McComas said that $25,000,000 had been mentioned when the Chinese Ambassador first broached the subject and that $10,000,000 had been later talked about as a starting point.

Mr. Hornbeck then asked just what inquiry, if any, Messrs. Freyvogel and McComas would feel disposed to put to the Department. Mr. McComas said that it was because this project, if proceeded with, would have a political aspect arid would involve a question of national policy, the project being different from ordinary commercial financing, that they had come to the Department. He indicated that they wanted to know what would be the Department’s attitude.

Mr. Hornbeck said that the Chinese Ambassador had made much the same inquiry, soliciting a “blessing” from the Department for the project, and that he had given the Ambassador an account of this Government’s attitude and policy and had told the Ambassador that he would say much the same thing to the representatives of the bank when they called. He then gave an exposition of policy and procedure in the light of the existence of the Neutrality Act and of public opinion [Page 530] in regard to subjects to which that act relates. He said that the old practice of the Department’s giving consideration to projects for foreign loans and expressing itself in terms of “no objection” or to the contrary has been discontinued. He said that, with the points which he had mentioned in mind, the parties interested in such a possible project would realize that the Department was not prepared to take a position with regard to the matter and, with those same points in mind, each of the parties must decide for itself.

Mr. McComas said that it was clear that the project had substantial political implications, would involve national policy to a considerable extent, and that Mr. Feis and Mr. Hornbeck could understand what would be his and Mr. Freyvogel’s position (which he implied would be unfavorable toward proceeding with the project); he added that he would explain the whole matter to his associates at the bank. Mr. Hornbeck said that he wanted to make sure that it would not be re-ported that the Department had taken a position either pro or contra the project: we could not say that we were favorable to it and we would not say that we were opposed to it. Mr. McComas and Mr. Freyvogel said that this was understood.

S[tanley] K. H[ornbeck]
  1. Herbert Feis, Adviser on International Economic Affairs.