Foreign Relations of the United States, 1946, The Far East: China, Volume X

893.516/11–1945

Mr. Thomas W. Lamont ² to the Secretary of State

New York , November 19, 1945.

Sir: In 1939 we exchanged certain correspondence³ with the Department as to the desire of the Managing Committee of the American Section of the China Consortium⁴ to reduce their contribution to the expenses of the central “clearing” office in London, in view of the change in conditions which had taken place since the Consortium was organized; also because under the provisions of the Banking Act⁵ the great majority of the members of the American Section were forbidden to undertake the principal function for which the Consortium was originally organized; namely, to render assistance to China through the issuance in the Western markets of such government and/or railway or public utility loans guaranteed by the Chinese Government as might be considered sound and marketable in the several Western markets.

An interim arrangement to reduce the contribution as mentioned above was made and payments were made by the Managing Committee of the American Group through the first half of 1941, subsequent to which date no further charges against the American Group have been made.

We recently asked the office of Messrs. Morgan Grenfell & Co. Limited to explore the present attitude of the Hongkong & Shanghai Banking Corporation, which acts as the Central Clearing Office, repeating our views that no useful purpose seemed to be served by maintaining the existence of the Consortium, at least so far as concerned the American Group members. In reply we have received the suggestion that we submit this tentative inquiry more formally and that we indicate to the Hongkong & Shanghai Banking Corporation that the American Group wishes to withdraw. We are given reason to believe that the Hongkong & Shanghai Banking Corporation might be disposed to accept complete disbandment of the Consortium.

Under the circumstances set forth above, we are of the opinion that a majority of the members of the American Group would favor its withdrawal from the Consortium, but before communicating with the Hongkong & Shanghai Banking Corporation to such effect, we are writing to consult the Department.

We should appreciate word as to whether the Department interposes any objection. Although the files of the Department contain complete information in regard to the Consortium, nevertheless, as a matter of convenience to you at the present moment we have prepared the attached brief memorandum covering its general history.

Respectfully,

Thomas W. Lamont

[Enclosure]

Memorandum by Mr. Thomas W. Lamont

The International Consortium of Bankers for the Assistance of China had its beginning in 1909 when banking groups of Great Britain, France and Germany met to consider financing the construction of the Hukuang Railways⁶ in China. In that year, during the administration of President Taft, the Open Door policy was being advocated in Washington, and the firm of J. P. Morgan & Co. were requested by the then Administration to organize an American Group to take its place with that International Group. This American Group consisted of J. P. Morgan & Co., Kuhn Loeb & Co., First National Bank and National City Bank. The International Consortium was organized in 1910 under agreements for the cooperation of the Groups in all Chinese business falling within their scope.

When the Wilson administration took power in 1913, Secretary Bryan,⁷ probably possessed of the fantastic idea that this Consortium had been organized for the exploitation of China, announced publicly without prior warning to the American Group that our Government could no longer give its support to the Consortium.⁸ This declaration resulted in the immediate withdrawal of the American Group from Chinese business, to the dismay of the other Groups.

However, in 1918, without any suggestion from the American bankers, the Wilson administration had a complete change of heart and requested that a new International Consortium be organized and a much enlarged American Group included.⁹ Owing to the preoccupation of World War I the initial steps for the organization of the new Consortium were not instituted until the Spring of 1919, when Mr. Lamont, representing the American Group, met in Paris with representatives of the British, French and Japanese banking groups.

Subsequently difficulties arose as to certain claims of special rights made by Japan as to Inner Mongolia and Manchuria. Early in 1920, at the request of the Department of State and the British and French Foreign Offices, Mr. Lamont visited both Japan and China and succeeded in arranging a modus vivendi with Japan which was satisfactory to the other groups and the other powers. The China Consortium thereafter, in October 1920, completed its formal organization.

During the existence of the Consortium, the only business undertaken by the American Group arose out of a loan for $5,000,000 made by the Group members to the Pacific Development Corporation,¹⁰ secured by a note of the Chinese Government, previously owned by the Development Corporation. This loan to the Pacific Development Corporation was reduced by interim payments to $3,600,000, and then defaulted in 1921. The collateral was not reduced to possession, by foreclosure, until 1928.

No interest was paid on the Chinese note after 1921, but in 1937 an arrangement negotiated with Dr. H. H. Kung, the Finance Minister of China, by Mr. Lamont revived it and resulted in the reduction in the claim for principal and in waiver of all overdue interest. While service on the new bonds at the modified rate was continued until January 1, 1939, it was then suspended due to conditions resulting as a consequence of Japan’s attack on China.

The Chinese Government bonds acquired by the American Group at a net cost of about $3,530,000 have had a market value as low as $80,000. At the present time, the aggregate value based upon market quotations is about $1,150,000. In addition to the depreciation represented by the foregoing figures, the amount of interest unpaid, computed at the contract rates in effect from time to time, first on the Pacific Development Corporation note and then on the Chinese Government note, was about $3,800,000, disregarding interest due to default on the Chinese Government bonds which took place in 1939; such interest, accrued and unpaid, amounts to nearly $1,000,000.

The potential and actual loss in this transaction, to the extent that continuous ownership was maintained, has fallen on the twenty-nine members of the American Group, including the Managing Committee. The loss of over $500,000 in maintaining the expenses of the Group has fallen solely upon members of the Managing Committee, although it was contemplated that that expense would become a charge against any future earnings of the American Group.

Owing to the confused conditions obtaining in China, it will be noted that the Consortium has never actually functioned in any direct operation, and to the American Group it seems that there is no further reason for its existence, or at any rate no possibility of American participation on the original terms; the Federal law of 1933 which prohibits the issuance of securities by banking institutions in the United States effectively preventing participation.

[ New York ,] November 19, 1945.

2. Of J. P. Morgan & Co., Inc., Representative of the American Group of the China Consortium.
3. See letter of July 31, 1939, from Mr. Lamont to the Adviser on Political Relations (Hornbeck), Foreign Relations, 1939, vol. iii, p. 731.
4. For organization of the China Consortium, see ibid., 1920, vol. i, pp. 497 ff.
5. The Banking Act of 1933, approved June 16, 1933; 48 Stat. 162.
6. For the inception of the Hukuang Railways loan, see Foreign Relations, 1909, pp. 144 ff.
7. Secretary of State William Jennings Bryan.
8. See telegram from the Acting Secretary of State to certain American diplomatic officers on March 19, 1913, 9 p.m., and letter from the American Group to the Secretary of State on March 19, 1913, Foreign Relations, 1913, pp. 170 and 171.
9. See Foreign Relations, 1918, pp. 169 ff.
10. For the inception of the Pacific Development Corporation loan, see Foreign Relations, 1919, vol. i, pp. 418 and 540 ff.