Under Secretary’s Meetings: Lot 53 D 250: Documents2

Paper Prepared in the Bureau of European Affairs 3

confidential

Investment of Blocked Baltic Funds

problem

To determine whether the blocked dollar and gold balances of the former independent governments of Latvia, Lithuania, and Estonia should be invested in American securities in order that the proceeds of such investment might be utilized to help defray the cost of maintaining certain diplomatic and consular establishments of these countries.

proposed action

That the Department discuss, informally and in the light of the facts and considerations presented below, the question of the investment of the blocked funds with the chief diplomatic representatives of the three countries in the United States with a view to receiving from them proposals for an investment program suitable to their particular situations. On receipt and approval of such plans, the Department would arrange for the issuance of appropriate licenses by the Office of Alien Property.

discussion

In 1940, the Baltic States of Latvia, Lithuania and Estonia were incorporated into the USSR. The United States, like many other western countries, has never recognized this incorporation, and continues [Page 338] to recognize and do business with accredited diplomatic and consular representatives of those nations in the United States. None of the Baltic states has a Government-in-exile. Before these states were incorporated into the USSR their governments transferred certain of their official funds to the United States for safe keeping. After the incorporation of the states into the USSR the United States blocked those funds.

The problem of providing funds to enable the established diplomatic and consular representation of the Baltic states in certain countries, including the United States, to continue their operations then arose. It was decided, at the request of and in agreement with the chief diplomatic officials of the three countries in the United States, that the United States Government would authorize the release of limited sums from the three blocked accounts to enable the Baltic diplomatic and consular officials in the United States and in a few other specified countries to carry on their work. Acting under the authority contained in Section 25(B) of the Federal Reserve Act,4 the Secretary of State each year issues appropriate certifications for the release of the necessary funds, the amounts in each case being determined on the basis of a budget submitted by the respective missions in the United States for the Department’s approval. The actual deblocking is accomplished by the issuance of licenses by the Office of Alien Property, Department of Justice.

The annual drawings have been made against the capital funds. If continued over a prolonged period, this process will obviously result in the eventual depletion of the capital funds. For example, the amounts of the 1949 budgets for the three missions were: Latvia $73,500; Lithuania $110,000; Estonia $57,000.

The approximate amounts of the blocked dollar and gold balances now on deposit in the Federal Reserve Bank in New York and in other United States banks are as follows:

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Country Type of Account Bank Amount
Latvia dollar Federal Reserve (NY) $4,350,000
dollar Riggs (Washington) 23,000 (free acct.)
gold Federal Reserve (NY) 3,430,000
7,803,000
Lithuania dollar Riggs 100,932
dollar Federal Reserve 4,000
gold Federal Reserve 2,806,000
2,910,932
Estonia dollar Federal Reserve 936,756
dollar National city (NY) 895,328*
dollar National city (NY) 41,742 (free acct.)
gold Federal Reserve 2,880,000
4,753,826 (potential)

It can be seen that the Latvian Mission, if granted appropriate permission, could, under the most conservative investment program, earn more than enough to meet its present budgetary requirements. In the case of Lithuania, by selling its gold balances and investing the dollar proceeds, a return of slightly less than 4 percent would be needed to meet its requirements, while a more conservative program could be expected to yield returns sufficient to meet a large proportion of their expenses. The Estonians have accounts totaling $978,498 which are readily available to them for investment, the returns on which would not meet their requirements. However, it may be that they will be able to secure the release either of the Bank of Estonia account ($895,328) or the gold account in the name of the Bank for International Settlements ($2,880,000), in which case an investment program should yield a major part if not all of their requirements.

While most United States Treasury securities are available for these investments, there appear to be no legal or policy reasons for limiting the proposed investments to such Government securities. It is believed that each mission should draw up a program to meet its own particular requirements and that each program should be considered on its own merits. It is further felt that the Department should be able to consider these funds as being, in effect, “trust funds” and that the statutes of the State of New York with respect to the investment of trusts might well be used as a guide in making investments in these cases. If, as is likely in the case of Latvia, the returns on the investment are greater than the amount required to cover the budgetary needs, there should be no objection to this as the proceeds derived from the investment would remain as a Latvian blocked account.

If this proposal for the investment of the blocked Baltic funds meets with the approval of the interested officers of the Department the mechanics involved in making the investment should be comparatively [Page 340] simple. It is envisaged that, after preliminary informal discussion with the chiefs of the respective missions, those missions would present a formal request to the Department for permission to invest their blocked funds in certain specified securities or types of securities. If these programs meet with the approval of the Department, the respective missions would then apply, through the Department, for the issuance of the necessary licenses by the Office of Alien Property. The securities and the income therefrom would then be reblocked. It is felt that, in this way, the selection of particular securities would be the responsibility of the individual missions rather than the Department or the United States Government.

policy issues

There has been no change, nor is any change contemplated in our policy on non-recognition of the incorporation of the three Baltic states into the USSR. Consequently, the United States will continue to recognize and do business with the accredited diplomatic and consular representatives of these countries in the United States. In implementing this policy we should continue to approve the release of funds from the blocked accounts of these states for the operation of their diplomatic and consular establishments in the United States and in certain other countries where they have continued such operations since the war. As there appear to be no legal or other obstacles to the proposed investment of these funds in a suitable manner and for the purposes herein described, it would seem that this should be done without further delay.

One possible development, if the approval of such investment becomes known to the American public, is that American citizens having claims against the three governments, arising out of pre-war financial transactions or out of seizures of properties in those countries by the USSR, may raise with the Department the question of their rights with respect to the blocked funds. It is felt that the Department should reply, in such an event, that there has been no change in our established policy toward the governments concerned in approving the release of funds for the maintenance of their representatives here and abroad; that the investment program is merely a means of enabling those missions to continue their operations with a minimum depletion of the funds at their disposal; and that, should the United States decide eventually to proceed against the funds for the settlement of the claims of American nationals, the investment program would prove to be in the interests of such claimants since, in at least one instance, the funds available for such settlement might be increased, while in all cases the funds would be preserved as far as possible.

[Page 341]

recommendations

It is recommended that the Department discuss the question of the proposed investment of these funds with the chief diplomatic representatives of the three countries in the United States, pointing out that we would look with favor on a request for permission to invest the funds in a sound investment program best suited to the needs of the particular mission.

  1. Lot 53 D 250 is a master file of records of meetings, documents, summaries, and agenda of the Under Secretary’s Meetings for the years 1949–1952, as maintained by the Executive Secretariat of the Department of State.
  2. This document was circulated in the Department of State for consideration at the Under Secretary’s Meeting as document UM D–72a, January 18, 1950. It was a revision of an earlier, less perfected paper (UM D–72, December 14, 1949, not printed), which was withdrawn before it came before the Under Secretary’s Meeting. At the Under Secretary’s Meeting of January 20, 1950, no objection was raised to the Bureau of European Affairs proceeding in accordance with the proposals outlined in this paper. In March 1950 officers of the Department of State began discussions with the chief diplomatic representatives of Latvia, Lithuania, and Estonia regarding the investment of blocked funds.
  3. Public Law 31, April 7, 1941 (55 Stat. 131), was an amendment to the Federal Reserve Act, as amended, designed to provide a means whereby friendly allied and neutral European governments and their respective central banks could have access to their funds on deposit in United States banks and frozen there under Executive order. The amendment provided that a depository bank was free from liability if it paid out on instruction of a person whom the Secretary of State had certified as authorized to operate the accounts of a foreign government or central bank.
  4. Account held in name of Bank of Estonia and not immediately available. [Footnote in the source text.]
  5. Account held in name of Bank for International Settlements and not immediately available. [Footnote in the source text.]