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1

O
September 13, iJe .

PEKSONAL r,NU
G0111.1 L Fain AL

Ity dear Mr. Gilbert:

era so glad that you wrote me ae fully Ce you did in your letter of

I
Septfmsibt:r 8.

There is much in your leti.lr rhich is enlip:htening and givee e.

for us to develop her:;

point of view /MO is most difficult

nr from the

ecEne of events as to the Uemea plea, and a point of view not only es to Lhe
economic developmente in k.iermany

If woaL I wad

tAit as to Llie

c,oncerned.

Lo Ur. 6cbacht hais tsea of any .;erice in improving

his

attitude, I em indeed de,libi.ed, and if it needs to he rid ai,sin you may count
upon my saying it or writing IL or singin,:. it or r.histlinz it, 1._-..oeuet, after
all, such en attitude

Mb wF discuseed, monk such men ea Schacht, is oerceinly

in the German interest.
We have no disagreement as to the Reichebank policy, anci while our

of course, asficient at Lie time, is rather seriously

inn-Amation mass

questicned

Schacht's policy when we *ere ciiscueeing it et the time. Cr he visit.
Putting the Ouaget problem and -Lbe
e.oures, a mistake.

partments is, af

complete, and I

a rec

tion of the view

that

tranefer problem into L,.:perste com-

My letter on that point was distinctly in-

Kith you that the record se,ms
leak

of economy

in

oungetery

_vcry

expenditure and excessive

borrowing abro,::a for non-productive purposes, com1;ined, can eeriouely
the

German economy by producing extravLgance

making it too easy to import luxuries,
trant,fer.

The




end over-expenditure by tke people,

end consequently impairing capecity of

borrowing, plus the $250,000,000 of devieen lost by the h_iehs-

its reserve, Itave isf;f:in furnished the means

well as means

undermine

facts in brief seem to be that during. th laet ye .r or Ltvo the

extensive foreign
bank from

confirma-

for

unnecessary imports of luxuries.

of effecting trunefurs as

Hon.

2

.

Parker Gilbert

9/16/27.

I bm so &lad to have your vi..?vs and your ex?lanbtion of .Lhe situation,
an

it ai11 be moat helpful.

I wish you could write an often.

me antimil I have airs:Ay had one opport4nity, and shall have

others, for

little quiet talk iiith Dr.

who wz..s here yoateruay arm erho

made a very favorable iirprestiou.
I trn anxioub to 8:7, that lett,..r of they 29.

like

tomething ?tout that, and if co,

Hon. 3. Parker Gilbert.




I

It ii6y be that you would

v,111 vith ileaeure.

September 24, 1927.
My

_'.(;:e.r Gilbert:

rhile this letter will not be complete, I think I should write you an
Interim report 07/ I.O1 discupaione with liarrie, Forbes do Company, following receipt

of your cables, &E I may not have time to io ao until late next week, and I am
cleening up mail et home Lo-day so ac to h'.ere a clear desk next londey.

The first intimation I h*d of the Peuaeirtn loan was only e couple of days

before the receipt of :'cur firer, cable when it we steten in one of the New York
newspapers that such a loan es being negotiated.

I think you will egree that our

situation is such in New York that it is unwise for us at the Reserve bank to take

the initiative in advising or acmoniehing bankers as to the conauct of their business in these matters. Fen of these loans are handled by the member benke, and it

Le only ty a rather extreme construction of our responsitility to the general
thet we can find ground for initiating propotele to the private bankere, an
tl-!en

we beck always to do so upon the theory that we hens a general responsibility

to the country in monetary setters which justifies us in furnishing them with informe.tion and even opinions, if tusked, even though we are not willing to go so far
5t3 to OM.7 advice.

I sag amazed to learn by your catice that no intimation of negotiations
had reached you, and further, I am ::.etonished to learn th.;t you heu been quoted in
Perlin as having ssr3ented.

Noy, to elaborate my rather brief cable. Immediately upon receipt of
your first cable thich arrived ledneedey, September 21, I telephoned the contents
to Castle in the Department of Stetti, Secretary Kellogg beinL, ae.ey. he informed me

act Culle had already called at the Department to discuss the loan, that he had
stated to Dulles that the Department would msint%in the position which it hd




Hon. S. Parker Gilbert

2

9/24/27.

0
di..
411

regerding the fire, ?ruasian Loan,

previously taken as expressed in a

former

and would not affirmatively object

to the placing of the loon,

letter

tate. to tell Mr. Dulles that they aid not like the bubintae.
it was understood. that the Department would address

but he did not hesiDulles belle tile that

Harris, F:,rbee and Company in a

similar letter to the earlier one.

Your second cable arrived Thursday morning,

September 22.

Ihie I imme-

diately communicated to Cattle by telephone who then informed me that the.

Dep!.rt-

sent heal receives come communicedon from Perlin, presumably our kmbetseaocr, indiostine, the need of eome caution in derling i-ith the Pruesien Loan.

telephoned to

I immedi. tely

Mr. Lloyd Smith ox Harris, Forbes & Company, and he end his partner,

Bell, together with Mr. Allen Dulles and er. Cricpell, their counsel, came to my

office, and with Mr. Harrison present, I see:.: that portion of your cable ae to
notifying Harris, Forbes ,± Company of your intention to publish the letter of
September 20, 1946, should any prubsian Loan be offered. They sere Er:;.e..tly aeton-

ibhed, ane tool the position that, relying upon their formtr discussion end correspondence on this subject an

upon Mr.

opiaien following

the receipt of Sir

Lees, opinion, they had proposed to ineue a prospectus in tertne which they

felt fully met the, objections expressed in your

letter to the Gentles)

Finance Minis-

ter, that is, they felt that it dieclosed to intending; subscribers the etecondary

character of the security for the loan. They expressed greet re! ret V:rit the first
probpectue, out entirely Lc an error, heti included three or four lines to which objection had been 111:..GC,

peetus is no

and which they had really intendet to eliminate. The pros-

..afore me, and I am unable to quote from it. They also expressed

the view tnat the publication of the 1.:_tter of Septemte.r 20, 1926, mould not only

of f ee. the i eaut, but might give rise to such t'";oubta as to all Cermen loane as to

does the ineric:n market to further German torrcwing and poEsibly hens a eerious
effect upon the whole international position.




They felt that

the firm of Harris,

40 Forbes & Company had established a reputation in Germany for

all of their

probity in

euperior

transactione, and that unless they

force from carrying out their contract they

did say tl.at there

/4e4/27.

Hon. S. Parker Gilbert

3

responsibility ane

.ere prevented. by some

would be discredited. They

k46 a force m .jeure clauee in their

contract, althousn tne
it could to

language wee not given to me and I nave no mean:: of juasios

invoked under the preeent circumetancee.
It Aac

done and

took the literzy of

I

kould -and you a ceOle as tney ba.ve

decided that they

6u,gt:ektir:6

that it 62101.11C:

cos epLeific as poesibie

in roger:: to the propceei to pu-lieh your lut :cr to the Minister of

I really feel that

they are, to dome

blight

extent,

finance.

thr: vietime of 1.n

unfortunate situation which has arisen, principally due to home
beti.cen you and they or you Lad the German Government
be

'hien

you nay not Lino to

excueeble tut ..hich ia really nonset on their pert, add which they certainly

greatly deplore.

In this
our conversations
proposed

el le)

cueeed.

In your

zonnection it is important that you should know one
iith Harrie, Torbee

(..;entrele Loan

doted

thins a tout

Company a year eau laet ilareh *hen the

cte

firaL

Prussian Loan .ere Lein& dis-

M-:rch 5 you ete.tec:

"A rather good recore: of reducing, oblisetione has been meue

resist political

but the beretungs-Stelle still seems not able to
L1-. e intermeole-iou of ite preeent
eyereplEe: of Okla
pre teure_.
attitude towerds proposed loan to Prussian State end the approval
it recently gave to Giro Centr:de loan elthough the lobs sae disapproved by Finance Minister and the Reichebank. The latter loan

entirely bad and Prueeian .Atite
loan would seem especially unjustifiable end contrery to interests
of 8,Itte..el situation."
wee .;nit;, uneeeeeeery end almost

I

ei etinctly rectal either ee, filn6 thie kart of the cede or 6ivint,

pLraphrt-Le of

it to Mr. Lloyd Smith when he

!tee in aly office liecuseing these

loan..-, and poietee out to hiai that irrespective of any 1e64.:1 yueutione involved,

or even irrespective of the goodness of thou loans, I thought, tla a yr teticai

tatter, he should



take notice of the attitude expreeaed in your

cable seas it eeemec




4

Ron.

Fark:r Gilbert

W/Le/e7.

I

rto he a definite: irr

some yeere Teter, in

required a decision

or rewire imposing

ar-tee as objection

I recall e

be mule.

that you lard ever ex

He did seem Ft tint

l! ft. the office at. o

mastery by i;oing t

did recall that conv

consider

been given

66 foreotten.

When Mr.

aer,;.e on Fridey to 0

this

convereetion t

aceueinteci wield th
of

%Viten! Lee

the trustee

of the r

fact that their acquai

the opinion of =e r.

hardly eeceee poeeib

of the Rep: retion £

our Department of S

suite unofficial end

Since our

talk with Teen, Fos

the eituation from

5

Hon. D. Parker Gilbert

9 /24/27.

them any opinion or aevice or take any position as to the juridical queetions in

I

volved, that,

in

fact, we had no responsibility or authority thrt neceeeitated

our giving them any

counsel or advice

or infonsttion except on the broad around

of our general responsibility in monetary matters, that I felt that no opinion
rendered ty a lawyer, no matter how familiar with the law and the facts a: Foster
Dulles unioubtedly was, could be sufficient under existing circumetences to ,justify

a conviction to be conveyed to investors that the interest and principal of these

loans could under certain circumstances be legally paid and, that under those circumstances Prussia would practically be able to meet them.
busineeL judgment.

That was a question

r

I gege them some little outline as to what the general problem

of the excLanges and transfers and all those netters involve,

and said

that, in

point of fact, aside from the legal enC practical queetions, there seems to be eore
moral question involved in offering a loan to the public in the position teat this
one wee, when the obligation of the State of Prussia to pay collars implie: the
obligation to transfer dollars, and the:. any statement ehich was areetuate to

bring

the facts before investors might indeed be effective in making, the loan unsalable.
I

wt s unable, nor would anyone else be able, to hazard any guess as to what the

future had in store for the reparation plan or

or decisions on these questione in

case the CepL,.retion plan encountered difficulties.

It wee solely a matter of bud.-

nese judgment tut, in view of my own friendship with the firm of Harris, Forbes &
Company, I certainly felt justified in 6iving thee the bare facts so far as we

kne

them so that,

in

deciding these questions, they could not feel that they had

not been informed.

As matters now stand, your long: cable quoting your cable to them has just
been received.

Her:icon has telepho-ed it to the Stete Department b.n-c,

Treasury and will Lend copies to-day.

the

I personally feel that the cr ble is b.usirt.ble

in every respect except one, and possibly that might be avoided.

You emphasize

the objection on the ground of the a, condary cht racterof the security.




to

I do not

Hon. S. Parker Ciltert .VZ4 /27.

8

without

rwee how you can advance any other ground

taking the very poeition which you

have ecrupulously evoidea taking ee to the goodness Lino. proptieteor thee loans. Exit

in emphasizing,

that point you do cut the ground out from tinder your feet in cede

they deci e to issue a circular which makes this point absolutely clear to all
investors.

I have

been trying

to consici r carefully

publication of the letter of September 20, 192.8.

quite

letter ie

long.

whit

the effect would be of the

It is difficult to

You could hardly expect it to be published in

bay.

The

full and to

the extent that it wee published it is quite likely that it would appear under

heavy Dead lines

with sensational comments which might have

upon all German financing.
on that a c

coun t.

I

am

in grave doubt

a really beri0U8

effect

of the iecom of its publication

I feel equally certain that it is unlikely that our Department of

State, after the conversations which have already occurred, will take
and affirmative position with the bankers.

The sudden cieuth of

the

a definite

German isetaeericior

may : dd to the difficulty of making repreeentetione to the German Government as

suggested in your cable, although when I last
that he

intended

talked with

to take these mattere up with the German

arrived in L.ehington

sne tell

Secretary Kellogg he said

embeeeedor att, soon es he

him pretty definitely how he felt about them.

In enema, it seems to me thet

there is

not

very much that the Federal

reserve bank can do .itheut assuming a great deal of responsibility, the warrant
for which would be some representations to us by our own Government.
,tence, Mr. Castle asked me specifically to

talk

In this in-

with Harris, Forbes & Company as

he thought it would be helpful to the position of the Department, ana I have certainly done so a,: fully

ee I felt justified.

Little can to expected through

cooperation among Mmerican bankers, as there always seem to be come, anu always

probably will be some, who

are willing to handle these loans despite any

expres-

clone which our Government or the Federal reserve bank may be willing to make,




Hon. 13. Parker Silbert

7

/Zzl,

lb°
db. unless the position of

the Stete Liepartin:-.-nt

seemed to them possible.

io mucn more definite than has yet

We must, th,lrefore, concha e that if a suitable control

is to be exercised it must be brought anout in ilermtny, and I should think that

this would involve a pretty uefinit.a stand on your part and pretty
eentations to the Gordian

Gov,::rnm nt by our GovLrnment.

the position that you are not responsible
ing, and despite

enough to

escape a certain

My apprehension

responsibility of putlishing

wo'lld, in fact, put you in the position of ewer-deice: ah

influence almost etrong
you can

If you continue to msinteic.

for supervision of German foreign borrow

th,:t position, you should assume

correspondence which

d.:_finite repre-

be interpreted is a control, I hardly see how

responsibility

for serious consequences

in

care they tri:_e.

would be not us to the immediate future, but the longer future.

in

If the publication of your letter should result

lz.rgely closing our mai-kete to

Ge man loans, then, indeed, tranefor

difficulties

do, the further impairment of k;ermen

ereuit may make all transfers impossible.

This would precipitate
teems to be

the

tee-,

may soon arise.

of the Dawes elan at least a year

desirable and poseibly

If they

thirl 1,:r than

neceset..ry.

I have had some feeling of uneasiness about the convereetione
already taken place.

The Hanle, Ferber, group

includes crown Broth.,re,

Equitable Trust Company anc, I believe, one or two others.
of

which have
the

These g,entlemen

are,

course, meeting rod repeating what they have tie.:.ro from you and whet ice have

told them, and I imagine

by the reaction to the

they will uo 60

meetings alreauy

passes Lround very quickly.

leak to the

with rather grave faces, if I can Judge

held in our office. Wor.i of this sort

If someone, in a fit of bad temper, should let this

newepap.rs following the decision by

Prussian Loan, and
ment, even though

tha bank

rs

not to offer the

if whatever appeared in the newep..pers should include s
unwarranted,

that you and we were

state-

responsible for the failure

to carry out the contract to place the Pruseden loan, I suppose the effect would
be Just as serious t.fa uhough the letter to the Finfinci Winister liter published.



Hon. o

I have cautioned them as fully anc: carefully

Ea:,

Parker Gil art

9/24/27.

I could, but you know ho* inaouate

these .,:autions are.

I do not fear anything of that tort happening,
of course, if

the loan ie issued.

It is only in oa,

e

is not issued.

6o Harrison ano I are

going to vend you a cable some time to-day
or Sunday and this Atter *ill be mailed
either early next week sr at the end of the week after
the situation has developed
further.
oeptemeer 29,

The situation hoe changeo :*o rapidly since dictati% the aoolia that I

have held my letter for further elaboration,

To give you a eluar picture I am

having a pretty complete set of clippings made which will exhibit the extentive
putlicity which the disclosure of the ciscussion nt.b CLU3tC.
hat eeems to have happeneu in labhin6ton may or may riot ht. v. been un-

fortunate.

As I understand it, when the newopap,re callec following the purlica-

tion of the Journal of Gommetee article, they were told thai, while 'oho Leper:sent

hao not altered its policy and had uo informe tho bonkerb who had applied for
"clearance," she iJepartment, nevertheless, deplorod the maUng of certain t!iess
of loans such as this one :Ind that, of source, gave ri,t.e to all the putlioity.

Secretary Kellogg hab been away, but I am informed that one of the 6CCrAllri ea had a talk with Mr. kiep, Gouncillor of V.-, ;:Mttavey, who called to inquire

about the incident, and he was told iu rather vLorous terms thi.t t flood. of state
and municipal loanu in this country would be disturbing end. diecoLoartini;, and

that some sort of a communication would be or had been bent to the Gormon Government either formally or informally in soma fashion.

my kmoltuo of "alr_, incident

is rather slender, but 'a:: conversation took place and I understand sus pretty
definite.

Since there pu:lications th re has been no end of discussion and some
little uncertainty if not apprehension Emong the bsnkere as to the outlook.
position, 48 we gather it from those we have tk.lked with, setae to be that



The

9

Hon. S. Parker Gilbert

e/2927.

III

in the early :Jar s they resented el.e intervention of the Depertzent of State and
.111

111

claiwee to be willing and able to ex_rcieu their on judeenont LI:, to t;:l.:1 propriety
and 600d-410643 uY loans

Gernau borroeere, Lit incident hats now rether led them

to dceir ague more epeoific end ti:-.finite direction from the Department ae a guide

to their policy. It cunetently recure in our ooneersetiene that they tisla to be
told whet to do and **lt not to do quite seecifieelly. I have einpl-y cold thse:
that .ge cannot tell the', the:. I undereteind you

un:-.b.le to d

urrtrillieg

eo,

rtment

certainly more definitely than you eiruaiy hee.e,

3.ttitu%:.: of tee Dz

of State tree been mede perfectly clear to the*.

I 'neve discueeed with two or ehree

of them .t_11 of tlte various clif_icuitieu of eettine, up anythine epproa(shinE e con-

trol, eielver ebroueh the lendere or through the :-..epereeiens orgenie: Lion, talc', in-

th: formulate their

euired by the leedine beakers do not meet hilt:. form a

;.131111111

views end sulmit i.hem elefiniLeely r.nt_ apeeifically in

riting to the Department of

State, and it' thf.. :eel the., the exercise of centred in CA-erlTiany is not eeequate
they should
eocuro

:so end ascertain .deather our Goveenseent

not take stepe to

more. Lds4w.Lu control.

Tito fact is
bankers

this publioe:Lion haft been

t.

bit of ,t bomb shell eo the

,6re all of e twitter. Cn the other hen°, up to

it bOviii8 to

have lied no effect upon the itacrieen valuee of German securities which reil,r sur-

prises us. Hsrri3, Forteo

Compeny tell ue thet in preperaticn for the issue of

the new Pruaeian loan they hought a foe; bore_:e of tle old iezne, which edvenced them

fro-, about 99 to 99 1/4 or 3/9. They diecontinued buying slier. this publication

occurred, end tl.e bonds are still cellinc et 99 1/4. It i.. a little too early,
howev!-r, to judge finally of the market effects.

You will be interested to leern that in my talk yesterday with hay Vorrie
he stated that when he celled he heed asked you in tfe.nerta what your etti Woe *.s
about the

etete and municipel loans which are cow bs.ieg proposteo, and that be

had mentioned e Prussian loan as in prospect. He then repeated what he understood
to be your position, which we not altogether fevoretle although discleiwing







10

son. S. Parker Gilbert

s/23/...7.

°

11

en:e uncble to carry out
unfortunate when

ft

Hon. S. Park-r Gilb-rt

formal written contract.

9/28/T7.

They think this in peculiarly

a9 I understand, tno thirds of tha proceeds of the loan are to be

devoted exclusively to np-icultural development in Prussia aua the other one third
to harbor works, all of which, t!Icy contend, era productive and will, in fact, improve Germany's capacity to pry reparations b.nd your !.hility to effect transfers.

I did point out that this ergument night be cpecioue were it founa' that lending
.T30,000,000 to Pruneia ern.hled t'.c Pruosinn Government to appropriate the equivnlent of , ite budget income to unnececar

cud unproductive expenditure ziuch as

building opera houses, etc.

In our last conversation with Harris, Forbes t Company and Mr. Ray Morris
I steted to the

thtt their obvious effort to uubstitute the judoient or decision

of some other authority for their own judgment or decision et to making loana to
Prucnia, etc., predicated to r.y mind that alat they desired 1.a8 to place the re5pona till ty upon eoracone el

i rtther than :°°7:zume it Lhemaelveu, as had formerly been

the. Et ti ude of the bcalkers.

I have asked them to consider ghethar (in ca-u they

cannot ef'net such a substitut ion of judgment) they are interested be beakers in
the prog so of whether the total borrowings of G..nmuny .2road, come part of which
arty he for unproductive purposes or have the effect of releLuing revenues for e.A-

penditure for unproductive purposar, may not, in fstt, have the same effect upon
Ctrnan feconom;

th' t ovr-ia:sues au:: debtaement of the currency hbve, end whether,

in fact, the eitunnion of ;_- nation hhich ha.; goat through bankrupt

and made u

composition -ith its crtdi tors it any di 'fel ant from that of nn individual who has
given e eeriLu of notes to his ortdi tore and who thereupon borrows money in 1 ,z-ce

emulate in order to maintain n lerce and extravagant E6tallishmont, me--or care and
yacht, and. indulgo iv le Dish entertainmmt, etc.

I have also stakec: them 7,e con-

sider tthether there is any fundamental diffrence beLvn:.-n an 16010 of n ark loran

in the United Statte :pith the guaranty of Prubois or of thL G,rmen Government that

it will not only w marks but will trenefer marks into Qolltrb to meet the bernice




is

Hon. S. Parker Gilbert

12

of the loan at a fixed rate, and the

direct

they rely upon the diecloeure in the

prorpectus os to

J/28/27.

issue of a dollar loan, ana that if
possible difficulties in the

transfer, can they do so effectively to ik-norant subscribers without destroying

the market for the bonds?

Finally, I have asked there to beer in mind always that

we simply wish to he of some service, but not to assume any authority, and that
naturally, as

the

Government's fiecal agents:, whenever we are asked to do anything

in these matters, if we are able to do so without assuming unwarranted responsibilities it is our duty to do so.

At this moment your cable of the 27th has arrived, and as I am uptown

Mr. Harrison will communicate with Harris, Forbes & Company and Mr. Leon Fraser
and answer as soon as possible.

I as sorry to burden you with such a long letter, but this matter is
really

reaching a

point where it may result in any sort of a development, and I

thought you should have a pretty complete record of what has transpired.

October 5, 1927.

With this addition the above narrative seems

about

complete.

Mr. Bell

of Harris, Forbes & Company, called to advise us that he was proposing to sail,
and Mr. Fraser also had a talk with Mr. Herrieon and gave him the substance of
whet was contained in our last cable reissrding his interview with Harris, Fortes
& Company.

Since Mr. Bell etiled there have been no particular developments save a.

good deal of newspaper publicity as to what the

German Government proposes to do

in th: face of your opposition and that of our Government to the issue of the
Prussian Loan.

adequate control

I hope it will all work out satisfactorily and will reeult in an
being exercised

in

Berlin.

That is where it belongs and I can

see great difficulty in atttopting it by any other ethoo.







13

Hon. S. Parker Gilbert

10/b/27.

Not el 7righton,
March 3, 1928.

Atlentic City, N. J.,

lb dear Cilbe rt
Illness ha s interfered with my writ ing you q I should bther vise hove done some time ago about one or two matters *Leh ye discussed
in /"err York durirf your hasty vie it with me. Of COUTO°, I must rite
you in very strict confid once, an3 afa a orry that deferring my t rip to
ope lu s prevent ed my explaining i in pa reon rather then by the clumsy
vehicle of a 1 ett er .
You recounted tome quite in detail your feelings about the

gewral possibilities of a settlement of the re oration problem and
its relotion to the debts owing to -tr. Covernment. I remember wry
distinctly the pos it ion you took, which i 3 qbsolutely in harmony with
the caw I feel myself aril I need not re -peat it here. When Niemeyer was
vie Iting us we ha d two long talks on this matter. I was care zl t o ex-

plain to him, of course, that I had no r.Ithority, very little influence
and could only express to him -y orn views, not having diz.cussed the
matter in .ashinc,on for a good while. I told him very frmkly that
it seemed to a to be a great mistake to push for a general financial
settlement made concurrently by all debtors aid creditors. The opportunity for doing that passed a good while aco, and unless there were
distimt chonge of public opinion in this court ry it would do no good
to male the attempt and might d o much harm. It etruok nty that experienced people in '.urope should be able to appraise Cern any's cepaty, agree among t113=3 elves as to whet Germeny could

p

and wha t

:;apit a adjustment could be effected, etc., when the time °erne, and

tlen, if they felt justified in

pirr OE: chip? our (.7 over trio nt subsequent

`,o arriving at their own understanding as to Ucrmany a n3 their own



*Iron.

Parker Gilt ert

3/3/28.

debts, why, of course, there was no reason why they should not do so.
*a Balfour note end 11143 expressions soaking to put 'this oonntry in
the posit ion of a harsh credit or aria t o force upon us the burden oft. anY
concession the t was made to Ca= any, he so obviously be en mistakeb
and boon handler"; in suoh maladroit fashion that a revival of that atym ql much disappointed
:;ler.1073 r
tempt .7,truek me as foolhardy.

I should hold this opinion, and eail that it ni.tLrally implied tl)at
ttay would hive to agree to a great reluotion 3071e day in Cersnny's
payments, a nd redue ti on of payment s among themselves, without any a:isurance t he t ':hey could jot concessions from t

United States; that it

was e skier them to t rust our generosity beyond what human ncture could
be expected to do. I tried to point out to him as gently as p-ssible
that there 1rd been so many cherges bandied about in regard to our

militoxy, financial and moral responsibiliV in connection with the
var that I felt it was now necessary for them to dc, exactly that;
y, t rust us. If the new administration pro ved to be willing to
reopen the sub :ect and review the ,'ebt situation, it might be that
,omethin could be done. nut that was in the lap at the gods. I
told him very frankly that he buei ness of ba it Ur the :gent Cener al
will prove to be on unprofitable occupation. Your position was such
tint in the ,nu you would oomsend the confidonce of the ixablic, and
that yi.ur 7'ecommendatione, which war- disinterested, wet hound to
carry more lidight than anything whic h appeared from more interest ed
by
sources, that is, from th:, chancellor /CO of the various Eovernment s,
and

I hoped that the c re d it or gone rnment a would continue the pa3 iti on

or f iv 1 ne you t heir full support.
;A times ht) misplayed some tendency to be critical of the

posit ion you had ta,;-:.en as t o the rep.erati on lien aid transfer priorities



San.

2ark. er Gilbert

3/3/28.

-- 3 -

the annual report.
He thoucht possibly that wee Fo ing a bit far in making commi'-ments, etc.,
but d id not give very much emphasis tc that point. I may say that
agoinuicated in your n et e to the German Cove

ment and

i'iemWer displayed e broader point of vi ew and a much m ore understand ing

one on this subject than I have ever before heard his express.

It is

pos sib le that I detect ed some chant- e in the ind iv id ual due t o the i nflus, as dis ti nen i she :1 from the atmosphere of
en ce of his ban k Surround
'_'his was the main sub st,Ence of our talk. I was care:521 t:
quote no one.
The other matter that oarta up disturbed me a bit , and I am
wonde.riT if ther- is anythir that I could do or should do in connection with it. He seemed to feel that sane friction had arisen between
you and Leith -i0E1S. I hope there is nothing in it. :loss is probably
tL e only rm n i n the ire a su rte who knows anything about the se reparation
and debt matters now that !-,he old crowd are all out. I have always
had a pretty high regard for him, although I have known him much less
intimately than either Bla eke tt or Viewer. The permanent of ficials
in the British Treasury have always boen rather hard-boiled, as you
know, but they have inA pretty able men there and fellows with whom one
can rally do busirr ss. I am wonderirc what the trouble is, and whether
Norman's art Niemeyer's influenc e r.-ay not be empl:-'yed. This is going
far outside of my own territory, but I thought you should know sormthing
o f what t ran spired.

!'y illness has prevented my seeirv: Mr. Mellon and almost
everyone else in -ashington and New York, so I am not very well posted
I return to New
as to rin,.ters in which you would be interested.

York in a couple of weeks I am hoping to have a gerrral survey made o0



-4-

Parker Gilbert

3/3/28

the market for Gernan seetreitie s, a fri o I! the atmosphere and of the
4101 ing among the bolt houses. for to time is apiros °thing ?hen the
question of Corm: z-1 loans must be 1 eked squarely in the face. It is
rather significant that the irussian loan is the one sellin,. more
below the tasue price than any other, as I recall, and most of t bo

inemttrial loans are selling above the issue price.
plane are still indefinite, but I have a hope that it
be possible for me to sail some time in 31w, and if so, I shall
count upon seeing you.
Please write me :t: art you et a chance, but address me at
the b rink, as I uha lI not be here very much toner.

..ith best regar2s t o you, as absays,
7:incerely yours,

Hon.

Parker Gilbert,

Agent Gem ral for .1eparation 7ayments,
33 Luisenstresse,
Berlin, Cermony.




lashin-ton, D. C.,
?larch 27, 1928.

GONFIDTMTTAT,

(blear Gilbert:
Tt wns very good of you to write me Yebrunry 26 on the matter we discussed
when you were at Now York, and to send me a copy of your memorandum of February 24.

I
arguments.

have just rend it through a second tine and T can find no flaw in the
in fact, it strikes no as a fine statesnantilro document, and as to the

merits of the argument, timely in being (rerouted before any more of these unfortu
ante ptblic commitments are made by non holding important offico.

They are alto-

Tether too ormlo to do that before they ere fully acquainted with the facts and
possibilities.

That troubles me about a practical conclusion along the line of your
memorandum relates to that very human weakness.

Soar& your memory, as / have just

nn-,, and you will find that loading otatosmen and important non who influence public

opinion, as well as the preen of all of the largo croditor nations of Germany, are
of

committed almost beyond the possibility of chance to the idea that any reduction
rmmtrls reparation payments will be accented only

if

corrosponding reductions

can be made in payments to their creditors, and in this country, we being the largest
creditor nation of them all, there is almost an equally definite re cord of lic Char-

acter that no rouction in the amounts paid under the debt oottlement will be

toler-

ated.

7ithout regard to whether th7s has been a wise attitude or not, it would
appear to no to be ask'mr a great deal more than is ordinarily humanly possible to
get the nations of lurope now receivin7 there reparation payments to agree to any
reduction, either in the hope that no will subsequontiy agreo upon a reduction, or
that they can justify it before their own reoele without a reduction by this country.

rractically, from the basis of the views hold abroad, it is asking them to
trust a good deal to luck or to our generosity in case the proposals of your nomorandum involve a matrIlal reduction of the amount of the annuity



or the termination of

Parker Gilbert

3/27/38.

2

neyments for any appreciable time less than Dint,. years.

You may, however, have reason

Ilkelieve that they will accept reduttions without erpecting reductions from us, but
tb-t I very much doubt.

Another situation which wilt complicate matters is the one I think we mentioned about the ?ronch settlement.
ing due before long.

They hnve the ro1,00,000,000 commercial debt fall-

This Congress will adjourn, most people say, in ray or June at

the latest and, of course, there will be no opportunity to effect a settlement and

have it ratified by Congress even though no change in the present terms were attempted
.,afore this Congress adjourns.

The next session is the short one, following the

Ovember election, commonly Imom as the lame dug* session, where, as you know, nothing is ever done.

The new Congress will not assemble, riless called to a special

session, until recember'29.

So it looks as though nothing could be done there much

under two years unless some miracle should happen.

nor., therefore, can anythine be

Jttempted along the lino of your argument unless it be atteapted quite independently
of the possibility of any concession from the United states.
Then again, if no general settlement can bo effected between now and, say,

the winter of 1929-30, will the Danoe plan stand up an long as that, without a large
accumulation of rrrks and the possible conseeuRnce of some impairment of German credit

abroad which I hnve always felt would be likely to arie to some degree whenever it
is

found impossible to effect transfers completely.

The one mppoal for a settlenrnt

by some capital transaction which might induce creditors to attempt it prior to any
attempt to read just the American debt is, of course, the need for mine the American
investment mneent for etching in securities which Gernmay mny iscue, such as the railroad and industrial bonds.

Another difficulty in the way of any sort of an adjustment

without dragging in the subject of our debt is the fact that it will require ratification by all the nations whidl partici3ate, not only in the Pawes Plan but in the Treaty
of Versailles.

As one of the participants in the Dawes Plan we would naturally be made




Mr. S. Parker Gilbert

- 3 -

3/27/28.

a party to any such procedure, and how then could we escape, even if we desired to
itso, a general debt discussion growing out of a general repnration discussion?

I

pm Just thinlxinc aloud end raising questions which doubtless you have

already fac-d, but which appear to me to be of much consequence to the success of
your program.

I hate written Jay fully about my plans and he will show you the letter.
rybost regards to yaw:, as always,

Sincerely your,

Mr. S. P:r1.11.er Mlbcrt,

33 Luisenetrasse,
Berlin, Germany.




Hotel George V,
Paris, June 27, 1928.

PER3ONAL
My dear Gilbert:

Mr. Harriron arrived on schedule, and I have had two very delightful days with him, during which he gave me n report of his trip, including something of what transpired in Berlin.

He tells me that you are

very short-handed, and I gathered from what he said that thcro seas not

much poesibility of my seeing you during my stay over here unless I were
able to get to Berlin myself.
ble.

This, I am sorry to say, will not be possi-

If, howovor, you do find it feasible to spend oven a short time at

vian, you must know how much I shall enjoy it and profit by it.

With practically all of your organisation who aro personal friends
of mine absent just now, I must concentrate my messages upon Grandma, co

please give her my love and tell her that, if she should come to avian with
you, it would cheer me tremendously and nothing would please me more.

Very sincerely yours,

Bon. S. Parker Gilbert,
Agent General for Reparation Payments,
!L RLIII.




Royal Hotel,
Evian-les-Rains, July 4, 1928.

nazona
Dear Gilbert:

By good fortuno, Jay and I had a visit in Paris.
a chance, as he was looking for Harrison and found me.

It was quite

He spoke rather

definitely of your intention to stop here some time during this month, so
I am enclosing a memorandum making the best guess I can as to visitors,

and if you aro ablo to come and wish to, you can understand how delighted
I will be to see you.

Bring Grandma too if you can.

Of course, it makes no difference if you are here at the same

time as some of the others, but if your time is at all flexible, take your
pick.

Only let me know in advance what accommodations you will wish, sc

that we can reserve rooms, as the hotel will probably be crowded after
July 15th.

They have promised to take care of you, however.
In view of some matters happening at home, it may prove to be

rather important that we should have a visit, if you can arrange it.
only sorry not to go to Berlin.

My best as always to you and Grandma.
Sincerely yours,

Non. S. Parker Gilbert,
33, Luisenstrasse,

http://fraser.stlouisfed.org/
133:"1
Federal Reserve Bank of St. Louis

I am

Royal Hotel,
Evian-les-Dains, Ally 14, 1928.

pragoNAL

My dear Gilbert:

*my

reached me last night, and I am
Your two letters of the 10th
possibly I may not see you in Paris
disappointed at the thought that
1st, because of Phil's marYou see, I must sail on August
after all.
Paris on the 24th and have just a
riage in August, oo shall arrive in
have some business still to
I have to see tho Doctor and
week there.
possible
looks as though it would not be
attend to before sailing, and it
the way to Cherbourg; and furthermore,
for me to get down to Dinard on
anxious,
Mellon at a time when he is so
I hesitate to intrude upon Mr.
business talks.
as I know, to escape
of your being in Paris between
If there is any chance at all
through Morgan t!.. Comthe let of August, please let me know
the 24th and
chat, I am explaining oepaThe reason for my anxiety to have a
pAny.

voi

rately.

Very sincerely yours,

Hon. S. Parker Gilbert,
18, Rue de Tilsitt,
PARIS.




loyal Hotel,
:3-vian -les -Dains, July 14, 1928.

PERSONAL

My dear Gilbert:

Your letter of July 10th was received yesterday after I had
practically concluded talks with Dr. Schacht in regard to general questions, which inevitably included reparations.

!lir"

lie has just left for

Zurich and Berlin and I have had some last words with him this morning.
Nothing that he said to me gave me the impression which you
have, as expressed in the second paragraph of your letter, that it might

be best to wait for some years to come in the hope that reconsideration
will be forced by transfer difficulties or a crisis.

It just happened

that the subject came up naturally and inevitably in connection with our
monoy situation at home, and I pointed out to Schacht that it was impoceible to forecast for what period of time domestic considerations would so
affect our policy as to make it difficult for Germany to borrow on reasonable terms.

I doscribe(: our situation, and ho agreed with me fully that

it had to be dealt with.

He then, without suggestion from me, made almost

exactly the statement which you have made in your letter, that no general
cettlement of reparations would be possible without employment of German
credit, and that beyond everything German cro it should be maintained unimpaired, which meant that a crisis would bo fatal to a general settlement.

Most of our discussion was given over to the credit position and
its influence upon their situation in Germany, but we did review a great

many of the difficulties which were inevitable in such a vast undertaking




Hon. S. Parker Gilbert.

7/14/28.

as to define reparations and organise a plan for some sort of a general
oettlemant.

I did not undertake any discussion of figures at all, nor

did he mention any figure.

In fact, I deliberately avoided that, on the

ground that I knew toc little to have any opinion and that it would be
misleading to discuss figures at all.

I shall not recount all of the

You are familiar with them muds more

points raised in the discussion.

than I am, and he seems to feel that his exchanges of views with you are
very complete and have been since early in 1927.
At the conclusion of our talks, I told him that I felt competent
to advise him on only two points.

One was that t

a crisis as would result from inability to effect transfers, if it did
arise, would prove to be disastrous to everybody, but more disastrous to
Germany than to any other nation.

He has some doubt as to whether a

crisis would result within Germany, but admits that it would gravely impair
German credit abroad.

The other point wee in regard to a figure.

said that you and he were very far apart.
in mind were impossibly high.

He

Ho thought the figures you had

I did not comment on that beyond saying

that if Germany cleared a settlement, which in my opinion would be the
only thing to con solidate German prosperity, it would be necessary to make
sacrifices to get it.

If he earnestly believed that a crisis must be

avoided, then some sacrifices would have to be made, and rather than approaoh the subject in a bargaining mood, it would be wieer for him to be
very much more guided by your advice than ho vould be by the desire to
keep the figure down.




There were obvious reasons in support of my view,

0111:

7/14/28.

Hon. S. Parker Gilbert.

Pt
the principal one being that as matters now stood them was no one capable of taking an effective initiative but you, and it would be most unfortunate if, at the very outset of any effort you undertook,

it was found

that you and he were in complete disagreement and very far apart, and
besides that, I thought the creeitor nations generally were ,uch more apt
to be influenced by your judgment than they mould be by any opinion from
the debtor as to Germany's capacity.

Of course, there is a lot of bar-

gaining to be done, and I understand all the difficulties, but I think so
far as the influence of Schacht goes, it will be greater if ho con first

get come sort of an agreement with you than it will be under any other circumstances that I can imagine.

Nov you realise that this conversation all preceded the receipt
of your letter, which gratified me immensely and enabled me to reinforce
what I had said more emphatically then I had at first been willing to do.
I find Sehaoht In a curious state of mind.

He is very much dis-

turbed by the evidence, Alich he thinks is complete, of a change of attitude on the part of ono of the principal creditor nations.
of touch and I think is hurt by the attitude recently displayed in that
quarter.

I cannot possibly attempt to give you in a letter an accurate

picture of a state of mind.

It would need a long talk.

Nor in fact, in

that connection, can I give you anything like a guiding opinion as to the
situation at home except by discussing it fully.

must of course consider our domestic situation from the standpoint of a bank of issue, and the facts, broadly stated, appear to be that




7/14/28.

Hon. S. Parker Gilbert.

4.

has been effective
our policy of the last four years, up to this January,
in accomplishing the purpose for which it was designed.

It hap enabled

would
monetary reorganization to be completed in Europe, which otherwise
have been impossible.

It was undertaken with the well recognized hazard

of
that we were liable to encounter a big speculation and some expansion

credit.

in stocks.

Speculation has not occurred in commodities, but almost wholly

In twelve =the the volume of bank credit increased five

billion dollars.

Six months ago we faced the new year with practically

matters, reserves
all the European nations in a strong position in monetary
well able to
restored, largo balances carried in ?dew York and London, and
stand the strain of a change of policy in Now York.
fectly obvious.

Tfe had to undertake it.

Our course was per-

The conditions permitted it,

and the poosibility of damage resulting abroad were at a minimum.

In

and we now have
view of this we have had the advances in our bank rates
borrowing over a billion
a really tight money market, with the member banks

dollars from us and absolutely in our grip.
allowed to continue, 1 cannot now forecast.

How long this situation will
It will require much study

the facts as to the credit poon the ground, and it depends somewhat upon
psychology of the
sition and somewhat upon an accurate appraisal of the
industry and
country, and of course very largely upon developments in our
trade.

maintenance of
No one realizes more than I do that the continued

present s real hazard to ICurope
very high rates in New York may ultimately
and especially to the smooth operation of the Dawes Plan.

It may indeed

be avoided
provoke the very crisis which you seek to avoid, and which should
if it does not involve unreasonable sacrifices at home.




Hon. S. Parker Gilbert.

5.

7/14/28.

My hope is that by Fall we can intervene in the money market
preliminary to rate reductions, but at this distance and with my lack
of knowledge of affairs at home, that ie merely a guess or a hope.

Those are simply the high spots and a text upon which one can
hang a long discussion, and it is this matter and the reparation matter
generally which led mo to feel the urge to have a talk with you.

Please

arrange it if you can.

You will be seeing Mr. Mellon, and I wish you would give him
my warmest regards and o:-plain to him what my plans are.

Ae to health, when I came over here I had four distinct problems
to face.

One was my lungs, and Dr. Riot has given me an excellent report

as to the conditions there.

Another was the after-effects of the ahingles,

which left r. severe neuritic', but that 13 about cleared up.

Tho third

was the terrible shock to my nervous system from the long and very painful
illness, and that is better but not right yet, because I am not sleeping
as well as I should, although much bettor than when I left home.

The

fourth is the general disturbances to the alimentary tract gauped by
copious donee of morphine.

That is not right yet, but I judge from what

the doctors tell me and from my on experience in the past that it in a
matter of months or a year before such a condition can be gotten completely
under control.

It has been a discouraging experience and set me back a

lot.

I wish very much you would take time, if you can spare it, to
leave a letter for me at Morgan & Company in Paris, giving me some idea
of the possibilities of our having a little visit.




G.

Hon. S. Parker

Gilbert.
7/14,/28.

Tith every good wish and
many thanks for your lettors,
bellow mo, as ever
Sincerely yours,

Hoar .

S. Park or Gilbert,
13, Rut, do Tilsitt,




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711iTHE SECRETARY OF THE TREASURY






w











http://fraser.stlouisfed.org/
have been Louis
Federal Reserve Bank of St. running

- 5 -

at very nearly 300 million dollars per month, which

It
S
The Gm= Goverment is re;leenini. for ?ublio,-._tion in
nisr eks? ere

of October kv:)-,

topittsior 'frith the

r,.anci,iy =tenting, ?crsaber 0, i 47, tic Lop.) rttilidlia

frost the .4,&nt 6sr.ers1 for :e'rruttou Paystents,
GOVereK ;rut, o psply of Neveabor to 14t7. Ert-3-1

Both the 4ent General' e eamor:no..m mid the :asst,- h reply will undoubtedly be covor4d by r.-ur r.sk-ular nes* reports five, Esi: rile.

The full test of the Agent Ganirits tAzorsnaus is, hoeuver,
airculuted ter4mitt for your cony :latent referbnce, on the under-

stauldins th-,.t it, is 6overned by the etas rt)lettoc dvt and viii not
be used before tPe tonday nornitv rismepapers of 15..) somber 6,




11,47.

ttt

-

























9

The salary proposals of the Government are noteworthy, not merely

I

0

because of the large expense which they entail, but even more because
they have been made on the most sweeping basis, and in the way most likely
to bring serious consequences for the general economy of the country.
They are apparently intended to apply quite as much to pensioners and retired officials as to officials on the active list, while even for the

active officials they appear to contemplate a general increase in salaries,
without any effective attempt at administrative reform.
It is not for me to express an opinion on the merits of the
salary proposals, but it would seem as if the German Government could have
served its own interests better by using such substantial increases as an
instrument for securing the reform in administration of which so many announcements have been made in the past two or three years.

It may not even

now be too late to make the salary increases serve this purpose.

But as

matters stand at present, they seen likely to hinder rather than to help
the cause of administrative reform, and to saddle new and lasting burdens
on the already heavily-burdened budgets of the Reich and the other public
authorities.

In addition to these general increases in pensions and in the
salaries of officials, the Government of the Reich is advancing two other

measures which seem likely to involve large new expenditures, one, the
proposal to compensate German nationals for loss or damage to private
property during the war, and the other, a general school law for the Reich.
Neither of these measures has as yet been enacted into law.

The first of

them, the draft law for indemnifying German nationals for property lost
abroad, apparently contemplates expenditures of about 1,000 million











http://fraser.stlouisfed.org/
has
Federal Reserve Bank of St. Louis

12

initiated may add very greatly to their expen-




13

II.

Finances of the States and Communes.

There is little or no current information as to the financial
condition of the States and communes, but their demands for additional
grants from the Reich and their frequent borrowings at home and abroad
indicate that as a whole they are living beyond their means.
The domestic long-term loans of the States, provinces and communes, and of the various public undertakings in which they are interested, have amounted to about 1,000 million reichsmarks since the beginning
of 1926, when the domestic market first became available for long-term
borrowing.

This sum is more than twice the amount of long-term domestic

loans placed in the same period by German industry and trade.

These

various public loans, taken together with the Reich internal loan of 1927,

were mainly responsible for overloading the domestic market and bringing
about the state of exhaustion which still obtains.
Foreign issues of the States and communes, and their associated
public undertakings, have amounted since the beginning of 1925 to the equi«
valent of about 1,600 million reichsmarks, approxinately the same as the
foreign loans of German business and industry.

Until recently, at least,

additional loans appear to have been under negotiation between the States
and communes and foreign bankers, up to a total of perhaps a further 1,000
millions.

These foreign borrowings have made heavy drafts on the foreign

credit of Germany, and those of the States particularly have tended to raise
difficult questions under the Treaty of Versailles and the related provisions of the Experts' Plan, as I have already pointed out in my letter of







16

go into foreign markets to finance their budgetary expenditures
and internal improvements, they raise fundamental questions of foreign
policy which have the most direct interest f or the Reich.

And under

the Constitution itself the Reich has a unique opportunity and even
responsibility f or leadership, not merely because of its large transfers

of rfvenue to the States and communes but also because of its powereto
prescribe the fundamental principles and main outlines of their laws in
many matters of taxation and public finance.

The force of these consider-

ations has been recognized to some extent in the efforts that have been
made f or the past two years and more to supervise the foreign borrowings

of the States and communes through an advisory organization established
f or this special purpose.

These efforts, f or whatever reason, have not

been successful, and the results appear in the swollen figures for State
and communal borrowings that have already been given.

A new and truly

effective supervision, based primarily on the principle of controlling

public expenditures, is urgently needed at this time, both in the interesto
of German credit and to safeguard Germany's economic recovery against the

dangers of over-stimulation and subsequent reaction as a result of overspending and over-borrowing by the public authorities.
The German Ceovernment's announcement of 0 ctober 7, 1927, is

greatly to be welcomed, not only because it indicates that a revised procedure f or supervising the foreign borrowings of the States and communes

is under consideration, but also because it points out the sound basis for
financial reform by stating that "in view of the entire present situation

in Germany any expenditure that is not urgent or economic, whether made










19

volume of Reichsbank credit and the total German circulation to the highest
points since stabilization.

The 7 per cent rate fixed on October 4, 1927,

recognized this situation and was itself the consequence of events which
dated back to the spring.
The financial authorities of the Reich, the States and the comp-

munes, by working at cross purposes with the Reichsbank, have made the whole
situation more difficult to manage and have contributed to the expansion.
The part played by rising budgetary expenditures and borrowings by public
authorities, involving heavy drafts on credit both foreign and domestic, has
already been discussed.

The Reich internal loan of last February, further.-

more, was of peculiar importance, not only because it put an end for the
time being to the domestic Earket for new issLes, but also because its
terms and market price furnished an additional obstacle to a timely revision of the Reichsbank's discount rate.

The various steps which have been

taken to manage the loan in the market since its issue have been expensive
and on the whole ineffective.

Another disturbing influence which must be

mentioned is the management of the public funds and the public banks, which
has been discussed at length in each one of my published Reports.

It is

unnecessary now to go into detail, but it is clear enough on the facts that
the administration of the public funds and the public banks has tended very
strongly to diminish the authority of the Reichsbank, and to deprive it of

resources which it needed in the general interest of the stability of the
German currency and exchange.

It has tended, no less directly, to deprive

the regular German banking system of its normal resources and to divert
,treat quantities of liquid funds into channels which ran counter to sound
credit policy.







11)
21

41.

credit at home and abroad, her industries have been reorganized and her

productive capacity largely restored, her supplies of raw materials and to
some extent her working capital have been replenished, and the general

standard of living has greatly improved.

This has been achieved primarily

through the industry and energy of the German people, but the people of

other countries have also co-operated by making their savings available in
liberal measure for the rebuilding of the German economy.

It would be

deplorable if what has been accomplished should now be imperilled by short-

sighted and unsound internal policies.
From the standpoint of the Experts' Plan, it is only natural

as

I have said, for the creditors of Germany to feel that reasonable prudence
in the management of the public finances is a necessary element of goodwill;

and it would not be surprising if outside observers should draw the conclu-

sion that the financial policies followed in the past year have not been in
the interest of Germany's reparation obligations under the Plan.

The payment

of the stipulated annuities to the Agent General for Raparation Payments at
the Reichsbank constitutes, it is true, "the definitive act of the Getman

Government in meeting its financial obligations under the Plan;" and the
payment of these sums is amply secured by the assigned revenues and other

specific securities.

But the responsibilities of the German Government do

not end with the internal payments.

The Experts' Plan, though it put the

transfer of reparation payments in the hands of the Transfer Committee,

recognized clearly that the problem of transfer would depend in large
measure upon conditions outside the control of the Committee.

It placed a

very definite responsibility upon the German Government by providing that

"The German Government and the Bank shall undertake to facilitate in every




22

reasonable way within their power the work of the Committee in making
transfers of funds including such steps as will aid in the control of
foreign exchange."

The Experts also emphasized in the strongest possible

language the dependence of the stability of the German;-exchange upon

Germany's balance of payments, and, in the long run, upon the course of
German imports and exports.

To the extent that German exports are

hindered by obstacles interposed from without, other countries must bear
the responsibility; but upon the German Government itself must rest the

responsibility for actions of its own which tend artifically, by overstimulating imports and hindering exports, to restrict the possibilities
of transfer.

All these considerations I am endeavoring to point out in good
season, in the hope that their importance will commend them to the attention
of the German Government, and that in the interest of the German economy
itself, as well as of the discharge of Germany's international obligations,
the German Government will take prompt and effective measures to meet the
situation.

Fortunately, as stated at the outset, the situation has not

yet become critical, and the German Government still has it within its
power, if it will act in time, to check the dangers which now threaten,
and to bring the German economy back again to a sound conditions




(signed)

S. PARKER GILBERT

Agent General for Reparation Payments

4

THE AGENT GENERAL
FOR REPARATION PAYMENTS

AGENT GENERAL
DES PAYMENTS DE REPARATIONS

BERLIN
33 LUIS ENSTRASSE

PARIS
18 RUE DR TILSITT
TaLHPHONE: WAOHAM 21.22-21.23

TELEPHONE NORDEN 11000-11910
TELEGRAMS: AGENTREP. BERLIN

TELHOIRANIMES : REPAO E NT. PARIS

BERLIN,

November 14, 1927.

PERSONAL AND CONFIDENTIAL.

May dear Governor:

I should appreciate it very much if you could send me a
wire as

soon as you

Algeciras.

decide definitely about

your

proposed trip to

I am still undecided about my own Christmas plans, and

under present conditions I am rather doubtful as to whether it will
be possible for me to leave Berlin for a long enough time to make
the trip to America.

The question whether you are going to be in

Europe or America will be an important factor in the final decision,
and I should be much more likely to make a short trip home if I
found that you were going to be there.
I should plan to sail, if at all, on the Leviathan on the
15th of December, and to return to Europe by the Aquitania sailing
on the 6th of January.

With best regards, I am,

Faithfully yours,

Benjamin Strong, Esq.,
Governor, The Federal Reserve Bank,
33 Liberty Street,
New York, N. Y.



O

THE AGENT GENERAL FOR REPARATION PAYMENTS

BERLIN, July 10, 1928.

PERSONAL AND CONFIDENTIAL.

My dear Governor:
I received your letter of July 4, 1928, and thank you
for sending me the enclosed schedule of your probable engagements at
Evian.

I have been uncertain about my own plans until I heard
from Mr. Mellon, but I can now tell pretty definitely about the prospects for the next three or four weeks.

I do not see any chance of

coming to Evian, and I am afraid that we will have to count on meeting
somewhere else, perhaps in Paris.

I am leaving Berlin on the 15th of July for Paris, and I
have three meetings there on the 17th, 16th and 19th,successively.

The meeting on the 18th is a meeting of the Reparation Commission, and
it will involve, among other things, a long discussion on the finances of
the German Railway Company.

While in Paris I hope to have the oppor-

tunity for good talks at the Bank of France and also at the Finance

Ministry and the Foreign Office, and I shall probably remain until the
end of the week for that purpose.

After that, I shall probably join

Mr. Mellon for a week or two on the seashore.

He sails, as you probably

know, on the 11th of July, and he is planning to stay only a relatively
short time on this side.

I hope, therefore, to join him at the end of

next week, though it is just possible that I may have to come back to







f,..tiolsein

THE AGENT GENERAL FOR REPARATION PAYMENTS




?Liao

- 2

Germany must be prepared to pay, and to pay high,for the sake of getting a
settlement.

I think it is clear also that in order to get a settlement

Germany must depend largely on the use of her credit.

It is vitally im-

portant, therefore, to keep Germany's credit at the highest possible level
and to deal with the whole situation while her credit is unimpaired.

This,

to my mind, shows the great dangers involved in the policy of waiting for
transfer difficulties or a transfer breakdown, since then Germany's credit
would tend to disappear and the essential material for a settlement would
be lacking.

In such circumstances, moreover, there would be the gravest

danger of a new reparation deadlock, since the people on the Allied side
who could not refuse, and might even welcome, a constructive settlement in
the present atmosphere, would probably ask for a further period of trial, or
perhaps begin speaking in terms of German bad faith, in case there should be
a threatened breakdown or any real crisis.

Germany, moreover, would suffer

most from any new deadlock, and her credit would be terribly difficult to restore again after having already been twice destroyed during the past fifteen
years, first by the war, and then by the inflation.

I think that Schacht is likely to be less farsighted in these
matters than one might suppose and that he might even do great harm by ranging
himself on the side of those who prefer to follow a passive policy of waiting
until something happens to force a change.

He is in some danger, moreover,

Of being led astray by his personal feelings, partly by his jealousy of some
of the political leaders and also by his general lack of sympathy with the
Socialists.

In this connection, I enclose herewith an English translation

of the Government declaration that was read to the Reichstag last week by




- 3

the new Chancellor.

On pages 4 and 5 you will find some general remarks

which put the new Government on record as favouring a definitive solution
of the reparation problem as soon as possible.

The Government's statement

on this subject impresses me as both dignified and reasonable, and I think
it is really important for the future.

I am not sure what Schacht would

say about it, but I think he will be tempted by his own feelings to underrate its significance.

I mention all these things to you moat confidentially in the

thought that they may give you some helpful background for the purposes of
your talks with Schacht.

I do not believe you need to raise the question

with him, but you can do a great deal to keep him on the reservation in case
it comes up for discussion.

Faithfully yours,

Benjamin Strong, Esq.,
c/o Hotel Royal,
Evian,aes-Bains, France.
1 enc.





1.1.9.30


44 440A64.4A-

7.;414;

DCC. 296







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The success of all efforts toward the definitive solution

but also possible.

of the reparation problem will depend upon their beinghandledtyall those interested

with the necessary measure of far-sightedness and upon their being carried out
in accordance with methods of mutual understanding, with a sound economic
policy and naturally with the assurance of a reasonable standard of living
of the German people.

Germany, for her part, will not fail to collaborate

loyally in order to bring to a final conclusion a question which is of the
greatest significance both for the German economy and also for the world economy
Foregoing special mention of the other tasks of our foreign policy
arising from our relations to the other countries,
questions of domestic policy.

I shall now turn to

Execution of the Experts' Plan, reconstruction

of the world economy and the interests of the German national econony itself
demand in equal measure the facilitation and the cultivation of trade.

In the

words of the Experts themselves, the reparation payments can be made in the
long run only out of genuine surpluses of the German economy.
economy is suffering from protectionism.

The world

The German economy requires for its

complete unfoldir; the development and intensification of its relations with
the world economy.

Consequently, the Reich Government will support all efforts

tending toward this end, and will itself use its strength to fortify German
economic forces through the cultivation and expansion of world economic activitz
(Bravos

from the Socialists.)

The new Reich Government associates itself with the unconditional recognition of the results of the World Economic Conference at Geneva by the
previous Reich Government.

For its part, it will aim at their materialisation

and energetically participate particularly in the work of lowering, through
international agreements, the customs tariffs which were increased practically
everywhere after the war.




(Very true!

from the Socialists.)




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8

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DOC. 296.

One of the most important and first tasks of the definitive Reich
Economic Council will be to discuss proposals for the further execution of
Article 165 looking toward an increasing participation of workmen in the whole
economic development of productive resource

(Bravo! from the Socialists.)

The creating and guaranteeing of fruitful collaboration will be aimed at
in all fields which are accessible to such collaboration.

This must be done

also in relation to the German border areas which, as a result of their situation, are exposed to a series of special difficulties and therefore require increased relief.

The practical consequences must be drawn from the idea that

the economy of these areas forms a unit, equally important for all, with the
more favorably situated portions of the country. (Bravo: in the middle.)
There is no isolated economy of individual districts but solely a united
German economy. (Loud cries of Bravos

)

Likewise it is necessary to guarantee an adequate equalisation and treatment on a uniform basis to the various economic interests which within the
Government are entrusted to various ministries for technical reasons and reasons
of organisation.

The Government will take care in this regard to cultivate

close collaboration between the individual Governmental offices and to adhere
to uniform fundamental ideas.

The distress of large circles and areas of German agriculture continues
undiminished.

The restoration of the profitableness of agricultural enterprises

is the pre-requisite for their maintenance and thus for the maintenance of the
German rural population which the German Reich so indispensably requires in
the interests of its economy and of a sound structure of the German people.
Any permanent weakening of agriculture as a purchaser on the domestic

market would not be without effects on industry and trade. (Very true! from
the Socialists.)




Likewise increased migration'from the rural districts, which




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with the States, it will aim particularly at a reduction of the costs of
settlement in connection with the purchase of land and with the building of
farmhouses and at a simplification and cheapening of the procedure.

The Reich

Government will devote ita special attention to providing long-term credits for
agricultural settlement. (Bravo! from the Socialists and in the middle.)
The social policy of the post-war period is one of the most important
problems of our domestic policy;

but it is also influenced by international

social policy and on its part exerts an influence far beyond the limits of our
own country. (Very true! from the Socialists.)

The Reich Government intends to ratify the Washington Agreement on the
eight -hours day (Bravo! from the Socialists) and in the international negotia-

tions it will collaborate with all its force in the

uncertainty

which at present exists concerning the revision of this agreement and in the
removal of the hindrances which stand in the way of its general ratification.
(Bravo! from the Socialists.)

It will shortly (Cry from the Communists:

Shortly!) present to the Reichstag a bill for a law to protect workers, which.
has already been passed by the Reichsrat, and also the draft of a miners' law,
which is necessary for its supplementation.

The regulation of working hours

contained in these laws is based on the eight-hours day, avoids economic
impossibilities and social injustices (Contradiction from the Communists) and
corresponds to the Washington Agreement. (Laughter among the Communists.)
Of the remaining fields covered by the bill for the protection of workers
particularly the social protection of the youth and the settlement of labor
supervision require the greatest attention. (Bravo! from the Socialists.)
The Reich Government considers a uniform development of the authorities
for supervising labor and their uniform activities under an expert central
authority equipped with the necessary powers, with participation of the




S

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- 14 -

employees, indispensable in the interests of effective labor protection.
(Renewed cries of Bravo! from the Socialists.

Cries from the Communists.)

Aside from the law protecting workers, there must be furthered above all
the revision of the decree on seamen, the tariff agreement law and the general
labor contract law, (Cries from the Communists: The arbitral system!) in order
to conclude as soon as possible the uniform labor legislation promised by the
Constitution.

The law on the provision of employment and unemployment insurance adopted
in the summer of last year has placed the organisation of the labor market on
a new basis.

The Reich Institution for Employment ecad-Lr Unemployment Insurance;

is still in process of amplification.
incorporated as yet.

The local unemployment offices are not

In the country they must in many cases be newly created.

The omissions of past decades must be repaired here.

Only when this has been

done, will it be possible reliably to judge the effects of the new law.
(Cries from the Communists.)

A question which must be settled in due time

before the winter is the status of seasonal laborers in respect to unemployment
insurance, to which end the organs of the Reich Institution have the necessary
powers.

They will make objective use thereof just as they have already done

in other, not less difficult, questions.

In this respect the Reich Government

will most emphatically support them.

Emergency relief has already been prolonged beyond July 1st.
time there have been a number of further measures to meet the stagnation on the
labor market which has been making itself noticeable of late.
Government will continue in this sense.

The new Reich

Furthermore, the period of emergency

relief to older employees and laborers is to be prolonged beyond the present
limits. (Bravo! on the left.)

This can be done by decree.

It will further-

more have to be examined whether the harsh dismissal of older employees can
effectively be curbed.




(Very right! on the left,)




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insofar as general economic conditions and the condition of the capital market permit.

Fruitful work, in the field of foreign,

economic and social policy

is possible only on the foundation of a solid political structure,
(Loud cries from National Socialists:
which ie our Weimar Conetitutic".
Democrats.

Very true!)

the basis of

(Warm approval from the Socialists and
It is the chief task of the

Laughter among the Communists.)

Reich Government to develop our State in a democratic sense on this basis
and to demand the honoring and respecting of the republic and its symbols.
(Animated concurrence among the Socialists and Democrats.
from the Communists.)

Laughter and cries

It will present to the Reichstag without delay the

a

initiative bill on Constitution Day which has been adopted by the Reichsrat.
(Disturbance and cries among the National Socialists.
the Socialists.

Continuous disturbance.

It goes without saying

Counter cries from

President's bell.)

that the Reich Government will protect the

Constitution against any illegal attack, from whatever quarter it may come,
with all the means at its command.

(Very true!

from the Socialists and

Democrats.)

In this connection the Reich Government relies on the loyal collaboration of the officials.

It will take pains to guarantee the rights of

officials and to further their interests.

Supplementing the resolution

already adopted by the former Reichstag on a maximum limit of pensions, the
restoration of such a maximum limit and the questions connected therewith
will be examined.

(Cries from the Communists:

"Will be examined!")

The

Government will devote its special attention to a settlement of the legal
position of ministers and the creation of a new law on Reich officials, in
which the decree on official penalties, which was not settled by the former
Reichstag, will be incorporated.

Also the passage of the law for which

reservation was made in Article 130, paragraph 3, of the Reich Constitution,







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S

This will require the greatest care, whether it is general economic policy
or the borrowings and expenditures of German public bodies that are under
consideration.

It has been possible to arrive at a settlement of loan

policy which has been made in close contact with the public bodies concerned.
In future also foreign loans seem desirable only if they correspond to the
economic principles of productivity and profitability.

The Government agrees with the conference of the States and with the
whole nation that the present settlement of the relationship between the

Reich and the States is unsatisfactory and requires thorough reform. (Very
true: from the Socialists.)

It approaches this vital problem in the con-

sciousness of the necessity of a strong Reich power, of the significance of
the manifold pecularities

national life and of the requirements of

the most economical financial practices of the public budgets.

It will

endeavour to arrive at a satisfactory solution in close collaboration with
the States.

The creation of a Reich administrative court as the next step toward
simplification will be emphatically furthered.

Fundamental agreement with

Prussia has already been reached to the end that the Prussian Supreme
Administrative Court is to be merged with the Reich Administrative Court.
Ladies and Gentlemen! the declaration of the new Reich Cabinet as put

before you shows you that we earnestly and sincerely desire to solve the
great tasks assigned to us with all the strength at our disposal.

But the

exhaustive program we have set for ourselves cannot be put into effect unless
there is an end to the era of crises and until the political situation is so
firm and consolidated that the whole energy of the Reich Government can be
concentrated on the fulfilment of its functions.




This is the unanimous wish




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Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102