The Acting Secretary of State to the Chargé in Great Britain ( Atherton )
218. [Paraphrase.] For Mellon and Stimson. When an appropriate time arrives, the President wishes you to submit to the Conference now meeting in London the following suggestions. It is left to your judgment to decide whether these suggestions shall be put forward as his plan or as an American proposal prepared by you. The President believes that you will follow whichever procedure will work out for the best. [End paraphrase.]
“The essence of the problem is the restoration of confidence in Germany’s economic life, both in Germany and abroad.
1. On the political side the United States hopes that, through mutual good-will and understanding, the European nations may eliminate all friction so that the world may rely upon the political stability of Europe.
2. On the economic side, the present emergency is strictly a short term credit crisis. Fundamental pressure upon German economy during the period of depression has been relieved by the joint action of [Page 281] the creditor powers in suspending all payments upon governmental debts during the period of 1 year. But Germany has financed her economic activities to a very great extent through the medium of short term foreign credits. There is no reason to doubt the soundness of the basis upon which these credits rest, but the general uncertainty which has prevailed for the last few weeks resulted in such a loss of confidence that the German banking and credit structure was subjected to a very severe strain. This strain took two very definite forms, both of which resulted in a drain of banking resources and the depletion of German gold and foreign exchange holdings.
In the first place there was a flight from the mark within Germany. In the second place there was a withdrawal of foreign deposits and a curtailment on the part of foreign banks of outstanding lines of credit.
Fundamentally there is nothing to justify these movements and if, through cooperative action, they can be arrested, there is no reason why the present emergency cannot be immediately and definitely surmounted.
- As to the first, namely, the internal flight from the mark, this can be and is being successfully combatted by the vigorous action of the German Government and the Reichsbank. Once unreasonable fear has been eliminated, it is certain that the patriotism of the German people can be relied on to prevent the destruction of the credit of their own country.
- As to the external credits, we believe that the first approach to this problem is the development of a program that will permit the maintenance for an adequate period of time of the present outstanding lines of credit. In this connection it is our understanding that this volume of credit together with the freed reparations and the natural gain from the allayment of the panic should be adequate to meet the needs of German economic life for the immediate moment. On the other hand it must be apparent that, unless provision is made for the maintenance of these credits, an attempt to provide new ones, whether of a short or long term character, would be ineffective. In the development of such a program, the governments of the countries having principal banking centers, including the United States, England, France, Italy, Japan, Switzerland, Holland and other important banking centers, might well undertake to encourage their bankers so to organize as to permit the maintenance for an adequate period of time of present day outstanding lines of credit to Germany. The responsibility for working out the details of such a program and the methods of making it effective with due regard to the protection of the banks and the needs of German economy should be left to the banking communities of the respective countries and the central banks could, we believe, be relied on to furnish the necessary leadership, cooperation and direction.
Such voluntary arrangements should be supplemented, for the time being, by strict control of all foreign exchange transactions by the Reichsbank so that the integrity of the program can be maintained and the banks that are participating can be assured that there would be no arbitrary withdrawal either from within or without Germany.
3. It is our belief that if such a program could be made promptly effective it would result in an immediate restoration of confidence [Page 282] and that in a comparatively short time the necessity for restrictions of this character would disappear and normal conditions would once more prevail. There is all the more ground for faith in such a result in view of the fact that the United States debt suspension program has now become effective and that the events which succeeded the announcement of that program clearly demonstrate that relief from payment of intergovernmental debts established in the minds of the business world the basis for renewed confidence.
4. A committee should be selected by the B. I. S. or created by some other appropriate method to secure cooperation on the following questions:
- In consultation with the banking interests in the different countries to provide for the renewal of the present volume of outstanding short term credits from those countries.
- In making an enquiry into the immediate further credit needs of Germany.
- In the development during the course of the next 6 or 8 months of plans for a conversion of some proportion of the short term credits into long term credits.”