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The Papers of Eugene Meyer(mss52019) 121 04 001- Subject File, Federal Reserve Board, Reports, Reichbank(Germany)to George L. Harrison, 1931-32 July 91 1931. The President, The Yihite House. My dear Mr. President: I am sending you herewith, for your information, a copy of the cable about *lick I talked with you an the telephone this morning• Respectfully yours, Governor. New York, july 8, 1931. Confidential for No-rman: 1. At various tims during the past week you and I have discussed on the telephone the possibility that the Reidhsbank might ask (A) for a renewal of the present central bank credit and/or (B) fOr an enlargmnent of that credit. 2. But I was surprised and concerned to learn this afternoon over the telephone of the huge amount which after talking with Luther you now feel may be necessary to hold the situation. 3. While you know I am sympathetic with taking any reasonable steps that may really be necessary to avoid a collapse in Germany and perhaps throughout central Europe as well, and while furthermore I agree with the general principle that if another credit is to be raised for this purpose it should be adequate rather than inadequate, nevertheless I should reiterate what I told you on the telephone: that it would be difficult if not impossible for us to consider taking any steps looking toward further credit accommodation here unless we have sass met definite evidence that the Reidhsbank has itself first done everything within its power effectively to protect its own position. 4. I am confident that the principal New York banks who are credit- ors of Germany have maintained their lines at about the amounts outstanding at the time of the President's announcement. In some cases, indeed, I know that those lines have been actually increased in that Interval. On the whole, the evidence available here indicates pretty clearly that much of the loss of foreign exchange by the Reidhabank during recent weeks must be due to a flight of German capital which it seems to me might well have been limited or restricted, thrtagh a firmer credit policy of the Reicbsbank. 5. Rationing of credit is, of course, a drastic and disagreeable procedure, but it has been applied effectively in Germany in the past without proving to be fatal. On the contrary, in each other in,stance it has been most helpful in repatriating German capital and in checking further outflows of funds and I cannot see why it might not - be equally effective at this time if applied with equal force. 8. So, on the *hole, I personally do not feel free at this time to advocate any further credit here until I am convinced that the Reichsbank has done all that it has in its power to do to protect Its own situation and this I think should be done immediately. 7. In other words: Is it not a mistake for any of us seriously to be talking about extending further credits, which at best mould be difficult to raise, until we know that they have first taken firm corrective steps on their own part and until we have had an opportunity to see their effect? 8. I realize the Importance of the time element, but the fact that the statement day comes on next Tuesday does not really seem controlling because after all in this great emergency is there any reason why they should not dhow a deficiency in their proportion with a consequent increase in the bank rate as provided by the bank law. -5- 9. Indeed, this, together with strict rationine may well turn the tide not only by checkinr a further flight from the reiChamark but by drawing back exported capital. At least it seems reasonable that they should make the effort, hard as it may be, before rightfully expecting the cooperation of the central banks or private banks in maintaining present credits or extending further credits, which would only facilitate a continued flight of Cerman capital. 10. I shall, however, continue to think along the lines we discussed on the telephone today and call you tomorrow before you leave London. You are perfectly free to show this to Luther who, I am sure, will realize full well the friendly and helpful spirit in which it is sent. HARRISON Berlin, November 6, 1931 Federal Reserve Bank of New York Nen-York No. 599 FOR GOVERNOR HARRISON German banks complain in increasing measure that while the credit lines are extended in the same limits as provided for by the Standstill Agreement, the formal requirements aS to the eligibility of the replacement drafts are in many cases exaggerated. For instance to prove commercial characzer date of shigment, name of steamer, marks and number of cases, docummts, etc. are required. The effect of this procedure is that, contrary to meaning and purpose of Standstill Agreement, the renewal of these crcdits is largely made impossible so that final repayments which were originally not intended by the Agreement, take place in an ever increasing degree and disturb the foreign exchange position of the Reichsbank. Should appreciate your influencing the American Bankers' Committee to work for elimination of difficulties described above to ensure smooth operation of Standstill Agreement. Have sent similar cables to Presidents of all other Banks of Issue concerned Please cable Reichsbank President Luther November 6, 1931 President Luther Reichsbank Berlin No.269 CONFIDENTIAL FOR LUTHER At a meeting of New York banks held today a committee consisting of Albert H. Taggin, Chairman; Charles E' Mitchell, William C Potter, George W. Davison and F. Abbot Goodhue was appointed with a view to undertaking immediate negotiations with the corresponding committee representing German debtors to provide for the gradual liquidation along commercial lines of the credits affected by the so-called "Standstill Agreement" bvteen German dbbtors and their foreign creditors. This action is believed to be essential at once in view of the comparatively short time remaining before the expiration date of the "Standstill Agreement." At this meeting it was emphasized that in the opinion of the New York banks any such negotiations must recognize the following fundamental principles: (1) That substantial payments must be made periodically beginning March 1, 1932 (2) That satisfactory security shall be provided for all outstanding credits during the period of liquidation; (3) That satisfactory evidence shall be given that definite measures will be taken to insure that some adequate !art of the foreign exchange proceeds derived fram the liquidation of German exports will be made available to the gradual liquidation of short term debts; (4) That in accordance with the spirit of the "Standstill Agreement" preferences as between creditors here and in other countries will be avoided not merely in such repayments as may be made during the existing "Standstill 9 Agreement" but also in the further liquidation of outstanding credits in the future. The New York bankers feel that it is fundamental to the restoration of German credit and to the rebuilding of the German economy that appropriate steps be taken at once. The Now York bankers will therefore appreciate your giving this natter your earliest consIderation and cabling me promptly so that I may communicate mith the Now York Committee mho, in co-operation mith such other foreign creditors' committees as may be appointed, wish to commence negotiations as soon as possible with a conmittee of German debtors Harrison November 6, 1931. Reichsbank Berlin No. 271 ONE CONFIDENTIAL FOR LUTHER Referring to my No. 269 in Ahich at the request of the New York bankers I communicated tD you their views relative to the future liquidation along commercial lines of their credits to German institutions it occurs to me that you bay be interested to have in mind a little of the background of their message. TWO According to the figures of the German statistical office German foreign trade for the quarter ending in October of this year has shown a favorable balance of about 0220,000,000. During this period Germany has been relieved of any obligations on reparations account and in spite of the fact that there has been apparently very little if any reduction in the total of the outstanding shortterm debt the reserves of the Reichsbank have continued throughout this period to dominish. The question immediately arises in the minds of the bankers, as well as in our own minds, as to whether there is not an unnecessary loss of foreign exchange due to insufficient measures by the Reichsbank (a) to recapture a greater part of the foreign exchange proceeds resulting from Germany's favorable export balance and (b) to make available to the Reichsbank other foreign exchange holdings of German nationals. In other words it seems to us that during this lEriod of moratorium on reparations debts and increasing favorable export balance, you have your greatest opportunity through appropriate action by the Reichsbank to build up a foreign exchange position which will enable German banks not only to liquidate gradually their commercial debt to foreign creditors but which will also permit the Reichsbank to prepare for appropriate liquidation of its central bankcredit. The views of the New York banks and ourselves in this matter are all the stronger because of the fact that in other periods, such as 1923, 1924: and -2- 1929, the Reichsbank was able very effectively to increase its foreign exchange holdings through appropriate internal measures. THREE Another question -which has been in the minds of the New York bankers is whether as a result of the current depreciation in sterling there may not have been a disproportionate amount of payments of sterling credits in relation to other foreign credits. As to this I have no figures or information and mould be glad if you can give me any advice. Best regards Harrison FEDERAL RESERVE BANK OF NEWYORK November 9, 1931. Luther Reichsbank Berlin ONE Governor Harrison has referred your cable of November 6th to Subcommittee. TWO The question of the ebility of bills outstanding in this m, rket at the tiH; the Stillhaltung Agreement negoeitations began and which arose from your side and speccally from the last paragraph of your cable of July 29 to the Federal Reserve Bank of ews made the American banks feel that they must have conclusive evidence of eligibility as required by our lamm and regulations. Clause I (a) Accordingly was incorporated in Stillhaltung Agreement. Also the character of merchandise, date of shipment, destination and in many instances the terms of sale are absolutely essential. An easy and satisfactory method would be to place in the hands of American banks copies of invoices together with copies of shipping documents. Vie are sure that such information must be in the hands of German banks and our orn experience in dealing with other customers satisfied us that these requirements are not difficult to fulfill. TBREn, Inasmuch as the Stillhaltung Agreement provides that where the foreign creditor bank sII satisfied as to eble character of drafts presented for acceptance such drawings are to be carried as overdraft it is clear as you point out that there is no diminution of credit but on eIer hand we do not under- stand how repayments are ncessarily required in such cases. In horrever we would point out that from the many complaints caning to sIIcnecon sIIc from American banke apparontly the German banks are not living up to that provon of the Agreement BRACKET Clause 1 (d) END BRACKET which provides that where th3 dbligation is carried in th3 form of 30 overdraft it should be a: :1 as the continuing liability of the original drawer or custamer of the German debtor under the same terms and conditions as mentioned in Clause 1(a). FOUR we take this occasion also to mention the many complaints which this committee is receiving concerning the action of German banks toward the avoidance of those provisions of Clause 1(a) i and ii of the Agreement for collateral. Inasmuch as the extension of the credits under the Stillhaltung Agreement was conditional upon acceptance by German debtors of these provisions we believe that the German Bankers Contiittee should take immediate steps to rectify failures to comply. FIVE American banks are convinced that German banks are not using reasonable effort to obtain and 'Provide collateral security. Their resistance has forced the American Committee to appeal on this question to the Arbitration Committee, the necessity for which they regret, being convinced that the s-Arit of the Agreement should have made this unnecessary. Goodhue Chairman Subcommittee Berlin, November 11, 1931. FOR GOVERNOR HARRISON Federal Reserve Bank of New York New York No. 622 CONFIDENTIAL FOR GOVERNOR. In spite of stringent restrictions in regard to foreign exchange trAnsactions the foreign exchange position of the Reichsbank has not improved and so far there are no signs of any betterment consequently further measuros have became unavoidable. The German banks have came to the conclusion that the dealings in securities as carried out in the present manner result in a considerable demand being made an the foreign exchange holdings of the Reichsbank. This referring not only to transactions in securities which have an international market and which are quated officially on. the Berlin Exchange nor to securities of German issues which are quoted abroad, but above all to purely German securiiies which are principally dealt in German Exchanges. Just in regard to the latter it is evident that from actual or from pretended foreign holdsings very large sales areefected in Germany. The tendency to effect such sales has continually increased in consequence of the general position which refuses to improve. In this connection the recent events occurring since the conclusion of the Standstill Agreement at Basle and which again have had a disquieting effect on the world trade and commerce plays an important role. According to the regulations so far in force the proceeds of such foreign selling must at request be converted into foreign currencies. This produces 2 a state which in the long run is irreconcilable with the spirit and the purpose of the Standstill Agreement. Apart from other difficulties very great and incalculable drawbacks in regard to the foreign exchange balances of Germany will result which not only might imperil the interests of the Creditors under the Standstill Agreement but also might in general be detrimental to the proper functioning of the interests and capital services. Reichsbank must not allow such dangers to develop and therefore has called the attention of the Reich Government to the necessity of intervening. Recognizing the justification of such representation and the urgency of the need of redress the Reich Government has decided to decree in addition to old regulations by way of a new order the following I here confine myself to communicating only the essential points: "Domestic, seourities which exclusively or alternately are expressed in a foreign currency and which are not eligible for dealings on any German exchange may not be acquired against payment except with the consent of the supervisory office fax= for foreign exchange transactions. Foreign securities which are eligible for dealings on a German exchange may not be acquired by an individual domiciled in Germany from an individual domiciled abroad against payment except with the consent of the supervisory office for foreign exchange transactions. Any claims expressed in Reichsmarks res lting from a sale of securities in favor of an individual domiciled abroad and effected after the coming into force of the present decree may not be paid except with the written consent of the supervisory office for foreign exchange transactions" I did not like omitting to inform you of the impending alteration and accentuation of the German decree concerning g transactions in foreign exchanges and to request you to kindly assist us by making our measures understood abroad. Luther. Berlin, November 12, 1931. Federal Reserve Bank of New York, New York No. 625 CONFIDENTIAL FOR GOVERNOR Your cables No. 269 271 and 272. The resolution of the American banks concerning the setting up of a committee with a view to undertaking immediate negotiations with the German bankers' committee to provide for the gardual amortization of short term debts along commercial lines meets the desire of the Reichsbank and the German banks which are 9baLt to elaborate proposals conceraiu6 such auoevization plan. We feel that the Gernnn banks and moreover all German debtors of short term foreign credits as well as German economy as a whole have a vital interest in this respect and that the sale holds true with regard to the Creditors in any country. In our opinion it is of the utmost economic interest to the whole world that a workable plan for the gradual amortization of these debts be found and generally adopted in time before the approach of the termination of the Standstill Agreement shall threaten both debtor and creditor countries with the gravest dangers. The German proposals are based on the point of view that the amortization of the short term foreign debts under a plan covering a number of years in addition to the payment of interest and sinking fluid amounts for long term private debts including the Dawes and Young la loan do not appear possible unless all the resources of German economic life are made use of. The failure of German debtors to offer proposals in this re- spect is due to difficulties having arisen in connection with certain political questions. In the negotiation bei g held with regard to this topic the tendency appears from same wuarters that the reparation question ought to be treated first or at least SOMOTA1017 on an equal footing. In order not to disturb the opening of reparation negotiations we are at present obliged to observe a reserved attitude in -2putting forward Standstill suggestions of our own. This question will however be put forward by ts simultaneously with the reparation questicn at the latest. refrain from dealingwith political questions but ehould like to stress the fact that when the Hoover year was adopted it was recognized that even as long as payment of political debts is interrupted the service for the Dawes and Young loan must be continued because of their character as debts due to private creditors. I fail to see haw a system might be generally approved of that persues the opposite direction the final result of which would be a curtailment of the private rights and interests of all Creditors. Restitution af the credits of the Germesi trades and industries and the safeguarding of the German currency are the most important end fundamental conditions of any arrangement. Referring now to ycur cable No. 271 concerning the development of our devison position I am gratified to see that you follow iwith so vivid an interest the development of the German foreign exchango position and especially that of the Reichsbank and I shall be pleased to give you any informtion you may require. Should you however feel inclined to think that the cause for the utter unsatisfactory development is to be found in insufficient measures of the Reichsbank I beg to say that no official regulation and control of foreign exchango transactions can lead to a real end lasting effect by coercitive measures. I much regretted that you referred to insufficient measures taken by the Reichbank mithout previously getting into touch uith ne concerning the facts. Already the Paris experts' committee of April 1924 has stated in the second part of their report known as the McKenna report "the failure of the methods employed both old and new demonstrates the final ineffectiveness of restrictive legislation when successful evasion is so richly rewarded" and furthermore "restrictive legislation 7hich in the main has proved futile in preventing the export of capital becomes superfluous the moment there is no longer any inducement to evade the law. It is indeed to be feared that laws -3purporting to compel the return of capital would have the reverse effect to that which might be wished "the nucleus of the situation is the fact that Genlany's foreign exchange position had absolutely recovered when the Standstill Agreement and its too far reaching exceptions took effect. The German representatives at Basle pointed without success again and again to the dangers inherent to these far reaching exceptions and when they in order to render possible the completion of a merely commercial settlement finally agreed they felt compelled to mako general reservations. The fact that seasonal credits and the foreign affiliations of German firms are not covered by the Standstill Agreement curtailed Germany's foreign exchange holdings to a very high extent. The rorst however is the fact that the credit linos which are to be kept open in accordance with Standstill Agreement are not made use of to a hardly sufficient extent. In this connection the depreci- ation of the pounds sterling which occurred in the meantime plays an important part. Thus the percentage of sterling credits not taken advantage of because of the failure to make use of the credit lines or repaid for other reasons have been computed on the basis of statements sent in by twenty eight regularly reporting banking firms at approximately sixteen per cent which mean in this instance about L 8,000,000. I cabled to you on Friday concerning the difficulties with respect to the renewal of maturing dollar credits and received in the meantime your reply by cable No. 272. In this case too the same banking houses were unable to use their credit lines or have repaid their credits to the aggregate extent of nearly sixteen per cent since July 1931 corresponding to an amount of almost 380,000,000. All these facts re- sulted in a considerable reduction of Germany's foreign debts equal to more than one billion reichsmarks for a period from end of July till end of October 1931 details about these figures will follow. The counterpart of this reduction and of the continuous withdrawal of foreign currencies is the aggravation of the foreign exchange position of the Reichsbank. Since article No. 31 of the German bank law -4rhich is pegged by international covenants the Reichsbank and the Reich Government which issue the emergency decrees concerning foreign exchange are compelled by this situation to adopt continuously new me sures concerning Which I also referto my cable yesterday. Another very aggravating circumstance is the high interest rates asked for at present by other countries and concerning which I wrote you on September 29. The statistical data of the trade balance referred to by you does not allaw unfortunately to draw a just conclusion for the present period with regard to Germany's foreign exchange poson for a parge part of German exports as reported by the statistics has had to be sold on longer termed credits because of the keen compeon prevang on the world markets. Numarous individual observations prove us furthermore that on account of the general credit crisis prevEng all over the world and especially of the German credit crisis German imports have to be paid for at shorter terms as formerly whereas with regard to Gernan export credits have had to be granted for longer toms than previously. To what extent and at what date a lasting equbrium may be attained in this connecti n cannot be forecase end so much the less as the volume of German exports prove distinctly its character of a crisis of exportation whereas on the other hand hindrance to German exports aro already being prepared by higher tariffs abroad and other measures. To the 535 34 recTuirements above mentioned are furthermore to be added the very high amounts required continuously for wyments of interest on and anortization of foreign debts. All these problems will be dealt with by me mr_re in detail later on. and best thanks for your information. Luther Kind regards Berlin, November 12, 1931 Federal Reserve Bank of New York No. 630 New York CONFIDENTIAL FOR HOVE-tNOR Referring to my today's cable concerning the causes for the foreign exchange position of the Reichsbank I may submit hereafter further details in order to enable you to form a correct idea of the exact situation. Firstly Statistical figures concerning monthly export surplusses are not identical with monthly foreign exchange surplusses as German exporters even under normal conditions are compelled to grant long credits so that foreign currencies will only come in later. Under present abnormal conditions German exporters are compelled to grang even longer credits. In case of industrial works and machines forming large part of German exports terms of payment of one year and more are required. Secondly following reasons. An abnormal transitory state exists at present moment for On the one hand at the moment market is overstrained regard- ing payments for imported goods because payments for goods imported in former months and at that time credited on long terms are now due whereas in many cases goods imported currently now have to be paid for on receipt or on very short term. On the other hand the influx of foreign currencies from exportation is at a low level at the moment because the foreign currencies originating from goods exported in former months and to be paid for later were at that time already turned to account by way of acceptance credits whereas it is not possible to promptly utilize to the same extent bills in foreign currencies originating from goods currently exported now. Consequently actual foreign exchange will not become available until later or often for reasons given under number one until very much later. 2 Thirdly preparations deliveries Statistical export surplus for July August Segtenber excluding n kind amounts to 910 million narks. According to esti- mate during these three months one billion marks have been withdrawn by foreiners especially for the transfer of mark balances with German banks for the transfer of the proceeds resulting from sales of foreign securities so long as such sales could be effected for the repayment of direct commercial credits for the settlement of forward exchange transactions and of other foreign exchange transactions not covered by Standstill Agreement. The entire statistical export surplus of these three months would therefore already have been more than absorbed by such payments even if this surplus had immediately been available in its entirety in the shape of foreign currencies. Fourthly It follows that even if it were possible to seize hundred percent of the foreign exchange originating from exports there could nothing be left of the export surplus of the last three months to enable the Reichsbank to replenish its stock of foreign exchange. However in spite of severest measures of control exercised by the Reichsbank in spite of threat of punishment and in spite of credit reprisals made by the Reichsbank in case of non-compliance it is never possible to secure the foreign exchange in its entirety. Large concerns which import and export at the same time use the foreign currencies received for exported goods to replenish their holdings for the payment of goods they imported. Apart from this deprecia- tion of foreign currencies is an incentive to speedily repay credits in foreign currencies. Fifthly In considering the situation over the period lying .head the following must be kept in mind. At the present time for interest and amortisation alone on all foreign debts approximately fram one and a quarter to one and a half billion RM marks have to be paid yearly to foreign countries the latter figure being more likely near the mark. Thereby it is assumed that the total yields which Germany -3- received from all kinds of investments and claims abroad are compensated by the yields -each foreign countries receive from their moneys invested in Germany in shares other participations and real estate. Therefore first of all the trade balance together with other asset items of the balance of payment will have to yield this amount of from one and a quarter to one and a half billion reichsmarks as a surplus before anything will be available out of the balance of foreign exchanges for the extraordinary repayment of short term or long term credits resulting out of the accumulation. of the recalling of short term credits and out of the accumulation of the resales of securities to Germ ny. Compared therewith in the first nine months of this current quiet anomalous year the surplus of the trade statistic excluding deliveries in kind amounts to 1627 million reichsmarks. Even if the economic forces active in Germany continue to strive towards an enforced export no certainty is given for such large export surplus to be of any duration in view of the already existing and still pending prohibitions of importation and raising of tariffs in our most important foreign markets. Kindest regards Luthe r November 13, 1931. Reichsbank Berlin ONE No. 282 CONFIDENTIAL FOR LUTHER Your No. 625 and 630 which were received late yesterday were considered Iy the New York bankers' committee at a meeting this afternoon TWO They have asked me to advise you (a) That they note with satisfaction from the first sentence of your No. 625 that the appointment of the New York comidttee with a view. to undertaking immediate negotiations with the German bankers' committee to provide for the gaadual amortization of dhort term debts under the Standstill Agreement along commercial lines meets the desires of the Reichsbank and of the German banks. however, in their opinion neither of your messages 625 or 630 responds to the specc proposals contained in their message which I sent you in my 269 therefore, as already stated in their earlier message they desire to be put in immediate touch with the German bankers' committee, in order that the negotiations necessitated by the approaching maturity of the Standstill Agreement may take place without delay through regular private channels. Consequently they request that ypu advise them of the names of the memI;rs of the German committee wlth WI= they can negotiation. (d) That they mill expect to receive as soon as possible proposals from the German bankers' conmittee in accordance with the general principlaes already stated in their original message as set forth in my No. 269. (e) That they are not concerned mith the pocal questions referred to in your messages and are only looking forward to a prompt settlement of the private debts covered by the Standstill Agreement along commercial lines. -2.- THREE I cannot overemphasize the importance of an immediate response as the committee at their meeting this afternoon expressed the opinion that no more time should be lost before definite consideration through private and nonplitical channels of the short term private debts now coming within the Standstill Agreement HARRISON November 13, 1931 Reichsbank No. 284 ONE Berlin CONFIDENTIAL FOR DR. LUTHER As I advised you in my 282 your No. 625 and 630 which were received later yesterday were considered by the bankers' committee at their meeting this afternoon and I have nothing to add to the message they have already asked me to send you except that I would like to refer to certain comments in your No. 625 relative to the principles applicable to the control of foreign exchange transactions. TWO I was of course already familiar with the principles discussed in the McKenna report of 1924 and was interested to see that you see to agree as to the general ineffectiveness of official restrictions or restrictive legislation in preventing the export of capital. Paragraph two of my 271 to which you evidently referred merely intended to raise the question whether or not the Reichsbank itself has taken sufficient or appropriate measures through its own credit policy, quite apart from other official restrictions, to protect or to increase its reserves of foreign exchanges. It was this aspect of the situation in which I was particularly interosted and concerning which I have little information even from your more recent c?bles. Perhaps these are matters however which we can discuss more thoroughly with your representative as soon as he arrives in New York and they only emphasize the opportunity which his visit will give to exchange views with him concerning many problems in which we are both so much interested. I am therefore all the more gratified at your decision to send him to New York Harrison FEDERAL RESERVE BANK OF NF;or YORK COPY OF INCOMING CABLEGRAM Berlin, November 14, 1931 Federal Reserve Bank of Nau York New York No. 637 FOR GOVERNOR HARRISON Referring to my second cable yesterday. Supplementing the data concerning foreign indebtedness I am communicating the following figures Firstly 28 banks have repaid and not renewed $80,000,000; L8,000,000; 22,000,000 florins; 80,000,000 French frEncs of reimbursemnt credits and overdrafts. To be added thereto are about 30% for the other banks and the remaining commercial enterprises. Secondly The efflux of foreign exchange caused by recalling foreign reichsmark balances and by the settlement of forward exchange transactions is being estimated by us as amounting to about 350,000,000 recishmarks. Thirdly, Not taken account of is thereby the not unimportant efflux of foreign exchange resulting from sale of securities and for current amortization of long term loans and advences. Best regards President Luther Cable from Reichsbank, Berlin Berlin, Nov. 14, 1931. FEDERAL RESERVE BANK FOR GOVERNOR HARRISON, NEW YORK No. 639 I received through Bank of England the following connunication from the English Mankerst Committee: "In answer to inquiries from London bankers and accepting houses here, bankers' committees are replying that under Standstill Agreement credit givers should, unless they exercise the option to go under cash advance of 60 days or less before the expiry of date of the agreement, continue accepting drafts up to February 29, 1932 STOP Please confirm that if this procedure be followed, Germany will in any settlement or in now Standstill Agreement, if any, refuse allowing any discrimination between obligations assumed under the present Standstill Agreement which matures February 29th, 1932 and those which mature after that date STOP This is in accordance with intention exprossed in memorandum attached to the agreement" I replied as follows: "Acknowledge with thanks receipt your cable 105 concerning continued acceptance of drafts drawn under Standstill Agreement STOP German Government and Reichsbank in accord with German bankers' committee consider it understood that in later settlement no discriminntion is exercised between drafts drawn under the Standstill Agreement irrespective of whether such bills nature before or after February 29, 1932. We shall maintain this viewpoint at the coning negotiations. I shall suggest to all other bankers' committees participating in the agreement to follow procedure of English bankers' committee" STOP I should appreciate it if the American bankers' committee would act according t'.) the course taken by the English bankers' connitte. I should thank you for relaying this cable to the American bankers' -2- committee and should be particularly grateful for an early reply LUT1IER FEDERAL RESERVE BANK OF NEV YORK Incoming Cablegram Berlin, November 16, 1931, For Governor Harrison Federal Reserve Bank of New York New York No. 644 CONFIDENTIAL FOR GOVERNOR Your cables Nos. 282 284. Referring to your question No. 282 paragraph Two (C) I beg inform you that the representatives of the German bankers committee are Mr. Schlieper and Mr. Jeidels. These gentlemen as well as the Reichsbank are prepared to discuss any question connected with the Standstill Agreement at any time with representatives of foreign creditors. It is however doubtful which procedure should now be adopted in this respect since the suggestions elaborated by Germany with regard to the amortization of short term liabilities have met with political difficulties in spite of our intention to aim at negotiations on merely commercial princples. We felt that we should observe a reserved attitude in this respect because the Berlin Ambassador of the United States Mr. Sackett has on the 30th October and later on repeatedly declared to official and privie quarters in Berlin that according to his opinion private debts are not enjoying priority but that the settlement of political debts ought to take place prior to that of private debts. Simultaneously the French Government informed us that the dealing with the reparation problems by the Advisory Committee provided by Young Plan aught to be the first stop according to the Hoover Laval conversation. The French Government also informed us that any German attempt to have Standstill negotiations opened prior to that step -2- wculd be incompatible with the way of procedure agreed upon between President Hoover and Mr. Laval and would thus meet with France's vigorous opposition. It is true that Yr. Sackett on November 14 towards the Ministry of Foreign Affairs has supported the opinion of the American Bani-ers Committee regarding the treatment of private debts independent of that of the political one, but the negotiations with the French Government of which now the development of the whole situation depends to the largest extent as a consequence of the hoover Laval conversation is still at a point where any German initiative concerning the private debts would bring Germany into the dangerous position that France regards Germany's attitude as ambiguous. As long as this political impediment for Germany making suggestions concerning the settlement of private debts in which direction Germany continues very energetically her endeavors towards France is not removed I cannot see which procedure to be adopted with regard to the negotiations desired by the American banks. Furthermoro it seems to me that the other groups of countries should also take part. Nay I ask you to kindly give me your advice and make suggestions in this respect. I beg to convey to you my special thanks because in this difficult situation you devote yourself so indefatigably to the task of mediation. Luther INcoTaNG RADIOGRAM London November 16/31 Governor Harrison Fedreserve NY We have been informed by Governor Norman of the contents of Governor Harrison's cable* to Dr. Luther. points mentioned. We are in complete sympathy with the four For discussion of these and other points and to try to ascertain any plans the Germans may have in mind we are as the London Committee cabling Luther our agreement with your points and through him taking occasion to invite Schlieper and Jeidels to come to London as soon as possible. We are reminding our Government that they have in conjunction with the other Governments concerned at the July conference in London undertook to cooperate in maintaining the financial stability of Germany and in reliance on this undertaking andat the further request of the Governments the short term creditors relinquished certain rights to repayments and so forth which they then possessed and that we still rely upon them not to acquiesce in any arrangement whereby the short term creditors would be prejudiced. Holland Martin For London Committee * See cable no. 269 to Luther FEDERAL RESERVE BANK OF NEW YORK Outgoing Cablegram November 17, 19$1 Dr. Luther Reichsbank Berlin No. 288 PRIVATE AND CONFIDENTIAL FOR LUTHER ONE I have received your No. 644 in reply to my Nos. 282 and 284. TWO I appreciate the procedural difficulties referred to in your cable but in spite of much confusion and some misunderstandings it seems to me personally that the procedure whkch Germany should now follow is clear and definite. As long as you have been good enough to ask me for my private views I shall set them forth frankly and personally without in any way speaking for my government or the private bankers: (a) The position of the New York private bankers and the American Government has I think been definite from the outset that private debts must be dealt with and settled separately from the political debts and their settlement therefore is not and should not be made a matter for negotiation by any committee which may be appointed under the Young Plan. (b) So far as I am aware the American government has never taken the position that the negotiation of private debts should be delayed either until the settlement of the political debts or even until the appointment of the Young Plan committee. As I see it, therefore, there is no reason from the Point of view of the American government why Germany should not comply immediately with the request of the New York bankers to begin private negotiations of private debts with the American bankers' committee and with such other private committees as may be appointed by other creditor countries. (c) I now understand from your cables, however, that the position -2- of the French government is that the Young Plan committee should be appointed first. But even if this is the present position of the French government, Which I had not previously known, it is not wholly within the power of Germany to call for an immediate appointment of the advisory committee strictly within the terms of the Young Plan? If that is done the German bankers would then be quite free, as I understand it, even in the face of the position which you advise me the French government has taken, to commence immediate negotiations with private bank credits. (d) Reports which I get from the press intimate however that the difficulty is that the discussions in Paris have been delayed by Germany's request for an enlargement of the existing powers of the advisory committee. Of course I have no comment to make as to the wisdom or propriety of any efforts Germany may make to enlarge the general powers of the advisory committee, but it does seem clear to me that nothing would be worse in its effect upon Germany's credit in this country than to attempt to subject the settlement of private debts to a committee appointed under the terms of the Young Plan to consider political debts. The settlement of these two questions must in my opinion be negotiated separately and distinctly. (e) Private commercial credits are at the moment a fundamental basis of Germany's trade. Her whole business structure as well as her credit standing in the world markets depends upon her conscientious and fair treatment of those debts with her private creditors. Those private credits were granted in good faith to German nationals on the basis of individual -.3— credit judgment. They were not granted to the government nor are they in any sense political debts. Any attempt to confuse them with political debts or to settle them through a committee set up to consider political debts would in my opinion be ruinous to Germany's credit standing and make impossible any satisfactory settlement of its short term banking credits along commercial lines. (f) So, in conolusion may I suggest in answer to your inquiry, that if as you indicate German bankers earnestly desire promptly and satisfactorily to negotiate a settlement of their private debts to individual bankers in this and other countries there must not be the slightest basis for any assumption, even though erroneous, that there is any desire or attempt to compromise those private debts through any confusion with reparations or other political questions. I believe nothing could be more detrimental to the restoration of the German economy than any such impression. It is for that reason that the New York bankers have so seriously urged the need for immediate consideration of the private debts quite apart and separate from political debts. THREE I am sending a copy of this cable privately to Governor Moret. thanks for your frank explanatio# of the difficulties as you see them. HARRISON Many INCOMING CABLEGRAM November 18,, 1931 Basle New York,November 18, 1931 Federal Reserve Bank of New York New York No. 650 PERSONAL FOR HARRISON ONE Confidentially advised we may tomorrow received official German request for Advisory Committee TWO This will raise question of action you wish to take under paragraph 128 of Young Plan TEREE Germans and French have agreed that besides minimum of 7 --- there shall be co-opted a Swede, a Dutchman, a Swiss and a Yugoslav FOUR Germans desire to open up whole question of permanent revisiion of plan whereas French desire to limit discussion to crisis measures such as a further one or two year moratorium for concondition annuities and the payment of the unconditianal anwzities through deliveries in mind FIVE British desire to force issue of priority for private debts and to help Germans in securing entire suppression of all reparation payments for next few years and if possible for all time. SIX All desire earliest possible meeting of the committee with a view to preparation of report which mould be basis for governments action at governments conference contemplated for early in January. Understand that agreement has been reached that question of manner of repayment of private debts will not be handled by the Advisory Committee which nevertheless in its deliberations on German economic conditions may take account of the existing short term credit situation SEVEN Upon formal receipt of German notification shall immediately cable Governors mentioned in paragraph 126 Young Plan and shall cable you officially asking whether you will nominate a member of the committee, unless such an official cable mould embarrass. If so please wire alternative you desire as prompt action must be taken by us Fraser • 7668 November 18, 1931 Paris, November 18, 1931 Federal Reserve Bank of New York New York No. 298 ONE OONFIDENTIAL FOR GOVERNOR HARRISON I thank you very much for sending me for my personal information text of cable(*) you have sent to Luther. I read it with the greatest interest and am glad to note our perfect conformity of views on this highly important problem. French government in their conversation with German Ambassador in Paris insisted several times along same lines with great emphasis. Contrary to what m is said in your communication they have never contended that Yonng Plan committee should be designated previous to private negotiations, they wish on the contrary that these ne;otiations take place as soon as possible. Their thesis is that work of Young Committee could refer to result of negotiations above private debts only by indicating that these negotiations are commenced directly between creditors and debtors. Bank for International Settlements will ask you to nominate American member to Advisory Committee. It would be highly advantageous that on account of great importance of interests implicated the American designated should be perfectly acquainted with European matters and specially with German matters. I understand in course of conversation between French Finance Minister and Mr. Jay of J. P. Morgan & Company name of Parker Gilbert has been put forward. Moret (*) Cable No. 288, Nov. 101 to Luther Best regards INCOHENG CABLEGRAM New York, Nov. 19, 1931 Berlin Nov. 19, 1931 Federal Reserve Bank of N. Y. New York No. 655 FOR GOVERNOR HARRISON The German Debtor Committee has just sent the following cable to the American Bankers Committee: "In view of the expiration of the Standstill Agreement on February 29 the German banks represented in the German Bankers' Committee as well as the representatives of Germany's industry consider it advisable En in the interest of German debtors interested in the settlement of German short term foreign debts to suggest the beginning of negotiations with the representatives of the foreign creditors. We propose Berlin as the place for such meeting and should appreciate your participation by sending delegates. le assume that all committees would be agreeable to have this meeting held in November and shall let you know the date. Schlieper Deutzentra Berlin Please reply to German Debtor Committee Schliepper Jeidels Kastl." I transmit this to you vith my best regards Reichsbank President Dr. Luther. November 20, 1931 Bank for International Settlements Basle No. 469 CONFIDENTIAL FOR FRASER Replying to the request contained in your No. 653 I nominate Mr. Walter W. Stewart, Chairman of the Board of Directors of Case Pomeroy & Co. Inc. as an ordinary member of the Special Advisory Committee. Mr. Stewart will be prepared to sail for Europe on the Olympic on November 28 the first available steamer Harrison. Basle, November 20, 1931 Federal Reserve Bank of New York New York No. 652 PERSONAL FOR HARRISON ONE Am informally advised by Reichsbank that German Committee of private bankers consisting of Schlieper Jeidels and Dr. Kastl will tonight cable various foreign creditor banking committees inviting each to send a representative or representatives to Berlin before the end of this month for the purpose of disdussing the future of the Standstill Arrangement. TWO German Consul in Basle has received official German notification and will deliver it formally today. Consequently shall cable you officially within a few hours reference to American member Special Advisory Committee. Fraser INCOMING CABLEGRAM New York, November 20, 1931 November 20, 1931 Basle Fed, Res. Bk. of N. Y. New York No. 653 FOR GOVERNOR HARRISON ONE Bank for International Ser-tlements today received memorandum from German Government requesting the Bank for International Settlements to convene the Special Advisory Committee provided for by the new plan. Am mailing you complete memorandum. TWO Kindly refer to paragraphs 127, 128 and 129 of the Experts' Plan and telegraph me name of the person you nominate thereunder THREE Similar telegrams being addressed to other six Governors mentioned paragraph 128. Fraser. Berlin, November 20, 1931. For Govennor Harrison Federal Reserve Bank of NY New York No. 658 CONFIDENTIAL FOR GOVERNOR In reply to your cable No. 288 I beg to refer to my yesterday cable through which I informed you of the initiative now by the German private debtors with a view to begin immediate discussion with their foreign creditors about settlement of short debts problem on commercial lines. Your cable No. 288 which was particular- ly valuable to me arrived simultaneously with a news purporting that France had taken a now attitude. Thereby we were enabled to have the initiative of German private debtors taken without delay. I thank you sincerely for explaining your point of view so clearly and openly in your last cable and beg to add that I am very glad to share in your opinion wholeheartedly. Luther 7706 November 20, 1931 Basle, November 20, 1931 URGENT Personal Harrison Federal Reserve Bank of New York New York No. 654 The present cable is sent in several sections. This is Section ONE Have just officially received following memorandum in German which constitutes the official text of the German Government's request for convocation of the Special Advisory Committee provided for by Experts Plan: "The German Government requests that the Bank for International Settlements in Basle convoke the Special Advisory Committee as provided for in the new plan of the Hague Agreement of January 20, 1930. To show cause and purpose of this request the German Government wishes to cite the following facts: In June of the current year the German Governoent had already come to the conclusion that in spite of the severest reduction in Governmental Expenditures and repeated increases in taxes it would be tnable to continue the annuities payable under the New Plan. The economic and financial situation of Germany appeared already at that time most seriously endangered. Therefore The German Government has decided to draw the necessary conclusions from this situation. Section T70 This decision was followed on June 21 by a declaration of the President of the United States of America suggesting a postponement of one year -2- in the payment of all inter-governmental debts, reparations, and reconstruction debts. The purpose of this farsighted initiative, as pointed out in the pro- posal, was to contribute towards reestablishment of confidence thereby promoting politiai peace as well as economic stabilization throughout the world; the debtor states were to receive time to re7an national prosperity. The hope that this proposal would bring about a decisive turn in the world crisis has proved vain. Further events showed that the Hoover Debt Holiday alone was unable to avert the danger of a collapse. Therefore the British Government took the initiative in July in calling the London Conference, which resulted in the recommendation that the central bank credit to the Reichsbank be extended, and also in the conclusion of the Basle Standstill Agreement and in the report of a committee of Experts appointed by the Bank for Internationl Settlements. No matter haw important these measures were to bring relief more quickly, they were in their whole nature of a preparatory character only. The London Confer- ence stated in the final sentence of its resolution that the measures recommended were only the first step and should merely form the foundation for more comprehensive action. Section THREE Accordingly, the Experts who cooperated in carrying out the recommendations of the London Conference kept over in mind the provisional character of all these measures. For instance, it says in the Standstill Agreement that the con- tracting parties consider the adjustment provided for therein effective only "until a permanent solution of Germany's short term debt shall have been found." The report of the Basle committee of Experts closes with the urgent recommendation "not to lose any time in taking the necessary measures to create a situation which will make possible financial transactions designed to bring to Germany and thus to the world the relief so urgently needed." In the months since passed the economic and financial situation in Germany has grown extremely acute. facts which characterize the present situation are generally known. The The pressure of the crisis has also had the most serious effect in other countries. The world is realizing more and more clearly the close connection between the various individual financial problems created by the present situation and the necessity of handling them as soon as possible in their entirety. In considering haw this task might best be handled, the idea to call the Special Advisory Committee has recently come to the foreground. Section FOUR Since according to the provisions of the New Plan the convocation of a special advisory committee depends upon the request of the German Government, the German Government has decided to make this request so that everything has bean done on its part to clear the way for comprehensive joint measures of the Governments. According to the New Plan a statement by the German Government is required to the effect that "in good faith it has arrived at the conclusion that Germany's currency and economic structure are seriously endangered by further transfer in part or in full of the postponable annuities." In making this statement the German Government feels obliged to say that this statement does not do justice to present conditions. Since the New Plan was drawn up, the economic and financial situation throughout the world and particularly in Germany has been fundamentally changed through an unprecedented crisis. As the New Plan assigns to the Special Advisory Committee the task of investigating the situation from all angles, the Committee must examine the problem in its entirety and with due consideration for all -.4- factors involved. It must particularly take into account that the question of Germany's private indebtedness must be newly regulated before the end of February 1932 by means of an agreement to be reached between foreign creditors and German debtors. Section FIVE As the present situation requires immediate decision on measures to be taken the German Government suggests that the Special Advisory gommittee convene immediately and complete its work as soon as possible so that a conference of the governments concerned may be called in the near future which will then take a responsible decision in the matter. Berlin, November 19, 1931 UNQUOTE Fraser My Received in German. pr FEDERAL RESERVE BANK OF NEW YORK December 7, 1931. Dear Governor Meyer: Referring to our telephone conversation of this afternoon, it occurs to me that you might be interested in reading over the enclosed file of cables which concerns the various aspects of the German situation. Many of them relate themselves primarily to a reconsideration of the so-called Standstill Agreement between the private bank creditors and their German debtors. Fundamentally, however, the discussions of the exchange position of the Reichsbank were, so far as I was concerned, designed principally to pave the way for appropriate consideration of the central bank credit to the Reichsbank when the matter of a renewal is raised. As you will observe, the first of these cables was dated November 6. Since that time the Reichsbank and the German government have both taken steps designed more effectively to control their foreign exchange position. Two members of the Reichsbank staff are now at the Federal Reserve Bank of New York and are working on a summary of decrees of the government and regulations of the Reichsbank which Will portray the various steps that have been taken to atop any unnecessary leakages of exchange. I asked for such a report on their arrival last week, but it is not yet available. I shall, -2.. however, keep you informed of any further information I get with respect to the whole situation. If there are any specific questions which the Board has in mind, I hope you will please be good enough to lot me know. Faithfully yours, GEORGE L. HARRISON Governor Honorable Eugene Meyer, Governor, Federal Reserve Beard, Washington, D. C. Enc. December 18, 1931. Hon. George L. Harrison, Governor, Federal Reserve Bank, New York, N. Y. Dear Governor Harrison: This is the first opportunity I have had to thank you for your letter of December 7, with which you enclosed a file of cables relating to various aspects of the German situation. I have brought your letter and its enclosures to the attention of the members of the Board. With cordial regards, Sincerely yours, EUGENE MEYER Governor For CIRCULATION. V rr. r. inmn .... RESERVE BANK I 1. t 6 I • OF NEWYORK McLiulland Vi!y:itt January 16, 1932. l'Icasefote and retur Dear Governor Meyer: Let me acknowledge your letter of January 14 with the enclosed report from Berlin transmitted through the State Department. 'dr. Burgess tells me that the paragraph purporting to quote "The Burgess ?Ian" is probably a relic of newspaper stories that appeared in Germany while he was on the ship in passage from the United States to ierance last October. They were made out of whole cloth, and the explanation appears to be that a German crank who had a scheme and wanted to get attention paid to it, put it out as "The Burgess Plan," and it was so copied in many parts of Germany. Th3 whole 'thing is, of course, perfectly ridiculous, and Mr. Burgess had nothing whatever to do with it. I am returning the report herewith. Very truly yours, hon. ,Jugene .deyer, Governor, Federal Reserve Board, Washington, D. C. Geor e L. Harrison Governor Encl. 1" :41.9 n) 1932 (*ACV,OP 7Fryl 4491 3604:9 TRIPLICATE No. 291 FXD, copy is for For. as Dom. Copy Rlso sent-to VOLUNTIFIT MORT and to TR-PASURI 1,40T FOR FIIBLIOATIOli PROPOSED =MODS cF CanGLIDATINC G104AN ..111()ET TWA ND'43TXD11433 From Consul •* I• John H. Osman Berlin Germany. Dote of Gompletion: December 9, 1931 Deeember 17, 1931 Date of Aailing: ,q)p roved: • • *IP **** *** George S. Mensersalth, Amerisaa COnsul General. 11 C12.1TIVI TOLE Page rmill Arr VIDILIBTIM33 •••• 44 •*111 •111.4 •11,0 ••••••4 TORNION PLANS FOR MX OONSOLIDATION a ntraillt*TIONAL IRDEBTXDNESS •• •.•••••Ir • to 3. The Riot ?IAA ........ •••••••••• 5. The lemma' Am ••0641••••••••• • 4- •• a*••• Of •••••• 0* 44%44 4 4 •• ...•••••• ••••••.••••••••• 1. The 3obmItz Plea •• • . ••• . •• •• 4 .o*414010. I- I 2. The Plan of the Federal 4L'oono2aie :Avisary Connell (WirteAshaftebeirat) ..,... 3. The G0vernuent's Program ostoosegeots +ern,. 6 8 - 11 SOUTICE3 •••••••••••••••••••••••••••••••••••••••• ii 141k 4 .• ••••... 4 ••••#••046•••••••4•••••••••460* 4. The Burgess Plea OXIGLAN -111.43 3- ••*** ..•••.• , .,.tIontaga, Sorman s Plan ...... 2. Thv irenqui :ilea • 3 00101.44•4411, - 3- In view of the impending discussions between the representatives of American. Luteb, Swiss, Znglish and Yrench banks and the comaittee appointed by the German banks on the further regulation of GOMM short term debts following the termination of the standstill agreement in February, 1932, it seems of imp.irtance briefly to review the various proposals for the consolidation of German iadebtedness. Kini.!ATE a INDBT1IMES4 rho total amount of Germenshort tam debts at the enJ. of July, 1931, was estimated by the Ifiggin-Layton report at about S billion re/oh/narks, or approximately $1,900,000,000, and that of low: term debts at about 9 billion reiohsnarks, or approximately v2,144,0000)00. On the basis of the information obtained tnoa the questionnaires which all individuals end companies having foreign obligations above the amount of 50,000 richemaks decree were required to fill out by the maergeaoy of :Ally 27 1931, the Reiehsbank now estimates that short term debts amount to about 12 billion reichimarks, or approximately $2,86,(ou,O,X), 4111 ISMS letn debts to about 11.5 billion reichsmarks, or approximately YoMIGN Pups 10, THS CON301,2D-IION 1. Monti Norman's Plan Mr. ;Iontagp Norman, the President of the tank of 4 li:ngland, long ago suggested that an international institute be entrusted with the task of testing obligations, the prceeeds of whisk should be devoted to enabling the debtor nations to falfill their international obligations. .4,42LitimaaLata The Plan of the Dormer Belgian Minister of Finance also provided for an international blink which was to transform international abort term debts into obligations due in 3 to 6 years. The immediate demands of the neediest creditors would, according to this Plan, be satisfied by the rediscounting of those new oblig4tions by the strongest banks of issue. k4kTrif MO Plan The ritemskk professor and finanoita expert, Charles Rists proposes that the banks of issue uf the principal debtor nations, espeOlolly Germony, guarantee the obligations of the individual debtors by endorsing their seceptanees end thus making them eligible at the banks of issue,of the creditor nations. 4, The Burigess Plan Mt. Burgess of the rodent Reserve Loard, proposes that the gold of the two Largest banks of issue, the French and the Anerioan, be deposited with the Bank for Internntioaal _iettlemonts and that that Bank should issUe gold certificates against this gold stock. The Bank for International 34/Moments would then act as great central creditor and in this capacity liquidate a pmrt of the nelson credits. - 5- 5/ The „uesnay asn Finally, the Plan of M. quesney, a director of the Bank for International :Attlements, must be mentioned. M. i„uesnay proposes a general reduction of the gold cover at the blanks of testae end a methodical end general increase of the circulation of currency which would enable the teaks to grant their debtors additional credits and thus enable them to settle their obligations to their toreign creditors. WWI FLANS 1,0 The 3ehmi4 flan In view of the fact that Dr. 3ehalts, Financial I. G. Manager of the/Farbon Company, has recently aoted on several occasions as adviser to the Gerson Governs's)* and as a member of the standstill oommittee of the Federal !Ampoule Advisory Council (Wirtsohaftsbeiret), the lehmitis PUB NMI be 3rimpuried as of some importance. Like J. Burgess, Dr. OfbMits proposes that the Bank for International Settlements issue gold certificates which are to serve the purpose of an tion of the elaimm of the creditors. immediate mobilisaThe central banks of the debtor nations would, on behalf of their individual debtors, issue certificates of indebtedness bearing 5 per (went (4 per cent interest and 1 per cent for a sinking fund). These certificates would be delivered to the Bank for International Settlements against the gold bonds. These certificates of indebtedness would be redeemed through the Bank for International /tattlemeats over a period of 41 years by means of the sinking 6 fund installments. Dr. SehmIte estimates that in order for the tank for international Settlements as central creditor to take over a sufficient amount of the present international short term indebtedness, it would be necessary to issue gold bonds in the amount of about 5 billion relehemarks. Dr. Schmitz clefts that the gold substitute thus created would relisve the world from the burdensome weight of the absolute or relative suavity or gold and =mid create an additional baying power which would favorably effect the world eoonomic situaflan. Orities of the Schmitz Plan maintain that its basic assumption of an existing scarcity of gold is not consistent with the fasts. Loreover, these critics claim that the '1an provides for consolidation of short tern debts szelasively brass** of the creation of money without taking int, ageount the necessity of the creation of additional credit. Other crities °onside? it Impera- tive that, if the world's surplus gold should be mobilised in the mower proposed by Dr. Ochmitz, the gold bonds should be savored 100 per cent in order to avoid KA increase In the note circulation. In answer to claims that the creation of a gold substitute along• side existing monetary gold reserves would lead to insurmountable difficulties, Dr. sehmitz suggest* that Instead. of the independent issue of gold substitute bonds by the Dank for international Settlements, the "mations having an OXANIM of gold should place at the disposal of the bmak ter lateraationald,ettlements (without actually shipping the gold) that portion of their gold supplies Which is not needed for the internal cover of the note circulation. The effect of this action, according to Dr. Gehmitz, would be to strengthen the international position of the gold standard and thus offer an incentive to the countries having en sioess of gold to make sufficient amounts of gold available to the Bank for International .i'ettlements,while the issuance of a larger amount of goad notes would promote world economic activity. 2. The Pla4 of the l'ederal :conomic Advisory Council Oirtsahihsteirati The importanoe of the 'problem of consolidation of indebtedness has been fully recognized by Germany itself. illmodiately after the first plenary session of the Patera Economia kdvisory Counoil established by govern*** decree about the middle of October, a special committ*. of the Council was entrusted with the task of studying the problem of German short term indebtedness and the prolongation of the standstill agreeniml. The government was represented on this cesaditme by the Chancellor, the Ministers of Finance and of Federal loonomies, the President of the Reichsbaak and the Ambassador to Trance. Four persons, Dr. ,chmitz (uuthor of the Sehmits Plan), Dr. Pferdmenges, Dr. Silverberg, and Dr. Jelimitt, all of great importenee in the buginess world, formed the nucleus of the essmittee. L number of other leading bankers were waled upon from tine to tiAie to partieipate in the dissuasions of the eammIttee. -8- The committee ooueluded its study by suggesting to the government the adoption of a plan whereby Ge,mea private debts eight be amortised over a period of 10 to 1* pars. The discussions of the iAlonomie Advisory Council will form the basis for the preparation by the government of a detailed program to be presented to the international eammittee of experts. .The Goveripaent •s Proven The Corms Oefeeriamemt, apparently in eonsequence of the pronounced views eklek the ?remit Prime 'banister has expressed with regard le the priority of the political reparations debts over private debts, appears unwilling to make public as yet any definite suggestions in relation to a proloneation of the standstill agreement and the problem et the soasolidation of the German short term debts. awe features of the supposed goVermment program have novertheleits been reported in the mewspepare and as )hese reports have not been repudiated, they may. reason ably be considered as indieations of the policy of the government, The Consulate General has also gained some , idea of the governments point of view through dis missions of a more private and intimate eharacter with certain high government officials. From these reports and dissuasions it appears that the government sees no possibility of the repayment of sad the short term debts on a considerable scald at the of the standstill agreement, in view of the fact that in Ally of the estimate of the elates of foreign beaks n this year amounted alone to more than 8 billio ... reichsmarks, and will therefore probably summit a system of slow liquidation of the debts. It 13 believed by Gorman officials that in carrying out this plan, credits should be divided into two classes, frozen and liquid. The frozen credits Should be liquidated by an institution created for that purpose. The individual debtors would be required to give additional securities to this institution. not be liquidated as a single group individual agreements. These credits should but by means of The liquid assets as for example, rombourse credits, should be treated in accordance with definite program of amortization spread over a certain period. This settlement of the consolidation of German debts should, of sears., first of all be properly adjusted 'to the Cermaa trade balance and the warkot capacity of foreign countries for German geeis. If a surplus trade balance amountinc to 2 billion reichsmarks aammally, Which is rather optimistic, is taken as a basis and the realer redemptions of about I billion reichemarks for interest and amortization of middle and long term debts and the interest on short term credits are taken into account, responsible Gerson officials believe that the German capacity to pay would amount to about 700 million retch:marks a year. This would moan • vedemption of German short term indebtedness within a period or about 10 years. The Cerman officials interviewed emphasized that it is in the interest of the creditor nations as well as that of Germany that rapid repayment of any considerable smouate should not be insisted upon since German oap4city to pay depends not on her property but on her inoome. They point out that if this income is to be preserved every regulation of the question must recognize the fact that the machinery of production must be kept going and that defensive measures against tensed German *worts will brims no relief to the world eeonoele crisis as porient can be made by Germany only by means of exports. Out et the large surpluses of meant months, Germany repaid between ;Ally 31 and the middle of November, 1i031, the astounding mount of betveen 1 and 1.5 billion reiohsmarks but the devaluation of the currency in Rbout 24 countries and the numerous defensive measures taken imileate that Osman' will hardly be able to usintain the large surplus of her trade bOpence The GONMSA Government in its request for the calltag of the special examining committee provided for esker the Young Plan, clearly expressed its opinion that political and private debts are closely conneeted *ad, mast be considered together. A. high official when asked about the government's opinion of Wt. Laval's remit Opeo0h in which he detested his view that repara- tions debts have priority over private debts, replied that legally Vi'. Level is right bat that politioally his position is dubious and that eaessaleally and financially the inseparable oonneetion of the ()ernes public and private debts is beyond doubt. is stated that it the priority of private debts in not recognized, it will severely affect German industry and solvency -11- amd will finally result in a further international Msancial crisis which will pro.4ably surpass the pretwnt in intensity and Note: xtension. Dr. X. Nattusch as =ploy,e of this Oonzulate General, is entitled to spools' credit for collaborating in the preparation of this report. Sources: Dr. Cestrich, of the Presidency of tho Reichsbenk; Oberrogierangsrat Dr. Lautenbaoh, of the Reiehsp. virtachattamlni&terium; Dr. Wingen, of the Pereigz Office; Dr. Mosier, Director of the DD Bank; Dr. kohruso Director of the Dresdnor ask; Gebouw*t Desalt, o.l." the Berlin Chamaor of ;;:ossasres; Dr. Simmeade, Director of the iieldka-10editGeeollsehaft; losport of the Basle xport Commission (WiggisLayton report); Memorandum on thb Goldroblem and the froblem of International Sh,)rt Tont Indebtedness, by Geheimrst Dr. R. Schmitz, October 8, 1931; History 6nd Waning of the Standstill Nesctiations, address delivered by Gehelmrst Dr. H.. Schmitz, DeceNber 2, 1931, Filo No. 851 JIMA A true copy of the signed o mal. TranslatiOn of telegram dated F.,bruary 22, 19:.7 2. The general depression, *hid' is particularly acute in Germany, has had a fPr reaching effect on our credit institutions. While the panicky excitement of vide classes of the population has subsided, as is indicated by the growth of savings deposits, nev,rtheless confidence has by no means been generally restored. The banks have suffered serious losses in the collapse of many firms and through the depreciation of many of their loans and investments. In this way they have lost many of their reserves and have more or less impaired their capital. through reduced activity. Their earninrs have declined The Goverment of the Leich and the ,eichsbank have decided, therefore, upon a far-reaching plan or reorganization for those phases of the banking situation that arc particularly important for economic life. The Government will take up the losses of banks that have not been otherwise covered by turning over for the present non-interest bearing TrAisury obligations of different kinds and maturities and will thereby also help in the building up of new reserves and capital. is to be repaid over a long period of years from earnincs. The Teich The banks will improve their balance sheets by combining their capital, which then will be correspondingly increased. The _gaichsbank will contribute considerably to that by using the Gold Discount Bank which will utilize for this pUrpose certain loecial trusts. The Gold Discount Bank will in this way acquire stock of reconstructed banks and will increase its own capital by an amount of 200,000,000 r.m. through the issue of special stock which the Reichsbank will take over end pay for. -2- The 14Achsbank is able to do this because it has large reserve funds, which for 1931 after payment of dividends will increase further by 95,000,000 marks. The leichsbank expects this to strengthen and consolidate the banks which are its principal debtors, and expects no serious weakening of its position because the funds employed will be in large measure repaid from the lieuidation of large but essentially sound loans. The Gold Discount Bank will handle the blocks of bank stocks through these trusts and will maintain a clear distinction between its old stock and its new stock so that its other affairs will remain undisturbed. The independence of these trusts which will handle the stock of the private banks, will be assured by many means so that there will be no danger of mixing the business of the bank of issue with the management of the interests of private banks. The banks are working hand in hand with the Treasury and the Reichebenk and they have had some changes in management. They are tryinu to reestablish their earninf capacity through mergers, combinations of branches, and in other ways. The most important merger, between the Danat and the Dresdner Bank, has been decided upon with a thorough collie cleaning up of the balance sheets, in part by the contribution of government securities, but more largely from the profit of coining existint metal owned by the Government with the participation of the leichsbank. The participation of the Government as well as of the Reicho- temporary. bank in the affairs of the Gold Discount Bank is considered only It is intended to have the stock of the Gold Discount Bank sold to the 1,ublid as soon as possibility develops. ;e hope by these means to have taken a step which will materially contribute to the strengtheneing of our banking and credit situation and to the general confidence in the banks and their management. LUTHER President of the ::ieichsbank
@FedFRASER