The Secretary of the Treasury (Mellon) to the Secretary of State

My Dear Mr. Secretary: I received your letter of May 23, 1922, regarding the liquidation of the Russian Government’s financial obligations in this country after the fall of the last recognized Russian Government.

The facts set forth in your letter are in accord with the information possessed by the Treasury on the subject, and I am glad to avail myself of your suggestion to furnish any additional information from the Treasury’s records that may be considered helpful to a public understanding of the matter.

It appears that under the authority of the Liberty Bond Acts the Secretary of the Treasury, with the approval of the President, made certain loans to the Provisional Government of Russia for the purpose of more effectually providing for the national security and defense and prosecuting the war. The net amount of the loans so made is $187,729,750. Although a credit of $100,000,000 was established by the Treasury in favor of the Russian Government on May 16, 1917, the first loan to that Government was not actually made until July 6, 1917, and was in the amount of $35,000,000. No loans were made by the Treasury to the Russian Government after the fall of the Provisional Government early in November, 1917, [Page 881] with the exception of an advance of $1,329,750 on November 15, 1917, the proceeds of which were simultaneously applied by the Russians to the payment of interest to the Government of the United States.

The funds advanced by the Treasury in making the above loans were used solely for the purchase of obligations of the Russian Government in accordance with the Liberty Bond Acts, in the same manner as with other foreign governments, and the funds so paid for these obligations became the funds of the Russian Government. All of the obligations thus purchased are signed in the name of the Provisional Government of Russia by Mr. Boris Bakhmeteff who was the representative of that Government designated to the Treasury by the Department of State as being authorized to sign them in the name and on behalf of that Government.

In connection with the loans so made to the Russian Government, the latter rendered reports to the Treasury of its expenditures. These reports cover the period from April 6, 1917, the date of the United States Government’s entry into the war, to March 4, 1921, and show total expenditures for that period of about $231,000,000. The principal items of such expenditures appear to have been munitions, including remounts; exchange and cotton purchases, and other supplies. It would seem clear that only a comparatively small portion of the total expenditures of the Russian Government in this country during the period referred to was made from funds advanced by the United States Treasury, in view of the fact that it appears from the reports filed by the Russian representatives with this Department that of the $187,729,750 so loaned about $125,000,000 was transferred by the Russian Ambassador to the account of the Russian Ministry of Finance at Petrograd and only the balance of about $62,000,000 was retained by the Russian Ambassador for expenditure in this country.

According to information shown by the Treasury records, the Russian Government’s financial situation in this country at the time of the fall of the Provisional Government in November, 1917, was, in a general way, as follows:

Its bank balances then on hand amounted to about $56,000,000. The Russian Ambassador has estimated that about $10,000,000 thereof represented the balance remaining from this Government’s loans to Russia, and that the rest of such funds consisted of moneys derived from other sources, such as British credits and loans made by private bankers in this country. At this time the Russian Government also had a large amount of property in the United States, consisting mainly of war supplies. Apart from its indebtedness to [Page 882] the United States Government on account of the loans above mentioned, the Russian Government’s financial obligations in the United States arose principally out of contracts for supplies and certain private loans issued in this country. The contractual liabilities amounted to about $102,000,000, and the total principal amount of such private loans was $86,000,000. In these circumstances, the Department of State and the Treasury considered it advisable to enter into arrangements with the Russian Ambassador with a view to effecting such an application of the Russian Government’s available assets in this country that the interests of the American manufacturers and contractors and of the United States Government would be protected. In accordance with these arrangements, the Russian Ambassador deposited about $47,000,000 of the $56,000,000 cash above referred to with the National City Bank of New York in a so-called liquidation account, subject to his disposition. This money was to be devoted to the general liquidation of Russian obligations in this country. The balance of approximately $9,000,000 was placed in special accounts with that bank to be used for certain specific purposes. These funds also were subject to the Ambassador’s disposition. Pursuant to an understanding had with the National City Bank, however, no withdrawals were to be made from the liquidation account without the bank’s first notifying the Treasury and ascertaining whether it objected to the particular disbursement proposed.

It further appears that from December 1, 1917, when the liquidation account was opened, to March 4, 1921, when the account was closed, additional deposits were made therein, aggregating a total amount of about $29,000,000. The funds so deposited resulted chiefly from the sale of Russian property in this country and the charter hire from certain Russian ships. This made the total deposits in the liquidation account aggregate about $76,000,000, and the total disbursements from this account for the period in question also amounted to about $76,000,000. From the reports of the Russian representatives, it appears that these disbursements were made for supplies, transportation, storage, inspection, interest on loans made by the United States Government and on private loans floated in this country, salaries and upkeep of the Russian Embassy and consulates and other Russian institutions in the United States, and various miscellaneous purposes. It is further shown by such reports that payments on contracts for supplies amounted to approximately $36,000,000, and that about $10,000,000 was expended for interest on said loans. It will be noted that these two items alone are greatly in excess of the portion of the liquidation funds estimated by the Russian Ambassador to have been derived from American Government loans.

[Page 883]

From the pertinent records, it appears that the settlement of the contracts outstanding in this country at the time of the fall of the Provisional Government was effected by the Russian Ambassador in cooperation with representatives of the Department of State, of the Treasury, and of the War Industries Board, with the result that the outstanding contracts were settled by payment, cancellation, and other means, without loss to American contractors. This settlement, I should say, may well be regarded as a noteworthy achievement in view of the extent of the liabilities involved in such contracts and the comparatively limited amount of cash available here to the Russian Government for use in respect thereto.

On February 14, 1921, the Treasury was informed by the Russian representatives that the liquidation of the outstanding liabilities of the Provisional Government of Russia in regard to contracts placed in the United States had been for the most part completed, and an arrangement was thereupon entered into whereby the liquidation account as such was closed out March 4, 1921, and the balance therein, amounting to $70,426.34, paid to the Treasurer of the United States and applied on account of interest due and payable on Russian obligations held by the United States. It was agreed by the Russian representatives, however, that sums which might still accrue to them from the remaining business of liquidation which would, prior to the closing out of the liquidation account, have been payable into that account, should likewise be applied on interest due on said obligations. Such sums to the aggregate amount of $337,766.73 have actually been paid since March 4, 1921 by the Russian representatives to the Treasurer of the United States and applied on interest due on the Russian obligations. It is the understanding of the Treasury that the funds so paid were realized chiefly from further sales of the Russian Government’s property.

As you are aware, all of the information above given with respect to loans made by this Government to Russia, and the greater part of the data set forth in regard to the liquidation of the Russian Government’s financial obligations in this country after the fall of the Provisional Government, have heretofore been made public in various reports and other documents. Attention is particularly called to the Annual Report of the Secretary of the Treasury for the fiscal year 1920; the testimony of Mr. Polk, then the Under Secretary of State, and of Mr. Leffingwell, a former Assistant Secretary of the Treasury, before the House Committee on Expenditures in the State Department on June 26 to September 8, 1919, in connection with House Resolution 132; the correspondence between the Russian Ambassador and the Department of State read before the sub-committee of the Senate Committee on Foreign Relations during the second [Page 884] session of the 66th Congress at the hearing on Senate Resolution 263 and printed on pages 501–504 of Senate Report 526, dated April 14, 1920; the hearings on House Resolution 635 before the Committee on Foreign Affairs of the House, 66th Congress, third session; Senate Document No. 86, 67th Congress, second session, entitled “Loans to Foreign Governments”; the testimony of former Secretary of the Treasury Houston and former Assistant Secretary of the Treasury Kelley before the Senate Committee on the Judiciary on February 2 to February 7, 1921; and the letter dated February 25, 1921, from Secretary Houston in response to Senate Resolution 417, printed in the Congressional Record for February 26, 1921.

In addition to reports showing the Russian Government’s expenditures since the entry of the United States Government into the war, the Russian Embassy has filed with the Treasury Department detailed reports and statements, with explanatory memoranda, in respect to the liquidation by such Embassy, after the fall of the Provisional Government, of the Russian Government’s obligations in the United States out of that Government’s assets in this country, and I understand that the Russian representatives have shown every disposition to make all possible information available to the Treasury.

Sincerely yours,

A. W. Mellon