opinion: NATIONAL CITY BANK OF NEW YORK v. REPUBLIC OF CHINA et al.
  No. 30.
  Argued November 9, 1954.—
  Decided March 7, 1955.
  Wm. Harvey Reeves argued the cause for petitioner. With him on the brief was Chauncey B. Garver.
  Louis J. Gusmano argued the cause for respondents. With him on a brief for the Republic of China were Cletus Keating and Robert E. Kline, Jr.
  Mr. Justice Frankfurter
  delivered the opinion of the Court.
  The Shanghai-Nanking Railway Administration, an official agency of respondent Republic of China, established a $200,000 deposit account in 1948 with the New York head office of petitioner National City Bank of New York. Subsequently, respondent sought to withdraw the funds, but petitioner refused to pay, and respondent brought suit in Federal District Court under 48 Stat. 184, as amended, 12 U. S. C. § 632.
  In addition to various defenses, petitioner interposed two counterclaims seeking an affirmative judgment for $1,634,432 on defaulted Treasury Notes of respondent owned by petitioner. After a plea of sovereign immunity, the District Court dismissed the counterclaims, 108 F. Supp. 766, and entered judgment on them pursuant to Rule 54 (b), Federal Rules of Civil Procedure. Petitioner appealed, and while the appeal was pending sought leave from the District Court to amend the counterclaims by denominating them setoffs and including additional data. The District Court denied leave. 14 F. R. D. 186. The Court of Appeals for the Second Circuit affirmed the dismissal and the denial on the ground that' the counterclaims were not based on the subject matter of respondent’s suit (whether they be treated as requests for affirmative relief or as setoffs) and, therefore, it would be an invasion of respondent’s sovereign immunity for our courts to permit them to be pursued. 208 F. 2d 627. Because of the importance of the question and its first appearance in this Court, we granted certiorari. 347 U. S. 951.
  The status of the Republic of China in our courts is a matter for determination by the Executive and is outside the competence of this Court. Accordingly, we start with the fact that the Republic and its governmental agencies enjoy a foreign sovereign’s immunities to the same extent as any other country duly recognized by the United States. See Guaranty Trust Co. v. United States, 304 U. S. 126, 137-138.
  The freedom of a foreign sovereign from being haled into court as a defendant has impressive title-deeds. Very early in our history this immunity was recognized, De Moitez v. The South Carolina, Bee 422, 17 Fed. Cas. 574, No. 9,697 (Admiralty Court of Pa., 1781, Francis Hopkinson, J.), and it has since become part of the fabric of our law. It has become such solely through adjudications of this Court. Unlike the special position accorded our States as party defendants by the Eleventh Amendment, the privileged position of a foreign state is not an explicit command of the Constitution. It rests on considerations of policy given legal sanction by this Court. To be sure, the nonsuability of the United States without its consent is likewise derived from considerations of policy. But these are of a different order from those that give a foreign nation such immunity. It is idle to repeat or rehearse the different considerations set forth in Mr. Chief Justice Marshall’s classic opinion in The Schooner Exchange v. M’Faddon, 7 Cranch 116.
  But even the immunity enjoyed by the United States as territorial sovereign is a legal doctrine which has not been favored by the test of time. It has increasingly been found to be in conflict with the growing subjection of governmental action to the moral judgment. A reflection of this steady shift in attitude toward the American sovereign’s immunity is found in such observations in unanimous opinions of this Court as “Public opinion as to the peculiar rights and preferences due to the sovereign has changed,” Davis v. Pringle, 268 U. S. 315, 318; “There is no doubt an intermittent tendency on the part of governments to be a little less grasping than they have been in the past . . . ,” White v. Mechanics Securities Corp., 269 U. S. 283, 301; “. . . the present climate of opinion . . . has brought governmental immunity from suit into disfavor . . . ,” Keifer & Keifer v. Reconstruction Finance Corp., 306 U. S. 381, 391. This chilly feeling against sovereign immunity began to reflect itself in federal legislation in 1797. At that early day Congress decided that when the United States sues an individual, the individual can set off all debts properly due him from the sovereign. And because of the objections to ad hoc legislative allowance of private claims, Congress a hundred years ago created the Court of Claims, where the United States, like any other obligor, may affirmatively be held to its undertakings. This amenability to suit has become a commonplace in regard to the various agencies which carry out “the enlarged scope of government in economic affairs,” Keifer & Keifer v. Reconstruction Finance Corp., supra, at 390. The substantive sweep of amenability to judicial process has likewise grown apace.
  The outlook and feeling thus reflected are not merely relevant to our problem. They are important. The claims of dominant opinion rooted in sentiments of justice and public morality are among the most powerful shaping-forces in lawmaking by courts. Legislation and adjudication are interacting influences in the development of law. A steady legislative trend, presumably manifesting a strong social policy, properly makes demands on the judicial process. See James M. Landis, Statutes and the Sources of Law, in Harvard Legal Essays (1934), p. 213 et seq.; Harlan F. Stone, The Common Law in the United States, 50 Harv. L. Rev. 4, 13-16.
  More immediately touching the evolution of legal doctrines regarding a foreign sovereign’s immunity is the restrictive policy that our State Department has taken toward the claim of such immunity. As the responsible agency for the conduct of foreign affairs, the State Department is the normal means of suggesting to the courts that a sovereign be granted immunity from a particular suit. Ex parte Republic of Peru, 318 U. S. 578, 581. Its failure or refusal to suggest such immunity has been accorded significant weight by this Court. See Compania Espanola de Navigacion Maritima, S. A. v. The Navemar, 303 U. S. 68; Republic of Mexico v. Hoffman, 324 U. S. 30. And this for the reason that a major consideration for the rule enunciated in The Schooner Exchange is the embarrassing consequences which judicial rejection of a claim of sovereign immunity may have on diplomatic relations. Recently the State Department has pronounced broadly against recognizing sovereign immunity for the commercial operations of a foreign government, 26 Dept. State Bull. 984 (1952), despite the fact that this Court thirty years earlier rejected the weighty opinion of Judge Mack in The Pesaro, 277 F. 473 (see, also, his opinion in The Gloria, 286 F. 188), for differentiating between commercial and war vessels of governments. Berizzi Bros. Co. v. Steamship Pesaro, 271 U. S. 562.
  And so we come to the immediate situation before us. The short of the matter is that we are not dealing with an attempt to bring a recognized foreign government into one of our courts as a defendant and subject it to the rule of law to which nongovernmental obligors must bow. We have a foreign government invoking our law but resisting a claim against it jvhich fairly would curtail its recovery. It wants our law, like any other litigant, but it wants our law free from the claims of justice. It becomes vital, therefore, to examine the extent to which the considerations which led this Court to bar a suit against a sovereign in The Schooner Exchange are applicable here to foreclose a court from determining, according to prevailing law, whether the Republic of China’s claim against the National City Bank would be unjustly enforced by disregarding legitimate claims against the Republic of China. As expounded in The Schooner Exchange, the doctrine is one of implied consent by the territorial sovereign to exempt the foreign sovereign from its “exclusive and absolute” jurisdiction, the implication deriving from standards of public morality, fair dealing, reciprocal self-interest, and respect for the “power and dignity” of the foreign sovereign.
  (a) The Court of Claims is available to foreign nationals (or their governments) on a simple condition: that the foreign national’s government can be sued in its courts on claims by our citizens. An American or a Chinese could sue in the Court of Claims for default on a United States bond, 28 U. S. C. § 1491 (4), or could counterclaim — to the extent of the Government’s claim — in a suit by the United States in any court, 28 U. S. C. § 2406; see United States v. Wilkins, 6 Wheat. 135; cf. United States v. Bank of the Metropolis, 15 Pet. 377; United States v. United States F. & G. Co., 309 U. S. 506, 511. Thus it seems only fair to subject a foreign sovereign, coming into our courts by its own choice, to a liability substantially less than our own Government long ago willingly assumed.
  (b) The Republic of China is apparently suable on contract claims in its own courts, and Americans have the same rights as Chinese in those courts. No parochial bias is manifest in our courts which would make it an affront to the “power and dignity” of the Republic of China for us to subject it to counterclaims in our- courts when it entertains affirmative suits in its own. Decisions of the Chinese courts which seem to grant absolute immunity from direct suit to foreign sovereigns are inapposite in this context and in light of our State Department’s reluctance to raise the defense of sovereign immunity in foreign courts, see 26 Dept. State Bull. 984, 985 (1952); cf. 41 Stat. 527, 46 U. S. C. § 747.
  (c) Respondent urges that fiscal management falls within the category of immune operations of a foreign government as defined by the State Department’s 1952 pronouncement. This is not to be denied, but it is beside the point. A sovereign has freely come as a suitor into our courts; our State Department neither has been asked nor has it given the slightest intimation that in its judgment allowance of counterclaims in such a situation would embarrass friendly relations with the Republic of China.
  (d) It is recognized that a counterclaim based on the subject matter of a sovereign’s suit is allowed to cut into the doctrine of immunity. This is proof positive that the doctrine is not absolute, and that considerations of fair play must be taken into account in its application. But the limitation of “based on the subject matter” is too indeterminate, indeed too capricious, to mark the bounds of the limitations on the doctrine of sovereign immunity. There is great diversity among courts on what is and what is not a claim “based on the subject matter of the suit” or “growing out of the same transaction.” See Clark, Code Pleading (2d ed.), 653-660; cf. United States v. National City Bank of New York, 83 F. 2d 236 (C. A. 2d Cir.). No doubt the present counterclaims cannot fairly be deemed to be related to the Railway Agency’s deposit of funds except insofar as the transactions between the Republic of China and the petitioner may be regarded as aspects of a continuous business relationship. The point is that the ultimate thrust of the consideration of fair dealing which allows a setoff or counterclaim based on the same subject matter reaches the present situation. The considerations found controlling in The Schooner Exchange are not here present, and no consent to immunity can properly be implied. This conclusion was anticipated by Mr. Justice Washington on circuit four years after he had been of the Court which decided The Schooner Exchange,
  The judgment of the Court of Appeals must be reversed and the case remanded to the District Court with directions to reinstate the counterclaims and for further proceedings not inconsistent with this opinion.
  Reversed.
  Mr. Justice Douglas took no part in the consideration or decision of this case.
  The Treasury Note on which the first counterclaim is based was pledged by the Republic of China in 1920 to secure a loan to the Pacific Development Company by a banking syndicate in which petitioner participated. The loan was not repaid, and during the liquidation of the Development Company the syndicate bought the collateral at a public sale. The Treasury Notes on which the second counterclaim is based were purchased by petitioner’s Shanghai branch at the time of issue in 1947-1948. The record allows us to assume that the petitioner gave full value as its share of the loan to the Development Company and bought the notes in the second counterclaim at par.
  At the outset respondent argues that since petitioner on cer-tiorari has dropped its demand for affirmative relief, the case is not properly before us. It is conceded that dismissal of independent counterclaims would ordinarily contain the requisite finality on which to base our jurisdiction, but respondent contends that when petitioner reduced its counterclaims to mere demands for setoff, the claims became defenses and, as such, nonreviewable until the respondent’s suit had been concluded below. We reject this view. A counterclaim does not dwindle to a defense solely because it is confined — as a result of the accepted jurisprudence of sovereign immunity, see United States v. Shaw, 309 U. S. 495 — to reducing the sovereign’s recovery. The District Court’s judgment, as affirmed by the Court of Appeals, terminated a separable and distinct segment of the litigation.
  Act of Mar. 3, 1797, §§ 3, 4, 1 Stat. 514-515. The present version appears in 28 U. S. C. § 2406.
  Act of Feb. 24, 1855, 10 Stat. 612, as amended, 12 Stat. 765, 14 Stat. 9; see United States v. Jones, 119 U. S. 477.
  The most recent development is the subjection of the Government to tort liability. Act of Aug. 2, 1946, now 28 U. S. C. § 1346 (b).
  Those cases that have dealt with the problem include: Republic of China v. American Express Co., 195 F. 2d 230 (C. A. 2d Cir.) ; United States v. National City Bank of New York, 83 F. 2d 236 (C. A. 2d Cir.); In re Patterson-MacDonald Shipbuilding Co., 293 F. 192 (C. A. 9th Cir.); Kingdom of Roumania v. Guaranty Trust Co., 250 F. 341 (C. A. 2d Cir.); Hungarian People’s Republic v. Cecil Associates, Inc., 118 F. Supp. 954 (D. C. S. D. N. Y.); Republic of China v. Pang-Tsu Mow, 105 F. Supp. 411 (D. C. D. C.); United States v. National City Bank of New York, 90 F. Supp. 448 (D. C. S. D. N. Y.); United States v. New York Trust Co., 90 F. Supp. 583 (D. C. S. D. N. Y.); Kingdom of Norway v. Federal Sugar Refining Co., 286 F. 188 (D. C. S. D. N. Y., Mack, J.); French Republic v. Inland Nav. Co., 263 F. 410 (D. C. E. D. Mo.); Union of Soviet Republics v. Belaiew, 42 T. L. R. 21 (K. B. Div.); South African Republic v. La Compagnie Franco-Beige, [1898] 1 Ch. 190; cf. Guaranty Trust Co. v. United States, 304 U. S. 126; Dexter & Car penter, Inc. v. Kunglig Jarnvagsstyrelsen, 43 F. 2d 705 (C. A. 2d Cir.); Strousberg v. Republic of Costa Rica, 44 L. T. R. (N. S.) 199 (C. A.); Claim of the Russian Volunteer Fleet against the British Admiralty, Annual Digest of Public International Law Cases 1925— 1926, p. 210 (British Admiralty Transport Arbitration Board; affirmed by Court of Appeal).
  Of the cited American decisions, only two district court cases directly involved the dismissal of counterclaims not based on the subject matter of the sovereign's suit and not seeking affirmative judgment: Republic of China v. Pang-Tsu Mow, supra, and United States v. New York Trust Co., supra.
  7 Cranch, at 136-137, 143-144. For a comprehensive critique of the doctrine as it has subsequently been applied, see Lauterpacht, The Problem of Jurisdictional Immunities of Foreign States, 28 Brit. Y. B. Int'l L. 220.
  The Privy Council recently rejected the view of Lord Justice Scrutton in The Jupiter, [1924] P. 236 (C. A.), that the mere assertion of a claim by a foreign government to property the subject of an action by a private party compels the court to stay the action and decline jurisdiction. Juan Ysmael & Co. v. Republic of Indonesia, [1954] 3 W. L. R. 531. Earl Jowitt reviewed the decisions and indicated some of the subtleties into which the doctrine has led the English courts. Cf. Republic of Mexico v. Hoffman, 324 U. S. 30, 38-42 (concurring opinion).
  28 U. S. C. § 2502. The earliest version of this statute appears in 15 Stat. 243 (Act of July 27, 1868); see United States v. O’Keefe. 11 Wall. 178; cf. 43 Stat. 1113, 46 U. S. C. § 785; Westfal-Larsen & Co. v. United States, 41 F. 2d 550 (D. C. N. D. Calif.). That an American citizen can sue the Chinese Government in Chinese courts, see Judicial Yuan Interpretation No. 6 (Feb. 16, 1929).
  See Treaty of Nov. 4, 1946, Art. VI, § 4, 63 Stat. 1305.
  Judicial Yuan Interpretation No. 373 (Dec. 15, 1930); Supreme Court Uniform Interpretation No. 1933 (Peking, June 22, 1925), 3 China L. Rev., No. 2, p. 84; cf. Judicial Yuan Interpretation No. 6 (Feb. 16, 1929); Constitution of the Republic of China, Art. 24 (1947).
  Treaty of Nov. 4, 1946, Art. VI, § 4, 63 Stat. 1305.
  See Rizaeff Fréres v. The Soviet Mercantile Fleet, 3 China L. Rev., No. 6, p. 14 (Provisional Court of Shanghai 1927).
  E. g., Hungarian People’s Republic v. Cecil Associates, Inc., 118 F. Supp. 954 (D. C. S. D. N. Y.); French Republic v. Inland Nav. Co., 263 F. 410 (D. C. E. D. Mo.); cf. Republic of China v. American Express Co., 195 F. 2d 230 (C. A. 2d Cir.).
  The case is King of Spain v. Oliver, 1 Pet. C. C. 276, 14 Fed. Cas. 572, No. 7,813 (C. C. D. Pa.). The King of Spain had sued two Americans for duties he alleged they owed him on shipments of goods they had made to the Spanish American colonies under royal licenses. The defendants replied that they had obtained the licenses from and paid the duties to Hope & Co., a Dutch concern which had a commercial concession from the King in return for which it had promised, inter alia, to pay duties on shipments to the colonies. Hope had also negotiated a loan for the King in-what appears to have been an unrelated transaction, and the King had pledged all his public revenues to repay the loan. Instead of handing over the duties received from defendants to the King, Hope applied them to reduce the debt due from the King on the loan.
  Mr. Justice Washington directed a verdict for the defendants. First he held that there was no privity of contract between the defendants and the King, so that payment to Hope discharged them. But assuming that there was privity he ruled that the duties had been properly applied by Hope to reduce the King’s debt to it. “Let it be, as was argued, that the consent of the Spanish government, under the administration of Joseph [Bonaparte, who had, while in power, agreed that the duties be applied to reduce the debt], was invalid and of no obligation upon Ferdinand; still, Ferdinand, as the successor of his father [Charles IV, to whom the loan had been made], and the nation, were and are bound to pay the debt due in Holland; and if it has been in part discharged, out of funds charged with the payment of it [because they were public revenues], in the hands of Hope and Co., the payments of the duties, have in effect been made to the plaintiff, because he owes, of the debt due in Holland, less than what was originally due, by the amount of duties which were applied to its discharge by Hope and Co. After such an application, which I repeat it, Hope and Co. were authorised to make, under all the circumstances of the case, this action cannot be supported, to recover the amount of the duties so appropriated.” 1 Pet. C. C., at 289-290, 14 Fed. Cas., at 577.