863.51/876

The Minister in Austria (Washburn) to the Secretary of State

No. 1664

Sir: With further reference to my despatch No. 1656 of the 14th instant, in relation to the projected new federal loan, I have the honor to report that following Dr. Schüller’s return to Vienna at the end of last week I had a brief conference with him on Saturday last [Page 466] and a more extended one today. As a result, I find that the facts reported in my despatch under reference were, in the main, correct. They were supplied to me by a Minister Plenipotentiary attached to the Foreign Office who was acting in Schüller’s absence.

The latter tells me that at the first meeting of the International Relief Bonds Committee on the 2nd instant, he announced the willingness of his government to proceed promptly to some funding arrangement for the old relief credits, but again emphasized Austria’s great desire, as I have heretofore reported, to disassociate this funding arrangement from the new loan negotiations. The various members of the Committee, according to Schüller, expressed their sympathetic understanding with this attitude, but added in substance: “You state that you are willing to make some funding proposal. Can’t you give us some hint of what this proposal is to be before we take action on your request to subordinate to the new loan the securities pledged to the old relief credits?” Furthermore, the position of the Dutch representative, set forth on page 2 of my despatch under reference, was not lost on Schüller. He thereupon outlined his idea of a funding proposal, a synopsis of which he cabled Minister Prochnik. He assumes that Prochnik promptly got in touch with the Department. The International Relief Bonds Committee took the adjournment until December 12th, as I have already reported, and Schüller advised his government of what he had done. The result was his telegram of instructions of December 8th, to which allusion was made on page 3 of my despatch No. 1656. These instructions practically embodied Schüller’s recommendations. He thereupon made his formal proposal on December 12th, and on December 13th he transmitted it in writing to Prochnik. This time he did not telegraph the latter and presumably the Minister’s advices reached Washington almost coincidently with my before-mentioned despatch No. 1656 of December 14th.

Pursuant to the promise made on page 5 of the despatch just referred to, the following is a copy of the Austrian Government’s formal funding proposal submitted as an aide memoire to the International Relief Bonds Committee on December 12th:

“The Austrian Government submit the following proposal:

They undertake the obligation of paying from 1943 onward during 25 years 40 million schillings annually, that is to say a total of 1000 million schillings.

The Austrian Government reserve the right to pay from 1929 during five years 10 millions annually and then during ten years 15 million schillings per annum, these sums with 8% compound interest until 1943 to be deducted from the sum of 1000 million schillings.

After having paid off in this way 200 million schillings before 1943 the Government would then have to pay 26.24 millions for 25 years.”

[Page 467]

In my despatch No. 1656 (page 2) I alluded to the contention of the bankers, Montagu Norman and Morgan, that the Austrian Government could not be required to arrange for any relief credit settlement prior to 1943. This contention, I ascertained upon enquiry, is based upon these statements in the prospectus published by the American bankers when the reconstruction loan was issued:

“By the concerted action of the principal nations of the world, including the United States of America, claims against Austria for relief bond charges have been subordinated to this Loan, and claims for reparation charges have likewise been subordinated by the Reparations Commission.33

. . . . . . . . . . . . . .

The Reparation Commission, by their Decision dated February 20, 1923, have suspended for the purpose of the Guaranteed Loan, for the period of 20 years and for such further period as may be necessary until the full repayment of the Loan, the lien for reparation charges on any revenues which may be pledged as security for this Loan.

By the concerted action of the principal nations of the world, including the United States of America by a joint Resolution of Congress approved April 6, 1922, liens against Austrian assets created after the Armistice in respect to relief credits, have also been postponed for the period of twenty years.”

Before submitting his aide memoire, Schüller took the precaution of submitting it to the bankers. Norman gave his approval immediately and Morgan, upon the plan being referred to him in New York, after some days did the same.

I gather that, while members of the International Relief Bonds Committee gave expression to their own opinion approving the Austrian proposal as a basis of negotiation, it was intimated that some alterations would probably be asked for by the governments interested. In fact, I have been permitted to glance through an informal aide memoire on this subject which is regarded as a confidential document. Objection was made to supplying a copy to the Reparation Commission on the ground that it was a part of the proceedings of a secret session. The main points of this informal aide memoire are:

1.
The International Relief Bonds Committee accepts in principle the proposal of the Austrian Government with the understanding that the arrangement will not give rise to any objection by the trustees of the League loan.
2.
The total sum to be paid back should approximate 1,250 million schillings and not 1,000 million as proposed. (In this connection, I may say that Schüller informs me that he arrived at the sum of 1,000 million schillings by adding to the 848 million total amount of the principal of the relief credits, the accrued interest up to the [Page 468] present time at a low rate of interest. This differs from the understanding of Minister Wildner as reported by me at the bottom of page 3 of my despatch No. 1656.34 The outstanding relief credit bonds, as I understand, carry interest at the rate of 6 per cent, and Schüller admits that on this basis the total amount due would more closely approximate the 1,250 million schillings. He asserts however that the idea of paying any interest upon credits of this character arising out of supplies furnished in time of dire need to feed a starving population is repugnant and that it was never really contemplated that interest would be exacted. He ventures the opinion that Secretary Hoover, having charge of the relief credit operations, never seriously believed in the repayment of the principal, to say nothing of the interest.)
3.
The payment of 10 million schillings annually for five years, beginning in 1929, appears to be satisfactory, but for the second period of five years an increase of payments from 15 million to 20 million was suggested. There was some further suggestion that beginning in 1943 the period of annual instalments should, if necessary, be somewhat extended so as to provide for the payment of 1,250 million schillings instead of 1,000 million.
4.
Annuities should be made payable in gold schillings.
5.
Relief debts should retain their full priority over reparations as now provided.

The Austrian aide memoire and the counter aide memoire of the International Relief Bonds Committee are regarded as only affording a basis for negotiation. The Austrian Government does not believe that it will be required in the end to pay 1,250 million schillings. Schüller, as I have heretofore reported, feels that his government should get in principle from the United States as favorable treatment as the United States accorded Italy. This, he realizes, is hardly possible because the relief credit settlements must all be on the same basis. The Austrian actuaries have figured out that Italy will pay back in the end about 26 per cent of what she would have been required to pay on any normal interest funding arrangement, whereas the proposal of the Austrian Government as made in the before-mentioned aide memoire means, so the actuaries figure, that Austria obligates herself to pay 37 or 38 per cent of the amount for which it would be liable taking into account the 6 per cent rate of interest. On the basis of the Austrian proposal the United States would stand to recover about $28,000,000 on account of the approximately $24,000,000 Grain Corporation loan, whereas on the basis of the informal counter proposal of the International Relief Bonds Committee the United States would in the end recover, as I understand, from $32,000,000 to $34,000,000. Having the Italian precedent in mind and taking into account the intrinsic character of the original loan, the Austrian Government hopes that the United States will [Page 469] not prove to be a hard creditor and will not enhance the difficulties of settlement.

I am enclosing a copy of the resolution of release of securities passed by the International Relief Bonds Committee.35 It requires a little elucidation. The “consent in principle” refers to the conditions (1), (2) and (3) therein incorporated. As to the clause relating to legislative approval, Schüller assures me that in the protocol of the proceedings, in response to his enquiry for information, it transpired, upon roll call, that legislation to subordinate securities to the new loan was not required, but only legislative approval of a proposal to postpone beyond 1943 the payment of the principal and interest on relief credits. Legislative sanction therefore does not here come into question, the Austrian Government having abandoned its original request for postponement until 1957.

As to the final paragraph relating to the views of the Netherlands and Swiss governments, the concurrence of these governments has since been obtained, as is evidenced by a communication of the International Relief Bonds Committee dated December 20th, addressed to the Austrian Minister in London, a copy of which is herewith enclosed.

There is further enclosed, as of possible interest to the Department and to complete its file of official action thus far taken, a copy of the resolution of the Control Committee (translated from German), dated London, October 12th, 1927. There is finally enclosed a copy of the letter, dated October 12th, 1927, addressed to the Austrian Minister of Finance by the Committee of Guarantor States.36 The resolution of the Control Committee (enclosure 3) states that the Committee has been informed that the Austrian Government intends “to continue to comply with the recommendations of the Control Committee of the League of Nations of the year 1924 concerning the interest on the investment sum to be obtained through the post and railway administration.” This rather obscure allusion really refers, I am advised, to Par. 6 of Annex I of the Joint Report by the League Financial Committee and the Commissioner General (Dr. Zimmerman), dated September 15th, 1924.37 The pertinent language is:

“The Austrian Government, in agreement with the Financial Committee, and with the Commissioner General, declares its willingness to adopt the following measures, and pledges itself:38

. . . . . . . . . . . . . .

[Page 470]

6. To take all necessary steps to ensure that, when the State supplies State undertakings (‘Betriebe’) with money for carrying out investments, the State undertakings in question shall pay to the State reasonable interest and amortisation charges on such loans.”

The findings of the Financial Committee embodied in Annex I were reported to the Department by F. S. Report No. 48 of September 17th, 1924.39 In my despatch No. 573 of October 23rd, 1924,39 page 3. I reported in relation to this Par. 6:

“The Budget before Parliament contains provisions to redeem the pledge in Point 6, especially with reference to the State Railways and Posts. (Point 6. To take all necessary steps to ensure that, when the State supplies State undertakings (‘Betriebe’) with money for carrying out investments, the State undertakings in question shall pay to the State reasonable interest and amortisation charges on such loans.)”

Because of the interruption in the courier service and also on account of the fact that the pouch leaving the 1st proximo goes via the Southern Route to Constantinople, I am proposing to transmit the enclosures herein contained, with explanations, by open mail.40 There will be duplication to this extent, but it may be desirable for the Department to have this information at an early date and I cannot assume that it is being otherwise advised. The documents in question, I know, were not sent to Minister Prochnik.

I have [etc.]

Albert H. Washburn
[Enclosure 1]
[Annex 3271–J]

The Secretary of the International Relief Bonds Committee (Leith Ross) to the Austrian Minister in Great Britain (Franckenstein)

Sir: The Relief Bond Committee, representing the Governments of Denmark, France, Great Britain, Italy, Norway and Sweden, having referred to their respective Governments the request of the Austrian Government for the suspension of the first charge enjoyed by the Relief Bonds in favour of a development loan or loans for a sum not exceeding 725 million schillings which the Austrian Government propose to issue, have the honour to inform you that the Government[s] which they represent would be willing, subject to such approval by their respective legislatures as may be required, to consent in principle to the release from the prior charge in favour of [Page 471] the Relief Bonds, for the period of the new Loan, not exceeding 30 years, of such securities as may be necessary for the development loan or loans now in question, not exceeding 725 million schillings, without, however, prejudicing the priority over reparations to which Relief Bonds are entitled, provided that:

(1)
Similar consent is obtained from any other Powers interested as holders of Austrian Relief Bonds;
(2)
Consent is also obtained from the Reparation Commission for the release of the securities in question from the charge for reparation and other Treaty Costs:
(3)
The specific securities which it is desired to release are, in due course, submitted to the Chairman of the Committee who is authorised to approve them.

A further communication will be addressed to you in regard to the views of the Netherlands and Swiss Governments.

I have [etc.]

F. W. Leith Ross
[Enclosure 2]

The Secretary of the International Relief Bonds Committee (Leith Ross) to the Austrian Minister in Great Britain (Franckenstein)

Sir: With reference to my letter of the 12th instant, on the subject of the Austrian Government’s request for the suspension of the first charge enjoyed by the Relief Bonds in favour of a development loan or loans for a sum not exceeding 725,000,000 schillings which the Austrian Government propose to issue, I now have the honour to inform you that the Netherlands and Swiss Governments have notified their willingness to assent to the release from the prior charge in favour of the Relief Bonds of such securities as may be necessary for the development loan or loans now in question for the same period and subject to the same conditions as have been laid down by the other creditor governments represented on the International Relief Bonds Committee.

I have [etc.]

F. W. Leith Ross
[Enclosure 3—Translation]

Resolution of the Control Committee, Dated London, October 12, 1927, Concerning the Contraction of an Austrian Investment Loan of 725 Million Schillings

The Committee has taken due note of the proposals of the Austrian Government and of the declarations of the Austrian representatives; it has been informed that the Austrian Government will during the [Page 472] coming five years not contract any other foreign loan and that it intends in the case of the proposed loan, of which a part will be floated in Austria itself, to continue to comply with the recommendations of the Control Committee of the League of Nations of the year 1924 concerning the interest on the investment sum to be obtained through the post and railway administration. The Committee takes due note that the Austrian Government intends to use certain sums from current receipts for productive investments, for instance for roads and other investments. The Austrian Government will, should need arise, address itself to the trustees in accordance with the general bond, and contemplates approaching the Reparation Commission and the Relief Powers. The Control Committee does not protest in principle against the contraction of a loan with proceeds not exceeding 725 million schillings for profit-yielding purposes of post and railways, according to the Austrian proposals. The Committee has authorized its president, after the concrete loan terms have been communicated to him to give the definitive consent.

  1. The following omission is indicated in the original despatch.
  2. Ante, p. 460, par. 5.
  3. Enclosure 1, infra.
  4. Printed as enclosure 1 to the letter of Oct. 18, 1927, from Mr. R. C. Leffingwell, of J. P. Morgan & Co., to the Secretary of State, p. 452.
  5. League of Nations, The Financial Reconstruction of Austria, pp. 216, 230.
  6. Omission which follows is indicated in the original despatch.
  7. Not printed.
  8. Not printed.
  9. Despatch No. 1665, Dec. 30, 1927, received in the Department Jan. 11, 1928 (file No. 863.51 Relief Credits/11, not printed). Copies were transmitted to the Treasury Department, Jan. 11, 1928 (file No. 863.51 Relief Credits/13, not printed).