Foreign Relations of the United States Diplomatic Papers, 1932, General, Volume I

800.51W89 Lithuania/92

The Lithuanian Legation to the Department of State ¹⁸

Memorandum

The Lithuanian Government, fully conscious of its duty in relation to the fulfilment of international obligations and firm in its determination to discharge them to the best of its ability, heretofore has met faithfully its obligations under the terms of the Debt Funding Agreement entered into between the governments of Lithuania and the United States of America on September 22, 1924.¹⁹

The disintegrating forces, which originated from the World War activities and which seemed to be on a decline at the time of the above mentioned debt settlement, have reasserted themselves during recent years on such a wide scale and with such unexpected violence throughout the world that it is felt that the encouraging prospects of the early economic recuperation, so fondly hoped for at that time, now have to be all but abandoned. The general feeling seems to be that urgent and drastic corrective measures must be taken without further delay if the remnants of the economic structure are to be saved and the very hope for a better future is not to be abandoned.

It is in the light of these general circumstances and apprehensions that the Lithuanian Government feels itself moved, however unwillingly, to respectfully submit to the Government of the United States, for its earnest attention and consideration, the greatly changed state of conditions by which the Government of Lithuania finds itself faced in its attempts to discharge the obligations undertaken by the terms of the above mentioned Agreement.

I. A brief review of the origin of the Agreement, as well as of some of the circumstances closely relating to it, may be helpful in clarifying the motives which prompt the Lithuanian Government in this matter.

In 1919, while the Lithuanian territory was still under the occupation of German troops and the Lithuanian Government was as yet unrecognized by the Allied and Associated Powers, and, as such, was deprived of the ability to enter into any direct binding agreements with other governments, the Government of the United States was in the process of disposing of various surplus war materials then stored in France.

The Lithuanian Government, through its Delegation to the Peace Conference in Paris, applied for some of these surplus war materials.²⁰ A request was made not for weapons or other strictly-termed war materials, but for food, clothing, medical appliances and like materials then urgently needed by the destitute population of Lithuania. This application was unsuccessful for the reason that the Lithuanian Government, still unrecognized by the Government of the United States, lacked the legal capacity to enter into a binding international agreement. The United States Liquidation Commission, in charge of the disposal of the above mentioned surplus war materials, though unable to grant the request of the unrecognized government, could dispose, however, of these surplus materials to private organizations and corporations.

To meet the said contingency, the co-partnership named “Vilnis” was organized and this organization negotiated with the United States Liquidation Commission to purchase of certain supplies to the total value of $4,159,491.96. Payment for the said supplies was arranged in the following manner: a Special Treasury Note of the Lithuanian Government in the face value of five million dollars, due and payable on June 30, 1922, was given,—thus covering the principal and interest at the rate of five per cent per annum up to the date of maturity of the said note. (It is interesting to note here that the significant passage in the said Special Treasury Note read, in part, as follows: “This note shall be entitled to the security of, and shall constitute a charge upon, any payments or property which the Government of Lithuania may receive from Germany or any of its Allies, by way of reparation or cession.”)

In addition to the above mentioned supplies, Lithuania received a certain amount of supplies from the American Relief Administration, the original cost of which was $822,136.07.

Thus the total indebtedness of the Lithuanian Government to the Government of the United States, arising out of the above two transactions, amounted to the original value of $4,981,628.03. With the interest to date, accrued and unpaid, it was funded by the Agreement, signed on September 22, 1924, in the sum of $6,030,000. on terms substantially similar to those of the settlement with Great Britain.

The above tends to indicate that Lithuania’s indebtedness in some respects differs from the so-called “war debts” proper, as for instance:

a) The Lithuanian Government’s indebtedness did not arise out of loans made before the Armistice, nor was it for any war materials or for war purposes generally. On the contrary, it was incurred for supplies of such a nature that it might be more properly classified under the head of Relief Assistance.

b) The Lithuanian Government in contracting this indebtedness did not receive one cent in cash, but acquired the various supplies at the prices then prevailing,—and it must be remembered that the prices of 1919, due to the exigencies of war, were the highest on record.

In this connection it may also be observed that the above mentioned temporary legal incapacity placed the Lithuanian Government, as a purchaser, in a disadvantageous position as compared to that of other purchasers whose legal status was not questioned and who, arriving on the scene at an earlier date, had a full opportunity for a free bargain and an ample selection while the Lithuanian purchaser, handicapped by the above circumstances, was glad to receive what could possibly be obtained.

It should be stated immediately that the above elucidation of the transaction, resulting in an indebtedness of Lithuania to the United States of America, is made here not in a spirit of any grievance whatsoever, but with the sole purpose of indicating that while all the debts, from a legal point of view, are of equal validity, still there may be certain circumstances, in connection with the process of contracting them, which would seem to justify their consideration, if not in law then at least in equity, in a somewhat different light from the straight loan transactions.

II. By the terms of the Funding Agreement of September 22, 1924, Lithuania undertook to repay this original indebtedness of $4,981,628.03 in the total funded sum (principal and interest) of over fourteen million dollars, to be paid during a period of 62 years.

With reference to the above settlement it may be permissible to mention a few additional circumstances which may illuminate more adequately the position of Lithuania. They are:

1) Lithuania is well advanced on the list of debt settlements, being the fourth nation to sign a debt funding agreement.

2) The interest payable, as accepted by Lithuania, is the same as that of Great Britain and is of the highest category.

3) In the meantime, the extent of reduction granted to Lithuania by the terms of the debt settlement happens to be of the lowest category, only a few other debtors leading her by an insignificant fraction of percentage.

4) Although between the beginning of the World War in 1914 and the date of the debt settlement with the United States in 1924, the Lithuanian people were twice made unwilling victims of the total devaluation of the currency imposed upon them (first the Russian rouble and then the German mark), yet Lithuania undertook to pay off her obligations as soon as she succeeded in establishing her national sound currency,—and she has already actually paid in cash on account of the said indebtedness the total sum of $1,128,580.22.

5) Additional light may be thrown on the subject by mentioning the fact that Lithuania, although a victim of the very extensive damages done to her while her territory was a battlefield for the contending armies and of still more extensive damages resulting from a nearly five year occupation by German armies, received no appropriate compensation or reparations which could be applied toward payment of her own obligations contracted during dire necessity and thus lighten her own burden. In this respect the position of Lithuania greatly differs from the position of other debtors and her comparative capacity to pay is thereby affected.

It is hoped that the above observations may lay the foundation for the claim that, if Lithuania was eager to settle her obligations at the earliest possible opportunity, she was in no less a degree determined, regardless of all the difficulties and handicaps of a newly-born State, to carry out faithfully and to the best of her ability the obligations so undertaken.

III. It is assumed from the various statements repeatedly made by authoritative persons, at the time of the debt settlement and since, that the basic principle underlying the debt settlements with the various debtor countries was the debtor’s capacity to pay. It must be recognized that it is a just and generous principle, and of undisputed practical value. Yet, since this principle, was laid as a foundation of the settlement, it may also be logically assumed that what was just and equitable at the time of settlement and of the initial payment must also be just and equitable at the time of any subsequent payment—in other words, that the same principle of the capacity to pay, born at the inception of the transaction, was meant to live during the subsequent stages of the fulfilment of the same transaction. An eloquent confirmation of the above assumption was given by the Debt Funding Commission itself when the policy of the United States was defined in the following terms:

“The commission (Debt Funding Commission) in its settlement with Great Britain … and in subsequent negotiations or settlements has adhered to the principle that the adjustments made with each government must be measured by the ability of the particular government to put aside and transfer to the United States the payments called for under the funding agreement.

“Nor does the principle of capacity to pay require the foreign debtor to pay to the full limit of its present or future capacity.

“It must be permitted to preserve and improve its economic position, to bring its budget into balance, and to place its finances and currency on a sound basis, and to maintain and, if possible, to improve the standard of living of its citizens.

“No settlement which is oppressive and retards the recovery and development of the foreign debtor is to the best interests of the United States or of Europe.”²¹

Prompted by the above stated considerations, the Lithuanian Government, while greatly regretting the necessity, nevertheless feels its duty to make a frank exposition of Lithuania’s present economic and financial conditions which naturally control its “capacity to pay” and determine the ability to continue the fulfilment of its obligations.

IV. In order to show the difference between the economic conditions which prevailed in Lithuania at the time of the debt settlement and those existing at the present time, a statistical comparison of a few chief indicators of the national welfare will be necessary,—such as of the annual budgets, the trade balances and the currency circulation.

Annual Budgets. The annual budget of Lithuania for 1925, the first year of the debt payments to the United States, totaled in the sum of nearly $26,000,000. During subsequent years the annual budgets gradually increased until in 1930 the sum of nearly $35,000,000. was reached. Practically all of the budgets were balanced with a small favorable margin.

Then adverse economic and financial conditions proceeded to set it back. The current year’s budget was balanced at a level of $28,000,000, thus making a drastic reduction, in comparison with last year, of $6,000,000. The figures available for the first nine months of the current year indicate a further alarming fall in revenue receipts and a considerable further reduction of the budgetary figures will be unavoidable. Thus the budget of the current year has dropped nearly to the level of that of 1925, and the modest degree of progress made during the intervening years was lost. Of greater significance is the apprehension that, regardless of drastic cuts in expenditures, a balance between revenue receipts and expenditures may not be maintained. For a small and new country with limited and very modest resources, the prospect of being thrown on the negative side of the ledger, is a matter not merely of apprehension but of real danger.

The above budgetary figures also demonstrate the extremely low level of incomes and expenditures per capita: about $10.00 in 1924, $14.00 in 1930, and again about $10.00 in 1932. It is not difficult to see that the margin between the present level of the country’s development and that of a minimum indispensable for its cultural and economic progress is so narrow that a further retrenchment would not only arrest the continuation of the very modest progress, but would simultaneously set into action those disintegrating forces which, if permitted to continue, would lead to an actual collapse of the economic structure.

Trade Balance. As already mentioned above, Lithuania undertook to repay her obligations to the United States of America shortly after the establishment of her own stable currency.

Having practically no gold reserve at the time and having to discharge her obligations to the United States in terms of gold currency, Lithuania could meet these obligations only from her foreign trade surpluses. The development of the foreign trade of Lithuania was as follows.

For the year of 1924, the value of exports was $26,660,000; the value of imports—$20,650,000, leaving a surplus of $6,000,000.

For the year of 1930, the exports amounted to $33,378,000, the imports to $32,984,000, leaving a surplus of only $394,000.

The catastrophic drop in the prices of agricultural products, which constitute practically the sole items of export, as well as various trade restrictions of recent origin, account for the following figures of exports for the last two years:

1931	$27,311,910
1932	14,246,140	(for the first 9 months)

The sharp drop in exports compelled a corresponding curtailment of imports, as is shown by the following figures:

1931	$27,795,910
1932	12,434,090

Of particular interest is the trade balance between Lithuania and the United States. It has always been very adverse to Lithuania, as the following figures show:

Exports to the United States:		Imports from the United States:
1924	$811,560	1924	$988,460
1925	359,380	1925	1,831,080
1926	208,330	1926	1,065,240
1927	437,870	1927	1,450,330
1928	241,140	1928	2,047,860
1929	442,140	1929	1,672,430
1930	264,340	1930	1,470,370
1931	201,360	1931	1,077,390
1932 (for the first 9 months)	23,670	1932 (for the first 9 months)	393,170
Total	$2,989,790	Total	$11,996,330

The above review of the development of the foreign trade of Lithuania clearly demonstrates two propositions:

• First—that the catastrophic drop in prices of agricultural commodities, the numerous new and drastic trade restrictions introduced throughout Europe, and, finally, the abandonment of the gold standard by some countries which happen to be among the best trade customers of Lithuania, brought about the situation where it comes not only increasingly difficult, but almost impossible to build up the balances out of which her foreign obligations may be met;
• Second—that the trade balance with the United States for the period from the time of the debt settlement up to the present date shows that Lithuania has actually paid to the United States of America in trade a net sum of $9,006,540.

Money circulation. The Lithuanian national currency, the litas, was established at the end of 1922. In the beginning it was covered, almost exclusively, by stable foreign currencies—mostly the dollar and the pound sterling. Then a modest gold reserve was gradually built. The Lithuanian Government has this to its credit, that while the various European currencies, new ones as well as old ones, crashed or widely fluctuated, the newly-established Lithuanian national currency never went off its full par value, which was of a gold standard.

This was achieved at the cost of considerable hardships and sacrifices. The fixed determination of the Lithuanian Government is to continue to maintain her currency on the gold standard as it is considered to be the only reliable anchor for her economic and financial safety. Yet this is possible of achievement only when the annual budgets are adequately balanced and the trade and paying balances maintain a proper equilibrium. If it is deemed advisable to apply such a policy to any country,—in the case of a small and new country with limited resources and possibilities, a similar policy is imperative.

V. It is hoped that the above review, incomplete as it is, will sufficiently indicate the changed status of economic and financial conditions in Lithuania and demonstrate how gravely the events of recent years have affected her capacity to pay. In some respects this capacity is actually even below the level of the capacity existing at the time of the debt settlement.

In view of the above considerations, the Lithuanian Government has the honor to request, and ventures to hope that the Government of the United States will consent, to reexamine and to reconsider the question of the indebtedness of Lithuania to the United States, with a view of its more proper adjustment to the new and changed economic and financial conditions.

At the same time the Lithuanian Government desires to bring to the attention of the United States Government that the rapidly diminishing revenue receipts of the current year, the greatly reduced value of the foreign trade and the existing exchange difficulties, have created a situation whereby it becomes increasingly difficult for the Lithuanian Government to meet the payment due on the 15th day of December of the current year in the manner provided by the terms of the Funding Agreement of 1924. The Lithuanian Government, therefore, would greatly appreciate it if a postponement of this payment could be granted or an adequate relief from the strict compliance with the terms of the said Agreement could be arranged.

Washington , December 9, 1932.

18. Transmitted to the Department by the Lithuanian Minister as enclosure to a note of December 10.
19. Combined Annual Reports … 1922–1926, pp. 144–149.
20. See Foreign Relations, The Paris Peace Conference, 1919, vol. iv, pp. 589 and 752–763 passim.
21. Combined Annual Reports of the World War Foreign Debt Commission, 1922–1926, pp. 37–38.