The Ambassador in Germany (Sackett) to the Secretary of State
[Received February 8—7:38 a.m.]
26. For the Secretary and the President. As background see telegrams 81, 82 and 85 of February 2nd from Paris to the Department.8[Page 667]
The question of reparations, particularly between Germany and France, has become a stalemate. Germany, by professing inability to pay reparations further, and France by refusing a conference as of no value, and was not premised on the German statement in spite of the English position to the contrary, have created a situation that seems to be rapidly leading to disaster in Central Europe with severe repercussions in England and Italy. The fear of such consequences is as definitely disquieting in America as abroad and its importance on economic recovery is plainly indicated.
Germany’s precarious financial situation, due to rapidly falling Government revenue which it is freely predicted will develop her inability to meet essential estimates in May or June, is known in European chanceries. Apparently France believes that delays are working in her interest; that the convergence of economic pressure will force Germany to abandon her declared purpose of avoiding further payments and, as a result, France will secure a re-acknowledgment of reparation liabilities though perhaps in altered form. Back of the moves of the four countries and especially of the French demand that our Government must agree in advance of any general reparations discussion to accept an equivalent release of Inter-Allied debts I feel confident lies their assured belief that America’s economic problems are so dependent on stability in Central Europe that we will be forced to yield to prevent financial disaster to ourselves. They visualize us as so deeply involved as a creditor that we are bound to yield to the French demand rather than suffer losses that will threaten the solvency of our banking system. They believe that through delay they can sabotage us into action in spite of the statements of our position contained in your aide-mémoire to the French Ambassador dated December 29, 1931. Their confidence is further induced by the belief, widespread in Europe, that the Hoover moratorium had its genesis in just that fear that the imminent German collapse would involve and drag down not only the largest American banks but imperil the Federal reserve.
To effectively break this strangle-hold through which France and other countries believe they can force the next move on us and smooth their own course with Germany, presupposed to bring them back to a genuine effort to solve Europe’s financial problems through the Reparations Conference (the procedure which was clearly indicated in the communiqué of October 25, 1931,9 and strongly stressed in the Basle report of December 23, 193110) I venture a [Page 668]constructive suggestion that a further authoritative statement would be effective. It could be pointed out that because our Government was convinced that reparations were a purely European problem the outcome of which we as non-participants were in no position to influence, our bankers had taken the necessary steps to render American finance immune to the danger which would flow from a European failure to act in the emergency; that our banks and banking system have occupied the 6 months since the German crisis in putting their affairs in order, increasing liquidity and preparing for eventualities; that this revamping of the American credit structure has so far proceeded that our banking system today is prepared for any financial strain including a Central European moratorium; that while we would suffer severe monetary losses we are now in a position to assimilate such losses.
The recent annual reports of the major banks in New York certainly warrant that impression. Furthermore, in a talk with Mr. Wiggin in Berlin the day the Standstill Agreement was signed, I asked him the direct question whether, if our Government found it necessary to announce such a position, he could assure me that our banking status had so improved that we could meet the emergency of a collapse in Germany and other European countries. He replied positively in the affirmative. Should you find that from a survey the situation in financial circles coincided with the view he expressed to me, a sharp and clear-cut statement that we were no longer under a dangerous menace from Europe’s economic difficulties should be effective to break the deadlock now existing and convince the European powers of the need of promptly acting in their own behalf. It would prove to them the genuineness of the phrase in the aide-mémoire that “then and only then” they could come to us as individual nations for discussion of their obligations to us. It would bring understanding that we have reserved the power of veto in case we find that their agreed adjustment is not sufficiently comprehensive to assure a return to prosperous conditions and that unless the relief were distinctly broadened we would not be interested in promoting it by any revision of Inter-Allied debts.