Papers relating to the foreign relations of the United States, 1929, Volume II

462.00R296/2787: Telegram

The Chargé in France (Armour) to the Secretary of State

Paris, April 15, 1929—2 p.m.
[Received 6:18 p.m.³⁷]

154. Reparation 211. [Paraphrase.] Following message is for you from Young:

“At plenary session of Committee on March 28, before adjournment for Easter vacation, I submitted a memorandum which has already been transmitted to you. Last week France, Great Britain, Italy and Belgium, the four principal creditor powers, held meetings which resulted in production of a memorandum submitted to Committee on April 13, copy of which was also transmitted to you. While the four principal creditor powers were in session and before drawing up their memorandum they requested me to boil down into definite figures my memorandum of March 28. I did this on understanding that it might be submitted later to full Committee. It was submitted this morning, and I transmit it to you now in full so that you will have all the documents which are before the full Committee for its consideration. [End paraphrase.]

‘Gentlemen of the French, British, Italian and Belgian groups:

You have asked me to aid you in arriving at some annuity figures which may be used as a basis for further discussion by you with the German group. I have considered the matter with my American associates and it is our unanimous opinion that I can best do so by suggesting a definite set of figures which fall within the general propositions contained in my memorandum submitted at the plenary session of March 28th now known as Annex No. 7. This I now undertake to do with some reluctance and misgivings and with all the reservations stated in my original memorandum and as an effort further to delimit the area of debate.

I may say at once that the total figures which I accordingly suggest for your consideration when translated into annuities shows an average of 1,942,000,000 reichs marks each over a period of 15 years and of 2,452 million reichs marks each over the remaining 22 years and in addition coverage of the out-payments only of the creditor powers for 22 years more. In the distribution of the annuities I have endeavored to apply as best I could the principle which was stated during the last meeting, namely, that safety for the creditor powers and for Germany lies in making the first 15 annuities well within Germany’s capacity to pay. In my judgment that was one of the merits of the Dawes Plan—that Germany was not overloaded in the first years and so the momentum she gained in that period was sufficient to carry her through years of higher figures without undue strain. Whether we like it or not I think we should face the fact that this conference and the questions discussed here have again raised in the minds of the world, and to some extent in the minds of the German people, themselves, the question of Germany’s capacity. Accordingly the Committee should be most careful in setting up a new plan as in the case of the Dawes Plan to keep the figures such that no doubts can reasonably exist as to her ability to pay and thereby insure as successful a working of the permanent plan as we have had of the interim one.

The result therefore is that I have diminished the average annuities during the first 10 years; have brought them up around the average during the next 5 years; and increased the annuities above the average for the remaining 22 years. I feel sure that the higher annuities after the 15th year will be the ones most easily paid, as indeed they should be. By that time the burdens of the war should be, and I think they will be, diminished as a result of intervening peacetime development, notwithstanding that the payments may increase in terms of currency. Indeed, if I am correct in my last statement, it may well be that Germany with her vastly improved credit would find it to her advantage to discount in the market the remaining 22 years of her regular annuities.

There is another aspect of low annuities in the earlier years which might well be considered and that is the question of whether the deliveries in kind might not be thrown into the postponable class. If they were and the unconditional class correspondingly increased it would solve the question which has troubled me very much in suggesting lower annuities in earlier years. I did not wish to decrease unduly the amount of the annuities subject to early commercialization or mobilization.

In connection with the figures in this memorandum and the distribution of those figures into annuities I do not intend to make any reference to the interests in nor the profits from the proposed International Settlements Bank. I regard the bank not only as the key to the wise and successful administration of the plan but as an instrumentality which in its normal operation is likely to yield a substantial contribution for the benefit of Germany as well as the creditor nations in one way or another to the figures which I have suggested. How that distribution shall be made with reference to the figures proposed is a question which should appropriately be discussed frankly and fully, not only among the creditor powers themselves but between them and Germany. Your preliminary discussions have already convinced me of your liberality of thought in the use of profits of the bank as a medium by which the last difficulties of a settlement may be overcome. Now let me give you the specific consideration which I have had in mind with respect to the different countries, together with a brief statement in each case of the methods which I have used and my reasons. First, as to France. In my memorandum, Annex 7, I said:

“For France: Her out-payments and not less than 40 billion francs present value determined on fair rate.”

I have retained the figure of 40 billion francs present value computed on a 5½-percent basis. Let me say at the outset that I realize that the sum of 40 billion francs is a substantial reduction of the actual reparation costs of France. I have named that figure not because in my judgment it does complete justice but rather because of my conviction that in view of the relative positions of other creditor countries to France it is impossible to reach a final settlement of the reparations problem on a sound basis and provide more than the sum proposed. After all, this is a matter of sound business with which we are faced where we must deal with facts and conditions as they are and where we must take into account not only economics but to a certain extent politics and general public opinion. In this respect the problem is not different from any other business problem. We are seeking for practical results which are as fair as they can be under the conditions with which we deal. It is in this spirit and this only that I have retained the figure of 40 billion francs.

Now as to the rate for fixing present value I realize well how important it is and what a wide divergence of opinion there may honestly be concerning it. I quite understand that at present the normal rate for German credit is around 7 percent. Two things may be said regarding that. First, that those high rates do not reflect altogether fairly Germany’s credit, but rather a temporary state of the world’s money market. For reasons well known to you all, we happen to be sitting just now in a high rate period. Second, it may be said fairly that if the reparations question is finally settled Germany’s rate will diminish. So I am convinced that initially it is unfair to consider anything like 7 percent. We have to remember that we are fixing a rate projected over a long period in the future and if we were to let history guide us it may well be assumed that during the greater part of the period the rate would be nearer 4 percent than 7 percent. This leads me to the belief that a fair rate should not be more than 7 percent and not less than 5 percent and so I have fixed it at 5½ percent with the general feeling which I must confess to you that the fair region is likely to lie rather under 5½ percent than above it. I may say, that my American associates, in whose judgment I have more confidence than my own, share with me the feeling that 5½ percent is a fair basis to take under the circumstances.

Accordingly I have asked that an annuity be constructed, 54 percent of which would yield France 40 billion francs surplus over out-payments computed on a five and a half basis.

“For Italy: Her out-payments and some reasonable additional amount for reparations, taking into account her damage.”

The figures show that, even on the basis of an annuity from Germany of 2½ billion gold marks per year for 37 years, Italy would not receive enough from her present share to cover her out-payments. There would be a deficit of 74 millions on this basis present worth at 5½ percent discount and some adjustment must be made in order to meet the requirements of my memorandum quoted above. I have therefore concluded in preparing the figures to give Italy enough, first, to make up the deficit in her out-payments and, second, an additional amount for reparations which represents about 12½ percent of the additional sum allowed to France for reparation purposes. I understand that this total exceeds what Italy would be entitled to receive on the basis of existing inter-Allied agreements, but, I believe, gives her a reasonable allowance for reparation purposes and that as between the Allied Governments it may be taken to represent a reasonable adjustment for the general equities which Italy has presented to us.

“For Belgium: Her out-payments on the understanding however that an additional amount adequate to make the so-called mark settlement and provide for reparations will be arranged between Belgium and Germany.”

The whole world has shown every disposition to be generous to Belgium and there should be no disposition here to change that attitude. We are, however, faced with the problem now of securing fair sacrifices from original demands in order that a permanent settlement may be reached and peace insured. For no country is that more important than Belgium and it may be fair in view of her large payments already received under the preferences granted to ask her to share with the other creditors in trying to make the pattern fit the cloth. The equities of the mark controversy as presented by the Belgian delegation seem strong but its history throughout has been such as to weaken its position when one endeavors to fix its fair value from a purely business standpoint. The best guess that I can make, and I confess it to be little more, is that a fair surplus for Belgium over out-payments including reparations and mark settlement is 1,200,000,000 marks, which represents 11.7 percent of the annuity available for surplus.

“For Great Britain: Her out-payments only and without reimbursement for her arrears.”

I adhere to the recommendations of my memorandum. 20.2 percent of the annuity constructed as aforesaid yields Great Britain a surplus over her future out-payments (but not including her arrears) of 160.8 million marks per annum. That sum I have regarded as available for application elsewhere. 2.8 per cent of the annuity I have recognized as an out-payment of Great Britain to her colonies.

As to Servia and the other creditor powers: “appropriate amounts (reserved for later discussion) for the out-payments and reparations of Servia and the remaining creditor powers”.

I have made these figures on the basis of the same proportionate reduction of their respective shares of the Dawes Plan payments of 2,500,000,000 as that assumed for France.

I have assumed that the following items referred to in my memorandum, id est, “(a) The prior service of the German external loan of 1924, (b) costs of the armies of occupation and any expenses of administration under this plan, (c) payments required to satisfy the awards of the Mixed Claims Commission” stand without diminution.

I suggest a distribution of the annuities as follows: That the first annuity of Germany be fixed at 1,750,000,000 marks and that such annuity be increased 25,000,000 marks each year for 10 years making the annuity in the 11th year 2 billions. Then I suggest that the annuity be increased at the rate of 50,000,000 marks per year for the next 4 years making it 2.2 billions in the 15th year. Thereafter each annuity Is to absorb its share of the deficits of the first years. On this basis the annuities would be such as are disclosed in the accompanying schedule.

In closing let me say that I have exercised my best judgment in the light of the information at my disposal and within the limits defined in my memorandum of March 28, to suggest for your consideration a set of figures that seems to me to offer a sound and practical business basis for further discussion. I would wish to avoid in any sense sitting in judgment and therefore these figures are to be considered only as suggestions for your aid. I make all reservations in regard to them, and I shall approach their further consideration with an entirely open mind in order that any injustice may be corrected so far as practical applications of business principles to an existing situation will permit.

It should be made quite clear that the reservations of which I speak are made not only with reference to the creditor powers but to Germany as well.

Schedule of Annuities

Year	Annuity of reichs marks	Year	Annuity of reichs marks
1	1,750,000,000	20	2,466,000,000
2	1,775,000,000	21	2,391,000,000
3	1,800,000,000	22	2,435,000,000
4	1,825,000,000	23	2,418,000,000
5	1,850,000,000	24	2,422,000,000
6	1,875,000,000	25	2,429,000,000
7	1,900,000,000	26	2,440,000,000
8	1,925,000,000	27	2,435,000,000
9	1,950,000,000	28	2,430,000,000
10	1,975,000,000	29	2,438,000,000
11	2,000,000,000	30	2,470,000,000
12	2,050,000,000	31	2,446,000,000
13	2,100,000,000	32	2,457,000,000
14	2,150,000,000	33	2,475,000,000
15	2,200,000,000	34	2,466,000,000
16	2,464,000,000	35	2,479,000,000
17	2,460,000,000	36	2,478,000,000
18	2,455,000,000	37	2,506,000,000
19	2,472,000,000

Remaining annuities to cover out-payments, et cetera, not to be listed but to be worked out so far as possible in connection with profits from bank capital.’”

Armour

37. Telegram in ten sections.