The Agent General for Reparation Payments ( Gilbert ) to the Secretary of State
[Received 7:45 p.m.]
Supplementing my brief message of last evening,16a I understand that a three-cornered transaction has been arranged between Lee, Higginson and Company, the German Government, and Krueger and Toll, according to which American credits are to be provided for the German Government to the amount of 50 million dollars on March 31st for a period of five months and to the further amount of 75 million dollars on June 1st for a period of one year, all by way of anticipating the loan of 125 million dollars which the German Government is to get under its contract with the Swedish Match Trust. Notwithstanding repeated inquiries I have not yet been able to get any information in the matter from the German Government, but George Murnane17 called late Friday afternoon to tell me that the agreement had been reached Friday morning and that the contract was about to be signed. He added that the contract would be expressly subject to the consent of the Department of State. In order to avoid any possibility of misunderstanding, I am cabling to advise you as follows:
- First, that the Agent General and the other reparation authorities have not been consulted in any way with regard to this transaction by either the German Government or the Reichsbank.
- Second, that the first charge in favor of reparations still remains in full force and effect under Article 248 of the Treaty of Versailles17a [Page 97] and that the Agent General and the transfer committee under the Dawes Plan maintain in all respects the position taken in the matter of September 20, 1926, with regard to the Prussian external loan. The Department is already in possession of this letter,18 which applies a fortiori to external loans or credits of the Reich.
- Third, that in my opinion the fundamental question on the merits is as to the purpose for which the proposed credits are to be used. I immediately raised this question with Mr. Murnane, who believes that 50 million dollars of the proceeds will be needed to cover bank debts to the same amount which mature in June. He could give no information, however, as to the use of the rest of the proceeds, and apparently the contract will contain no provisions whatever to define the use of the credits. It seems to me that this point should be decisive, not merely from the banking standpoint but also on the question of access to the American market. The operation might perhaps be justified if it were clearly and definitely understood that the proceeds were to be applied immediately to the retirement of existing debt. But without this safeguard the money is likely to be used to finance new expenditures and to enable the German Government to postpone once more the necessary measures of financial reforms, thus interfering with the institution of the Young Plan and particularly the mobilization of the reparation bonds. In this sense, the present transaction is most untimely, since the financial programme for the coming fiscal year is to be settled within the next few weeks and there is a real danger that new credits will simply relieve the Government from the pressure that otherwise exists to put its finances in order.
- Fourth, it seems to me that this transaction, on the present showing, raises a general question as to how far the German Government and other German public authorities are to be allowed to have recourse to the American market for the purpose of financing their budgetary deficits. The German Government sooner or later must face the problem of setting its financial house in order, and until it has done so it does not make a good case for foreign credits.
- Fifth, I had intended to send this message through the American Embassy in Berlin but it has just notified me that it prefers not to transmit it.