Mr. Thomas W. Lamont, of J. P. Morgan & Co., to the Adviser on Political Relations ( Hornbeck )

Dear Dr. Hornbeok: Confirming my telephone conversation with you today, I attach herewith copy of the memorandum filed a week ago with the Hongkong Bank in London, to be submitted to the Head Office at Hongkong. I think that probably you and I don’t see quite eye to eye on this matter of the dissolution of the Consortium, but I don’t see what useful purpose the maintenance of it serves. However, we shall see what we shall see.

Hoping that you will have a fine holiday, I am

Yours sincerely,

T. W. Lamont

Memorandum by the Chairman of the American Group, China Consortium (Lamont)

The situation of the American Group in the China Consortium was radically and completely changed through the passage of the Federal Banking Act 193330 which prohibited American bankers of deposit from issuing or dealing in securities. Inasmuch as the American Group is made up almost entirely of banks of deposit, one will readily see that it is quite impossible (even if conditions in China were materially altered for the better) for the Group ever to function in the issuance of Chinese securities. For the last five years, therefore, there has existed no valid reason for the continued existence of the American Group for while at the time the Act was enacted, six years ago, and even later, there was some little talk of possible modification, now all such prospect has been abandoned. (There has seemed to exist in certain London financial quarters the impression that the so-called Johnson Act [Intergovernmental Debts]31 constituted the obstacle in question. That act, which may be temporary, [Page 732] has no bearing on the situation. The obstacle is the Banking Act which is permanent).
In the light of these circumstances and of the situation in China, there has been considerable discussion for the last three years between the British and the American Groups as to the question of dissolution of the Consortium. In fact, the British Group manifestly anticipated such a dissolution in the execution of the Pukow–Siang-yang contract for financing, which contract tied this business up to the British Group by the provision that the contract would not become effective until the present Consortium obligations ceased to be binding upon the British Group. The British Foreign Office in point of fact, as our own Department of State informed us a few months ago, expressed itself as seeing no reason for the continuance of the Consortium. The American Department of State however expressed the hope that dissolution might be postponed for the time being, and also that the American Group might see its way clear not to file notice of withdrawal always provided the responsibilities upon it did not prove too onerous. As a matter of fact, although there are nominally 30 members of the American Group it has been impossible to levy upon any of them, except the members of the so-called Managing Committee, the expenses and the fee of the Hongkong & Shanghai Banking Corporation. For one reason or another, even the members of the Managing Committee have fallen away, so that they consist now of only three or four institutions, and Messrs. J. P. Morgan & Co. (who have acted as clearing house without compensation for years for the American Group) are not disposed longer to urge upon their associates the payment of a stated fee as it now stands. Nor is the Morgan firm disposed to take upon its own shoulders the entire onus of such payment.
The amount of this fee, £750, for the American Group, seems on its face an inconsiderable matter. Yet under the peculiar circumstances set forth in the foregoing paragraphs the continuance of the American Group in the Consortium depends upon some readjustment of this fee. In connection with this it may be appropriate to recall the fact that up to 1920 the fee charged by the Hongkong & Shanghai Banking Corporation for its clearing services in connection with the Hukuang Railway Loan (the only issue in which the American Group ever participated) was fixed at £25 per annum. Upon the reorganization of the Consortium in 1920 the expectation was that there would almost at once ensue very considerable activity in the functions of the Consortium. In expectation of such activity an increase in the annual payment to £750 for each participant was arranged. This activity has never been realised. Political conditions in China in the almost 20 years following 1920 have gone steadily and rapidly from bad to worse and in the minds of the American [Page 733] Group there has been for years past no valid reason for the continuance of this fee at its present level. This observation is made with great respect and with full knowledge of the readiness with which the Hongkong & Shanghai Banking Corporation would have gladly fulfilled any special functions attributed to it.
The American Group has however until recently allowed this matter to rest as it was, hoping that there might be some favourable development. There has been no such development and in fact now the outlook, in the opinion of the American bankers, is rendered hopeless for many years not only on account of conditions in China but, as has been pointed out in paragraph (1) above, by the completely prohibitory laws of the American Government. During the term of this last 20 years the American Group has up to within a year or two maintained at great expense representation of its own in China. Unlike the other three groups of the Consortium the American Group has had no local institution that could function and the expenses of special representatives, cable exchanges, etc., have, since the Consortium was originally reorganised, been a charge upon the American Group of something like $500,000. The other Groups have been able, it would appear, to carry on their representation in such a way as to enable the overhead to be largely absorbed in other items of expenses.
The American Group, in the light of the circumstances as set forth, propose alternative courses of action. The first would be this:
The dissolution of the Consortium not later than January 1st 1940. As to the fear that in the present state of affairs in the Far East such a dissolution and break-up of so-called partnership would have an unfortunate repercussion in Japan, the view of the American Group is just the opposite. That view is to the effect that politically it would be a very good thing for the Japanese Group and the Japanese Government to realise that under prevailing circumstances the Western banking groups prefer no formal association with them. While the American banking group realises that the Japanese bankers are not responsible for the actions of their Government, nevertheless under prevailing conditions the American bankers would prefer to dissolve partnership with the Japanese bankers. The alternative suggestion is:
If, for reasons of State, it may be deemed important that formal dissolution of the Consortium be not undertaken, then the American Group will be prepared to withhold its own contemplated withdrawal upon the understanding that beginning January 1st 1940 the fee to be paid by the American Group to the Hongkong & Shanghai Banking Corporation should not exceed £200 annually. This suggestion is made purely out of goodwill and in order to avoid the necessity on the part of the American Group to file notice of withdrawal. Any suggested rearrangement should also provide that any group is permitted to withdraw from the Consortium upon 90 days’ notice.
As to the effect upon the Hongkong & Shanghai Banking Corporation’s relations with the other groups under any such arrangement as just suggested, that is not a matter for the American Group to pass upon. The other banking groups are in a position wholly different from that of the American Group. Members of the other Groups have, as heretofore pointed out, active business relations in China which are continuous. The American Group has none with the possible exception of one member, the National City Bank, whose scope of operation is very limited. An even more radical difference, however, rests in the fact that the bankers chiefly composing the American Group are now completely estopped from carrying out any of the original functions designed for the Consortium. And while the amount involved, namely £750 per annum, may seem small, nevertheless, under existing conditions it is an item sufficient to make some readjustment necessary. Naturally, if its nominal membership is still desired, the American Group would much prefer to see friendly and voluntary readjustment than to give actual notice of withdrawal.

Respectfully submitted,

T[homas] W. L[amont]
  1. Approved June 16, 1933; 48 Stat. 162.
  2. Brackets appear in the original; for the Johnson Act, approved April 13, 1934, see 48 Stat. 574.