Memorandum by the Assistant Chief of the Division of European Affairs (Henderson)

It will be observed from the attached memoranda21 and from Senator Barkley’s letter of June 2222 that Mr. I. R. Guilden22a of New York and Mr. G. G. Serkau, a Canadian citizen who is associated with Mr. Guilden, have presented informally to the Department of State a plan for selling American cotton to the Soviet Government on long term credit.

Mr. Guilden’s Plan

The plan, in brief, is as follows: An American corporation is to be formed which with the financial assistance of the appropriate American governmental agencies will purchase cotton in the amount of one million bales, as well as possibly some lard and wheat, in the American markets at current prices and sell without profit these purchases to Amtorg, the Soviet purchasing agency in this country, or to some other Soviet governmental agency. In payment for the cotton the corporation will receive notes drawn up or endorsed by the Soviet Government payable at the end of ten years and bearing rates of interest of approximately 3.6 percent. These notes will in turn be guaranteed by the appropriate American governmental financial agency, as, for instance, the Export-Import Bank,23 and will be used in raising funds [Page 820] for paying the persons and firms from which the corporation purchased the cotton.

Mr. Guilder’s Relations With Amtorg

Mr. Guilden and Mr. Serkau maintained that although they have not been formally authorized to represent Amtorg or to negotiate on behalf of the Soviet Government, they nevertheless are presenting their plan after having discussed it with Mr. Bogdan, Acting President of Amtorg, and after having been encouraged by him to place it before the American Government.

Mr. Bogdan has informed Mr. Henderson of this Department, however, that although he is cognizant of the plan, he has not encouraged Mr. Guilden and Mr. Serkau to present it, and he desires to have it understood that they are not acting on behalf of Amtorg or the Soviet Government. He stated, furthermore, that in case the American Government should desire to offer credits to the Soviet Government, it would be preferable if negotiations would be direct between the appropriate American and Soviet governmental agencies rather than through intermediaries. Mr. Bogdan also stated that if the Soviet Government should accept long-term credits from the United States it would desire to purchase with them industrial as well as agricultural products.

The Plan Believed To Be a Soviet Maneuver

I am inclined to believe that Mr. Guilden and Mr. Serkau are telling the truth when they state that they were encouraged by Mr. Bogdan of Amtorg to approach the American Government with their plan. For many years the Soviet Government has been endeavoring to obtain governmentally guaranteed American loans or credits and it has from time to time sent out feelers for the purpose of gauging the attitude of the American Government toward the granting of such loans and credits. I consider that Amtorg is using Mr. Guilden and Mr. Serkau to explore the ground and if through them it can obtain what it can consider to be an American governmental offer of credits it would immediately drop Mr. Guilden and Mr. Serkau and begin to negotiate direct with the appropriate American governmental agency.

I am not, however, at all convinced that the Soviet Government would be willing to buy such a large quantity of cotton under the terms outlined by Mr. Guilden and Mr. Serkau. It is likely that if once Amtorg is successful in obtaining an indication of willingness on the part of the American Government to grant long-term credits in order that it may dispose of surplus American cotton to the Soviet Government, Amtorg will then begin to bargain regarding prices, [Page 821] interest rates, volume of sales, and so forth, and use what it would term as the American offer as a wedge in order to endeavor to obtain long-term credits which would enable it to purchase in this country manufactured goods, particularly merchandise needed by Soviet war industry.

There is also a possibility that the Soviet Government would be particularly pleased to obtain an offer from the American Government of credits at such favorable terms, since it could use such an offer in order to bring pressure to bear upon other countries, particularly Germany and Great Britain, from which it is now hoping to receive credits, with the purpose of receiving more advantageous terms from those countries.

The Spirit of the Johnson Act Mat Be Involved

In considering the plan advanced by Mr. Guilden and Mr. Serkau, the question arises as to whether, since according to a formal opinion of the Attorney General24 the Soviet Government is one of the governments in default of its debts to the United States, it would be within the spirit of the so-called Johnson Act25 for an institution such as the Export-Import Bank to grant or guarantee to that Government credits of such great magnitude and of such a long term as that contemplated. It will be recalled that on March 16, 1934 the Export-Import Bank passed the following Resolution:

“It is the sense of the Board of Trustees of this Corporation that no actual credit transactions with the Soviet Government shall be undertaken unless and until that Government shall submit to the President of the United States an acceptable agreement respecting the payment of the Russian indebtedness to the Government of the United States and its nationals”.

This Resolution was referred to on April 4, 1934 by Congressman McReynolds on the floor of the House during the course of the debate on the Johnson Bill. The policy laid down in that Resolution has been adhered to since 1934. A departure from that policy would undoubtedly give rise to considerable adverse comment in the United States, particularly on the part of certain members of Congress who are interested in securing payment of foreign governmental indebtedness to the United States, and on the part of private claimants against the Soviet Government who would feel with considerable justice that the granting of large credits to the Soviet Government prior to any settlements of debts and claims would undoubtedly destroy such vestiges of hopes as exist at the present time that their claims might at some time be settled.

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If the use of the credits would be limited entirely to the purchase of cotton it would be possible to reply to such comments that it is preferable to dispose of the cotton to the Soviet Government even on such long credit terms than to permit the cotton by remaining in American warehouses to present a potential threat to American cotton growers. As pointed out above, however, it is doubted if the Soviet Government would be willing to accept credits of such magnitude limited entirely to the purchase of cotton or other agricultural commodities.

The Question of Precedent

Another question which should not be overlooked in the consideration of this plan is that of the precedent involved. A number of other countries in default to the United States, particularly countries in the Eastern European area, such as Poland and the Baltic states, would undoubtedly be delighted to purchase large quantities of cotton from the American Government on terms similar to those outlined in the plan. It is probable that these governments would immediately seek to purchase cotton on long-term credits. Furthermore, the Soviet Government itself, if it should once succeed in breaking down the barriers which have thus far existed, would undoubtedly in the future continue to bring pressure through various channels upon the American Government to obtain additional long-term credits.

Such a Loan Could Not Be Considered as an Ordinary Commercial Transaction

It seems only proper at this time also to consider the amount of risk involved in a transaction of this kind. In view of the international situation there can be no doubt that no reputable financial institution would favorably consider granting on a purely commercial basis a credit to the Soviet Government to the amount of fifty million dollars for a period of ten years at 3.6 percent. The risks are too great. If there should be no war or no internal upheaval in the Soviet Union, the Soviet Government would probably pay at the end of the term. The fact is that it has at present sufficient gold on hand to pay for the purchase in cash if it desired so to do. The danger of a war involving the Soviet Union within the next ten years, however, is not to be overlooked; and although the present Government of Russia seems to be firmly entrenched, it is difficult to foretell what might happen to it within the next ten years, particularly since it is possible that Stalin, who is the governing force of that country, may not live until the end of that period. It is my understanding, however, that loans of this kind are not being granted upon a purely commercial basis; in other words, that the Government, in order to encourage [Page 823] employment and to dispose of surplus commodities, is willing to take chances which could not be taken by any private firm. The question as to whether the advantage of disposing of a large quantity of cotton is sufficiently great to warrant selling it at terms such as those proposed by Mr. Guilden and Mr. Serkau is a question which can be answered only as the result of a cooperative study undertaken by the various interested departmental agencies of the Government.

  1. None printed.
  2. Not printed.
  3. Chairman of the Board of the Trade Bank of New York.
  4. The Export-Import Bank of Washington, organized pursuant to Executive Order No. 6581, February 2, 1934.
  5. May 5, 1934; 37 Op. Atty. Gen. 505.
  6. Approved April 13, 1934; 48 Stat. 574.