Later (October, 1916), the Department of State made public the interchange of memoranda which had taken place relative to this question. The memorandum of the Entente Powers was as follows:

"In view of the development of submarine navigation and by reason of acts which in the present circumstances may be unfortunately expected from enemy submarines, the allied governments consider it necessary, in order not only to safeguard their belligerent rights and liberty of commercial navigation, but to avoid risks of dispute, to urge neutral governments to take effective measures, if they have not already done so, with a view to preventing belligerent submarine vessels, whatever the purpose to which they are put, from making use of neutral waters, roadsteads, and ports.

"In the case of submarine vessels, the application of the principles of the law of nations is affected by special and novel conditions: First, by the fact that these vessels can navigate and remain at sea submerged, and can thus escape all control and observation; second, by the fact that it is impossible to identify them and establish their national character, whether neutral or belligerent, combatant or non-combatant, and to remove the capacity for harm inherent in the nature of such vessels.

"It may further be said that any place which provides a submarine warship far from its base with an opportunity for rest and replenishment of its supplies thereby furnishes such addition to its powers that the place becomes in fact, through the advantages which it gives, a base of naval operations.

"In view of the state of affairs thus existing, the allied governments are of the opinion that submarine vessels should be excluded from the benefit of the rules hitherto recognized by the law of nations regarding the admission of vessels of war or merchant vessels into neutral waters, roadsteads, or ports, and their sojourn in them. Any belligerent submarine entering a neutral port should be detained there.

acter, is capable of being stopped by warning shots across her bow, and can be boarded for examination of her papers. These strictures on the merchant status of the Deutschland, coupled with the declaration that submarine operation in itself constitutes an evidence of extra-legal character such as warships assume, are understood in fact to be crystallizing into a definite outline of a joint note of protest for presentation to the State Department."

"The allied governments take this opportunity to point out to the neutral powers the grave danger incurred by neutral submarines in the navigation of regions frequented by belligerent submarines."

To this the United States made answer in the memorandum of August 31, 1916, in part as follows:

"In reply the Government of the United States must express its surprise that there appears to be an endeavor of the allied powers to determine the rule of action governing what they regard as a "novel situation" in respect to the use of submarines in time of war, and to enforce a compliance of that rule, at least in part, by warning neutral powers of the great danger to their submarines in waters that may be visited by belligerent submarines. In the opinion of the Government of the United States, the allied powers have not set forth any circumstance, nor is the Government of the United States at present aware of any circumstances concerning the use of war or merchant submarines which would. render the existing rules of international law inapplicable to them. In view of this fact, and of the notice and warning of the allied powers announced in their memoranda under acknowledgment, it is incumbent upon the Government of the United States to notify the Governments of France, Great Britain, Russia, and Japan that, so far as the treatment of either war or merchant submarines in American waters is concerned, the Government of the United States reserves its liberty of action in all respects and will treat such vessels as, in its opinion, becomes the action of a power which may be said to have taken the first steps toward establishing the principles of neutrality, and which for over a century has maintained those principles in the traditional spirit and with the high sense of impartiality in which they were conceived.

"In order, however, that there should be no misunderstanding as to the attitude of the United States, the Government of the United States announces to the allied powers that it holds it to be the duty of belligerent powers to distinguish between submarines of neutral and belligerent nationality, and that responsibility for any conflict that may arise between belligerent warships and neutral submarines on account of the neglect of a belligerent to so

distinguish between these classes of submarines must rest entirely upon the negligent power.

(New York Times, July, passim, October 10-11, 1916.)

§ 26. PREVENTION OF UNNEUTRAL ACTS BY INDIVIDUALS

FOREIGN LOANS (1915)

THE thirteenth ground of complaint against the manner of its observance of neutrality by the American Government covered by the Stone-Bryan correspondence was as follows:

"(13) Change of policy in regard to loans to belligerents.

"War loans in this country were disapproved because inconsistent with the spirit of neutrality. There is a clearly defined difference between a war loan and the purchase of arms and ammunition. The policy of disapproving of war loans affects all governments alike, so that the disapproval is not an unneutral act. The case is entirely different in the matter of arms and ammunition, because prohibition of export not only might not, but, in this case, would not, operate equally upon the nations at war. Then, too, the reason given for the disapproval of war loans is supported by other considerations which are absent in the case presented by the sale of arms and ammunition. The taking of money out of the United States during such a war as this might seriously embarrass the Government in case it needed to borrow money and it might also seriously impair this Nation's ability to assist the neutral nations which, though not participants in the war, are compelled to bear a heavy burden on account of the war, and, again, a war loan, if offered for popular subscription in the United States, would be taken up chiefly by those who are in sympathy with the belligerent seeking the loan. The result would be that great numbers of the American people might become more earnest partisans, having material interest in the success of the belligerent, whose bonds they hold. These purchases would not be confined to a few, but would spread generally throughout the country, so that the people would be divided into groups of partisans, which would re

sult in intense bitterness and might cause an undesirable, if not a serious, situation. On the other hand, contracts for and sales of contraband are mere matters of trade. The manufacturer, unless peculiarly sentimental, would sell to one belligerent as readily as he would to another. No general spirit of partisanship is aroused no sympathies excited. The whole transaction is merely a matter of business.

"This Government has not been advised that any general loans have been made by foreign governments in this country since the President expressed his wish that loans of this character should not be made." (Senate Executive Documents, 63d Cong., 3d Sess., No. 716.)

Notwithstanding this official opinion, foreign loans were placed in the United States during the war by both belligerents, especially by the Entente Allies. In January, 1915, it was announced that the Russian Government had established with J. P. Morgan & Co. a credit of $12,000,000, against which drafts were to be made for the payment of obligations contracted in the United States, the understanding being, it was said, "that the Government does not regard this method of extending credits to foreign belligerents as a violation of the spirit of the President's neutrality proclamation." (New York Times, Jan. 19, 1915.). On April 1, 1915, it was stated that Morgan & Co. and other banking houses were prepared to receive applications for a large part of $50,000,000 one year five per cent bonds of the French Government at 99 and interest, the proceeds of the sale to be used "only for purchases made by the French Government in the United States." On the same date subscriptions were invited by the Central Trust Co. and Chandler & Co. for the purchase of $10,000,000 nine months five per cent treasury notes of the German Government at 999 and interest. (New York Times, April 1, 1915.) This step, it was later stated, was for the purpose of strengthening German credit in the United States.

On June 23, Morgan & Co., who had now become purchasing agents for the Allies, announced a new French loan on the following terms: "The Rothschilds of Paris have arranged to borrow in this market for a period of one year a considerable amount of money, the proceeds of which the Rothschilds will make available

to the French Government here for payment for its commercial obligations in this country. The loan will be secured by highgrade American railway bonds to be lodged with J. P. Morgan & Co. in New York. It is impossible at this time to state the amount of the loan." (New York Times, June 23, 1915.) This loan had in August, 1915, realized $43,000,000.

On July 9, 1915, a further French credit of $20,000,000 was announced by Morgan & Co. "to take the form of acceptances to be drawn by French banking houses upon the banking houses and institutions here which are parties to the arrangement." In addition, the loan was to be guaranteed by the Bank of France “and practically by the French Government as well," for the acceptances were to be secured by French treasury notes. (New York Times, July 9, 1915.)

By midsummer, 1915, however, the financial situation, as between America and Europe, was undergoing an unusual development. Sterling exchange was falling steadily, due to the shifting balance of trade. Gold shipments on a large scale were being made, but such measures, it was recognized, could be only temporary. Financiers generally were of opinion that, in order to restore international exchange to something like normal conditions, Great Britain and France, the chief customers of the United States, must be accommodated in some way, if they were to continue to purchase American products. Accordingly, the AngloFrench Financial Commission, headed by Lord Reading, Lord Chief Justice of Great Britain, came to New York in September, 1915, and held a number of conferences with representatives of the leading American financial institutions. Assurances were said to have been received that if a loan were arranged as a straight credit negotiation, "no opposition would be offered by the State Department on the score of a possible violation of neutrality." (New York Times, Sept. 14, 1915.)

As a result of these conferences, Lord Reading was able to announce, on September 28, that agreement had been reached as follows:

"... The proceeds of the loan will be employed exclusively in America, for the purpose of making the rate of exchange more stable, thereby helping to maintain the volume of American exports.