840.515 Gold Bloc/69: Telegram (part air)
The Consul at Geneva (Gilbert) to the Secretary of State
Geneva, April 1, 1935—6 p.m.
[Received April 2—2:30 p.m.]
[Received April 2—2:30 p.m.]
107. For Feis7 from Deimel.
- Joint Committee has agreed upon a report for early publication which has nothing favorable to say of clearing agreements beyond [Page 533] recognizing that they may in some cases have alleviated somewhat the effects on commerce of the general application of exchange control.
- Clearing agreements are found to have developed out of the exchange control and concurrent import restrictions which themselves arose as a result of the fall of prices, paralysis of credit and of capital movement, et cetera. While there was agreement that return to freedom of international monetary exchange is essential the report constitutes a compromise between two views: (a) that the maintenance of exchange control is due to an unwarranted fear of the consequences of allowing a currency to depreciate in foreign exchange being confused with the consequences of internal currency inflation as experienced in the early postwar period, the remedy being simply to let the currency find its own level with some debt regulation if necessary; (b) that it is due to the fear depreciation will be met by abrupt exclusion from foreign markets; insecurity resulting from exchange disequilibrium between the principal currencies; and uncertainty over the definitive real weight of indebtedness; the efficacious remedy being reestablishment of an international monetary standard with freedom of exchange. By clever strategy Dayras8 obtained somewhat greater emphasis for the second view.
- Clearing agreements are found to reduce trade as a whole but by their bilateralizing tendency to injure commercial and financial interests of third countries particularly those which are at once raw material producers and financial creditors. Moreover, by forcing third countries to seek markets elsewhere, a tendency to reduce world prices results; third countries are likewise pressed to adopt clearing for their own protection.
- But the apparent original advantage to the clearing countries themselves is short lived being based upon a trade balance between the parties favorable to the weaker party which tends soon to disappear owing primarily to overvaluation of the latter’s currency in the clearing relations. Counteracting measures result principally in further restriction of trade as, notably, when the stronger, usually a creditor country, restricts exports to the other.
- Indebtedness, particularly short term, while reduced by dollar and sterling depreciation and special agreements must in some cases be dealt with before exchange control can be terminated.
- Creditor countries with ample financial resources have a basic role to play (a) in reaching agreements with their debtors based on a broader view than merely debt collection and (b) “when a country acts to permit its money to find its natural level by abolishing the control of exchange, it is important that creditor countries should not neutralize the effect of the measures by augmenting their import restrictions.”
- The tendency of certain countries to use clearing agreements as an instrument of commercial policy like quotas and customs duties impedes return to normal conditions of exchange, “may put” the country in question “in contradiction with the most-favored-nation clause” and should be discontinued.
- Pending the removal of exchange control transitional measures are recommended to permit greater flexibility in the actual exchange rate including giving discretion to clearing offices to alter the clearing rate permitting “private compensation” transactions with maximum liberty to the merchants to set the terms, and replacing the “bureaucratic” clearing system by the more flexible system of transfer or payment agreements (which Leith-Ross9 insisted to be essentially different from clearing agreements. He informed Ryder he was going to Rome to negotiate and feared he might have to conclude a clearing agreement).
- Most-favored-nation aspect only lightly touched upon, apparent sense being that clearing agreements are in their nature discriminatory but this would not seem to be considered an urgent or serious point.
- Ryder will be in Milan, April 4; Rome, April 6. Please inform Tariff Commission. I will be here several days following up certain aspects further by contact with League Secretariat. [Deimel.]