Mr. Thomas W. Lamont of J. P. Morgan & Co. to the Under Secretary of State (Cotton)

Dear Joe:

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German Annuity Bonds

As I told you over the telephone: the first and probably the only issue which will be offered simultaneously in the leading investment markets of the world is scheduled to be sufficient in amount to produce an effective $300,000,000. Depending, therefore, upon the rate of interest and the discount, if any, the par value of the issue will be $300,000,000 as a minimum and perhaps a very few million above that as a maximum. Of the $300,000,000, $200,000,000 is for the benefit of the creditors and, of course, to go to Germany’s general credit with them, and $100,000,000 is to go to the German Government for their immediate requirements in connection with the German Railways and the German Post Office requirements. This latter arrangement strikes us as excellent, because engaging the further good will and co-operation of Germany.

The total issue will be divided up into various international tranches, each issue to be made in the currency of the particular country where the tranche is issued. It is expected that there will be French, British, Belgian, Italian, American, Swedish, Dutch, Swiss, German and possible Japanese tranches. Over there they have had an idea that the American market might do the largest share. Our own idea has been that the American market ought not to take an amount in excess of that which the French market takes and not to exceed an amount sufficient to yield $100,000,000. Our mind is not closed [Page 103] on the matter, because we have not heard all the facts of the situation, which will be communicated to me when I reach Paris. But this is the way we feel at present. The other markets, with the exception of the British which will take a substantial amount, will be rather limited in the amounts which they are able to take. But it is important to have Germany herself somewhere in the picture as a subscriber to the bonds.

There are several reasons why we think it is important that the American investment market should share substantially in this operation:

One is that this is the final liquidation of the War so far as the settlement of great economic questions is concerned, and obviously it is greatly to the interest of American trade to have this great Reparations question settled.

Second, it was a cardinal principle of the American delegates at the Young Conference to urge that Germany be taken effectively out of receivership; that the heavy mortgage liens upon her railways and industries be abolished, and that she be put upon her honor to carry out her obligations. We feel that in this way the good will of her people could be best engaged. The present plan carries out that principle which is, if I may call it so, an American one and was well recognized and appreciated at the time by the German delegates.

If we should fail to offer a substantial portion of the bonds here, the American investment market would, in any event, because of the present keen demand for bonds, buy a large quantity of these bonds. Obviously it would be much better to have them buy dollar bonds than to have them buy foreign currency bonds, because by such an arrangement we should gain all the disadvantages and none of the advantages of a direct issue.

If you find by April 4th or 5th that there is going to be serious difficulty at Washington, then that fact should be privately communicated to me through our firm here. My partners will keep you posted as the situation develops on the other side. I shouldn’t think that active negotiation itself and the figuring out of prices and terms would be undertaken much before the middle or third week in April.

Sincerely yours,

T. W. Lamont