In the early years of the twentieth century, a number of American financial institutions accumulated capital for which they sought foreign markets. J. P. Morgan and Company, Kuhn, Loeb and Company, and National City Bank of New York were prominent among firms interested in investing funds outside the United States. Opportunities for domestic investment were still plentiful: the United States remained a capital-importing nation, and Europe remained the world's banker until World War I. Opportunities for greater profit, however, were believed to exist abroad, and American bankers became deeply involved in the financial affairs of countries such as Mexico, Cuba, Haiti, the Dominican Republic, and Nicaragua. To a lesser extent, some bankers and industrialists were interested in East Asia, especially China. China was attempting to modernize, preferred U.S. capital to European or Japanese, and the Chinese government was a better credit risk than a number of U.S. state governments.
There were, however, other kinds of risks involved in investing in China. The Caribbean was an American lake, dominated by the growing power of the United States, and investors were confident that the U.S. government would protect their interests in Caribbean countries. But in China all of the great European powers and Japan struggled for advantage, sometimes political as well as economic. With rare exception, the U.S. government had shown itself disinclined to become involved in Chinese affairs, unwilling to give American businessmen support comparable to that which their European and Japanese competitors might reasonably expect from their own governments. As a result, little U.S. capital could be found in China in 1909, when William Howard Taft became president of the United States.
Taft was eager to expand American influence and power, and his administration was noted for its use of "dollar diplomacy" to achieve its ends. Taft not only continued Theodore Roosevelt's support of U.S. economic interests in Latin America, but also backed enterprises in places as remote as Turkey. The most striking contrast between the policies of Taft and Roosevelt could be found in East Asia, where Taft refused to acquiesce in Japanese expansion in Manchuria. He believed that Chinese and Americans shared a mutual interest in preventing Japanese hegemony over China's northeastern provinces and that the development of American economic interests in that region would serve the interests of both nations—perhaps all nations. Several schemes for forcing American capital into Manchuria, most notably the "neutralization" plan of Secretary of State Philander Knox, a scheme for internationalizing Chinese railways, failed; but in China proper the Taft offensive met with one apparent success: American bankers were awarded a share in a loan for the building of the Hankow-Canton or Hukuang Railway and allowed to join what became known as the consortium.
A group of American banking firms had come together in the last year of the Roosevelt administration to explore investment opportunities in East Asia, but had not acted in the absence of interest in the White House or on the part of the secretary of state. When Taft and Knox insisted, early in 1909, that the United States be allowed to participate in the financing of the Hukuang, the existing banking group was formally designated the American group and called upon to play the American role—if the British, French, and German groups, and their respective governments, as well as the Chinese government, would honor the American demand.
In June 1909, as a syndicate of British, French, and German bankers was about to conclude negotiations with the Chinese, Knox filed a formal protest, reminding the Chinese government of assurances it had given in 1904 that the United States would be able to share in any loan to build the Hukuang. Choosing to see the exclusion of the United States as an unfriendly act, Knox threatened to discontinue the remission of indemnity payments resulting from the Boxer Rebellion in 1900. Responding to American pressures, the Chinese urged the British, French, and German bankers to share their concession with the Americans. Almost a year of haggling over the terms of American participation followed, featuring the personal intercession of President Taft and the Department of State's refusal to permit the American group to accept anything less than a full quarter share of all components of the project. The American group, recognizing that its share of the bond issue that would ensue from the Hukuang loan would likely require listing in European exchanges, was willing to compromise with the European bankers in order to retain goodwill and preserve their own profits. The Department of State, however, was far more concerned with American prestige and influence, presumably contingent on the American group's participating on a basis of absolute equality. Finally, in May 1910, an agreement was signed between the three European banking groups and the American group that not only permitted the Americans to share in the Hukuang loan but brought them into the banking syndicate. As of the signing of the agreement, bankers of Great Britain, France, Germany, and the United States were united in a four-power consortium, committed to sharing equally all future business in China.
But the creation of the consortium did not lead to the immediate consummation of the Hukuang loan. To the consternation of the bankers, the Chinese government backed away, fearful that coming to terms with the consortium would exacerbate mounting unrest in China and lead to a revolution. Opposition to foreign control of China's railways was growing among educated Chinese, and there was, in addition, a desire by provincial gentry to prevent central control of railways. The consortium bankers insisted that a preliminary agreement was binding upon the Chinese and asked for and received diplomatic support from their governments. The U.S. minister to China, William J. Calhoun, was greatly embarrassed by instructions that he demand that the Chinese conclude the loan negotiations. He argued that it was undignified, "unworthy of civilized powers," to force a loan on an unwilling government. But Calhoun's protests were brushed aside, and the U.S. government joined in the pressures to which the Chinese succumbed in May 1911. As the Peking government anticipated, conclusion of the £6 million loan led to increased violence in the provinces and ultimately to revolution.
Even Calhoun was willing to drop his opposition to the loan if the loan operations were essential to continued cooperation between the United States and its new European partners in China. In Washington, this cooperation was deemed vital to the furtherance of U.S. interests in China. Participation in the loan was a wedge for American investments, which would lead to expanded U.S. trade, greater public attention to East Asia, and a greater role for the United States in the political affairs of the region. By forcing the consortium to admit American bankers, the Taft administration assumed it had reserved a place at the table at which the future of China would be played out. As long as the game promised to be profitable, the bankers of the American group demonstrated a grudging willingness to play the pawn.
While negotiations over the American role in the Hukuang loan were under way, the American group responded favorably to a Chinese request for another large loan, partly for currency reform and partly for Manchurian development. The Chinese hoped that by turning to the American bankers they could obtain better terms than were available from European bankers—that they could play off the American bankers against the Europeans. To Knox, the Chinese proposal held the dual promise of American hegemony over Chinese finances and an opportunity to penetrate Manchuria in order to fulfill the goal of checking Japanese expansion there. The American banking group, however, brushed aside the visions of both the Chinese and the Department of State by insisting on offering the new loan to the European bankers. Again, the problem was the shortage of capital in the United States, which necessitated an international listing of the bond issue for the loan to be floated successfully. If the American group offered the currency loan to the European groups, the Europeans might prove less disagreeable about having been forced to offer the American group a share in the Hukuang loan and allow the American group to list the bonds of both its loans on European exchanges. Profits for the American bankers would thus be assured. The Chinese were indignant, but once Knox was converted, he bludgeoned them into permitting the currency loan to be taken over by the consortium. The currency loan was never issued, however, because the revolution began.
The creation of the four-power consortium worried the Japanese and Russian governments, especially when they learned that part of the currency loan was earmarked for use in Manchuria. The Russians attempted to block the loan, and, failing at that, they tried unsuccessfully to destroy the consortium by urging the French—to whom they were closely tied, politically and economically—to withdraw. Ultimately, the Russians accepted French assurances that their interests in Manchuria could best be served if they too joined the consortium. As early as November 1910, while the Russians were still being obstructive, the Japanese concluded that their interests could be protected most readily from within and expressed an interest in membership in the consortium.
Knox was willing to allow both the Russians and the Japanese to have a share in the loan business, but not in the management of the consortium. The bankers of the consortium were not eager to share their profits with new partners. Both the British and U.S. governments tried instead to reassure the Russians and Japanese by specifying the particular Manchurian enterprises for which the consortium would provide funds, trying to demonstrate the absence of any intention to threaten the existing interests of the two Manchurian overlords. But the Russians and Japanese continued to fear that the Chinese intended to allow the consortium a monopoly on development loans in Manchuria and were still opposed to the terms of the currency reform loan in October 1911 when the revolution began.
As Ch'ing rule of China disintegrated and warfare spread along the Yangtze River, the U.S. government surrendered its hope of using the consortium or other forms of dollar diplomacy against Japan and Russia in Manchuria. With China less able than ever to protect its own interests in the frontier regions of the empire, Knox and his assistants concluded that American interests could be furthered only by cooperating with Japan and Russia, settling for an equal opportunity to trade in Chinese provinces under their control. The British Foreign Office reached similar conclusions, joining Knox in recommending that Japan and Russia be invited to join the consortium. Both France and Yüan Shih-k'ai, strong man and later president of the Chinese Republic, agreed; but the American bankers, reinforced by the Germans, both government and bankers, opposed Russian participation.
As Yüan's regime began to assert itself over the country, his prime minister, T'ang Shao-i, notified the consortium's representatives in Peking of his interest in a £60 million loan to enable the government to reorganize, pay off advances, and proceed with development projects. In return for an option on the reorganization loan, the consortium bankers agreed to an immediate advance on the currency loan. A few days later the consortium bankers learned that the Chinese had concluded another loan, with a Belgian syndicate that included the Russo-Asiatic Bank—the main instrument of the Russian equivalent of dollar diplomacy. To the Russian government and to bankers of England and France who were excluded from the consortium, the opportunity to disrupt the consortium's efforts to monopolize China's financial transactions proved irresistible. Similarly, the Chinese were delighted to find other bankers to play off against those who combined in order to dictate the terms under which China could obtain foreign capital. The consortium bankers were outraged and broke off negotiations with Yüan's government.
The few bankers involved in the consortium, of whatever nationality, wanted a monopoly over all Chinese loans. Their governments, especially the British and U.S. governments, were uneasy about the demands of their bankers and were more interested in establishing and preserving order in China and in using economic cooperation as a base upon which political cooperation in China could be built. The governments were more receptive to Chinese requests for a relaxation of the foreign controls that the consortium bankers demanded and were ready to admit Japan and Russia to the organization if that was necessary to facilitate operations in China proper. In addition, European political considerations made pacification of Russia imperative to France and Great Britain. Consequently, the French and British governments pressed for the admission of Japan and Russia to the consortium, appeasing the consortium bankers by forcing British and French participants in the Belgian loan to withdraw, which led to cancellation of that transaction.
Although Japan and Russia were both interested in joining the consortium, they stipulated the exclusion of Manchuria and Mongolia from the scope of the organization's operations. The British and French governments were willing to accept the Russo-Japanese terms, and in May 1912, Knox assented, but it was June before a formula agreeable to all concerned could be discovered. In June 1912, the six-power consortium came into existence, and more money was advanced to Yüan's regime. Yüan used the money to consolidate his position against his enemies, especially against Sun Yat-sen's supporters in the south and in parliament.
As Yüan sought more money, the banking groups were caught up by the political machinations of their governments in the selection of foreign advisers to oversee the expenditure of the monies loaned. European politics prevailed as Britain, France, and Russia supported each other's proposals to the detriment of German suggestions. Yüan became increasingly irritated with the consortium, his political opponents anxiously opposed further loans, and the American bankers wearied of the entire process. The U.S. minister to China had never been comfortable with the loan operations, and by 1913, Sir John Jordan, the British minister, considered the consortium arrangements to be of benefit to the one British bank involved but detrimental to British interests generally. To the American bankers there appeared little prospect for reasonable profits. The U.S. government had abandoned hope of playing an important role in Manchuria. Only the principle of cooperation, to which the State Department had dedicated itself, remained. In 1913 the new U.S. president, Woodrow Wilson, did not consider cooperation with European or Japanese imperialists a virtue, and he refused the American group the support it no longer wanted. In April the American role in the consortium was terminated.
Wilson mistrusted the Wall Street bankers of the American group, and he mistrusted their foreign partners. He suspected the consortium of seeking to take advantage of China's weakness to infringe on Chinese sovereignty and to profit at the expense of the Chinese people. He wanted to help China but was determined to find another way. Yüan was pleased, hoping that an American loan on better terms would soon be available. But American money was not forthcoming, and Yüan, desperately in need of money, concluded the reorganization loan with the remaining five members of the consortium. His position thus strengthened, Yüan was able to crush a rebellion led by Sun's Kuomintang (Nationalist) Party.
By April 1915, with Europe embroiled in warfare, Wilson recognized Japan's intent to dominate China, as evidenced by the Twenty-one Demands (1915). To check Japanese imperialism and further American interests in China, he designed his own version of dollar diplomacy. Although hostile to the American group because of its monopolistic practices and attempts to infringe on Chinese sovereignty, Wilson was very much interested in the use of American capital to further the process of Chinese modernization. He failed, however, to elicit interest among other American bankers, and, in response to a request from the Chinese government in 1916, Wilson asked the American group to consider a loan to China.
The member banks wanted to disband the American group but were held together by their inability to rid themselves of their share of the Hukuang loan. They responded negatively to Wilson's proposition, refusing to compete with the consortium and willing to consider a loan outside the scope of the consortium only if the U.S. government would offer a guarantee that China would fulfill its obligations. The government would not offer a guarantee and appealed instead to the bankers' patriotism. But the bankers would lend to China only as a business proposition, and the matter was dropped.
When a U.S. bank outside the American group entered into a loan agreement with the Chinese in 1916, the other consortium banking groups protested angrily. Wilson rejected the protests, warning the British, French, Japanese, and Russian governments against excluding American bankers from participation in Chinese affairs. With most of these governments anxious to avoid conflict with the United States while involved in a life-and-death struggle with the Central Powers in Europe, their bankers could count on little support against an invasion of American capital. There was one hope: British, French, Russian, and Japanese bankers expressed a desire to see the United States rejoin the consortium, to co-opt the United States and contain the financial offensive the American bankers were now presumed capable of launching.
In March 1917 the American group notified the Department of State that it favored accepting the invitation to rejoin the consortium, contending that the time was ripe for advancing American commercial prestige. But Wilson was unyielding: loans should be made directly to China and not through the consortium. The president recognized the overtures from the consortium as an attempt to prevent independent American action.