employ as Chief Engineer, Traffic Manager and Chief Accountant of the road three Japanese to be recommended by the Japanese capitalists making the loan, but who should be subject to the supervision of the Chinese Managing Director. Any intention upon the part of the Japanese Government to control the operation of the road was disclaimed but nevertheless it was declared that Japan placed great importance upon these appointments.

Mr. Sze pointed out that the main aim of the Chinese Government in operating the road would be economy and efficiency: that foreign experts already employed by the Government could be utilized: that the Shantung line was only 280 miles in length and would in all probability be operated in connection with the Tientsin-Pukow line, and, therefore, could utilize, without extra expense, the services of the Chief Engineer, Traffic Manager and Accountant of that line. Mr. Sze said that it might be possible to have a Japanese District Engineer to look after the maintenance of the Shantung line who might be selected from Japanese Engineers already in the Chinese Railway service, but that there was no necessity for a separate Traffic Manager or Chief Accountant. He pointed out that upon the Peking-Hankow Railway, which was as long as the Tientsin-Pukow and Tsingtao-Tsinan lines put together, there was but one Traffic Manager. In fact, said Mr. Sze, there would be no real need for a separate District Engineer for the Shantung line after its union with the Tientsin-Pukow line, and he had made the suggestion that such a post might be created and filled by a

Japanese only to show the willingness of the Chinese to meet, as far as possible, the wishes of the Japanese Delegation.

Baron Shidehara insisted that what the Japanese Delegation wanted was a Japanese Traffic Manager and a Chief Accountant, that a Japanese Chief Engineer would not be insisted upon, and that unless this arrangement was arrived at, it would be difficult for Japan to accept payment in Treasury Notes.

The Japanese Delegation asked whether, if cash payment were agreed upon, the Chinese would pay the entire sum into the bank of a neutral Power prior to or at the time that the process of transferring the railroad should begin, which bank should pay the amount to Japan as soon as the transfer was completed.

To this question the Chinese Delegation replied that such a procedure would not only lead to a disturbance of the money market but necessarily entail upon China a very considerable loss in interest, since, while the money would be in the bank, only a very low rate of interest upon it would be paid as compared with that which the Chinese bankers could obtain from its use. Also there was the difficulty that at present the Chinese Delegation did not know how large the total sum would be, the value of the improvements and additions made by Japan not having been determined. It was therefore suggested by the Chinese Delegation that the Joint Commission for determining values, when it had finished its work, should decide how much money should be deposited at the outset in the bank of the third Power, and that the

remaining amounts be paid in, pari-passu as the transfer of the Railway and its appurtenant properties was proceeded with. Concretely, Mr. Sze suggested that two-fifths of the total amount should be paid in at the end of the first three months after the conclusion of the Shantung agreement; that at the end of another three months another fifth be paid in; and that the last two-fifths be paid in at the end of nine months after the signing of the agreement.

The Japanese Delegation said that it objected to this plan upon the ground that it did not furnish a sufficient guarantee that, after the transfer of the railway properties had begun, the remaining threefifths would surely be paid into the bank. To this the Chinese Delegation pointed out that no business transactions were possible without some degree of confidence in one another's good faith and ability,that merchants sold and delivered goods upon the understanding that they would be paid for when received. The Japanese Delegation, however, stood firmly upon the condition that, if cash payment were made the entire amount would have to be paid into a bank of a third Power before the transfer of the road should begin.

A deadlock having been reached upon the foregoing points, the Conversations were discontinued on December 20 until the Japanese Delegation could receive further instructions from its Government, and it was thus not until January 6 that the next meeting was had. After discussions running through two more meetings, the two Delegations found themselves still in disagreement and it was at this time, as

has been earlier referred to, that the Chinese Delegates suggested that the "good offices" of Secretary Hughes and Mr. Balfour be resorted to-a suggestion which the Japanese representatives expressed themselves as unwilling, or unable under their instructions, to accept. The meetings were thereupon adjourned sine die, pending further developments.

The Issue Drawn. In the Communique issued to the press the situation that had been reached was stated in the following terms:

The Japanese Delegates proposed a railway loan agreement plan for the settlement of this question on the basis of the terms of ordinary railway loan agreements entered into by China with various foreign capitalists during recent years, namely, on the following general lines:

1. The term of the loan shall be fixed at fifteen years while China shall retain an option of redeeming the whole outstanding liabilities upon six months' notice after five years from the date of the agreement.

2. A Japanese Traffic Manager and a Chief Accountant shall be engaged in the service of the Shantung Railway.

3. The details of the financial arrangement shall be worked out at Peking between the representatives of the two parties to the loan. This plan was not found acceptable to the Chinese Delegation. The Chinese Delegates, on their part, proposed the following two alternative plans:

1. China to make a cash payment for the railway and its appurtenant properties with a single deposit in a bank of a third Power at a specified date either before the transfer of the properties or when such transfer is effected.

2. China to make a deferred payment either in Treasury Notes or Notes of the Chinese Bankers' Union secured upon the revenues of the railway properties, extending over a period of twelve years with an option on the part of China at any time after three years

upon giving six months' notice to pay all the outstanding liabilities. The first installment to be paid on the day on which the transfer of the railway and properties is completed.

China to select and employ in the service of the Tsingtao-Tsinanfu Railway a district Engineer of Japanese nationality.

Neither of these plans was found acceptable to the Japanese Delegation in their present form.

Informal Conversations and Interviews. Meetings of the two Delegations were resumed on January 11 for the consideration of other questions involved in the Shantung controversy, but it was not until January 30 that the two Delegations found themselves in a position again to take up the matter of the railway.

During this interval of more than three weeks a number of plans emanating from American and British sources were brought to the attention of the Chinese and Japanese representatives with a view to bringing them, if possible, into agreement. Also personal and, of course, wholly informal interviews were held with Secretary Hughes, Mr. Balfour and other representatives of the American and British Governments. Mr. Sze, of the Chinese Delegation, also had an interview with Mr. Harding, President of the United States. As a result of these efforts, it finally appeared that an agreement might be reached upon certain terms that had been brought to the attention of both Delegations, and, therefore, with this expectation in view, the matter of the Shantung Railway was again taken up in the Conversations at the meeting held January 30.