862.51 Interest/10
The Secretary of State to the Ambassador in Germany (Sackett)
Sir: Reference is made to your despatch No. 1475 of February 10, 1932, enclosing a communication from the German Foreign Office respecting the application of Emergency Decree of December 8, 1931, to American holders of German securities payable in reichsmarks.
Consideration has been given to the reasons advanced by the Foreign Office concerning the failure of the German Government to exempt from the application of the decree the interest on securities held by American citizens. The Department, however, is unable to perceive that the arguments advanced have any application to the merits of the case.
While it is appreciated that under the Regulations of December 23, 1931, the decree does not affect obligations issued abroad nor German loans floated abroad, no appreciable distinction in principle is perceived between such loans and loans floated in Germany.
The Department is at a loss to understand what is meant by the statement, “No agreement has been entered into between the American Founders Corporation and German debtors which would be impaired by a reduction of the rate of interest payment …” While the Department does not have the text of the various loan agreements available at present, unless these agreements contain a specific provision which would permit the arbitrary reduction of the interest rates by Government decree, it is not perceived that such a provision is implicit in loan agreements. The interest rate of a loan is a substantial part of the consideration involved in the making of a loan. In the absence of legislation in effect at the time a loan is made, which would render the interest rate illegal, the uniform action of governments through their courts and legislation is to enforce such agreements rather than to impair their effect by legislative decree.
[Page 382]No analogy is perceived between the abandonment of the gold standard, which may incidentally affect loans, and the arbitrary reduction of interest rates. The Treaty of Commerce between the United States and Germany, signed December 8, 1923, provides that the property of nationals of each of the high contracting parties shall not be taken without due process of law and without the payment of just compensation. No provision has apparently been made for the payment of conpensation for the proposed reduction of interest rates by the German decree. Should the decree be enforced, this Government can only look to the German Government for satisfaction to the extent that it impairs the obligations of existing contracts. While such a decree might legally be made effective as to new contracts, its operation on all existing loan contracts in effect renders it retroactive and confiscatory in nature.
The suspension and reenactment of Section 247 of the German Civil Code does not appear to have any effect on bearer obligations. That provision of the code specifically exempts bearer obligations. In the absence of a showing by debtors to creditors in each instance of their inability to meet their obligations and an agreement for a lower rate of interest, there is no justification in law for a general reduction of interest rates on the ground that the debtor’s voluntary agreement has fastened upon him an unbearable burden. The purchase of the loans concerned would in all probability not have been made, but for the fact that they called for rates of interest higher than six per cent. The agreements were legal in every respect when entered into. The practical effect of the decree of December 8 is to impair their legality in part, and release the debtor from a substantial element of his contract.
In the case of Aspinwall, executor of Howland, et al. (U. S.) v. Venezuela, the opinion of the Commission stated:
“Debts can not be paid by acts of Congress. This is not a case of bankruptcy. There is no difference in principle between discharging a part of a debt by legislative decree and wiping out the whole of it by the same means, as there is none between paring off and diminishing the value of an obligation by degrees, in one way and another, until that value is destroyed, and out-and-out destruction at once. If there be any difference it is in favor of the latter, as a quick death is preferable to torture.” (Moore, International Arbitrations, Vol. IV, pp. 3616–3641.)
In addition to the legal principles outlined above, there is the further consideration that German credit abroad would in all probability suffer a severe set-back, if the rights of foreigners are to be dealt with in the manner contemplated by the decree of December 8. [Page 383] American citizens and corporations who have purchased German reichsmark securities do not have the benefit of the forced deflation of other elements of German economy. Consequently from equitable considerations alone they should be relieved of the burdens of the decree of December 8, 1931.
It is hoped that in the light of the considerations outlined above the German Government will find some procedure whereby the Decree of December 8, 1931, will be construed so as not to apply to American holders of German reichsmark securities.
You are requested to address a note to the German Foreign Office in the sense of the foregoing and transmit a copy thereof to the Department with the reply of the German Government.5
Very truly yours,
- Apparently no reply was received from the German Government.↩