The Acting Secretary of State to the Ambassador in France ( Edge )
369. For Mr. Stimson. If constructive results are to be achieved at the London Conference, it appears to us that we must first analyze the situation critically. We would like your views on the situation before you give them to anyone else.
- The basic problem is to restore the confidence of the world in Germany. This problem falls into two parts: The first part of the problem is to ease the political frictions which exist between France and Germany. Except for using our good offices in conciliation we can take no part in this. If the financial world is to gain increased confidence it is vital that it be reassured that friction no longer exists and that the political stability of Europe, at least until the present economic crisis has been overcome, can be relied upon.
- The second part of the basic problem revolves around the financial crisis. Through the action of the President Germany and the Allies as well have been entirely relieved for 1 year of the pressures of intergovernmental obligations. The German position has been bettered to the extent of more than $400,000,000. The United States has aided in this with the largest contribution of any single nation, more than $250,000,000. In addition our Government will pay during this year more than $31,000,000 to individual German citizens on account of the awards of the claims arbiter.91 The remaining difficulty is solely a banking matter. It arises from the overextension of short-term credits abroad and the loss of confidence resulting in the flight of the mark from Germany. The flight of the mark has had a most alarming effect upon foreign holders of demand [Page 276] obligations and has greatly accentuated the loss of confidence abroad. These results are in addition to the actual loss of resources in Germany. The flight of the mark can be remedied by German decrees rigorously executed, and if efficient action is taken, the German authorities should be able to recover a substantial part of these losses through the return of the marks which have been in flight.
- As we see it, the problem thus resolves itself further into (a) the regularization of these external short-term obligations, and (b) provision for such additional amounts of bank credits as may be necessary for the German economy at the present time.
- It is quite likely that present foreign loans are sufficient to meet German credit needs. We understand that a few months ago the short-term obligations of Germany then outstanding totalled $2,000,000,000. It is reported that this has now been reduced to $1,400,000,000. It is entirely possible that this volume, if it could be held open, would be sufficient to keep German economic life at a normal level. This is the more true since the Germans now secure the benefits of the favorable trade balance now existing and of the $400,000,000 saved through the President’s proposal. In addition they should be able to regain a part of the marks now in flight.
- However, it is clear that unless provision is made for maintaining these credits it is completely hopeless to provide any sort of a loan or banking credit, whether short term or long term, guaranteed or not guaranteed, unless such loans were made to total more than $1,400,000,000. Otherwise it would be like pouring water into a sieve.
- Therefore, the first approach to the problem that we would suggest is the development of a plan for maintaining for an adequate length of time the present lines of credit. As part of such a program the Governments of the countries with the principal banking centers might well undertake to encourage their banks so to organize as to permit the maintenance of the present outstanding volume of credit to Germany. The details of such a program might well be worked out through the cooperative action of the Central Banks or the B. I. S. The countries included in this undertaking should be not only the United States, France, England, and Italy, but also Holland, Switzerland, and other important holding countries.
- Moreover, the existing distribution of the weight of German foreign credit obligations is not fair to all countries concerned. We understand that French credits have been reduced to the very small amount of $45,000,000, while our bankers have maintained their very large credits. In the period since the President’s plan was proposed it seems that some of the smaller countries have greatly reduced their holdings. They should restore these lines of credit as a contribution to stability, for by reducing their holdings they have increased the [Page 277] economic dangers of the world. Considering Germany’s relief from reparations, certainly German credit is far better today than it was at the time these countries originally advanced their credits.
- For Mr. Mellon’s information and your own: We know that the New York banks have already agreed to maintain existing credits in Germany for the present. Our understanding is that this is also true of the British banks. Although the burden is larger on the United States than on any other country, or perhaps all countries, we believe that voluntary arrangements can be worked out here.
- If it is possible to work out voluntary arrangements for holding open the present volume of credit, this action will have to be accompanied by strict control through the Reichsbank of all foreign exchange so that an arbitrary withdrawal of credit could under no circumstances occur.
- We believe that if this can be done, the whole problem will be reduced to small dimensions. At least for the present Germany will be able to go along on this volume of credit if she takes vigorous action to recover the marks which are now in flight and if she has the benefit of her existing trade balances. If after a time it should appear that this amount of credit is too small, then the restored confidence which this plan will assure, would mean that Germany could probably obtain increased credits through normal banking channels. It might even be possible to make some additional advances in order to restore the present German situation to normalcy, but such advances would be worthless if the present outstanding obligations were not fixed as suggested above, and unless definite assurances could be given that new funds would not merely be used to liquidate existing obligations and that these new funds could be recovered without interference of reparations.
- We want to point out strongly once more that aside from the
political friction existing in Europe this whole problem is a
banking problem that can be solved only through the use of
banking methods. We also wish to restate, in view of the
analysis that has been given above, that the French plan is
completely impracticable. It is impracticable because
- We could not be a party to the political or semi-political demands on Germany that the French have outlined.
- Neither the British Government nor our own Government would enter into the guarantees implied in that plan.
- Without Government guarantees the securities projected in the French plan are worthless for marketing or banking purposes.
- If present lines of credit are maintained, the proposed $500,000,000 is not needed. If these lines are not maintained $500,000,000 is merely a drop in the bucket.
- It is to be noted further that although our bankers are willing to help, the American Government cannot pledge their credit. In any case, the primary step of securing voluntary action and the resolute action of the Government of Germany in stabilizing existing lines of credit, probably constitutes the only solution of the problem. It is at least a necessary basis for any additional plans.
- For your own information, there is possibly another way in which the American Government might be of assistance in this German crisis. The farm cooperatives which are financed by the Farm Board could supply 70,000,000 bushels of wheat and 1,100,000 bales of cotton to Germany on payments distributed over 2 or 3 years. This would amount to a year’s supply of these two commodities. The total assistance to Germany by this move would be approximately $120,000,000. This is merely for your own information. We do not wish this suggested to anyone.
Please discuss this telegram with Mr. Mellon and Mr. Stewart and let us know your joint opinion by telephone.