The Ambassador in France (Edge) to the Acting Secretary of State
[Received July 20—11:36 a.m.93]
461. [Paraphrase.] We did not receive all of your No. 369, July 17, 9  p.m., until July 18, 1 p.m. We have protested officially to the French telegraph office. Before the decoding of your 369 was completed Mr. Castle reached me by telephone and we discussed generally the contents of your telegram. The President and Under Secretary of the Treasury Mills also participated in the conversation. Later on I conveyed to Mr. Mellon and Mr. Stimson the substance of this conversation. In the meantime we had received the full text of your 369. Our combined judgment was that the suggestions made in your 369 if formed into a specific American proposal could very well be presented to the London Conference by Stimson and Mellon as a first step. Nevertheless before so informing you we thought it would be wise to talk first with Bruening and Curtius. We had already arranged a conversation with them to be held at 10 o’clock last night, as I informed you on the telephone. This conference lasted 2 hours, and we obtained a fairly clear picture of the German financial situation. Mr. Stimson summarized the conversation for you by telephone at midnight last night. At the very beginning Bruening gave a résumé of their meeting with the French Ministers during the afternoon. He said that the conversations with the French were on a basis of great friendliness and cordiality, but that the conference did not go much beyond a discussion of the German financial situation and an indication on the part of the French that they were prepared [Page 287] to join other countries in raising an additional loan under certain conditions not fully specified.
At our own conference with the Germans, Stimson expressed the opinion, in accordance with your 369, that we felt that if the $1, 400,000,000 of short-term credits held by the banks of various countries (largely by the United States) were held without any present threat to German credit, this should aid greatly in the relief of the German financial situation and would probably make additional loans to Germany unnecessary. Bruening then made a long explanation of why, as he saw it, this would not be sufficient. In his opinion, in order that confidence in German credit might be assured a cash loan of from $400,000,000 to $500,000,000 would be required. Bruening stated further that about this amount of money had been lost in withdrawals since the failure of the Darmstädter Bank. When the suggestion was made that the President’s proposal balanced this amount by relieving Germany of $400,000,000 of reparation payments during the next year, Bruening indicated that Germany only receives that relief from month to month, as that was the basis upon which they would have paid it into the B. I. S. As a consequence this total amount was not really available until next year. At this point the German Chancellor confessed that the only way they had been able to keep the 35 percent reserve as cover for their note circulation was by the use of the loan of $100,000,000 recently granted by the Central Banks of France, Great Britain, the United States, and the B. I. S. He said that now this was practically exhausted, and he seemed particularly concerned about this phase of the situation, feeling that it was vital for Germany to get an additional loan so that the necessary legal reserve could be maintained. Up to this time we have not been given the detailed figures which he promised us. Mr. Stimson stated clearly our opinion that a $400,000,000 loan or a loan of any other amount would be useless unless the holes were plugged. Otherwise it would be necessary, of course, to loan perhaps a total of $1,500,000,000 to meet all the outstanding German credits. The Chancellor agreed to all this, but he kept insisting that an actual cash loan is absolutely necessary—this notwithstanding our frequent reference to the possibility of intergovernmental cooperation to hold the existing acceptances and other credits.
Mr. Mellon raised the question of the possibility of aiding the restoration of confidence by an encouraging statement to be freely published by the Germans. This statement would indicate that Germany did not intend to repudiate the Young Plan after the moratorium year and that Germany also would stand behind its representatives who had signed all the pledges of the Young Plan. The German Chancellor was extremely cautious in replying to this suggestion. He stated that the great trouble was that the Young Plan had been established in [Page 288] undoubted sincerity in a period that was abnormally bullish. The Young Plan had undoubtedly been influenced by that condition and now it was difficult to tell what Germany’s capacity would be with times as uncertain as they were at present. According to Bruening’s statement Germany has paid her reparations from the outset out of borrowed money. We questioned this view because of the fact that reparations amounted to only 28 to 33 percent of the budget of Germany and I suggested that the Chancellor’s viewpoint was perhaps only a bookkeeping statement.
We discussed completely the fact that Germany’s 5 years of prosperity paralleled that of other nations. While the whole talk was thorough, frank, searching, and friendly, nevertheless the Chancellor stood by the specific statements he had made and clung to his position that, while Germany would do all that it could, an additional loan within 8 or 10 days would be necessary or the situation would be beyond their control. He gave details of the strict decrees that the German Government had put into force in order to protect deposits and to curtail withdrawals. He said that these measures were inviting serious internal repercussions.
At 1 o’clock this morning Mr. Stimson telephoned the substance of this conversation to the President. [End paraphrase.]
This morning at 10 o’clock Mr. Stimson, Mr. Mellon and myself attended the meeting accompanied by Premier Laval to be participated in by representatives of the foreign nations now in Paris who were particularly concerned with the German financial situation including the United States, France, Great Britain, Germany, Italy, Japan and Belgium. The outstanding development was a brief analysis of the situation in Germany by Chancellor Bruening and a call for tangible proposals by Prime Minister Laval to which Secretary Stimson and other Ministers present replied in general terms.
In opening the meeting Premier Laval thanked the representatives of the Governments who had consented to assemble in his office and reviewed the developments of the previous day, his conversations with Secretary Stimson and Foreign Minister Henderson in the morning and the Franco-German conversations in the afternoon. The object of the gathering, he explained, was to explore the means of participating in a concerted move to assist Germany in meeting the difficulties of the financial and economic crisis through which it was passing. No formal proposal had so far been made by any Government, he declared, and every one present was in full agreement that nothing of a formal nature should be done until the delegates met in conference in London.
However he felt that the general meeting would be useful in facilitating the London Conference and in assisting France to meet [Page 289] the peculiar situation in which it found itself. France, he stressed, was prepared to devise the ways and means of going constructively to Germany’s assistance in time to bring an efficacious remedy. But it was essential that prior to taking material steps it should have a frank and free face to face explanation with the German Ministers. To achieve that end, a first interview had taken place yesterday which would be followed by a second meeting this afternoon, Sunday.
France, he continued, could not participate in the contemplated relief measures without definite “precautions” which it had indicated to the German Ministers yesterday. The German Ministers fully understood the position of the French Government as the French Government understood the difficulties facing the German Cabinet and it was hoped that the German Ministers would reply today in a way which would pave the way for further conversations.
The French Cabinet, Mr. Laval then explained, must before reaching a decision know what the agenda of the London Conference would be. It sincerely hoped that it would be limited to the subject of financial aid to Germany and would not go into such subjects as disarmament and the Young Plan. In any event its final decision would be determined by the position taken by the French and German conferees at the meeting this afternoon.
The only proposal so far formulated has been contributed by the French Government, M. Laval pointed out. France recognizes Germany’s need for money for a short-term credit to be reimbursed through a long-term loan.
This was merely a general idea thrown out for consideration and in no sense of the word a formal proposal. In any event, M. Laval concluded, the final adoption of the French formula would have to be conditional on definite guarantees. He then asked Chancellor Bruening briefly to review the situation in Germany.
The financial and economic situation in Germany was basically different from that in other countries the Chancellor explained. German finances had for the last several years depended primarily on short-term credits. Thus last year a total of from 7 to 8 billion marks was obtained from foreign countries on short-term arrangements and unlike other countries which are covered by gold, Germany has approximately 4 billion marks in circulation in bank notes which must have coverage.
Germany, the Chancellor stated, must have coverage in foreign exchange to the amount of 2 billion marks. In 8 months Germany had lost more than 2 billion marks necessary to cover notes in circulation. Under these conditions it is impossible to reconstruct the economic and financial life of the country and it will only be possible to correct the situation by cash loans.[Page 290]
The German Government, he said, had attempted for 15 months to reorganize its financial situation to meet the demands of domestic payments and reparations. The result was a rapid deflation which had brought on grave difficulties from an economic and financial point of view. These difficulties were increased following the Credit Anstalt failure and the collapse of certain Dutch banks, so that today the situation in Germany was desperate.
Germany’s position at the present moment could be described as follows: Its budget is stabilized as a result of radical, almost brutal, financial restrictions. The Government has done everything in the domestic field to remedy the situation. It has bolstered the Darmstädter Bank; has taken drastic steps to curb the flight of capital; has decreed that all bearers of foreign currency must notify the Reichsbank; has held up bank payments for several days; has increased the circulation of paper currency; has taken measures to broaden the scope of bank credits and has arranged a system of mutual guarantee grouping 40 German banks.
If Germany were to declare an external moratorium tomorrow it would imperil the financial structure of all Europe. Many European nations would be obliged to follow the moratorium and suspend their foreign payments. The situation would become so grave that it would be exceedingly difficult to find a remedy.
Everything now has been done that can be done to prevent the further withdrawal of foreign credits and the flight of capital. To meet the situation Germany must have not short-term credits alone—that would in any [no?] sense be sufficient—but it must be assured that the capital already withdrawn will be replaced by new capital. Admitting the short-term credits will be returned, these steps are imperative if Germany’s economic life is to be revitalized.
Monsieur Laval at this point resumed his exposé of the situation. The Governors of the Central Banks, individually approached by Doctor Luther, had already confessed their helplessness to remedy the grave difficulties now prevalent. Even the B. I. S. had confessed that it was unable to supply the needed remedies and had referred the problem back to the Governments. The representatives of the various Governments were now met together and Premier Laval hoped they would attempt to come to an agreement on how best to assist Germany in its hour of dire need.
France, the Premier observed, had already defined how far it was willing to go and had circumscribed its field of action. It was now the turn of other Governments to explain their positions and to discuss the means at their disposal for coming to Germany’s aid. Monsieur Laval then called upon Secretary Stimson to explain in general terms, of course, without commitment the position of the United States.[Page 291]
Secretary Stimson replied that the position of the United States towards this problem had been shown fundamentally by the nature of the proposal with its sacrifices which President Hoover initiated. The United States, he said, has felt throughout that the basic evil of the situation was the general lack of confidence, the basic remedy the restoration of confidence. President Hoover’s proposal was made in that conviction and has been accepted by all nations on that basis. The favorable reaction which followed the launching of President Hoover’s proposal showed the accuracy of the American Government’s diagnosis of the important part which the need for confidence played.
I look upon these conversations in that light, the Secretary continued. The invitation of the French Government to the German Ministers, and the conferences between the German and French Ministers must be regarded in the same light, as vitally essential to the restoration of confidence.
When the question of further steps in the direction of meeting the crisis arises, the United States is prepared to receive and explore with sympathetic attention the explanations and suggestions which other Governments submit. The United States, Secretary Stimson continued, has followed the steps which the French Government is taking with attention, although in some respects they raise insuperable difficulties of a governmental nature from our point of view. When you have a tub with a hole in the bottom of it out of which water is running, there is not much use pouring in new water until the hole is plugged. In other words, the situation described by Chancellor Bruening of the flight of credit from Germany makes it primarily necessary that we should see that there is no further flight. The American Government is giving its attention to this phase of the problem believing that it is not contrary to what the French Government is proposing to do, but is supplementary. There are credits which Germany still has, and the American Government believes that the preservation of these credits for Germany is absolutely necessary. In conclusion Secretary Stimson expressed his belief that with a conference called in the spirit in which the London Conference is called, begun in the spirit of the President’s proposal and continued in the spirit of the French Government’s invitation to the German Ministers, the solution of the grave crisis which Germany and the world is now passing through is not impossible. The Secretary expressed the hope that out of the work in Paris which is to be carried on in London a solution will be found which will be helpful in aiding Germany to meet her crisis.
Foreign Minister Henderson followed the Secretary of State, associating himself with Tyrrell, in offering his congratulations to the French Government for the broad spirit in which [they issued?] the [Page 292] invitation to the German Ministers and [for] according them a cordial reception in Paris.
Whatever plan may ultimately be adopted to give assistance to Germany, its foundation must be in a firmly established Franco-German understanding, Mr. Henderson declared, with regard to the position of his Government. Mr. Henderson remarked that he was not at this time and had not been when he came to Paris prepared to make any tangible proposal. Great Britain, he said, has already evidenced its desire and determination to do everything to assist the Germans. It has been animated with the same determination since the British Ministers met with the German Ministers at Chequers and which it was proposed to call on in the visit of Prime Minister MacDonald and Foreign Minister Henderson to Berlin to show their sympathy to the German Government and the German people. This proposed visit, however, had been canceled because of the change in program. However, Mr. Henderson explained, it was impossible for him either [even?] to express an opinion, much less to commit his Government. He announced that he would leave for London on the 4 o’clock train this afternoon, would see Prime Minister MacDonald at midnight and would attend a Cabinet meeting tomorrow, Monday morning, to consider the problems which would have to be solved at the full Conference opening in London tomorrow night.
However, Henderson welcomed the possibility of some form of preliminary agreement between France and Germany that, he believed, would be a substantial contribution toward making the London Conference a success.
Furthermore, the British Government was prepared to consider very carefully any proposal that might be made as the outcome of the Franco-German conversations of yesterday and today.
In conclusion Henderson stated that his Government was in complete accord that the conference in London should be confined to the financial situation in Germany.
Grandi, speaking for Italy, thanked the French for inviting Italy to participate in the conversations “which are so important for the ultimate success of the London Conference”.
The attitude of Italy is well known, he observed. The Italian Government was among the first to accept the Hoover proposal94 and has already begun its execution. It notes with great satisfaction the conversations between the French and German Ministers which in themselves open up the prospect of a favorable issue of the present world difficulties. Italy, he continued, is hopeful of concrete results. The Italian people are following with breathless attention the present [Page 293] conversations and realize that on them hinges the hope of European peace.
Italy, he remarked, had no specific proposals to make but was ready to receive and examine any proposal which was put forward for the solution of the crisis in Germany.
Ambassador Yoshizawa95 interpreting the Japanese viewpoint, associated with the representatives of other Governments in congratulating the French and German Ministers for their effort to meet in common the economic crisis “which is world wide”. He expressed himself as very pleased to record that the atmosphere was in every way conducive to a successful solution of the crisis and declared his Government ready to promote any proposal which might permanently remedy the situation.
Hymans,96 for Belgium, expressed himself similarly and specifically stated that his Government was prepared to associate itself with any proposal which might really be conducive to a favorable outcome of the present difficulties.
Thereupon, Laval again took the floor and after remarking that President Hoover has apparently closed the question of governmental credits, recalled that Chancellor Bruening’s appeal was twofold:
- For a ready credit to be at the immediate disposal of the Reichsbank in the sum of 2 billion marks;
- For a loan with which to consolidate the credits.
Referring to Secretary Stimson’s statement that it would be necessary to study the credit situation in Germany in order to stop the outflow of capital and the removal of credits Laval observed that this was not a time for protracted study; something must be done at once. Positive means must be found for meeting the monetary crisis. In short he stated the question was, are the powers which have already participated in a credit to Germany prepared to grant new credits? And are other powers willing to associate themselves with this enterprise?
Thereupon Monsieur Laval repeated his previous warning that the French Government in order to meet the susceptibilities and allay the fears of the French public would have to surround the proposed credit and loan with certain “precautions” or guarantees. France had already been required by the Hoover proposal to sacrifice its reparations and now it was being called to give its money. It has shown itself to be almost alone in its willingness to make a firm, precise proposal of additional aid to Germany and has frankly outlined to the German Ministers the conditions in which this aid can be granted, [Page 294] and explained why it was necessary if a loan was to be floated on the French market for the French participating banks and the subscribing public to have the guarantees. The German Ministers had met the French terms with frankness and it was to be hoped that they would be able to give a satisfactory reply this afternoon to the express requests of France and the French delegates would be able to go to London animated with a firm desire to reach a satisfactory solution.
Laval then asked Briand to discuss the Paris conversations and the London Conference from the positive and practical standpoint and the Foreign Minister made the point that unless the conversations initiated by the French Government succeeded, Europe would be threatened with grave disorder. He emphasized the psychological importance of a Franco-German accord and that it was essential for nothing to obviate the possibility of a complete understanding between those two peoples; that Germany and France should agree where possible and lay aside questions upon which they could not agree. He then called on Chancellor Bruening to describe the unfortunate results which would follow upon a break in the Franco-German efforts to meet jointly the crisis.
The Chancellor again stressed that he had tried for 15 months to stave off the economic disaster in Germany. He had made stringent economies, had cut the salaries of Government employees to a dangerous minimum, had by decree taxed and burdened the German people until they could not stand any further load. This he explained was to meet Finance Minister Flandin’s criticism that Germany should show a willingness to make new economies.
Germany has economized, the Chancellor insisted, but over too short a period with dangerous deflation as a result. The purchasing power of the German people has been decimated with consequent disastrous repercussions not only in Germany but in neighboring countries. To meet this situation and remedy the crisis, Germany needs a loan—short or long term—but even with the loan the Chancellor did not know whether it was possible to stabilize the German financial and economic situation without very grave political repercussions. If Germany fails to obtain loan, it is obvious to see what will happen.
Should only a short-term credit be granted to Germany it would have to be thoroughly guaranteed. The previous hundred million dollars credit was an invitation to the flight of capital and the withdrawal of credits, the conclusion being apparently reached in foreign financial circles that that was all that Germany was good for.
He hoped that the present conversations would lead to adequate financial support for Germany; otherwise the repercussions will be grave in Germany and neighboring countries.[Page 295]
M. Briand added that all the participating powers must make sacrifices to remedy Germany’s financial situation.
“If the situation is allowed to run on unchecked the situation throughout Europe will become threatening and highly perilous for everyone”.
In concluding M. Laval again reiterated the necessity for international guarantees of the credit and a loan to Germany. He realized that final commitments would have to be taken in London, but France felt it essential to determine in Paris the limits beyond which it was impossible for it to go. France, he repeated, was the only power to make a constructive proposal following President Hoover’s moral intervention, and it was thoroughly committed to bringing the conversations to a successful conclusion. However, everything now depended on a reply which the German Ministers would make to France.
The above comprehensive report of the statements at the same conference is practically a stenographic report of just what was said. There was no attempt to cross-examine, challenge or clarify any broad statement. On the part of the American delegates it was felt that this informal meeting was not the place to engage in that type of criticism or defense. The main effort of all of us had been during the last 3 days to assure the presence of the French in London. As will be seen from the statements of Laval there might still be a question in the minds of the French as to their presence at the London meeting tomorrow if the conversations between the French and Germans scheduled for this afternoon as the telegram is being dictated do not result satisfactorily to them or if anything but good feeling prevailed. With this in mind I personally asked Laval at the conclusion of the meeting when he and his associates were going to London. He replied “at 10 o’clock Monday morning”.
[Paraphrase.] There have been some indications that the Bank of France is not very pleased about the loan proposal. I sat beside the French Minister of Finance, Flandin, at the luncheon which followed the conference. In answer to my question on the above point he admitted to me in confidence that the rumor was correct. Ever since the French made their proposal of a loan to be participated in and guaranteed in part by the French Government we have been trying to discover the real motive behind the proposal, especially since it became apparent that both the British and ourselves had made it clear that a Government loan could not be considered and the Bank of France itself was not enthusiastic about the idea. The suspicion is strongly held that the French may be standing behind this proposal, which they brought up very frequently at the conference today, so [Page 296] that in the future they will be able to insist that they were the only ones who actually made a constructive proposition for furnishing cash to Germany, while at present they realize that it would be extremely difficult to put through in view of the attitude of Great Britain and the United States. They therefore feel certain that they would not be asked actually to loan the money. Under the circumstances the only other motive which can be deduced is the desire of the French to appease public opinion in France on the matter of political guarantees which they constantly refer to as necessary and which they well know will not be accepted by the Germans. These thoughts are of course merely speculative.
After the conference a communiqué of a conciliatory nature was issued to the press. I will not repeat it here since it will probably appear in the American press before this telegram is available to you.
I asked Bruening for the latest Reichsbank statement which would warrant the general financial picture which he had given to us Sunday night and which he also gave to the conference this morning. In reply I have just received the following communication: [End paraphrase.]
“Last statement of the Reichsbank of 15th July, 1931. The gold reserve of the Reichsbank at home and abroad was 1,366,000,000, foreign bills in hand, 124,000,000, notes in circulation, 4,162,000,000, liabilities for foreign bills due (Devisenschulden) 630,000,000.
Compared with the statement of 7th July, 1931, the gold reserve shows a decrease of 55,000,000, foreign bills in hand a decrease of 246,000,000. Whilst the notes in circulation on 7th July, 1931, were still covered up to 43.7 percent, the cover has now decreased to 35.8 percent.
According to the bank law, the Reichsbank is obliged to keep for the notes in circulation always a cover of at least 40 percent in gold or foreign bills. Under exceptional circumstances, this cover may, by unanimous decision of the general board, be reduced to under 40 percent. In case of such a decrease, the Reichsbank has to pay to the Reich a currency tax which starts at 3 percent and amounts for a cover of less than 33⅓ to 1 percent; to be 1 percent per annum for each percentage which the cover gets below 33⅓ percent.
The bank rate has to be increased by at least one-third of the percentage of the currency tax, that is, should the cover be 33⅓ percent, it would have to be increased by 2⅔ percent should, for instance, the cover fall as low as 24 percent the bank rate would have to be increased on 7th of July to 10 percent. During the last 15 months short-term credits of an aggregate amount which may be put at about 3 milliards have been called back from Germany and more than the half of this sum during the last 3 months. This sudden calling back has severely weakened the German economic system and especially the German credit banks and naturally has caused a decrease of foreign bills in hand at the Reichsbank.[”]
[Paraphrase.] Mr. Mellon and I discussed with Dr. Bruening in this connection the question of whether, as rumor had it, the Germans would further increase their paper circulation in the event they received additional financial help. Bruening assured us unreservedly that this would not be done. [End paraphrase.]