Papers Relating to the Foreign Relations of the United States, With the Annual Message of the President Transmitted to Congress December 7, 1911

File No. 611.627/344.

The German Ambassador to the Secretary of State.

Imperial German Embassy,
Washington , January 31, 1911 .

Your Excellency: In reply to the aides memoire which the American ambassador at Berlin submitted to the Imperial Government on December 22, 1910, and on January 11 [sic], 1911, regarding the potash question, I have the honor to inclose a memorandum, requesting that you kindly make its contents known to the United States Government. The memorandum corrects certain errors contained in the American aides memoire and gives a history of the potash legislation, pointing out its most essential provisions. The Imperial Government trusts that the United States Government, after receiving correct information regarding the facts of the potash law, will form an opinion different from that entertained until now.

The Imperial Government proposes that in the first place the legal question who, according to the private contracts, has to pay the excess delivery tax, should be settled by arbitration as provided for by the contracts. In case the verdict should not be in favor of the American purchasers the Government of the United States would have legitimate cause, not established so far, for intervention on behalf of the American purchasers, and then the Imperial Government would be willing to enter into negotiations in accordance with the terms discussed in private conversation between Ambassador Hill and Minister Sydow last fall, upon which an agreement, except regarding the prices, was reached. In order to settle the latter point the Imperial Government and the United States Government would have to agree on such prices as could be considered by both sides as fair and equitable. After coming to an agreement the two Governments would have to use their influence with the parties interested to bring about an acceptance of such prices.

The Imperial Government, in declaring its willingness to enter into friendly negotiations on the settlement of these private differences, does this on the supposition that the United States Government is likewise inclined to a friendly arrangement of this question, and will desist from intimations as made in the Aide Memoire of December 22d. The Imperial Government sees in this the best and at the same time the only way to come to an understanding which will be in the interest of the American purchasers.

Accept, excellency, etc.,

J. Bernstorff.

[Inclosure.]

memorandum.

The Imperial Government, regretting the unfavorable opinion of the United States Government regarding the German potash law and its effect on American interests, [is] convinced that this unfavorable opinion is caused, as the aide memoire shows, by the incorrect information which the United States Government has received concerning the potash law and the circumstances connected with it * * *.

The Imperial Government hopes that the United States Government, in consequence of the following statement of facts, will form a different opinion of this matter.

Some remarks regarding the history of the potash law may precede.

Negotiations took place in the summer of 1909 to renew the Potash Syndicate, which for years had regulated the production and delivery of potash with due regard for the general welfare. These negotiations failed, and immediately afterwards, during the night hours between June 30 and July 1, 1909, Mr. Schmidtmann, the owner of a potash mine, who, until its dissolution was a member of the Potash Syndicate, entered, acting for the Aschersleben mine, into a contract which at first was not binding and contained only informal stipulations for the delivery of large quantities of potash at ruinous prices to the American Agricultural Chemical Co. The term of the contract was two years and an option of renewal of the contract for a further five years was given. The prices of this contract automatically apply to contracts which Schmidtmann had made with the independents, for the Sollstedt mine previous to the latter’s joining the syndicate. These Schmidtmann contracts greatly disturbed the German potash market and caused a discussion of the situation in the session of the Reichstag of July 7, 1909. In its course Mr. Delbrück, then Prussian minister of commerce, declared that the German Government, in order to protect the German potash deposits from wilful waste, had in consideration to place a tax on potash equal to the difference between ruinous contracts and normal prices. In August, 1909, the American purchasers signed as formal contracts the stipulations, which until then had not been binding.

In pursuance of the statements made by Minister Delbrück, conferences took place between the competent authorities with reference to legislative regulation of the production and delivery of potash. When intimations to this effect appeared in the press the counsellor of the American Embassy at Berlin verbally inquired at the foreign office whether it was intended to place an export duty on potash. He remarked in this connection that the introduction of such an export duty might, considering the provisions of Section II of the American tariff law, unfavorably influence the discussions of a rearrangement of the German-American commercial relations. Thereupon verbal answer was given to the counsellor that the internal authorities were occupied with the question what, on account of the well-known circumstances, should be done to safeguard the interest of the German potash industry; that the matter had not passed the stage of discussion; and that the placing of an export duty on potash was not intended.

On December 17, 1909, when Germany and the United States had entered upon tariff negotiations, the first draft of a potash law, introduced by Prussia, was laid before the Federal Council and at the same time published. This bill met with opposition in the Federal Council and an amended bill was drafted and laid before the Reichstag on February 3, 1910.

On January 10, 1910, Mr. Hill, the American ambassador, for the first time mentioned the potash question in writing but, as he expressly stated in the missive, unofficially, expressing the hope that the value of American contracts might not be impaired by the intended measure. A note of the same tenor was addresed to the foreign office by Mr. Hill on February 4, 1910, i. e., at a time when the tariff negotiations were nearing their conclusion. These steps were taken independently and had no connection whatever with the tariff negotiations. As a matter of fact during the latter, carried on by the State Department and the German ambassador at Washington, the potash question was never mentioned, as shown by the numerous notes then exchanged, dealing with the most varied subjects. The imperial ambassador, Count von Bernstorff, upon an inquiry recently addressed to him, asserted emphatically that during the tariff negotiations the word “potash” never, not even in verbal conversations, was mentioned to him.

By verbal note of February 24, 1910, in answer to the communications of January 10 and February 4, 1910, the necessity of a regulation by law of the potash question was explained to the American embassy at Berlin. The principles underlying the bill then laid before the Reichstag by the Federal Governments were stated and assurance given that the prospective tax would not be so high as to render impossible the fulfillment of existing contracts. This bill was not passed by the Reichstag, and a new bill, drafted by members of that legislative body, was enacted in May, 1910.

It appears from this account of the facts that the aide memoire was incorrect in stating that the American Government protested against the first bill in connection with the tariff negotiations, and that as a consequence of this protest the first bill was withdrawn by the Imperial Government, The United States Government, referring to the tariff negotiations, has addressed to the German Government only the verbal inquiry whether as rumored an export duty was planned. No protest was preferred; much less was a bill withdrawn by the Imperial Government on account of a protest. The United States Government did not enter into the potash question during the tariff negotiations and made no proviso regarding the potash situation in the agreement concluding the tariff negotiations, but granted unconditionally to Germany, in exchange for the entire German conventional tariff rates, the American minimum tariff, and expressly gave to Germany the most-favored nation treatment.

The Imperal Government may in this connection invite attention to the circumstances that led to the commercial agreement. On account of the American tariff act of 1909 the United States had to enter upon rather difficult negotiations, not only with Germany but also with France and Canada. By complying with the wish of the American Government in granting the whole conventional tariff, Germany showed her, good will and greatly facilitated the American negotiations with France and Canada. Under these circumstances the German Government would be compelled to consider it as an unfriendly and discriminating act if the American Government, on account of a purely internal German matter, not in the least affecting the tariff rates or regulations, should take into consideration the interruption of the friendly commercial relations with Germany, at the same time not objecting to the open and continuous discrimination against American products on the part of France and Canada.

Furthermore, the assertion of the aide memoire should be corrected according to which the former secretary of the foreign office, Baron von Schoen, is said to have promised the American ambassador that the American contracts were not to be affected. A thorough investigation of the files has shown no trace of such a promise. Baron von Schoen, to whom the aide memoire was consequently transmitted, together with the verbal explanations given by Ambassador Hill at its delivery, corroborated that he had talked to the ambassador about the potash law, after a luncheon given at his house on May 12, 1910, in honor of Col. Roosevelt. He emphasized, however, that his remarks were in accord with his note of May 11, 1910, which just then had been sent to Mr. Hill, and that he had referred the latter expressly to this note. In this note it is stated that the tax could be reduced by the Bundesrat only in so far that the prices for potash delivered after May 1, 1910, plus the tax, would not be higher than the prices prevailing prior to June 30, 1909. That conversation can not be regarded as an independent act but must be considered in connection with the note of May 11, 1910.

The scope of the potash law enacted by the Reichstag is the same as that of the two Government bills. The law intended to prevent a production exceeding the requirements of the world’s markets and the willful waste of the national potash deposits. At the same time it will bar potash mines, individual mines as well as combinations of mines, from obtaining control of the entire potash production, from creating a monopoly and from eliminating the competition of other mines.

The scope of the potash law therefore is identical with the ends which the Government and the Congress of the United States had in view when the preservation of the natural resources of the nation was warmly recommended in the special message of the President of the United States to the American Congress of January 14, 1910. The law furthermore intends to prevent the formation of monopolies in order to restrict or eliminate competition, a tendency which found the strongest expression in the Sherman Antitrust Act. In order to attain these objects the following provisions are made:

To each potash mine is allotted a share of the total delivery of potash for the domestic trade as well as for export. The delivery of potash within the limits of the allotment is not taxed. A tax is levied upon deliveries in excess of the allotted quantity. The allotments are made by a board consisting of representatives of the Government and of the mine owners. The allotments are always made impartially and the total output is estimated on the basis of the actual demand of the previous year. The law provides in section 6 that the total output, and accordingly the apportionment to each mine, must be raised every year. The law further provides that the board of apportionment may during the course of the year raise the total output, and accordingly the apportionment to each mine. Thus no shortage of potash can occur and the required quantities for domestic trade or export are placed at the disposal of buyers free from taxation. In fact the apportionment board had in December, 1910, by virtue of this provision, already raised the total output as previously estimated for the period May 1 to December 31, 1910; accordingly the quantities apportioned to each mine for domestic trade and export have been increased, too.

The quantity needed each year to cover the total requirements of the American consumers is therefore guaranteed to the United States. The potash prices are by no means higher now than prior to the enactment of the law. The tax for excess delivery is levied no matter whether the apportionment for domestic or for foreign trade is exceeded. It is furthermore immaterial to which country the excess of the export apportionment is exported. The tax is an internal-revenue tax and according to the law is collected from the mine owner in Germany. The tax is not prohibitive, but puts a damper on overproduction. At all events all the better mines can, even when greatly exceeding their allotment, produce with a profit, although a small one. This proves that the potash law is in itself in no way a burden to the American consumer, and that the American contracts can be fulfilled, as far as the potash law is concerned, without loss to the American purchaser.

The burden of the tax would fall on the American buyers only if they bound themselves to pay the tax in their private contracts with the potash miner, in which case it would be a voluntary act on the part of the American purchasers, of which they must take the consequences. The Imperial Government can not be made responsible.

The question who finally has to pay the tax is yet open. According to the statements which in the fall of 1910 were made by the interested American parties, and by the American official persons supporting them, the American opinion is that the tax has not been taken over by the American buyers. If this is correct the American buyers could get the potash contracted for at the low contract price; American interests then would not be affected in the least and there would be to all appearance no reason for an intervention on the part of the American Government. The Imperial Government does not consider itself competent to decide whether, according to the private contracts, the tax has to be paid by the American purchasers. This question can be settled only by the arbitration provided for by both parties in the contracts, the arbitrators being selected in such a way that American views will prevail. As long as it has not been decided by arbitration that the tax has finally to be paid by the American purchasers the Imperial Government can not recognize a legitimate cause for the American Government to intervene. The Imperial Government therefore proposes that the question by whom the tax, according to the private contracts, finally has to be paid should be submitted by the parties interested to the arbitrators provided for in those contracts. In case the arbitrators should decide against the American buyers the Imperial Government is willing to offer its good offices in order to find an equitable adjustment of the conflicting interests of the German and American parties. The German Government however emphasizes the fact that it prefers this offer only for reason of equity and to give the American Government a renewed proof of its friendly sentiments. It can not acknowledge that there is a legal basis for an American claim, for, as stated in the account of the history of the potash law, no contracts valid in law were made in the night June 30–July 1, 1909, but only informal stipulations, and, as their wording shows, between persons; who were not authorized by the concerns they represented to enter into formal and valid contracts. The words are as follows:

The above stipulations will be signed as a formal contract by the parties above mentioned [Kaliwerke Aschersleben and the American Agricultural Chemical Company] in the city of New York by the authorized representatives.

These stipulations became binding only in August, 1909, through their ratification by the authorized representatives of the contracting parties. At that time the introduction of a potash tax had been announced publicly by Minister Delbrück in his statement in the Reichstag on July 7, 1909. The contracts, formally ratified after the publication of this governmental statement, were therefore entered into with a full knowledge of the character of the intended legislation and with a view to counteract it.

Furthermore the business transaction in question are only a speculation, and the parties interested have not suffered an actual loss but claim compensation for a profit not gained, i. e., a purely speculative profit which they hope to draw from contracts concluded with a view to evading a law already announced. If the American Government should officially support these claims it would depart from the principles that have been followed by the European States for the diplomatic support of claims, which, as has become known here, have on other occasions been recognized by the American Government. According to these principles diplomatic support is granted only to those that have suffered an actual loss. The American Government would not take these steps, contradictory to international principles, in the interest of American economic welfare but solely in the interest of a few trusts. In all probability these trusts, if not prevented by the potash law, would have ruined their less fortunate competitors, especially the Virginia-Carolina Chemical Co., which has no long-term contracts at low rates and which has heretofore furnished the potash supply for the South of the United States; and they would further have monopolized for themselves the entire potash trade of the United States. According to experience in the United States with trusts this would have meant a general increase in potash prices for the American consumer.

It is assumed in the aide memoire that law, and action of the Bundesrat, would allow the Imperial Government to comply with the American wishes, and remove the entire excess-delivery tax. This view is erroneous. The provision in question (sec. 46) reads as follows:

The Bundesrat is authorized to reduce the tax provided for in section 26 for deliveries on account of contracts made before December 17, 1909, so much that the prices for quantities delivered after May 10, 1910, including the tax, will not be higher than prices prevailing before June 30, 1909.

It appears from former remarks of Ambassador Hill that he concluded from the words “not higher” that the reduction of the tax was limited only upward, not downward, and that therefore the tax might be reduced to 0, i. e., be entirely dispensed with. This opinion is erroneous. The law, on the contrary, by the words “The Bundesrat is authorized to reduce the tax of section 26 * * * so much,” expressly fixes the limit to which, a reduction downward is possible. According to the law a reduction below this limit is not possible. A change of the law or of the action by the Bundesrat is out of the question. Just as the American Government claims the right to refer, in answer to our claims, to internal American conditions, to acts of the American Congress and to American laws, it must recognize the right of the Imperial Government to regulate important internal questions according to German national demands, and to claim that laws that were passed by a large majority of the Reichstag are inviolable. Consequently there can be only an understanding that remains within the confines of the potash law. It would be entirely possible to reach such an understanding on the basis of the principles discussed in private conversation between Minister Sydow and Ambassador Hill. These guide-lines were the following:

1. The Aschersleben potash works transfer their contracts to the Potash Syndicate.

2. The Potash Syndicate pledges itself to make deliveries to the American firms within the limits of the allotment of the separate mines so that a tax for excessive delivery will not be due.

3. The American buyers consent to a reasonable increase of the prices contained in the Schmidtmann contracts.

At the discussions in Berlin an agreement had been reached concerning the provisions of 1 and 2. The question of the prices, however, was not settled. Since the parties could not reach an agreement concerning this point, it is proposed that both Governments come to an understanding as to a reasonable basis of prices that will take into account the interests of both parties.

The German Government is willing to propose for all potash the delivery of which falls under the excess-delivery tax, prices that would be lower than those actually paid by the American buyers prior to June 30, 1909. These prices would also be below the basis of prices possible in case the Bundesrat should make use of the privilege given by section 46 to reduce the excess tax. They would also be lower than the minimum prices established by the potash law, a settlement that is legally possible only by the transfer of the contracts to the, Potash Syndicate as above referred to.

After reaching an understanding both Governments would have to cause their parties to accept it. It must be mentioned, however, that Mr. Schmidtmann, who was recently received by the President of the United States and has informed him, has interests directly opposite. He will probably not be inclined to give his assistance toward the reaching of the agreement desired by both Governments unless convinced that the American Government offers its hand only to a peaceful settlement of the differences.

As soon as by the decision of the arbitrators the obligation of the American contracting parties to pay the tax is established the Imperial Government is willing to enter into negotiations with the American Government upon the basis mentioned above.

Berlin , January,¹ 1911 .

1. Day not stated.