800.51W89/873

The Secretary of State to President Roosevelt

My Dear Mr. President: There is enclosed herewith a memorandum which has been prepared in this Department and just now completed, covering in a summary way a number of possible courses of action for dealing with the war debts and intended to collect in a single paper the gist of much of the thought on the subject which has been expressed up to date. It is possible that you might wish to have this before you. Reference is made in the text to a series of exhibits which are designed to more fully set forth the relevant data. I shall be happy to send these exhibits to you if you care to examine them at this time.

In my own judgment, if it becomes necessary for this country to make any concessions from the exact terms of the several funding agreements, either by way of a temporary arrangement or permanently, [Page 544] such, concessions should be utilized as a means for attempting to blast out the present barriers in the way of international trade, not only between this country and a debtor country but generally in the world. This idea is more fully developed in the memorandum.

May I also call your attention to pages 14 to 20 of the memorandum, on which are set forth in brief a new suggestion for dealing with the payments for the next two or three years. In substance, the suggestion is that Congress authorize the President, in his discretion, to receive payments in the currency or credit of the debtor countries rather than in New York funds, and instead of covering the avails into the Treasury as quickly as might be possible they be utilized by way of a credit pool to stimulate world trade. This type of payment would meet the claim of the transfer difficulty and might also have the additional advantage of actually benefiting the debtor countries instead of hurting them, thus affording a motive for favorable consideration of the proposition by them. This suggestion has been discussed with certain gentlemen in the Department of Commerce and in the New York Federal Reserve Bank, who believe that it may be applied with practical benefits resulting therefrom. You will understand, of course, that it is presented to you at this time not as a recommendation of this Department but with the thought that you might wish to consider it with us in further detail.

Faithfully yours,

Cordell Hull
[Enclosure]

Outline Statement of a Number of Alternative Courses of Action for Dealing With the War Debts

Definition. As used in this statement “war debts” is intended to include all of the foreign governmental obligations owing to the United States heretofore funded by agreement, including the debts of Germany, Austria and Greece.

[Page 545]

Status of War Debts, and June 1934 Payments

Total indebtedness as of Dec. 31, 1933, including arrears of interest and principal. Regular payments due on June 15, 1934, under funding & moratorium agreements. Amounts not paid under contract terms and payable on June 15, 1934. Total due June 15, 1934.
Austria $23,752,217 $34,767 $34,767
Belgium 411,166,529 $7,159,453 11,309,453 18,468,907
Czechoslovakia 165,283,195 1,682,812 2,852,898 4,535,711
Estonia 17,784,695 322,850 989,985 1,312,835
Finland 8,726,645 166,538 166,538
France 3,960,772,238 59,000,218 82,308,312 141,308,530
Gt. Brit 4,636,157,358 85,670,765 176,120,246 261,791,011
Greece 32,573,537 1,891,578 1,891,578
Hungary 2,051,938 32,669 114,628 147,298
Italy 2,008,103,288 14,741,593 13,687,010 28,428,603
Latvia 7,312,658 134,883 286,462 421,345
Lithuania 6,554,544 147,864 221,169 369,034
Poland 222,560,466 4,039,039 12,317,829 16,356,869
Rumania 63,860,560 1,248,750 1,048,750 2,297,500
Yugoslavia 61,625,000 300,000 525,000 825,000
Total 11,628,284,874 174,647,439 303,708,093 478,355,532
Germany
{ RM
13,041,527,612
} Postponed
{ RM
127,956,661
RM
127,956,661
Mixed
Claims
} Army
Costs

(See Exhibit A for details2)

Preface

In view of the fact that, with minor exceptions, there appears to be no intention on the part of the debtor countries to meet the June 15, 1934, payments or the ones subsequent thereto, in accordance with the terms of the pending agreements, the occasion is presented to review the provisions thereof with the idea of developing acceptable compromise interim arrangements or completely new terms. In so doing it might well be possible not only to avoid wholesale default, with the consequent danger of loss of these assets, but at the same time to induce the debtor countries, in exchange for debt concessions granted by the United States, to cooperate with this country in breaking the present worldwide economic log jam which now prevents nations from engaging in mutually profitable trade on a reasonable scale.

Assuming a comprehensive and sound domestic program in this country, a suitable international procedure is necessary for a full and stable measure of economic rehabilitation. Permanent exchange stabilization and monetary arrangements are one major factor in [Page 546] international business recovery. The liberalization of commercial policy, including the readjustment downward of unreasonable trade barriers, is a second major factor. A third but minor factor is the temporary or permanent settlement of the war debt problem. One country cannot by itself return to sound and constructive economic and trade practices. Nor will the restoration of trade between two nations accomplish the desired end. As many nations as will must join in the undertaking to bring about suitable and full recovery. Only thus will anything like the normal volume of wholesale and healthy commerce, with its wonderfully favorable reaction upon the domestic economy of every country, be brought about. Thus the war debts solution, from this country’s point of view, becomes a two-edge sword, designed to secure a proper measure of ultimate repayment and at the same time, as the price of concessions made to them, cooperative action of the debtor countries designed to facilitate world-wide trade recovery.

It is desirable to consider the specific propositions hereinafter developed in the light of these general observations and of certain other relevant assumptions.

Thus, it is obvious that all alternative courses of action for dealing with the war debts fall into two general classes, one of which contemplates payment either now or in the future strictly in accordance with the existing contract with the respective nation, and the other of which contemplates payment either now or in the future or both in accordance with one or more modifications of the existing agreement. Any type of payment or settlement in the second class requires Congressional action.

With regard to any type of payment in either class, any debtor nation should have access to the American money market, if it desires such access, to borrow money which could be applied directly toward the payment of its debt.

To the extent that it may be proposed at this time to agree upon a form of payment other than that stipulated in the contract, it would seem most desirable that it should be viewed solely as a temporary expedient, covering possibly two or three years, and looking forward to a subsequent and more permanent disposition of the debt, if and when world economic conditions should become more stabilized. It would not be regarded as a precedent.

Inasmuch as Congressional action would be necessary to permit the adoption of any plan of payment differing from the existing agreement, and in order to make the proposal as simple as possible, it is suggested that the payments temporarily to be provided for should merely be the current installments, and that the question as to the disposition of all payments now in arrears should, by Congressional [Page 547] action, be deferred to the end of the temporary period. Nevertheless, alternatives not in accordance with this thought are included in this statement because serious consideration has been given to them.

Furthermore, the act of Congress which might authorize payments in a manner differing from that which is already provided in the debt agreements, might also, as well, authorize the President to accept partial payments representing, in his judgment, a sum measured by the full capacity of a particular country to pay, in which event such country would not be deemed to be in default. Annexed hereto as Exhibit B3 is a suggested form for a statute covering the points just discussed and making possible an emergency handling of the debt program.

Finally, it should be emphasized, in the interest of the sanctity of international obligations in general and the preservation of the breath of life in our own credits in particular, that almost any temporary expedient is better than default.

Classification of Alternatives

a. payment in accordance with the existing contracts

While it does not appear likely at the present moment that any nation (except possibly Finland) will offer to pay its June 15, or subsequent installment, whether of principal or interest, in strict accordance with its agreement, it is felt that alternative proposals can be best visualized against a background of what is now required or permitted under practically every funding agreement.

(a) United States Gold Coin or Gold Bullion.

Payment in United States gold coin is, of course, legally out of the question. On the other hand, the chances are against any country’s shipping gold bullion to this country, either because of the difficulty of purchasing such bullion, or due to its unwillingness to deplete monetary gold reserves.

(b) Immediately Available Dollar Funds.

While we make no comment on whether or not, as a matter of fact, it would be possible for any or all of the debtor countries to make payment in dollar funds, it is certainly clear that the countries involved strongly represent the difficulty of effecting the transfer across the exchange and the inevitable interference of such transfer with the normal processes of international trade. Under this heading, however, it is appropriate to refer to the statement made in the preface that if the American money market were open to borrowers, some of the difficulties involved in this type of payment would be temporarily [Page 548] overcome. Persuasive argument, however, has been and can be advanced against the general economic soundness, from a world point of view, of undertaking to pay existing foreign debts by borrowing more money in this country.

(c) Certain United States Bonds on Thirty-Day Notice.

The option to make payments on account of principal and interest in this manner has been exercised to a very considerable degree, payments in this form having aggregated over a billion dollars, principally by Great Britain. No notice has been received to date from any debtor country advising of its intent to pay in bonds. Of course, when United States bonds sell at a discount, there is some advantage in this manner of payment, but when our bonds are selling at par, or over, there is no advantage whatever over payment in dollars, except to the extent that these bonds might be acquired abroad from the citizens of a debtor country by payment in local currency.

(d) Definitive Bonds of the Debtor Countries Suitable for sale to the Public.

With the exception of the Austrian and German debt settlements,4 and the 1929 Greek loan,5 each of the agreements provides that the debtor country will issue, at the request of the Secretary of the Treasury, definitive bonds suitable for sale, in exchange for the funding bond or bonds then held by the United States. Of course, this does not constitute an alternative method of payment, except as it would afford a means for the United States to acquire bonds in this form in an amount, say, equal to a semi-annual installment, sell these bonds to the public and cover the cash into the Treasury. It is not thought that this privilege could be successfully exercised at the present moment, first, because of the natural reluctance of any private investor to acquire any of these goods in the absence of a reaffirmation on the part of the debtor country of its intent to pay them, and unless the bonds were for a short period; and, second, because in many cases, particularly France, Italy and Belgium, among the large debtors, the interest rate is not attractive. The rate on the British bonds, however, is reasonably attractive. It is possible that, with the cooperation of the British, and in view of their present apparent strong financial position, and in view of the large number of people in this country having friendly feeling for Great Britain, that some such arrangement as this might be worked out for two or three years, though it is a fact that the British to date have not looked with favor on the distribution of their obligations into private hands. The opinion of the Attorney General would probably [Page 549] have to be secured as to whether or not payment in this form would be such as to satisfy the requirements of the Johnson Act.6 As an alternative utilization of the principle of this procedure, it might be practical to have Congress authorize the modification of a particular agreement so that bonds of a reasonable maturity and reasonable interest rate could be secured by the United States and disposed of in the market, and as a consideration therefor, to make some concession to the debtor country on its present obligation under the agreement. The whole question of utilizing definitive bonds of debtor countries, rearranged to make them readily marketable, in any refunding of outstanding United States bonds issued in connection with wartime financing, in whole or in part, is something that would bear further consideration, in our judgment, because, while there is, without a doubt, inherent in such a plan seeds of international discord in the event of default, there is at the same time present the possibility of cementing friendly international relations. Of course, the mere substitution of one creditor for another in no way overcomes certain difficulties inherent in the whole question of the payment of these debts, and is merely one alternative avenue of approach.

b. payment in accordance with one or more modifications of the existing contracts

In considering the various courses of action hereinafter set forth for the temporary or even permanent disposition of the debt problem there should be kept in mind the possibility of a correlative compensatory benefit to be sought by the United States in agreeing to a concession from its contract rights. As was stated at the outset this benefit not only could involve the element of a quid pro quo moving to this country, but in appropriate circumstances and possibly depending on the degree of concession made by us, should embrace the idea of a utilization of the concession to attempt to blast out, in general, the barriers now existing to the flow of world trade.

(a)
Thus, for example, with respect to any particular country with whom a new arrangement is entered into, and by way of quid pro quo, the gradual elimination by that country over successive years of any system of quotas directed against the United States or affecting the products of the United States.
(b)
Concessions by way of reductions of tariffs interfering with the importation into any country of American products.
(c)
Modification of any existing arrangement between a debtor country and any other country or colony or dominion so that the United States shall participate on an equal footing with respect to trade or privately-owned blocked accounts or bills receivable, use of port facilities, et cetera.
(d)
Elimination of discriminatory taxes on American enterprises in the particular country, or capital investments in such a country.
(e)
Improvement of the general taxing system in its relation to this country with a view to the mutual elimination of double taxation.

This idea of benefit might be expanded to include not only reduction of barriers to United States trade such as set forth above, but also the reduction of barriers to world trade in general through the cooperation of the United States and the debtor countries and other countries as well and might further embrace proposals for exchange stabilization, thus by world-wide mutuality of action encouraging the movement of trade. The instrumentality in each case would be the yielding by the United States of specific rights under its debt agreements.

Not only could there be improvement achieved in the realm of trade, but likewise in other areas in which the conditions are disturbing to world affairs.

(f)
Thus by cooperative making of multilateral concessions to attempt to effect progress toward disarmament or armament holidays.
(g)
Etc., etc.

It is thus apparent that there are a number of economic and other fields in which the United States could legitimately seek to change the status quo to the advantage of the United States and the world in general. It would seem that an endeavor along this line is so much more sensible and practical than the mere discussion of partial cancellation of the debts out of hand without seeking anything in lieu of that part of the debt which is so cancelled.

We come now to a consideration of specific proposed courses of action which involve receiving something less than the full agreed payment. As hereinbefore stated, it would seem that the most sensible approach to a course of action which involves a departure from the original agreement is to seek that method which would seem most nearly to permit the payment of the original obligation while, at the same time, disturbing the debtor country the least or even possibly aiding the debtor country by the manner in which the payment would be utilized after it was made.

Within this general concept any number of possible combinations of forms of payment are possible, ranging from a payment in dollar funds very closely approaching the full amount due, with the balance in foreign currencies, to a relatively small amount of dollars or no dollars at all, and the balance in foreign currencies; or payment in dollars, foreign currencies and United States bonds in whole or by way of partial payment, or a combination of dollars, foreign currencies, United States bonds and definitive bonds of the debtor country to be sold to the public. Anything approaching concreteness in this realm [Page 551] of combinations could result only from negotiation. It is our opinion, however, that this approach to the proposition is more by way of an extracting process, rather than anything creative, and we frankly favor a payment of the full amount, or as much as may be, in the currency of the debtor country, the same not to be with a view to immediate conversion into the United States Treasury but to be utilized by way of a credit pool as an international primer of world trade and possibly for achieving stabilization of foreign currencies, and subsequently to be covered into the Treasury over a period of years.

I. Payment in full in currency or credit of the debtor country.

The balance of international payments position of the United States, showing in every year since the war a large excess of credits due us arising out of the current interchange of goods and services with the rest of the world, actually makes it extremely difficult to receive war debt installments. The plea by debtor countries of inability to pay rests in large part on very real grounds, inasmuch as the available estimates of their balances of international payments indicate that at the present time only Belgium and Finland might be able to pay war debt installments out of their current income arising from international transactions. (See Exhibit C7). The other debtor countries could acquire the necessary dollar exchange to meet their war debt payments only by borrowing—a recourse which is at present wellnigh impossible—or by depleting their gold reserves, which they are naturally loath to do. In order to protect their currencies from depreciation in relation to other currencies, the debtor countries, with the exception of Great Britain, Finland and Lithuania, have set up severe exchange controls or import restrictions, or both. (See Exhibit D.7) Such devices, which now prevail all over the world are symptomatic of adverse international payments positions of the countries in which they are employed and necessarily operate in a vicious circle, definitely limiting the possibility of increasing the movement of international trade.

The Proposal. It is therefore proposed, with the approval of Congress, (see Exhibit B7) that the President may allow payment of war debts during the two calendar years 1934 and 1935, to be made in the currencies of the respective countries, the credits thus provided to be utilized as a pool to move goods in world trade by providing exchange outside of the regular exchange markets, thus acting to break the present circle and to permit an aggressive commercial lending policy for international trade. It is proposed that the war debt payments, amounting in two years to about $850,000,000, (see Exhibit [Page 552] A9) or to such lesser amount as may result if the President is authorized to accept partial payments when circumstances justify such action, shall be used as a lever to lift the trade of the world, in furtherance of the announced aim of the Administration to promote a revival of world trade. At the end of two years the proceeds of debt payments, in whatever currencies they may be, would be sold for dollars in any orderly manner over an extended period and covered into the Treasury. To allay possible fear of any country that large unused sums to the credit of the United States might be suddenly moved to the disadvantage of that country, provision could be made that the credits would only be made available to meet more or less specific transactions as they arose.

Operation of the Plan. The Bank for International Settlements, if willing, or if not, a temporary agency set up by the United States and the debtor countries, would act as a clearing station for the receipt of debt payments in the various currencies. The funds created by debt payments would be divided roughly into two equal parts.

1.
One part to be utilized by the United States substantially as follows:
(a)
To sell foreign exchange through the medium of the Federal Reserve System to American tourists and for immigrant remittances in any amounts in excess of similar expenditures for either of the two preceding years, whichever was the higher, at a substantial discount on the basis of the entire sum purchased, upon satisfactory proof by the purchaser. (See Exhibit E.9)
(b)
To sell foreign exchange in the same manner to American importers at a substantial discount for purchase of goods on the free list in excess of similar purchases in either of the preceding two years. (See Exhibit F.9)
(c)
For direct purchase by this Government on its own behalf of goods not produced here or those goods produced domestically in insufficient volume to satisfy commercial demands, such purchases to be for military and naval use, for promotion of public health and education, or for aid to agriculture.
(d)
To provide grants enabling American students, teachers and research workers to study in foreign countries.
(e)
To allocate foreign exchange to one of the Export-Import Banks to finance imports of goods not on the free list.
(f)
To afford, from the dollar proceeds of the above mentioned sales of exchange, a revolving fund of unrestricted credit at 90 to 180 days to persons in foreign countries desiring to buy American goods, either directly or through triangular transactions. Repayments of such credits would be made in domestic currencies of the commercial borrowers and these sums in turn would become available for further commercial loans. If it is decided to proceed further with this proposal a careful study should be made of the market possibilities in [Page 553] the United States for types of goods to be brought in under this plan and also whether there is a possibility of developing feeling between debtor countries because of types of goods from any one country being severely competitive with similar types of goods from another country brought in under this plan.
2.
The other part to be handled by the Bank for International Settlements to furnish credit to stimulate the movement of goods not only among the debtor countries but generally throughout the world. Loans would be made on a reasonably liberal and intelligent basis for private commercial transactions, secured in the customary manner and maturing over a period up to one year or 18 months. No matter what currency was loaned, the commercial borrower would effect repayment in his own currency at an equivalent in value of the money borrowed. Thus, operating outside regular exchange markets and avoiding pressure on the exchange rates for any currency, this fund would be worldwide in its application. Also as may be deemed in the best interest of all concerned and without prejudicing commercial needs, loans might be made from the pool for the purpose of effecting stabilization of currencies.

Conclusion. The promotion in the above fashion of the total volume of world trade would tend inevitably to increase the sale of American goods abroad through the mere creation of added buying power and as a consequence of raised standards of living in the several countries which would result from the stimulus given the trade. The general improvement in the economic life of other countries would also tend to enhance the probability of repayment of American private investments abroad. Finally, this utilization of debt payments in a worldwide cooperative program would convert now stagnant funds into a dynamic means of world recovery for mutual benefit, thus offering a quid pro quo to countries desiring to fulfill their contractual obligations.

II. Payment in current or available credits of the debtor country in accordance with the country’s capacity to pay, but not in full.

This proposal is based upon the same general theory as in I. above, varying only in the fact that payment would be received in an amount less than the full amount contracted for. The proceeds of the payments would be utilized in much the same manner as under I.

III. Payment in dollars, only of principal installments.

The suggestion has been made that as a temporary expedient Congress authorize the President in his discretion to permit a country to make payment during the three-year period beginning June 15, 1934, only of the principal installments falling due within that period, with a waiving of interest payments; also that all token payments and payments of interest and principal received from the particular country [Page 554] since the expiration of the Hoover moratorium10 be applied against such principal payments falling due on and after June 15, 1934. This method of treating the debt payments falling due in the next three years would give present universal effect to the policy implied in the debt settlements with France, Italy, Belgium, Yugoslavia, Austria and Greece, of minimizing the matter of interest; and is designed to recognize the claim of the British and certain other governments, whose settlements were modeled after the British agreement,11 that their interest payments are out of proportion to the rates of interest charged the above-named countries. Furthermore, during the anticipated continuance of present unsettled world economic conditions, this treatment would, it is maintained, enable debtor countries to uphold the sanctity of their own obligations, thus serving to strengthen the validity of international obligations in general, without placing on the debtor governments too great an actual burden.

IV. Combination payments.

As previously pointed out, as a temporary measure and as the result of negotiations rather than on the basis of a preconceived program, it might be possible to effect full or partial payment of the installments falling due during the next two or three years, by allowing the President in his discretion to receive such payments partly in dollars, partly in foreign currencies and available credits and partly in definitive bonds of the debtor countries suitable for public distribution. With regard to the foreign currencies so paid, it is to be assumed that they would be utilized somewhat along the lines indicated under I.

V. Payment in short-term notes.

Possibly as a last recourse the President might be authorized in his discretion, in lieu of payment in dollars, foreign currencies or bonds, to accept the note of a debtor country for the amount of principal and interest falling due in the three-year period beginning June 15, 1934, such note to bear interest at a specified rate and to mature on or about June 15, 1937. The only possible motive for employing this alternative would be that it would serve to keep alive the obligation of the country to the United States and tend toward recognition of the sanctity of international obligations. Of course, there is a danger in such a proposal by reason of the fact that payment is called for in more or less substantial amounts at one particular time, which might well tend to throw the machinery of international payments out of [Page 555] balance at a time when the world might be emerging from the present difficulties. And if it were not contemplated by those concerned that these notes would be paid, then nothing much more is accomplished by the proceeding than if the countries were permitted to default.

In order to present as complete a treatment of the war debt problem as possible, the following suggestions heretofore made are included in this statement, although each presents a permanent settlement rather than a temporary one.

  • Ia. Elimination of all interest. Waive all future interest payments provided for in the debt agreements and allow all interest payments made to date since the funding agreement with any particular country to be applied against future or past due principal installments. This type of settlement again is a reflection of the tendency heretofore referred to of minimizing or eliminating interest on the war debts and attempting to secure only the principal amount of the funds originally loaned.
  • IIa. Lump sum settlement. The suggestion most commonly made is that the war debt agreements should be set aside and that each country should settle its debt to this country by making one lump sum payment. Of course, the amount of such payment and the concessions to be stipulated in favor of this country as a condition of agreeing to a lump sum settlement could result only from negotiation. A lump sum settlement with any particular country would of necessity involve once more the transfer problem. A lump sum settlement, if it could be effected without too great a dislocation of international exchange and commerce, might have the present effect of enabling this Government to balance its budget.
  • IIIa. Other Plans. In addition to the above the following is a list of some other proposals for war debt revision which are typical of a larger number involving in each instance the same specific principle but varying in detail:
    (1)
    In consideration of reducing our claims on the debtor nations by one-third, it is proposed that such countries agree to an armament holiday and, furthermore, that the payments to be made under this settlement would be a small number of annual lump sum payments, the proportion to be paid by each of the debtor countries to be determined by agreement among themselves. This settlement, it is pointed out, would make operative the Lausanne Agreement,12 as the result of which Germany would in effect meet the installments due this Government during the first two years.
    (2)
    A moratorium on all war debt payments for a specific number of years, during which period an annual reduction of the existing war debt obligations would be allowed on the basis of a percentage of American goods imported by the debtor countries.
    (3)
    The substitution for war debt obligations of the securities of private enterprises existing in a debtor country or any other country, including American securities. This proposal envisages an operation similar to European financing of the early stages of the war whereby private holdings of securities were mobilized by the various Governments.
    (4)
    For a concise outline of the many American proposals for war debt revision, see University of Illinois Bulletin No. 47, of June 20, 1933.
  1. Not printed.
  2. Not printed.
  3. For correspondence concerning German payments to the United States for claims and army of occupation costs, see vol. ii, pp. 469 ff.
  4. See ibid., pp. 533 ff.
  5. 48 Stat. 574; for correspondence relating thereto, see ante, pp. 525 ff.
  6. Not printed.
  7. Not printed.
  8. Not printed.
  9. Not printed.
  10. Not printed.
  11. Not printed.
  12. June 20, 1932; for correspondence, see Foreign Relations, 1932, vol. i, pp. 584 ff.
  13. For text of the agreement of June 18, 1923, funding the debt of Great Britain to the United States, see Combined Annual Reports of the World War Foreign Debt Commission, 1922–1926, pp. 106–111; for text of the agreement of June 4, 1932, relative to the postponement of payments during 1932, see Annual Report of the Secretary of the Treasury, 1932, pp. 296–297.
  14. For text of agreement, see Great Britain, Cmd. 4126, Miscellaneous No. 7 (1932): Final Act of the Lausanne Conference, Lausanne, July 9, 1932; for correspondence on this subject, see Foreign Relations, 1932, vol. i, pp. 636 ff.