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FEDERAL RESERVE BOARD X-U0U5 STATEMENT JOR THE PRESS For Release i n Morning Papers , Monday, May 5, 1924. The Federal Reserve B u l l e t i n for May w i l l c o n t a i n the following summary of the provisions of the r e p o r t t o the Reparations Commission made "by the committee of e x p e r t s on the German "budget and currency s t a b i l i z a t i o n . The May i s sue w i l l a l s o c o n t a i n t h e complete o f f i c i a l English t e x t of the r e p o r t s of the two committees ( t h e s o - c a l l e d Dawes and McKenna r e p o r t s ) . Copies of r e p r i n t s of the t e x t of the r e p o r t s can be obtained from the Federal Reserve Board a t a nominal charge. REPARATION PAYMENTS AND STABILIZATION OF GERMAN CURRENCY. Report of Experts to Reparation Commission.- During t h e month the p r i n cipal event of i n t e r e s t has been the report of the committees of experts appointed by the Reparation Commission t o make an i n q u i r y i n t o f i s c a l and monetary conditions in Germany and t h e i r r e l a t i o n t o the problem of r e p a r a t i o n s . A f t e r r e c e i v i n g the unanimous approval of the Reparation Commission t h e r e p o r t s of the experts were accepted by the German Government and favorably received by t h e Governments of the Allied c o u n t r i e s as o f f e r i n g a p r a c t i c a l basis f o r a s o l u t i o n of the problem of reparations. In view of t h e importance of t h e s e r e p o r t s , which a r e r e p r i n t e d in f u l l elsewhere i n t h i s i s s u e , the p r e s e n t review suoorrarizes the proposed program of a c t i o n contained in the recommend a t i o n s of t h e committee on budget and currencyUnder i t s terms of r e f e r e n c e t h i s committee was to consider "means of balancing the German budget and t h e measures to be taken to s t a b i l i z e i t s currency." The e s s e n t i a l f e a t u r e s of the plan recommended by t h e committee are a schedule of r e p a r a t i o n payments to be made by Germany d i r e c t l y out of t a x a t i o n and through the imposition of 9 mortgage debt upon German railways and i n d u s t r y ; t h e s e p a r a t i o n of c o l l e c t i o n s i n Germany, f o r which t h e German Government i s to be held r e s p o n s i b l e , from the t r a n s f e r of funds abroad, which i s to be c o n t r o l l e d by a. committee r e p r e s e n t i n g the A l l i e s whose f u n c t i o n i t ' -2- X-4(A5 w i l l be to make the maximum t r a n s f e r s c o n s i s t e n t with maintenance of exchange s t a b i l i t y ; the establishment of a new bank of issue to u n i f y and. s t a b i l i z e German currency; and the f l o t a t i o n of a f o r e i g n loan intended to a s s i s t in the establishment of t h e bank and in enabling Germany to meet h e r most urgent immediate o b l i g a t i o n s . The committee regards i t s proposal as one i n d i v i s i b l e whole and cons i d e r s i t e s s e n t i a l to i t s s u c c e s s f u l operation t h a t the r e p o r t be adopted in its entirety. I t furthermore points out t h a t vvhile the plan does not "attempt a s o l u t i o n of the whole r e p a r a t i o n problem, i t foreshadows a settlement extending in i t s a p p l i c a t i o n f o r a s u f f i c i e n t time t o r e s t o r e confidence, and a t the same time i s so framed as to f a c i l i t a t e a f i n a l and comprehensive agreement as to a l l the problems of r e p a r a t i o n and connected questions as soon as circumstances make t h i s p o s s i b l e , " In considering the conditions e s s e n t i a l to the r e s t o r a t i o n of Germany's c r e d i t and the establishment and maintenance of s t a b i l i t y in budget and currency, the committee based i t s report on t h e assumption that the f i s c a l and economic u n i t y of Germany w i l l be r e s t o r e d . Furthermore, the committee recognizes t h a t Germany's p r e s e n t f i n a n c i a l conditions a r e such t h a t r e p a r a t i o n payments can be made from her ordinary budget revenues only a f t e r a period of recuperation. The r e p o r t says: "At the time of our i n v e s t i g a t i o n Germany was passing through an a c u t e economic c r i s i s , the d i r e c t r e s u l t and the culminating point of a d e p r e c i a t i o n of t h e currency so c a t a s t r o p h i c as p r a c t i c a l l y to destroy the currency and reduce the budget to a l l but a shadow. The h a b i t of saving has been destroyed and i t w i l l r e q u i r e time and the r e s t o r a t i o n of confidence to r e e s t a b l i s h i t . u n p a r a l l e l e d degree. The e x i s t i n g wealth i s m a l d i s t r i b u t e d i n an almost The c e s s a t i o n of d e p r e c i a t i o n , w i t h t h e consequent r e - moval of the premium on exports and the s t a b i l i z a t i o n of p r i c e s a t a l e v e l which -3-; X-U0U5 i s momentarily, a t any r a t e , above t h a t of t h e world l e v e l , has had important reactions. F i n a l l y , t h e s t a t e of employment and the f i s c a l and economic ma- chinery of Germany have been v i o l e n t l y deranged by the events of 19-3* & return to normal c o n d i t i o n s i n t h i s r e s p e c t can not be e f f e c t e d o v e r n i g h t . " In i t s a n a l y s i s of t h e problem of s t a b i l i z a t i o n of the Germany'-' currency and b a l a n c i n g the German budget, the committee' d i s t i n g u i s h e s sharply between t h e two phases of the problem, the amount of revenue Germany can make a v a i l a b l e f o r t h e r e p a r a t i o n account and the amount which can be t r a n s f e r r e d to f o r e i g n c o u n t r i e s . Since the probable amount of t h e budget s u r p l u s and other c o l l e c t i o n s on r e p a r a t i o n account can be nore d e f i n i t e l y e s t i m a t e d than the amount which can be made a v a i l a b l e f o r payments abroad, the r e p o r t p r e s e n t s a schedule of annual payments over a s e r i e s of y e a r s , but does not undertake to e s t i m a t e the amounts t h a t can be converted i n t o f o r e i g n c u r r e n c i e s w i t h o u t causing i n s t a b i l i t y of exchange. abroad a r e d e f i n e d a s f o l l o w s : The l i m i t s w i t h i n which payments can be made "The funds r a i s e d and t r a n s f e r r e d t o t h e A l l i e s on the r e p a r a t i o n account can not i n t h e long run exceed the sums which t h e balance of payments makes i t p o s s i b l e t o t r a n s f e r w i t h o u t currency and budget i n s t a b i l i t y ensuing." The e n t i r e plan r e s t s upon t h i s d i s t i n c t i o n between the c o l l e c t i o n s in Germany on r e p a r a t i o n account, which a r e measured by the German t a x p a y e r s ' c a p a c i t y t o pay, and the t r a n s f e r of funds t o t h e A l l i e s , t h e volume of which depends i n t h e f i n a l a n a l y s i s on Germany's balance of i n t e r n a t i o n a l payment s. Schedule of C o l l e c t i o n s . The committee, in view of i t s terms of r e f e r e n c e , Aid not u n d e r t a k e t o determine the t o t a l amount of r e p a r a t i o n payments, but worked out a p l a n of annual payments t o be i n c l u s i v e f o r any p a r t i c u l a r year of a l l p o s s i b l e charges f o r which Germany may be l i a b l e t o t h e A l l i e s , w i t h t h e u n d e r s t a n d i n g t h a t any -4- X-UO45 a d d i t i o n to one category of charges can only be made a t the expense of another. The f i r s t f o u r y e a r s of the operation of the plan a r e regarded a s a r p e r i o d of r e c u p e r a t i o n and t r a n s i t i o n . , with a gradual increase of payments t o t h e f i f t h y e a r , when t h e amount to be paid reaches a standard t o t a l . During t h e f i r s t two years no payments are t o be made out of ordinary budget r e c e i p t s ; in the following years t h e payments from t h i s source a r e increased so t h a t in t h e standard year the budget f u r n i s h e s one-half of the t o t a l payments. The plan f u r t h e r provides f o r a f o r e i g n loan and f o r t h e c o l l e c t i o n of i n t e r e s t upon a mortgage indebtedness t o be placed on German r a i l r o a d s and i n d u s t r y . Essentia d e l i v e r i e s in kind a r e to continue and t h e i r value i s to be included each year in the t o t a l of payments p r e s c r i b e d by the p l a n . The amounts which i t i s estimated Germany w i l l be i n a p o s i t i o n t o pay during the p e r i o d s of r e cuperation and t r a n s i t i o n and the standard amounts s p e c i f i e d f o r subsequent years are given i n t h e following schedule, which d e s i g n a t e s the several sources from which t h e funds a r e to be derived. Provision i s made f o r m o d i f i c a t i o n of the amounts s e t f o r t h in the schedule during t h e t h i r d and f o u r t h y e a r s in accordance with t h e y i e l d of c e r t a i n c o n t r o l l e d revenues and f o r a d d i t i o n s to the standard payments t o be determined by an index of p r o s p e r i t y . t5- X-U045 SCHEDULE OF COITZCTIONS (In'.millions of gold marks) I First Year Second Year j Vi a. lllcXL J U UUgC V — — — T? A 4 1 A O v*l I n t e r e s t on railway bonds Sale c^f railway p r e f e r e n c e — 800 200 595 500 125 I n t e r e s t on i n d u s t r i a l bonds — 11 dilu vl V wU-A Total 1 ...... 1,00C 1,220 Transition period Standard year F i f t h and subsequent years Third Year 1 1 Fourth Ye.,r 110 500 1,250 550 660 660 O O Budget moratorium period 300 290 300 290 1,200 1,750 2,500 Sources of c o l l e c t i o n s In t h e proposed schedule, as shown above, no c o l l e c t i o n s on r e p a r a t i o n account are expected t o bs made out cf funds derived from the ordinary budget during the two years of r e c u p e r a t i o n or s o - c a l l e d budget moratorium. I t i s a requirement of the plan, however, t h a t f o r t h e s e two y e a r s taken as a whole ordinary revenues and expenditures s h a l l balanceIn the t h i r d year the budget i s expected to c o n t r i b u t e l l u , 0 0 0 , v 0 gold marks. i n the f o u r t h year 500,000,000 marks, and in the f i f t h and subsequent y e a r s 1,2^0,000,000 marks, which c o n s t i t u t e s one-half of the t o t a l standard payment. The c o n t r i b u t i o n s of the budget to r e p a r a t i o n payments a r e t o be secured by the control and s u p e r v i s i o n of revenues derived from taxes on tobacco, a l c o h o l , sugar, and b e e r , and from customs r e c e i p t s . During the t r a n s i t i o n period, the t h i r d and f o u r t h y e a r s , p r o v i s i o n i s made f o r i n c r e a s e s and decreases in payments w i t h i n the -6- X-U0U5 l i m i t of 250,000,000 marks, dependent upon the y i e l d of these controlled revenues It i s estimated that these revenues w i l l y i e l d in the standard year over 2,000,000,000 marks, against which reparation payments w i l l be a f i r s t charge. Any excess of y i e l d over t h i s charge w i l l be a v a i l a b l e to the German Government for ordinary expenditures. Beyond indicating the t o t a l amounts to be paid from budget and the guarantees provided by the controlled revenues, the committee does not undertake to prescribe methods of r a i s i n g revenue, but Germany i s l e f t f r e e to devise such f i e c a l arrangements as seem best adapted to her conditions. The committee does, however, commend to the German Government c e r t a i n methods of taxation which have been worked out by technical experts. A proposed f o r e i g n loan of 800,000,000 gold marks i s to bd the chief source of reparation payment during the f i r s t y e a r . This loan i s intended to "serve the double purpose of assuring currency s t a b i l i t y and financing e s s e n t i a l d e l i v e r i e s in kind during the preliminary period of economic r e h a b i l i t a t i o n . " The r e l a t i o n of t h i s loan to the proposed bank of issue and i t s use as a b a s i s of currency s t a b i l i z a t i o n i s considered l a t e r in t h i s review. Other proposed sources of payment are i n t e r e s t on railroad and i n d u s t r i a l bonds r the s a l e of railway preference shares, and the transport t a x . The com- mittee places upon the German railroads a t o t a l valuation of 26,000,000,000 gold marks, and against t h i s t o t a l i t s plan provides for the issue of 11,GOO,COO,000 of mortgage bonds, 2,000,CO,COO of preference shares, and 13,000,000,000 of common stock. The mortgage bonds, which shall be guaranteed by the German Government are to be turned over to the Reparation Commission and are to bear i n the standard year a rate of i n t e r e s t of 5 per cent and an amortization charge of 1 per cent, The income from t h e s e bonds, which i n c r e a s e s during the f i r s t four y e a r s , i s the p r i n c i p a l source of payments luring these y e a r s . Of the p r e f e r e n c e shares, one- f o u r t h i s to be turned over t o the German Government and t h r e e - f o u r t h s to a company which i s to take over the operation., of t h e r a i l r o a d s . This company i s t o be ad- ministered by a board of d i r e c t o r s r e p r e s e n t i n g the Reparation Commission, the German Government, and t h e h o l d e r s of the p r e f e r e n c e s h a r e s . From the s a l e of i t s preference shares the Government i s to make r e p a r a t i o n payments i n the second year amounting t o ^00,000,000 marks, and in case the sale of these shares f a i l s to y i e l d t h i s amount the d e f i c i t i s t o be made up by an i n t e r n a l l o a n . The common stock i s t o be issued t o the German Government, which w i l l have a u t h o r i t y t o hold the stock or t o s e l l i t , a s i t p r e f e r s . Through redemption of the bonds and the repurchase of t h e p r e f e r e n c e shares the plan provides a means f o r t h e German Government u l t i m a t e l y t o r e g a i n control of the r a i l r o a d s . TJpon German industry the plan places a mortgage amounting t o 5»000., 000,000 gold marks t o be r e p r e s e n t e d by bonds, the burden to be d i s t r i b u t e d a-rong i n d i v i d u a l concerns and guaranteed by the Government. The y i e l d of these bonds in the standard year (5 per cent i n t e r e s t plus 1 per cent a m o r t i z a t i o n ) i s to be a source of r e p a r a t i o n payments beginning with the second y e a r . The t a x now l e v i e d on r a i l - road t r a n s p o r t a t i o n i s r e t a i n e d and, beginning with the t h i r d y e a r , i s t o be a d i r e c t source of r e p a r a t i o n payments up to 290,000,000 marks. Total payments under the schedule, a s shown in the t a b l e , are t o i n c r e a s e from 1,000,000,003 gold marls in the f i r s t year t o 2,500,000 ,000 gold marks in the standard, y e a r . —8— X—U0U5 • Commensurate t a x a t i o n . ~ A guiding p r i n c i p l e used by tne committee in determining t h i s schedule of annual payments was that the German people should bear a burden of t a x a t i o n as heavy as t h a t borne by the peoples of the a l l i e d c o u n t r i e s - the p r i n c i p l e of commensurate t a x a t i o n . This p r i n c i p l e , which i s considered j u s t i n i t s a p p l i c a - t i o n t o Germany, i s a l s o deemed to be economically d e s i r a b l e , because i t tends toward competitive e q u a l i t y in i n t e r n a t i o n a l t r a d e between Germany and the A l l i e s The placing of a mortgage debt of 16,000,000,1?0 marks upon German r a i l r o a d s and industry i s in r e c o g n i t i o n of the f a c t t h a t a l l bonded indebtedness in Germany has been v i r t u a l l y extinguished through the f a l l of the mark, Railroads and i n - dustry, which through the d e p r e c i a t i o n of the German currency have been r e l i e v e d of a l a r g e p a r t of t h e i r burden of bonded indebtedness to i n v e s t o r s , a r e to cont r i b u t e u n d e r . t h i s plan to currency and f i s c a l r e s t o r a t i o n and t o r e p a r a t i o n payments through the assumption of a mortgage debt to the Reparation Commission. I n t e r e s t payments on t h i s mortgage debt into r e p a r a t i o n account w i l l under the plan take the p l a c e of the annual i n t e r e s t charges which were borne by German ent e r p r i s e s in tho y e a r s b e f o r e i n f l a t i o n . No mortgage debt i s placed upon a g r i - c u l t u r e , but i t i s recommended t h a t the German Government, i n case i t deems i t d e s i r a b l e , impose such a mortgage in favor of the r e g u l a r budget. Certain o b l i - gations, i t may be noted, have already been imposed upon a g r i c u l t u r a l land through the levy which guarantees the rentenmarks. Two c o n s i d e r a t i o n s are indicated by the committee which might l e a d to a modi f i c a t i o n of the annual t o t a l s s p e c i f i e d in the schedule - growth of i n d u s t r i a l p r o s p e r i t y and changes in the value of gold. For the purpose of enabling the -q- X-4oU5 A l l i e s t o . s h a r e in the growth of German industry and t r a d e , an index of prosperity i s proposed, which, a f t e r the f i r s t f i v e years, may i n d i c a t e v a r i a b l e addit i o n s to the standard payments on r e p a r a t i o n account. Thus the payments, instead of being modified by changes in the value of exports alone as i s contemplated under e x i s t i n g arrangements, w i l l under the proposed plan increase in accordance with a composite index based upcn s t a t i s t i c s of railway t r a f f i c , population growth, t o t a l f o r e i g n t r a d e , consumption of tobacco, sugar, beer, and alcohol, budget expenditures (excluding r e p a r a t i o n payments), and per c a p i t a consump- tion of coal. There i s no provision f o r decreasing the standard payments on the b a s i s of the p r o s p e r i t y index, but in case i t i n d i c a t e s a reduced capacity f o r payment in any year the amount of the deficiency i s to be deducted from any f u t u r e supplementary payment based on the index, A f u r t h e r m o d i f i c a t i o n i s provid- ed f o r on the b a s i s of changes in the value of gold which, i n case they exceed 10 per cent of i t s value in 1928,.may r e s u l t in f u t u r e years in a corresponding increase or decrease of annual r e p a r a t i o n payments. -10Transfer of funds to A l l i e s - X-4045 A more important f a c t o r in i t s p o s s i b l e e f f e c t upon t o t a l r e p a r a t i o n payments i s the p r o v i s i o n which p l a c e s a d e f i n i t e l i m i t upon the accumulation of r e p a r a t i o n funds in Germany in excess of the amount t h a t can be t r a n s f e r r e d abroad without r e s u l t i n g in undue f l u c t u a t i o n of exchanges * In c a s e c o l l e c t i o n s on r e p a r a t i o n account a r e in excess of what Germany *s balance of payments w i l l make i t p o s s i b l e to remit to the A l l i e s , a l i m i t i s placed upon the accumulation of r e p a r a t i o n funds in Germany* Up to 2,000,000*000 marks t h e s e funds, which a r e to be d e p o s i t e d in t h e new bank of i s s u e , may be used i n short-term c r e d i t operations in Germany. If the accumula^ t i o n continues beyond t h i s amount and up to ^,000,000,000 marks, the funds may be used by the A l l i e s in Germany in t h e purchase of bonds and other forms of investment, When, however, the t o t a l amount of t h e s e funds reaches S,000,000,000 marks p r o v i s i o n i s rnde f o r a decrease of payments out of t h e budget and the t r a n s p o r t tax and f o r t h e i r discontinuance to the e x t e n t t h a t t r a n s f e r s can not be e f f e c t e d * Even, b e f o r e the funds accumulated reach t h i s t o t a l the payments may be modified if in the judgment of the t r a n s f e r committee i t appears t h a t f u r t h e r accumulation i s a menace to the f i s c a l or economic s i t u a t i o n of Germany or to the c r e d i t o r c o u n t r i e s . In case the t r a n s f e r committee d i s - covers concerted f i n a n c i a l maneuvers by the Government or by i n d i v i d u a l s to i-*rethe vent / t r a n s f e r , the t r a n s f e r committee may undertake whatever measures a r e necessary t o defeat t h e s e maneuvers and i s authorized under these circumstances t o accumulate funds beyond t h e l i m i t of 5>000,000,000 marks. In d i s c u s s i n g the r e l a t i o n betwesi c o l l e c t i o n ~ that i s , the German taxpayers 1 c a p a c i t y t o jjay ~ and remittance abroad - t h a t i s , Germany * s capacity -11-- x-4045 to pay t h e A l l i e s - r e c o g n i t i o n i s made in t h e r e p o r t of t h e f a c t t h a t the amount t h a t can be p a i d abroad by means of an economic surplus in i n t e r n a t i o n a l trade i s "by comparison with the budget, incapable of c l o s e c a l c u l a t i o n , 'unmanageable *, and t o o e l a s t i c . Tut l i m i t s s e t by economic b a l a n c e , i f im- p o s s i b l e of exact determination, a r e r e a l . For s t a b i l i t y of a c o u n t r y ' s currency t o be permanently maintained, not only mast her budget be balanced but h e r earnings from abroad mast be equal to the payments she mast make abroad, including not only payments f o r goods she imports b u t sums p a i d in reparation. Nor can balance of -the budget'i i t s e l f be permanently maintained except on the same c o n d i t i o n s . " Thus the amount which the exchange p o s i t i o n makes i t p o s s i b l e f o r the A l l i e s to t r a n s f e r not only l i m i t s the r e c e i p t s t o the A l l i e s on r e p a r a t i o n account but a l s o u l t i m a t e l y p l a c e s a l i m i t upon the c o l l e c t i o n s to be irade i n Germany. Faced with t h i s l i m i t a t i o n t h e committee does n o t undertake t o make a d e f i n i t e estimate of t h e amount which can be t r a n s m i t t e d , but makes the volume of t r a n s f e r s depend upon the a c t u a l exchange s i t u a t i o n a s i t develops in experience. BAfik of I s s u e - Reference has already been made t o the proposed bank of i s s u e , which i s to serve as the d e p o s i t a r y of r e p a r a t i o n funds c o l l e c t e d in Germany and i s r e g a r d e d by the committee as an e s s e n t i a l agency f o r t h e c r e a t i o n of a u n i f i e d and s t a b l e currency. which the r e c a i t s t a b i l i t y of Gernan Establishment of t h e Benten'oank, through currency has been brought about, i s viewed by t h e committee a s not a f f o r d i n g , in t h e absence of other measures, an adequate guaranty of permanent s t a b i l i z a t i o n . Such s t a b i l i t y the committee b e l i e v e s i s e s s e n t i a l to the maintenance of a balanced budget and t h e r e s t o r a t i o n of German -12credit. X-4O45 The commit tee provides safeguards that reparation payments w i l l not lead to i n s t a b i l i t y of exchange through the control i t places in the hands of the transfer committee, and proposes to maintain the gold value of the domestic currency by means of the establishment of the new bank of issue and through the l i m i t a t i o n s placed upon i t s n o t e - i s s u i n g power. The bank i s to perform the usual functions of a central bank and may, in f a c t , be established through a reorganization of the Reichsbank. The c a p i t a l of the bank i s to be 400,000,000 gold marks, of which one-fourth i s t o represent the f i x e d a s s e t s of the Reichsbank and the remainder i s to be offered for s a l e in Germany and abroad. The bank i s to have the exclusive r i 6 h t , with certain minor q u a l i f i c a t i o n s , to i s s u e notes, and a l l other notes now in c i r culation are to be gradually withdrawn. Against these notes the bank i s re- quired t o maintain a normal reserve of 33-1/3 per cent in gold, s t a b l e foreign exchange and gold c r e d i t s with foreign banks. The purpose i s t o keep the currency stable in r e l a t i o n to gold and a s soon as conditions w i l l permit to place i t upon a convertible b a s i s . Against i t s demand deposits the bank i s to maintain a reserve of 12. per cent in gold, with c e r t a i n further provisions regarding l i q u i d i t y of a s s e t s . The bank i s intended to be primarily a bankers' bank, though i t may make loans d i r e c t l y to the p u b l i c , with safeguards as to type and naturity of paper to be discounted. I t i s to be the f i s c a l agent of the German Government, but e n t i r e l y f r e e from governmental control, and i t s power ,to l a i d to the Government and to State enterprises i s s t r i c t l y limited. It i s contemplated that the new bank of i s s u e , which w i l l either, supersede the Reichsbank or be the outcome of a reorganization of that bank, - 13 w i l l absorb the r e c e n t l y organized gold discount bank (the s o - c a l l e d Schacht B&nk). This l a t t e r bank i s considered an i n t e r i m arrangement e x p r e s s l y l i m i t e d to p r o v i d i n g the means of carrying on f o r e i g n t r a d e and thus supplementing the Eentenbank, whose o p e r a t i o n s and currency i s s u e s a r e l i m i t e d to domestic t r a d e . According to the committee's p l a n , the Eentenbank i s to be l i q u i d a t e d . With the p a s s i n g of the Eentenbank and the absorption of t h e gold discount bank, the new bank of i s s u e i s intended through i t s operation a t home and abroad t o take over the f u n c t i o n s which a t p r e s e n t a r e performed by both of t h e s e i n stitutions. Proposed Administrative Machinery - P r o v i s i o n i s made i n t h e plan f o r machinery to administer the bank of i s s u e and the r a i l r o a d s , and f o r t h e establishment of a t r a n s f e r committee. Administrative arrangements w i t h r e f e r e n c e to t h e bank provide f o r an organization committee c o n s i s t i n g of the p r e s i d e n t of t h e Beichsbank and one member of the committee of e x p e r t s ; and a f t e r i t s e s t a b l i s h - ment a general board of 14 members, 7 e l e c t e d by German stockholders and 7 f o r e i g n members, r e p r e s e n t i n g United S t a t e s , Great I r i t a i n , France, I t a l y , Belgium, the Netherlands, and Switzerland, to be appointed by t h e organization committee, and later selfperpetuating. This board i s t o elect t h e p r e s i d e n t of t h e bank, who mast be approved by t h e p r e s i d e n t of t h e Reich, and f o r the f i r s t s i x months of the bank*s operation i s t o be t h e p r e s i d e n t of the Beichsbank. The board i s to have general s u p e r v i s i o n of the operations of t h e bank, and t h e a c t u a l adm i n i s t r a t i o n i s t o be in charge of a mana E .in e board t o c o n s i s t of German n a t i o n a l s appointed by the p r e s i d e n t s u b j e c t to the approval of the general board and .the p r e s i d e n t of the Reich. In a d d i t i o n t h e general board s h a l l e l e c t a banking commissioner to s u p e r v i s e the maintenance of r e s e r v e s and tne i s s u e and r e demption of n o t e s . - 14 - X-4045 The r a i l r o a d s a r e to be operated by a board of IS d i r e c t o r s , ; 9 of whom a r e t o be appointed by the t r u s t e e of the mortgage bonds and 9 by the German Government. A f t e r the s a l e of the p r e f e r e n c e shares the h o l d e r s of these shares w i l l e l e c t f o u r d i r e c t o r s and the Government w i l l appoint f i v e . Of the d i r e c t o r s appointed by the t r u s t e e , f i v e may be of German n a t i o n a l i t y . chairman of t h e board and t h e general manager s h a l l be Germans. The The f o r e i g n members of t h e board of d i r e c t o r s w i l l s e l e c t the commissioner of railways who i s t o e x e r c i s e s u p e r v i s i o n over t h e operations of the roads, and i n case the railways f a i l t o y i e l d n e t revenues s u f f i c i e n t to meet the r e q u i r e d r e p a r a t i o n payments, i s to t a k e over the f u n c t i o n s of the g e n e r a l manager. The Reparation Commission w i l l appoint a t r u s t e e of bonds and a. commissioner of c o n t r o l l e d revenues. The t r u s t e e w i l l receive and hold tne railway and i n d u s t r i a l bonds and w i l l have cnarge of tne s a l e of tnese bonds and the c o l l e c t i o n of i n t e r e s t payments. The duty of the commissioner of con- t r o l l e d revenues w i l l be to supervise t h e r e p a r a t i o n payments out of budget, and in case of d e f a u l t to take complete charge of the c o n t r o l l e d revenues. All o p e r a t i o n s in connection with tne t r a n s f e r of funds to ti>e A l l i e s and the investment i n Germany of accumulated funds i s to be i n cnar^e of <» t r a n s f e r committee appointed by the Separation Commission, With t h i s committee w i l l r e s t the d e c i s i o n to suspend c o l l e c t i o n s when the f u n d s exceed the s t a t e d l i m i t of 5,000,000,000 marks. This committee w i l l include in i t s membership the anient f o r r e p a r a t i o n payments, who i s to be the p r i n c i p a l r e p r e s e n t a t i v e of t h e Repa r a t i o n Commission and i s t o coordinate the a c t i v i t i e s of a l l the agencies p r o posed by the p l a n . Foreign Loan — Funds a r i s i n g from the proposed f o r e i g n loan of - 15 - x-uou-5 800,000,000 gold marks, to which r e f e r e n c e has been made in connection with the f i r s t y e a r ' s r e p a r a t i o n payments, w i l l be deposited in the bank to the c r e d i t of the German Government and w i l l c o n s t i t u t e a c o n t r i b u t i o n t o i t s r e s e r v e s and thus enlarge the b a s i s of i t s currency i s s u e s . The loan w i l l a l s o help to overcome the acute s h o r t a g e of l i q u i d funds in Germany and w i l l a s s i s t in meeting her immediate and more urgent o b l i g a t i o n s to the A l l i e s , p a r t i c u l a r l y in making payments in Germany f o r goods to be d e l i v e r e d on r e p a r a t i o n account. In commenting upon the c r e d i t p o s i t i o n of Geraany i n connection with the proposed f o r e i g n loan and upon the use to be made of the funds thus r a i s e d , the r e p o r t s t a t e s t h a t "A c o n s i d e r a b l e sum can c e r t a i n l y be r a i s e d upon the good s e c u r i t y that t h e plan p r o v i d e s , with a c l e a r prospect of improved i n t e r n a t i o n a l p o l i t i c a l p o s i t i o n and of s t a b i l i t y . "The q u e s t i o n i s , t h e r e f o r e , whether t h e claims upon Germany can be so reduced by agreement amon^ the a l l i e d c r e d i t o r s as t o come within t n i s p o t e n t i a l credit. If they can, then obviously the g r e a t e r the reduction the more moderate the sum to be r a i s e d , and the g r e a t e r the p r o b a b i l i t y of Germany s u c c e s s f u l l y r a i s i n b : a loan. If n o t , then, the loan w i l l not be forthcoming, s t a b i l i t y can not be insured, and n e i t h e r t h i s p l a n nor any other can come i n t o b e i n g . « • - 16 - X-4045 "The s u c c e s s f u l launching of the scheme depends, therefore, upon three main f a c t o r s : ( l ) Limitation of payments for a l l purposes to 1,000,000,000 gold marks, of which at least 800,000,000 mast be spent in Germany for the f i r s t year, and thereafter to such sums as are available under the plan during the succeeding, years; (2) cooperation between the A l l i e s and Germany in securing p o l i t i c a l conditions w^ich w i l l i n c l i n e the investors of the world favorably toward the German loan upon £ ood security; (3) a loan of 800,000,000 gold marks, which w i l l serve the double purpose of securing currency s t a b i l i t y and financing e s s e n t i a l d e l i v e r i e s in kind during the preliminary period of economic rehabilitation," Currency S t a b i l i z a t i o n and Reparations - Flotation of t h i s external loan w i l l be one of the f i r s t p r a c t i c a l steps in the carrying out of trie plan, a f t e r the acceptance of the report by the Governments concerned, and will t e s t the a c c e p t a b i l i t y to the investing public of the s e c u r i t y offered by the plan. Banking credits of a short-term character have already been granted by ITew York and London bankers in connection with the recent establishment of the gold d i s count bank in Gernany, The establishment of foreign c r e d i t s as a means of s t a b i l i z i n g currency in relation to gold was the plan followed by a number of other European countries during the past year, and t-ie r e s u l t s of t n i s metnod of currency s t a b i l i z a t i o n were described in the previous issue of the Federal Reserve b u l l e t i n . In e f f e c t taese plans e s t a b l i s h a & old exchange standard and may be regarded as c o n s t i t u t i n g an intermediate arrangement between depreciating paper money with wide fluctuations in exchange and currency s t a b i l i t y on tne gold - 1% standard. X-4045 Currensy reforms under taken i n Europe have been in the d i r e c t i o n of r e e s t a b l i s h i n g the connection between domestic c u r r e n c i e s and gold by l i n k i n g them to s t a b l e f o r e i g n exchanges. In those c o u n t r i e s whose budgetary p o s i t i o n was not immediately a f f e c t e d by the payment of r e p a r a t i o n s , t n i s method of currency reform has r e s u l t e d in a g r e a t e r s t a b i l i t y of exchange. In Germany the balancing of t h e budget and t h e s t a b i l i z a t i o n of the currency i s complicated by r e p a r a t i o n o b l i g a t i o n s , but in i t s proposals the committee nas considered currency s t a b i l i t y as e s s e n t i a l t o the r e s t o r a t i o n of German c r e d i t and .nas made t h e maintenance of s t a b i l i t y a limiting, f a c t o r upon the payment of reparations.
@FedFRASER