By June 1918 the Wilson administration was forced to concede failure in its efforts to find American capital for investment in China. Fearing that the Japanese, in the absence of American or European competition, would monopolize Chinese economic affairs, Wilson agreed to allow the American group to join its old associates in a new consortium. The American group was to become more inclusive, admitting to membership banking groups throughout the country, and it would pledge not to undermine Chinese sovereignty. In return, Wilson agreed to announce that the group was offering a loan to China at the suggestion of the government.
The Wilson administration had returned to the conception of an international banking consortium, because no other means could be found to move American capital into China. The American initiative for a new consortium was intended to serve the same purpose independent American loans would have served: the containment of Japanese economic expansion to preserve opportunity for U.S. expansion in China. Given Wilson's faith in the "liberal exceptionalism" of the United States, he readily assumed that U.S. expansion, unlike the Japanese variety, would be salutary for China—that Chinese and American interests were congruent.
For the American group, Thomas W. Lamont of J. P. Morgan and Company met with representatives of the British, French, and Japanese banking groups in May 1919, at the Paris Peace Conference. Lamont proposed and reached rapid agreement on the American plan for pooling all future business in China and for pooling all existing loan agreements and options involving public subscription except those relating to industrial undertakings upon which substantial progress had been made. The efficiency of cooperation and the expectation of the exclusive support of their governments were attractive to the bankers.
In June, however, the Japanese group reported that its government insisted on excluding from the consortium agreement all rights and options held by Japan in Manchuria and Mongolia, where Japan had "special interests." The Japanese expected the United States to consent to the exceptions on the basis of Secretary of State Robert Lansing's recognition of Japan's "special interests" in his 1917 agreement with Viscount Ishii Kikujiro. Once Japan's sphere in Manchuria and Inner Mongolia was thus protected, the Japanese government viewed the consortium with favor, as a means of improving relations with the United States and as an instrument for checking the anticipated torrent of American capital.
The purpose of the consortium, as understood in Washington and London, however, was to eliminate special claims to spheres of influence and to open all of China to cooperative international development. Not only the Wilsonians, but also Lord Curzon, Great Britain's secretary of state for foreign affairs, considered economic imperialism an anachronism in the face of the nationalist movement that was sweeping over China. When the French government expressed fear that refusal to grant the reservations Japan requested would result in the Japanese finding friends outside the circle of their wartime allies, Curzon insisted that the Japanese request was inadmissible and expressed confidence that they would back down in face of the unanimity of the British, French, and American groups supported by their governments.
Months passed as the Japanese and U.S. governments exchanged mutually unsatisfactory counterproposals. In February 1920 Lamont went to Tokyo in an attempt to break the deadlock. One area for possible compromise existed, and the State Department had focused on it in December 1919: Japan's existing economic interests ("vested" interests in Manchuria and Mongolia) could be conceded, excluded from the scope of the consortium. Both sides moved slowly toward this position. To prod the Japanese government, Wilson authorized a threat to reveal the secret protocol of the Lansing-Ishii Agreement, in which Ishii had committed Japan not to seek privileges in China at the expense of other powers.
As the negotiations proceeded, Lamont proposed an exchange of notes between the American and Japanese groups defining the attitudes of foreign bankers toward Japanese economic interests in Manchuria and Mongolia, specifying what would or would not come within the scope of the consortium. Lamont's plan would allow for the acceptance of existing economic facts without giving official governmental recognition. Only the consortium would recognize Japan's economic interests. The American and British ambassadors to Japan liked Lamont's proposal, but the Department of State rejected it and suggested that Lamont reach an agreement on the basis of specific enterprises the Japanese wanted to exclude from the consortium's focus. The U.S. government would not accept a reference to the exclusion of any region of China. Lamont was angered by State Department scruples, but, insisting that Manchuria was in fact dominated by the Japanese and unattractive to nationals of the other banking groups, he was able to reach agreement with his Japanese counterpart on the department's terms. In April 1920 the Japanese government, in a last effort to strengthen the consensus within the leadership, bid once more for veto power over railway construction in Manchuria. If further concessions could be won from Japan's prospective partners, opposition to the agreement within Japan might be stilled. The effort alone might satisfy dissidents within the cabinet that the government had done all that was possible. But the U.S. and British governments held firm and the Japanese appeared to retreat.
In the following month, the Ministry of Foreign Affairs gave the U.S. ambassador, Roland Morris, a "draft reply" to the American rejection of Japan's last set of reservations, claiming that the earlier note had not been presented for the purpose of raising new conditions but simply to avoid future misunderstandings. The Japanese government would not insist on explicit American assurances but would accept the general assurances offered previously and refrain from insisting upon discussion of the veto power it sought initially. The Japanese were satisfied to make known to the U.S. government their interpretation of the questions at issue.
Lamont and the American ambassador were pleased, interpreting the Japanese position as complete acceptance of the position taken by the U.S. government and supported by the British and French governments. But J. V. A. MacMurray, chief of the State Department's Division of Far Eastern Affairs, argued that the Japanese had retracted nothing. MacMurray claimed that the Japanese note reemphasized Japan's claim to a veto on railway construction in Manchuria and had further placed on record their understanding that American assurances regarding Japan's right of self-preservation meant U.S. recognition of that veto power. But MacMurray was overruled; the Department of State accepted the Japanese draft, and the consortium negotiations were concluded.
MacMurray was probably correct when he contended that the Japanese, in addition to receiving explicit acceptance of all of their existing and some of their projected economic interests in Manchuria and Mongolia, had established a strong basis for arguing that the United States had conceded to Japan veto power over railway construction in Manchuria. Certainly that was the view that prevailed in official Japanese circles. But MacMurray's superiors in the Department of State had concluded that the choice was between accepting the conditions obtained or surrendering the idea of the four-power consortium. To the U.S. government there appeared no alternative means of preserving American interests in China. After March 1920, when the Senate for the third time rejected U.S. membership in the League of Nations, the consortium offered the best, perhaps the only, basis for cooperation with the powers in China.
With the formation of the consortium in 1920 and the subsequent agreements reached at the Washington Conference (1921–1922), Great Britain, France, Japan, and the United States were committed to cooperation among themselves in assisting with the modernization of China. The consortium bankers were to provide the Chinese government with the funds it needed to build railroads and other major productive enterprises. But in the six years that followed the Washington Conference, China suffered from almost constant civil strife, and, despite prompting from the U.S. and British governments, the consortium did nothing to assist China's economic development: no loans were granted. The British frequently referred to the consortium as a financial "blockade," designed to prevent the Chinese government from obtaining funds it would presumably misuse.
Similarly, American businessmen anxious to develop or expand their interests in China failed to obtain needed capital. They did not lack support from the U.S. government, within which the Departments of Commerce and State competed to build up American economic interests in China. But American entrepreneurs in China, like the Chinese government, found the consortium an obstacle.
The core of the problem was the divergence between the interests of the Department of State and those of Lamont and his fellow bankers. The department wanted the consortium to provide capital for China's development—to help in the creation of a strong modern China in which American interests would thrive. For the bankers, the remote promise of China could not compete with the more immediate promise of Japan. In 1923 the House of Morgan floated a $150 million loan for the Japanese government, and other smaller loans followed in the mid-1920s. American capital that might have been available to China was lent instead to the Japanese, and some of it, by indirect means—by being "laundered" or simply by freeing other capital—facilitated the expansion of Japanese interests on the Asian mainland. Because the Japanese were competing with the Chinese for American capital, they could use their position in the consortium to discourage loans to China. The American group, led by Lamont, accepted this process. In short, one of the two competitors for capital worked in collusion with the potential lender to deny capital to the other. However permissible among businessmen pursuing profit, it was not consistent with the ends of public policy. Conditions in China, however, left the Department of State no means for changing the direction of the flow of capital. Lamont proved to be remarkably skillful in leading State Department officials to believe that he shared their views but was held back by partners less interested in helping China.
Twice during the early years of the consortium's existence the ability of Lamont and his colleagues to avoid lending money to the Chinese was tested. In both instances, in 1922 and in 1923, the U.S., British, French, and Japanese ministers to China and the Peking representatives of all four banking groups recommended that the loans be granted. In both instances the diplomats and group representatives argued that the consortium could not afford to reject Chinese overtures. But in neither instance could Lamont be moved, supporting or being supported by the head of the British group or the Japanese government in his opposition to taking up the Chinese business.
For the next two years, until the violence subsequent to the May Thirtieth Incident radically changed the context, Lamont and his British counterpart, with at least the public support of their governments, sang in praise of the success of the consortium's negative effort. They had stopped wasteful borrowing by the Chinese government, and their cooperation had a salutary effect on relations among the powers in China. Despite dissatisfaction with the inactivity of the consortium, the U.S. and British governments were anxious to have it remain in existence. For the United States and Great Britain the consortium appeared to have assisted in checking the expansion of Japan's economic hold over China. For the British, continued Anglo-American cooperation in East Asia was itself a valuable end. And the Japanese indicated no dissatisfaction with the consortium, supporting a motion in 1924 to renew the agreement in perpetuity. France, the fourth party to the consortium agreement, appeared to its partners to be apathetic, unreliable, and forever bargaining for some trivial advantage, but supportive of the others when the agreement was renewed.
Although after 1923 there was never again serious consideration of a loan from the consortium to any Chinese regime, the organization continued to exist, at least in theory, until a decision in 1946 that the Japanese attack on U.S. and British forces in 1941 constituted abrogation of the agreement. The persistence of the consortium through the 1930s is remarkable because of the constant desire of the American group to withdraw and because of the determination of the British government to end the agreement in 1937. One stubborn man, Stanley K. Hornbeck of the Division of Far Eastern Affairs, Department of State, continually blocked dissolution, with an assist from the Japanese army in the summer of 1937.
The American group's desire to be rid of the consortium, voiced regularly by Lamont, reflected the leadership's conviction that there was no money to be made out of China and that continuation of the organization was not worth the bother or expense. From 1920 on, Lamont argued that there was no market for Chinese securities in the United States—that the American investor would not touch Chinese bonds until the Chinese demonstrated stability and paid off earlier loans, especially the Hukuang Railway loan, on all issues of which they had defaulted in 1925. After the Banking Act of 1933 prohibited banks of deposit from underwriting or offering securities, Lamont explained to the Department of State that his own firm and most members of the American group could no longer participate in loan operations even if they were to become feasible on a business basis. But for over a quarter of a century, Lamont deferred to the State Department's desire to maintain the consortium. It was not until January 1946 that he succeeded in getting the department to concede unequivocally that no useful purpose would be served by continuing the consortium, with or without the American group in it.
Despite their failure to get the consortium to lend money to China, officials of the Department of State fought to keep the organization in existence. Certainly it was not because American economic interests prospered. Lamont and his colleagues were concerned with their own profits and not with the expansion of the trade of their countrymen or with abstract conceptions of national interest. Sino-American trade remained static in the 1920s and rose slightly only in percentage terms for a few years in the early 1930s. The increase in American investments in China was not impressive. The American group hindered rather than helped the development of U.S. economic interests in China, as the Department of Commerce found when it tried to advance the prospects of American corporations.
Ultimately, men like MacMurray and Horn-beck fought to retain the consortium as a means of keeping the United States involved in East Asia, in the affairs of China. This had always been the fundamental purpose of a policy of cooperation with those powers earlier and more profoundly committed to activism in China. Without hitching a ride, the State Department's East Asian specialists, from John Hay's adviser, William W. Rockhill, through Hornbeck, feared not only that the United States would be deprived of an opportunity to expand its interests in their region, but also that interest in the area to which they were committed would cease to exist in the United States. The promise of U.S. expansion in China, however remote the reality, had become their raison d'être. The consortium, however inadequate, was the only vehicle they had for much of the interwar period.