462.00R296/4179: Telegram
The Acting Secretary of State to the Ambassador in France (Edge)
298. For Mr. Mellon and the Ambassador. It appears to us after full consideration of the French proposals and your discussion that the French proposals so widely depart from the full and generous suggestion of the President as to destroy its value and importance in the present economic situation:83
“The American Government proposes the postponement during 1 year of all payments on intergovernmental debts, reparations and relief debts, both principal and interest, of course not including obligations of governments held by private parties. Subject to confirmation by Congress, the American Government will postpone all payments upon the debts of foreign governments to the American Government payable during the fiscal year beginning July 1 next, conditional on a like postponement for 1 year of all payments on intergovernmental debts owing the important creditor powers.”
2. We should add in order to complete the proposal that funding of the payments postponed during 1 year should be, provided all others including the French agree to this period, over a period of 25 years.
3. It is our understanding of the French proposals as now made that unconditional reparations shall be paid to the B. I. S.; that the B. I. S. shall reloan this sum to Germany, except that one-fifth of the French portion shall be made available by the B. I. S. for loans to other Central European countries; that the B. I. S. loans to Germany and other countries shall be repaid in installments of one-third, beginning with the third year after suspension, and lasting through the fifth year. Interest at 5 percent shall be paid upon deferred payments. If the suspension provisions of the Young Plan shall be invoked by Germany after July 1, 1932, and prior to July 1, 1936, the B. I. S. loan to Germany will at once become due, and on her part France agrees that it shall be applied to the Guarantee Fund. Any reparations in kind made by Germany shall be credited upon the amount of the unconditional payments, but these payments are to be limited to those covered by existing contracts.
4. We regard this proposal as unacceptable. It represents a whittling away of the value of the proposal of the President. It would compel us to say at once to all other governments that their payments to us must be funded over a period of 5 years. Other objections appear which make it a long way from the relief to Germany which the President [Page 89] contemplated, and it does not meet in his judgment the possibility of preventing the impending European panic.
5. It seems to be feared by the French that the suspension privileges under the Young Plan might be invoked by Germany and that it would then be necessary for the French to deposit in the Guarantee Fund at the B. I. S. 500,000,000 reichsmarks.84 It is not apparent how this could occur under the President’s proposal, since it is inconceivable that the suspension privilege would be invoked by Germany during the coming fiscal year, which is to be a year of suspension. The French could obtain a definite assurance from Germany on this score.
Our proposal on the question of the term for the repayment of the loan made to Germany by the B. I. S. was for funding over the full 35 years, it being the unexpired term of the Young Agreement applicable to unconditional payments. We would have no objection to cutting this to 25 years, since this would seem reasonable for treatment to all the debtors, in the view of the American people. We should of course expect that all deferred debts, including conditional reparations, would also be refunded over the above-mentioned 25-year period. That is to say, that every governmental payment of every kind during the forthcoming 12 months would be refunded universally over the 25-year period. On our part we would be glad to have the rate of interest to our debtors from year to year coincide with the average rate of interest on the American Government public debt at the beginning of each fiscal year, and would suggest that all other creditor governments apply the same formula.
6. Our final proposal to the French stated in its simplest form is that all conditional payments due during the period of 12 months shall be funded over a 25–year period, payable in equal installments; that the unconditional payments due during the period of 12 months shall be paid into the B. I. S. and reloaned to Germany in toto, Germany to repay the loan in 25 annual installments, with interest. The French suggestion that the loan shall become due at any time during the years of repayment if Germany should invoke the Young Plan suspension privilege is unacceptable. The French formula for the payment of balances on current contracts for deliveries in kind not covered by previous payments is also unacceptable. This question must be left open for future discussion on the part of interested governments.
7. You should inform the French Government, in the event that it is unwilling to accept this proposal, that in order to contribute what it can to prevent the economic collapse of Europe which will inevitably result from the breaking off of negotiations, the American Government is considering continuing the offer (originally made [Page 90] to its debtors collectively) to each one of its debtors individually to postpone all payments which are due the United States for 1 year, beginning July 1 next. We would suggest that the postponed amount be funded over 25 years, provided a similar postponement will be granted by them on intergovernmental debts to each country which has accepted the plan of the President. It would be expected, of course, that the countries to which this offer is made, and which accept it, would not extend this relief to their debtor countries which do not accept the proposal of the President and which continue to call for payments on intergovernmental debts. In view of the immediate emergency it is not clear what other course we can pursue should France not agree. You should tactfully and discreetly ask the French for their opinion of this proposal and what alternative they have to suggest in the event that it is not possible to reach an agreement.
8. The following is for your information, only to be presented to the French in your discretion: there is no question that the Germans will, upon this offer being made, immediately give notice under the Young Plan of the suspension of unconditional payments. We are advised, furthermore, that on account of their impaired credit and their total inability to obtain foreign exchange under existing conditions, Germany will be unable to meet even the next installment of unconditional obligations. On the assumption that France declines this offer, her financial position during the coming 12 months will have the following net result:
- (a)
- Assuming that Germany could continue the unconditional payments but gives notice of suspension of conditional payments, France would receive $109,000,000 from Germany. France would be obliged to pay $106,000,000 into the Guarantee Fund, which would leave France with $3,000,000 net additional cash. On the other hand, even after having exercised (under her agreements with the United States and Great Britain) her postponement rights, France would still have the obligation to pay the United States and Great Britain $50,000,000. Her net outgo in this case would be $47,000,000. France would probably not make the declaration of financial weakness which this step would imply, and in this case the full amounts would have to be paid to the United States and Great Britain, i. e., $110,000,000, leaving France $107,000,000 net outgo.
- (b)
- If, in spite of the relief which we are trying to give Germany, Germany’s credit, in the fundamentally weak position existing today, is so affected by the failure of the Franco-American negotiations that the unconditional payments could not be met by Germany, then France would have to meet her payments to the United States and Great Britain with no income from outside. The French would still be faced with the complete breakdown of the Young Plan, France would receive nothing from Germany, and she would still be obligated under the terms of her own solemn engagements, to pay Great Britain and the United States. It is inconceivable to us that the French would want to find themselves in that position.
9. It is to avoid the appearance of disassociating ourselves from common action with France in the solution of such difficult problems that we are hesitating to make this offer at the present moment.
10. We wish to impress strongly upon you that our information indicates that credit conditions in Germany and Central Europe are reverting rapidly to those which existed before the announcement of the President, and that there is a threat of immediate breakdown which may not be postponed beyond the early part of the week, and unquestionably cannot be postponed if the impression gets abroad that France is not willing to associate herself in this effort with all the other important governments; any agreement we might make would be too late to save the situation once the crash had come.
Time for negotiation is lacking. It may be impossible once more to restore German credit so that they can meet reparation payments due July 15, unless the French and American Governments can agree by Tuesday at the latest. You should not forget that not more than a week ago Germany was allowed by France to drift to the very edge of the precipice. The Reichsbank would have collapsed last Monday had it not been for the announcement by the President. That such a risk should be incurred a second time is intolerable. In this Gilbert concurs.
Please make every effort to get in touch with the French representatives in order to present our position to them as early as possible tomorrow (Sunday).