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(147n4;741-cri alk-hat fuLt, F/oefa66-67 auk Wtalee CUirtuectz&R_4 tft. 4 fiat: Katt(ra- ncetai4t-gire, daftili-ut9. THORPE LODGE, CAMP D E N HILL. W. 8. Ace-Lti7 (Clemeot&e_t 0-fienta ad WC, 11491- a4t-ttla anc? ex__ 117-4;rxiiis--- evtAt dl-fm c3r-tidttl Ayiesj 616--ciA0 ikerterzvi4 " oak; 14; nt/Ottil Cell 41E4 VJeAt_eA_ MO k. at---rra lerefint) kale ;iiikteet" (of ant _ &11,-,61c,- Ara/xi' lc: laY 14m. leks a fof of ?nativi s d---aieic /hitt atortfigu' ?Auk_ if/t 40.0 /lir" /4" ilf/3 rigijit;$ arCle-C 7na 6100 aig-J t 4,6 6607 itiaaVAP (alaeci (1..AristA>rN flayitii eR( An ear otal---61=4 Ata>, br Cen6)61K.P7(0)1 /kw), Cinf-4-(trA1-4 )it; MISC. B (MISC. 140 d.1-1814-7-60) Friday April 1924 Thorpe Lodge Campden Hill, W. S. Dear P.J. My trip over was quiet, uneventful, and much of it Cs spent in my bunk resting. I did manage before leaving to pick up a slight sore throat and as the weather here has been usually raw with a cold East wind, I have been conservative. Stopped in the house and most of the time in bed until time to Shall probably not go to the bank until ss for dinner. day. So far, I gather the following picture from the press and from Norman. Politics. pill)well The Labor Government was doing surprisingly until the "housing of unemployed" question was forced and a bill proposed suspending the right of eviction and putting the loss on the landlord unless his fire happened to be as bad as the tenant's. This united the Liberal and Conservative parties and would have turned the Government out on a vote, had they not allowed the bill to be "talked out" under one of the ridiculous old parliamentary rules which both avoids a vote and a back down. But they are all being laughed at, which is ominous. Business. There is undoubtedly a gradual improvement. Hard to say how much, but sufficient to reduce the registered unemployment to slightly over one million, about two thirds of the recent high figure. But the advent of a Labor Government MISC.1ft6B (MISC. 14013 1-1BM-7.70) 2 has made the unions greedy and notwithstanding unemployment, strikes are in prospect, or imminent in many quarters. It will either prove most awkward for the new Government or (as most surmise) they will allow demands not justified by conditions and cause what Norman fears will be a "spending inflation." The "Commission". I am growing fearful of a report which one or the other party cannot or will not accept. Germany may be asked to do more than can be done without a renewal of all the disorders of the past few years. They 'phoned from Paris asking me to go over for a chin, but I said thing doing"--for reasons good enough! Gold. A heavy subject. Norman agrees with me that the Services are about dried as outside new production. pip But the outh African mines, reports from which have just appeared, show good profits last year, and some high records, with production increasing and wages all down again. The Bank has about 60 million erling in escrow for the rest of the world, mostly advance ___-- - reserves of one sort or another, which we are not likely to get. reserves Nothing yet changes my view that outside new production, of which 2/3 is free to come to us, only a French breakdown or British debt payments can greatly increase my estimates of say 2/3 of world production. The Bank. Since my last visit to Londson, curious as it may be, the old Lady has been gradually forced into an investment policy almost identical with ours. shorter, and yet surprisingly large. Their "swing" is Now, at times 30 and even MISCAlleB (MISC. 1400 1-18M-7-.59) 3 #!- 40 millions sterling, the centralized market enables them to anticipate the Treasury turnover, while we follow it--on quarter days. I'm turning over in my mind some scheme for improving our own technique. Rates. Norman faces the cry of the inflationist, and anti-deflationist with astonishing equanimity. British courage ..*-would we had more) and tradition are his great assets. He now considers that a-11 advance to 5% will be forced upon him by-(a) The need for improving the exchange. (b) The possible "spending inflation" mentioned (c) The excessive foreign loans now taken eagerly by ve, and the market with rates so low. [ID e has some fear that if we lower our rate, say to four, it will cause complaint that he is playing our hand too generously. My .yr belief is that when alltiemployment gets below say one million, he ' 1 go to 5% but will still be influenced by continental con- ditions ditions following the Dawes report. It all strengthens my feeling, however, that indications of slackening business at home will (or may) justify our reducing to 4%. Let us ignore politics and act upon our convictions, but first get our investment account up to a level where it will be effective when we see the need for a check. Schachts bank. No definite credit of ten millions or any other sum has been arranged in London. For us to take MISC.i*ee 0419C 140 El 1-101.1-75 Ol 4 bills as base described involves one considerable departure from our present practice in that the acceptor will be neither all American concern nor a foreign one domiciled in America. That does not disturb me greatly, but it would be distinctly bad to have the impression get about that we were a party to transaction or had taken the first step in getting behind behind any plan for currency or monetary or credit reorganization 'n Germany or anywhere else in Europe. That first step, when taken, must follow real construction progress over here, which Some German of more not yet in evidence with a telescope. bition than honesty could well picture an American "eligible" credit as a real participation in a transaction by the F.R. ystem, and that should not be allowed to happen. If you do plipdecide to make such bills eligible, see that it is understood that we would not take them were our own wishes to be disregarded. The franc. My friends in Paris fear that the sharp advance will be harmful--So do I! It will lessen the submissive attitude of the politician, reduce their expe\rts, and make a balanced budget exceedingly difficult. My friends on the corner were not unaware of this possibility as I suggested to them the need for some control of the "dealing", after credits were opened, so as to avoid a policy of " " toward the States. This is all I shall attempt now. and expected at the Bank today or tomorrow. Harding is in London My own plan is to MISC. leB (MISC. 140 0 1-15M-750) 5 follow up a lot of matters in which we are interested, tuck them away in my cranium, and take them home. It is not likely that I shall go to Paris at all, much as I would enjoy a visit with old pals and dinner at "Voisuvis". with much discretion. Edit it for consumption with the elect -s'Xd near elect! With best to all, (:(1/ 0 P This letter must be handled B.S. fea_d ottc-6,r P. 7: olk_4:nah-cut decx aft_ At( For tee:- fife (614/4A-4 Afett-A 110 geszt,1 atta-et AC, (f q-1- leet ofecci) (23q) 6efirntia-CE agi-J 41: atvaLt-4 61--Petal: Pastieletit,o Ant; 4154 9)- ttlf&ca- Iw (Noll& Iteumf annior Waits Actin ati, izitei itGai ini-fatsiti pa A rb-slutio-t;tv ICttb Agit istan, Ike R. attyria ti/r ef(f-,1144 00' atf -69 7re-Iltra,;L: "4 Cal- 1k2 1(4qttr 4-26, r tit of krinth, fiG orrnfizoara- Oiket 690-1,t Ct,j &tax eiAutiA dirkb f ate Fact- A - rte Pun c4fi4jv P alt1 1Vun_g- k a--/1 2 0?2, Euett 1616_ qiumi -12% tektuAt to7T4--- /te) lOryrUZ-J Nitta. 7-7ta_e-k_ AI atlt- Tri,t jilt) eirov--ina.G. CUL) Acetrvi ctick4 toc fAtht a-te 11:44 Praet. auteattex_ o{ 571,7 ite taitca f-tA-o dtc-etlj tut-mu; 0177 7itLeaft, ad-biltg-eac cc: 4Yit.; 916/4/A_ 74 &wiz )(a-fs rti-giqw-cce 1412 IWO -171W- /61 etchltu aPintAvr itarrv0 Pli-0-1,1tAc- OlevIsL_ 4-viiit4 few Cot_ pi-ft:Lys. roctu,c, 4cuz,-J _ dita4k/r-pmc 0/0- k__/zPatesi kerlue RktnicIL-4,41,4714tar4,3-- 6(- eitisvfitki attiregfaii-p, fe ,owes a/4 gal Aid c;17 6/Lei ckeety-tizq-. isurulfintivi Prce_, f Ia 1 itcy .-7Aaft-fetAr: 114-1642 arystilW-7- tora/a oUttlatetA, 19-6-7rtkAkt,62ttif-rt-ri-v-14--, 7Atitt. - (VA itetue --/Ct-zort eoxv-r41__R ZALLI 9 7-xfacat_cct__7, ftc lacctu-es- dite_ergAa_c) 7-ttowtal kaut_ i6r. dtaiv" .421p-ntaxt, atcy-7cf (c491.1.7 462.--/c) lictuLanwitfrf, 1 ./7v2t3 atiA turriti4 7.1Le.as4 elA c2 tif), eo741 tizacActii; 87xatc,___ C ciivt, COIL Faze Ali eit;o ezurvAsu,;z.t an IV (911,7r77t01-4 GUI attif4.;3 (IG 'oak extAs iva) 11Wr ecttL 102? Ctier-t-fak , O ut rzt-/awe lt 7Xe deas tvi 0.o.ee-0 eirxele lam, at&A T,eckausiv (mu_ litrtitz_c Li) r. fr . fro- tied CGS-tatotto afornt- froA it eiPe-rittiat itctio 45i 'at 7niik_ek Attur cLAIAL0-.4 t/f" tCEL4Cs - So- 431 yoitA ex* ist. kla-1(111.4L-f tri-J - antt -taitut ,/4?-; avy.;-", &ICE.? Felt tied 15-X CA - Arbkr-natoo. 9uvu/a/t- GI' -6-i-ruce2 'an/ti kGtAlf 6-Y21L c( ea,62", aellhig)/0 a-0 (40)(7&A,tei/A4») tru,ruire 101 -:1--(;; tortoz--frvr 11.5-gtit a/a/itait divricceiL 6/ a,43./et At) 41 Wits-Po find Ce-64 Iter AO' 1))° (9"--tocit-IJ A AY tr"--erg iCyvtKet-tlan-6) eauf-K/0 f-42 o(it 4-/Aiti -kit/ r c-44 Gh va Katitypacc - etexo-ci41,-- dy 012 4tr:42;h, ditze2 4G4 - /Aug aU a-kti 1404a.;__ _ ittive ize-id alit__ a it-->kf ftki5toz- IcEA- f toidc- 0-(stati ,nry1977u45, 711.f ynmit KW-- eacca6lx '1>r 44=1 677. 4- rtera717-0(_ (507(_-,ie 42i.t_fd MISC. )B (MISC. 140 0.1-18M-7-591 London April 11, 1924 am. Dear P. J. The Southampton dock and shipyard strike caused the Majestic and Mauretania sailings both to be changed, leaving no boat until the Franconia (19th) and Olympic (23rd), which arrive only a day apart. I'm awaiting word as to which boat Basil Miles will take, and shall wire you in a day or two what to expect. gat -J-14-1 Owen Ettntre'll arrives here today, with Kinderslie, and ___,...4.7e shall have an interesting talk. I had an interesting visit also with Niemeyer and wtrey, of the Treasury. They were most complimentary re- ,ding the F.R. Board's annual report as were Kid* of the ,, "Morning pip C-- _))at" and Mill of the "Times". They seem to think that it finally tells them something. As to monetary matters, one finds at the extreme "left" Keynes, Adams, etal., in the middle Hawtrey, Cannan, and others rather better standing in the city than the former--and the o extreme "right" led by our Stewart Addis who thinks English prices must come down further if they are to regain their trade. All k but Norman seem to have adopted the "purchasing power parity" doctrine--and think that a 12% increase in our price level will cause a 12% increase in the Xto par with us), whereupon we could \ lose gold to much of the world and our troubles (and theirs) would be over. But there are other factors, which I find Norman appreciates better than most--and first of all is the "report ". However, the problem remains that our prices must advance or thus decline before Sterling can recover and retain par with the MISC. B 2 (MISC. 1408.1-1BM-7-59) dollar. 41 Probably the middle ground will be found in time, whereupon the bank rate and general interest rates here must be advanced and held above ours to prevent foreign loans hitting Sterling too hard. Meantime our policy at home should be to take advantage of the hesitation of business and tendency to lower prices, to build up that investment account. Only by that will we avoid complete loss of influence in the market. If the Treasury objects, representations must be made to Mr. MilleZthat will convince him. I explained something of the recently deceased "reserve" ...--....// lan of Dr. Miller, to Norman, and he at once threw up his hands arking, "That would mean disaster to you and me!" Very confidentially, I have a strong conviction, after an all afternoon discussion with Norman, ea.t.414m-and Addis the real ones here) that if the Dawes report is accepted, we can find a way to deal with the London--New York exchange that will finally do the job. But it is all in future and depends on that big "if". Norman has been much harassed, I have been a bit seedy- - so we have taken things easy and not gone out for dinner once even--always have breakfast in bed--and one or twice dinner as well. What with Norman's "Amy" (housekeeper) and Mr. Ernest, one would think we were two fragile infants. We may be asked about a small advance or two on gold. I have no praticulars but if it develops will cable you. It would be for one of the continetal banks of issue. Later. Have had a most illuminating visit with Young and Kindersley--but it is too late to write any account of it. I shall try to do so tomorrow. Young tells me he may take the B MISC. (MISC. 140 13.1-18M-7,59) 3 Levithan on the 22nd, and I may do the same. My best to one and all at the bank. As ever, B.S. -- ---...\ Excuse the paper--It is "easy" writing. (1.-.......,/ 0 pp or CONFIDENTIAL Paris, 7 rue Monsieur, April 23, 1924, to April 28, 1924. Dear P. J. In default of a more prompt verbal report, - delayed by my illness, here are some of my impressions gathered in London and Paris. - They are high spots, only, and the most important object of my trip whici has been accomplished, I can only cover by discussion on my return. The countryside, in South England, looks as before the ';,ar. There is much buildirg in evidence, all the farms, fences, roads and buildings look in first class condition. The same appearance impresses one in London; traffic, much ne building and renovating, streets in good order, and a general appearance of activity. enormous street I saw nothing of the manufacturing districts in the north, but the impression is general in the city that output, sales and trade are slowly but soundly improving. leading. The figure of unemployment (registered) is regarded as mis- ;thile 1,100,000 are on the lists for doles, the enormous increase in woman labor end the addition of the small income class no forced into employment, might account for the entire unemployment without reducing prewar effective labor totals. "any mechanics, carpenters end masons are seeking to move to the United States, attracted by the high wages. The neu labor government are facing a constantly increasing number of outlaw strikes or attempts to organize them without, union support, - the younger men expecting sympathetic assistance from a labor government. obtaining some wage increases and then return to work. They usually succeed in The vote on another coal strike was too close to justify a walk out, and the wage question now goes to a commission for irvestig5tion and adjustment. The Labor Government has kept in the saddle by grace or support from a large section of the Liberal Party, which has recently become an uncertain factor http://fraser.stlouisfed.org/ of dissent Federal Reservebecause Bank of St. Louis within Liberal. ranks. The new budget, to be introduced in a day -2- or two, may be their downfall, although the tradition is for a Government never to risk defeat on budget proposals. The annual report of the Federal Reserve board is very favorably commented upon in London by both bankers and students. Just, now England's problems are mainly three - outside of politics, (1) The high labor costs which restrict their markets, and their possible further increase by strikes, etc., depreciation, (3) (2) The exchange, both its fluctuation and its recent The burden of taxes upon fill industry and private incomes. The Bank of England has regained its position in the money market, long ineffective due to war and post -war finance, by the development of a policy closely resembling our OAM, but moreeffective because of the greater concentration and better organization of the market at the one center, than is ours. The bank's policy will be governed by consideration of (a) The exchanges, (b) The extent to which they are over-burdened by foreign borrowings (c) The extent of unemployment, (d) The relation of their price level to ours - and our willingness to in London, act in concert with them. (e) Of this more anon. The position of the currency note account ,hich promises to threaten their reserve if the present Treasury minute (requiring bank note cover for issues in excess of the previous year's maximum) is continued. Most people fail to realize that this plan operates upon the bank's reserves (in a domestic sense) exactly as gold exports do. On the whole, I was impressed as to the outlook in England having steadily improved, but still more by the extent of their dependence upon us for a constructive plan looking to monetary recovery and stability in England and Europe. Cf this, -3- 411 more later! In France I have had little opportunity for observation; with some Tell posted peorle. Paris looks as before the war. but have talked There is not as much building as in London, but I hear that business has been good, there is no unemploy- ment, unless the army is considered as its equivalent, and the only obvious difference from pre-war days that I have noticed is the bad condition of all roads. Un- doubtedly Government economy is being forced upon them here by the disappointment it reparation recoveries from Germany. The collapse and spectacular recovery of the franc has hurt their exporters somewhat and fears are expressed that they present very favorable foreign trade showing cannot continue. year. On the other side is the enormous American travel here this It will probably exceed all records. The serious side to the increased value of the franc is the fact that the budget calls for some thirty billions of taxes, which might be no burden at 4 or even 5 a franc, but at over qe may be hard to col- lect! The only word I hear on the elections is that the country will support Poincare and he is the only issue. It is, by the way, generally understood that the loans to support the franc have all been repaid in both New York and London and the bank of France is supposed to have accumulated very large balances in London and some dollars - possibly considerable. On the whole I should say that the business situation here - thanks largely to travellers and luxury business - is good, and the great problem is that arising from the sine of bad war and post-war finance; namely, the topheavy debts. Solution of reparations will gradually put France back, but only if they have courage to impose and collect adequate taxes so as to make debt refunding an early possibility. The saving virtues of France are industry and thrift by all classes. 4 -4- I hear much discussion of Germany, but not much real infbrmatior reaches me. They are certainlyin a sense whipped in the Ruhr, 5nd note chance to catch their treath and try something new. seem to welcome a Curiously enough the leaders of two most important sections of public opinion pass off the stage at the crisis, Stinnes, leading industrialist, and Helfferich, leading imperialist, - both strong and probably dangerous men in the present situation if in opposition to the Government. Young can tell you the story of Germany better than anyone and I hope you get him to do so. The most momentous question before the world is nod the "Dawes" (Sic) plan.Inadequate information both in New York and London gave me a rather strong prejudice against the plan until I had read and studied the report and then discussed it with Young and Logan. It is a most ingenious and in some ways masterful hand- ling of a situation which has always appeared to be "an irresistable force meeting an immovable object." It proposes impossible things and sets up alternatives to employ when the impossibility has been demonstrated. I like it, that is, in its broad foundation, save in twy major respects and possibly three. One is its failure to adeuately protect the new currency - another is its failure to consider the whole price problem inGermany, and the third ie what may prove the salvation or the wrecking of the plan - i. e., the concentration in one body and lar-ely in one man, of the management of "payments." A man or superman of just the right qualifications might make the plan a stunning success or er:ually a stupendous failure if he were not the right man. The plan does afford opportunity, at last, for France and Englend to join hands and for Germany to make a sincere effort, in the direction of good will and tranquility for a few years. The scheme has, to my mind, certain very ingenious points and some doubtful ones, which it may interest you to discuss with Young. let. The amount Germany is to pay is a fixed sum to cover everything. So military and all other costs come out of the budgets of the creditor nations -5- and not Germany. It will make the "sanctions" more costly and so less popular in France and Eelgium: 2nd. It leaves the United States claims against Germany a bit uncertain as to status and I hope will force our State Department to take a definite position as to sharing in the German payments. 3rd. The interval during which the plan is being organized, could not well he financed - and the pressure upon Germany is growing to be so severe that acceptance of the plan in toto is inescapable. 4th. Otherwise another breakdown. While the total reparations is not fixed, (and that point is much criticised) the creditors can fix it by a simple decision to stop the annuity - after a certain number of years - and the plan having avoided any change in the total (for the moment) escapes the need for action on that point by both the Repara- tion Commission and the interested governments, which might cause endless haggling. 5th. The annual payments are between three and four times what Great Britain now pays us, and are undoubtedly more than Germany can make, - at least 4or a great many years. It may on that account mislead the Frenci public into a false sense of prosperity and another disillusionment. 6th. The first two years are so safeguarded, that once the plan is launced successftilly, there is a fine chance that the present tense public opinion will cool off before any crisis arises in the execution of the obligations Germany assumes. 7th. The bank scheme is open to some criticism, and yet almost every point can be met if it has honest and capable management, - just as with our Federal Reserve System. fer, and I do not like the huge accumulation of funds pending trans_ fear that it means an inflation which will be very hard to control. The bank may have a tendency to suck the country dry of liquid funds from time to time, end then again to flood it. 0 -6- One of the most excellent features of the plan is the debenture lly the industrial. It creates a class of non-political paymasters to work out their own financial freedo41. If properly set up by the bankers, the loan looks to me to be good htest doubt, if any security is worth anything. I shall not attempt e security can be made unquestioned, as Young will explain. Our bankers should assume the attitude, in general, of desiring to ovided the plan is accepted, in toto, in good faith, and with satis- e of good will justifying the hope or belief that all will try and s, including Germany. Nothing could be more harmAl than to have our leading bankers, say publicly that we cannot make the loan until our war debt ques- d, - or than to have a member of Lawes own organization, like Col. criticise the plan on his return, as reported here. ove are just a few rambling comments - a book could be written on ogress toward acceptance of the plan is slow, - but the outlook ion next week has improved in the last 24 hours. hich means Poincare. It all depends I am rather more hopeful than at any time. y's future, if the plan works, will be an interesting eubject of ld surmise that her industrial plant, and organization are ready vity. Her leading men and business organizations undoubtedly have oreign funds awaiting favorable indications for "repatriation." omplish is probably much greater than usually understood, but it eated were the price readjustments, including wages, to work out adverse to her export position (which means competitive position ns) or her bank to fail in stabilizing the currenPy ulations, bad management, or otherwise. because of The gradual return of -7- foreign balances will be an insurance for a time, but when that is ended - they 0 will reed to exercise great skill and courage to avoid inflation, and the Reparation Agent will be the one largely to decide. He is "King" of the plan! Now from the above you may gather that I am always considering our old bugbear, "gold" and the gold standard - and how these new developments fit into our picture. This can only be written out, in the crudest sketch. It is too com- plicated for pencil and paper. First, of course, all depends upon the fate of the Dawes' plan. If it is successfully launched I would look for two years or so during which Germany would balance her budget and stabilize her currency, - it is not impossible that she mi4lt take a little of our gold. That would leave the pound and franc afloat.The British would view (and do) the former with consternation. complaisant. The French will be more So what is the problem as to dollars and pounds? It seems to me to have become simplified in so far as the urgency will grow in London to get back to Orthodox ways as soon as possible; and that feeling has gained a new impulse because of the Dawes plan. Without. elaboration, our interest lies in the earliest possible return to the gold standard, by all the nations, especially Great Britain, so that we may escape these arbitrary controls on which we no,N rely. t4-igland's interest is to re- turn to gold payment, for the ultimate benefit of her trade, and to facilitate paying her debt to us. We should have little difficulty in arranging matters where our interests are so mutually to be served by coTmon action to one end. is to to be done? But how On the whole, I believe we must see London rates higher than ours - our "prices" at least a bit higher, and Great Britain's bit lower - and at the proper moment, a. credit operation, secret at first, and only becoming public when is fairly close to par. the job can be attempted. My belief is growing that it will not be long before I'll give you more details on my return, and as Prosper said, "We'll see what we'll see." -8- If within ten years of our creation, the Federal Reserve System can 40 have accomplished the restoration of the gold standard, our first decade will have justified itself. Personal news on a separate sheet. Yours, (Signed) B. S. -3- to shareyears underwhich Arnr are CosttoAgreement ratified ei be expendedif "almost Paragraph (a) page 31 apparently cartem gold marks. Not yet clear whether any s tion other than in Kind. Payments app reparation (See footnote Article 2 of Agr that forfeit payments for restitution are TilIaD. Further question as to bear Army Cost Agreernent on repartit ion propo decide whether it desires to claim share used for covering deliveries in kind., B possibly current Army costs or other paym FOU1151. With respect to claims one separate array rnent with Germany. 'Jill sibility that this policy might yield be the A lies, it would involve great risk feeling and endanger prospects of genera of confidence in a settlement. .Notwith Department will find. any tine mo /19 favo American claims in Tiew of .references co further in view of service rendered. by -. renewed American interest in reparation claimed in proposed (.3erman. payments, Un with Germany that the la'.ter pay the Uni ning perhaps in third or fourth year of begin receiving some reparation other th States to continue until to tal claim dis charged. One advantage of flat global annual meet sum instead o f -alder rercentage of annual is that should. Germany mt our payments the plan in fullpayments nevertheless might continue paying annual fixed sun on the ground that it was a liquidated amount under separate tr rather than an integral part of scheme devised. prirraril,y under Treaty of Versai It would be less objectionable to the Allies were the United States to grant tha these payments would. nark rani passu with payment to them for all purposes othe than army costs aril expenses of control. The risk of an absolute limitation in that sense is of course that the United States might find difficulty in getting paid in full should the allied reraration policy continue to be such as to prevent 'substantial payments( Germany cies-gooks FLOM:. cables. The United. States might agree to credit on clam= the value of In case this offers accounting difficulties the United States could credit this sum on capital amount of allay costs. Sr.LT.H. Do not know what can be said as to disposition alien property, matte but presume Dcecutive rreanot commit the United. States to any GT' 44 prii414iittely , Tne AP C.49-t4,4,*'^-"Ot 4, havever, might 14., . Aeredicon iApeclaim the value of any property of the German Government or States, also OF crecli le valu of arkv private property of German nationals that it may actually liquida e, ,f..a.r.b.. -ered-its--ber-be---e-Q1-4-4-rett-ted--frere--trie-tat.e.1-.01.5.4fri, Unless possible political objec- tions at hone should be too serious an obstacle and if there is arry possibility of utilizing this property in ar way, consideration might be given to the President reconrending to Congress use of this property under wither of the following alternative plans: (a) ',7aivin.g for the present questions of Possible technical legal -5- to facilitate such compensation, it might be less objecti -6- marks yearly beginning perhaps in thi i3. or fourth year when other ipvernmer_ts likely ever to be less than at this tine, when it nay be possible to negotiate -4- this property before seeking direct payment 40 bonds might not be readily marketable beca their status. If this suggestion at all p compensation by 4ermany to owners should be trial debentures under Experts' plan. Yifth. Since claims question has arisen, unratified, particularly because as Depart Wadsworth neg-)tintions Allies indicated ob payment army costs under Agreement and at direct from Germany. Allied view not off confidential information recently obtained either should utilize alien property or be twenty or thirty years. Under the circums only German calim and not army costs, some Army Cost .greement unratified. Theref.) might well reaffirm that the United States that Agreement. It would. be particu-arly be made integral part of any new agTeement effective at the same time. A possible o claims matter be introduced both claims an .by the Allies and hence might appear large resistance. Question presented whether the Un silare under Army Cost Agreement if ratifie years .%;iiicia are to be expended "almost exc -S- OParagraph (a) page 31 apparently contemplates possible trqnsfer abroad 200,000,000 gold marks. Icredited Not yet clear whether any such payments would be as repar,,tion other than in Kind. Payments applied to clearing houses are obviously not reparation (See footnote Article 2 of Agreem,:nt). orfeit payments for restitution are not bearing of principle embodied Article 3 n proposed German loan. The United States claL:i share in this loan, which otherwise ies in kind, British lieparation Recover;, Act, r other payments. t agree to credit on claims the value of cables. ffic,lties the United States could credit this ts. foregoing points Allies likely to raise aims of value of German ships tacen ov,r by estion raised in Army Cost Conference. I ns as to response to be made on this point in On Army costs our claim was against Allies they had already received our army costs. As h are against Ger;;.any direct, Allies will n property seized by us and pervanently retain- against capital amount. Also in case we agree will be necessary to explain why we credit one presented whether the Executive is competent an claim. Have noted your statement that the er certain cate-ories on which the Allies have -6insisted. AP In this connection may mention purely f information and not for use in any discussions that Dele 'ations here has calculated that Germany's debt 132 billions were claims for pensions and sep:zation Department will note that under Ilxperts' plan capita may be less than 53 billion. I.:Aftiithstanding the did not insist on certain categories it may be antic disposed to admit United States claim at all, will f on an equal footing with the 132 billions for such s necessary, holding the view that if the United State was entirely its own responsibility. ILPTITEr. Desire to enphasize urgency of a prompt decision. ,cite possible that unknown to the United States present and future conferences between govern- ments nay frame up division of all the furrls Prior to meeting of finance ministers' conference which would be only to confirm informal unclerstandinPs. Such agreements among the governments when once reached are almost impossible to upset. In view of specific language of PAperts' report covering American claim, quite possible that Allied Governments will act concertedly in preparing measures to exclude tie United States, in which they have a common interest. The efore believe it very important that arican position be formulated at owe. Of course there might be danger in introducing questions of repartition at this stage, but the United States might at least inform the p;Dvenaments that it expects to negotiate with them an agreement as to participation on a fair basis 4:444;It- that this at the same time theAview in the payments in question, 4.44.C(t question -ire-rlti.a49-1T-4ebe raised only after agreement has been reached. between the Allies and Gemany on the basis of the Experts' report, 4- ivai ete,44,e, ht,att_ er- Anticipate very strong opposition to Americbn claim on the ground that the United States did not ratify the Treaty, that the United States has not liquidated Germ= property, and that tie United 'States assures no responsibility far enforcing payments under the Treaty while claiming its advantages. In case United States mates claim, believe therefore it should be presented on broadest grounds of equity, avoiding discussion of technical questions. , a4ir -/4/49m42; S IRE QUESTION OF DEBTS DUE TO THE UNITED STATES WITH PARTICULAR REFERENCE TO EXPERTS' REPOR2S The Experts' Reports contain certain principles Which have oeen or may ue alleged to uear upon the settlement of inter-governmental debts. I. The limitation of payments to capacity, in the estimation of which considu,ration is given to: II. (a) ComAensurate burden of taxation (b) Balancing of budgets, and (o) Possiuility of Inter-National transfer of funds Payments ought only to be made out of budgetary surplus, if IinAncial and monetary stability is to be maintained. III. Exchange should be stabilized and maintained stable as a condition of payment. IV. Reductions, in effect, of the capital amount of the debt, in apdication of the principle of capacity. V. A moratorium to uermit of reconstruction; a foreLn loan to facilitate reconstruction. VI. An index of prosperity, and orovision for modifying annual oayaents if the gold prices change. VII. Gradual increasing scale of payments. ADVANTAGES AID DISADVALTAGES OF A. PRO1PT SET' 'LE:LENT 70Th I. ADV,1NTAGES (a) Revenue from debts would permit lighter taxation. (b) Settle ent would remove friction end source of possible - 2 - (c) If the United States waits, the British may settle debts owing to them on a reduced basis, or they may wipe them out for a quid pro quo. In that event, it would be easier for the debtors to pay the United States, whereas if an American debt settlement is first made the debtors would feel bound to treat the British dent on a line basis, out :aight feel that the ourden would be so great that they would be reluctant to rare any settlement with the United :states. II. EUROPE Advantages: (a) Would remove an uncertain element in their finance and currency situation. (b) Would avoid the accumuiation of compound interest and higher rates than those eventually payable. (c) Would help their credit by an evidence of economic strength. Disadvantages: (a) Would impose immediate burden. (b) Passage of time increases the chances of either cancellation or settlement favorable to the deotors. wry compound interest accumulates, the gene Even though growth of the debt goes to support the thesis that these governlents cannot pay vet 411. II. THE DAWES PLAN AND AMERICAN CLAIMS AGAINST GERMANY. Our claims fall into two classes: Claim A: Army Costs. Claim B: Awards of Mixed Claims Tribunal for damages to person and property. Assuming that the Dawes Plan is to he rut into execution, the United States has three alternatives with respect to collecting these claims: III. (1) To participate in the Flan, taking a fixed percentage, or an annual lump sum, to be applied to both claims, or at all events to Claim B. (2) To hold aloof, to insist on the ratification of the Wadsworth Army Cost Agreement (See footnote), and to endeavor to collect Claim B directly from Germany. (3) To waive the claims. The third alternative being unthinkable, the choice lies between participation and abstention. IV. Participation seems to be preferable, if not imperative, for the following reasons: (a) The Plan appropriates Germany's maximum capacity of payment both her budgetary capacity and her transferrable capacity. (b) If the United States attempts collection outside the Plan, either the collection or the Plan fails. The whole theory By the Army Cost Agreement, Claim A may be paid by the Allies, if Footnote: ratified by France; but we would then indirectly enjoy the benefits of the Plan because the Allies pay us only out of what cash they receive under the Flan. Since the Army Cost Agreement is not yet ratified, the Allies, for all practical purposes, will take this financial factor into account in dealing with us whether we participate in the Dawes Plan or not. If we go in, they will either urge that the Cost Agreement be discarded and everything taken from the sum allocated to us, or they will use the Agreement as an argument for keeping our percentage If we hold aloof, they may condition ratification upon our agreeing not to low. collect other sums from Germany for a long period of years, or they may decline to ratify at all. - 2 - of the Transfer Committee's control becomes illusory when large transfers are demanded outside the scheme. If the Plan fails through American action, aside from the of the Allies, we shall have another European financial debacle and an internal German collapse. V. (c) The United States has a moral obligation as well as an economic interest in seeing the Plan succeed. However unofficial, to a degree we sponsored the idea, our -litizens played a large part in formulating it, and we should foster, not wreck it. (d) The present is a golden opportunity to fund, as it were, our claims against Germany in sympathetic cooperation with the Allies instead of in competition with them. Hitherto they have maintained that under Article 248 of the Treaty of Versailles their claims have an absolute rriority and ours only a second lien. Now the conditions 're such that they would probably agree that our claims be adjusted on a parity with their own, because (1) There is a friendly appreciative atmosphere due to our informal stimulation of the convoking of the Experts and President Coolidge's public aprroval of the Flan. (2) There is need for a substantial loan from America to initiate the Plan. (3) There is a direct advantage to the Allies in our participation because of the moral effect such participation would have in influencing Germany to observe her obligations under the Plan. (4) There is an express statement in Section XI, Part I of the Experts' Report t the effect that the all-inclusive payments contemplated comprise all amounts for which Germany may be liable to the Allied and Associated Powers for all costs arising out of the war. The United States was an Associated Power. If we ore to participate, certain problems arise which must be solved speedily because an Inter Allied conference seems imminent. The principal problems are: First. The exact amount of our army cost claim must be fixed and stated; and the approximate amount of our damage claim must be estimated. - 3 - Second. Whether the army cost claim is to be satisfied in priority to, or on an equality with, the damage claim must be decided. Third. Whether the United States will accept only a portion of cash annuities accruing under the Plan, or whether it will also take a block of the railway bonds and industrial debentures must be determined. Fourth. Whether the following properties are to be credited on either or both of the claims must be considered: (a) The value of German ships exprorriated during the war. VI. (b) The value of the cables to be allocated to the United States under !,nnex VII, Part VIII of the Treaty of Versailles. (c) The value of enemy property sequestrated in the United States (see footnote). As to the enemy property, it appears that its disposition is c)ntingent upon the action of Congress. A practical and fair method would appear to be for the Executive to recorm end the liquidation of the property and its application to the claims upon the proviso that the individual German owners should be reimbursed by Germany out of the mark funds deposited in the Rank of Germany pursuant to the Experts' Plan. This procedure would have the advantage of not taking any private property without compensation, and the further advantage of eliminating the problem of exchanging marks to the extent that private owners were residents of Germany or were willing to accept part payment. The Allies are averse to our releasing German Footnote: As to the foregoing three categories of property, the question of their credit, if any, must be settled whether we participate in the Plan or attempt to make collections directly from Germany. - 4 - property (-elereas they liquidated it) and then claiming direct payment Tim D.,,11213 CLAIIIS AGAINST G.-Mita:Y. 0 of the Transfer Committee's control becones illusory when large transfers are demanded outside the scheme. If the Plan fails through American action, aside from the ill-will of the Allies/we shall Irive another L'uropean financial debacle and an internal Gennan collapse. (c) The United States has a moral obligation as well as an economic interest in seeing the Plan succeed. However unofficial, to a degree we sponsored the idea, our citizens played a large part in foimulatirig it, ael we should foster, not wreck it. (d) The present is a golden opportunity to fund, as it were, our claims agai ns t Germany in sympathetic co ore ration with the Allies instead of in competition with them. Hitherto they have maintaiied that under Article 248 of the Treaty of Versailles their claims have an absolute priority aryl ours only a second lien. rim the conditions are such that they liould probably agree that our claims be adjusted on a parity with their own, because (1) rile re is a friendly appreciative atmo sphe re due to our informal stimulation of the convoking of the Dtperts and President Coolidge's public approval of the Plan. (2) There is need for a substantial loan from Are rice to (3) There is a direct advantage to the Allies in our participation because of the moral effect such participation initiate the Plan. could have in influencing Germany to observe her obligations under the Plan. (4 ) There is an express statement in Section XI, Part I of the 2cperts' Report to the effect that the all-inclusive payments contemplated comprise all amounts for which Germany may be liable to the Allied and Associated Powers for all costs arising out of the war. States was an As V. The United Power. If we are to participate, certain problems arise which must be solved speedily because an IeterAllied conference seems imminent. The principal problems are: First. The exact amount of our army cost claim must be fixed and stated; aryl tie auproxin.te amount of our damage claim must be estimated. -3 -4-