The German Ambassador ( Luther ) to the Secretary of State


By order of the German Government I have the honor to submit to the Government of the United States the following statements concerning the present German foreign exchange and transfer situation, and concerning the consequences resulting therefrom for transfer after July 1, 1934.

The conference of the representatives of the creditors holding German medium and long term foreign debts with the representatives of the Reichsbank, which was concluded on May 29th has, after careful examination of the present and foreseeable foreign exchange situation of Germany, recognized that there are grounds for making concessions in order to help Germany in overcoming some of her transfer difficulties. It has, further, reached the conclusion that the problem of German foreign exchange is not a problem of the debtor’s inability to pay, but that the difficulties lie only in the domain of transfer. It has, finally examined and recognized also the efforts of Germany to acquire foreign exchange by encouragement of additional exports.
The regulation of Germany’s foreign debt contemplated at this conference does establish a respite, but the solution of the German transfer problem remains open as before. The German Government considers it advisable at this time, when the transfer question demands solution as an urgent problem of world economy, to state what the situation of the German transfer problem is.
According to the report of the International Committee appointed upon recommendation of the London Conference of 1931, in the years from 1924 to 1930 foreign capital in the amount of 18.2 billion reichsmarks net came to Germany and enabled Germany to pay interest on her commercial foreign debt, to raise her gold and foreign exchange stock 2.1 billion to about 3 billion reichsmarks and to equalize Germany’s unfavorable trade balance. Only about half of the equivalent of the foreign capital which flowed into Germany in this period therefore benefited German business. While 10.3 billions of reichsmarks in foreign exchange were used for reparations, and therefore could not be used in German trade, Germany had to take over the burden of interest on and amortization of all the foreign credits. If the individual debtor under the loans also received the [Page 357] equivalent in reichsmarks for the dollars, pounds and francs lent, it was necessary to procure the amount of the loans corresponding to the reparations payments from the resources of the German tax-payer. As the investments of German capital in foreign countries were taken away in consequence of the post-war treaties and have been built up again subsequently only to an inadequate extent, and Germany therefore had available only small current receipts from foreign capital investments, German trade was faced with the task of procuring foreign exchange to the amount of more than 600 million reichsmarks, year after year, by forcing exports or by restricting imports, merely in order to pay interest on foreign loans to the amount of 10.3 billion reichsmarks, for which German industry taken as a whole has not received any equivalent. This was the system of commercializing reparations, which was attached to the system of the removal and alienation of Germany’s capital. This new system found its direct expression in the international loans which were raised especially for the financing of reparations. In other words, the foreign capitalist lent his capital to Germany; half of this capital, however, flowed to the reparations creditors. The real problem of the different loan agreements, that is, how Germany was to pay interest and return the capital on the loans accepted, was left to the future.
Germany has indeed, despite the great difficulties which this task encountered, never spoken of a repudiation of the loans placed on the market, regardless of whether their aim or their effect was of a productive nature or was for payment of reparations. On the contrary, she has always emphasized her determination to honor these loans and has made the greatest exertions for that purpose,—exertions which are unparalleled in history.
Germany has sacrificed to that end practically all the gold reserve and foreign currency reserve of the Reichsbank, which amounted to approximately 3 billion reichsmarks at the close of 1930, according to the report mentioned above. This reserve had dwindled to 108.9 million reichsmarks on June 12, 1934, that is, practically to the zero point. The note coverage, which amounted to 56.2 percent at the close of 1930, amounts to 3.1 percent at present. At the same time, the note circulation has shrunk by about 1300 million, to 3486 million reichsmarks, on June 12, 1934, in consequence of deflationary measures. In the depression year 1931, and also in the following years, Germany met the run of foreign creditors and only saw herself compelled to take measures restricting transfers, in defense of her currency and trade, under the pressure of the extreme scarcity of foreign exchange.
Germany has also decided further to meet, in so far as it is within her power, her commercial obligations or those foreign obligations placed on a commercial basis by the reparations system mentioned, within the framework of the agreements made. But German [Page 358] efforts alone are not sufficient to do so, particularly as all available reserves of capital in foreign countries have been exhausted. It is for Germany, if it is so in any country, solely a problem of the balance of trade as to how foreign debts can be paid. German export trade has the task, as in other countries, of procuring bread and labor for the workers and of making import trade possible, which is needed for procuring raw materials for the export trade and goods covering the necessities of life that are not procurable within the country. In addition to that (and in this respect the situation of Germany differs fundamentally from that of the countries that are competing with Germany in the world market), German export trade must also provide foreign exchange for the settlement of a large foreign indebtedness, against which there are no counter claims. All international experts have pointed out over and over during the last ten years, therefore, that the payment of the German foreign debt depends on the cooperation of foreign countries. Only to the extent to which world trade is increased or to which the creditor countries themselves provide special possibilities for disposing of additional German exports, is therefore transfer [to meet]54 the German foreign debts possible.
Now, the general world depression has so far made increased world trade impossible. But the creditor countries also, with the exception of a few countries, have not opened any additional possibilities for sale of German goods, although they insisted on the payment of Germany’s debts. They have, on the contrary, adopted prohibitive measures, which have, directly or indirectly, made German trade more difficult. Even if a nominal lowering of the German foreign debt and a saving in interest, to the equivalent value, of about 200 million reichsmarks annually has come about through the devaluation of the currencies of some creditor countries, the pressure on German export trade as the result of this debt, has not been lightened, but has been increased, by the international fall in value, combined with the intensification of competition of creditor countries caused by the devaluation of currency. In addition to this are quotas, increases in customs duties and similar measures.
Despite this pressure, German export trade has, until recently been able to hold its ground to some extent, as to value in gold value and volume, in comparison with the most important European neighboring countries. German export trade fell from 12 billions in 1930 to 4.8 billion reichsmarks in 1933, and has therefore declined to about 40%. There was no decline worth mentioning in the first quarter of 1934 as compared with the first quarter of 1933. Conditions in 1934 were made much more difficult, however, by the further fall of [Page 359] the currencies of the principal creditor countries. Therefore German import trade fell in the same proportion, i. e. to about 40%, from, 10.4 billions in 1930 to 4.2 billion reichsmarks in 1933, and remained the same in the first quarter of 1934 as compared with the first quarter of 1933. In this connection, we must consider that German import trade, consisting mainly of raw materials has in turn necessitated greater expenditures of capital as a consequence of the rise of prices of certain raw materials, which took place last year,. According to the general opinion, revival of world trade is possible only through increased purchasing power of countries furnishing raw materials. As an industrial exporting country, Germany has a strong interest in this revival, but aside from this fact, has considerable need of import goods, to meet a condition of unemployment which endangers the economic structure of the whole world. The maintenance of imports, hitherto of a relatively substantial character, on the part of Germany shows how groundless the oft repeated opinion is that Germany is intentionally shutting herself off from world trade. Germany has rather done her share to the end that there should be no interruption up to the present in sales by countries furnishing raw materials, and has at the same time given German labor opportunities for employment.
In view of the efforts that Germany has hitherto made, to fulfill her treaty obligations and to contribute to the economic reconstruction of the world, the German Government can bespeak a greater degree of justice on the part of the creditor countries with respect to the actual economic situation of Germany than in the past. Germany desires to pay her debts. This is possible only to the extent that foreign countries, which under present circumstances, means practically the creditor countries, open additional markets. If the creditor countries do not wish to do this, or are unable to do so, they cannot at the same time make the impossible demand for unmodified transfer of funds for debts. As hopes of cooperation on the part of foreign countries have not hitherto been fulfilled even the Transfer Conference has not solved the task set for it, namely, “to provide a basis for the treatment of the German debt service, adapted to eliminating the weaknesses of the present system, as well as the basis for a permanent adjustment”, the German Government must in the interest of private debt conditions redouble its efforts, to maintain a favorable trade and foreign exchange balance by its own efforts. It finds itself, therefore, obliged above all to reduce imports in every conceivable way, in order to pay at least for the imports of necessaries of life, and, so far as it is in any way possible, to be in position to continue to make transfers to meet foreign debts. The German Government hopes that the temporary suspension of the service of the medium term and long term foreign loans which has now become inevitable together [Page 360] with an increased demand for additional exports through the channels provided at the Transfer Conference, and the reduction of imports, will contribute to such an improvement of the German Foreign Exchange balance that a transfer will again be possible within a measurable time. The active cooperation of the creditor countries is needed, however, for a substantial and permanent improvement of the German transfer problem. The solution of the German transfer problem depends very decisively upon the decision of the creditor countries regarding the extent to which they are willing to open their markets to the purchase of German goods. To this end common efforts are necessary. For this an obvious condition is a trusting cooperation and a reciprocal regard for vital needs. What the German Government can contribute through economic measures of its own has already largely been done. Moreover, the German debtor continues as formerly to pay punctually in reichsmarks. The will to pay and the faithfulness in making payments therefore are beyond question. But in order to transfer, Germany, as the representatives of the creditors have now recognized, requires a breathing space so that its balance of foreign exchange may be restored at least to the point where the resumption of regular service on its foreign debts may be rendered possible at all. In the absence of special common efforts this would be possible only in the course of decades and only to the extent that Germany obtains continuing receipts from export surpluses. The German transfer question is a special problem which cannot be compared with the general transfer problem of other debtor countries and which requires special treatment and special effort because, as stated, a large part of Germany’s foreign debt is based upon loans the proceeds of which have flowed to the reparation creditors and have not been retained by the German economic system, and represent in practice an unproductive burden for German economy.
Irrespective of this circumstance and although it is not a question of a dilatory debtor but of a general economic problem, the solution of which is not dependent on Germany alone, the representatives of the creditors at the recent conference decided to exclude from consideration the question of the Reich loans, just as in former international conferences the discussion of reparation or political debts was excluded, although the latter represented from the beginning economic problems of the first order. The annual service of these Reich loans without amortization at the present time alone requires approximately 115,000,000 reichsmarks, that is more than the total foreign exchange and gold reserve which the Reichsbank now has at its disposal. Of this amount 88,000,000 reichsmarks are required to meet the interest of the Dawes and Young loans. If there were included the amount hitherto transferred for amortization of the [Page 361] Dawes loan, 109,000,000 reichsmarks would be necessary for both loans. In connection with these loans the German Government has endeavored to bring about parallel discussion of practical relief measures similar to those which were considered at the conference with the medium and long term creditors, and in a communication to the trustees of both international loans of the Reich made it known that neither the existing legal basis nor the existing mechanism for the service of these loans should be questioned. The trustees, however, contrary to expectation, have stated that they are not in a position to take part in such a discussion. The German Government regrets this course. It is desired to bring about at the proper time, in agreement with the representatives of the interests of the creditors of the loans, a practical modus vivendi which should take into account the unavoidable development of the German balance of foreign exchange that has arisen as well as the special nature of these loans,—in the same way as the Bank for International Settlements states in its Fourth Annual Report describing its duties as trustee and agent for international loans namely,—”to reconcile contractual obligations with economic possibilities”.
What are these economic possibilities for the loans of the Reich? Manifestly none other than for the other loans. According to the proposal of the Reichsbank of May 29, the transfer of interest service on foreign loans should be postponed for a half year from July 1. This would open up the prospect, if fully observed and if German foreign trade can be maintained at its previous level, that the gold and foreign exchange reserves of the Reichsbank which have fallen almost to zero would recover in an amount less than what Germany formerly paid for reparations in one month. Under the prevailing circumstances, the available foreign exchange must serve solely for the strengthening of the currency reserve of the Reichsbank.
Since according to the recent communication of the Reichsbank, foreign exchange for the service of medium and long term foreign loans of any kind from July 1 of the current year until further notice is not available, the inclusion of the loans of the Reich in the proposed breathing space is also unavoidable. This inclusion would also correspond to the real purpose which the transfer conference had in view, namely, by means of a breathing space, to render Germany again capable of transfer. It would therefore seem to be in the interest of the creditors if the basic economic facts were kept in view rather than if the fulfillment of the letter of the contract were insisted upon, which as matters stand would necessarily lead to a situation where within a short time the transfer of service on loans would be compromised for a long time.
The German Government, without wishing to disturb the basis of the loans, presents the following for the consideration of the creditors: The interest rate of the Dawes loan amounts nominally to seven percent. The loan was floated in 1924, when money had a comparatively low purchasing power in relation to the high price level then prevailing. If one takes into consideration the increase in purchasing power which, on the basis of the averages of the wholesale price index and the cost of living index, has resulted from the decline of prices up to 1934, then the real level of the interest on the Dawes loan amounts today for the creditors, in spite of the currency depreciation, to 11.30 percent in the United States, to 11.79 percent in England, to 8.01 percent in France, to 8.47 percent in Holland, to 8.58 percent in Switzerland (Swiss francs 12.59 percent), to 12.24 percent in Italy. On the basis of the prices for exports, whose proceeds serve for the procurement of the foreign exchange for the loan service, the real interest rate amounts for Germany on the average to 9.8 percent. The corresponding figures for the nominally 5½ percent Young loan of the year 1930 amount in the United States to 7.88 percent; in England to 7.41 percent; in France to 7 percent; in Holland to 8.47 percent; in Switzerland to 8.47 percent; in Italy to 8.71 percent; in Germany to 9 percent. The German Government can indeed understand that the trustees of the loans and perhaps also the individual creditors, limited in their freedom of action by their formal obligations, find hindrances to giving up rights in regard to these bonds. In view of the generally demonstrated impossibility of carrying out the transfer of the German foreign loan service to the agreed-upon extent, and in view of the injustice which would result from insistence upon such high interest rates while the other creditors agreed to be satisfied as long as a year ago with considerably lower interest and, in accordance with the proposal dealt with by the Transfer Conference, must be satisfied with nothing temporarily and for a year with at most 2.4 per cent interest (40 per cent of their claim), it ought to be considered whether the responsibility should really be taken of denying concessions in the field of the Reich loans also.
The German foreign exchange situation has obliged the German Government to inform the Bank for International Payments as fiscal agent of the Dawes loan, and as trustee for the Young loan, that, temporarily, from July 1 until further notice, there will be available no foreign exchange for the maturities of the service of these two loans also. It has further announced that the value in reichsmarks of the loan service, as has also been the case up to now with regard to the amortization of the Young loan, will be placed at the disposal of the trustees in the account of the Bank for International Payments [Page 363] with the Reichsbank, and that the rights and special position of the two loans will in no way be prejudiced by the contemplated regulation of transfers. The German Government is cognizant of the special obligations entered into with regard to these loans. It regrets the development which has arisen, but hopes that in view of the unexampled sacrifices and the extraordinary efforts which Germany as the debtor has taken upon itself in order to combat this development, the creditors will appreciate the circumstances which have led to the present step. The German Government begs the Government of the United States to take note of the foregoing explanations and statements and to take into account the unavoidable situation which has arisen. The German Government is gladly prepared to give more detailed information with regard to the German situation; it would likewise welcome discussions concerning measures of assistance which might be taken in the way of an agreement for the additional sale of German goods, if from the beginning it were clearly understood that only genuinely additional sales would be considered, provided that the Government of the United States believes that such discussions would be of practical value at this time. Also, aside from this, the German Government is prepared, before the actual resumption of interest transfer on any long or medium term foreign loans to enter into general discussion with the bodies competent for the Reich loans and also with the Government of the United States as to the methods by which the transfer of the service of the Reich loans can be resumed.
The German Government indulges in the expectation that the situation will not in the meantime be made still more difficult by measures of retaliation against German exports. It has learned that in certain states the idea will be given consideration, in the event of non-transfer of the service of the Reich loans, of themselves securing payment by means of a unilateral clearing arrangement or similar measure of compulsion. The German Government cannot assume that such intentions seriously exist. They would mean that economically impossible performances would be compelled by means which run counter to the laws of economics. Such a procedure must naturally within a short time demonstrate itself as vain, and necessarily, together with the counter-measures resulting therefrom, lead to a renewed contraction of international trade and destroy the basis for the revival of world economy. The only result, which would be most disadvantageous for the creditors themselves, would be that the improvement in the German transfer capacity to be hoped for from a temporary breathing spell would be completely prevented.
  1. Brackets appear in the file translation.