862.51/4089
The Secretary of State to the German Chargé (Leitner)
Sir: The statement submitted by the German Government on June 15, 1934, concerning the present German transfer situation, and the actions taken in connection therewith in regard to Germany’s foreign indebtedness, has been examined with care corresponding to its importance.
I desire to submit the following comment arising from this examination:
1. Your Government cites conclusions of the Transfer Conference held at Berlin April 27 to May 29, 1934, whereby the representatives of foreign creditors of Germany recognize that a case can be made out [Page 369] for concessions on debt service and that the only difficulties regarding German debts are transfer difficulties. The communication then refers to the arrangement concerning Germany’s external debts, which was foreseen by the Transfer Conference, as creating a breathing space.
It is presumed that these statements confirm the offer announced by the Reichsbank May 29, 1934, with respect to the suspension of transfer of interest during the year beginning July 1, 1934, on Germany’s long and medium term non-Reich debt, including provisions for exchange of matured coupons for ten year three percent funding bonds of the Konversionskasse. Your Government states that while the Dawes and Young loans were not included in the discussions with creditor representatives, these loans must be included in the breathing space as no other economic possibilities are open for them than for the other German loans. It also states that it is prepared to discuss with the bodies having competence affecting these Reich loans and with the Government of the United States methods under which transfer of the service of these loans can again be undertaken.
2. This Government receives with grave regret the announcement that the losses already being borne by American investors in German securities are thus to be augmented. This action will be a further dislocation of the process of international finance on which the international trade of the world has developed, and a discouragement to international cooperation.
This Government is furthermore disturbed by the indications contained in the communication and in other declarations emanating from official German sources, to the effect that discrimination may be practiced between the various national groups of holders of German securities. Under the terms of the agreements controlling the issue of German loans, the obligations taken towards investors of all nationalities are in virtually all cases identical, and in fact part of one general pledge. In the case of the Dawes and Young loans the credit of the German Government is pledged on terms of unconditional equality to investors in all parts of these issues.
3. Your Government introduces its discussion of the transfer problem by a historical note regarding the foreign indebtedness incurred by Germany in the years 1924 to 1930. It emphasizes the fact that during that period the German Government was making payments on reparations account and implies that the fact that a substantial portion of the foreign exchange made available to the Reichsbank was required for reparations payments lessens the regard with which German foreign indebtedness must be considered. It is unfortunate that a discussion with the Government of the United States of the practical problem of the service of German debts should be prefaced [Page 370] by expressions indicating this feeling against them on the part of the German Government. The United States received no reparations from Germany.
The loans made by American investors to Germany were primarily made in accordance with loan contracts and arrangements which stated that the proceeds were to be applied for productive purposes. A study of the announcements presented by the borrowers shows that the mass of the indebtedness in both private and public enterprises was contracted for such purposes as reconstructing the German Merchant Fleet, modernizing and rationalizing German industries, restoring the capital reserves of banking institutions, improving the public utilities systems, the constructing of houses, roads, canals, et cetera. It is unquestioned that the foreign private capital which the German public authorities and enterprises borrowed was an indispensable element in the recovery then witnessed of German production and economic vigor from the collapse of 1923 to the stage where prewar indices were surpassed.
This aspect of the course of German foreign borrowing was prominent in the minds of the investors to whom the borrowing offers were addressed, and it was their reasonable expectation that once German industrial and financial institutions were re-established, German policies would be directed to assure to the utmost that the external obligations could be met. This period of borrowing by the German public authorities, banks, industries and other institutions, both on long and short term account, was a voluntary course of action taken by a mature industrial and trading state whose past experience no doubt indicated the dangers of creating a situation in which its capital markets were subject to great disturbances in the event of loss of confidence in its affairs.
4. The main body of the communication under acknowledgment from paragraphs 4 to 10 constitutes an assertion and argument to the effect that Germany has made efforts unparalleled in history to honor German loans, but that the transfer situation brings it about that further substantial foreign payment by German debtors is now predominantly dependent on the action of creditor governments along one particular line. It virtually narrows the duty and problem of fulfillment of German debt obligations down to this one feature of the situation.
The claim that Germany has made unparalleled efforts to honor German obligations is supported by the statement that since the end of 1930, the gold and foreign exchange of the Reichsmarks have been reduced from 3,000,000,000 Reichsmarks to 100,000,000 Reichsmarks. Referring to the whole of the transfer situation which the German communication describes, and to the present state of the monetary [Page 371] reserves of the Reichsbank, this Government feels constrained to make the following observations:
- a.
- The creation of any particular transfer situation and the possibilities of transferring funds needed to meet external obligations are by no means solely dependent on the policies pursued by creditor governments. That the trade barriers erected throughout the world by creditor and other governments have seriously impeded the flow of world trade is beyond question, and the German transfer situation has no doubt been thereby affected adversely. However, in any particular transfer situation such as that which now faces Germany, the policies pursued by the debtor government are no less crucial elements. The German Government is no doubt aware that its policies have created opposition in many parts of the world, which has expressed itself in various trade conflicts and the probable reduction of Germany’s capacity to transfer.
- b.
- Connected therewith is the fact that one of the causes of the present German monetary situation is the extremely extensive reduction of Germany’s short term indebtedness during the past three years. The desire of foreign creditors to withdraw their credit from Germany has been powerfully stimulated by the anxiety aroused by various phases of German policy.
- c.
- During the recent period of most rapid diminution of the Reichsbank’s monetary reserves, there occurred substantial repurchases of German securities previously issued in foreign markets. It is the general belief that many of these re-purchases reduced exchange resources which otherwise would have been available to the Reichsbank for other purposes.
- d.
- It has generally been judged that it is the obligation of a debtor government to so direct its policies that sums required to meet external obligations receive priority over all but the essential needs of the government. It is widely believed that during recent months German foreign purchases of material susceptible of military use have been extensive and financed out of available exchange resources. To the extent that this may have taken place, the ability to meet external obligations would thereby have been reduced.
While this Government does not wish to give undue emphasis to any of the elements of the situation just cited, it believes that they adequately illustrate the view that any transfer situation, including the German situation, is the result of many complex influences including all aspects of the policies pursued by the debtor country.
The asserted anxiety of the German Government to make every effort to meet its obligations cannot be proven by a mere display of its depleted balances, but must be evident from an examination of the whole trend and operation of German policy.
5. For these and other reasons, the narrow and exclusive connection which the German Government seeks to establish between the payment of its external obligations to American investors and the current state of the direct bilateral commodity trade balance between the two countries [Page 372] seems to this Government a distinctly inadequate approach to the problem.
Trade between any two countries, unless it is decisively controlled by governments for other purposes, must naturally tend to conform to the underlying physical circumstances and economic constitutions of the two countries. To such underlying circumstances the permanent elements in the trade between Germany and the United States are due. In fact, most of the international trade of the world must be so accounted for.
The exclusive emphasis, therefore, on the current and variable state of bilateral trade balance and the tendency to make such balances, country by country, the base of an increasing number of special agreements connected with debt payments will inevitably cut across natural channels of trade and may not improbably reduce the total volume of trade and general transfer capacity. Furthermore, since the terms of such special agreements are apt to depend on the real or conceived bargaining position of each of the parties at the moment, the result of the pursuit of this policy will be to make the matter of debt payment a question of national relations rather than of obligation or of contract. Such a process inevitably must result in discrimination between various creditors, and thus augment the causes of dispute and ill-will between countries.
In presenting these observations for the consideration of the German Government, this Government does not desire to argue away the importance of liberalizing the commercial policies throughout the world so that the discharge of all international obligations will become possible with less strain and difficulty. It is cognizant of the fact that the reduction in international trade brought about by the multiplication of trade barriers has increased Germany’s difficulties in meeting its obligations; no measures of defense have been taken against the regime of using postponements and reductions of payment to stimulate German exports. It cannot admit, however, this further tendency to connect the obligation of making payment with the narrow set of considerations just discussed, and it must reiterate its expectation that the German effort to meet those obligations will be as great as the sum total of all circumstances shaping Germany’s capacity to pay permit.
6. The German Government refers to its own obligations outstanding in the Dawes and Young loans and suggests that it will be prepared to enter into general discussion with the bodies competent for these loans and also with the Government of the United States as to the methods by which the transfer of the service of the Reich loan can be resumed. The Government of the United States understands that this part of the German communication is addressed primarily to the Governments which are signatory to the agreements in connection [Page 373] with which the Dawes and Young loans were floated. It does not desire at present to comment on these suggestions further than to state that large parts of these loans were floated in the United States and are held by American investors and this Government expects that the German Government will assure that no discrimination against such American investors is permitted with respect to the payment or transfer of the service on these loans.
Accept [etc.]