462.00R296/4273: Telegram
The Acting Secretary of State to the Ambassador in France (Edge)
335. [Paraphrase]. For Mr. Mellon and Mr. Edge. There are two parts to this telegram. The first part contains (a) our comments on the basis of agreement, the text of which was sent in your telegram No. 405, July 5, 3 a.m., and (b) our views with regard to the present status of the negotiations with the French and final instructions. The second part is a note which we desire you to submit to the French Government and which states the terms of the agreement which we are ready to conclude with the French Government.
Part I (A). It was our understanding that we had come to agreement with the French on all the larger questions of principle which have been discussed by the two Governments and in which this Government is directly interested, namely, the principle of the suspension of all payments for 1 year, the period of the funding of the suspended payments, the principle of continuity of the unconditional payments, the method of affording complete relief to Germany by the reloaning of the sums deposited on account of the unconditional payments with the B. I. S., and the question of Central Bank credits to Central European countries. We understood that the French Government felt that the guarantee fund question could be dropped from the discussion so far as the American Government is concerned. We refer you to our telegram No. 329 of July 4, 2 a.m., in this connection.
The problem which remains arises out of the current contracts for deliveries in kind. This Government has consistently held that this problem should be a matter for later discussion and solution by experts of the various interested states, but that the solution must be within the spirit of the President’s proposal. (The French have already agreed that they would retain nothing during the moratorium year.) The French proposal for deliveries in kind made on July 4 and contained in your telegram No. 405 is as follows:
[Page 151][Here follows the text of point 7 of the basis of agreement proposed by the French and transmitted to the Department in telegram No. 405, July 5, 3 a.m., from the Ambassador in France, printed on page 141.] For the reasons stated in our telegram No. 332 of July 4 this proposal is unacceptable.
Mr. Mellon has indicated that today M. Flandin has submitted a new counterproposal. Although the language of the counterproposal is not clear, it is our understanding that it is in substance as follows: The Government of France is quite ready to nullify all current contracts for deliveries in kind for the year of the moratorium provided that the French Government and its citizens can be relieved from any liability at law for breach of contract, and if it does not prove practicable to nullify these contracts then the French and American Governments will refer the matter to the study of an experts’ committee formed by the interested powers. So far as this counterproposal is concerned it is evident that the abrogation of the current contracts for deliveries in kind would end this particular problem in so far as it has any effect on the proposal of the President. Therefore the American Government has no further interest in the matter and could raise no objection. This Government understands, however, that in numerous instances it may be undesirable from an economic standpoint to nullify these contracts, that some of the creditor powers may not be willing to do so, and that it may prove to be impracticable in other cases. We are quite willing in such an event to refer this particular problem to a committee of experts of the interested powers. We insist, however, that the solution of these problems must conform to the spirit of President Hoover’s proposal. The last French counterproposal omits this stipulation, and it is therefore unacceptable.
If any creditor Government whose budget is benefited by payment arising from deliveries in kind during the moratorium year agrees to reloan these funds to Germany and to have them funded over a period of 12 years, this Government would consider that such a solution was within the spirit of President Hoover’s proposal. You may so inform the French Government.
According to our understanding of the negotiations which have taken place for the past 10 days, the question of current contracts for deliveries in kind is the final one on which there is any considerable difference between this Government and the French Government. If, therefore, the French Government is ready to accept the solution outlined above, there should be no difficulty in attaining a final accord.
You are instructed to submit the note which appears in the second part of this message to the French Government and to attempt to reach an agreement on this basis by your subsequent negotiations. Our telegram No. 328, July 4, 1 a.m., is accordingly modified.
[Page 152]Our comments on the text of the proposed agreement which was prepared by the French Cabinet and submitted in your telegram No. 405 of July 5 follow:
We understand Point 1, although it is very ambiguous, to provide for the continuity of the payment of unconditional annuities, a principle to which we have already agreed.
Point 2, relating to the funding period, differs from the proposal which according to our understanding had been accepted, in that it provides for 12 annuities for repaying the suspended obligations, the first 2 annuities due on July 1 of 1932 and 1933, without interest. Our proposal, on the other hand, was that the first 2 years following the period of suspension should require no repayment and that the amount funded should be repaid thereafter in equal annual or semiannual installments with interest over a period of 10 years.
Point 3. We understand the third point to mean that all suspended payments on intergovernmental debts should be repaid upon the same conditions that would apply to the reparation payments which were suspended; also that the proportions of conditional payments allotted to the various creditor states under agreements now in effect should remain undisturbed, and that the interest rate for the payments which are suspended should be based as a general principle on the average interest rate paid by the creditor governments on their public debts during the budgetary period just preceding the period over which interest is paid.
Paragraph 2 of Point 3 [4] is very ambiguous. If this paragraph means that the sums which are payable to the United States in the year 1931–32 and which are to be suspended according to the provisions of President Hoover’s proposal are to be repaid out of the 12 annuities arising from the repayment of the conditional reparations which are suspended, such a proposition is totally unacceptable to the Government of the United States, since it purports to establish a direct relationship between Germany’s reparation payments and the obligations due the United States on account of its war and post-war advances to the Allied Governments in the face of the well-known policy of this Government and in direct opposition thereto. This paragraph, as has already been stated, is ambiguous and this may not have been its meaning; but if this meaning was intended, you should make it wholly clear to the French that no such proposition could be considered.
Point 4. This point provides that the unconditional payments made by Germany during the moratorium year and paid over to the Bank for International Settlements shall, after the funds needed for the services of the Young loan are subtracted, be invested in bonds of the German Railway which shall be guaranteed by the Reichsbank [Page 153] and the German Government or, in place of this, invested in financial institutions to be decided upon later. We point out that it was our understanding that the funds paid into the Bank for International Settlements should come from the German Railway and then be re-loaned to the German Railway for its use in any manner that it might choose.
The French Government’s suggestion that the funds might be loaned to certain financial institutions is a suggestion which is entirely new and which is not acceptable to the American Government. Point 4 suggests in addition that these bonds shall be of such a nature that they may be offered to the public and that Germany, the B. I. S., the Government of the United States, and the other creditor governments are to aid their immediate conversion to the profit of the states possessing rights in these payments. This is a suggestion which has never before been put forth by the French Government during the whole course of negotiations. It is an obvious attempt to mobilize the unconditional payments during the moratorium year and is in clear contradiction to the willingness expressed by the French Government not to retain any of the annuities due France during the moratorium year. The French Government would make no noteworthy sacrifice during the year of suspension if this proposal is accepted and provided the bonds could be marketed. This suggestion so clearly violates the spirit and the letter of President Hoover’s proposal as well as the French Government’s note of acceptance that the American Government must reject it without qualification. In this we leave aside all of the technical difficulties which are involved in this suggestion and which relate to existing priorities. If any such provision should be adopted it should apply with equal force to the obligations received by this Government.
Point 5. This point states that the Government of the United States declares itself ready to take up with the Federal Reserve Banks the creation of a fund of $30,000,000 in the B. I. S. to be set up jointly with the Bank of England, if it shall agree, and the Bank of France. This fund will be administered and invested at the discretion of the Bank for International Settlements with priority in loans to the Central and Eastern European countries which may be particularly affected by the moratorium on German payments. It has been repeatedly emphasized and it must be known to the French Government that the American Government does not control the Federal Reserve Banks and makes it a policy not to influence their actions. A governmental agreement cannot include any actions of the Federal Reserve Board or the Federal Reserve Banks. However, we have informed you of our understanding that the Federal Reserve Bank of New York City would, if asked, and subject to the concurrence of the [Page 154] Federal Reserve Board, be willing to deposit not more than $10,000,000 in the B. I. S. for use in accommodating Central European countries which may need assistance. This deposit would be made upon the condition that the Bank of France and the Bank of England would each deposit an amount not less than $10,000,000. We believe that the Federal Reserve Bank of New York City in taking this action would naturally assume that in granting credits the B. I. S. would take into consideration only economic factors and that political factors would not be called into question. We are confident that the suggestion that certain countries should have a priority constitutes a political element which would at once result in the refusal by the Federal Reserve Bank of New York City to participate in any way in the granting of deposits or credits.
Point 6. This point has reference to the guarantee fund which the Hague Agreements provide for. This Government will not dispute the French interpretation of the relevant provision. The United States Government, however, is a party to neither the Young Plan nor the Hague Agreements. Therefore it cannot assume the right to interpret or modify any part of those agreements. The French Government must take up the interpretation of the guarantee fund clause with the signatories of the Hague Agreements.
Point 7 is concerned with payments in kind that are covered by current contracts. The French Government takes the position that these contracts are outside the scope of intergovernmental obligations since they are contracts between private persons. Although it is true that contracts between private individuals are involved in payments in kind, nevertheless cash transfers from one government to another are effected by this means. Payments in kind clearly fall within the terms of the President’s proposal to the extent that the budget of the debtor government is adversely affected by payments in kind and the budget of the creditor benefited. It is recognized by this Government that current contracts may need special treatment, and it is our suggestion that this matter be referred to a committee of experts of the interested powers. We must insist, however, that the solution which is worked out must conform to the spirit of President Hoover’s proposal. Point 7 is unacceptable because it fails to include this last proviso and assigns to this Government a neutral attitude on a matter which involves a fundamental principle of the President’s proposal.
Point 8. We call the attention of the French Government to the fact that Germany has today already made a declaration containing an assurance such as the French Government has requested.
With the exception of our comments on Point 8, Part A is designed to explain to you why the French memorandum is not acceptable. [Page 155] I would avoid discussing the detailed points of difference treated in Part A since, in view of the situation in Germany, we desire to try for agreement with the French on a general statement of principles given in Part B.
Part I (B). The developments which have now taken place make it doubtful that the disaster which is impending in Germany can be stopped. There have been so many delays by the French Government and they have involved us in technical matters of such a nature that it is almost impossible to make plain to the American public the vital points at which the President’s proposal is being destroyed. Technicalities such as these would in the long run undermine completely the principle and objective of Mr. Hoover’s proposition. For these reasons, we feel that we must adopt another plan of action from that which you have been instructed to pursue up to the present time. We now believe that there should be laid before the French Government a simple proposal of principles as well as the machinery for determining technical points and questions in disagreement, which proposal, if France is disposed to come to any understanding at all, they will be willing to agree to. Refusal of such a scheme would make their stand clear to the world at large. Accordingly, we wish you to present the following note to the French Government, the acceptance of which should be strongly urged. At the same time you should give them clear reasons, which reasons are being sent you by telegram, why their note cannot for one moment be considered as a basis for agreement. Our object all along has been to keep the proposal on general and simple lines and in an atmosphere of cooperation by all parties. Should France refuse to accept the scheme thus presented, it will be plain that they are refusing the President’s proposition. By this means, you will be, we hope, in a position to telegraph us either that there has been definite acceptance or definite refusal by the French Government. Our intention is to keep the original proposal of the President open to the nations of the world because, as developments have occurred, we believe it unwise to make the President’s second offer, with which you are already acquainted. It is our belief that the original proposal is more apt to be successful and will be plainer and more understandable to the world in general if it is maintained in its original form and if the French Government is obliged to make a choice and accept the consequences thereof. The American Government has no threats to offer in this connection. Our impression is that France is making no effort to solve the problem but is trying to prevent acceptance of the proposal and to make it appear that we are responsible for its failure by building up a fog of technical details. In case tonight’s proposal is rejected by the French, we will continue to express the hope that in the end they will [Page 156] fall in line and in the meantime we will await developments. [End paraphrase.]
Part II. “The American Government regrets that the French Government could not accept its memorandum of July 4 as a basis for agreement.
The merit of the President’s original proposal was its clearness, comprehensiveness and simplicity of application. It was intended to offer the maximum of relief where relief was most needed. It entailed temporary sacrifices on the part of several governments, but the President believed, since the United States was itself assuming more of the burden than any other single government that the others would gladly fall into line. The American Government was disappointed that the French Government could not see its way clear promptly to accept the proposal in principle since then it would have enabled the plan to have become effective immediately. The American Government has always understood that there would be many technical details to be settled later but has proposed that a committee of experts of the Treasuries of the interested powers should work them out under instructions to conform to the spirit of the President’s proposal. The French Government knows that immediately on the announcement of the President’s proposal the world took new hope; that this was reflected in immediate, almost universal strengthening of commodity and security values, as well as a very distinct improvement of the situation in Germany and elsewhere. The French Government will also recognize that the delay in coming to an agreement along general lines has already had an ill effect in Central Europe.
- (2)
- The French Note of July fourth39 does not accept the American proposal in principle and contains many variations from our previous understandings; it suggests new technicalities difficult of understanding. It involves the United States in agreement upon questions solely within the province of the creditor powers under the Young Plan; it outlines solutions which modify the spirit of the President’s proposal and would not result in that full relief which his plan proposed and upon which full American sacrifice was based. It opens the door to the exceptions from other Governments; requires action from the United States in respect to the Federal Reserve Bank and in relation to issues of securities all of which render it wholly impossible as a basis of accord.
- (3)
- To avoid all difficulties the American Government proposes the following definite joint statement of principles by the two Governments worded so to bring matters to a conclusion and assure relief to the world.
‘On the major questions which we have had under discussion for the past 2 weeks we are in substantial agreement. We have agreed to the principle of the American proposals. We are agreed that postponed payments are to be repaid over a period of 10 annual installments beginning 2 years after the expiration of the postponement period. We are agreed that the rates of interest on all deferred payments shall be controlled by the average rates paid by the creditor nations on their public debt at the end of the preceding budgetary period. We have agreed that against the account of unconditional reparations, payments are to be made by the German Railways into the Bank of International Settlements and that these sums are to be re-loaned to the German Railways on a similar period as above. We are agreed that no monies are to be diverted from German payments to loans to other Governments. (Such questions to be taken care of through the action of central banks.) We are agreed that no question arises between the American, French or German Governments over the question of the Guarantee Fund.
We agree to dispose of the question of reparations in kind together with the technical questions and relations which arise as between the several creditors under the Young Plan, the technical questions which arise on the form of securities to be given by the German Railways, and all other questions which may arise to a Committee of Experts representative of the Treasuries of the principal interested powers, with overriding instructions that they shall work them out within the spirit of the President’s proposal.’”
We wish to urge that acceptance by the French Government of the above would constitute an ample agreement in this connection and will enable the world to realize its accomplishment.