862.51/3806
The Acting Secretary of State to President Roosevelt
My Dear Mr. President: May I bring to your attention a situation that seems to be shaping up in regard to the treatment by the [Page 336] German Government of American holders of German bonds, to a present total of substantially over a billion dollars.
As you know, service on all German long term securities is governed by German official regulations. The debtors pay the service in marks into a German official bank, and the German Government, acting through President Sehacht of the Reichsbank, announces how much is to be remitted to the bondholders.
For the six months coming to an end, the treatment accorded American bondholders was to give them 50 per cent cash on their interest coupons and then an extra 25 per cent in the form of additional cash for scrip, or in total 75 per cent of the interest service due.
Yielding to the pressure of Dutch and Swiss interests, the German Government entered into an agreement with the Dutch and Swiss Governments whereby the full 100 per cent interest was paid as part of an arrangement by which the Dutch and Swiss Governments facilitated the purchases of German goods.
Dr. Sehacht has now announced that the debt service on the American bonds is to be curtailed to 30 per cent directly in cash, plus 35 per cent to be derived from the repurchase of scrip, or in total 65 per cent (instead qf the previously existing 75 per cent). He furthermore has implied in various addresses that even this may be seriously reduced in the future. In the meanwhile, the German Government has been making some exchange available for the repurchase of bonds at depreciated prices.
Meanwhile, it appears to be the intention of the German Government to renew the special agreements with the Dutch and Swiss Governments for 100 per cent payment. You will realize that it is the fact that these countries buy more from Germany than Germany buys from them that puts them in a position to press for this special treatment and which probably led the German Government to give this special treatment.
Up to the present, the British bondholders have been treated the same way as the American bondholders. The British Government protested the action of the German Government and gave the Department a copy of its note asking that we support the same position. The Department last week instructed Ambassador Dodd34 to make similar representations on behalf of this Government but up to the present has had no report from him as to action taken. I am attaching a copy of a telegram just received from our Embassy in Paris35 (Cochran is usually a most reliable news source) which seems to imply that the German Government may try to buy the British off by offering them a compromise, for the British, like the Dutch and Swiss, buy [Page 337] more from Germany than the other way about. Our information is that Dr. Schacht is playing off the demands of the British for nondiscriminatory treatment against those of the Dutch and Swiss; that Governor Norman of the Bank of England is not wholly opposed to the scrip practise worked out by Germany, and that he and Dr. Schacht might work out some plan of conciliation for the British in which American interests are not included.
As early as last summer the Department argued with Dr. Schacht that such discriminatory treatment was injurious. It has endeavored to make clear that though the direct bilateral trade position seemed to justify such discrimination, other matters should be taken into account, especially
- (1)
- The fact that there are other items in the balance of payments, such as the tourist expenditures of Americans, that should be considered;
- (2)
- That American purchases of goods from other parts of the world, e. g., from the Dutch East Indies, furnish exchange to these other parts of the world wherewith they can buy German goods;
- (3)
- That the decline in the gold value of the dollar has lightened the burden of the American debt as compared with the burden of the bonds payable to the gold countries;
- (4)
- That in various other debtor regions, such as Brazil and Colombia where most of the exchange is derived from sales to the United States, no discrimination is enforced against Dutch, Swiss, or German bonds.
This issue is likely to arise at the meeting between the bondholders and the German Government scheduled to take place in Berlin on January 22. I feel that if this Government accepts this discrimination in the case of Germany it would be a precedent for similar action on the part of other debtors. Great Britain is apparently approaching the matter from the point of view of a great creditor country that knows that the development of discriminations of this type will only create new causes of conflict and be costly to all in the final event; but the temptation held out by the German Government may be too strong to resist.
If the American contention is to be upheld, it is probable that it should be conveyed not only through Dodd but that we strongly press our point of view to Luther36 at once; to be most effective it should be done before the conference meets. May I ask your consideration of the accompanying draft instruction to Dodd,37 which we might also use as a basis of a conversation with an aide-mémoire for Luther?
Faithfully yours,