462.00R296/5929
The Secretary of State to the German Ambassador (Luther)
Excellency: I have the honor to refer to the passages in Your Excellency’s note of May 24, 1935,91 which touch on German financial obligations to American investors and to discussion of the same subject in a Note Verbale addressed by your Government to the American Embassy at Berlin May 7, 1935.
[Page 433]In the Note Verbale of May 7, 1935, which replied to an Aide-Mémoire regarding the Dawes Loan coupons maturing April 15, 1935, the German Foreign Office, after disclaiming any intention to discriminate and explaining that the present practice was not due to any initiative of the German Government but was forced on Germany by the governments of certain creditor countries, offered to conclude with the United States a payment arrangement similar to those with other countries under which full interest on the Dawes and Young Loans has been transferred. In Your Excellency’s note of May 24 are found statements that the question of the financial obligations of Germany to the United States is inseparably connected with a revision of the bilateral exchange of commodities between the two countries and that only when an understanding has been reached as to the regulation of such trade will it be possible to see whether and to what extent the service of loan obligations will be possible. Your Government further states that it is prepared to include this question within the scope of the commercial negotiations which it has proposed to this Government.
The Government of the United States has had many occasions to reaffirm its attitude in this matter since 1933, when, in common with other creditor states, it expressed earnest objection to the discriminatory payment agreements of Germany with Switzerland and the Netherlands.92
It is no doubt strictly and technically true that Germany did not take the initiative in negotiating the further series of bilateral agreements which now regulate its payments to individual creditor countries other than the Uinted States. It is clear, however, that the general adoption of these agreements was a sequel to the circular note of June 15, 1934,93 in which the German Government notified other governments of the suspension of transfer of interest service on German foreign loans, and heavily emphasized the thesis that the transfer of debt service was a problem for decision by creditor governments rather than by Germany. This Government at that time, in the light of this as well as of other expressions from official German sources, replied to the note as to a pronouncement in favor of bilateral discriminatory agreements and discussed the disadvantages to trade, to credit, and to international relations to be expected from a system making the payment of debt depend on the nationality of the creditor rather than on obligation or contract.
Since that time, the Government of the United States has had occasion repeatedly to protest against actual discriminations against American creditors. Among other cases, it has called attention to [Page 434] the implications of the failure to transfer the small amounts necessary to pay American holders of direct obligations of the Reich Government itself in full as all other holders have been paid. In its reply of May 7, the German Foreign Office explains that this discrimination is merely the result of the existence of special agreements forced on Germany by other governments which enable the nationals of the latter to obtain transfer of interest on better terms than the German Government voluntarily makes available for that purpose to nationals of countries which do not have such agreements. This seems to leave untouched the points as to the direct pledge of the faith and credit of Germany to American holders of these Government bonds and as to the relatively slight effort apparently required to pay all holders without discrimination when payment has been provided for all holders other than Americans.
The Government of the United States cannot accept the offer of the German Government to negotiate with the United States an agreement of the type suggested in the note of May 7. It is the Government of Germany that is the custodian of the credit of Germany. Bonds are voluntary contracts between the holder and the debtor, engaging the responsibility of the latter. The Government of the United States is not willing to share or decrease the responsibility of the German Government for the discharge of such obligations or to substitute for German obligations to American citizens an intergovernmental contract limiting payments on such obligations to the amounts that can be paid from the excess proceeds of the sales of German products in the United States.
In addition to the considerations of principle and general policy which have already been presented regarding agreements of this type, there are obvious practical considerations of direct pertinence.
From the first it has been evident that the system of bilateral agreements covering German debt payments would unequally affect the different creditor countries. Indeed, in January 1934, when the system had been initiated but was still opposed by most creditor countries, the excellent statistical services of the German Government published an analysis of the bilateral balances of trade and payments between Germany and the individual countries of the world showing with considerable detail and emphasis what is sufficiently obvious, namely, that Germany has normally sold more to the countries of Western Europe than it has bought from them and has normally bought more from non-European countries than it has sold to them, and that the United States is the only country which is both normally a larger supplier than customer of Germany and a large holder of German medium and long-term obligations. Obviously it has been more feasible for European creditor countries than for the United [Page 435] States to collect debt service through their direct trade with Germany since no substantial modification of their domestic economy or of their tariff structure was required. In these circumstances the tender to the United States of a bilateral arrangement though similar in form to those entered into with European creditor countries is not in fact a tender of nondiscrimination.
Bilateral agreements covering German debt payments have now been operative between Germany and European creditor countries for almost a year. It is understood that the agreements have given rise to numerous difficulties, with the possible exception of the agreement with Great Britain, under which the latter has been in a position to obtain payment of service of the Dawes and Young Loans while continuing to maintain its exports to Germany at the previous normal rate of 55 percent of its imports from Germany. A striking case is that of Switzerland which, in view of its large excess of purchases from Germany over sales to Germany, had stipulated and obtained by special agreement, as early as 1933, full payment to Swiss holders when other countries were receiving only part payment on non-Reich German bonds. The system of bilateral balancing agreements has had such effects on Swiss trade that Switzerland has now found it necessary to arrange for a decrease in German interest payments to less than those which nationals of other countries are receiving.
The Government of the United States cannot ignore considerations of this kind in evaluating the tender of a bilateral agreement with Germany in lieu of the nondiscriminatory discharge of the contractual obligations of German debtors to American bondholders.
The German Government has not ceased to declare its intention to meet German obligations to the fullest possible extent. In the note of August 1, 1934, to which the note of May 7, 1935, refers, it has disclaimed intention to make the fulfillment of debt obligations depend on concrete promises of commercial concessions. Hence I do not understand the statements in your note of May 24 to mean that in case the commodity trade relations between the two countries are not revised for that purpose, the German Government will withhold all provision for interest payment to American bondholders.
On the other hand I must point out that while the year July 1, 1934–June 30, 1935, for which funding bonds covering interest maturing on non-Reich loans were to be issued under the tender made in the Communiqué of the Debt Conference, May 29, 1934,94 which the German Government duly ratified, is at its end, no effective provision has yet been made to implement the tender in so far as concerns American bondholders. These funding bonds were to be ten-year bonds bearing three percent interest. The German Government has [Page 436] since agreed to issue to British holders of non-Reich bonds, four percent funding bonds covering coupons for the period from July 1, 1934, to June 30, 1936, and it is understood that these securities have already been issued and are in the hands of British bondholders.
Similarly, although Dr. Schacht and Mr. Dreyse95 in the conference with bondholders’ representatives at Berlin January 31, 1934, signed an agreement to give a firm undertaking to purchase at 67 percent of par the scrip issued in part payment of interest maturing during the first half of 1934, and European bondholders were able largely to realize their interest payments through this procedure, scrip covering that period was not issued to American bondholders until January, 1935, and in the meantime the German authorities had announced that the purchase of scrip so undertaken by them would be discontinued commencing September 15, 1934, because of lack of the necessary foreign exchange. In such situations delay may in itself involve discrimination in addition to the express discrimination involved in a tender of poorer terms to American holders than are granted to holders of any other nationality.
The German authorities have just announced the continuation for the period from July 1, 1935 to June 30, 1936, of the moratorium on transfer into foreign currencies of interest and amortization on German long and medium-term obligations other than Reich obligations. An exception is made of payments in favor of foreign countries which are regulated by special agreements, i. e., the moratorium regulations will in general be inapplicable to bondholders other than Americans. Thus the régime under which the German Government intercepts the payments of German debtors to American bondholders and takes responsibility for the disposition of these sums is continued in its most acute form for another year while American bondholders have not yet received the minimum advantages they had been promised for past periods of the régime. This is the picture of aggravated discrimination presented before the American public and government, as the outcome of the system of control exercised by the German Government.
While German bonds in European creditor countries are mainly in concentrated holdings of insurance and financial corporations, American subscriptions have been largely from individuals all over the country, including many of limited means, who have reposed their confidence in the credit of German obligors. They have voluntarily assumed the risks common to all investments, but they do not understand discrimination against them based on their American citizenship [Page 437] or residence. It is to these numerous American citizens who have freely chosen to subscribe to German bonds that German obligors are responsible and it is they who are affected by the policies of the German Government regulating debt payments. German obligations to them are direct and, in the opinion of this Government and in accordance with its long-established practice, it is with them or their representative organizations that the German Government should discuss the manner in which these obligations will be discharged.
This Government has in no way minimized the actual transfer difficulties which confront the German exchange control authorities, but has left to the directly interested parties, as in the transfer conference held in Berlin in May 1934, the question of the reasonable capacity of Germany to transfer debt service over a given period. It is confident that the German Government will not dispute that American holders of German bonds are entitled to look to the German authorities charged with the use and allocation of foreign funds to do everything possible in the utmost good faith to avoid discriminating against bondholders whose Government is not a party to the system of nationalistic discriminations which has developed since that conference.
Accept [etc.]
- Post, p. 448.↩
- See Foreign Relations, 1933, vol. ii, pp. 439 ff., especially pp. 453–460.↩
- Ibid., 1934, vol.ii, p. 356.↩
- Not printed.↩
- Member of the Reichsbank.↩