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7.11. 25


He seemed very glad to see me;

expressed a good deal of concern

about Mrs. Morgan's illness and the effect it might have upon her health
permanently, and upon Mr. Morgan.

After the usual complimentary exchanges, I asked him if he would
mind telling me something abcut the labor and trade situation;

that we had heard

so much about bad trade in England, about the difficulties with labor, etc., that
it was giving us some concern, and I had wondered at times whether there might be
some exaggeration of the type which we find at times in a country like England,
where they are always willing to face the worst of the situation and state it.

Ho said that in point of fact the trade situation was bad, and causing them considerable concern;

that the difficulties with labor were spotty at the

present time, the coal trade presenting the greatest difficulty.

He said that they

thought they would face a struggle with coal labor, but that this was a time when
they could afford to do so, when the demand was slight and stocks of coal on hand

He expressed himself as hopeful of a successful outcome of the

negotiations for the security pact, although again that would prove to be a very
difficult negotiation indeed.

I asked him if he regretted the debt settlement, and he said that

while the service of the obligation was always a matter of concern to them, and
the difficulties would likely increase rather than decrease while British trade

was so bad, he did not regret the settlement and that the advantages ofthe
generally changed attitude in America toward Great Britain, of which that was
largely the cause, more than offset the purely fiscal difficulties involved.

He was anxious to know how I felt about the prospect of settlement
of the debt questions with the allied countries, as they describe France, Italy,
and Belgium, to which I replied that I had left too soon really to be conversant


7.11.25 - Interview with Stanley Baldwin, Continued

with what was taking place, but that I still feared that the French proposals
especially would be of a characterthat wculd leave the negotiations scmewhat up

in the air, unless, indeed, the monetary and fiscal crisis in France was of a
character which impelled them to make a real settlement and a real adjustment of
their domestic difficulties.

He expressed the keenest appreciation of the result of the negotiations
between Norman and myself looking to the resumption of specie payment;

said that

they had had quite a battle with some of the opposition to immediate resumption,

but, on the whole, he thought it had gone with greater success than they had
He thought that the strong gold position of the Bank was a sur-


And he also said that he had occasion recently to make a statement in

the House of Commons in which he had spoken very frankly his belief that this

arrangement and other arrangements of similar character which were necessary
in such affairs were possible because of relations of mutual confidence, which
had peculiarly characterized the relations between himself, Governor Norman,
Jack Morgan and myself.

He exacted the promise that I should have another visit with him
when I go back.





LONDON, JULY 7. 1925.

After leaving Mr. Baldwin, I went to the Embassy and found Fred
Sterling there, but the Ambassador engaged.
some engagements.

He said to wait and he would cancel

Meantime Bill Phillips, our Ambassador to Belgium, came in,

whereupon Mr. moughton cancelled all of his engagements and we spent the morning
together until nearly one o'clock.

The first part of the talk had to do entirely with the negotiation
of the proposed pact.

Mr. Houghton had just seen Austin Chamberlain, the

Foreign Minister, and went over all the ground with Phillips so that he would be
conversant with it on his return to America.

The substance of it, leaving out

the great mass of detail, was that Germany had made a proposal to the trench
which should apply to middle European peace.
I recall them, were - (1) mutual compact for France and Germany nct to attack
each other, (2) Germany was to be left free to negotiate for the absorption of

Austria, for the rectification of the eastern frontier, and for the rearraigement of the situation in Upper Silesia, where the big coal areas are;


obligating hereself not to resort to war or military measures, but to diplomatic

mgotiations, possibly with the assent of the powers;

(3) England would retain

entire freedom of action, her obligation of guaranty being to take sides with

either Frame or Germany in case willfully attacked by the other, and to use
influence, without guaranty or other obligation, to maintain peace on the eastern

This proposal by Germany England believed could be put into workable
shape, but the Frenchhad dispatched a reply to Germany which was highly legalistic

and contained conditions which Germany would find it impossible to accept,one being absolute obligation by Germany to respect the present frontier lines on the


- Conversation with Mr. Houghton, Continued


east, and reserving the right of sanction, which I gathered principally meant the
right to send troops through Germany for the defense of Poland in case of war with



Germany would join in the guarantee of present western frontiers.

Mr. Houghton felt that Germany was in danger of making the serious
mistake of meeting the French on their own grcund of highly technical, legalistic
discussion in their reply, raising all sorts of objections, which would have the
effect of giving Germany the appearance before the world of raising obstacles to
the pact which contains the germs of real peace in middle Europe.

A large part of the discussion had little bearing upon our affairs, and
At the end, however, Mr. Houghton said that he wanted to

need not be included here.
talk with me further.

I had to leave to keep an appointment at the Bank, but under-

took to meet him at his house at 5:00 o'clock, which I did.

He then outlineC a

plan which he was reducing to writing for a general agreement among the nations
which would open the door to a very extensive military disarmament, - to include
the United States, Nngland, France, Belgium, Germany, Italy and Japan.

He was

working it up for the President, believing that the only hope for some universal
plan of disarmament would be some scheme of this sort, undertaken under the auspices
of the President and at his initiative.

He then gave me a long description of conditions in Germany, and something of personalities.

As to the latter, he said that Hindenburg had proved

to be a level-headed, sensible president, with a very high sense of honor.


difficulty arose in getting candidates and the nationalists approach& Hindenburg
he at first declined summarily.

On second approac

urgency, he replied that he had given a personal oath of allegiance to the Kaiser,

and under those conditions it was impossible for him to become a candidate and take
the oath of allegiance to the republic.

He was then persuaded that he

in his position and went personally to the Kaiser to be released from his oath,
which the Kaiser granted him.

And when he was elected he took the oath to the


7,11,25 - Conversation with Mr. Houghton, Continued

( 3 )

and Mr. Houghton said thereby he gained the confidence of the great


mass of people who otherwise would have had no confidence in him whatever.


He spoke very highly of Dr. Luther, Chancellor, but regarded the rest

of the cabinet as men of small caliber, some of them, in fact, being bureau chiefs

who had been given cabinet positions because of the diffie lty of getting men of
the usual type.

He said that Dr. Schacht had gained a great position for himself;


he was very able and resourceful and was earnestly devoting himself to real work of
reconstruction and to carrying out the Dawes Plan;
with the Government;

was very vain;

and had a predelection for makin

speaches, some of which were very indiscreet;

with him, not always with success.

that he had great i

that his friends had remonstrated

He thought it was an excellent thing for me

to meet him, and that it would help him by strengthening his influence.
Mr. Gilbert, he said, made a great impression in Germany;

his report,

as well as his actions, were regarded as strictly neutral, unprejudiced, and fair.
So much so


indeed, that President Hindenburg had sent for him recently and told

him this personally, and thanked him.
He spoke very highly of the work that Shepard Morgan is doing.

Also he said that Dr. Schacht was very much under the influence of
Governor Norman, which spoke well for the outlook for the Reichsbank.

Then, when it came to a discussion of the political situation, he
went over the points mentioned at the morning meeting and asked me if I would
find opportunity, if it came in conveniently, to tell Dr. Schacht that in his
opinion it was most important that the German reply to the trench note should

avoid raising all sorts of objections which would enable the French to say
"There are the Germans again rejecting the opportunity for a peaceful adjustment
of affairs;

they are always to blame,"

I told Mr. Houghton that this was

somewhat outside of our line, but I might have opportunity to drop a hint to
Dr. Schacht on my own responsibility, or possibly as coming directly from Mr.



Conversation with Mr. Houghton, Continued


I gathered from what Mr. Houghton said as to conditions in Germany,

tik ,. was definitely impressed with the fact that political tranquility was now
possible in a domestic sense;

that Germany would suffer to a considerable extent

as the result of the loss of the discipline that was imposed upon all of the men
of the nation by army service;

that that was the kind of training they were ac-

customed to and needed, and that on all hands he had heard regrets expressed, even
by the poeple of the lower class, that they no longer had the advantage of the kind
of training and discipline which the army afforded.

He felt that the period of self

denial, economy, heavy taxation, etc., which they were now facing, with inadequate
supplies of capital, and with this change in the preparatory training of young men,

would give them a period of rather bad times, but that the industrial establishments were in apple pie order, with immense facilities for production, and when they
emerged from the readjustments now impending they would be a severe and probably
successful competitor for the world's trade.

He thought that the reports indicated an excellent crop outlook for
this year, with less need for buying food abroad.

But that was almost the only

particularly favorable development of the moment.

This conversation bears so directly upon the discussion at luncheon
at the Reichsbank today (July 11, 1925) that I will skip directly to our m eting
at luncheon, when Governor Norman and I joined Dr. Schacht, the Chancellor, Dr.
Luther, and the Minister of Foreign Affairs, Mr. Stressemann.


yoRK7.11, 25




Reichsbank Position:

The new bank law requires the Reichsbank to maintain a reserve against
its note issue of 405, of which 305 must be gold, and 105 may be divisen.
The position of the Bank, the economic situation in Germany, and,

ultimately, the success with which transfers may be effected under the Dawes Plan
depend, in a monetary sense, entirely upon developments in the note issue, the
reserves, and especially the divisen of the Reichsbank.
The status today is as follows:
Gold Held at the Bank


to which add
Gold Received from Norway
as the result of settlement of
the Herring Account



Gold just Purchased from the
Bank of Switzerland


Gold actually Held Abroad



M. 1,118,000,000

The Divisen Account stands as follows:
Balances Held Abroad in Banks
Subject to Immediate Withdrawal
(This is the amount shown in the
Reichsbank Statement)



Allowing for certain changes which were taking place at the time the
figures were given us, the reserve position as of a few days previous showed
roughly M. 1,460,000,000 gold and divisen against nearly M. 2,500,000,000 notes,
or about 585.

In addition to the divisen shown in the statement, the Reichsbank
holds bills and investments abroad which are not subject to immediate call,
but may be gradually made available, amounting to M. 302,000,000.

This appears

in sundry of their accounts, and is the reserve out of which demands for foreign

FEDERAL RESERVE BANK OF NEW YORK7 .11.25 - Conversations with Dr. Schacht, Cont'd
Reichsbank Position (cont'd)

payments are now being met


by Germany, which are gradually reducing available supThe

Otis of divisen at the rate of from M. 7,000,000 to M. 10,000,000 a week.

loss, however, has been much more rapid than this during the past few months, being
no less than M. 420,000,000 between April 15 and July 12.

An inspection of the large reduction of M. 420,000,000 makes it appear
that this is not as serious as the figures would indicate.

which he had on hand early in the year, he was obliged to pay 5,000,000 sterling
to the Bank of England in repayment of their loan;
in settlement of the herring account in Norway;
up the Stinnes embarrassment;


something like 45,000,000 marks

about 22,500,000 marks to clean

and possibly one or two other payments on Government

The balance, therefore, represents the normal drain on the divisen

account due to foreign commercial debt repayment and purchases of goods in foreign

While the present position of the Reichsbank does in fact show a reserve of 585, the theoretical position should be figured differently.

The law requires that the Rentenbank shall gradually retire its note
issue, as I recall, at the rate of M. 120,000,000 per annum;
are retired, Reichsbank notes must be issued in exchange.

and as those notes
The Rentenbank has

M. 1,800,000,000 outstandjng, making the total circulation of Rentenmarks and
Reichsmarks M. 4,300,000,000.

And in order to maintain the 40% reserve

ultimately against what is at present "actual" circulation, the Reichsbank would
nee... to hold M. 1,300,000,000 gold and 433,000,000 divisen.

It will be seen

that the Bank is some M. 200,000,000 short of gold, and is likely to be short of,
divisen unless the exchange should turn in Germany's favor.

The real difficulty about the note issue, therefore, is not apparent
on the surface.

The only way in which the Reichsbank can acquire gold in order

to build up its 30% reserve is to convert divisen into gold, and the supply of


- Conversations with Dr. Schacht, Cont'd


Reichsbank Position (cont'd)
divisen is being gradually, and until recently very rapidly, reduced by demands
to pay for goods and to pay debts abroad.

Therefore, the only way in which pr.

Schacht can maintain the reserve position of the Reichsbank will be to effect
such a restriction upon credit (that is to say upon note issues) that his actual
reserve requirements will constantly be reduced as his supply of divisen becomes

It seems to be overlooked that this involves a reduction of M. 2,500,000

note issue to compensate for every loss of M. 1,000,000 divisen, - a somewhat
similar position to that of the Federal Reserve System.

There is also a great deal of misunderstanding abroad as to the whole
system of payments and reserves in Germany.

The commercial banks do not carry

large balances at the Reichsbank as the use of checks is exceedingly restricted

and the 450 branches of the Reichsbank, which cover every part of Germany, give
all the commercial banks and their branches ample facilities for getting notes
whenever desired.

They rely entirely upon the Reichsbank.

The system of payments (other than by bank notes) is entirely through
the giro system.

All large payments and financial payments are made through the

giro system of the Reichsbank;
system cf the post office.

and all small payments are made through the giro

Before the war, the Reichsbank habitually required

large balances as compensation for making giro payments.

the necessity fcr an economy

But the war imposed

of credit which resulted in the Reichsbank instituting

a system of cash charges instead of balances, which reduced the need for carrying
balances at the Reichsbank;

and the post office required simply a minimum bal-

ance as a general rule of only M. 5.

The post office funds, nevertheless, on

account of these deposits and other funds, aggregate over M. 500,000,000.
It will, therefore, be seen that the great bulk of the credit operations of the Reichsbank result in increases or decreases of the note issue,
rather than in changes in the deposit account;

and that the heavy burden of


7,11.25 - Conversations with Dr. Schacht, Cont'd

Reichsbank Position (cont'd)

external payments, which depletes the bank's reserves, can only be effected under
pent conditions in case the bank is willing to impose such a restriction upon
credit that they can reduce note liabilities at the rate of 2-1/2 times the loss
of reserve.

Dr. Schacht tells us quite frankly (and stated the same thing to the
Chancellor and to Mr. Stressemann) that he is looking forward to a very severe
financial crisis in Germany because of this need for restriction of credit in
order to maintain the external value ofthe mark.
the value of the mark;

He is determined to maintain

and his only remedy is to curtail credit and keep the

note issue down, - in fact to reduce it - though it will mean a very sharp reduction of prices throughout Germany, unemployment, and a social crisis.
In his latest conversations, however, he did say that if the German
industrial establishments as a whole, including possibly German Municipalities
in good credit, were successful over the next year in securing long time loans

in America of from, say, $200,000,000 to $400,000,000, he thought he could see
his way clear to maintaining stability, avoiding too serious a crisis, and
giving the Dawes Plan a thorough-going, honest test.


In a subsequent talk with Dr. Schacht, confirmed by
Mr. Gilbert, I learn that the M. 45,000,000 paid in settlement
of the herring account in Norway was paid out of the divisen
held by the Government in a Government organization which had
accumulated foreign exchange during the inflation period, and
that, therefore, there was no reduction in the bank's reserve,
Dr. Schacht intimated
but a gold gain of M. 22,500,000.
to me that the balance of divisen held by the Government was
but that the
comparatively small, around M. 40,000,000;
Government had no further outstanding obligations abroad
of any consequence to deal with.
Further conversation with Dr. Schacht disclosed the
fact that the Government is obliged to retire M. 60,000,000 of
the M. 120,000,000 annual retirement of Rentenmarks, and the
and that in addition, all
Rentenbank the other M. 60 000 000.
of the surplus profits which would go to the Government are applied to retirement of Rentenmarks and even this does not consume all the profits of the Rentenbank which has now accumulated




.11.25 - Conversations with br. Schacht, Cont'd


Reichsbank Position
Notes (cont'd)

a capital out of earnings of M. 200,000,000, which, by the
end of the year will probably be M. 250,000,000 (Rentenmarks)


S,,a, Belgium


- Conversations with Dr. Schacht, Cont'd

Stinnes Affair:

The information I gathered about this came chiefly from Dr. Schacht,
sill from Mr. Von Siemens and a few others with whom I discussed it.

It seems that a few months ago young Hugo Stinnes, being the younger
brother, came to Dr. Schacht with a request for assistance to the extent of
Msqn,(100,000 or M.95,000,000, stating that he owed M.150,000,000, largely representing shnr+ time obligations given for the purchase of properties.
acquired mainly since his father's death.
they had decided to separate.

I judge these were

He and his brother had had disputes and

There seems to be some doubt as to who was responsible

for the fiasco, and as to which of the brothers, if either, had the brains.


is quite a young man, under thirty, and undoubtedly not qualified by experience or
ability to deal with the enormous situation which was left by his father.

It seems that the M.150,00,000 had largely been furnished by German
banks, some having been borrowed abroad.

Dr. Schacht told Stinnes that he regarded

the German banks who had facilitated his transactions as equally guilty with him in
a very unwise speculation, and that he would do nothing whatever to assist them;
that he must get the bankers together and work out a plan with them.

It resulted in a meeting at the Reichsbank, attended by some twentyfive bankers.

I guess Dr. Schacht gave them a good combing, and they then agreed

to extend the maturing loans, which he found, on inquiry, were not M.95,000,000
but M.120,000,000, the other M.30,000,000 representing foreign borrowings which
were maturing.

And Dr. Schacht required the bankers to put up the money with which

to buy divisen from the Reichsbank so as to pay off the foreign obligations and thus
avoid the shock to German credit which would have resulted.

Dr. Schacht says that the situation is not as bad as it appears to

In the first place, there will be no losses to either the banks or the public,

the only loss being a very large shrinkage in Stinnes' equities.

He had figured


his net worth at some M.350,000,000.

properties as rapidly as possible, in fact some have already been sold to pay

They are now

Sna, Belgium

"....9.a.)7 - Conversations with Dr. Schacht, ConL'd

Stinnes Affair /continued)

Stinnes s obligations out of the nroceeds, and he believes it will leave



a fortune of from,0n0,000 to M.1nn,r00,000, or even more, but will

nut him entirely out of the situation as a disturber.

Dr. Schacht was a good deal disturbed by some slight evidence of had
faith on -oung Stinnes's part.

Tt seems he went over to London, without a

word to Dr. Schacht about it, where he met Clarence Dillon, who offered to let him
have M.60,000,nOn 'say A2n,n0n,n00\ to clean un the affair, provided the German
banks would take care of the balance with second liens.

Dr. Schacht said it was

no situati^n to iustifir borrowing abroad, nor did the situation justify allowing

this Young man any -ossible way of again getting into trouble.

From what Colonel Logan said to me in London, I gather that Dillon
felt that some of the German barkers were trying to squeeze Stinnes a bit and make
a killing out of the wreckage.


Dr. Schacht gave me quite a different impres-

in fact that he was not proposing to have large credits arranged abroad

to a weak borrower, which would later cause trouble, but would rather clean the
situation up once and for all, and within. Germany.

There was some amusing discussion of this at luncheon at the

British Embassy, when Lord D'Albernon asked Dr. Schacht about the Esplenade
Hotel in Berlin, which he had heard was being sold, and which was one of the seven
cr eight hotels that Stinnes owned.

Dr. Schacht stated that he thought all

the hotels had cost about 2,000,000 sterling, but that they could be purchased now
from the Stinnes creditors for 1,00C,000 sterling, this notwithstanding the fact
that real estate values have had a great advance recently.
situation as to our own Embassy in Berlin.

One evidence is the

It is a large house on Wilhelm Platz.

Gerard paid a rental of M.4,000 gold originally for the place.

advanced cnce or twice until recently it got up to Y.15,000 gold.

The rent was
And Dr.


Schuman told me it was owned by one of the banks which wished to turn it over to
the President of the bank as his official residence, so that in order tc obtain

Spa, Belgium
7,22. 25 - Conversations with Dr. Schacht, Contid



Stinnes Affair (continued)

extension for a year, he would probably have to pay a rental of M.75,000.
On the whole, it struck me that the Stinnes affair had been handled
conservatively and well, and that it was much better to have it cleaned up as
Dr. Schacht proposed, than to have it the subject of some foreign exploitation.

Dr. Schacht said that two weeks now would see it all in good shape, with young
Stinnes so under control that he would have to behave himself.

Spa, Belgium
7 22.25,



Spa, Belgium 5 - Railroad Situation in Germany, Cont'd



thinks that their claims are extravagant.

Unfortunately, a dispute has recently arisen between the Dutch and the

APOermans in regard tc railroad rates, which cause' Dr. Schacht a good deal of embarrassment.

It seems that prior to the war the German Government had built some kind

of canal waterway along the Dutch frontier so as tc avoid rcuting a considerable
part of the railway freight to Dutch ports for shipment to America and elsewhere.
work was suspended because of the war.

Quite recently a rearrangement of rates

and routing was effected, by which a large part of the freight traffic for port
shipment was diverted to German ports, thereby depriving the Dutch railways of the

Without any preliminary word to Dr. Schacht, Dr. Vissering sent a

circular letter to all the Dutch banks advising them that in view of the discrimina-

tion against the Dutch railways, he thought it wculd be inadvisable to continue
German credits.

This did, in effect, result in a large withdrawal of credits

and quite a strain on the Reichsbank foreign balances.


ly discontinued were reduced to 30'/, or 407 of normal.

Those that were not entireDr. Schacht learned of it

only through some banker, who sent him a copy of Vissering's letter.

Of course,

as a matter of fact, the German Government had nothing to do with it, the arrangement was made by the railroad management, - now divorsed from the Government and was done in the interest of larger earnings, as Leverve told me himself.
it made a very bad impression, and is another one of those
which is taking place all over Europe.





Mr. Max Warburg and Mr. ter Meulen, of

Hope and Company, have taken the matter up in Holland, and they are hopeful that
a satisfactory adjustment with Vissering and the bankers can be effected.
the situation has been, nevertheless, a little strained.





7.1125 -Discussion at Reich sbank Luncheon, Cont d.

the 2-1/2% debt would bear no interest.

debt, I gather,


The payment of the principal of this

is deferred in some way until a subsequent date related to the

operation of the Dawes Plan, but that was nimentioned specifically.
Of course the revival of this debt, so far as it is held abroad, will
impose some strain upon transfers whenever the time comes for the payment of interest

or principal, and Governor Norman also feels that it will create a great outcry in
England, where a good many German Government obligations are held, because trading
in the German Government bonds on the stock exchange has been conducted as though
it were all of equal status and value, and if this valorization scheme goes through,

it will be found that they were really trading in two different classes of German
bonds without being aware of it, and it may give rise to a good deal of criticism
and disorder.

I think this is hardly justified when one considers that the period cf

bonds subsequent thereto 1920 resulted in purchasers of German Government
inflation commencing about July getting them at a nominal cost, so that even the 2-10%
will mean a profit;

whereas those who

held them continuously since before July

1920 probably paid a good deal more for them, and most of them, even at 5%, will
realize only a fraction of their investment.

Dr. Luther then launched into a general discussion of the pact and the
question of political tranquility in middle Europe.

I pointed out to him that

the attitude of financial people in America toward Germany, and toward Europe
generily, would be very much governed by the degree to which confidence was felt in
political conditions.

I reviewed somewhat the history of what had happened at

the time of Ur decision not to evacuate theuoio8Huarea, the Ruhr and the cities of
Dusseldorf, Duisberg and Rhurort, stating that every time developments of that
sort occurred, and every time anything like a disclosure such as that made by the

Military home, and made it exceedingly it sent a chill over the financial community
at Control Commission appeared, difficult indeed for any of the affected parties
to place loans in America.



Discussion at Reichsbank Luncheon, Cont'd.


That, he said, in his opinion, struck at the root of the whole problem
of recovery.

Without political security, and confidence in it abroad, Europe was

going to have a hard time.

I asked him what the prospects were of something coming out of the pact,
and he said that they had submitted to the French a very simple, concrete proposal,
embodying simply the principles,which he felt had a good deal of support in England;

that the French reply was a highly technical, legalistic document, exceedingly difficult to answer, and especially to answer so as not to give the impression that
Germany was balking peace.

He said it never would be possible to accept some of the

conditions laid down by the French, but he, nevertheless, was hopeful of a satisfactory
outcome of the negotiations, and that they were working diligently on an answer which
wouldbe dispatched, he hoped, in about a week.
I explained to him that I had no connection whatever with political affairs and was interested in them simply as being one of the conditions which affected
the operations of the banks of issue, and especially the relations which we might
endeavor to maintain with similar institutions abroad, like the Reichsbank and the
Bank of England.

He said this he understood perfectly and why 1 was interested

in discussing the question of the pact.

I asked him then, simply as a personal inquiry, whether it might not be
that the German reply would be of a character that could be misunderstood, or misinterpreted as indicating that Germany again was evading a move toward real peace.

And he said that the facts were so contrary to that, that he felt that it could be

He said there is nothing that Germany so eagerly and keenly desires as a

real peace with all of her neighbors;

not only that, but they were fully convinced

of the disinterested impartiality ofthe Dawes Plan, and were hoping that the Yrench
would but that if they could to make a serious effort to carry it out in its entirety;
give them opportunity not have security on their frontiers, it would be very dif-



7.11.25 - Discussion at Reichsbank Luncheon, Cont'd


ficult for Germany to reestablish her credit throughout the world and gain the aid

He expressed himself as delighted that I had made the trip to Berlin,
which is urgently needed.

and said that anything and everything that I needed in the way of aid or information

was at my command.

I had very little talk with Mr. Stressemann.



eAll iZD

July 13. 1925.

Herr Bankier Fritz Andreae

Fa. Hardy & Co.
Berlin W. 56
Markgrafenstr. 36

Herr Geheimrat Bernhard

Reichsbank, Berlin

Herr Professor Dr. Bruins

Reichsbank, Berlin

Herr Geheimrat Budczies

Reichsbank, Berlin

Herr Reichsbankdirektor Dreyse

Reichsbank, Berlin

Herr Geheimrat Friedrich

Reichsbank, Berlin

Herr Reichsbankdirektor Fuchs

Reichsbank, Berlin

Herr Hans Furstenberg

Geschaftsinhaber der Berliner
Berlin, W. 8 Behrenstr. 32/33

Exzellenz v. Glasenapp

Reichsbank, Berlin

Herr Jokob Goldschmidt

Geschaftsinhaber der Darmstadter-u.
Nationalbank, Kom.-Ges.a.Aktien,
Berlin, W. 8 Behrenstr 68/69

Herr Carl Joerger

Delbruck, Schickler & Co.,
Berlin w. 66 Mauerstr. 61/65

Herr Vizeprasident Kauffmenn

Reichsbank, Berlin

Herr Franz v. Mendelsschn

Fa. Mendelssohn & Co.,
Berlin W. 56 Jagerstr 49/50

Herr Direktor Nathan

Dresdner Bank,
Berlin W. 8 Behrenstr.

Herr Direktcr Sobernheim

Commerz-u. Privatbank
Berlin W.
Behrenstr 46/48

Herr Geheimrat Schneider

Reichsbank, Berlin

Herr Bankier Paul v. Schwabach

Fe. S. Bleichroder,
Berlin, T. 8

Herr Franz Urbig

Direction der Disconto-Gesellschaft,
Berlin W 8

Spa, Belgium
7 24.25 - List of Guests at Dr. Schacht's Luncheon
July 13, 1925, Continued


Herr Geheimrat Vocke

Reichsbank, Berlin

Herr Prasident Wagemann

Statistisches Reichsamt,
Berlin W. 10 Lutzowufer 6-8

Herr Staatssekretar Weismann

Preuss. Staatsministerium,
Berlin W. 8
Wilhelmstr. 63/64

Herr Kommerzienrat Millington-Hermann

Deutsche Bank,
Berlin W. 8

Herr Prcfessor Bonn

Berlin lc

Herr Gert Weismann

Sekretar des Herrn Prasidenten
Dr. Schacht, Reichsbank, Berlin.

Landgrafenstr. 6

Berlin, Germany,
July 11, 1925.
Dear Pierre:

It was my hope to be able to sandwich in a half day here
and there when it would be possible to write ycu some fairly long letters which, together, might form something of a narrative of my visits.
But sc far there has not been a moment to spare beyond what I took
to write you form London.
I shall, however, make some notes, and
those can later be worked up into something of a narrative.
Stewart is deLag the same.
Aside from visits with the folks whom you would expect
at the Bank in London, I had one very nice talk with the Prime Minister,
also a visit with Gaspard Farrar of Barings, who, as you know, is an
old friend;
and two long visits with Mr. Houghton.
The last was moot
interesting, as ho gave me a very illuminating account of the political
situation in Germany.
In fact he went out of his way, after we had
spent a morning together, to finish up by a couple of hours at his house
late one afternoon.
It gave me a fine approach to our talks with Dr.

To all left London by the 8:30 p. m. train on Wednesday
(and when I say all, I include a formidable array of luggage as wall);
crossed to the Hook of Holland that night and took thetrain there at
7:07 a. m. on Thursday; arriving promptly in Berlin at 5:40 p. m.
Thursday, after a very comfortable trip.
Dr. Schacht, Mr. Gilbert,
and Mr. Sterrett were at the station to meet us.
In fact, from the
time we left England until we reached the Adlon Hotel,everything possible
was dcne to make the trip easy as to passports, luggage, etc.
had reserved a magnificent suite for us at the Adlon, the coincidence
being that they are the same rooms that I had here in 1914.
Thursday evening we all dined with the Gilberts.
Friday monrind Norman and I went to the Reichsbank, and
never loft until after 7:00 o'clock.
And I am dictating this late Saturday afternoon after
spending the entire day at the Bank again.
Last night we dined with Dr. Schacht, and he had one of
his men, Dr. Bruins, there also, and Mr. Heineman of Brussels, whom I
think you know, then Norman, Stewart and myself.
Today the luncheon
party at the Bank consisted of the Chancellor, Dr. Luther, and the
Minister of Foreign Finance, Mr. Stressemann.
Tonight some of us are
dining with the Sterretts, but I am going off with Mr. and Mrs. Morgan,
and likely Dr. Stewart will go with us, for a little family confab.


Mr. Jay

Berlin, 7.11.25.

It seems a shame to write you at all and not give you something
in the way of information, but Ireally think it will be better to wait until
I have gotten it written out and corrected, and in something like orderly

TAlk shape.
On the way to the Bank this morning I stopped to pay my respects
to our Ambassador, Mr. Schurman who, as you know, is an old friend.
he literally grabbed me, insisting that I should stay long enough to have one
or two visits with him to talk over various t];inge; he having just taken up
his poet, and, I imagine, feeling considerably at sea.
The trip to Spa is fading away into the dim dietabce, not be!aus° we have abandoned the idea of a holiday, but because everyone unites
in saying that Spa is the wettest place in Europe, where you never see the
I am not sure
sun, and I told Norman that I wouldn't gc tc such a place.
Od where we will go.

We all keop well, and Mrs. Humphrey seems to be hawing a grand
Ame out of the trip, although I have abandoned her to her fate, and to
acme of my friends.
Please give my best regards to everyone at the bank.
If I get that skeleton from Harrison pretty soon, I can do some
work on it while on our holiday.
The only one
The enclosed clippings speak for themselves.
for which I accelA any responsibility is the one from the Berliner BorcenCourier, which was edited at the Reichebank and given out by Dr. Schacht.
Very sincerely yours,

Pierre Jay, Nsq.,
Chairman, Federal Reserve Bank of New Tcrk,
33 Liberty Street, New 'fork.


Berlin, Germany,
July 15, 1925.

Dear Mr. Case:

My last letter went to Mr. Jay, and I overlooked the
fact that it would arrive during his absence.
I am not sure whether
Miss Holmes would have opened it or not, so I am enclosing a tissue
copy of it.
Enclosed are a couple of newspaper clippings, in one of
which you will observe that our friend Willis is still taking a hand
in misrepresenting u§ibefore the public in his usual, graceful style.

And separately I am sending four copies of the report
of the Agent General for Reparation Payments, which will be a good
thing to have in the library.
It gives an excellent acco
ters bearing on transfers, etc, and it has made a very good impression
Gilbert is exceedingly well regarded, and has established
himself in everybody's confidence.

We have been so exceedingly busy trying to get all the
facts bearing on the position of the Reichsbank and the monetary and
credit situation, that I have not been able to keep up even with my
However, we are leaving Friday night for Spa, and there I
hope to reduce all of this material to something like a workable account of our trip to dates and I will send a copy to you.
Of course
it must be held in strict confidence , as much of the material is
given to us very confidentially indeed. I will try and mark those
portions which should be so considered.
Dr. Schacht has been the most hospitable possible host;
has answered all of our questions with frankness;
and has volunteered
a good deal of information which could not have been had from anyone
We have spent practically all of our time at the Bank, but
have also had opportunity to meet the Chancellor and some of his Cabinet;
as well as the British and American Ambassadors;
and, of course, Gilbert
and his organization.
Then one night we met ten or twelve of the leading bankers at Dr. Schacht's, after a small dinner party.
I must still defer giving you anything in the way of an
account of how things are here until the material is arranged.
Dr. Stewart is busy every day working along separate lines,
As he will not
and he will also have some interesting material.
remain as long as I shall, we have arranged for him to go to Amsterdam
to meet Dr. Vissering, while we are at Spa. Then he proposes to return
to London and finish up his work there; and to join me later in Paris.



Mr. Case

Berlin - 7.15.25.

Meantime, I will
absibly Amsterdam. But it may

Vissering goes to London lat

The trip to Prag
that I cannot afford without
at least, and I think it is
London at the time when Gove
One hop
exchange pressure.
seems certain to make this y
situation which are going to

I am enclosing a
number of the functionaire.
ing the shipment of some sma
Paris, and covers only the t
of the bill of lading (from
to this in appearance.
stamps on it, and each stamp
All ofthis, apparently, had
I understand t
M. 11:55.
resulting from the period of
industrial, and transportati

Please give my b
We all keep well, but
after the strenuous days her

J. H. Case, Esq.,
Deputy Governor,
Federal Reserve Bank ofNew Yo
33 Liberty Street, New York.



Berlin Consultations of the Bank Presidents

Berlin Tageblatt
July 14, 1925.


nkfurter Zeitung, July 12.

Interview of the Note

vernor Norman of that bank, for t long time conversant with German problems and
erman personalities, accompanied him on a journey to Berlin.
had no practical business or currency-tactics object, but instead the purpose of
drawing closer the present contact, and of talking over all subjects which to-day can
iterest the note bank heads of important countries that are related to each other
the general rearrangement of world and money economics.
Among those the Transfer
problem and the questions for the year 1926 are said to have been discussed.
conference lasted many hours and the parting was in a very cordial tone, if a chance
observer might judge.
They clearly gave each other full information, eespecially
was that done from the German side and conscientiously; they undoubtedly agreed
unanimously in their views and in the currency policy;
only in this way
understanding be secured for the case, that some time later - not now - international
financial questions of importance may be solved by mutual consent.
To speak of
credits and loans as a subject for the conference is naturally absurd.
It is amply
sufficient when the guests carry away with them a good impression of the commonsense
with which bank policy here is handled, and of the earnestness with which German
industry is striving to bring about its reformation and its readaptation.
convictions obtained personally alone can support be found for German private credit
abroad, which later, especially when lands come into contact again, are of greater
use than any present agreements, which would have to count on the difficulties of
foreign markets.

Dear Mr. Jay:

Spa, Belgium,
July 19, 1925.

Many thanks for your nice letter of July 3.
I am not surprised at what you write about Kansas City. That district,
and California, need stirring up on member bank relations as much as any, and I
hope your committee can get them started.
I shoul6 think he would
Traylor's interview struck me asexcellent.
arrange for its use in Chicago as that's where it would do most good.

My understanding of the charter plan is that if agitation continues
for recharter, amendments, etc., Congress be asked to pass a recharter bill
This was the matter that Stewart
right away, and take up the amendments later.
I do think the
and I cabled you about, and there isn't much to add to that.
scheme is an excellent one if the subject of recharter must be dealt with at
the next Congress.
I have read Willis' article, which was cabled to Germany and published

Doubtless the rumors have to do with
also the Whaley Eaton article.
what I of St. Louis
If the Journal of Commerce should be sold, I surmise that Willis
Federal Reserve Bank

must ask you all to be patient about replies for about a week or so.


Very siuxrely yours,
Spa, July 19, 1925.
Mr. Jay

and monetary matters, and that this was in line with what seemed to be a perfecto lay natural, normal, and spontaneous development since the war in the gradual drawing together of the banks of issue for the sake of mutual understandings.
In fact
it was quite likely that I would do something of that sort every year hereafter,
* and I was hoping that the heads of some of the central banks of Europe would visit
New York in like fashion.
I pointed out tc him that the gradual move towards
resumption of gold payment in Europe made it exceedingly necessary that we should
have first hand information and personal acquaintance with the men with whom we
would need tc deal as these monetary questions developed in importance and activity.





Si,a, Belgium,

July 20, 1925.
Dear Mr. Jay:

I have written Mr. Kenzel about one credit matter concerning which
Dr. Schacht spoke to me, and this relates tc another credit which I believe is
'44f considerable importance.

It seems that some time ago Harris, Forbes & Company had tentatively
negotiated a credit for one of the agricultural loan institutions, to be secured
Subsequently, a representative of the National City
by mortgages on farms.
Company (or the National City Bank) approached Dr. Schacht with the suggestion
Dr. Schacht succeeded
that they might consider making a loan to the Rentenbank.
in convincing the representative of Harris, Forbes & Company, as well as the
City Company's man, that they should join hands in the transaction, and that it
gshould take the form of an issue fcr the Rentenbank.


The matter had reached a point where the maximum amount of the loan
-flad been discussed as $100,000 000 a portion only to be issued at first. The
rate of interest had been almost agreed upon, being somewhere, as I recall, be
And I gathered from Dr. Schacht's statement that they were pre
tween 8 - 9%.
Close to an understanding as to the form of security, etc.


The status of the Rentenbank I gather to be as follows:

Upon the reorganization of the Reichsbank, this was promptly conver
into an agricultural credit bank, and loans made by the Reichsbank(which were
somewhat in exception to their general policy) to the farmers of Germany, secu
:py farm liens, were transferred to the Rentenbank to a total of some M.700,000
All the details of the transaction are not clear to me, bu
-Or M.800,000,000.
the result is that the portfolio of the Rentenbank now largely consists of the
'farm mortgage loans.

Dr. Schacht tells me that the business is very profitable, their
being, of course, a concession tc the rather urgent needs
'discount rate of
of agriculture fcr increasing production and reducing costs.
The capital is, in round figures, M.200,000,000, most of which, I
The earnings are now very heavy.
believe, has been earned.

Under the law resulting from the Dawes Plan, the circulation of the
Rentenbank, which is M. 1,800,000,000, must be retired at the rate of M.120,00
a year, M.60,000,000 by the Rentenbank, and M.60,000,000 by the Reich.
above the M.120,000,000 the Rentenbank pays large profits tc the Reich out of s
plus earnings, and these, I believe, are likewise applied to retire the Rent en
But even with these payments Dr. Schacht says that they will add M.50,000,000
this year to their capital and reserve out of earnings.

InArder that the Rentenbank may function more as an agricultural c
bank, and, 6/0ourse, in time retire as a bank of issue, a bill is now pending




Spa, 7.20.25.

Mr. Jay

It is expected to
the Reichstag providing for a reorganization of the Bank.
It is intended to fill the gap in their economic machinery
pass almost any day.
in such a way that the agricultural community can get credit which is badly needed;
lack of credit being one of the outstanding deficiencies in the German position
just now.

From what Dr. Schacht tells me, I should suppose that it would not be
difficult to arrange a well secured loan for the Rentenbank, which might indeed
The loan would be secured, I gather, by a statutory
sell quite well at home.
lien of 6%, the same as the Rentenmark, upon all farms in Germany having a value
In addition tc that, the individual farmers would be able
in excess of M.6,000.
to make mortgages, as I recall, up to a maximum of 25% of the value of the farm.
Now of course it must be borne in mind that there
points requiring careful investigation in connection with any
nor in fact many other features of the business, could not be
But I can, at least, give
in Berlin as time did not permit.
of their significance:

are certain specific
such loan.
studied by me while
a rough description

The Dawes Plan priorities as to foreign payments might be
capable of being construed as coming ahead of all private payments, and, therefore, if the operation of the Dawes Plan became wholly unsuccessful and transfers
could not be made without encroaching upon supplies of exchange for making private
payments, will the Agent General at any time insist that private payments be allowed to default in crder that the Dawes Plan payments may be made:
This is the same story we have so often heard, and Gilbert tells
I think
me that he is unable to give any assurances to anybody on that subject.
But the general provisicns of the Plan in regard to the mainhey quite right.
tenance of German economic integrity afford some protection, and certainly the
ability of citizens to borrow abroad for such a necessary purpose as the maintenance
of agricultural production can hardly be construed as wastage of resources.
The mortgage lien of the Dawes Plan, I gather, will net affect
But that, of course, needs to be investigated and understood.


the farmers.

The valorization law, which has passed, or is just about to pass
the Reichstag, will likely have the effect of reviving 25% of the nominal value
of mortgages on farms in Germany. And any such decision, without careful study,
would make it very difficult to determine exactly what position new loans will

My suggestion would be that anyone making a loan to the Rentenbank
would need to inquire, first, as to the Rentenbank lien for security of the Renten
second, as to the Dawes Plan lien for the security of the Dawes Plan payments;
and, fourth, as to the
third, as to the valorization lien of revived mortgages;
general position of the Rentenbank, - the appropriation of its capital, and whether
the capital must be maintained in its integrity after the new law passes.
As stated above, I doubt if anything can be done in the way of
assurances as to Dawes Plan transfers.
Now I have told Dr. Schacht that it seemed to me that he was wise in
securing a consolidation of the negotiations with these different concerns;




Mr. Jay

Spa, 7.20.25.

he was in thoroughly responsible hands in dealing with them;
and that were I at
lemma I would not hesitateto tell Mr. Mitchell that my impressions were quite favorable, with the understanding, of course, that all of these matters would be the subject of careful investigation and study, which doubtless has already been made.
111, may be that investigation will show that the legislation provides for a determination of the relations of the various liens, so that some of the questions mentioned
above will all be resolved by an examination of the law itself.
I am told by Gilbert, however, that these loans in America should
only be made anyway after careful advice as to the statutory position, because
this is sometimes complicated and requires the study of people who are fully informed.

As Germany needs long credits, and certainly cannot afford the hazard
of short credits, this is the kind of business which will be of real benefit. The
security is so diversified and the agricultural situation in Germany is now so
settled that my surmise would be that the loan would have ample security.
crop, this year, appears to be in first class condition.
As to that all reports
A large part of it is beyond the point where any damage can be done.
weather just now is perfect for the maturing crops, and I should suppose that a
a fortenight or a little longer would see them all safely matured, including oats.
There is one thing, however, which should be mentioned in this conThe whole economic and industrial situation in Germany is approaching a
crisis due to the shortage of credit, the policy of restriction imposed by the
Reichsbank, and the need of eliminating the mushroom growth of weak, poorly organized and under-capitalized enterprises, which simply ac'd to the cost of distributing
the product of the nation's industries.
economy in wasteful expenditure.
The period of inflation led to such distrust
of the paper currency, that people cultivated habits of spending it directly they
These habits have not yet been cured, and cannot be until after Germany
got it.
has had some housecleaning.
This Dr. Schacht has reiterated to me repeatedly.
He made the statement frankly before Luther and Stressemann.
And later I had opportunity to talk
it all over with Mr. Von Siemens, who stated to me almost exactly what Dr. Schacht
had said.
Upon inquiry of various people, I find that Mr. Von Siemens is one of
the most respected men in Germany.
He is the head of the big Siemens electrical
And I
properties, employing about 100,000 men in their plants around Berlin.
found him one of the most delightful men I have met.
Mr. Young can tell you
something about him.
I would rank his opinion very highly.
So you see the difficulties about the business are partly technical, and
partly those which will arise due to some crisis in Germany which might temporarily
It would be a
discredit German industrial and other private borrowings abroad.
purging process which Germany needs, and from which she will probably benefit.

Were I at home, I would have a talk with Mitchell quite frankly about
all of this, and, without assuming any responsibility, I think my attitude would be

than that for Lombard loans, of which they make very few indeed;
rate is 7%, being a special concession to agriculture.



and the Rentenba

Spa, 7.20.25.

Conservatively to encourage him to go ahead.
If you do have a talk with him about it, I wish you would cable me
41$ quite fully the result, and I will be glad to help with Dr. Schacht in any way that
I can within the limits of propriety.

Pierre Jay, Esq.,
Chairman, Federal Reserve Bank,
33 Liberty Street, New York.

I am frank to say that I cannot find a flaw in his attitude, with only a few
minor exceptions:

One is that he is undoubtedly an exceedingly vain man. This does not
so much take the form of boastfulness, as it does a certain naive self-assurance.
Another is that he has something the fault of a crusader.
He bel
program will not succeed unless people understand it, so he bursts out into speeches
every now and then, and, in these, occasionally, gets into political matters which
PERSON. & would be better left alone by the head of the Reichsbank.
An illustration, - and
probably the strongest one - is his Cologne address, typewritten translation of which
I enclose, attached to a copy of Gilbert's daily press service, which contains some
A third weakness of Schacht's, which I believe will
interesting translations.
disappear since our visit, is a tendency to run the Reichsbank according to the
letter of the Bank Law as to the General Board of Directors, rather than to use
these foreign contacts for the purpose of building up confidence not only among
the directors, but among those to whom they would naturally report at home.
Reichsbank Act gives very little power to these directors, who are regarded in some
quarters as a species of eye wash, to satisfy French and Belgian public opinion.
I learn confidentially that at first ho and Bruins, the Dutch Bank Commissioner,
had some difficulties on this account, which have all been eliminated.
The same
has been true, possibly in matters of little importance, as to both McGarrah and
Norman and I had a long talk about it, and, as Norman knows Dr. Schacht
much better that I, Norman took it up with him, and, I guess, had a pretty plain
At any rate, when we met later, Schacht told me that Norman had given his
hair a thorough combing and that he intended to follow his advice.
I suspect that
Norman originally sympathized with Schacht's position, but was persuaded somewhat
by what I said to him.
At aay rate, Dr. Schacht tells me that if McGarrah and
Addis give him an cpportunity he will tell them every blessed thing there is to
know about the Bank, and make it his business to convince them that he is striving
to carry cut the program in letter and in spirit.


Still a fourth weakness of Schacht's is possibly a little lack of
sympathy between him and the Directorium, they being, as you know, the salaried,
responsible staff of the Bank, which we might describe as Managing Directors.
seems that Schacht's selection was unanimously opposed in the Bank, and there
are still some members of the directcrium who resent an outsider coming in; and
with them he does not get along as well as might be.
But they tell me also that
improvement has taken place in this matter.


Mr. Jay

Spa, 7.20.25.

And a fifth weakness, to be expected in a man of his character and

temperament, is undoubtedly the fact that he runs his part of the show with an
iron hand. He does it openly, frankly, and courageously, and seems to have the
support of his Government, but it certainly would not do in America. And one

"needs somewhat to reconstruct ideas here in order to appraise the man, as well
as the situation in the Bank.
On the whole, I think it needed just that type
man, and that he presents exactly the contrast with Havenstein which was necessary to accomplish the results that, so far, appear to be little less than a
This introduction, in a general way, will give you about all that I
can say to his disadvantage.
And there is so much to be said in his favor that
I would need to go over much of the ground which we didoVver a week in order to
give you the many favorable impressicns which I gained.
He seemed to be absolutely honest and frank, in fact, candor was the
outstanding characteristic of all cf our talks. He doesn't gloss things over; he
seems actually to relish setting up and exposing the difficulties, and then attacking them with plansand projects for their treatment.
asked him caused him tc hesitate or display any evidence of reserve.


I went to Berlin with the impressions which we all have at home, that
the Reichsbank was in a pretty comfortable position and the outlook fairly favorable.
Dr. Schacht's first effort was to disillusion me;
and produce
figures to show the facts of what the situaticn is, rather than permit me to carry
away the opinicn that everything was rosy.
Much of the information he gave was
volunteered. In fact he did not give us oppertunity to try him out on many things,
and his eagerness to have us gain the correct impression and understanding was
perfectly obvious from the beginning.

Dr. Bruins and Shepard Morgan both say that that has been his attitude
Those two, you realize, being the ones mainly charged with securtowards them.
ing information about the Reichsbank, even more so than members of the Gereral
Now with this preliminary sketch of the man, I want to give you a word
about the position of the Bank, as to its reserve, its credit policy, and what its
immediate future must be.
The banknote issue today is about M.2,500,000,000 (leaving out the
Renten marks, which must be separately dealt with).
Against these notes the lank
has a reserve of 58'%, of which one-quarter is in divisen.
or has at its command, in round figures, M.300,000,C00 of divisen in the shape of
Only bank balances and
invested assets abroad, which are not counted as reserve.
The drain on the bank's fcreign exgold held abroad are considered as reserve.
change balances has been continuous since early in the year, partly caused, without
question, by "payments in kind; which reduce supplies of divisen otherwise available;
Were not these
and partly by the payments under the British Recoveries Act.
deliveries made without the equivalent cash payments in fcreign currencies, the
position of the fcreign balances would be very different indeed.
Now it appears that the big reduction of over M.400,000,000 in the
divisen balances abroad has been caused successively by various developments, each
One was the failure to
of which has shaken confidence in Germany's position.



Mr. Jay

Spa, 7.20.25.

.arithdraw the troops from Cologne;
another the Hindenburg election (which is really
liro cause for alarm);
another is the Stinnes affair;
and still another, having noth-

ing to do with politics, being the repayment of a loan of 5,000,000 Sterling made tc
the Reichsbank by the Bank of England, some eighteen months befcre it was really due.

Dr. Schacht maintains that if his reserve of divisen abroad should get
below the 105 which he is allowed to carry in that form, it would be a shock to the
credit of the Reichsbank, and to Germany generally, and that he cannot afford to have
that happen.
His margin, as you will see, is now getting rather narrow, as it is
down to about $75,000,000.
The Government, in various forms, probably hasn't got
over $10,000,000 of available foreign balances left over from the old divisen office accounts.

Germany is facing some political reactionswhich cannot be escaped as
the result of the negotiations for a'pact:
I feel, and others here feel, that the
agitation of the pact negotiations may, temporarily, create the impression abroad
that the political situation in Europe is still most uncertain.
They are also
facing some disturbance to confidence abroad, which may result from the policy
deliberately undertaken tc force a licuidation as described below,
When I say
force it, I do not think any measures are needed beyond what are now in operation
and the high cost of credit.
These developments may lead to withdrawals of short credits, placed
principally in London and New York.
They estimate that there are b25,000,000
credits in London, and, of course, we have a good many, though not as much asthat,
in New York.
If any considerable part of these are withdrawn next month, when
they expect the moverent to begin, the invested divisen account may be entirely
used up, the surplus reserves disappear, and the Reichsbank have great difficulty
in maintaining its reserve.
$100,000,000 or thereabouts would wipe out the margin.

Dr. ochacht says that, rather than see the foreign value of his currency impaired, he intends, if it takes the last ounce of his strength, to continue to reduce the circulation so that the reserve will be maintained and the mark
maintain its value;
that is to say, he will meet demands for foreign payments by
using his reserve, thereby maintaining the value of the mark.
But, in order to use
his reserve and yet nct impair it, hemust reduce the circulation.
He states this
frankly in public, and I gather from what I have learned of him, that he likely will
do it, and that the most thoughtful people in Germany will support him in doing it.
Of course relief will be afforded by foreign loans, and these he will
encourage provided they are well secured and are long in maturity.
In a word, therefore, he has from $75,000,000 to $100,000,000 of foreign
reserves yet to be used before his reserves become impaired, and he must, therefore,
restrict credit and, consequently, reduce note issues.

It is necessary, in order to understand
situation, tc describe what
he means by restricting credit.
with us, it means direct action
something quite different.
The Reichsbank has between 450 and 500 branches, which
cover every part of Germany.
Only 18% of their portfolio consists of private
discounts for their depositors;
the rest represents transactions with banks. No
loans and bills, or other fcrms of credit, are given directly to industrial and coml. jnercial customers.
Each branch has an absolute limit upon the amount of credit
which it may extend.
The managers, I believe, are instructed in a general way to
maintain that position by using carefal discrimination between loans for productive



Mr. Jay

Spa, 7.20.25.

The Reichsbank contact is so intimate
and those for non-productive purposes.
III, lewith all of the operations of German commerce and industry that this sort of
rationing can be practiced through their system of branches, while it would be
quite impossible in the United States.
If, therefore, the reserves approach the
danger point, he will simply reduce the amount of credit available at each branch.
This will force a liquidation and bring notes into the bank, and thereby reduce
his reserve requirements.
Assuming, therefore, that the crisis which he mentioned, will arrive
in due course under present conditions, without the necessity of further credit
restriction, it would seem to be unfortunate, and I think he would regard it as
most unfortunate if the pressure had to be increased simply because the reserves
became impaired.

This stimulates his interest in long-time foreign loans, in the
negotiation of the Gold Discount Bank paper, and has led him to ask me how I
feel about the possibility of buying some mark bills.
last matters brought up in our talks. He explained very frankly that he had not
the slightest intention of asking us for any credit.
It was the last
thing that he wanted to do. But long-time credits would be helpful, and those he
realized must be negotiated in the investment market.
The d
Discount Bank paper would be helpful because it would furnish divisen, and would not
be dangerous because exchange would be provided automatically to liquidate the
The disposal of any mark paper, however, would impose upon them
later the necessity of finding divisen to meet payment, and that he would seek to
avoid and employ only as a last resort.
He wanted rather an expression of my
general sentiment on the subject, than he did anything in the nature of an

I replied to him that it was a subject which would necessarily require consultation at home, and that I would be very glad indeed to write home
about it, and, if possible, gain some expression of the views at the office.
I think in the long run that we should be prepared to do that business, but I was not yet ready to say that we could do it now, because of circumstances which I think I should outline to you quite frankly.

The first is that unless Germany and France can agree upon something
in the nature of a pact along the line of the present discussion, the reaction
from the failure would be unfavorable;
that it might lead to a feeling that we
were pouring money into a situation which was yet uncorrected, and simply postponing the day of ultimate political tranquility in Europe;
might feel it was better to defer any action until more was known on that subject.
It is possible that I gave him a more unfavorable impression on that score than
is justified by the facts here, but I nevertheless do feel that there is room for
great improvement in the situation as to the Eastern Frontier and the very
uncomfortable relations now existing between Poland and Germany. It all relates
to theucorridor: and Upper Silesia.
The next point was in regard to the pending crisis, which is undoubtedly coming, and which might also prove a jolt to foreign confidence, and I don't
know how our people at home would feel about buying mark paper under those conditions.

The third point was the impossibility of determining whether these
foreign credits were not, in point of fact, simply pouring money into a rat hole,
which, through various devious channels, finds its way cut ultimately through
deliveries in kind, and likewise in debt payments to France and England.

and tha




Mr. Jay

Spa, 7.20.25.

The fourth, and by far the most important to us at the moment, was
the serious criticism seemed toin certain that might suit his book quite having in order to
He at home feel that quarters as the result of our well,
made a two year arrangement with the BanksuchEngland, might have quite fall. to
take care of a seasonal situation of as they which was this likely
I told him that I, personalresult in some Congressional Inquiry this winter.
ly, thought it would think his idea us to add to the atmosphere of loans now being made,
be unwise for is that what with some foreign hostility in
certain such as Berlin and Cologne, and some transaction on top of the possibility of
quarters by entering any long-time smaller ones;
with the one which
has already been given such publicity;
and that my general will
negotiating Gold Discount Paper; and a possible loan to the Rentenbank; heattitude wo
that our own peoplemeet every possible should not do long period, and until more favorable
would feel that we demand for a so at the present time. I told
be able to
him that if this subject came up before all command had been settledM.200,000,000 at
conditions develop, by having at his doubts somewhere from politically to
home, the most that I which he would only use in an emergency, and the last to be used the
M.300,000,000 could consider would be adopting a policy of maintaining a
portfolio of of mark bills in New York. a certain amount. And if we ever did anysale mark bills in Berlin up to
thing of that sort, certainly until this political question was disposed of, we
could give no assurances of any kind that we would not require payment of and he has told
Norman was present when this conversation took place, the bills
at maturity.
Dr. Schacht that he would be very glad indeed to take up to E5,000,000 of mark
paper, I believe giving him quite a long period in point of time; and afterwards
he told Schacht privately that he would undertake to do so if Schacht needed that
I think the idea was that if we were later at all interested we might buy
These bills would be
some bills, the outside limit being, possibly, $50,000,000.
prime paper, discounted with the Reichsbank, of a strictly commercial nature, bearing the name of drawer, acceptor and a bank indorser, as well as the indorsement
of the Reichsbank.

After all of our discussions, and the intimate character of the
information we gained from Schacht, I am convinced that the paper is just as good
as gold. There isn't any possibility of the Reichsbank failing to meet such an
obligation as things are now, or are ever likely to be, so far as the near future
can be anticipated.
Of course if we should decide to do al ything of that sort, it would
be highly important not to have it a disturbing factor in our money market, so
I stated definitely to Schacht that if we did buy mark bills from him, we would
be unwilling to place the exchange at his disposal in New York, but would require
In other words, he could, if he found his reserve becoming
him to take gold.
impaired, ship gold, say, to London, or elsewhere for the purpose of making the
payments, and replace it in New York by selling us mark bills, and having us
This would
earmark gold for him, or even ship it, on his order, to other points.
And as his undisclosed dollar
avoid putting our funds into the New York market.
reserves in New cork are now all invested in one form or another, the use of those
reserves if it had any effect at all upon the money market, would be in the direction
of reducing loanable funds, rather than increasing them.




Mr. Jay

Spa, 7.20,25.

Dr. Schacht has promised to send me translations of tl'e statements
the Reichsbank, the Rentenbank, and the Gold Discount Bank, and any other
information that I want.
If the situation develops pretty rapidly, - before
I return home Now, as to come to impressionstalk to aover again. can give you only a
- he will my own London to as it policy, I
very brief outline, as it would take a volume to give you everything that I
gathered in Berlin.


First, I believe that deliveries in kind are now draining Germany of
potential reserves of fcreign balances, the strain of which will gradually increase until within six months cr possibly a year, it may be necessary for Gilbert
to slow down.
He realizes the position and is protecting himself by clauses in
contracts, etc., in a very forehanded fashion, and my confidence in his wisdom
in this matter is immensely strengthened by what he tells me of his care in
anticipating developments.
Second, I believe that the tremendous confidence shown by Germany
in the Dawes Plan as a means of relief, is something which must not in any event
be shaken by attempts at modification, certainly for a year.
The fat would
then be in the fire, and, therefore, it may be the part of wisdom to ease things
along, in reliance upon common sense prevailing in handling the matter.

Third, I believe that well secured credits to Germany (secured by
mortgages on good properties) and not maturing too soon, are justified by conditions here.
Fourth, I believe that Germany intends to make every effort to
earnestly carry out the Plan, but that most people are convinced that the full
schedule of payments cannot possibly be maintained, and that some people are reluctant
and unhappy in making these payments, but nevertheless see the wisdom cf doing so.
They are willing to do it, but cannot be glad to do it.
Fifth, I believe that short credits to Germany are a menace and should
be discouraged.
Sixth, the general appearance of the country, so far as I have seen,
and everything that people tell me, would indicate that Germany is ready to forge
ahead as soon as they have been through the trial cf a secondary period of liquidation.

Seventh, I believe that political developments in connection with the
negotiation of the Pact, and the economic developments in connection with what
they anticipate will be a busire ss crisis, will injur Germany's credit abrcad

Eighth, I believe that during that period, which is likely to extend
into the winter, help will be needed from abroad.
Ninth, The Bank of England is willing to let the Reichsbank have
25,00C,000, if help is needed.
And finally, tenth, we could probably afford to do sc also, along the
above general lines, dependent a little bit what happens politically both in
Germany and with us in the course of the next few months.

Now, as Dr. Schacht has not asked us for any credit, but simply that I



Mr. Jay

Spa, 7.20.25

consider his position and the possibility that some day he may need cne, all that I
want you to do is to study this over, describe the situation to some of our directors
who will be interested, especially Mr. Young, end then cable me as soon as you can
 general way, the reacticn is.
what, in a



Mr. Jay

and looks and feels wretc
Spa, 7.20.25.


(7.21.25 continued)


We may take
then do Paris;

Spa, Belgium,
July 21, 1925.

hear Mr. Jay:

Since dictating my separate letter in regard to the Rentenbank
negotiations with the City Bank, I have received the enclosed description
relating to the revaluation procedure, as proposed by the law of July 15,
relating to mortgage loans and priorities.
Reichsbank at my request, and is a digest, of course, and not a copy of the
You will observe from it how complicated the position becomes.
law itself.
In this connection it must be bcrne in mind that while a large
amount of these farm mortgages may be held by private owners, probably a
still greater amount is in the hands of credit institutions such as savirys
banks, etc.
The revival of 257. of the mortgage loans makes necessary the
similar revival of 25T of the liabilities of such institutions.
It becomes
very difficult to accomplish this, and is, of ccurse, the first step in the
direction of the revaluation of other forms of debts and credits.

While Dr. Schacht was earnestly opposed to the whole scheme,
and believed that it would work considerable injustice to various classes,
he, nevertheless, saw no escape from the plan because of the serious losses
of people of the poorer and middle classes, some of whom are directly or
indirectly a charge upon the State, or the industrial establishments of
Germany, such as the railroad lines.

The best estimate that he could give me of the amount involved
was M.40,000,000,000 for private mortgage debts, meaning that M.10,000,000,000
will be revived;
and that the revival of the Government debt, at the rate of
57/0 for the portion which had been permanently held since July 1, 1920, and
at the rate of 2-1/e. to holders subsequent to that date, will amount to around
M.4,000,000,000 or a little more.
In other words, the effect of the
revaluation act is to bring into existence about M.14,000,000,000 of debts, placing a burden upon one class of people for the benefit of another class.
It will be interesting to see how it works.
Sincerely yours,

Pierre Jay, Esq.,
Chairman, Federal Reserve Bank,
33 Liberty Street, New York.

This wa

About revalued mortgages - priority.



15th July 1925)

According to the law voted by the Reichstag (third read -i

ing,) on 15th July 1925, about revaluation


mortgages and

other claims (revaluation-law) mortgages are to be revalued


at 25 percent

the amount in goldmark. The so revalued mort-

gages maintain on principle their character as first or second
etc. class securities. Any mortgages registered during the time
from 14th February 1924 (the date on which the third emergencydecree on taxis,

"Steuernotverordnung", went into force) to

1st October 1924 are preceded by right of priority by the revalued mortgages only up to the amount which is fixed by the

said third emergency-decree on taxes, consequently up to 15 percent



amount in


The remaining revaluation


10 percent takes place behind the mortgages registered within
the above mentioned period. Any mortgages registered after
1st October 1924 are prededed by the revalued mortgage to the


full .y. amount

25 percent


the peace-value.

Special regulations are applied to this system. In the


general revaluation to 25 percent such old mortgages

as appear in the rear after the ,fax first mortgages would obtain

a position which would confer on them better right than those
at the time


their rights origin. Since there presents itself

a yaza necessity for obtaining credit
owners as for owners, of houseproperty
to attend to,




which is more stif,ficult

the more /old mortgages enjoy priority before

newly proposed mortgages,
to such a way

both for agricultural


it appeared advisable to have recourse

settling rights



in which

the principle that revalued right maintains its

rank unimpaired, leaving to the owner a mortgageable place for





new mortgage-credit and which at the s

and prejudice the right and position o
as such right and position were at th

valuation n law therefore conveys to th
have attached a marginal note, in ord

gistration of a mortgage (reserving,

the amount of 25 percent of the goldm

valued claim; jointly with the usual
rights take place after the revalued c
%first priority and beforehand of the

'Whenever the goldmark amoun
and having 2d or after the first followf
rank 3rd mortgage) is

established by law for wa
value) then the owner is
vation as well after this r
ights up to the amount of
of the revalued claim joi

The afore standing

Revalued "nationa
§ 3, paragraph 2, number 1
of 19th december 1923 R23

the wards-security is to b
to real estate value, alwa

100 000 H, charge in peace

gages. These 3 mortgages

Since all 3 mortg
wards-security, (66 2/3 pe
them, by operation of the
2500 11.




rank-reservation on the "ground-book" jointly with registration


All papermark mortgages are to be revalued up to
25 percent


their goldmark amount; all


their old places


them maintaining

rank. All mortgages, existing at the date

this law takes force,


Reichsmark will take,

on solicitation, place on the credit-

stablevalued or


foreign currency or

spaces held free through the "rank-reservation",

in the order

as they rank.- New mortgages made out after this law has taken

force dispose



"credit-spaces", free on the strength


the"rank-reservation", according to the free decision of the


the real estate. In case these spaces are filled, the

new mortgages, of course, take rank behind revalued mortgages
and behind rank-reservations. There is besides the possibility
to register again such cancelled mortgages as have been repaid
during the time from 15th June 1922 to 14th February 1924.
Al] public charges, by virtue
the industries,


to 5 percent


the law on charges on

to 15.7 percent and by virtue



the Rentenbank-

the "national defence tax", have



priority before all other rights and remain untouched by the
present draft

of law.

Spa, Belgium



Governor Ncrman has held in mind continuously since the Genoa Conference
that he is under obligation to have some sort of bank meeting, at which would be
present various representatives of banks of issue, the object being to discuss the
His original expectation was to have a very informal, unofficial

gold policy.

meeting, attended by Dr. Schacht, Dr. Viseering, Mr. Moll, himself and myself.

This wculd be representative of those banks which are, to a greater or less extent on a distinct gold basis.
It seems that he has also been approached by both Robineau and Hautain
to call a meeting.

They suggested the desirability of having the banks of

Italy, France and Belgium discuss the future of the gold standard, etc.

To the latter request he replied that he felt no such meeting would be
profitable unless it were accompanied by friendly cooperation and political harmony.

Hautain replied that while friendly cooperation might be possible, he thought that
from some of those invited to the meeting political harmony could hardly be expected.

After a talk with Dr. Schacht and me, Governor Norman decided that a

meeting of that character was inadvisable, and I believe he has notified those
three bankers.

When it came to discussingthe other meeting, it seems that Governor
Norman felt that the call for the meeting must necessarily be based upon the

resolution, and that no meeting would be profitable unless there was a

definite objective set out in the call.

I told him that I did not care to at-

tend a meeting, especially if some publicity could not be avoided, which had for
its foundation the resolutions of the Genoa Conference;
might be entirely wise from their standpoint;

that such a meeting

but I felt unwise from mine;


that the same, or even more satisfactory, objectives could be obtained by meeting


men individually and separately.
There is a certain amount of friction already between some of them,

and a meeting of these five men, possibly with a representative of the Suisse

Spa, Belgium


A Bank Meeting, Cont'd

7,22, 25

4lational,ank also present, would result in a very reserved discussion of affairs,
and my own part in it would have to be that of an onlooker entirely.

So we decided not to have any such meeting, but to arrange separately

to see Vissering and Moll, and probably Dr. Schacht again before leaving for home.
Of course the important thing is the subject to be discussed, which
would be:

The Gold Policy.

Governor Norman has come forward with a rather

novel idea that the whole future of the credit situation depends upon the adoption
of some policy by which the inflationary effect of the new gold production can be
neutralized, and the gold so distributed as to do the least harm.
My own idea isquite the reverse of that.

I think the movement of

gold is the result of other factors which are capable of a certain amount of regulation or control, and that the flow of gold must be reasonably automatic in response
to exchange conditions, and that, therefore, what we are dealing with is not the

of the central banks, but rather their credit policies, which are bound


to have a strong influence upon the exchanges, especially to the extent that credit
policies develop the employment of foreign portfolios.

The curious thing about Norman's position is that when he was in New
York, the whole course of his discussion with us was directed against a possible
heavy drain upon the reserves of the Bank of England.

Since the resumption,

however, gold has been Pouring in on them at a rate which he considers rather
alarming, and he is now worried about the accumulation of gold rather than its

The same thing, in a way, seems to have been true in Germany.


gold which has been accumulating has come partly from Russia, partly from South
Africa, and the balance from Holland and Switzerland.
One of the difficult things to be dealt with grows out of the gold
exchange standard development, which is so largely taking the place of the
operation of a true gold standard.

it seems that the new gold coming into the

hands of the banks of issue is going to those countries which are on a gold basis,

Spa, Belgium
7.22.25. - A Bank Meeting, Cont'd


( 3 )

The Gold Policy (continued)


where habit and the desire to make earnings is leading to its being employed
rather than being earmarked.

Very large balances are being so used in London, and


is one reason for the d rth of bills in the market.

Governor Norman's idea has seemed to be in some way to force the direction
in which this gold shall move.


I, frankly, do not see how that can be done.

In Sweden, by varicus devices, they are

situation in each country is different.
resisting further acquisitions of gold.

The Reichsbank has p

which it can now afford to own without reducing its reserves of divisen.
bank had a surplus, which it is giving up.

The Suisse

The same is true of De Nederlandsche Bank.

The two last named seem to command a larger volume of foreign exchange than the two

Our own position at the moment seems to be fairly


While the

Indian demand has been somewhat reduced, occassionally they are still taking some
gold, and enough to prove a great relief to Norman.
Nov: the inconsistency in the situation, to me, seems to be this:


are these four banks of issue, operating in a part of the world where there is a
distinct shortage of credit, two of which are in the position (according to their
notion) of having gold forced upon them which they do not want, and fearing a
period of inflation resulting from it.

And both of them believing that their

own future depends upon establishing lower prices for what they produce and
consume, especially what they produce fcr export.

The probability is that the situation will be met by just what will
develop from the present high cost of credit, namely, soma business recession, some
unemployment beyond what at present exists, a readjustment of wages, especially in
Germany, and then a period of recovery of business based upon a lower wage and price

I gather that the officers of the German Government are expecting some

such development and look upon it with reasonable tranquility, provided it does not


, zotoofar.:§tressemann


did say that he looked to see some little social disorder

*this fan a0winter, but that it would net be of very long duration, nor very



Spa, Belgium




There seem to be certain inconsistencies in the reports which are hard
to reconcile, but the following are my impressions from long talks with a good
many people:

In the first place, the whole machinery is over-burdened still with the
remnants of the organization which grew out of the inflation period.

There are

too many employes on Government payroll, and on those of private enterprises.
pension system is extravagant.


There has been a vast mushroom growth of enter-

prises of light financial responsibility, mostly handling the middle stages of

distribution of goods, which all agree must be eliminated in order that production
and distribution can be brought down to economical bases.
Nevertheless, there is a great shortage of banking credit.



gant and wasteful expenditure seems to/widespreadbecausebecause ofsome habits
acquired during the inflation period, and still of still the distrust of the
paper mark.

The German Government is criticized by some of the people connected
with the Dawes Organization for unnecessary expenditures;

and Dr. Schacht him-

self is unsparing in his own criticism of some of the work that is being done by
the Government.

He says there is too much road building and road repairing.

Housing projects have not yet been wholly discontinued.

One example is the

project which had been started before the war

and co

period, to put all telephone and telegraph lines underground.
mense scheme calling for an expenditure of some M.13,000,000,000.

Some of that

work is still going on, and Schacht thinks it should be all discontinued.
says altogether too much money is being spent for extravagant food;


that a few

months of real business recession and unemployment will be helpful.
Von Siemens told me that with 704! of their pre-war output in his

enterprise, they still have as many men on the payroll as before the war.


Spa, Belgium
7 22 FEDERAL General Economic Cond:_tions



e 3,000 more men in his works around Berlin if he could find


The trouble does not lie with the artisan himself.

he bench of the actual workman is quite up to pre-war standard,

nization for bookkeeping, selling, etc., is badly overmanned.

be true throughout Germany from all accounts.

there is a middle class of people who have suffered a good deal
the wiping out of their savings, the impression I gained is

living on the whole have risen too fast and too high, and that


f the men who was in our Liberty Loan Organization, Schumann,

ad just imported 90 Buick cars, which had sold before their

he believed a very large number could be sold.

He was making

development of some sort of instalment plan sale of care, and
numbers could be imported.

that class are being importedSchacht says that cars of
Dr. into Germany, but they are offset b
more expensive cars manufactured in Germany, for which they have

That still does not seem to justify going into a larg

importing foreign manufactured cars.

Another difficult situation seems to be developing ou
liveries of coal.

We are now experiencing a period of depression

business at home.

They are having a serious time in England.


mines in Germany are pouring out coal at a tremendous rate, - two-t
to France.

Coal is piling up in England and France and Germany.

though competition of oil and electricity had considerably affecte

that the industrial setback had also had a bad effect;

France was willing to take all the coal she could get, believing

she gets in the way of reparation payments is better than nothing.

may be a world-wide readjustment of coal prices, unless there are

America and England, asnow seems possible, in which eventthe shut

Spa, Belgium
'7.22.25 - General Economic Conditions, Cont'd



and English France wouldthe advantage.
give mines all provide a world-wide developmerts of the next and temporarily liable
The market for German coal, few months are
4IP to be exceedingly interesting in the whole coal industry.
a rather mushroom growth, without a very secure foundation.


But it looksto me like

Spa, Belgium
7. 22.0



I have had a good many talks with Gilbert and Shepard Morgan about

the course of the reparation scheme.

So far, they seem to be well satisfied

with what has taken place, but both feel a good deal of reserve about the future.
Gilbert, for instance, is insisting upon certain reservations in all contracts
for deliveries in kind, which will enable him at any time to discontinue making

payments in Germany in marks, and requiring the French contractors for the goods
to pay cash, giving him, thereby, a certain amount of foreign exchange.
I believe he has a similar reservation as to the British Recoveries

And when the accounts were checked up,/i± was found that the

Act Payments.

British had been paid at a rate exceeding the rate at which the French had been

he actually required a repayment to be made by the Tiritish, which annoyed

them quite a bit, but I gather, nevertheless, had the effect of creating a whole-


some respect for Gilbert all the way 'round the table.
Gilbert and Morgan both express doubt as to whether the deliveries

in kind can continue according to the schedule under the Plan without such a
serious strain upon the reserves of the Reichsbank as to require modification
before the maximum normal payments begin.

He sees quite clearly that excessive

payments reduce supplies of foreign exchange, thereby throwing a strain upon the
Reichsbank to furnish the means of making foreign pa;:ments for the benefit of

German industry and Commerce, which in turn, as described in another place, has the
effect either of forcing an impairment of the Reichsbank's reserves, or a contraction
of its note issue.

One interesting thing in connection with all of this situation, each

part of which is interdependent upon all the other parts, is the very high type of
organization charged with administering the Dawes Plan, -

men like Gilbert,

Sterrett, Morgan, McGarrah, Addis, Bruins, McFadyen, Leverve, in fact all of them
with whom I have come in contact appear to be men of the highest quality of ability
and integrity.

And the same is reported to be the case with almost all of the

Spa, Belgium




Reparation Payments, Cont'd


They seem to be working together well, and working well with Dr. Schacht,

with the exceptions which I noted in a letter to Mr. Jay.
hopeful outlook for the future.

And this presents a

Spa, Belgium

There is one very admirable thing which stands out in discussions
with Germans in responsible positions.
I am quite sure that if an American were obliged to submit to the
interference and in,:liries and controls which are now imposed upon Germany, the

irritation to feelings, and the sense of subordination to control would be a
menace to anything like tranquil conditions.

The extensive character of these controls in Germany is really

A large part of the western frontier is in possession of a

foreign army, extending right into the vitals of German industrial districts;
foreign directors in the Reichsbank;
issue and accounts;

a commissioner

for supervising their note

and the entire railroad system in the hands of a French

all of the industrial establishments mortgaged to foreign nations,

and in general under the supervision of a foreigner;

government financing,

the budget, and the whole scheme of central banking and foreign finance subject
more or less to inquisitorial supervision by the Transfer Committee;
called upon to make endless reports and statistics;
and specific transactions questioned;

they are

to have matters of policy

and yet, I must say that they seem to

take it in pretty good spirit, and while, now and then, they may groan in private
among themselves, they do come up cheerfully, so far as 1 have observe:, and
toe the mark.

That also is a good sign.

Spa, Belgium

I have already described the favorable impression made by Hindenburg.


He seems to be universally well regarded.

Of course he is a

believe now 78, but his reputation is that of a rather kind hearted man of the

highest rectitude, who has abandoned militaristic notions in the belief that he
can aid in Germany's recovery under the present regime.

Dr. Luther is undoubtedly the strong man in Germany, and many people
say that he is the strongest chancellor they have had since Bismarck.
three time, once at luncheon at Dr. Schacht's

once at luncheon at his own of-

ficial residence, and again at dinner at the Gilberts.
him each time.

I had a long talk with

And I must say he impressed me as straightforward, and a man of

truly dynamic force.
in his views.

I met him

He is very outspoken, and seems to be absolutely independent

He is known as a man without a party, and presents the anomoly of

being the Chancellor but not a member of the Reichstag, as is the case of four
other members of tle Government.

Stressemann, of course, is a party man, who is not very well regarded,
and is believed to be rather shifty.

A number of members of the cabinet were formerly Bureau Chiefs in the
various departments, as there was a good deal of trouble in forming a Government

after Hindenburg's election, and they had to take what they could get, putting the
bulk of the strain on Dr. Luther.

But he looked to me like a man of exceptionally

soundconstitution, and gave no evidence whatever of being under any strain.

He is

good natured, speaks rapidly and positively, and when he does not understard a statement in English very well, he instantly stops you and asks to hare it explained.
However he speaks and understands English well enough to get along very well.


understand that he has learned it within the last year.

There seems tc be much satisfaction on every hand at the poor showing
made by Ludendorf in the election.

I think he got in the neighborhood of 200,000

Spa, Belgium





Politics in Germany, Cont'd

There is also a definite feeling that it was the vote of the women which

saveaprrcm y socialism,

or communism, or worse.

trongay nationalistic.
died out.

Apparently the women are rather

They all tell me that the chauvanistic spirit has largely

Germany, except for the more extreme imperialists, is today ready, without

hesitation to enter into definite obligations as to the western frontier and the permanent ownership of Alsace Lorraine by the French, and of Malmedy by the Belgians.
They definitely want four principal things:

The rectification of the frontier with Poland;

especially to do

away with the "Corridor" which cuts Germany in two, and makes East Prussia a very
difficult and expensive unit.

The recovery of Upper Silesia.

They say the coal mines are

being ruined and that the Poles will never be able to manage the country.


greatly resent its assignment to Poland in the face of what they claim was an
adverse vote by the population.

As to these two matters, they are willing to enter into definite
engagements only to effect a rearrangement by negotiation, without resort to

arms or military measure of any kind, and under reasonable supervision by the
Powers, or by the League of Nations.

Then they want to be free ultimately to bring about the incor-

poration of Austria in the German Republic.

And to thatt,I believe, there

isn't much objection on any hand.

Finally, they want the immediate evacuation of the Cologne

Area, which was due some months ago under the terms of the treaty;

also of the

Ruhr and of the sanction area, which includes Dusseldorf, Duisberg, and Rhurort.

And they have hopes that the progress of evacuation will enable the second
area, at Coblenz, to be evacuated before the end of the second five year period.

These matters are today the great outstanding subjectswith the German
Government and people.

Spa, Belaium
7.2,25 - Politics in Germany, Cont'd



As to internal politics, there seems no doubt that the Luther Govern
ment is developing

a sense of security and tranquility which had not been achieved

Spa, Belgium


Politics in Germany,Cont'd

from that which they exhibit officially, the explanation being that Germany

probably desires now to live in peace, to have good relations with neighbors, to
develop industrially, and to repay and build up what she can.

But, officially,

all contacts with neighbors, such as France and Poland and Belgium, are characterized by distrust.

I,think possibly the worst feature of the European situation

today is the distrust which politicians have of each other.
ly, they feel unable to say officially.

What they say private-

This lack of franknes

either bring the political organizations into conflict with the Dawes Organization

or may have some influence upon the independent attitude of the Dawes Organization.

But the encouraging offset to this situation lies in the very high character of
the men who are administering the Dawes Plan.
Having had opportunity now to talk with such men as Luther, Stressemann,
Schacht and some other members of the German Government, also Houghton, Dr. Schurman,
Lord D'Albernon, the Belgian Ambassador, and the men in the Dawes Organization,

I can see that this background of distrust exists everywhere.

One consequence

of this atmosphere is that the American and British Ambassadors seem to be constantly drawn into consultation for advice.

Their attitude is to compose dif-

ferences and bring about agreements.

Right now the French seem to be doing their best to continue negotiations in regard to the frontiers by correspondence, while the Germans are anxious to
have a conference.

The Germans believe that no settlement can be arranged by

correspondence, and that the French insistance upon correspondence is for the purpose of defeating an arrangement;

whereas the French are reported to feel that

once they have a conference with the Germans, pressure upon them will be strong
enough to lead them to make concessions which they are unwilling to make.

It was

interesting to me to note that Mr. Houghton, Lord D'Albernon, all of the German

Officials with whom I talked, as well as Dr. Schurman insisted that a conference
was absolutely necessary.
Dr. Schurman has suggested a meeting of no more than three men,

without a big staff, and in a very informal way.

And at least negotiations

Spa, Belgium
FEDERAL RESERVE BANK OF NEW YORK 7,24.25 - Politics in Germany, Cont'd

have progressed to a point now where they are considering where the meeting


will be held.


The British prefer London, but are willing, I belive, to go to

At least all with whom I talked were hopeful of being able to have a

conference, and that the results would be in the main satisfactory.


Spa, Belgium



I had some very interesting discussions with a number of people in
illregard to this whole subject, although my own part was more listening to a

variety of complaints and suggestions, some of which, however, it will be well
for our Government to heed.

The first came from Mr. Houghton, entirely unsolicited from me,
being the result of some inquiries that Mr. Phillips made about the progress of
the negotiations with the other debtor nations.

Mr. Phillips, our Ambassador

at The Hague, was just returning home to be present during the negotiations with
the Belgians.

Mr. Houghton remarked that he was satisfied, as the result of his
study of conditions in Germany, and of what he had learned in England since taking up his post there, that our Government was heading towards a dangerous situation if they insisted upon refunding arrangements with the French, Italians and
Belgians, and were unwilling to suggest any modification of the British arrangement.

He said the British would never suggest it officially, but would always

resent the severe treatment imposed upon them if much more liberal terms were
granted the others.

But he felt even stronger that the rate of payment of

debts to the American Government was liable to reach the point likely to cause
serious disturbance in the United States to the exchanges and to stable banking

He asked me whether I thought our Government could be induced to
volunteer a rearrangement of the British treatment.

Mr. Phillips, as I recall,

stated his belief that even if our Government were willing to do so, the Congress

would never ratify such an arrangement, believing it to be unpopular throughout
the country.

I askedstill Houghton for he did that think that a very good chance
Mr. existed if doing not if refunding arrangements could be concl

other nations, and then submitted, together with a proposal for modif
British plan.

Mr. Houghton, who is an old member of Congress, said

was largely in the Funding Commission, - just as I do
Spa, Belgium

7. 23. 25

- Allied Debts, gone home convinced of the need for some
Kellogg had Cont' d

He also asked me what I thought of the

regard to loans, both Government and private, to cour

to fund their debts, and I told him that I thought it

mistake for the Department to exercise pressure in th

each banking firm which had a loan declined the spoke
explaining the reason for declining.
and cause bad blood.


Also, when loans were approve

servative formula of the Department, these bankers w

which the impression would gradually be conveyed



ment in some way was behind these foreign loans.
impression has already arisen in some quarters.

Mr. Houghton seemed to be troubled on t

thought agreed with my suggestion that the way to ha
to give merely an acknowledgment to the bankers who

then, if there were objection, state the objection t

tive of the foreign government concerned, and at onc
that the Government had objected by that method and
not made.

I told Mr. Houghton I thought the situa

some sort of a report home, which I hope he will do.

He said that if our Government voluntee

with the British, it would have such a wholesome eff

gain much more in prestige than we would lose in mon

When I reached Berlin, Gilbert told me

his own correspondence with the Department when they

Spa, Belgium
7.23.25 - Allied Debts, Cont'd



part of
York bankers to apply the proceeds of the loans to the City of Berlin and the City

of Cologne to effect the transfer of some M.15,030,000, being our share of the
reparation payments, for which no provision for transfer had been arranged.


seems that the Department cabled Gilbert two or three times asking his consent

to the arrangement, which Gilbert positively declined, and finally sent a rather
peremptory cable indicating that his previous cables had expressed his opinion
and concluded the correspondence.

I know he felt that the suggestion was at

least unethical, - as I do myself.

Gilbert feels a good deal as I do about the pressure now being exerted
through these foreign loans being offered in America.

He told me that Janssen,

the Belgian Finance Minister (who is a friend of mine) had been advised through the
Belgian Foreign Minister of the receipt of a very peremptory note

from our Depart-

ment of State, which was almost a command for Janssen to come to Washington by a
certain date named to discuss debts.

It seemed that Janssen had*only been in


office a week, and had tc prepare the budget within two weeks, making it quite
impossible for him to leave Belgium.

And he and the other members of the Belgian

Government expressed the utmost resentment at the way in which the correspondence
was conducted.

Of course this does not help the debt negotiations.

Then, when I spent an evening with Dr. bchuman, our Ambassador at
Berlin, he and Mr. Hill of the Department of State, who is on a special mission

there, tackled me right away about the transfer of the M.15,000,000 and this
whole subject of loan negotiations in America and the control now being exercised.

I think Mr. hill rather favored the attempt to grab a part of the proceeds of the

Berlin and Cologne loans, but Dr. Schuman agreed that the proceeding was rather
unethical, and that it should not be handled in that way.

The fact is that our Government has been led to agree to the Paris

settlement and division of reparation payments without any scheme being arranged
whatever for transfers of our share.

The trench are being paid by deliveries in

kind, and the British are being paid by the operation of the Recoveries Act.


Spa, Belgium
- Allied Debts, Contld


The only suggestion for dealing with the matter that I could think of
was to make special purchases of potash in Germany, to be paid for out of the mark


and then sell the potash in America for dollars to the fertilizer manuNo question of competition could arise, as Germany is the sole source of

Other suggestions have been considered, like toy contracts, contracts for

certain types of fabrics which we import from Germany, etc., but the potash one
strikes me as the likeliest scheme of settlement.

Another suggestion is that we buy

property for a new embassy in Berlin, to which Gilbert would readily assent, but
it looks to me as though we wouldaccumulate about M.15,000,000 a year for the

next few years and then find that there was considerable doubt as to whether the

transfers could be effected anway, unless some supplementary agreement to the
Paris agreement can be negotiated.





Mr. Case

Spa, 7.23.25.

I do hope that you and Mrs. Case have returned from your
holiday in first-rate shape.





Spa, Belgium,
July 95, 1925.

Dear Mr. Jay:

This is to confirm cable #97, which reaches me to-day via London, and
which you will observe has evidently been somewhat garbled:
"Strictly Confidential for Governor.
New York banks hear from London that declining money rates there
Also that subare agitating for question of reduction of bank rate.
stantial volume of American funds returning from London due to lower
That considerable volume American deposits in London have
rates there.
Would appreciate your comments on foregoing.
been reloaned to continent.
If you have not written me regarding Class A directorship, please
send your suggestions as I should like to get nominating committee appointed before I leave August 4 for vacation."

and to confirm the cable which I

am forwarding in reply today:

"No.z_(test) Strictly Confidential for Jay
Replying to your No. 27
New York rumors result from general discussions in London following
Arrest of increase of short deposits in London
large gold receipts.
Relending on continent if true is purely European
seems desirable.
Two Important immediate consideration is relation of two bank rates.
If we must increase to 41 within say three months, London must reIf we anticipate continuing unchanged for that
main unchanged.
period London might immediately reduce.
Three If you apprehend that stock speculation may at any time necessitate
increase to 41 that would justify London remaining 51 and probably
be best we make increase immediately as suggested by Owen D. Young
possibly selling some securities.
Four If however our situation justifies hope of safely maintaining
present rate for three months London may reduce to 411 at once.
Reduction in London would tend to encourage trade white increase
Please telegraph
in .New York would be to discourage speculation.
fully and immediately (Bent]y code) care National Bank of Belgium,
Brussels, to arrive Tuesday, which course you propose.
Six At this distance Norman and I now favor alternative paragraph 3 if
;ilthough Norman here we have had no
you apprehend as stated.
communication with London but on receipt your reply he will return
there if desirable and cable you developments direct.
Meantime director
Seven McGarrah away and probably unable to see him.
Shall I submit ouestion to McGarroh by wire."
matter is as we left it.



shall await further word from you, as reouested, with the keenest


Sincerely yours,
(Signed) Benj. Strong.
Pierre Jay, Esc.,
Chairman, Federal Reserve Bank of New York,
33 Liberty Street, New York.




n itah
161, a,



Brussels, Belgium,
July 27, 1925.

Dear Mr. Case:

With this I am enclosing the copy of a memorandum
in course of preparation covering impressions gathered by Mr.

It is the one he promised to send.

Also there is a copy of the translated Reichsbank
statement, concerning which Mr. Strong wrote the other day.
At present he is hopeful of leaving for Paris
on Wednesday, as he believes today and tomcrrow will finishthe discussions at the National Bank of Belgium.

But some-

thing depends on the reply to his cable about rates.
Very truly yours,


H. Case, Esq.,
Deputy Governor, Federal Reserve.Bank of New York,
33 Liberty Street, New York.


AUG 10 3.315

J. H. C-


JULY 7, 1925





Reichsbank shares, not yet issued..
Gold (bullion) as well as German and foreign
coin, one pound (the pound equals 1/2 kilo)
fine calculated 1392 RM, divided as follows:
RM 974,947,000
Gold at Home
Gold (not pledged) with
RM 90,654,000
foreign central banks
Foreign valuta (Devisen) used as cover
Portfolio of bills and cheques
German coin
Notes of other German Banks of issue
(not including the Rentenbank)
Loans against securities
Sundry Assets.








i\t a


Fi EL)



Auka 13 1925

Brussels, Belgium,
July 28, 1925.



Dear Mr. Case:

Before sailing, I told Mr. Winston that I would advise him if I
And this
learned anything of importance bearing upon the debt negotiations.
will serve to inform you of discussions which we have had with Governor Hautain
of the Banque Nationale de Belgique, which bore something up thatoubject.
1.11...ACT0A,.. 4477
A spare copy is enclosed for Mr. Winston's use.
50---'tOf course you and he will understand that the communication is
private and confidential, and to be used with much discretion.
It was carefully explained to Governor Hautain that my visit here
was quite private and unofficial; that I desired to discuss especially monetary
matters in which all banks of issue are interested; and any discussion of
the debt incident tc purely private and banking matters must be regarded as
wholly personal, and not in any way representing official views.


as I hope will be disclosed by this letter, that the




Mr. Case


410011of hope of some special recovery from Germany on account of the so-called currency

debt (which will be described later) and which hope, so far, has proved to be fruitMonetary reform has, therefore, been delayed because up to the present time
the Treasury has been either unable or unwilling to balance the budget.

A further difficulty common to almost all of the countries in similar
position, has been the adverse balance of payments, due partly to the need of large
imports, and partly to the fact that citizens having investments abroad have been
timid about the stability of the domestic currency, and, instead of bringing the
income home for investment, they have invested it abroad.
And finally

The revaluation of the franc and monetary stability in Belgium
will be impossible, according to Monsieur Hautain's view, with which I agree, if the
burden of payments on the American debt is heavy, esnecially in the early years.

He tells me quite definitely that Monsieur Janssen will be able to
but that
balance the budget; that the Government stands ready to impose new taxes;
of the washington negotiations
the reorganization of the budget depends upon the outcome
He also tells me that the budget deficit has been decreasing and that the adverse balance of payments due to the adverse trade balance has been steadily decreasing. And
he believes that if a satisfactory funding arrangement can be effected, and the currency stabilized, there will be a considerable improvement due to the return of income, and very probably of capital which has left the country.
The technical position of the bank is most interesting, and beers
directly upon the settlement of the debt.
The Germans, as you know, during the occupation of Belgium, imposed an
issue of marks upon the Belgians, not through the National Bank, but through the
Societe Generale, which was employed as the instrument for the emission of large
quantities of paper money, at one time exceeding 7,000,000,000 francs.
the armistice, the National Bank retired the paper marks by issuing their own paper,
the Belgian Government assuming the obligation of repayment to the Bank, and underThe amount of the obligatsking to negotiate some settlement with the Germans.
tion of the Belgian Government to the National Bank on thisaccount is now about
The Belgian Government also owes the National Bank scmething
5,300,000,000 francs.
over 400,000,000 francs, that debt having originated in war levies imposed upon the
So that the Government debt to the National Bank on account
Belgians by the Germans.
currency assumed by the Bank, and the German levies upon Belgium,
of the German
amounts to 5,700,000,000 francs.
The note issue cf the Bank is undoubtedly excessive for a country of
We estimate roughly that
the Belgian population, being, in fact, $50. per capita.
Probably a sound policy
it is 40% or thereabouts in excess of what it should be.
would necessitate reducing both the portfolio and the note issue of the bank before
But, unfortunately, the Bank's position
any method of devaluation is arrived at.
is such that this can hardly be effected at the present time.
The Bank's portfolio, which nominally appears at 1,660,000,000 francs
in its statement, is composed of the following items:


Commercial bills
Francs 540,000,000
Lombard Loans
Portfolio of Fcreign Bills
representing the investment of balances, prinaipally in New York, acquired

Brussels, Belgium


by the Goverment as the
result of the last two
American loans


Mr. Case



This 880,000,000 francs represents roughly $44,000,000 at the rate of
twenty francs to the dollar.
All the/bills in the Bank's portfolio represent the debt of the Government to the Bank, above described, arising out of the German occupation.

With a domestic portfolio of only $35,000,000 or $40,000,000 it can be
seen how slight is the power of the Bank to effect any shrinkage of the currency,
except it is brought about by a retirement of the Government debt growing out of the
and Germany is paying nothing on account of its liquidation.
German occupation;
The task of the Bank, and of the Government, therefore, is to secure
either some adjustment frcm Germany on the one hand, or effect some monetary
transacticn on the other hand without German aid, which will enable the Belgian
Government to repay to the Bank a sufficient amount of this debt so that the Bank
will be protected in some program of revaluation.
The reserve of the Bank against its note issue today, adding its
domestic holdings of gold and its foreign balances in gold paying countries, amounts
to something slightly over 30% of its note issue, - much too small a reserve fcr a
country like Belgium, which depends so largely upon the outside world for supplies
of food.

I think that Monsieur Hautain feels that if a funding arrangement is
made with America involving any considerable payment at all at the present time,
it would imperil the monetary position of the country because of the drain on its
foreign reserves, which I confess would seem to me to be inevitable.
That drain
of course is liable to be all the greater in case the budget is not balanced.
I may best express his own views, which he has stated to us with the utmost frankness, by describing roughly a plan which he has in mind which contemplates concluding
in one operation the funding of the debt to America, the balancing of the budget,
the revaluation of the franc, the establishment of an adequate reserve for the
Bank, and placing the bank in position tc control the volume of the currency issue,
and thereby maintain its international value.
If the funding arrangement with America is moderate in its demands
for foreign payments, he would then propose that additional tax resources be fcund
at once, which he says he believes could be done.
The Parliament would then be
asked to revalue the franc at roughly one-quarter its present gold value, leaving
the present note issue in circulation, but, in fact, reducing the amount cf gold in
the franc to one-quarter, thereby enabling the bank to redeem, say, four notes of
the present issue for one franc of old gold value.
At the same time Parliament
would be asked to extend the charter of the Bank.
If this could be done, the
Government should prepare at once to endeavor to float a long-time loan, probably
in America, but preferably with British, Dutch and Suisse participation, to a total
of $150,000,000, the entire proceeds of which would be applied by the Belgian
Government to repaying an equivalent amount of the debt to the Bank.
The figures,
when worked out roughly, are as follows:

The conversion of the franc frcm its present
gold value to one-quarter of its present geld
value would at once enable the bank to increase
the franc value of its gold reserve by 4 tc 1,
which would give the bank a nominal profit on its
gold of


Brussels, Belgium


Mr. Case

That is tc say, thatamount of gold would
serve as reserve for four times the amount
of currency.
Federal Reserve Bank of St. Louisprofit

on the gold reserve would be

And it would
especially require consideration from the standpoint of the market in America
for another large Brussels,Belgium, which might, even with the participation of
loan to Belgium
other countries, amount 1100,000,000, or even exceed it.



There are certain points which Monsieur Hautain fully appreciates,
and emphasized strongly in his talk with us.
One is that the restoration of the
gold standard in Belgium will afford erotection to the Bank against excessive
currency issues because of budget deficits and Government borrowings, which all
banks of issue in Europe just now dread.
He also understands that there must
be an intermediate period during which the gold exchange standard must be substituted for a true gold standard.
But Monsieur Hautain believes ultimately in the
return to monetary gold circulation, and to actual international gold pwment, as
befcre the war.
He appreciates that the reestablishmert of currencies throughout the world on the geld exchange standard presents the danger of credit inflation
in gold standard countries because of the large accumulation of balances by the
banks ofissue, which they will be constantly tempted to employ in the money market,
and because of the inevitable attraction of gold from the mines and from non-gold
standard countries to the gold standard countries.
He is, therefore, a strong
advocate of the principle of cooperation betwrin the banks of issue for the purpose
of controlling the possibilities of inflation; and I gather that he would even be
in case his program could be carried through, to actually earmark gold
to the amount necessary, rather than to put funds in the market, in order to.
observe practically, as well as in principle, an international policy of inflation
There is one danger in Belgium which strikes me as possibly imminent
if the airrency situation is not gotten in hand.
I have been amazed to find,
contrary to my expectation, and to what I had heard at home, that prices in Belgium
are far lower than they should be considering the per capita circulation. To illustrate:
we are occupying rooms in the besthotel in Brussels, on the best side
of the hotel.
The rooms with bath cost from 45 to 50 francs a day, say ;2.35.
An excellent dinner in the hotel, with wine (and not a cheap wine at that) costs
about ;2.00 per person.
Last night three of us dined in one cf the most expensive
cafes in Brussels, where prices are supposed to be high, and were high before the
we had a bottle of vintage champagne and a very.excellent diner pgf.pgIr
Fixed prices of articles in the store
the cost being about t!,2.60 each.

Brussels, Belgium

7a 2R.

Mr. Case


ridiculously low compared either to English or American prices, and considerably
lower than German prices, sc far as I could gather.
If the National Bank of Belgium has no means with its present small
portfolio to control the note issue except through retirement of the Government
debt, and if the Government, being unable to collect from Germany, is, nevertheless,
obliged to make heavy debt payments in America and unable to deal with its debt
to the Bank (and thereby deprive the Benk, through the Government debt repayment,
of the means of controlling the currency) I can see nothing in the future for
Why it has been so long deferred amazes me.
Belgium except advanced prices.

This year should be an excellent year to deal the monetary
problems providing the various factors enumerated can be satisfactorily dealt with,
because by all appearances, not only in Belgium, but in all of Europe, it seems
likely there will be an excellent crop, with the minimum requirement of foreign
Belgium has always had to im ;ort a large amount of food, and the
crop will be a relief in this respect.
I am, therefore, hopeful that when the funding commission comes to
meet the Belgian commissioners, they will not overlook the importance to us, as
well as to the rest of the world, that the progress of monetary restoration
abroad, upon which our foreign trade depends so fundamentally, shall not be
impeded by attempting terms which will make monetary reform difficult or imposWe must not overlook the fact that the Dawes Plan affords protection
Digitized for automatically against an excess of foreign payments, and places a very skillful
organizaticn in charge of affairs in Germany tc supervise foreign payments, so
Federal Reserve Bank of St. Louis

1.71 rilLAI

Biarritz, France


BRUSSELS. JULY 27,28,29. 1925.

The Belgian Budget:
The Belgian Government, as the French, have had a normal budget and an
extraordinary budget, the latter having to do with restoration work and having been

predicated, more or less, upon the theory that in some way Germany would pay.
cause of the size of the extraordinary expenditures, the Belgian budget has not
balanced, and last year the deficit was something like 1,500,000,000 francs.


the extraordinary budget will be very much reduced this year, and Monsieur Hautain
believes that Monsieur Janssen will be able to balance the budget unless the
American debt payments are too heavy.

They assume that the funding arrangement will be made, and the commission
undoubtedly went to America with an honest endeavor to effect a settlement, and
probably with pretty broad authority the deal with the matter. an economist, who lectured
Monsieur Janssen, to Finance Minister, is

at the University of Louvain for a good many years at the same time that he was a
director and an active offic3a1 of the National Bank.

I have kn

many years, and have had the same favorable opinion of him that others generally

He Is quite unlike the co mon type of Gaul;

well posted;

not at all excitable;


apparently a thoughtful, deliberate man of sound views, and the

determination to do the right thing.
It is opportune that they should have a Minister of Finance w'.o was

educated in the National Bank, and who is thoroughly alive to the perils of an
unbalanced budget to the monetary situation.
The Belgian citizens still have large investments abroad, which will
ultimately be resources of great value over the reconstruction years.

Biarritz, France

Discussions with Monsieur Hautain, Cont'd


The National Debt:

The present debt is between 40,000,000,000 and 45,000,000,000 francs

the amount, of course, being estimated because of the need for valuing the foreign
obligations according to the international value from time to time of the Belgian

Of this total, the floating debt is 5,500,000,000 francs.

There seems

to have been no difficulty in keeping the floating debt rolling along.

There has,

however, been a deliberate effort to keep the bank rate down so as to avoid high
rates of interest on the Government borr(wings.

It seems that the Bank is free in

fixing its own discount rate and loaning rate on all classes of business except u'on

Government securities, which requires the approval of the Government before it can
be changed.

Notwithstanding the heavy debt, Monsieur Hautain states that the amount
discounted at the Bank is negligible, being only about 250,000,000 francs.
Government makes no effort tc use the Bank, and will not do so.


He justifies the


low bank rate for the Government's benefit by stating that the Bank Rate is completely ineffective.

The amount of their portfolio of discounts and loans is so small

Bank Rate would accomplish nothing, and the only way in which they could

that a high

control is by rationing, just as has been done in Germany.

While the national debt is very heavy, he does not feel that it is beyOnd
their capacity to take care of the service of the debt.
In general, business in Belgium has been pretty good, and the crop outlook is excellent.

The only two questions which cause them serious disturbance

are the funding of the American debt, for which they fear the burden will be too

heavy, and the prospect of complete loss of the claim against Germany on account of
the issue of marks.

The Bank is protected by the Government's obligation, but,

obviously, it would be much easier all around if this particular debt, which has a

strong moral support, could have been given some priority in the Dawes Plan.

Biarritz, France

Discussions with Monsieur Hautain, Cont'd


The German Debt:

This matter is described in my letter dated July 28, 1925 to Mr. Case.
in 1919
It happened that I was in Belgiuywhen the conversion was being dealt

The Government had a mistaken notion that it was

with by the National Bank.

their duty to their own citizens to take over this issue of marks at a very high
rate of exchange.

And they did it in a very clumsy fashion anyway.

Instead of

closing the frontiers to the importation of Belgian marks, they gave nctice


advance and converted them at a high rate, - I think at the equivalent of 17 or 18

The result was that a very large amount of this paper, which was not within

Belgium at all (in fact was in Germany) at once flowed in in order to get the benefit of the conversion rate.

Twice the Belgian Government succeeded in negotiating an agreement
for repayment of the debt


the Germans.

The papers were actually signed, and

then the Reichstag declined, in both cases, to ratify the agreement.

The debt was

recognized by the Treaty of Versailles, but when presented for preferential treatment st the time of the adoption cf the Dawes Plan, the claim was rejected.


it locks to me as though whatever Belgium recovers will be through the percentage
accruing to Belgium under the Dawes Plan;

and the priority there will

up before long and Belgium will be left with this debt unliquidated entirely.
So t'ne burden of repaying the Bank will fall entirely upon the Belgian
Government, and, cf course,

If the Belgian franc should be revalued at, say, one-

quarter of its present nominal value, and gold payment then be resumed, the main
protection the Bank could obtain -Iculd be by some arrangement with the Belgian

Government by which they will promptly repay to the Bank a large proportion of that

And the only wa: in which the Belgian Government can do that will be by

borrowing in a gold standard country or countries.


Monsieur Hautain.

Hence the plan proposed by

Biarritz, France



Discussions with Monsieur Hautain, Cont'd


Notwithstanding the situation as to the so-called mark debt, Governor
410kutain is determined to propose a plan to revalue the franc, always provided the
burden of payments to America is not too heavy.

This subject is pretty well covered

in my letter to Mr. Case, dated July 28, 1925.

Monsieur Hautain admits that if his program can be carried out, it means
a higher bank rate.

He believes that the maintenance of the international value of

the new franc can only be accomplished by a foreign loan which would furnish foreign
exchange that the Bank could sell to the market, thereby reducing their circulation
in just the same way that any reduction of the portfolio would effect a reduction
in the circulation.

This reduction in the circulation would have the effect of

driving the banks to discount with the National Bank;

and that, in turn, would

make a high bank rate effective in controlling expansion.


Foreign Relations:

Monsieur Hautain states that in a small way the Belgians are gaining
some interests in Russia and in a larger way in Poland.

They have always had

quite a little business with Russia and Poland, and they are now hoping to develop
it by making some investments there, and particularly by furnishing management to
their industries.

He says that the developments in Poland have been very satis-

factory and profitable.

These are in connection with the textile and engineering

But he does not think their trade will be restored to what it should

be until after confidence is again restored in the stability of the Belgian currency.

Biarritz, France


11.2.2a.....Discussions with Monsieur Hautain, Cont'd

Foreign Financing:

I pointed out to Monsieur Hautain that a loan of ;150,000,000 was a large
sum of money for a small country, especially following as it did the placing of

other loans in America, and asked him if he had any plans.

He said that the fiscal agents of the Belgian Government were Messers
Morgan and the Guaranty Trust Company.

And he wanted to know how best to handle a

new loan, - whether they should have a competition and invite other houses in,

He said that not a week passed without their being approached by

etc., etc.

American bankers for some of that business.
I told him that I thought it was a mistake to shop around;
were, of course, a number of good houses who could handle the business;

that there
and that

they might be justified in employing them if their regular agents could not handle
the business satisfactorily;

but that it was a great mistake to make inquiries of

various houses at the same time and so unsettle the market for their own securities.
i also told him that I thought their budget position would be a
detriment in these negotiations, and he admitted that

stating that the budget

should have been balanced before, but that it was always the myth of collections from
Germany that stood in the way.

He was very insistent upon the need for separating the French from the
Belgian franc.

They move together now almost exactly.

It was pointed out tc

him that the only way to do that was to revalue the Belgian currency, put the
revalued unit squarely on a gold basis, which would stabilize it, and then the
French franc would fluctuate independently.

I pointed out to him what the result of our relations with the Bank of England had
Biarritz, France
been, giving him the impression, sc far as I could, that we were ready to discuss
80425, Discussions with Monsieur Hautain, Cont'd (6)


such relations with him, but that we felt that that subject generally should
Central Bank Cooperation:
await the developments of the funding negotiations in Washington, and possibly the

Governor Norman and I had a long talk with him about this whole subject.
result of any Congressional inquiry which might take place this winter.
e agreeC that a general meeting was at present out of the question, but thought
He is very anxious to establish close relations with us as soon as we
these private meetings would produce better results.
are willing to have him do so.
He thinks it might be most helpful were he able
I dcubt if he much understood the possible dangers resulting from the
to sell us some of his portfolio of bills, and I believe he would be ready at any
widespread adoption of the gold exchange standard.
moment to turn over all of his American business to this was discussed with him,
I pointed out tc him

he seemed to think his bank would gladly cooperate in any sound plan to eliminate that
the unwisdom of doing this instantly, because of the antagonism it would create

among our members, but that ultimately some such arrangement was what we should

work to.

I think he proposes to write us about it later.

I think it is rather

Biarritz, France

Discussion with Monsieur Hautain, Cont'd


Relations with the Federal R-serve Bank. continued:

important that we should gradually have the account turned over to us, as they may

*lave very large American balances, and the imfortance of the relation to our money
market is obvious.
time, possibly mcre.

The National Bank must have $50,C00,000 abroad at the present

And if the revaluation scheme should go through it might be

three or four times that amount.


We had a little talk about this, although there was nothing special to
be said.

I explained to him our reasons for making the loan, and that we were

glad to have him hold the gold for us;

but what we wanted was to see the National

Bank established and functioning normally as a national bank should;

and that we

would probably carry the loan along, suggesting to them now and then that progress
should be made in that direction.

IIIGeneral Impressions:

My impressions from the visit with Monsieur Hautain were quite favorable, as were Governor Norman's.
I think possibly the only adverse, commentgwould be, first the delay

in balancing the budget, which probably was not justified, being based, as in the
case of the French, upon the vain hope of German payments;

second the proposal

for a separate adjustment with Germany, outside of the Dawes Plan, involving the
surrender of Malmedy against some scheme of payment.

This plan struck both Norman

and me as visionary and impossible, and involving a great variety of dangers and
difficulties which the Belgians do not seem to fully comprehend.
On all other points, however, it struck us thatMonsieur Hautain was

that his proposals were of the right kind;

and th-t he was an honest

advocate of sound finance and sound monetary conditions.
i have no doubt that the bank is in excellent condition, and that the
clearing up of the Government finances will enable it to function normally.



Grand Hotel Britannique
Spa, Belgium

July 25, 192.

My deer Dr. Stewart:

Enclosed are colies of cables so far exchanged regarding rates.
This arises
will observe some change of attitude since our discussion in Berlin.
partly from further reflection and discussion, but considerably because of intimations of a possible rate reduction in London, the consequence of which I fear
might have a distinctly bullish reaction on our stock exchange.
Governor Norman and I are agreed that a runaway stock speculation in
New York would be a distinct menace to the position on both sides, requiring, as
it might, more vigorous rate treatment later than would be necessary if we were
to begin now.
A letter received from Mr. Jay since you left indicates such considerable crop improvement that there is always the possibility of a bull stock market
Were we forced into a situation later
being followed by commodity speculation.
in the year, and in the midst of the fall demand, where a 6/ rate became necessary, London would then be required to go to 61 - a situation which by every means
should be avoided, especially in the early stages of the gold standard resumption.
This letter will be delivered to you by Mr. Norman's friend, Mr. John
Hugh Smith, who is also carrying a. note to Sir Alan Anderson.
Please discuss the matter in a preliminary way with Sir Alan, as you
will observe that Governor Norman is willing to go to London on Tuesday night if
my cable from Mr. Jay indicates that his presence is desirable, and if Sir Alan
desires to consult before settling this question.
If Governor Norman does go to London, it will be with the undertaking
to rejoin me in Faris as promptly as possible, whence we will go to Biarritz for
And I shall leave it entirely to you whether you
a stay of a week or ten days.
prefer to come to Paris before I leave for Biarritz, or join me there on my return,
when we could have a longer stay together, and possibly make a short trip to
Switzerland to meet the officers of the National Bank.
Concerning all of this, please telegraph me fully, if desirable, care
of the National Bank of Belgiun, Brussels, as I shall be there until Tuesday evening.
Sincerely yours,

Dr. Walter W. Stewart,
care Bank of England,
London, E. C. 2, England.


Brussels, Belgium
July 29, 1925.

De:0110r. Stewart:

This will serve to acknowledge
e receipt of your message in code, received yesterday morning together with one from Mr. Jay on the same subject, reading
as follows:







Your letter indicates belief that present exchange
position could be maintained with narrower differential between bank rates.
I agree, but believe that London rate, because of gold
receipts, is at the moment unnecessarily high, rather
than New York rate too low.
Early crop movements and seasonal requirements for currency
will make money firmer it New York without rate action.
Also prospective growth of commercial demands, if realized,
will absorb some funds now in call market and have more
effect than increase in discount rate.
Believe rate advance aimed at stock market would chiefly
influence bond market and further foreign flctations.
Believe rate increase in New York should await clearer
indications of advance in commercial paper rate.
Desirable that increased use of reserve banks this autumn
should largely take form of discounts rather than acceptances.
Suggest if action is required an advance in bill rates
to level of discount rate.
Will join you in Paris after your return from Biarritz."

and to confirm my telegram in reply, readirg:
"New York prefers to defer action, to which I agree.

Particulars by mail."

In order to give you a complete picture, I am enclosing a copy of Mr. Jay's
cable, together with a copy of my reply.
The suggestion contained in the earlier cable, originating with Mr. Young,
reporting the very sudden increase in the l -an account, and the possibility of a reto
duction to 4 in London, suggested at once to my mind that we might be adding fuel
the speculative situation in New York, which might later cause us serious trouble.

The coal strike in England, and the reports contained in the enclosed cable
from Mr. Jay, however, make it advisable to wait, and do not indicate that present
action is justified.
I am looking forward to seeing yeti in Paris on my return from Biarritz,
and will keep you advised of the date.
With best regards, I am,
Sincerely yours,
Dr. Walter W. Stewart,
c/o Bank of England,
London, England.
As Governor Norman decided to return to London last night, you may already
P. S.
have gotten this picture, but you will wish to see the actual text of the messages.
I am expecting the Governor to rejoin us in Paris as promptly as may be possible.


Brussels, Belgium,
July 29, 1925.

Dear Mr. Jay:

Acknowledge the receipt of your cable, received
This will serve to
yesterday morning, reading as follows:
Your cable No. 3
"Private and Confidential.
No. 4 (test)
Officers see no immediate likelihood of serious
disturbance through stock exchange account.
Speculation iswidely difused, margins large, many
large operators out of market, and most houses conservative. Volume of loans decreased slightly in
last week. You have now probably received memorandum
presented to Board of Directors July 16th.
Agricultural prospects excellent and general expectation throughout the entire country of substantially
better business volume but no boom.
Offerings of commercial paper light but practically
none being purchased under 4.
Three months time
money 4-1(4,!.
Yield on Governments working slightly higher.
Borrowings here and in system practically unchanged.
General anticipation of somewhat higher rate in
early autumn. Some think commercial paper may reach



Officers think money conditions not ripe for rate
increase at present and are satisfied that it would
not be understood.
Therefore we recommend no action at present nor
until it is clearly indicated by situation, but
cannot now predict whether or when that time will




Have discussed business and speculative situation
fully with Alexander and foregoing includes his
views which coincide with ours although anything he
said regarding rates was volunteered by him.
Alexander says present differential between London
and New York private rate is not now sufficient to
induce bankers here to retain money in London in view
of prospect for firmer money here this autumn. He is
withdrawing his funds as they mature and today
deelined London bid for three to six months deposit at
4-5(8% yielding 4-1(4.
If we take no action in the near future and London
should now reduce, and if we should then later increase
would it not seem appropriate for London if it so desired to increase again on the strength of our action
at that time.
This seems to us more logical and less
disturbing here than for us to increase now

Brussels, Belgium



Mr. Jay

Case returns August 3. Saunders and Runkle only
directors available till about the middle of
Referring to your paragraph 7 should aA)reciate
your communicating with !cGarrah and cabling his

and to confirm the reply which I dispatched last evening, as follows:
*No, 4 (test) Your telegram to me No. 4
Strictly confidential for Jay
My telegram to you No. 3 reflected belief that
(a) you feared danger in stock exchange loan
account as suggested your telegram to me
'bacaz' and
(b) London would reduce if we did not advance,
Your telegram to me No. 4 indicates (a) is
unfounded and ccal strike for present defers

TRIM Sulgest that you keep me advised by cable,
always giving position earning assets.
Leave for Paris tomorrow Hotel Majestic,
Shall see McGarrah and cable results.
Sending important letter to Case reporting
result our talks here, copy for Winston.

111 well.


It was only after my cable had gone forward that I received, via
London, the batch of mail which contained the memorandum submitted to the
Directors on July 16th.
Concerning all of this I will write furtler just as
soon as possible.
We are leaving for Paris today, and it is not possible to
dci so before then.

For your information I am enclosing a copy of the message I
received yesterday from Dr. Stewart in London, who has been keep in close touch
with all of this information.
Sincerely yours,

Pierre Jay, Sao.,
Chairman, Federal Reserve Bank of New York,
Liberty Street, New York.



Paris, France,
July 30, 1925.
Dear Mr. Case:

On reading over my separate letter to you atout the
Belgian situation, I notice that I have overlooked mentioning the
He is a
name of Baron Terlinden as a member of the commission.
bank official in Brussels, and was formerly chief secretary to
Prime Minister Theunis.
I do not understand that the Belgian Ambassador,
But the
Chevalier de Cartier, is a member of the commission.
three gentlemen who are, have considerable experience in financial

And, further, I find I have not given any indication
of whatl said to Monsieur Hautain on this subject of debt negotiations.
All that I said, in fact, was that Mr. Mellon was a
man of broad experience and great skill in financial matters, andI
felt sure he was sympathetic to the difficulties which Belgium had
encountered and that they would find him an eminently satisfactory
gentleman to deal with.
Baron Terlinden called just as I was leaving the Bank
yesterday, and in the course of conversation I was casually asked
what I thought would be the general line of procedure in regard to
I told him that I had no knowledge whatever
these negotiations.
as the matter had all arisen since I left home and as it was outside of my own duties anyway, and that I'could not give them any
Sincerely yours,

. H. Case, Esq.,
eputy Governor, Federal Reserve Bank,
3 Liberty Street, New Ycrk.

AUG 13 1925
J. H. C.



Paris, France,
July 30, 1925.

Dear Stewart:

I have yours of the 77th, which reached me just before I left Brussels
And I also received your telegram sent in code.
yesterday afternoon.
Of course, in principle, I agree with what you say about our stock exIf foole will speculate it is just as well that they
change loan account.
should prepare their own medicine and take it when the brew is ready.
On the
other hand, anything in the nature of a stock market collapse always has an adverse effect on business.
The combination of Mr. Young's suggestion, the figures of the stock
exchange loan increase, the possibility of a rate reduction in London if we did
not advance, the reports of our own crop outlook accompanied by easy money, and
the indication that there was some optimism developing in the business outlook,
led me to believe that it would be wiser for us to advance than for London to
always assuming that our associates in New York were convinced that the
stock exchange situation was becoming a menace.
On the other hand, the subsequent, development of the British coal strike
and the more reassuring report from New York regarding the exchange situation,
made me feel quite content to send the cable of which I sent you a copy.

I agree with you that there is something more fundamental just now than
the relation between the two bank rates, and that this movement of gold does preNaturally we do not want it. to turn in our direction if we
sent a difficulty.
An advance it our rate, or a reduction in London, might have
can avoid that.
Put I think all of us, in London, in Berlin, and in
that effect to some extent.
New York, must look with complacency upon a further reduction of portfolio to meet
:lid I would not hesitate, as matters now are
such a development if it arises.
and with opportunity for further conversation with some of our friends abroad, to
indicate to them the need of withdrawing funds from our market and earmarking gold
in our vaults if they wish to save themselves the consequences of a policy which
we must ourselves adopt in order to protect ourselves from too great an accumulation of gold.
All of this we can deal with much better by discussion than by correspondence or telegram$, and I am most anxious indeed to have a good visit with
you on returning from Biarritz.
In view of what you say about preferring to stay in Paris until sailing
time, August 25, I wonder how it would suit you to join me some time around the 10th,
We could then take the
I am not particular as to the exact date.
12th or 13th.
three days necessary for a trip to Berne, and I would not return to London until after
I find, as you do, that these gallops around Europe are pretty
you had sailed.
tiring, especially when we put in as long days as we did in Berlin and Brussels.
And I am ready for a loaf myself.
I hope you keep well and
Please drop me a line at the Hotel Palais, Biarritz.
are not too tired.

And with best regards, I am,
Sincerely yours,

Dr. Walter W. Stewart,
c/o Bank of England J





0. el.


Biarritz, France,
August 1, 1925.

Akr4.5.3VV RED

AUG 13 ig25
0 . rl

Dear Mr. Case:

There is little to add to what appears in the letter I wrote
Dr. Stewart about rate changes (copy of which went to Mr. Jay) except the
cable I am sending today, of which a copy is attached.
The situation roughly appears to me as fellows:
Any advance in our rate would be justified, as I understand conditions, only by our fear of a dangerous stock speculation. The report tc the 1(
directors of July 16 seems to make cl ar that uneasiness on that score is not
now justified, to a point where we should advance our rate, and that we can
On the other hand, the situation in
afford to await further developments.
London became complicated because of their very large receipts of gold, which
Their money market was easing and
exceed, as I recall, 8,000,000 sterling.
complaint about the high rate and its adverse effect upon trade was becoming
And at the moment they were considering a reduction, the situation
in the coal trade became acute and it locked as though a strike were unescapable.
This led them tc abandon the thought of reducing pending the outcome of negotiations.

Governor Norman returned to London from Brussels in response to
a telegram stating that charges were being made that the difficulties in the
coal trade were due to the resumption of specie payment, and the Chancellor
When he returned to Paris, I fcund that
wished to discuss that with him.
an adjustment of the coal strike had been about agreed upon, and, in conformity
with Mr. Jay's cable No. 4, paragraph 9, the Bank had tentatively agreed to a
feductiol. to 4-3/25 next Thursday, assuming that the coal strike situation
would be patched up in the meantime.
If they reduce, as I believe they will, it still leaves a differential of 15, but probably not so great a differential as will lead to
furtheraccuinu3ation but some reduction of American balances in London.
think they would like to have them reduced anyway, even if it becomes necessary in the fall that we should both advance our rates one-half of one per

I think in the meantime it may be well tc consider whether our
also possibly a portion of our
bill rate should not be somewhat advanced;
system holdings of securities sold.
This would only be for the period
prior to the usual Fell demand, which may increase discounts anyway.


Biarritz, France

Mr. Case


I am quite clear that we should not take measure to enable the
banks to escape borrowing from us when the fall demand arises. It is one of
to things which will keep the stock market in order to have the banks owe us
pirtty heavily.
Please be sure hereafter in cabling me on this or kindred subjects
always to send me information of the amount that the New Ycrk City banks are borr wing from us, and of the position cf earning assets in the System and in New York.
This is the one item which gives a little inkling of what is going on better than
any other, and, of course, an average figure is better than an actual figure as of
any one date.
I am enclosing a letter addressed to Mr. Jay for you to read, also
Dr. Burgess, and you can pass it on tc him if you think it worth while.
Our stay in Berlin seemed to have used Dr. Stewart up. It was
pretty strenuous.
Governor Norman is better, but he is yet rather tired.
seem to stand the racket better than either of them.


We shall be here at Biarritz for about ten days, and then Stewart
who is now in London will join me and we will try to gather something of what is
going on in Prance.
I am hoping tc see the Suisse people at that time, and,
on returning to London from Paris, we will arrange for a visit with both Dr.
Vissering and Moll.
This will cover about all the ground that it is possible
for me to do without too much delaying my return.

with best regards to you and all at the bank, I an
Sincerely yours,

J. H. Case, Esq.,
Deputy Governor, federal Reserve Bank,
33 Liberty Street, Ne.. York.


Biarritz, France



Bie--ritz, August 1, 1925.

Federal Reserve Bank,
New York.

Your telegram to me No. 4 paragraph 9

Norman here after trip to London.

He wishes you to

know that he believes that

Bank ofEngland will reduce to 4-312% next Thursday
which I understand indicates



That this concession to trade is justified by money
market conditions


Consider this conforms to your views


Send cables direct Hotel Palais Biarritz until
further notice


All well





Hotel du Palais,
Biarritz, France,
August 4, 1925.
Dear Mr. Case:

Enclosed are some more rather hastily dictated notes;
these covering the main points of our conversations with Monsieur
Please treat them as confidential.
Of course they
are hurriedly prepared, and I have not made any effort to get
atmosphere into the notes, which would be quite impossible.
This is a delightful place, and we have had some
enjoyable visits,for the Leffingwells were here on a motor trip
for a few days, and the Morrows have a beautiful house about fcur
miles from here overlooking the Bay of Biscay.
Dean Jay and his
wife also have arrived;
they have a house in the town. And we
are expecting the Gilberts tomorrow,
I have telegraphed to
Dr. Stewart suggesting that he come down for a few days and then
we will all return to Paris next week.

Please tell Mr. Harrison I have his letters of the
21st and 24th of July and will writeseparately after I have had a
chance to study them.
My best to all at the office.
Sincerely yours,

J. H. Case, Esq.,
Deputy Governor, Federal Reserve Bank of New York,
33 Liberty Street, New York City.






Biarritz, France



Mr. Case

11, and the acknowledgement which I have just dispatched, reading as follows:


"No. 7 (test)
Strictly Confidential fcr Case:
Your telegram to me No. 5 most illuminating.

Many thanks.


Paragraph 3 - Doubt if used this year


Paragraph 9 - Likely receive some gold from London


Paragraph 10 - Judge this is not likely before my return
next month.


Paragraphs 11 and 12 - Foreign bills held by Reichsbank not
over $75,000,000, and in New York probably not over $50,000,000.
Shall ask Schacht about report, but earmarking entire amount
would. be negligible and possibly desirable.


Harrison's letter of July 21 - After consulting Norman believe
within legal limitations proposed form is best available."

It was a great satisfaction to have so prompt and complete a
cable from you, and I hope you will continue to keep me advised.
I hope that you have returned after a good holiday, and that Jay
got off as he had planned.

This is a delightful place, and as the weather keeps fine, vie are
enjoying it immensely. Dr. Stewart will join us on Saturday, and then the
middle of the week we will leave, Norman returning to London, and we going on
to Paris, where I hope to have some good visits with Governer Robineau.

My best to all at the office.

J. H. Case, Esq.,
Deputy Governor, Federal Reserve Bank of New York,
33 Liberty Street, New York.

Hotel du Palais,
Biarritz, rrance,
AuLust 7, 1925.
Dear Mr. Perrison:

Thank you for your fine letter of July 21.
After discussing it with Governor Norman, I cabled (paragraph
5 of my cable ro. 7, separately confirmed)
"After consulting Norman believe within legal
limitations proposed form is best available."

He feels, as I uo, that the limitations of the statute are such nat we
And I feel
can do no better than is proposed in the memorandum you sent.
myself that the inference to be drawn from our published figures will not
only do no harm, but will probably not be available to most readers because
it requires a comparison of two separate statements, published at two difmaturity
weekly statement
ferent times;
statement of bills published in the Bulletin; and that little danger is to
Besidr's that, we may be buying other foreign bills
be apprehended.
long before the rritish credit is used.
The situation seems tc be that gold 5r piling up in the Bank of
England, so that they are about to_166,000,000 sterling, while the Cunliffe
report only suggested a minimum of 150,000,000 sterling.

Governor Woman feels that he cannot well advance his rate until
I disagree with him as to this, because I
after Lb has shipped some gold.
feel that the present time is the opportunity which the Chancellor should
avail of to increase the gold behind the currency notes, which has something
the sane effect as a gold shipment, and which will strengthen the Bank against
the time, say two years or more hence, when it will assume the currency note
issue in tote.
/hey probably reduced their discount rate yesterday, although we
And Governor Norman anticipates, as I do, that if
have no advice as yet.
an increase on the part of either is found necessary in the fall, it will moan
that he must advance to 5-1/2% if we advance at all; but that if he advances
it may not be necessary for us to do so, even though the differential between
London and New York is thereby increased.
We are reserving final discussion of these matters until Dr.
Stewart gets hero tomcrraw.

We are having a good vaction now, although the stay at Spa was

Biarritz, Fr (C.3


It. Harrison

a distinct failure. The weather WaS4 bad and the place dull.
reverse, and th clirate is gplendid.


Here it is

uite the

I will write you separately about the inquiry data, which I
have not yet studied.
Sincerely yours,

George L. Harrison, TCsq.,
Deputy Governor, Federal Reserve Bank of New York,
33 Liberty Street, New Tcrk.



M; CI&

AM §

Biarritz, France

.8.11. 25

Mr. uase


in fact, somewhat inspired by his talk with uovernor Norman and me, where1116n it was pointed out to him that if his reserve continued to remain inflexible
and was constantly maintained three-quarters in gold and one-quarter in foreign
bills, he would be educating the public to a state of mind in regard to his
reserve which might cause trouble whenever the need for a reduction occurred;
that is to say, either a reduction in the total, or in either one of the
respective items.
in order to meet this criticism, he is proposing to give it a
fluctuating quality right away, by arbitrarily increasing and decreasing the
gold proportion.
This means that there may be times when he will earmark
some gold with us, and later will invest it through us.
As to short-routing gold
and I feel that it is unlikely that
does not propose itself to ship any
would be taken from the Bank by the

from London to Berlin, uovernor Norman
this can be done.
The Bank of =gland
ouch gold as might be shipped
market and shi:ped purely as an exchange

It is possible that i shall see vr. ochacht later, before returning
home, when i can suggest that he have it in mind that something of this sort
might be worked out between himself and Governor Norman to save some
uneconomical double shipments of gold.
and if i find that
am not going to
see him, i will write him about it.
Dr. ochacht is likely to go to New iork in uctober or November,
and we can talk this over then.
Colonel Logan joined us here yesterday, and from him i learn that
Mr. and mrs. bharley Mitchell are now in raris; and i am expecting to meet
them at dinner on friday of this week.
this may afford the opportunity to
discuss the nentenbank matter with him.
she possibility of buying mark bills is, of course, pretty remote.
my letter was simply intended to get thought started on the subject.
vle all keep well and are enjoying our visit here at biarritz.

best regards to you all.
oincerely yours,

J. ii. base, zsq.,

weputy uovernor, federal Reserve Bank of New York,
33 Liberty Street, New York.



Hotel du Palais,
Biarritz, France,
August 12, 1925.

Dear Mr. Case:

This is to acknowledge the receipt of your cable,
as follows:

"No. 9 (test o. k.)
A. C. Miller telephones New York Counsellor of
Italian Embassy is making inquiry of him as to
your whereabouts and whether you plan visit to
Miller thinks inquiry from Mussolini
and, at my suggestion, is replying you are now
vacationing and not planning such visit.
Italian Embassy wants your address. Please
cable whether we should encourage or discourage

and to confirm the reply which I have just dispatched, as follows:

"No. 10 (test) Your telegram to me numbered 9:
Say I am not planning visit to Italy and return
home after short stay at Paris and London."

We have had an enjoyable stay here, and leave in the morning
for Paris, where I shall be at the Hotel Majestic for ten days or two
weeks prior to returning to London. Governor Norman, however, returns
home tonight.
My best to all at the office.

 J. H. Case, Esq.,
Deputy Governor, Federal
Federal Reserve Bank of St. Louis

Sincerely yours,


Reserve Bank of New York,

Hotel Majestic,
Paris, France,
August 15, 1925.



Dear Mr. Case:

Referring to your cable in regard to th Reichsbank's possibly
taking more gold, I am sending you with this a letter which I have just received,
after much delay, from Mr. Gilbert, together with a copy of the statement, a
portion of which appearing in the press doubtless suggested your cable to me.
I am told very confidentially indeed that the occasion for this
statement was a request by the Chancellor that the Reichsbank reduce its rate
This Dr. Schacht explained could not be done, and he immediately called
to 7%.
a meeting of the Central Committee of the Reichsbank and submitted the statement
of July 29, which was unanimously approved and then went to the press.
This does not necessarily indicate any lack of harmony between Dr.
Luther and Dr. Schacht, but it does afford evidence of the vigor with which
Dr. Schacht is endeavoring to maintain the independence of the Reichsbank, which
in fact was one of the essential principles set out in the Dawes Plan.
I am sure that Mr. Young will be interested in reading this, and you
may, therefore, show it to him in confidence.
oincerely yours,

J. H. Case, Esq.,
Deputy Governor, Federal Reserve Bank,
33 Liberty Street, New York.



MO 2 3


Hotel Majestic,
Paris, France,
August 18, 1925.
Dear Mr. Case:

Many thanks for yours of the seventh, received yesterday.
There is still a chance
in London, and I am sorry that there
The fact is I was invited tc
having been understood that he would
of which he is in London this week.

that I shall see Mr. Mitchell when I am
was a misunderstanding about his arrival
dinner tc meet him last Friday night, it
arrive here Thursday of last week, instead

Of course I shall await with interest whatever you learn about his
If he
statement to the Department of State in regard to our business in Prague.
has gratuitously, or in any other way, undertaken to make any trouble through the
Department of State, I will be inclined to take it up, on my return, with the
I hope
For that sort of thing we certainly cannot tolerate.
bank officially.
that his explanation was sufficiently convincing to make this unnecessary.
course if I see him I shall ask him to tell me what it was all about.
This, of course, leaves the matter cf the directorship up in the
air, but I shall await something further from you befcre doing anything.
I regard the transaction
About a possible purchase of mark bills:
as extremely unlikely, partly because there has recently been a considerable improvement in Schacht's devisen position, and partly because of his obvious reluctance
My letter, as stated, was just a preliminary
to obtain credit by that method.
warning, so that you could be thinking it over.

The criticisms at home could be ignored were we to limit our transactions to purchases of bills, without any agreement for renewals.
i shall write nothing in general about conditions until I reach London,
My present plan is to sail on the
which will be about the 28th of this month.
Olympic on the ninth. That's about the best that can be done without pushing too
hard and fast and coming home tired out.

Thursday night Dr. Stewart and I are going up to Switzerland to spend
We will be back here on Saturday evening.
one day and one evening.
I had a most interesting lunch at the Bank of France yesterday, with
But nothing of special interest developed, except that the
endless courses.
members of the Council were all most interested to learn whatever I was willing to
tell them about affairs in Germany, - which was not much - and they ire especially
keen to impress upon me the desirability for lenient treatment in the debt negotiaConcerning this I said that I had no official responsibility and felt that
the best thing to do with that question was to settle it, and net to let it remain
a bone of contention.

Paris, France


Mr. Case


I had another meeting at the Bank this morning, and one for Thursday
I will
afternoon, when Robineau and I will have a chance fcr a private talk.
ill write you anything that develops.
Best regards to you all at the bank.
Sincerely yours,

J. H. ease, Esq.,
Deputy Governor, Federal Reserve Bank of New York,
33 Liberty Street, New York City.



Hotel Majestic,
Paris, France,
August 20, 1925.


Dear Mr. Case:


The enclossd letter, just received from Governor
Norman, and the translation from the "Frankfurter Zeitung"
explain themselves.

I think you will find them interesting

Won't you pass them along to the officers, and pos-

sibly you will also ask Dr. Burgess to glean what he may from

it as an aid in talking to the newspaper men. Then it can be
passed back into my files.
Sincerely yours,

J. H. Case, Esq.,
Deputy Governor, Federal Reserve Bank of New York,
33 Liberty Street, New York.






July 15, 1925.


the Governor of the Bank of agland, T.I. Norman,
d the Governor of the American Federal Reserve Bank, B. Strong, are visiting the ReichsOh
ank President, Dr. Schacht, in Berlin. They intend,as the Reichsbank direction declares.
to discuss with Dr. Schacht the relations which arise from the natural intercourse,their
It is natural to assume that the relations, in particulall also be
discussed which have arisen with -England and America in regard to the Gold-diskont-Bank.
As is known all the shares of the last mentioned, after the payment of the sums put up
by the Bank of 121ngland went into the hands of the Reichsbank which also manages it.
In April of this year it was decided to make the bank, which had become meaningless as a
The intention was,
currency institution, live again as a purely credit institution.
chiefly by granting credit to the exporting industrytto help this along, the secondary
intention was in this way to secure a better rate of interest for the external possessions
of the Reichsbank.
The old credits of the Golddiskongbank, which at the end of last
year amounted to 6.7 millions pounds in drafts and checks had been reduced in April to
about 3 millions and should be fully wiped away in the later intervals On the other
hand new credits to the amount of 5-6 million pounds have been given,which, for that
matter Jr. Schacht, before the Kclner meeting had also mentioned.
the credit amounts are again very numerous and the exchange amount is slowly rising.
In connection with this they will think perhaps in the Reichsbank of regarding more the
rediscount possibilities in foreign parts. We are inclined to assume that the presence
of Lessrs. Norman and Strong, has a certain relation to this. As we at the time stated
the foreign rediscounters (in thi first line-ale", the International Acceptance Bank)
had declared that they would take up again the credit relations to the Golddiskontbank
after the rediscount credit of 25 million dollars that was previously certified to,and,
that could hardly be taken into account, was declared off on December 15th of last year.
IliOur Berlin office writes to us;

We may therefore, assume that now relations with Londaand New York have been taken up
again with the object of a renewal of the rediscount credit to the German Golddiskontbank.
BERLINER B0rtsgg,z4mici.

July 11, 1925.


Conversitions with ieichsbank President Schacht.

In financial circles great importance is given to the visit of the President of
the Bank of England and of the Federal Reserve Bank of New York to the Reichsbank Pred4dent, Dr. Schacht, in Perlin, the more because silence is kept guarding the object of
The rumor is spread however, that it is a question of negotiations for a
the visit.
new German loan.
The "British United Press" publishes an interview of its correspondent in
Berlin with the ieichsbank President, Dr. Schacht, he is said to have declared that
Montague Norman, and Benjamin Strong have come to Berlin to visit him personally and to
talk ahout certain circumstances Which have to dc with the relations bOween the three
national banks. At any rate Dr. Schacht had calWgorically denied that the transaction
had any thing to do with a new German loan.
8 Uhr-Abendblatt


July 15, 1925.


Lately in London there has been a 3ussian sending of gold of the value of
20,000,000 marks for the payment of English machinery delivered in Russia.
Our picture shows the London Custom Officials examining the gold cases.



BERLIN TAGEBLATT - Making the Dawee Plan Sure.
The Berlin Consultatio
Nashington July 14.
The Philadelphia Public Ledger today points
Bank Presidents.
out the great significance of the present Berlin consultations of Bank Governors Strong
and Norman.
"It is clear," writes the newspaper, that these leading financial authorities
do not intend to inform each other about weather conditions or turtle egg,a from
Timbuctoo, but are preparing decisions of the greatest importance for the financial fate
of the world." The making sure of the Dawes plan stands in the foreground of interest
and the necessary preparatory measures for this must be taken at the right time.
present Berlin confe ences will be followed by numerous ones of similar nature till conditions attain a common definite stabilization.

BERLIN TAGEBLATT - America and the Transfer Question.
1114shin, ton, July 15.
The leading
New York commercial newspaper, "Journal of Commerce," speaks, under the healing
"Mysterious Finance," of the Berlin journey of the i.overnor of the Federal Reserve Bank
in New York, Strong, in company of the Governor of the Bank of England, and writes:
"Since England has returned to the Gold Standard, it is no longcr able to hold Germany
under the arms with credits as liberally ae before, and America' s help is therefore
necessary for the solution of all the currency problems that arise in connection with the
carrying out of the Dawes plan.
Difficulties of transfers could only be overcome by securing snortterm credits. In thi e it is a question of techni cal transactions, the care ying
out of which would be not at all in contradiction with the American policy of keeping away
from the entanglements of the Reparations question."
The newspaper de
necessary bank operations in thi s connection should he carried out on a strictly legal
basis, in order that there should not again be a protest of the American Congress, as
there was in the case of restoration of the English currency to the gold standard.
America has every interest in Germany's returning to sound currency conditions, as England

VOSSISCHE ZEITUNG - America on the Visit of the Bank Presidents. New York, July 13.
The visit of Norman and Strong to Schacht has interested greatly the New York banking
The most varying versions as to its object are in circulation. The simplest excircles.
planation is that G rmany seeks an additional loan to the Dawes loan.
The second explanation is England is so embarrassed oy the return to the gold standard that she needs for
herself the resources which see formerly placed at Germany's disposal, and on that ace_ount
Strong wishes to inform himself in order to come to England's assistance.
This would
especially concern a German short term credit affair and the exchange di amount.
version, finally, asserts that in connection with the transfer question, the foundation
of branches of the combined general reserve hanks in Germany and perhaps in England also,
is planned.




RANKFURTER ZEITEING - Interview of the Note Banks.
Our Berlin correspondent writest
It is undoubted testimony
moral success of the young Reichebank, that it could
receive the visit of two leading note bank heads, two persons, to wit, who are not imbued
with the quality of controllers or of creditors, but are simply the representatives of
the currency banks of their countries and as such wished to confer with the currency bank
of another country. Mr. Strong of the Federal Reserve Bank of the State of New York came,
on his European journey, to the Bank of England, and the lately reelected Governor Norman
of that bank, for a long, time conversant with German problems and German personalitiee
accompanied him on a journey to Berlin; apparently the visit had no practical bueiness or
currency tactics object, but instead the purpose of drawing closer the present contact,
and of talking over all subjects which today can interest the note bank heads of important
countries that are related to e ch other in the general rearrangement of world and money
economics; among these the Transfer problem and the questions for the year 1926 are said
to have been discuesed. The conference lasted many hours and the parting was in a very
cordial tone, if a chance observer might judge.
They clearly g
formation; especially was that done from the German side and conscientiously; they undoubtedly agreed unanimously in their views and in the currency policy; only in thie way
can mutual understanding be secured for the cae-3, that some time later - not now international financial questions of importance may be solved by autual consent.
speak of credits and loans as a subject for the conference is naturally absurd. It is
amply suf icient when the guests carry away with them a good impression of the common sense
rnestmese ef
with which German industry
.ith which bank policy here is handled, and of the
From convictions ohtained
is striving to brine., about its reformation and its readaptation.
personally alone can support be found for German private credit abroad, which later,
especially when lands come into contact again, are of greater use than any present agreemene, which would hive to count on the diLiculties of foreign markets.

of a great


ry -

G. Bendcic.ri

July 27, 192b.

iPress Service

Berlin, July 14, 1925.



The 1.72.1174221221111.111nE and Berliner Tageblatt of July 14,

information concerning the visit of M' Montagu Norman
1925, public
and Mr Strong to Dr Schacht.
The Vossische Zeitung dra"s attention to the interest aroused
by this visit in New York financial circles
d to the different
reports current as to its object. The simples version of these is
that Germany wishes to raise an additional loan to the Dawes Loan.
It is also said that, owing to the return to the gold standard,
England now requires in toto the funds previously placed by her at
Germany's disposal anT-7-t-h-el-Mr Strong desires to collect information
According to a third
with a view to supporting Great Britain.

version, the foundation of branches of all the Federal Reserve
Banks in Germany and perhaps also in Great Britain is under consideration, in connection with the Transfer 2roblem.
The Berliner Tageblatt quotes from an article from the
Journal of Commerce, dealing with Mr Strong's journey to Berlin
The assistance of the United
17177ETTITOWgrerious Finance".
States has become necessary for the solution of the various currency
problems connected with the application of the Dawes Plan.
transfer difficulties can, it is argued, only be overcome by the
These would consist of technical
issue of short-term loans.
transactions, the execution of which would not be incompatible with
American policy, the object of which is to hold aloof from any
The Journal of Commerce
interference in the Reparation question.
urges that all banking operations should be carried out on a strictly
legal basis.
The Boorsen Courier, evening edition of July 13, 1925,
Publishes a report stating that the Journ6e Industrielle has made
public a statement by the Under-Secretary of State or the Liberated
Regions, M. Schmidt, confirming his intention of substituting new
regulations for all existing regulations regarding deliveries in
His object is to simplify these deliveries.
kind by Germany.
Herr Lehnhardt, and M. Sartini,
The German Delegate,
Belgian plenipotentiary, have signed in Paris an agreement under
which Germany will pay an indemnity of 21 milliou iranos to B016.4.,,
According to the Berlinee Tageb
subjects deported during the war.
this indemnity was offered spontaneously by the GermarraZilnment.
The indemnity will be distributed among 55 000 seigian-Subje
i.. an average of 450 francs per person.

The Deuteches Tageblatt (Fhist) of July 14, 1925, states
that the economic disaster 7,1-Fgatoning Germany is "the benediction
The Deutsche Zeitung, expounds the difficulties
of the Dawes Plan".
involved in the settlement 75f reTsTaIron payments which were
These difficulties confirm the arguments
recognised at Brussels.
put forwprd some time ago by the Deutsche Zeitung and its financial
The Deutsche Zeitung displays satisfaction
correspondent, Herr Bang.
with the comments of the more moderate German Press upon the
Bruosels Conference.

- 2



The Vossische Zeitung reports that a certain portion of the

City of BerlTri LeaH-1-6-661.71-g-offered on the Amsterdam Bourse.


prospectus of the Loan contains the statement that the service of
the City of Berlin's debts will not exceed in all 4 300 000 dollars
per annum. It is impossible to give more exact particulars pending
the final settlement of the revalorisation question.
The charges
resulting from the Dawes Plan for the Berlin communal undertakings
are estimated not to exceed 475 000 dollars for the year beginning
September 1, 1925, 590 000 dollars for the following year and
1 150 000 dollars for the seceeedeng years.

The Muenchener Neuesten NaeheeUinten state that the negotiation

of the Bavarian Leiiiri-ci-indued at-Munich with a prominent
delegate of R group of New York banks.

According to the Boersen Zeitung; the City of Bremen has not
It proposes to contract
a foreign loan, independent of the 11 million mark loan granted by
the mortgage banks.
suspended negotiations wiTE-Aiii-e-HC:inTinance.

(German) in
3.5 million

Deutsche Handelsdienst confirms the report regarding the
flotation of the loan contracted by the Glanzstoff Group
the United States. The principal of the loan is for


(a) The Vorwaerts announces from Warsaw that the Polish Commercial
Delegation has offered to resume negotiations with the German delegates.
The German Government's proposals are to be re-examined and counterproposals will be submitted.
A new decred published by the Polish Government lays down
certain new import prohibitions. The decree is to come into force
on July 17, 1925, and will apply to a large number of German products.
The Commercial Committee of the Reichstag discussed yesterday,
July 13, 1925, the tariff items in the Customs Bill relating to the
The Socialists and Democrats criticised
iron producing industry.
the Government's Hill, the former pressing for the withdrawal of the
duties and the latter for their reduction.
The German Civil Servants' Union has published a manifesto
protesting against the Customs Bill, the application of which will,
in their opinion, conduce to a general increase in the cost of living,
The Union; on behalf
economic confusion and social controversies.
of one million Civil Servants, is opposed to the minimueduties on


to the foundation of a German
The last remaining Obstaolps
P. plenary meeting of the members of the
Steel Trust were overcome at
"A" products Union (semi-finished products, laminated iron, railway
material). (Deutsche kllgemeine Zeitung, July 12, 1925)

According to the K8Inische Zeitung, the German railways will
commence in November the ;York of completing or renewing their stock
of locomotives.

- 3
According to a report in the Vossische Zeitung, Mr Harriman
and the General Manager of the United ltmerican Linihave left for
Hamburg, where, it is said, they are to negotiate as regards the
possible purchase of the Stinnes fleet.


The A.E.G. will be entrusted by the City of Berlin with the
construction of the new electric power house at Rummelsburg.
sum involved is over 50 million marks.


In its meeting on July 13, 1925, the Taxation Committee of
the Reichstag continued the debate on the Finanzaus0.eich Law and
adopted the motion submitted by the GovernmieWParties on the increase
in the Beer Tax.
The amendments were all rejected. The Government
representative estimated the yield of the new tax at 40 or 45 per
cent more than the old tax. The debate on the Tobacco Tax has
A Socialist deputy and a Democratic deputy protested
against th3 increase in the latter tax.
In the Vossische Zeitu, Dr. Flagler, Syndikus of the
against the proposed Tobacco Tax and
states that in its present position the cigarette trade is unable
to support heavier burdens. Dr. Plugler recalls the proposals made
by the trade with a view to settling the question of the tax by a
SteuarE,emeinschaft (joint committee of the trade on taxation) .


The Berliner Tageblatt of July 14, 1925,

publishes an article

by the S:ind-37TES-,--lerr Breuer, calling attention to the excessive

taxation borne by the German champagne (Sekt) industry.
The Vorwaerts of July 14, 1925, protests against the proposed

regulationsor the tax on rents.

The Reichstag concluded on July 13, 1925, the second reading
of the Law on the revalorisation of mortgages.
The proposed prescriptions for the revaloi.isation of industrial bonds were adopted.
A summary return of staff in the Ministries of the Reich,
in the Postal/ Administration, and National Printing Press,has been

laid before the Reichstag. The Ministries of the Reich employed
on April 1, 1925, 95 789 civil servants, 21 163 lower grade officials
and 44 653 workmen. The Postal Administration and National Printing
Press have in their employ 252 585 civil servants, 3 234 lower grade
officials and 38 447 workmen.
These figures are slightly lower
than those for October 1, 1924.

The Cabinet will meet to-morrow to discuss the reply to
M. Briand's Note.



The German Government has collected and published/a pamphlet
of about 100 pages the principal documents relating :o the security
During his visit to Dresden, the Chancellor, Dr 'Luther,
informed the journalists that the acrmramant, had not yet taken a
decision as regards the Provisional Rep17 to be sent 4,o M. Briand.
The German Note would, he said, refer to each of the - .arious legal
points introduced into the discussion by the French Note.

The Vossische Zeitun$, evening edition of July 13, 1925,

expatiates o n - i l i e - o l o r in shown bt the Nation-111st Party to

I. from the Ministry for Foreign Allairs hac been cu
fc.,:m.irg resignation cf Dr Stresemann
Dr Stresemann.
cime.i.nun cireles, but is denied by the mae!Tliche Rundochaa
The Berliner Tageblatt recognises f,h2cii^:Sii%ede


The Vice-President of the United States,
gave a banquet in Chicago on July 13, 1925, on t
visit of the German Ambassador, Herr von Maltzan.
delivered by General Dawes and the Ambassador. (B

The French Chamber of Deputies has passed
The Socialists voted agai
by 421 votes to 150.
The German Press regards this vote as the end of
gauche; ".

Preparations for evacuation are being act
the Ruhr. A first zone will be evacuated this we

The Congress of the German Chambers of Co
AirEraft Manufacturers' Trust have protested agai
from the Council of AMbassadors.

A strike has broken out in the building t
involving about 25 000 workers.

From the French
Translated - CP
Checked - NL

Page #2.
OR01.)IT PlUaa""`SUF.L;1


London, July 16, 1925.
Private Report.
""Dailv Herald"has it telegraphed to it that liontague Norman, the Governor of the
Bank of Lngland,who is now staying in Berlin, has promised Germany a credit of 40,000,000
pOunds, if it accepts the alliance proposal of Briand, endeavors to be taken into the
alliance of nations, and pledges itself to support -.!land's policy against Russia."

That is naturally a piece of news with a purpose that can be easily seen through.
A notice in the"Times" is probably to be taken seriously, on the other hand, which repeats
a large number of the excuses brought out in Germany against the security agreement and
finally ends with the opinion that the care for foreign credits outweighs everything, but
that these foreign credits cannot advance without a solution of the security question.
Further a notice of the diplomatic correspondent of the "Daily Telegraph" must be mentioned, who writes; "After the English-German commercial treaty has been held up the opinion
will rule strongly in London that Germany should be refused credits as long as the wishes
of England are not complied with."

We do not believe, indeed, that Cis'in fact, is held in earnest in London.
From the preceding news items,however, it is clear to be seen how sure people in London
are that they can obtain everything from Germany if only they offer credit to it.
It is not devoid of da
idea is naturally helped by Germany herself.
because in it the position of Germany seem much weaker than it really is. As a matter
of fact, in Germany, from the beginning the possibility of building up again its own
economic conditions with foreign credits has been exaggerated in an extraordinary manner.
In the second place
igland's economic position is such that a dropping out of the German
consumer, through a cutting off of credit, would injure English business for natural
reasons to a degree that England could not support in her uresent condition; and finally
it seems that People do not clearly see whether a credit boycott organized by England
must of necessity lead to an organized ware boycott on the part of Germany which would
deal many wounds to Luglish commerce.

Page 41.


July 16, 1925.



Montague Norman's and Benjamin Strong's Berlin Transactions.

On the 10th of July, ias has been stated the Governor of the Bank of England,
Mr. Montague Norman, and the :;evernor of the Federal Reserve Bank of New York, Mr. Benjami
Strong, arrived in Berlin. Both gentlemen, who are at the head of the English and the
most important American banks of issue,have made a visit of several days on the Reichsbank
have had several
president, Dr. Schacht, here, which at present is still continued;
conferences with him and other important persons and have partaken of several common meals
This visit has given rise to a number of comments and suppositions in this country and in
foreign parts which are partly erroneous. Among other things a connection with
The Termination of the First Dawes Year
in August, with questions of transfers, and with the use of the fundcreated by the reparations loan, has been imagined, and further and more extensive suppositions have been attached to this apparently accidental visit. On the other hand it must be establisheu
that the personal visit of the two Governors of banks of issue has no especial or peculiar
cause, and that oeople have little cause for astonishment in it because in future more of
such conferences will take place.
The solution of the reparations question, and the stablizing of German currency is built out of the London agreement, this again out of the
the Dawes plan on its part assumes the creation and the
contents of the Dawes Plan;
keeping; up of a stable German currency, if it is to be carried out, and intends in this
connection to have a strengthening of the itichsbank.
ILIn the plan itself and in the Reichsbank law, it is exnressly stated that a
friendly cooperation of the various foreign banks of issue, which are represented in the
Psneral council of the Reichsbank and took. part in leading to the emission of the reparatiOns
That compels the settlement of .a whole series of mostly
loth, should be assured.
amongrother things they are to be consulted
technically executive or banking Questions;
in the case of replacing a departing member of the general council. Moreover it must be
established that the Genoa Conference had already hven the banks of issue and their
working together a certain part.

The Reichsbank president,404 alhacht
who, has come into touch with the two gentlemen tW,are dealt with here about the proceedingsof last year, has consequently kept their visit in agreement with the problems
that existed before hand, which the Reichsbank has inherited on the one hand through
the agreements built upon the London agreement, and on the other hand through the relations of the German bank of issue to international finance and to the foreign banks of
Dr. Schacht,,as is well known,,made a visit to Brussels some time ago, and it is
to be assumed that the Governor of the Belgian bank of issue, Mr. Hautain, will also at
the proper time speak in Berlin in return for this visit. From all such conferences the
conclusion is perhaps to be drawn that there will be a more intelligent and active cooieratica of the bank of issue institutions which deal with the currencies of the individual countries, but not that there will be special consultations in every single instance which could have a definite object or perhaps a political meaning for the country
that is visited at the time.


July 16, 1925.

:Teue -reussische Zeitung
TEP V171X 07 2/E BAIT,: crovEzolp

On the 10th of July the Governor of the Bank of England, Mr. Montague
the Governor of the Federal Reserve Bank of Nea York, MX. Benjamin Strong, arrived
in Berlin.
The two gentlemen, who are at the head of the anglish and of the most important American banks of issue, have arranged here a visit of several days, which is
still contimijaagamith the Reichsbank president, Dr. Schacht, have had various conferences
with him and other imaortant persons, and have taken part in some common meals.

This visit has given occasion to a number of commentaries and combinations in
this country and foreign parts, which are partly erroneous. 2or example, a connection
with the ending of the first "Dawes Year" in august, with questions of transfers, and
with the use of the fund created by the reparations loan, have been made out, and still
further suppositions have been connected aith this nrobably accidental visit.
In opposition to this it may be assured that the personal visit of the two bank of issue
Governors had no .especial or extraordinary cause, and that people have oven so little
cause to be astonished at it in that,inathe future,more such conferences will take place.
The solution of the reparations question and of the German currency stablizing is
grounded on the London agreement, and this again on the contents of the Dawes plan;
Dawes plan on its part assumes the creation and the maintenance of a stable German
currency in order to be carried on, and aims in this connection at a strengthing of the

In the plan itself and in the Reichsbank law it is expressed, that a friendly
working together of the various foreign banks of issue, which are represented in the
general council of the Reichsbank and which were already leading in the giving out of the
reparations loan, shall be assured.
That is surely necessary for a whole series of questions of technically executive or banking character; among other things they are to be
consulted in the choice of a successor to a departing member of the general council,.
Moreover it must be established that the Genoa conference gave to the banks of issue and the
common work a certain part to _play.
Reichsbank president, Dr. Schacht, who has come into closer connection with both
the gentlemen in question here in relation to last yeax*s dealings, has therefore kept
their visit in consonance with the standing obligations, which the Aeichsbank,on the one
hand through the agreements built upon the London agreement, and on the other hand
through the relations of the German banks of issue to international finance ana to the
:oreign banks of issue, has assumed.
Dr. -shacht has, as is knoan, some time ago made a
visit also to Brussels and it is to be assumed that the Governor of the Belgian bank of
issue also, Ex. Hnutzin, will make an address in
as a return for this visit.
From all these conferences the conclusion to be drawn is perhaps of the development of
the more intelligent and active cooperation of the bank of issue institutions, responsible
for the currencies of the individual countries, but not of special deliberations in each
individual case which would have a definite object or political significance for the
country that was visited.


JEWS 02 A ;I:24._ 40Q MILLIql. ;AnIf ai'OR

July 16, 1925.


Foreign newspapers state that the President of the Fedoaal Reserve Bank, strong
and the President of the Bank of adgland, Norman, who are at present in Berlin are dealing
with the Beichsbank president, Dr. Schacht, concerning tin assurance of an amglish American
loan of 20 million pounds sterling, which apparently are to be given to Germany as soon as
Digitized for the security agreement is signed.
This news, which sounds very improbable even to a parti
ally informed reader, is declared from a reliable German source to be false.
Federal Reserve Bank of St. Louis


Hotel Majestic,
Paris, France,
August 19, 1925.
My dear Winston:

So far, I have not had opportunity to gather,lagresaiona
as fully as I would like, partly because so many people are away on vacations,
and partly because of language and other difficulties which have to be overcome
here to a greater degree than almost anywhere else in urope.

Undoubtedly they have had a good crop this year, and it is now pretty
well gather d. I refer especially tc cereals.
The tourist crop has been about
the best on record, and, from personal experience, I can testify that it has
brought a good price.
In Paris, even on a gold basis, prices are pretty high,
and yet Americans have been here in droves, spending =nay right and left.
Of course there has been a good deal of uneasiness about the situation in Morocco, but the evidence of cooperation between the Spanish, Britie and
French, and the recent military success which the French enjoyed against the miffs
ham largely relieved that feeling of uneasiness, which was undoubtedly growing
and having a rather widespread effect.

There is unfortunately some feeling that when Parliament reassembles
the present government will be facing difficulties which they may not be able to
avrvive. Two or three people have mentioned to me the possibility of their not
lasting many months logger. The ever-present fear in the minds of the business men
is the activity of the sociali ts and communists, and the intrcduction of fanciful
ideas of government and finance by some of the long haired type of radicals.
So far as I can learn, there are no figures available from which to
judge of the success of the conversion loan which is now being floated and on which
subscriptions close early in Sestember. They all speak hopefully, but with some
The general attitude in that the people will not subscribe until the
last days.
My rough impression is that the maturities are now being comfortably
taken care of, but that the subscriptions are only about 501 of expectations.
There are about 55,000,000)1,M to 58,000,000,000 francs of bonds de
defense outstanding, maturing, of course, every day.
They are issued for one
month, three months, six months and one year.
Some days they are short and some
days they are over in subscriptions to take care of maturities, but the average
recently has bean pretty good.
Some fear is expressed that if they have a failure
of the present loan, it will mean an enforced conversion of the bonds do defense
and a very severe blow to French credit.
The only other resort, if conversions
are not effected and maturities canaot be met, is inflation by further issues of
Bank of France notes, of which they have had all that they want and more.
You know the new bond is a perpetual Ir. rente, issued at par in exchange for bonds de defence, with all of the exemptions and privileges attaching
to the existing issues, and with the obligation of the Government to pay interest
on the basis of the sterling value of the franc figured over an average period
each day, at the rate of 95 francs to the pound.
Of course any distrust of the

rams, France

Mr. Winston

add to the budget
sterling value would simplyfancied the scheme
caused a decline in its
I have never
franc which
new rent's.
justified some such radical
paying interest on these
burden in
tc believe that the emergency
lijkbut am le6



of the resignation of
have heard the many rumors in the accounts of the Bank. I
Of course you
have been
the disclosure of irregularities
which suite likely would
Robineau following
his resignation,
that the job was
he submitted
Rumor has it
later an
am told that twice
they been able to find a
sous-Governor of the Bank,
I am
accepted had
who was at cne
of the banks in Paris.
offered to Monsieur Sargent, at present the head of one
Jes0h Simon,
generally heard as to Monsieur
officer of the Treasury, and
story is
And the sane
of introduction.
told he declined.
to whom I gave you a note
Societe Generale,
head of the
Sixscn, and had a long and
with Monsieur
be no
impression that there will
I have just had luncheon
that he is now of the
He tells me
talk with him.
the Bank, at and rate for the
governorship of
change in the
yesterday, - the
of France
considerable part of the Bank nine years, - and was
I went through a
premises in about
Pallain resigned.
made a tour of the
first time that I have improvements which had been made since Monsieur
could judge by the way
astonished to find the
institution, so far as one
adding and type
It is really a modern, up-to-date equipped with American tabulating,
It is fully
records, etc. The dingy
for accounting
work was being done.
the girls
modern appliances
macUnes, and with all the
refurnished with modern
businesslike aprepainted and
old building has been so-called over-ails, and it has a very
established out near the toile
put into
have all been
Unite' States.
the new branch they have
I also visited
better for any bank in the
have anything any
is very much beloved
and I do not believe we
of Monsieur Rcbinoau, who
weak men in
of this is to the credit
though he nay be a rather
At least all
of the Bank, even
of the blame for
and truatea by the staff
If Robineau has some part bank have more. And
importunate politicians.
that the regents of the
the dife
accounts, I certainly feel
of patriotism, of course
juggling the
to him on the ground
would have resigned
Nevertheless, a stronger man told, is the arguwhen his own people appeal
That, I am
position is obvious.
ficulty of his
it had been.
finances and turned
a crisis, however great
disrupted French
and precipitated
it might have
them, - that
ment used with all of
them inside out consequently.
with Monsieur
detailed account of my talk
like to give you some
I would

1906, he was Chef de Bureau
As long ago es
is briefly this:
life; and hes a very
His history
has known him all his
of an exin the Cabinet;
Be says he comes
to Caillaux when he was
strongest man in
of culture and ability.
is the
high regard for his: as a man
he, nevertheless,
and while under a cloud, but, of course, not as strong politically
cellent family,
financial matters,
France in monetary and
as others.
but I will burden
already be known to you,
I am writing may
Much of what

you with repetition:

will head a mission to the
understanding is that Caillaux
fifteenth of September.
The present
sail not later than the
proposing to
possible, and fixed September
United States which is
himself, and
mission sail as early as
Simon has urged that the
He is to be a member of the
latest feasible date.
acme of the leaders of the
as the
Caillaux is determined to select
ne tells me

Paris, France

Ur. rinston

by that means will it be posmembers of the mission, as only
likely arise on his
political parties as
parliaa-ntary situation which will
:Able for him to deal with the
will need ratification by the
settlement is effected, as it
parties committed to the
return if a
the important men of the various
possible Caillaux Ale only by having some of
I think Simon feels, - and
get ratification.
debt funding comliPtlenient can ho
justified by the complexion of our own
in Congress.
that such a mission is
of the two political parties
contains representatives
mission, Velch
Washington on landing in
mission plans to go immediately to
The Trench
courtesy demands this.
seeing anyone, believing that
of the political situation
New York, without
to be a bit uneasy about the uncertainty the American debt is but
himself seemed
fooling that an arranz,emoat
at home, in a general way
and monetary matters which
whole series of reform° in finance continuous management of the same
one atop in a
accomplish under the
expect the present
take two or three years to
systen of government, they can hardly
man. And under their
consequently the policy of continuity
for any such period, and
sabinet to last
be difficult to carry out.
questions about the personnel of the
.of who
He has asked me some
caution, telling him something
Mellon is a man
answered with a good deal of
which I have
history has been; explaining that Yr.
illusions, and that it would be a
the men are, and what thetr
who deals with facts and not
of grant skill,
as possible information about
America, complete
thing for them to take to
very wise
give Mr. Mellon a thorough understandand in such form that it will
their situation,
ing of their problems.
promptbasis for the uneasiness about the
I asked him if there was any
and if there
Government was paying its current bills; for it, this
ness with which the Trench
but if there was any
that should be dispelled;
facts bearing on their capacity to
was none,
as well as all other material
should be discloses',
deal with their financial problems.
that the Bolden settlement, if corHe said that on the whole he feltwould be helpful, the principal and
Commission to
rectly reported in this morning's
apparent disposition of the American than upon
thing being the
most important
the basis of capacity, rather
deal with the problem of payment upon
the amount of the obligations per se.
is showing a constant improvement,
He thinks that the budget situation
being a great improvement over
year's deficit of 2,000,000,000 francs future a balance can be struck,
the current
hopeful that in the near
former years. And ho was
which we have all heard repeatedly
of the difficulties
the farm classes, etc.
but he urged all
adequate taxes from
direct taxes, the difficulty of getting
aseacinecs of the
difficulties they are facing is the
governOne of the great
conditions, and their fear of a socialistic
about political
agriculturists, es ycu know;
public generally
mostly email
Theneasant classes in France are
The classes having socialistic tendcncis
property owners and
that is to say,
so-called intellectuals, - proand a considerable section of the
are wage earners
These latter classes are active an( agress!.ve,
fessors, lawyers, and the like.
home and works hard on his
is a quiet fellow, who stays at
at the idea that his
mile the farmaeasant
hates to pay taxes, and gets frightened
farm, saves his money,
property may be taken away from him.

Paris, France

Mr. Winston

Simon points out that the collection of the taxes now imposed is being
the Societe Generale, with
made most effective. He says that in a big bank like
He thinks the
branches in so many towns, they have a good chance to observe this.
orts of failure to collect taxes are grossly exaggerated and most
The income tax is not as productive as it should be, but he calls atthat the
tention to the fact that this is a new tax, only imposed since the war;
traditions and
that it is abhorrent to their
people are not accustomed to it;
Even sc,
and that its development will necessarily be gradual.
is already taxed up to
when one considers that most of the income from securities
top of that
25%, such as coupons and dividends, and the income tax is imposed on
bit misleading. Increases
tax, the actual figures as to direct taxation are a
of rate, but rather
in the return from the income tax will not be by an increase
by spreading the area of the tax over greater numbers.
rate to 6%
I asked him whether he thought the reduction of the bank
the rovernment'h borrowings
and, in general, the maintenance of present rates on
whether rates should not be increased, some pressure put on
was a wise program;
Treasury put on a more
credit generally, and the short time securities of the
Me said that that criticism they
businesslike basis as to the value of funds.
the principal bankers as to
had had many times; that the Treasury consulted unanimously against it, all of
whether the rate should be raised, and they were
by the holders generally
them stating that an increase in rate would be regsrded
and that it
of the bonds de defense as evidence that there was something wrong,
and reducing subscriptions
would actually have the effect of frightening holders
rather than the reverse.
Of course you realize that Simon is non-pclitical, and one of
with me that the ideal program
He agree
thoroughly sound, able bankers of France.
kind of a security pact and give a sense of conwould be, first, to complete some
then to fund the American debt;
fidence as to political conditions in middle Europe;
and fiscal reform, which would
and, following that, undertake e vigorous monetary
possible with some
include revaluing the franc and revising the Government's debt, if
restored a good deal could be
advantage in interest. He thought that with confidence
saved in interest, but the difficulty, again, was political.

The question of capacity, I think, must be preeminent in their minds
reasonable and businesslike
just now, and he looks at that question in a fairly
German reparations might
He says that he can urderstand that payment out of
that we would bebe objectionable in America ar tending to create the impression
reparation payments, and, ultimately,
come involved in all the disputes over German
On the other hand,
with the political discord with which this is all associated.
limit to its capacity to pay its
we are a creditor of France, which has a certain
able to collect from
debts, that limit being influenced by the extent to which she is
her own debtor, - Germany.
I gather that he felt that a definite scheme of fixed payment over a
too heavy a
period of years might, on the one hand, have the effect of imposing
than perhaps
burden, or, on the other hand, might call upon France to pay lees
possible if Germany were able to carry out the Dawes Plan in a larger way than
many people now suppose is possible.
I know nothing of what is in their minds in the way of a proposal,
65timatpapaprintgreater or
Should suppose that in some way they would hope to have
It will be the same old
less from Germany.
less according as they get more or
could be dealt with so that a contract
difficulty, which I should hope, however,
can be effecter .


Mr. 'Winston



I gained the imprecsion that Caillaux is going to America with the
intention of getting a settlement if it is possible to do so. He may not have
an acceptable proposal, but he will certainly have some proposal which he will be
Ilkpared to fight for with his own parliament on his return if it can be put into
e acceptable to us.

My own belief is that almost any settlement is better than a break just
now, especially as Simon tells me that the country is in a mood now to make sacrifices
in order to put the house in order.
With a commission such as Caillaux ias suggested, I can well imagine that
you will bo indulged with a good deal of oratory. After a good many years experience
with these folks, my suggest'on would be that the oratory bo allowed to flow just as
freely as possible; that the members of our own commission do not attempt to deal
with the members of the French commission by argument, expostulation, or admonition.
If they could listen patiently to these gentlemen, exchange patriotic speeches without limit, and then let Messrs. Mellon and Caillaux sit down privately and arrange
the deal, it will be fcund much easier to let Monsieur Caillaux convince his own
people, and Mr. Mellon our people.
And the effective thing to be accomplished by
the commissions will be the votes among themselves whether they will agree to the
proposals of the respective chairmen or not.
I can assure you that it will be very
much easier for Monsieur Caillaux to convince his own colleagues than it will be for
our Comminsion to do so.
There is one point which I promised Monsieur Simon to speak to you
about very confidentially.
He says that it would be a matter of such delicacy for him to seek the
advice of any of his American friends while he is negotiating with the Commission,
on which matter I think he is quite correct.
I told him I would speak to you,
however, about the possibility of some private discussions cf that character in
case he felt that he needed the advice of some reliable American friends while
he is in Washington.
It would be a very excellent thing if that ie done. And you
know of a similar case where the results were good.
I had hoped to visit Paris without being under the necessity of seeing
Caillaux, fearing lest it might cause some embarrassment. But when I was at the
Bank yesterday, Robineau told me that Caillaux knew I was here and would feel that
I had been discourteous if I did not call to see him.
I explained to Robineau
that my colleague in Paris was the Governor of the Rank of France; that I was not
official in any way;
and did not want to make any calls which might be misinterpreted
He said that that would be carefully explained tc the Finance Minister, but he strongly urged me to see him. So I am going to have a talk with him late tomorrow afternoon
after having another visit with Robineau.
Of course you know the way things flash
around here in Paris.
While Simon only reached Paris this morning from the country,
he had already been advised of my appointment with Caillaux, and wanted to know
whether I proposed to see him alone, or would have anyone with me. I think he was
afraid there would be someone with me.

While my talk with Caillaux may lead to some modification of what I
gathered from Simon, at present my feeling is that the French are earnestly desirous
of settling the debt;
are probably encouraged to feel that they can as the result
of the Belgien settlement; will undoubtedly need to go through a period of discussion
and bargaining;
will probably have a great variety of things to suggest; but, in
the and, if we are reasonably generous, we should be able to get a settlement; and
any better than none.
So I hope that Mr. Mellon and Monsieur Caillaux

Paric, France




4t all up without a lot of wrangling in the commiesicn, which roulci endanger


I will continue this letter at the first opportunity after eaeine
Miensieur Lail faux, but, as I am leaving for Switzerland temorrew afterneen, I may
not have a chance to fix it up until next week.
One impression I cot from the bankers is the probable urgent need of a
moratorium with the French even greater than with the Belgians. They do nese a
period after the uncertainty of the debt obligation is disposed of within which to
carry out the rest of their financial and monetary program, aseecially te get the
And for the first time I get the impression that the effort to
get balanced.
the budget in order is a serious one with some chance for success.

Continued - August 24, lg'S.


As stated above, I had a long visit at the Pank of France lest Thursday
ernoon and went directly from there to make my call on Caillaux;

Fe seened to be a nan of
sure and energy, but not afflicted with the French nervousness and excitability.
Fortunately he caused me no embaerasament by
80. rpeaks Englieh very well indeed.
tine discussion of debt negotiations, or raping any spacial requoets fcr asaintance, or loans, or anything of that sort.
On the whole he impressed no quite favorably.

Ho was anxious to tell me something of his program, which I can describe
in a few words:
As to the budget, he says that he can accomplish balancing it, assuming
that an arrs.ngemont is made as to the Pritish and Amoricae debts, and is within strikHe had the figures all on his desk, which ho said ho would
ing distance of it now
have boon glad to show me had there been time, giving the various changes proposed
ler taxation.

Among other things, he says that the maximum inheritance taxes will go
up to about 8074, and the maximum income taxes in the high brackets he proposes to
He complained
end other sources of revenue are to be tapped.
got .s high as 70%.
ereepod deal about the French system of taxaeion, - the prcduct of many years experimentation and efforts on the part of the Government to meet a characteristic
French demand that the collection of taxes shall be reduced tc a mathematically
exact calculation of how the burden shall rest with justice to every tax payer.
said it would bo bettor for France if they had a simpler system and more direct taxes,
but the Trench temperament would not stand it.
Ho explained that the d
tax was new since the war, and ho agreed that to bo more prcductive it would need to be
spread over a wider area; end that simple increases in rates were dangerous in
developing various expedients for escaping taxes and driving money out of the country.
He claimed that it was too early to gain any idea of the success of the
pending loan, which had encountered difficulties because of the harvests, which occupied the peasants, and because of the strike of the bank clerks, Weich made the
work of the banks ineffective;
also because the old Fonds do Defence paid 1p more
than the new loan;
that there was no advantage in conDerting before the last days,
.nd consequently results could only be expected late.
Subscriptions were scheduled

Paris, France

to c

Mr. Winston


:eptembor 5, but they are being extended, probably until the end of September.


He spoke of the prevalent opinion abroad that the French were not paying
I told him I did not think
adequatletaxes, and asked for some expression about that.
that aE the people of America could be convinced about that one way or another by a
The only argudetailed explanation of the complicated system of taxation in France.
ment which would be convincing would be a balanced budget, and once that was done the
criticism would disaepenn.
He was very positive in his assertion that with a balanced budget he
would propose to deal with the floating debt vigorously, and ultimately effect a consolidation of the debt. And, with a reasonable situation as to the debt, they must
effect a stabilization of the franc for a periodnand then revalue it at some figure
The alternatives to a successful consolidation of the debt by
to be determined.
some such measureas that being attem"ted now would be either further inflation as
the maturities were taken care of, by note issues by the Bank of France, or else
I believe at first Caillaux
a forced conversion, which would hurt their credit.
was supposed to favor an enforced conversion, but the bankers talked him out of it,
He is supposed to lean somewhat to that
stating that it would wreck the country.
and somewhat to capital taxes.
He thought the French people would accept a revaluation of the franc
if it did not involve a reduction in the amount of paper money in circulation.
Then he wanted to know in a general way what the American attitude was
and whether, in case of need, they could turn to the United States for help in their
I told him that if he had in mind some specific transaction, such as a
loan, the pact record in that respect indicated that the American attitude was helpHe must bear in mind, however, that while the Federal Reserve System had a
certain control of the use of its own credit, that was a very small motbr compared
to the attitude in general of American investors, which could not be controlled. But
during the last two years we had loaned t2,000,020,000 to the root of the world by
absorbing security issues, and some further sum in the way of bank loans and credits.
If anything developed to shake American confidence in -uropean affairs and that investment market closed, it wculd add very seriously to their difficulties; that
and that they were still timid about
foreign investments were new to Americans;

He wanted more information about this, and I explained how successively
Switzerland, Holland, ngland, and then France had suffered from a shock to conThe case of Switzerland being typical, where the proposal for a capital
levy resulting in a flight of Suisse francs, and temporarily wiped out the balances
of the Bank of Issue, which had to supply the exchange to timid Suisse people.
Not much developed in the talk beyond giving me the impression that he
was a pretty vigorous person and really determined to do a good job if he is given
From various other sources I get the following information and imI an told that it is a fact that so far the
First about the loan.
The Government has outstanding from 55,000,000,000
loan has been a complete failure.
to 58,000,000,000 of short paper, of which about 15,000,000,000 is held by the banks

Faris, 'France,

Ur. , inston


It is the 40,000,000,000 with which
1111,111040,0001,0C'e000 by the public generally.
must deal.
Outside of the City of Paris, I am told, subscriptions last week
It was at first hoped that they would get
rnted to only 1,000,000,000 francs.
They are now talking about 10,000,000,000 being
at Met 20,03C,000,000 converted.
a successful result (when it aoulc, in fact, be a failure -al leave them in a difficult situation).
That this is beginning to be appreciated would Lapeer from a statement
made to me yesterday by one of the special American NewspaperCorresponC lets, that
there were steries about that they were again having difficulty in France in meeting
maturities and that while the statement of the Eank of France eholed that they had a
good margin on their note issue, if the true facts were known it wculd be shown
I, perscaalthat the new limit had already been exceeded by 2,500,000,000 francs.
/y, don't think that story is true. But it indicates the degree of nervousness which

There also are stories around that the fighting in Morocco is costing
them vast sums of money beyond what they have stated, and that they have fixed up
some deal with the 2paniards to finance it so that it does not show in the French

There is a good deal of discussion and uncertainty about the commission
The last time I saw Simon, he asked me whether the coaluission
should all go at the same time, or whether he, !amen, should go ahead of Caillaux.
I told him I thought that was the sort of euestica which should be dealt with by
private inquiriee at Zashington.
Then he wanted my personal opinion, and I told him
I would like time to think it over, but my first impression was that Caillaux should
go at once him elf. It would add dignity to the proceedings;
would give the commission an appearance of responsibility which it could not otherwise have, and
avkid the unfortunate impression resulting from Parmentier's visit.
to go to '7ashington.

Subsequent inquiry loads me to believe that Caillaux's position is a very
difficult one.
The socialists are in position to unhorse this Government at any
moment. They know that if they do so the burden of dealing with the 3oroccan situation
and with these debt negotiations will fall upon them. They prefer to sit by in the
position of vetoing or approving procedures, rather than assuming the responsibility
of initiating them and conducting them.
Caillaux, accordingly, is anxious to make
no effort at funding the debts which is unsuccessful.
And I think his
might be to send Simon on ahead to spy out the land, and, if there is hope of success, then to go over and finish up, himself, but, if not, to escape tho odium of
failure by not going.
The rumor roaches me/an unofficial proposal for a 99 year system of payment, with 2T interest, has been transmitted and rejected at home.
Now there is no doubt that the first reaction to the Belgian settleaent
here was rather favorable, as it gave the impression that capacity was going to be an
important consideration in fixing the amount.
Since the figures have come over
they have been analyzed pretty carefully here, and the French now seem to draw the
conclusion that the amount to be paid by the Belgians, increased to the proportions
of the French debt, and without the special concessions made to Belgium as to
the pre -armistice debt and interest, etc., will put an unsupportable burden upon
the French and that they could not pay that amount.
The statement t' at the terms
accorded Belgium were of a special character out of respect tc some moral obligation

-I --n
Paris, France

Mr. Winston


Treated by Pr3c:dent Wilson, has given them a chill.

Possibly it is just as well
hat this should be so if the Funding Commission is ready to make acme concessions
the French when they come to negotiate.


The facts are, undoubtedly, that the burden of the foreign debt on'the
French is much heavier, proportionately, than the burden of the foreign debt on the
The Belgian foreign debt amounts to about 00. per capita, or thereabouts,
and the French foreign debt is possibly 0100. per capita.
Belgium, of course, suffered little devastation compared to France, and had priorities in repration payments
which has put them in a fairly strong position.
The -rench, having tc pay the reconstruction bills themselves, w:thout adequate reimbursement from Germany, have gotten
their finances in a very bad state.


Of course we must remember at home that the whole scale of living here
is almost poverty along side of our scale of living at home and has a connection
with the difficulty of collecting taxes and the meagre investmmit fund available for
dealing with their domestic debt, compared with some other countries.
For instance
a friend of mine has just rented a large house under an arrangement by which he takes
over the chef and butler. The wages of those two men aggregate loss than 500 francs
a month -- one of them gets the equivalent of 410.00, and the other 412,00 a month.
Parmentier tells me that his apartment is run by a frenchman and his wife.
He has
had to increase their wages two or three times recently to meet the a ded cost of
living, and he says he now pays then 525 francs a month.
They do all the work in his
apartment and the man, in addition, takes care of his car.
If this scale of living
is applied throughout France to all classes, one recognizes what a slender margin
there must be for taxation and for investment.
recounting conversations
Up to this point I have been rambling along,
Now for e. few specific conclusions as
and impressions as we would in discussion.
I see the picture here:
The domestic debt of France is some 300,000,000,000
These are a menace to
this 55,000,000,000 are short obligations maturing only way in which they can be paid I
shock to confidence, the
the nation, and with any
is by inflating the currency.
chcice of
Caillaux's effort to deal with this was the result of a
the following measures:

a capital levy
an enforced conversion
a further inflation of the bank not: issues
an obligation issued on a gold basis.
to the pound, and the interest
He selecteo the fourida, fixing the rate at 95 francs
Nc one knows
The result of the loan, so far, has been a. complete failure.
at 4%.
known, and the date is being dewhat the reaction will be when it becomes publicly
ferred in the hope that something will save the lean.

The Ban',: of France has, in part, lost control of the situation.
Its commercial portfolio is of negligible amount. Most of its bills are simply
The bulk of its earning assets are the
cllection bills discounted for five days.

Government repaydirect obligation of the Government. There is nor no hope of the
And the bank has lest control of the
Consequently no bank rate is effective.
possibilities of inflation due to issues of notes made on Government account.

Paris, France


The budget has not yet been balanced. They admit a deficiency
It may, indeed, be larger than that.



Mr. rinston

,000,0,-,0,000 francs.

771th this situation ut home, they are commanded by both the
Brelksh and Americans tc fund their debts.
I think it has given them a tremendous
shake -up.
There are some in France, and I believe influential people, who feel
that the situation is rather desperate, and that the hercic measure would be to
frankly tell the British and American Governments that they cannot and will not pey;
make the sacrifice to their credit;
and then do their best for their domestic creditors
The present painleve government it retained in office by sufferance
of the socialists. -hen :ornament m ets they may te. e
et depends upon the outcome of the debt negotiations, the Riff war and the pact negotiations.
If they go
out, there is likelihood of a socialist government under Ferriot, or the like, and
all sorts of fanciful attempts to deal with the debts and like matters, probably
indLudine a forced conversion and capital levy, all calculated to scare the French
investor out of his wits.
There is, nevertheless, the feeling that/the suspension of reconstruction work (which I believe is almost complete) the prospect of collections from
Germany, and a le etty good domestic business situation with an improved beleece of
foreign pEe,ments, if they can make a liberal adjuotaent of foreign debts, they can
some way or other giggle out of the situation.

It is probably true that if the franc can be stabilize: and the
budget balanced, oven though the domestic debt is not reduced, the thrift and
industry of the French people will result, within a few years, in the accumulation
of a savings fund which will constantly lighten the burden of the debt.
Tith this outlock, while they were pleased at the evidence of a
generous attitude toward:, 2olgium, they are disturbed by the statement that it was
a special ea-range:lent, for :-(21Lium which will net apply to others.
Roughly, if
the French debt is three -quarters of the British debt, then the French payments
will be three-euartors of the British payments, or t120,000,000 a year.
would be beyond their capacity, especially as they met make a funding arrangement
with the Frito:-. as well, r id. the British seem to be advertising strongly the
opinion that the french are capable of making very considerable payments.

I gather that the Belgian schedule of payments starts at about
44,000.000, and, after ten or twelve years, reaches nearly 413,000,000. Against

this there will be still scae payments by Cerrr...iy which will be tc.)::licable to

the payment of the dcbt, cc that the pressure on Belgium will be much lighter.
Their work of reconstruction is completed. They have the benefit of priorities
in reparee:on eeyackets from Ceraanert reed they have been forgiver: a large part of
their debts.
France, on the other hand, had no prefer:ace from Germany,

had enormous reconstruction projects to finance in northern France, has had but
1 contributions of cash from Germany which will be u,elicable to finance recone
ruction, and will need a considerable part of whatever Germany can pay hereafter
r the improvement of her domestic national debt cituation.
Finally, I think it is a fact that if debt negotiations fail,
at the same time there is a loan failure in France, they *ill be driven pos-




Paris, France
Mr. Winston




an enforced =version of the domestic debt; the domestic credit of the
ent will suffer tremendously; and there will probably be some flight of
with the resultant pressure on the franc,


But there are, of course, offsetting considerations, one being
the fact that the inflation which has taken place in France has reducee the burden
If the French were as
of the debt to very much less than its nominal figure.
complacent about paying taxes as the Anglo Saxons, the burden of the debt would be
much lens, but the psychological limit of taxation in France is low, - much lower
than in either ?ngland or America, and the sane rules which would apply to a British
adjustment will not apply to a French adjustment because we are dealing with Frenchmen and not 7:ngl!shmen.

My best judgment is that some kind of settlement must be made with the
French if they are to avoid trouble;
and that if those negotiations fail trouble
is almost certain to come.
I have had quite a few talks with Morrow, and with Gilbert, as well as
some others, to get the impreecions they have gathered from talks here.
I think
Morrow's idea is that the French can ray a total of t100,000.000 a year to the
British and Americans together.
But, of course, with us this would include the
$20,000,0-0 they are now paying as the interest on the debt for the sale of supplies.
The British, on the other hand, seem willing to accept a more moderate fixed obligation, and take a part of their payment conditioned upon German reparation payments.
My own feeling is that the beet prospect of collee-"-g from France lies
in very moderate payments indeed for the first period of, say on or three years,
giving them a chance to put their domestic situation in _nape, and that after a few
years their capacity to make foreign p4 ments will be very greatly increased if they
escape the present crisis.
Another thing of which I am convinced is that a reorganization cr their
monetary situation is essential to a continuance of foreign pa; meats.
This is because of the menace of their floating debt.
If they undertake to pay us fixed sums, and close to the margin of safety, and then they have any dificulty with t':oir domestic d-lt at all, their only reccurso is tc the rank of Francs,
d that means depretietion of the franc and of the exchange.
I may write you something more later, especially after we learn more
f the negotiations in London.
But I will let
go for the present, as Dr. Stewart
e leaving tomorrow and will take it to you.
Sincerely yours,

norable Garrard B. `Unston.
cr Secretary of the Treasury,
ington, ID. C.

Hotel Majestic,
Paris, France,
August 24, 1925.
Dear Mr. Case:

This is to give you some account of our trip tc Switzerland.
I arranged to meet the officers of the Bank at Bale on Friday
morning, but it seems that they were scattered in various places and were
unable to get there until the afternoon.
We met at their agency at 4:30 o'clock, and it developed, as I
feare(f, that the meeting was more or less of a function, and we were regarded
as personages.
On that account the conference was not as productive of results as Dr. Stewart and I had hoped it would be.

The bank, as you know, is a comparatively new one, - seventeen
is run by three managers, Messrs. Bachmann, Schnyder and 7/ober.
They have a Board of Directors, which has a President, Mr. Ustersi, and a
Vice President, Mr. Sarasin.
Mr. Usteri is an old man of eighty, formerly a
senator, and a man of very high standing in Switzerland.
speaks no English, being the only one there who did not.
I think he takes
himself rather seriously, is jealous of his position, and, unfortunately,
started the meeting by reading a speech, which then had to be read in translation.
Thereafter every single word spoken had to be translated for his
benefit, although everyone else in the room understood.
years old;

Mr. sarasin, the Vice President of the Board of Directors, is
the head of the banking house of that name, closely allied by blood and
marriage with the Iselins, and one of the foremost men in Switzerland.
speaks English perfectly, and is a man of great intelligence and ability.
Mr. Bachmann impressed us favorably.
and knowledge.

He is a man of intelligence

Mr. Schnyder is a great talker, and a man of little consequence.
And Mr. Weber we did not get much from, though what we did was

Unfortunately there waz no opportunity at that meeting, nor at dinner
that night, nor, in fact, after dinner to discuss the details of our account.
All of the officers of the Bank understood the embarrassment and difficulty because of Mr. Ustersi's presence.
And Mr. Weber, after dinner, said that he had
wanted to discuss these matters, but that it had not proved to be possible.
he asked if' would be good enough to write them, which i shall dc after my return
to New York.

Paris, trance

Mr. ease


what developed from our conversation was interesting in disclosing the
faQILthat owitzerland is now in the throes of the same difficulty that some of the
countries have been over here which have reestablished their currency on a
stable basis;and that is their being flooded with gold.
It has resulted in the
Bank's portfolio being pretty well liquidated.
Their domestic portfolio is so
small that it gives them no hold on the credit situation, and furnishes insufficient
They have accumulated large foreign balances, principally in New iork
and London, but in other countries as well, which they are using by buying bills and
short-time governments, these making their principal earnings.

A couple of years ago they endeavored to reduce their gold by putting it
and did pay out 160,000,000 francs in minted gold.
into circulation;
of this about
30,000,000 francs came back to the Bank, and about 130,000,000 francs was hoarded by
peasants who got frightened at the socialist proposal for a capital levy.
Private money in owitzerland is today loaning at about 27..
is 4/..

They tell me that while some of their foreign trade, such as the exportation of ribbons and watches, has suffered somewhat, nevertheless business conditions
in owitzerland are pretty good.
And the travel crop this year has been excellent.
The exchanges are running strongly in their favor, and idr. aarasin estimated that
every year the ouisse had about 200,000,000 francs to invest abroad.
As you know, the uovernment recently repaid its loan of c,20,000,000
which matured on August 1 in America.
This has been done without recourse to the
auisse market.
And the ouisse Bank sold 30,000,000 marks of gold to the ileichsbank while we were in uermany, offering 60,000,000 more if the aeicshabnk cared to
take it, which they did not.
cold is coming to them from ocandinavia, and from
sith their uovernment finances now in good condition, and with the
balance of trade in their favor, with the Bank's portfolio pretty well liquidated
and the Bank rate ineffective, they are naturally disturbed at the influx of gold
because the bank's circulation is now between three and four times tne amount which it
was prior to the war.
whey have a reserve of 65r.

We talked a good deal about central bank cooperation and the possibility
of the gold exchange standard having the effect of causing involuntary inflation in
This caused some significant looks about the room,
the gold standard countries.
and I think they have a little guilty feeling thatwe consider Switzerland one of the
I explained to them that in an immense market like ours, the small
amount that they were investing was not of great consequence, and we had felt that
they had been willing to earmark gold pretty freely, were glad they had done so,
and hoped that they would continue to do so.
There was also a good deal of discussion about the outlook of Suisse
finances generally. Mr. Sarasin stated that in his opinion Switzerland could be
expected to repay all their foreign loans, as they had the loan maturing August 1;
that some part might be refunded but he thought it unlikely;
that the Suisse
were definitely now in the position of a lending nation.
Of course it is significant with this the case that they employ as much of their balances as they do in
America, where rates are comparatively low as against continental Europe.
I imagine
their confidence in our gold standard has much to do with it, as well as their confidence in the Federal Reserve Bank.


Paris, France


Mr. Case

( 3 )

They were all greatly pleased and complimented by our visit, and exa strong desire to take part in any program undertaken at our initiative,
os they expressed it, under our leadership.
I explained to them that while
it was true that we had the resources and were sympathetic to the idea of a general
monetary reconstruction in Europe, it must not be understood that we were seeking
leadership; we were not sufficiently informed of European conditions to undertake
that role;
that monetary reform should be undertaken in Europe under their own
but that we were glad to listen to proposals and help if it seemed
We carefully explained that the terms of the Genoa Resolutions
feasible to do so.
were not, in our opinion, appropriate to the present situation, especially in the
suggestion that there would be competition for gold when monetary reform was sericusBesides that, we were strongly of the opinion that nothing in the
ly undertaken.
way of a formal conference between banks of issue would prove to be feasible, as
they would always be influenced by the necessity for a central bank to give consideration to local problems, in preference to international problems; and that each
central bank should be entirely free to do so;
but that, where there was no conflict with domestic interests, they should endeavor to cooperate.
was to cultivate personal acquaintance and confidence, and that that was one of the
principal objects of my visit to Europe.
Mr. Sarasin and Mr. Bachmann were both
of the opinion that that was the right way to progress, and that anything like formal
meetings should be deferred for a time until we had better private understandings
among ourselves.
They displayed some concern about the activities of the socialist and
communist parties in Europe, especially at the present time in France. Switzerland
is surrounded on all frontiers by countries which have suffered so severly from
the war that the reactions in Switzerland seem to cause them dismay.
They seem to
act as a clearing house for advanced notions.
There is an active socialist party
in Switzerland itself, and, just now, they are watching with some apprehension the
activity of that party in France.
There is nothing like a discount market in Switzerland.
There is a
certain amount of trading in bills between the banks in the cities of Zurich, Berne
and Bale. But Switzerland, they claim, is over-supplied with banks.
They have
nearly 800.
Competition is pretty keen and there is little need just now to use
the bank of issue.

Mr. Sarasin said he thought the role Switzerland would play for some
years would be that of a small money lender to the rest cf the world, the Suisse
people taking a moderate amount of conservative investment securities, and the
Suisse banks maintaining moderate portfolios of foreign bills.
Their one fear,
of course, is inflation.
They were interested to gather from us whether we were liable to undertake any radical measures to prevent further imports of gold. I think they were
fearful lest we do so.
I told them that we had so far gotten along without that
and I hoped we would continue to do so;
that we preferred to see this gold problem
work itself out by methods of cooperation which would avoid abnormal tinkering,
any efforts tc change gold points, and so add to disordered conditions.
On the whole the meeting was unsatisfactory in bringing out details
which we hoped to get at, but was satisfactory enough in establishing friendly
and cordial relationships, and in satisfying us that they had a most tremendous
confidence in America and in the Federal Reserve Banks.



Mr. Case



I described the System; its organization and its method of operation,
The questicns asked showed
co lning which they displayed a good deal of ignorance.
they were uncertain of the feasibility of having twelve banks, each issuing
its own currency and each having its own rates of discount, but a description cf the
way the system works in those matters seemed to completely dispell their doubts.

They were very insistent in urging that I shculd visit them again and
spend more time with them the next time I come to Europe. They want me to spend
a few days in Zurich and become acquainted with the Bank in some detail.
Mr. Usteri is visiting America shortly to attend a meeting of the
He has great pride in the prospect of meeting the
Inter-Parliamentary Unicn.
I believe he expects to land in Canada and go to Washington by way
I think he is sailing very soon, and he may even reach America
of New York.
before I am home, so look out for him and give him a good look at the Bank. He
does not speak English, but will have someone with him to interpret.
This is about all that occurs to me to reccunt about our friends in
Sincerely yours,

J. H. Case, Esq.,
Deputy Governor, Federal Reserve Bank,
33 Liberty Street, New York.


r 1

Hotel Majestic,
Paris, France
August 26, 1925.
Dear Mr. Case:

Some of my letters will give you a little idea of the financial
situation here, but I have written nothing Lenera]saLLUeleenuiejelee,....,


Sc far as the crops are cencerned, on the whole they have been
pretty good, except that just at harvest time they had some heavy rains and I
hear that there has been quite a little loss as the result. No exact estimates
are available, but the crop is regarded, generally, as being better than last
The principal losses due to bad weather have been in the vegetables,

'-'the late grains, and the fruits.

I have new been over the linesfrom Brussels to Paris, Paris to
And I
Biarritz, and Paris to Bale, these being three of the important lines.
am not at all impressed by their physical condition.
they have had twenty accidents to passenger trains, some of them very serious.
yost of them have been due to the trains jumping the tracks.
They all run at
high speed, and I think too fast for the condition of the lines.

Friends who have been motoring throughout France tell me that the
roads are also in bad repair.
we visited Versailles the other day, and there the palace is undergoing repairs, entirely due to the generosity of Mr. Rockefeller. But the
grounds are not kept and it is a rather sad spectacle. This is true, I am told
of the Louvre. That building needs constant attention but is not having it.
These evidences of national economy are indicative of the straights
the Government has been placed in by their budget shortage and the difficulty with
the floating debt.
I have had little chance to see anything of the devastated areas, but
am told that reconstruction work is completed as to the farm lands, public buildings, many of the churches and important business and industrial plants.
there are a good many private dwellings still to be rebuilt cr repaired, though
I gather that the owners have eccommodated themselves to conditions.
The nation is certainly at work, however.
I hear there is practically no unemployment cf consequence, and the visible figures of the balance
of trade
continue favorabJe.
One must, however, make allowance for these figures in one
respect, which is not commonly known. Franceendher colonies, particularly
Indo-China, areregarded as being under one monetary system, and
partly for that
reason all French exports to her own colonies appear in the figures of
although they do not prcduce a true balance of payments.
Of course the exports
cf the colonies to the rest of the world are not included
for some strange reason.

In th



Mr. Case



Inasmuch as the exports cf France to Indo-China and other colonies are heLv-;',
bullpesult in payments to France in her own currency, the effect is somewhat to
swell what appears to be a fevorable balance of trade, without, however, giving
the foreign exchange needed to protect the franc.

Just now there is something of a crisis in the wine business, especially in the sourthern part of France, and pretty heavy lcsses are expected.

All of my talks with Frenchmen indicate that outside of the agricultural
My friend. Baron de
classes they are feeling the burden of taxes pretty heavily.
Neuflize, father of the Jacques de Neuflize whom you know, told me at lunch the other
And I understand that
day that he paid 607/, of his income in taxes to the Government.
their system of taxation is such that business losses (that is capital losses) are
not capable of deduction from current income, the same as ours, and, consequently,
many firms and businesses are obliged to amortize losses over a period of years.
There is also universal agreement that the general standard of living
has been much reduced. French people who live in the provinces, in former years,
were accustomed to spend a portion of each year in Paris, to attend the opera, do
They are no longer able to pay the hotel
their shopping, and visit friends.
rates, nor the prices charged at the best restaurants, so they don't come to
But the flood of European travel which has reached hitherto unknown proParis.
portions has kept Paris fairly prosperous.
A curious situation has resulted from the immense deliveries of reparaComing as it does with enlarged use of oil and hydro-electric
tion coal by Germany.
power, there has been an immense accumulation of surplus coal, and the coal business
Notwithstanding this, hydro-electrical development is going on all
is withering.
over France, Germany, Switzerland and Italy. The Suisse, for instance, include in
their export figures "receipts from power transmitted over their boarders," which is
Railroad lfnes are being electrifieC in many directions wherever
now considerable.
water power is accessible, and, in time, I have no doubt a large part of the main
lines of the French railways will be operated by electricity, just as a considerable
It presents a gloomy outlock for the coal busipart of the Suisse linos now are.
ness, and for the extent to which reparation payments in that form can indefinitely
There are some evidences of an upward move cf wages, and if it should
become general, I can see prospects of considerable difficulty with the circulation.
The postal clerks struck for pay increases and get them. Now the bank clerks are
engaged in a determined strike which cannot be settled, and the newspapers report
that the postal clerks are endeavoring to support them by refusing to deliver commercial mail to the banks.
Any general wage increase would undoubtedly be the
signal for some price increases in the provinces, which have not yet risen to the
city levels; and necessitate still further currency issues, thus still more complicating the Government's difficulties.
Dr. Stewart, I think, feels quite definitely that this development
is likely, and he was interested, in discussing these matters at the Societe
Generale, to hear the opinion expressed that with the franc at twenty to the dollar France would never be able to support her domestic debt; and probably would
not until it got somewhere in the neighborhood of forty to the dollar.
Of course
this sounds like a counsel cf despair, but it is not out of the question that something of that sort would develop if the pending loan is a complete failure and
debt settlements cannot be effected with England and America.

Paris, France,

Mr. Case

( 3 )


My understanding is that our Government has shut down on private loans
If this should be continued, notwithstanding a failure of
rance completely.
negotiations, I suppose the odium of any disaster which happens over here will
be promptly handed to us.

While French people are very courteous, I suspect they dislike us, and
despise us for our policy.
The outlock politically is about as uncertain, unfortunately, as the
The present Painleve Government is continued in power by
outlock financially.
the sufference cf the socialists and radicals, who are unwilling to assume the
responsibility of dealing with the present difficulties, but who are always in poSc it locks as though vigorous efforts were
sition to vote the Government out.
being made to smash the Riffs, put over a funding loan and settle the debts with
I have heard it
the hope of giving the present government a new lease of life.
definitely stated that the government will go out the middle of November.
The position of the Bank of France is the outstanding illustraticn of
the difference between our scheme of war finance and the European scheme. With the
exception of the first loan of $50,000,000, our government borrowed nothing from the
Reserve Banks to finance the war, and consequently we had the obligation of a private
individual or institution on every lcan we made. Here a large proportion of the
war borrowing from the banks of issue was made directly by the Governments. England
escaped to some extent because of the decision to issue the currency notes; but
nevertheless, for a long time they were burdened with ways and means advances.
They have now struLgled out of that situation, and their sole monetary problem
of consequence is to deal with the currency notes, which they will be able to do in
Germany swept the deck clear by abandoning the old currency and
a year or two.
reorganizing the Reichsbank. Belgium, France and Italy, however, are in the position
In Belgium, as I
of having their portfolios almost entirely loans to the Treasury.
advised you, their private portfolio of leans and bills is only $30,000,000,0r
The position of the Bank of France is similar. They have, in round
figures 30,000,000,000 of loans to the Government. And their private portfolio
consists roughly of 3,000,000,000 of Lombard loans to customers upon the security
Their portfclio of
cf railroad and other good securities, - say $150,000,000.
bills discounted, of about 3,000,000,000 francs is almost entirely short bills,
Yesterday, for instance, the bank
simply deposited with them for collection.
discounted 256,000,000 francs, and of this all but 8,000,000 francs were of
five and seven day maturities, the five day bills being those payable in the cities,
This leaves the bank
and the seven day bills these payable in remoter districts.
in a position where its discount rate is cf no effect because the rate on the
Government loans is a fixed rate, and the amount which they are furnishing generally to industrial and commercial ccncerns is too small to have a rate change operate
The Bank of France has some 200, branches and these bills are these
which come from all over France. Sc you can see, when divided up among all of
It is hard to see what will
those offices, what a very small portfolio it is.
The Government is not in position to reduce its debt to the
be the outcome.
Bank, nor will it likely be for some time, and it will be a considerably longer
time dependent upon the success or failure of payments by Germany.

The striking difference between the situation in Belgium and in France

Paris, France,

Mr. Case



in the fact that the Belgian Government is willing to proceed to liquidate
iiipobligation to the Bank assumed in connection with the retirement of the mark
notes, although, under present conditions, they must do so by foreign borrowings.
It will, however, put the Bank back in a position where it can become a real bank
of issue and exercise a real influence through its discount rate.
Criticism of the reduction of the Bank cf France rate from 7%. to 6%
under present conditions looses much of its force.

In a long talk with Robineau yesterday a very interesting piece
of information clipped out, which I think Winston would be interested in hearing.
It seems that recently a seccnd cousin of Robineau's died and left him 1,000,000
francs in his will. After calculating the expense of administering the estate,
etc., Robineau found that it would cost more to accept the legacy than to turn
it right over to the State, sc he relinquished it entirely.

I am told that the pressure has been sufficiently severe recently
for the French Government to slow down considerably in paying their bills.
What this all amounts to, I can't tell, and it may be just gossip.
But I have
heard it more than once.
The importance of the present situation lies in the fact that they
have 22,000,000,000 or 23,000,000,000 francs cf short cbligations maturing before
the end of the year.
Nearly a half of them mature September 15, and somewhat
more than half December 1E, except for a negligible, scattering amount of small
The Bank of France now tell me that they have a margin of 4,000,000,000
on their note issue, and 6,000,000,000 on their loans tc the Government.
If they
can whip up the present loan to a reasonably successful ccnclusien by the fifteenth,
or have enough subscriptions accumull.ted by then, they may be able to take care
of these maturities without asking for an increase in loans from the Bank beyonc
the present authorization.
But I judge September 15 will disclose a geed deal.
From the foregoing you may conclude that France presents the picture
of a concern which is very heavily in debt;
with the debt in a fairly perilous
with a reasonable prosperity in production of goods and in trade;
during the period of strain, with an enforced economy which may result in an impairment of the properties and machinery of the State.
If they succeed in effecting
funding arrangements with Great Britain and the United States, they will then
promptly need some help, and will turn to the American market.
But I surmise they
will also seek assistance in England as well.
My best to all at the bank.
Sincerely yours,

J. R. Case, Esq.,
Deputy Governor, Federal Reserve Bank,
33 Liberty Street, New York.


London, England,
August 29, 192b.

My dear finston:

A cable reached me yesterday just as I was leaving Paris
advising me that you would like to have some word from me about
the position of Frace.
By now you have re eived my letter of August 19, and
I hope lir. Case has sent you a copy of my letter of August 26 to
I am unable to send you anything further today, but, of
course, you will know that both Leffinwell and Morrow have been
here. And they have seen a good many people in London and in
France, and I think. Mr. Morrow, at least, expects to have a talk
with hr. Mellon, and to see the President also.
You will pro ably discover that they have some pretty
positive opinions, with which I might not necessarily agree in
And they will also likely have some interesting iniormafull.

In the course of the next few days I am meeting some
people here who are ouite intimately informed about Frehch affairs,
and will be able to supplement what I have already sent.
It distressed me to gather that the American newspaper
accounts of the tentative proposals between the British and French
just concluded by Caillaux, were unfavorable and intimated that
I am very satisfied that no such
there were ulterior motives.
It would appear to be necescharges are justified by the fcts.
sary for both Caillaux and Churchill to make some reservations
pending an American adjustment in order to meet possibly hostile
and even critical public opinion wT.ich would be exceedinLly difIf our people would put taemselves in the
ficult to deal with.
position of those two negotiators over here, they would see that
without such a reservation, an American settlement which diifered
materially one way or the other from the basis of the British settlement wculd arouse such hostilit: in either one country or the other
And, of course, the
as to possibly defeat the whole settlement.
settlement is subject to ratification in both countries when their
Parliaments meet, as I unC.erstand it.

Very confidentiall,, hr. Robineau has promised me some
important and confidential figures about the 'Preach position, which
I tT_Ink you may rely upon the
I believe may be ver: helpful to you.
figures as being accurate ana aareflection of the true position.
We had a very frank and friendly talk, and I explained to him frankly


Mr. Winston


at there was nothing which I could do in furthering
cept it might be through obtaining reliable facts. these matters,
They should be
my hands within a week.

This is the best I can do until some time next week, when
I will get off a letter in more detail.
Sincerely yours,

Honorable Garrard B. dinston,
Under Secretary of the Treasur
Washing ton, D. C.






Hotel Majestic,
Paris, France,
August 25, 1925.

Dear Mr. Case:

Yours of the thirteenth refers to the situation in the market,
rates, etc.

It would take too long a letter to give you a picture of just how
we are related to the situation over hero, which is, as usual, complicated.
The gold standard countries are being more or less flooded with
And, to some extent, they are passing it about among themselves.
The portfolios cf the central banks are pretty well liquidated, and they are
all more or less afraid of easy money and of inflation, and of loss of control. This has happened in London.
And while I am not posted to within the
last week or ten days, I have a note from Norman indicating that if matters
continue as at present they will have to consider a further rate reduction.

Now my view of this is that up to a certain point we should make
every effort to accommodate our policy to theirs.
If they f
in meeting domestic conditions to reduce their rate, then, of course, they must
do so, but should not necessarily expect us to go down with them if our domestic
And, in fact, that is our situation
situation would render it perilous to do so.
We cannot now afford a rate reduction, and the only question is whether
at home.
we can afford to stay at our present level as the best we can do, or whether,
notwithstanding -kV/reduction in London say to 4%, it may be necessary for us to
go up to 474.

Of course you understand that the consequence of an increase in our
rs;Le, in the face of rate reductions among the gold standard countries of Europe,
will be some transfers of funds to the United States by bankers generally, and
by the banks of issue specifically; and that we cannot then escape further ship1\
ments of gold.
Our earning assets are now nearly $300,000,000 above what they were
a year ago, and of our earning assets over $200,000,000 are Government holdings
under the control of the committee and about $100,000,000 are Governments not
If, therefore, we are now obliged to pursue a policy
under committee control.
of higher rates and it does result in gold imports, the Federal Reserve System
must definitely face a period of liquidation of earning assets at least equal to
gold imports, and it may be that the sale of securities must be extended beyond
the committee's holdings and take in some of the holdings of the individual banks.

I am hoping that there will be no important change in the situation
prior to the date of the Governors Conference.


Mr. Case




lain to our colleagues everything that I know about the situation abroad
ndeavor to induce them to a complacent state of mind about earnings during
t is temporary period of readjustment. If we are not successful in doing that,
we are going to have a struggle with an inflation and a boom sooner or later,
unless, indeed, they have an up-sel in Europe which would act as a deterrent.


The letter which I have sent to Mr. Winston by Dr. Stewart's hand
(and of which a copy is going to you) will, however, indicate that within the
next few weeks it will likely be known whether the French will be able to meet
the difficulties of their situation both financial and political or not.
they fail in doing so, I would expect to see some period of uneasiness, which
might result in gold coming to America anyway.
You will, of course, gather
from this letter and my letter to Winston that any change in our policy must
receive the most careful consideration; have full discussion; and I should hope
our directors will be available when I get back for this purpose.
We are sailing on the Olympic on September 9. I would return earlier
;ere it possible, but arrangements have been made for Vissering to come to London;
I am anxious to meet the Pole there;
and I also expect that Dr. Schacht will run
over for a short visit;
and possibly Moll of Sweden.
So you see it would be
inconvenient and unwise for me to leave, and the difference of a week would hardly
be worth while.
I think the important thing at the moment is to keep our resources
available for use in case the gold movement does again turn in our favor.
Sincerely yours,

J. H. Case, Esq.,
Deputy Governor, Federal Reserve Bank,
33 Liberty Street, New York.

London, England,
August 31, 1923.

This brief line is Lc oommen-c. on one cr twc iskoortant

observations in yours of the twentich, which just reaches me.
I have reaCL it with much interest and pleasure.
mat you say about the direotorium I agree to entireThe s=e thing is found in every bank of issue over here,
so far as I know them. It took an outsider to stir them up
in the Reichsbank, - and they certainly got a goon stirerl

Aant I wrote about kr. HouOiton's views is, of course,
exceedingly ecnfidential. In fact the whole document is a conI am afraid our own people will not entertcin
fidential one.
the idea which we discussed, but it should be done and, would
lift the ;:hole world out cf a elout,h of despond.
The Rentenbank reorganization bill has become law,
but so far they have not ar,-reed with Kitchell on a loan, although
negotiations, I believe, are still pendirs;. Dr. Schacht is to
acme over to see me on :ondayl, and I will know more thereafter.

I really have great reservations about any prior approval by our government of the operations of tae Reserve Bank
It is a dangerous precedent, and heretofore we have
contented ourselves with no-Lif%/lng them after the event.

The possibility of buying any paper from the Reicsbank,
I think, is very remote; and in general I acree with your &,,servaI further
tio= of its relations to the i3ank of Ere;land credit.
agree about the need for the pact negotiations being concluded
The difference
first. This I told hr. Schacht very plainl.
between a transactions with the Reichsabnk and one with the Bank
of .ngland is that the former would simply be a temporary matter
of policy and an informal arran,,ement, whereas the Bank of "tngland
arrangeueht was necessarily formal, as it was the basis of the
resumption of Ecld pr..:ment. The need for a lonE comitment,
therefore, was obvious, and the interest of our own country in
the results (probably second only to that of the British themselves)
Whatever we did with the Reichebank, however,
necessitated it.
would be more in the nature of a seasonal affair with a bank which
w:s already on a gold basis, and where we could possibly have
informal uneerstandin,s frovl tine to time which would accomplish

London, -.LaiLland

Mr. Jay



everythin, and more than would be possible by formal loan

But I doubt if we have occasion to do anything,
especially since he,,rinc that their divisen position is much
This is all that I will bother you with just now,
as I will see you not; lorv2 after your return.
ThanJ:s for your letter, rnd best regards.
Sincerely yours,

Pierre Jay, Esq.,
Chairman, Federal Reserve Bank,
33 Liberty street, Dew York.



0. t7-1-.
8 17:1- London, England,

September 1, 1925.

Dear lir. Case:

I am enclosing herewith for your information

copy of the only memorandum I have thus far been able
to prepare concerning the visit Governor iBorman and I

had with Lr. Laynarski of the Bank Polski.

It can be

added to the others I have sent, and shoulL, of course,
also be treated confidentially.
Very truly yours,

J. H. Case, Esq.,
Deputy Governor, Federal Reserve Bank,
33 Liberty Street, :Jew York.


London, England


1 .2 5

Vice President, Bank Polski)
LOZLOii - AUGUST 31, 1925

Mr. Iflynarski was accompanied by Lir. F. A. Poklewski-I:oziell, Commercial

Coun4ellor of the Polish Legation.
State Bank:

Its capital, fully maid, is 100,000,000 zloty, of which
Jhile the Government is authorized by law

the Government owns 1,S.

to be a stockholder, and was expected to be a large stockholder, the
subscriptions were unexpectedly successful and all but lj
is held by the public.

of the stock

The law provides that stock may be held abroad,

but there are at present no foreign stockholders.

It is desired to in-

crease the capital of the bank by selling stock abroad, but thl:t is no
at present possible.

The law requires a minimum reserve of gold and valuta of
30,/L of the liote issue.

No reserve is required on deposits.

must be internal bills.

The other

The reserve provisicn is the only limita-

tion upon the note issue.

Borrowings by the Government from the Bank are permitted
up to 50,000,000 zloty, all of which has been loaned to the Government
for the purpoLe of retiring mark notes formerly in circulation.
The Bank is limited in the amount of subsidiary coinage
.rhich it ma.- ilold to 5

of the outstanding circulation.

chile in Germany and Austria the bank of issue is permitted
to make loans for limited amounts to the Treasury against uncollected
taxes, these loans are not permitted in Poland.


London, P



Meeting with Ex. Elynarski


Present Position of the Bank:
The BanXrate is now 10% (unless it has been increased, as
is possible, to 12% within a very recent period).
inland bills is roughly 300,000,000 zloty.

Its portfolio of

The outstandina circulation

is 460,000,000 zloty, or, roughly, 15 zloty (or $3.) per capita.


law permits the Government to issue silver coins to a maximum of 8 zloty
per capita, and copper coins, 4 zloty per capita.

Recently, when the

bank note circulation was reduced over 100,000,000, the holdings of subsidiary coinage by the Bank became excessive;

that is, over the 5% per-

And the Bank enforced the rule of receiving payments from customers

of not over 500 zloty in subsidiary coinage so as to correct the difficulty.
The circulation in Poland is so deficient in amount that the
velocity of circulation is tremendous.

The payment of taxes each month

equals over one-third of the entire Bank monetary circulation, so that
for tax payments alone the velocity is equal to four times the volume
every year.

The Bank was originally organized entirely on domestic
resources, both as to capital, gold reserves and foreign bills.


Polis:_ Government loan, and the accumulation of emigrant remittances gave
them a large reserve, until last January.

Last year's crops, however,

were a failure, and the stabilization of the currency gave it an
artificially high purchasing value domestically, so that the shortage of
exports and domestic extravagance in expenditures resulted in an adverse
balance of payments, and a loss in the Bank's reserve until today it has
in gold and foreign balances only about 40% of its note issue, notwithstanding a reduction

in the note issue by over 100,000,000 zloty.

London, England


Ideetin_. with Mr. Lay.a._.rski



Present Position of the Bank (continued)
The Bank of Poland exercises a practical monopoly in the
foreign exchange market.

Such market as there was for forward exc:_an e

has been discontinued recently since the value of the zloty declined so
sharply, and the Bank has been discriminating between what it regards as
le gitimate demands for foreign exc=a-n-e for con ercial purposes, and those

for simply speculative purposes.

In order to correct the adverse balance of trade, enormous
increases in customs were levied commencing the middle of June.
rates were increased from two to six times the old rates.


This im-

mediately curtailed imports, as shown by the reduction from 25,000,000
zloty customs duties collected in May, to 3,500,0:0 zloty for the first
ten days in il:uaust.

The foreign exchange monopoly by the Bank gives them com-

mand of about $20,00,000 per annum in checks and foreign currencies,
principally dollars, largely arising out of emigrant remittances. Checks
are remitted for collection regularly, but currency only every two months,
so that there is quite an accumulation of currency for which they do not
get reimbursement promptly.

Delayed remittances of currency are due to

the heavy expenses and the need for making large shipments in order to

satisfactory protection and low insurance and transportation rates.

The first eight months of 1924 the Bank accumulated $14,000,060 from
this source.

Under the Treaty of Versailles, Germany was obligated to
take 500,C00 tons per annum of coal from Upper Silesia until June 1925.
Germany is the only European nation with which Poland has no commercial


Commissioners went to Germany last January to negotiate a treaty,

but the Poles concluded that the Germans were procrastinating with them

in order to

wait until the obligation to take coal had expired, so as to


LeetinL; with 1,:r. Lainarski


Present Position of the Bank (continued)

that as a club in the negotiations.
The Poles export, of all the

but import only 5,: from Germany.

send out, 40,E to Germany,

Notwithstanding this, and being

unsuccessful in the negotiation of a treat, Poland placed an embargo
on imports from Germany.

They also had a dispute about exports of

cattle to Germany, the vetrinary examination, etc.

The general impression

from this narrative was that they were on bad terms with Germany, and
were not using means calculated to be successful in improving their
trade with them, notwithstanding their dependence upon Germany for their
export market.

They claim that Poland alone will consume all the Lilesian

coal as soon as the railroads can be turned about and extended into the
east and northeast, where transportation is insufficient but where there
will be a 1:.rge 1..iarket for col. .railroad reconstruction means the build-

ing of about 1,000 miles of lines.

But the result of their policy has

been to impose a virtual prohibition upon imports from Germany.
somewhEt the appearance of sawing off the limb that represents 5,

It has

their import trade, but which, nevertheless, may furnish support for

404. of their export trade.

The Government budget is in balance.

Their domestic debt is

5 zloty per capita, and their external debt 15 zloty per capita, the
latter representing principally the debt of $178,000,000 to the United

States Government, the loan of $35,000,000 plced in New York by Dillon
Read & CoMpany bearing

and sold at 95, and a previous loan of about

020,000,000 sold in hew York to Americans of Polish origin, which bears


which I believe was sold at about par.
The zloty, uncer the influence of the conditions described,







Meeting with Lir. Mlynarski


Present Position of the _Bank (continued)

*around 27 to the pound, partly as the result of the restriction upon
imports, and partly as the result of the favorable sentiment created by
the credit granted by the Federal Reserve 3ank.

They are fearful oa'

a further decline due to spread of distrust of the currency, which would
cause an exodus of capital.

They are considering whether the Polish

Government might not borrow abroad.

Dillon Read

Company have an

option on $15,000,000 additional Pclish bonus, but as these are now
selling at 87, having been issued at 95, the outlook is not promising.
lilynarski probably was not aware the first Dillon Read loan

was not a great success, and while $35,000,000 was floated, only

$27,000,000 was ta::en, and the balance never has been sold, nor do I

understand that Dillon Read are under obligation to take them).

In a subsequent interview with La.. laynarski, he quite
frankly told us in detail of the situation/respect of the Dillon Read

bond issue, that the entire issue did not sell and the Polish Government preferred, for various reasons, to take back the unsold portion.
Since the issue was originally made, small sales have been effected,
but nothing of consequence.
lie also made the very important statement that the

reason why the very high bank rate, the high cost of credit, and the
low per capita circulation in Poland was not effective in stopping
importations of foreign goods was the fact that after the currency was
reorganized and stablized, apparently foreign business concerns sent
salesmen into Poland and offered large quantities of goods on credit.
This caused importations in excess of the real capacity of such a poor
country as Poland, and when the credits Natured, the burden fell on the

national bank
Federal Reserve Bank of St. Louis

to fUrnish foreign exchange to make the payments.


London, En-:land


heetin,_.: with


(6 )




much of the difficulty which has now developed, and the unfortunate

necessity for raising the tariffs to such a high level.
After another long interview with Governor Norman and me, he
probably will decide to make some sort of proposal to Dillon Read to arrange a bank loan, secured by the Polish bonds, hoping to borrow for a
couple of years until the position of the Bank is such that they can take
care of the external value of the zloty without the need for using credits
at all.

Then, within the two year period, they would hope to sell the

balance of their bond issue;

that is $7,000,000 of the original issue,

plus $15,000,000 now under option.
I explained to him that we could not grant them a credit
for two years on their domestic bills, even though they were the highest
possible grade.

Governor Norman's position was outlined in a letter to them
some months ago in which he explained that he was opposed to granting short
credits to banks of issue, but, as one of their valued correspondents, the

Bank would entertain proposals for an advance of reasonable amount secured
one-third by gold and two-thirds by acceptable foreign bills.

Of course

such an arrangement is quite impractical for the Bank of Poland.
On the whole our impression of him was ver: favorable as
to his honesty, earnestness, and intelligence.
ever, similar to that with all Poles, -

12-e difficulty is, how-

they are not very practical

people, and while they may be excellently informed, they do not know how
to use their information along sound lines.




Private and

London, England,
September 1, 1925.

My dear Garrard:

As you know, my trip so far has been entirely upon the
Continent. Te were in London only a couple of days before leaving for
During this period the Belgian debt settlement has been effected,
the tentative arrangement has been concluded between the British and the
French, and now, at the moment of writing;, so far as I can gather, the French
are hes.tatinr as to the personnel of the commission to go to Washington, whether Caillaux shall go with them, ahead of them, or after them.
As I wrote you, the Belgian settlement had a distinct reaction
And now I gather from the newspapers that the British-French
arrangement has had a very decided reaction in America.
I think I have most
of the details of it fairly accurately.
in France.

On Monday T received a note from the Fmbassy asking if I
could obtain quite a lot of information on the subject to be cabled home.
And I am just now debating with myself whether it will be wise to send it in
that form, or to await my return and give it to you and the Secretary personally.
Mr. Houghton, in whosejudgment I have a good deal of ccnfidence, is
out of the city, but it is likely that I will see him tomorrow, and I shall be
guided somewhat by what he says.
In view of our relations with the Bank, and the importance attached
here tc the arrangement with the Fed rat Reserve Bank fcr the resumption of specie
payment, it seems necessary for me to have a teak with the Chancellor. I think
my failure to do so would arouse some curiosity, especially as it has been surgested
to me.
:le, also, is out of the city, but I have accepted an invitation to motor
down to his place in Kent ana take lunch there on Saturday.
Of course you realize that it would be unfortunate for me tc send
inccmplete statement;
and I believe that any statement would be Incomplete
until I have had opportunity to talk with both Houghton and the Chancellor.

This is the position today, and I am writing to explain it to you
so that you may not think I am unmindful of your wish to get all the information
I am also particularly anxious that neither you nor the Secretary
should arrive at any conclusion as to the reasons for the Particular form of
the adjustment with the French and the way in which it was announced, until
have sn opportunity to talk with you.
I have had a very frank explanation of
the matter from one in pcsition tc know the facts, and am personally satisfied
that there was no ulterior purpose in the arrangement; that there was no attempt

tc set a trap, nor in any way embarrass Mr. Mellon or the Commission.
It may that the announcement was a bit mal-adroit.
well be
Federal Reserve Bank of St. Louis

Mr. Tinstcn

London 3.1.25.


You know, many people here interpret the falfour note, or statement, as meaning that the British intended not only to accept no less on the
learn they made than they were caned upon to repay to the Urited states, tut
The same possibility
also to accept no more than they wore required to pay.
of mtsundr-retanding could al:, arise ehoot the announceeent made by the Iritish
1, frankly, don't know exactly
in connection ith the French negotiation.
whet they intend, and I an not sure that they know themeelvee. Certainly if
they mean that they will accept both no less and no more than a payment proportionate to what is paid to us, it would have been more palatable at home
But the conclusion, appearing
than the form in which the statement did appear.
in the press I still believe are quite unwarranted ond calculated to mal':e our
own negotiation much more difficult than need be.
As I shall be home at least a week before the French mission can
arrive, T can explain all of this much better then is possible in a letter.
And, indeed, I may decide to send something in advaece of my return at: er
through t')e T-mbastly or by mail directly to you.
"m.t% best reijarc:s T am

Sincerely yours,

Honorable Garrard 7. -inston,
Under Secretary of the Treas:lry,
Tashineton, i. C.

London, England,
September 2, 1925.

Dear hr. Case:

Since I wrote you about the Polish matter, Colonel Logan
has come to London and had a long: talk with hr. Llynarski.
are now discussing whether it might be possible for Dillon Read
to arrange some sort of a ban',: loan for Poland upon the security of
Government bonds, with some understanding by which the entire proceeds will be deposited in t:,e National Bank of Poland and the
Polish Government maintain the account at current rates of exchange
at a sufficient level to cover the credit, the idea being that this
would give the National Bank the proceeds of the loan in dollars
which they might use to protect the external value of the zloty.
I have explained to both Colonel Logan and hr. Llynarski
that at the present there is no possibility of our doing more than
I have also stated that I was quite
we have already done.
that what they
sympathetic with their desire to get assistance;
needed was long-time money and not short credits, and if, in a
reasonable period, the Polish Government could sell an issue of bonds
that would be better than any kind of bank loan or bank credits; that
if any of our bankers called to inouire about a credit such as might
be proposed by Dillon Read, I would be very glad to tell them what I
know about the matter, without responsibility to me or to the bank.
This seemed to satisfy him pretty well, although for a time he was
very anxious to get some sort of credit against the pledge of some
I told him it could not be done.
kind of security other than gold.
As Colonel Logan will be cabling New York about this matter, you may have inquiries, and this will give you a line on how
to deal with them.
I will be glad to talk with Mr. Dillon about it on my
return if he wishes to drop in at the bank.
Sincerel-, yours,

J. H. Case, Esc.,
Deputy Governor, Federal Reserve
33 Libert-, Street, rew York.


S. S. Olympic,
September 11, 1925.


Dear Winston:

Of course you realize that during my visit abroad I had opportunities for discus sing the whole situation as to debts, reparations, etc.,
with some of the best informed and most responsible people in Berlin, Paris and
London, including Gilbert and the members of his organization, Mr. Houghton,
our Ambassador at London, an0 Mr. Nelson Perkins, the American Citizen member
of the Reparation Commicf.on.
It is no exaggeration to say that all of these gentlemen, and others,
are in agreement that we are in danger of making a serious mistake in these
refunding arrangements if insistance develops for larger payments than can be
definitely supported.
I am somewhat uncertain as to the best method_of getting the picture
graphica-ly and authoritatively before the President and Mr. Mellon.
memorandum which T have prepared for Mr. Mellon, and the data accompanying it,
will, I believe, throw much light on the facts. But this will be incomplete
without the views of Messrs. Houghton and Gilbert as to this whole situation.
Would it not be possible to have these gentlemen ccme home for a
I am satisfied that no more than a word
short visit to talk matters over?
from Mr. Mellon to Mr. Gilbert would bring him home by the first boat. And, of
I do not like to
course, the President can summon Mr. Houghton at any time.
suggest this in any official way, or in a way to give the impression that it
has been suggested to me, but I um very sure that the matter is in their minds
and that both of them stand ready to come.
Ycurs very sincerely,

Honorable Garrard B. Winston,
Under Secretary of the Treasury,
Washington, D. C.


itckvilect 44) Ate N1100
5 ova 912,-,1>SVIctsAcieci -{-0

Me W.... s`

tAe-uakto,lk.. 11-31





September 21, 1925.


Dear Mr. Eecrettry:

While in Europe, e cable from my office advised thcA Mr. Winuton desired

report from me for your use, which I now have pleasure in making.

I wee Flak,

asked by the American Ambassador in London to secure certain information in regard
to the war cebte, which I conveyed to him verbally.

My trip afforded many op-

portunities to gain an insight into conditions, especially ts they bear upon the
subject of debt funding, and these impressions, together with the informs' ion which

I gave Ambsesaoor Houghton, I shall now attempt to express in this letter.
Much of whet follows le confidentitl and knowledge of the existence of
this report might, indeed, cause me coneiderbble emberrausment.

I am therefore

asking thet it be heated

t confidential document, "or your use, and for the

Presientos if he desires to

rest: it.

I have made it relate particularly to the French position because of the
pending negotiations.

But it can be elaborated with comments in reserd to the opera

Lion of the Dames Plan, which, of course, ha at a bearing upon debt funding.

I will

be gled to write a suppleuenttry statement if you desire me to Yo so.
Attached is s translation of c. confidential statement phich was :urniehe
to se by

Governor of the Bank of France.

This letter is in part based upon

that statement.

General Conditions:

It is probably true that the people of France are

well employed, and reasonable prosperity is returning measured by French prewar
ettnderde of living, whereas the Government of France is impoverished, if not
struggling against bankruptcy.

This iu in contrast with the situation in Gerw,ny,




tle A.

W. Plau


here the Pne'eerneent, being relieved of its eat, is !-e,irly proeperoue, but induetry

e commoWescre not 00 erofitebles ,De tie people not so erotee:oue.
On the whole, this yeer's crops heve been good; better then lest fear,
tlthoueh ellea loetlee reeulted from heavy rrite tt herveet time, principtlly to vege-

ttbles, late veins find fruits.

There is etrious repression in the vine inaustry of

Southern !pence e'le to tome deterioration in tbe condition of the vines, but princi-

palr to the large expense of herveeting.
Except for the 'Nord,' ell the reilroede on which I traveled were in bed

The Nord line le lergely owed by Edouerd de Rothschild, mho has probably


!raw sufricient seine to finance the meintentnce of the road.

But there sere L*20

period of flirty deys, eostly due to bad track conditions end
twenty recks in e pet
runeine trains too fest.

Friends who have motored throughout Fr,nce tell me that the motor roads are
Also in tad condition, not beic

kept in the ecpoo repair of preear days.

The national monuments of Perim teve been
is evidence that they are not being maintained.
for repairing the Palace or Versaillee,

pride of the French, but there
*bile fir. Pockefeller bee provided

erouede ere not maintained ATIC are rather

:'sprat: slug epectecle of 'cede end underbrueh.

I was (deo told that the Palace of

the Louvre end other impo:tant eutlic buildings ere in bad reptile
thtle I feed no chance to aoe more then a email part of Lhe deveetvta Arcfte,

I em tole tnet reaonatructioe cork is about completed 46 to Vero lends, public build-

ings, railroad etetions, cenele, eeny churches, eee the more imeortent business and


Also ea to s large number of the private dwelliege, although

many dealing.eoueee still reeuire rebuilding or repeirine.

Further pork of recon-

etruction hee nos been timoat entirely euapended.
Theee evidences of national economy ineicete the etreiehte of the Government

y tLeir budget deficits end difeiculties kith the floating debt.
The people of the nation, however, are certainly at work.

I es tdviced that

Honorable it. I. Mellon


there is precticelly no unemployment of conew4uence, etd lebor le even being im-

iorted from Italy ene eleerihere for the harvests.
Tne figuree of tat visible belence oz trade coetinue f,: vo re. ble, but too
optimietic coeclueione eight be drewn 'rom thia condition.

The progreeeive depre-

ciation of the franc rots as e etrong stimulus to ex?orte, end the nation ie lieble to
experience e (Merl? temporary revereel o: trade coreAtione whenever the currency it
reoreenized mend ettnilited.

Another ellotience muat be mode for s factor which is

France includes in export figures all exporte to her own

not comeonly known.

colonies, including particuIerly French Indo-China, to *Met: ene eeporte la rgely.

But the monetary eystemeof the French coloniee ere, ie feet, tied to the monetery
eyetem of France, bed coatoquently exporte to the colonies eo not produce 8 true balenoe of pay:Dents.

or course exports of the colonise to the rest of the world, ehich

e:e not included in export figuree, could, in pert, offset thin. But it ie nevertheLebo a feet that payments for ex,)orts from France to Into- Chine Et re etts de in h r oen

currency therefore serving to seell whet e -.jet re to be s fevoreble belrnce of trade
without producing the roreiga exchenge needed to protect the franc.

There is no doubt that utanderds of living have been reduced.

French people

who live in the 1.-roviticee, in former yeere Pere eccuotomed to spend b aerteon in Paris,

ettend LA 0 opera, do their shopidng, and vielt friends;.


re no loner able to

pay the hotel retee, nor the prices charged at the beat stores rod reeteurante, 50
trey no longer go to Pnrie.
Americo taeq, reached e

But tee flood of Euroeeen travel from North tad Louth

eortions hereto -or unknoen, erie has Kept Perie fairly prosper-


There are some evidences of en upward movement in wages, and especielly in
eels ries and *eget) eetiong the more helpleee cleeeee.

sae in ;.rogreee while 1 wee in Faris, which


serious strike or beak clerke

extended somewhat throughout the

The postal clerks recently struck for pay increaeee, rrei got them. If

Honorable A. W. lellon


tJe (ouch increebe becomes general, especially in the Governecnt &ervice, it will add
the difficultiee with the currency.

Any general wage increaee will likely be

followed by come price increases in tne provinces where they hive pot yet risen to

city levels, still further adding to the dificaltieb of uhe currency droblum.
A curioue situation tee resulted from the imeeete deliveries of reparation
coal by Uermetny.

Coming as thin, sees() with greatly enlerged use ce oil and hydro-

electric power, there hee been an unwieldy accumulation of surplus coal; and the coal
bueinese of Europe is sithering.

Hydro- electric development ie active all over

France, eerainny, .5witzerlend an.' Italy.

6witzerland, for instance, includes in he-r

export figures "Receiets from Power Trnsmitted Over the Border," which is now coneiderbble.

Railroad lines are being electrified in many Aeitricte where water po;.er

is eceeeeihle.

e large percentage ef the euieee reilwaye are now being electrically

operated, Lad it looks as though in time a lerge part of tee mein linee of the French
railways will be operated by electricity.

This presents a gloomy outlook for ttse

coal eusinese and the extent to which rep:ration payment& in Viet form can incefinitely continue.

I have been told by members of the reparation organisation that in

order to convert coral ,eliveriee into cash, the French are disposing of reparation coal

at 30%, or even more, bolos the price at which Germany gets credit.

And, in fact,

it is not iaposeible thtt the entire credit on reperetione for deliveries in kind to
the French would need to be diecounted from 10% to 30% in order to eecertein what -he
French ere ectuelly realizing.

A fairly elaborate explanation of the French ayetem of taxation

sppeere in tae eocument attached, which will not, however, be s:holly intelligible

without better underettneing of the dif:icultiee of taxation which arise lamely from
the psychology of the French people.

Too meny critics of French finance abuse the

French Government for its failure to collect texas without any understanding at all
of the French People.

Limitations upon that a Government cen collect in taxes cre

partly whet tee people are able to pey, but equally what the people ere willing to

Honoreble A.





The e'reneh nation haa a .I.*ya relied upon indirect taxation, as hive the other

iatin countriee, wheretei for many years the Anglo Saxons have been educated to

regard direct taxation, proportioned beeording to eteacity re the more juet-yeees.
lee e'reueL had eca diteot income tea before the war.

Therefore, in eetiabting that

is possible in the way of taxation in Frence, be ehoulu fece the feet teet et.

a re

dealing with Frenchmen, end not with 44nglo ee.x.oas, ewe recognize that Haiti) of taxa-

tion a re bomewhet fixed by the ability to pay taxes, but quite es melee or more by

ability to collect them.

The peycholoeical limitations of taxation in France ere

lo;: compared to "'tat they ere in Anglo Saxon countriee. The peeeent cleeeee ere

'freely smell egrieulturiste; tret is to Ley, eroperty owners e.nd etvers. They are
conservative, thrifty, end secretive.
tax return.

And it it imeteabible to set thea to mike a

They will pay te.xee on their lend, but not on the concealed results of

taeir thrift. The fare peesa.nt le a euiet folios, who stays at home, eorite hard,
etves hie money, and largely escapee taxation.

Tne other claee shich probably

escapee a fair beare of the burden of taxation Le the wealthy bueineeeseni who has
the &eerie of concealing hie income.

Undoubtedly, a greet veriety of expedients are

employed, even, I era told, to the extent of keeping a seperete sat of records upon
which to beet, a tax return. But escape from taxation by thib (at see lb even more

serious than that or the peebente, ea it is the wealthy bueinteesen who is able to
send bib eernines out of the country end keep they invested ebroad, without taking the
income Lome.

IL not only deprives France of tax revenuaa, but reduced the working

cepital of tee nation at 6 tiara when it is badly needea.

This is e bituotion euich

cannot be corrected over night, but, in ay opinion, wile be corrected if the debt
funding operations are cozeleted; if tney make due allowance, as they snould for the
peculieritiee or the. French teseeresent, en( afford the French Government op ortunity

for increeeing direct taxation gradually, ratner than 61.1 enly, awl Lc) avoid a flight

of capital out of the country, or a sore extensive roarding of the currency.

Honorcble A. lc. Mellon


On the other hand ere the (-Atlases having socialistic tendencies, - the
1)111 Le et mere, the salaried claasee, the profee ears, lawyers and the like, - many of

whom ere active and aggressive eocieliste. These ere conetently pressing for capital
And that ie the one way to frighten the French ;emote:a., er- get him to ceen-


ceal his sevines.
There are evidences, however, URA texas are being more vieorously co.: acted,

end thee, the program of enlergineg the area of taxation is being more vigorously eeMoneleur :Amon told ma net in a 1=rge hank like his won, the "Lociete


GI snerale", they have flood o;eortunity to observe much improvement in the thorouehneee

with which tee collection. ere now being made.

It ie one of the largeet banks in

France, and covera motet of tea industrial eection kith a network of brenchee.

All of ay talks kith Frenchmen ineiceted that outside of the aL.riculturel
cleteeet they are now feeling the burden of taxation more heavily.

My friend Berea

de Neufliae, a banker end one of the regents of the Bank of France, tole ,ao ',het he
paid 80% oi' his income in texas to the Government.

They are also emberreseed by in-

ability to deduct bueieetsu loeees (-Chet i& cei:itel losses) from current income as we
do, one` consequently teeny firms a.nd bueinesees ere obliged to amortize loates over a

period of years.

AS illustrating the burden of the inheritance tax, the Governor

of the Bank of France told me that he had recently been left E. legacy of 1,000,000
frence by


second cousin, end after calculating the amount of the tee, the expense of

edoinietretion, etc., he found that there would be nothing left P. n d he relinquished

the legacy entirely to the eet.ete.

But in considering the capacity of the French people to pay texas, it suet
oleo be :dome in wind tnet utaarlarda there are much lower than 'o, ith us, or even ie some
other i.,arts of Europe.

To illustrate, Moneieur "ermentier employe n man end hie wife

to run his spertment, who cit., all the work, the man also tskine care of en automobile.

Even though he ate increeeed their lieges two or three times recently to meet the in-

Hororeble A. W. ?talon


creeued coat of living, he 1c todey ;eying tear only EE5 frence e montb, or, Bey,
ebile I wee in Perie Colonel Loetn rented a new houee oath an obligetion

eke. gold.

to employ tee owneee chef ene :liteer.
a lonth, and the betler 110.
lower in the provinces.


The chef receives the gold eeeivelent of $12.

Tteye ere verse paid In the city of Feriae

They are

recent report on salaries of bank clerks chose that they

receive un evereee of BOO or 900 francs a month (e4e to :46 Bold) even in tee higher
graces, on shich they muet eupeort a fteily.

Put even these wages are better tilt')

LLoss paid in Italy, weete an American family I tnow of, now living in Rome, employe
twelve servants whose ggeregete salaries ere not eeual to ehet I pay my valet.

If the economic rule prevails in Frcrce teat wages and eateries eeuelie
themselves to relative levels between tte rIfferent decibel', these indicetions of the

low btandsrd of reward of labor in Frtnce are likewiee sore indication ae to the burden
of' indirect texation, which ts,!o to the coet of living of ell clteseh, as well as of

the meagre capacity of the nation 6 a whole to pay heavy taxes.
Too little coneideration is given by critics of tee French of general iseeirment of capacity to pay texts beceuze of ver loacee.

These are not confined to the

destruction of 4nduetritl eetshliahments in Northern Frrnce end to long idleness in
production while reatorttion work 74.b teeing place, but to eirect looses or the French
people in foreign inveeteente.

It is eetimeted thtt no lees tefe2 14,000,000,000 wes

lost by French inveetore in Russian securities whit') have been wipec out, ant total
boatels on foreien inveettente, the velum of which we

destroyed or impaired by the

war, is placed by eoee estimators se high es $6,000,000,000.
On the other hand, even with the increreed texas and reduced exeenaes, the
budget has not yet been beleeced, bed that, together with the embarrassment caused by
the large maturities of floating debt has led to many current reeorts that t"e Coverne
ment is not paying its bills promptly.

There is a strong argument, not commonly coneiaered, however, in support of


Honorable A. I. Mellon


the belief that the 1.'rench peoele oen pay heavier t:xee then they are no ;,eyine.

nnexea statement shoes thet the combined budget and ski; lementery budget in

14 aggregated 8,260,000,000 fr.nce tole, end th-t the budget of 1925, reduced to
8. solo be.eia by uaine; a. ratio of four francs to one, totele 9,770,000,000 fr lice,

ehich, on tt gold beaie, is -n increvee or only e out 50% over presser.
In englena the reeer budget ran et about :f900,0,:i0,0::0 gold, .nd the
present budget runs roughly at 8.frOUt t4,0J0,000,000 gold, or four to five times
the prewar budget.

In other woras if the 1.-turcheeieg rower of the French currency has been

reduced to one- ue..rter of its prewar value, tee burden of the debt suet he but
one-euerter 8.8 heavy, proviaea, of course, the .urchesing poser of the franc is

correctly represented by tee ratio of four to one.

Unfortunetely in a netion like
France, were a large part or the industry ie conducted by crefteaen, rather than
by large organized units, wages do not acivence es rapidly as the value of the cur-

r:ncy depreci.tee noteithetanding thtt the coot of livire; does edvance euite rapidly.

: resent index number of i:ricee in Fr-nce is over 500.

loveriehing lere;e cl..Bees of

This results in in-

le, .,ho, nevertteleee, suet meet rn unduly heavy

pureportion of the te:x burden because indirect texetion is eo lergely em-loyec rather
than uirect tbxl.tion.
The solution of the ,,hole tam problem for France is, probably, to gradually increeee the texes of the agricultural Ci.88888, end collect such heavier income
temes from the .,eelthy claesee.

But it must be done greduelly:

just At, the former, bee mny me as of sec


This latter cies/4

They send tLeir money out

of the country, idaereee the peusent hoards ena coact:tele his s vie s in benk
Thy i'ublic Debt:

of the public deist.


The attached stettereent gives an .re.lyeis of the coition

heference here need

only be meae


the statement

on ptge

which indict:tee the volume end r to of turnover of short obligations i eared for one,

three, six

.n.3 twelve


tad on phge 6 et

bey., showing the wei,t.t



ilonortnie A. 0. SiuilOR


t Via end ul




On tee 25th o: eaptu:tuar 3,4b0,000,000 franca mature,


on the 6th or Duut:Ocur 104,0W,000,000 franca.

Muse maturitica, toLether


wi,.;e tree recent embErressoent uf the Bank of Umince, led to tee radicel meneure of
iaaulut the attibilii,etion loan in the form of e ;..;r2etual rents 'ueering 4f interest,

to be keid in paper fmnce .but et uuuh e rete trItA the holder rill elwaye realine
not lees thbn i* frenca -kits: pound sterlIn4;.

CciileuA's 1)n:sent ufiort to dual with the floating tlebt itL. v the result of
a ehoiee uf l'cit.r possible mettures:


A capital levy
An enforced conversion




An obligation issued on a sold basis.


_Curt:air inflation of LLO back 110141

Plan (a) tould likely heve csused t flight of the frEnc, es it did in Switterlend
when e capital levy 'Mb threetened.

?len (b) would have bed c somewhat eimiler effect

end have been e severe blow to French credit.
gressive inflation.

Plan (c) would neve eterted pro-

And plen (d) web the choice 01 evils.

The expedient it a dsngeroue one, for if the franc suffers e rurther decline it means that ,roffre,Ave inflet.ion of the currency will be necessary after
meeting Chit: oUligation, in orcer to meet the tubsequently msturing obligationa which

naturally csnot be refunded on rny lees favoreble busier.

There are many reeponsi-

tle Frenchmen femiliar wlth finance who today hive abandoned their belief that the
nction cen support its public

,LIbt tith the franc worth e.- such es 100 fr-nce to tht


They think it levy hive to go to 120, or 150, or even to 200 francs to she


It in now r. bout 103 to the pound.

This is counsel of despair, but it is

not out of the ,iuestion tet eomething oe the

sort will develop if the pending loan

is u frilurw ;Jid supportable debt setl:leisents cannot be effected with the United btatee
and Ragland.

Many rumors ragardin9 the auccesa or failure or the loan
I was in Frunce.

ert3 heard chile

Lome stctemunts placed subscriptions ES high as 20,000,000,000vmno6;

Honorable A. S. Mellon


there 'Acted that it wee a complete failure except in the city ct



aunt reelly required it about 40,000,000,000 french; anti the Government hoped to

get a minimum of 20,000,000,000 frence.
in London, etich ie probebly too low,

The let statement which I received, while
indiceten that total pubecriptionb wer, then

between 10,000,000,000 and 11,000,003,000 frames.
The Bank of Frence cen etill increftee loPnb to the state by over

3,000,000,000 trance, end their note iebue by over 5,000,000,000 francs.

Tole may

enable them to meet the September situation, but will result in further inflation,
further deprecietion of the franc, and might induce e further export of capitel at n
deneoroue rate.

The Bent of Frence:

The pobition of the benk illubtretes the difierence

between our scheme of ver finance end that practised by tee feuropeen nations in varying degree.

Nith the exception of a loan of e50,000,000 made by tee Reserve Bents to

our Tree eery immediately after war weep declared, our Government hbe eorrowbd nothing
directly from the Reserve Banks, except edvencee to finance the turnover on gut: rear

days, which

re elseye paid oft within e Ada.

Coneeeuently, ell of the aer loges

of the Reserve Benka were ueon the private otligstione of individuals end inetitutione.
The Re3erve Banks were left in control of tee money ml,rket throueh teeir discount
rates, end the benkine byetem w: a able to ebeorb the enormous ieportatione o: gold
without dangerous inflation.

The gold simply pein off the borrowings of our :sera ,ere.

If the Government lied borrowed, it might not have been willing er tble to repay as

rapidly te our bankers did and the imported gold would htve ctused en imeenee inflation.

In Frence, as with other Allied Governeeute, too ltrge a proportion of the
Government borrowing 11!;13 from the Bank of issue.


Ths Government cannot repay the

and the Bank is left helpleab to control the comestic monetary situation.

Greet Britain escaped the worst of this development, but etill hte to deal with the
currency noted.

Germany cleared the decks by abandoning the old currency end re-

Honorable A. W. Mellon


organizing the Reichebank.

The :tanks of Issue of rrence end Italy are helpless,

Ihowever, because their portfolios are almost entirely loans to the State.

of France, in round figured, he loaned the State 60,000,000,000 fremcs.

The Benk

private portfolio consists roughly of 3,000,000,000 francs "Lomberd loans", secured
by inveeteent bonds, - say, $150,000,000.
end breaches ell over ?macs, and are not ci

These lotus ere wide ii, the heed office

t-icient volume to exert may influence

upon monetery conditions if the beak rite were wised.

The portfolio of "bills dis-

counted" - about 3,000,000,000 francs - is eltout entirely composed of short bills
deposited for collection end peyable within rive or seven days.

On one of the days

I *ad 6..t, the sank, the diecounts presented were 251,000,000 frence, of ,hich only

8,000,000 were long bills, ell the balance being simply collection items.


leaves the Bank literally helpless; its mein function is merely to cut up Government
bonds into smell eenominetion notes to circulate se money.
The government of the bank is also of :

character to add to the diffi-

While the regents are elected by the stockholders, the Governor end Deputy


Governor are appointed by the State.

The directors can do nothing without the assent

of the Governor, end the Governor con do nothing without the resent of the directors.
It results in the influence of the State being superior to tie influence of the

When the records of the Bank were recently falsified under a previous cebi

net, I as told that it was due to an urgent appeal that if the regents resigned, ea

one or more or them threatened to no, the nation would be wrecked financially because

of the resulting elem.

Under the conditions described, criticism of the recent

reduction in the discount rate from 7% to 0 loses much of ite force.

My understtnding of the present situation of the Peinleve Govern-

ment, gathered from many saurcee, is 2robebly reasonably sccurtte.
inclutes canny socieliet votes, - those of the "left."

The "majority"

The Government is dealing

with many elfacult :,ueetione; these are the Riff wars the rebellion in Syria, the
domestic debt situation,. the foreign debt funding, ens the negotiation of the

Honorable A. W. Mellon


ecurity pact.

The aociwliste do not Kish to ebouidcr the responsibility of dealing

111 ith theee aueatIona hied are suite billing to allow the present ,government to do so,

roval or Ciairoval.

tte radicals simply retaining the right of

There 6081fit to

be general expectation teat after .?..rliaaent reeseemblee in October, sey by the middle

of November, thie govornnent ia likelr to fell, and e more radical take
its place.

Briand is btA

e. government him self.

deal with the financial

oeed to be manoeuvring; to secure= the radical vote and form

Caillaux on the other aand, is makine a superhuman effort to

icuitiee in the hope that he may experience 6.111156 eLd be
The probability seala; to to that thin say

asked to form a gokernment timedlf.

happen after a short interval of a more radical government, under aome mtn like Briand,
with Violet te Finance Minister.

The following I believe to be accurate.

It is based'upon my memory of

many talks with reeponeible people curing which it wad impodA.ble to take notes.
Caillauxlb firet position ate to ineiat tnat payments be wholly conditioned
upon the product of the Daaee Plan;

that any development ouch as a decline of the

franc which indicated that France eta prying beyond capacity would be dealt with by

eome plan analaioua to the Erne Pltn.

Hie offer waa en annuity of 10,000,000

eterling for eL..ty -two years.

The British position w:a to require en unconditional annuity of 18,300,000

This was partly Lae result of a study of estimates end figures submitted

by eaperte, but was finally arrived Et by


rough calculation v,hich attempted to

Plan, the probable of the of the tea
reconcilethe principles resultsBalfour Note,

aton Churchill in his speech in Parliament last
roughly estimated a6 capable of producing one-half

125,000,000 sterling, say .1300,000,000 per annum.

nts, say 52%, would theoretically be about ;T150,0001000


Fonoreble A. . Mellon


although actually it would be such less thie on account of the priorities, and
ot tccount o:' tL

discount on ecliveriee in rind mentioned elsewhere.

Upon thie

eatimate the compromiee figure of 12,500,000 aterling we finally arrived at for the
British ermuity.

A like or000rtion on tee Americen debt would be about 16,000,000

eterling, - the to together approeching the eetimeted receipts by .isence from Geratny.
The Balfour Note leid down the principle that Great Britain ehould collect
as such on Oebte owing to her L.6 she iet required to eeey under the American debt

The British figured that 12,500,000 sterling, plus peyments which they

would receive on other debts, plus their share of the annuitiee under the reties Flan

(probably figured ae producing more than the eetiaated 50%) would roughly approxiatte
the esount required to meet the Americen pcymenta.
As to the prolatee lade in Parliament by Churchill in Decemer, t!wt payments

to Great Britain should be oeri peeau with other creditors, the vies wee expreeeed
teat a debtor threatened with insolvency could not prefer one creditor over enother,
but that the creditors might themselves agree to accept respectively more or less one

than the other, if that woo agreeable to the debtore

But the tentative agreement did

not commit eh:: British to accept lees proportionetely then what th. United eetes is
to be oeid.

Cailleux stronoly ampheeized the transfer dWicultiee,
that was the controlling rector.
reference ehould be Aerie to



insisted test

Re proposed that if transfer Oif iculties prose

comeittes consisting of the Governor of the Bent of

England, the Governor of the Ben

of frence, and the Preei-!ent of the League of Ntions.

Objection gee made that ouch a reference would only dieclooe the fecte of the eituetion at r

given moment, but would not correct causer leading to that etete of fecte,

such, for iaetence, t.a sight eriee from abuse of the Bank of rrance, evidence of' the

possibility of which had alre&ly been specifically given to the world.
could not be settled and WES left open for future neootiation.

The ouestion



finnorable A. W. Mellon

rainbow also insisted that there r.u:t be t moratorium, or very era.; pullmerits .t the outset.

While ttle rate of enymont at.e not aettlee, it was egreed that

ps.yment would he gredueter, stertine octeA.bly at 2,000,000 etarling, end increasing
slowly until the full annuity wt t.. re,ched after the bank of england loan (referred to

later) bed b. en fully repaid.

The echeeole of payments ie to be arrerged later.

Ctilleux further insisted that paymente be dependent upon tht amount collected from GereAny.

In rrinciple tht British are willing to make tome concession on this ;pint.
Mr. Churchill intimated to me that probably e fixed annuity of 10,000,000 aterlia6,
with 2,F.00,000 conditioned open German paymente would be acceptable.

But I surmise

they sight make r smaller fixed payment and a larger contingent payment if preened
by the French, rather than see A fsilure of the settlement.
The lump alum figure arrived et ae a comproaira 1-,. un,loubtedly the reeult of
the intervention of Downing :street.

The Chancellor's point of view NUS frankly that

of the Tre,sury, And of the British budget.
more larvely political.

4r. Chamberlain's point of view wee

40 ie et present negotiating the security pact, to which

they ettech the greatest importance.

The 1nfluenco of Downing Street we to moderate

the payments as some aid in fecilitating eucceeeful nevtietion of the pact.

The de-

tens of the discueeion I am not acquainted with, but it era.; thirst influence ,Ahich led

Yr. Churchill to Agree to reAuce the annuity.
I think the at cation may be fairly ex^reared by stutin6 that while ft
payment to t.h


Inited States proportior,tely than the proposed Britieh anruity would

be !ratifying illad helpful to Downing Street, it would not be as pletLing to Whitehall.
But nevertheless, I have the f,elini- that while Phitehall would try to ineiot upon

increasing the British paymente peri pascu with tmerican peywente if the latter are
larger, Whitehell might be persuaded to make even r further reeuctior in the British
payments if the American payments were proportionately smeller.

Thie night take the

form of E reduction in the portion of tree ennuity which le rimed, Ene an increase in

iio;.orable A. t. Mullen



thc portion onion is contingent upon German psyxents.
liIn e.:dltion to A)(2 ,cyments to tine Berk of EncIttnk!, 4n0 the ;roposed annuity

to tho Eritieh Governwent, there is st presew buing paid (e..n' I gither rill be con-

tinued) about 1,000,000 sterling for auppliee aoP Franco, ailllsr to the prywentc
now boin:z. made to the Unitsd .4vtots.

I understand that the actuel amount of cuoh avanced to Frhnne by the
British Govornaont, without any intmreet incluOed, Kfz6 47),000,000 sterling in round

Intertat hse been n4.ted to capital at the Balk of Cngland discount rrte,

whatever that alt.,ht, be from time to time, thus increasing the princi?el .4, the preeent
amount of about G3(1),000,000 stsrling.
tif'oacted by gold tienstotions.

The amount or this debt is further agein

Larore ti

United autos entered the war, an er-

rangcment was aude between ft..: British, Fratiab, Fu:;Lii&n,

Italian 6overument6 by shich each contlituted en
America in payment fur war sup,.liee.

Ets'., (uubouquently) the

runt of gold to be shipped to

According to 1._ puLlishod stattvilente oL' the

Bank o: France, the amount which it furniehed should be estimated et stout 70,000,000

This, au I recall, ice the balance of the ancunte of :sold shown tae "held

abroad," 1008 the amount to be repaid by tho Eenk of Enlnnd.
told ma t.let the -mount iliz2.a 50,000,000 sterling.

had in gAting exact clures.

Fut Mr. Churchill

Ponbubly no dit'iculty tould be

This gold, wlitsver may be th

Emount, has been

treated by the British Governaent as *torrowed" gold, altkou02 the entire 'mount,
to ether with the %sulfa,. an... 'Lila% gold (all

some 1 believe from Egypt) W!8

ehipped to the UnitA Z.tttea in sc..orance with th., arren43eacnt oricinall7 ea.!e.


British ..lovernment 11:-.1s teen tllowing interest to Francs upon the Lnount of thiu fold

and the int.t.reat Las been credited on the interest charged aainit Pnlco on the
entire amount of t.:.e loan.

It is in the nature of a borltkeoping entry.

The nes arrangeuent ,matemplates tart L non-intureatbei:rin,: note will be

given repreaentin

the entire Eaount of thu golds which will be repave le Et the

enc of siity-two yeare,, and when roplic., the French tre to get back the ,old.


Hor.orehle 1. W. tknon


tie eye -we eh to cc ve the etetement or thy. Bon

ever ie let:rally ptid.

of F11-11CL:.

I very ealch doubt if it

Ceille.ux probcbly feele that the errengement ie temporary to

proteet I. he eenk of Frence sesinet my .genic treeng the. peesarte. who hoard Peck of

niece notee, which miTht result "roe so oonnidereble f reduction in 1.!ei nominel cold
reserves of the eenk as would be neceetery if this ieole were credited on the French

debt to Great nritein, !kyle the technictl ri yht of the Beni( or Frence to its return be
thereby terminated.

The Britieh would hrce .preferred to join the limite' 5t .tee in P. eettlevent
with the French.

They lid not consider that _ any settlement with en insolvent debtor,

or one of eoebtful solvency, solid be tolerated which did cot reault in peyments pert

es such e joint neeotintior e e not po , Ible, boenver, they did the beet ;.hey

cull arc' etronely hope that the Americin eettlement will et let et be elong sinner
lines, but eith nac-_seery eetjustmenta of dettils end leer important mettere, eo long

as the basic principle of this settlement ie observed.

They eatiegite that their

settlement will of vet repepaent of tke princlIal erel not over 2% in erclet.
ter. Churchill erpleir.od to ate kb greet length hie difficulty ir. towline; with
the Britieh debt eo long ee the tmericsn debt eettlemer.t A' L incomeletc.

He eeeteed

to heve been considerably disturbed by the ed'erse cone-era from ieterice, and the in-

ference that ir. eoee way the remit of the nevetintione crated t trap for the
United Etettee, or operated in come eel to circumscribe the freedom oin the United Stetes

in dealing rith Fr*nce; or eome such thiere

Pe P.E,kee le if I toeld ettte to you in

his behalf, end froe him, that there wr.e not the slightest intention of clueing tiny
emberreeement, or of placing eny lieitetion upon the freedom o' cation of the Asericen
Goverreeent, Prfi that rutore to thrt :.Affect should be diereorded.
The litritieh think the French mtpable of Takin,r:- these eayeents if Germany Joakee

eubetential pereente under the Dues Plen, but Omit 'et, there ie 501t uneertainty
even then.

The queetion of 3t.De. city to effect tranefere euat be exesined en:: dealt

with leter, end will uneoubtedly ?recent greet difficulties.

There would be little

honoreble A. N. Mellon


Ilidissent, hokever, that if the British battlement is not followed by F somewhat bimiler

settlement in America, and, following that, a monetary reorgunizetion, there ia still
danger of .' breekdown of the franc which would make the present settlement ineffective,

and put the whole setter back in its original position.

The perilous situation of

the French floating debt is not minimized, but hope is still exereeeed that this can
be dealt with ettisfecto,ily if the external debts are funded, and if confidence is
improved by the successful negotiation of the security pact.

On the other hand, the

conversion loan is regarded ee imposing on the Treasury the necessity for heseafter
conducting ell of its refunding on some such stabilization baths.

The pending scheme

of 95 fettles to tne pound may mean a later. loan with e higher rate per pound, - end

so on with a pobible increasing deprecietion of tae franc.

The only solution is

menetery reorganization, recognising the need for revaluation, and regularizing
it by law.

If the pending maturities of French lomeetic loans not met by aome

refunding loan, the only recourse of the Government will be to the Bank of France.
Lech reeort to fresh issues of paper money will mean depreciation of the franc in
terse of sterling and dollars.

The service of tne annuities to the United States

tee Greet Britt-in will again ctuse further emieeionb of paper money by the Bank of
France, tee resulting progressive depreciation of the foreign value of tne franc

must inevitably lead to a suspension of foreign payments.

References are frequently male to

so-clled "comaercibl" debts of France.

They appear in the attached meeorandum in three categories:




The commercial loan extended to the Bank of
France by the Bank of England.
The obligation of the trench Government, to
the American Government for war and
other supplies sold to Frence after the
All oter debts of this general character.


nonortble A. if. Mellon


oio too heavy s burden of transfers, and this, of course, gives the bank of

het it in the n* tore of r

preference over the Government.

My uneeretending hats been that the interest on tte Bank of Englend loan hes

been the regular bank discount rate from the begin ine, whetever that ma; be.
This matter was, I believe, explained Melt:11y to both Mr. Gilbert and
Mr. Nedeeorth when they were connected with our Treeeury.

The payments now being made by foreign eovernmente to our eovernnent, including Belgium but excluding France, eoaewhet exceed UO0,000,000 per &arum.


estimate at tee benk that the service of foreign lone Uken by American investors
since the conslusion of the war will cell for further payments of about e20C,000,000

end many of these, of course, relate to loans which are wholly unproductive for the

Peyments to be wade by Germany to her creditors next year will, tneoreticel-

lhemount to around $500,00,000, end German; ail_ not eve the proceed* of the
Lewes Loan to drew upon for the purpose.
In as general way It may be eteted that the facility with which these Inter-

national trenefere were made last year w.e eainly due to the extent to which credit

we extended by the investors of the United Etetee.
taken P2,000,000,000 of securities of foreign origin.

In lose than two years they have
Tele enabled foreign purches-

ere of American goods, eepecirlly of the increased eeeorte of cereals last year at
high prices, to mule peymente in Americe, enc it undoubtedly was the principal means
for enabling Germany to meet her payments, and, ie turn, the British, French, end
others to make payments to us.

It was a development shich I regard ae et ential to

European recovery, and greatly feciliteted monettry reconstruction and etabilization
in exchanges, so eeeential to the continuance of our foreien trade.
But it must not be overlooked teat if say cnenge in conditions in the in-

vestment or money merkete, or if any ohock to tne coneinence of American investors



foreign eecuritiee,

Honorable A. W. Mellon

especially Europeen,

should tribe, ouch ee might indeed be the

14ksee if e French default ehouic occur, or if the neeotiation o: thc security pea were

t failure, then the closing down of the Amsric&n investment market to the reet of

the world could coneieenbly imperil the continuance of these toreign peyments.
The greet importence of the American inveetor, end hie tbeorption of teropean
securities, in enabling these aebt oet'lemente to proceed in en orderly fashion is

not euf:iciently emphaeixed in Ascueeione of this subject.

There ale certain uneecepcble oonclueione to be drawn from whet I have observed -broad, which 1 will briefly eammerite:


Thtt the domestic debt of France, co large a portion or *hien /8 of

early mtturity, ie a menece to the Governmentge credit, and, consequently, a mantes
to the Berle or ?remota.

It contains the pot:, ihility of r coaplets breakdown of their

a;onetery eyetes, neceeeiteting much more radical memsures then thooe which ere now

under discueeion or being et!empted.

That tne limitRtion upon the ability of France to make foreign peyments

is lees a problem of transfers; (that is finding the amount of foreign exchange

neceeeery to meet abligutions) than it is of collecting eut:icient texas in francs
to enable the Liovernment to ecc,uire the foreign exchange aithout inflating thc,

Mat zhet the State needs is a thorough-oing financial reorgenization end

funding of the abort debt, whict should be tc.ompliehed by domestic loans and not by
foreign loans.

That tee expectation that rrence might rely upon anything like the maximun

of q,30J,000,C00 Li year l'iom Uermsny ail. prove 11:ueory ror ante time, if not entirely

as tau f,teily be abewn by a etu4 of the -eciat ;sport of ,ne Reparation Agent,

and by coudideretion of the various dif.iculties with which Germany is now etrugjimg.

re not, hoeever, touched upon above.

Eonorahle A. W. Mellon




the present


of runding the cebt to


Britain with et

of 12,500,000 sterling, if i'oLowed by a refunding of the kmericen debt upon

approximately equal terms, could impoee a burden of psymenta upon Frence which ehe

in not at the present time likely to be able o meet in full, unlese recoveriee from
Germeny are greater teen expectation ,justifies, and peymente bre graduated for some
yea rs.

That an obliettion to pay annually et, once to the United Ste tee and

Greet Britain any large sum ouch ae .;125,000,000 to $150,000,000 %ill to

followed by en inflation of the currency, and resulting inability to mske trenefers.

That the closing of the British laveatment market to all foreign loans

except her own colonies and the natione being reorgenized under the fieence section
of the League of Nutione, two eloaed the only market, outeide of the United Staten,
where ?ranee could borrow; end that in conee:4uence, the et,itude of our goverement
in restraining our beekere Lion neA,ptiatin6 Freech loane in th

Americtt. market, and

at the :Jame time insisting upon debt funding, hoe placed the French Treeeury in a

vine, trom which there 16 no escape except by repudiation, or by meetin6 any terms we
may exact.

That we mast accept the fact that wu are 'feeling with the Franca people

and not with Anglo Sexono, sad meet the peculiarities of the people of that nation,
which would indicate the neceeeity for email teed gradually increasing payments at the

outset, until the maximum iu rehed, say, thirty-A:lve. or forty years hence, or even

later, eftr which time the fete of trsnefere ahoeld gradually be decreased in order
to avoid the serious reedjuetmente which would be neceseery were tranefere to be entirely ciecontinued at the period of maximum payeento.

That if some such plan is tidopted, the -Lurden of taxation in Franc!, is not

so heavy but *het repayment of principal and some interest could be effected.
Gradual increases in texation (ttie only plan likely of succeee) eould actually be
facilitated by the need for meeting greduelly increasing payments,.

Honoreble A. W. idiom

Thtt t successful negotiation along theta lines would alto facilitate

e)saineLEeltent or the domestic debt, aril sight even be followed by a reorganization

of the currency to a stable baste, eo thtt prices, true segues, the burden of debt,

and the cost of foreign currencies *ill not be constantly fluctuating.
V_ Au you have doubtleee bsen advieed, the tiationtl Rank of Belt;ism and the

Belgian Govirmient have a fairly well matured plan for dealing with their own monetary
problem, which I heed en op?ortunity to examine with L. Governor of the Bank in


The funding of the Belgian iiebt to th. United States now presents tUe op-

portunity for them to carry out their plan, which I have little doubt ,ill be euccees-

ful, Lou an example to rtnce.
in Frtnce, eepecially

If this could be followed by c. similar resrgenizatiOe

traNuillity is insured by the negotittiot of Lhe

security pact, I believe ee cLn look forward ho2efully to the approach of the inst
stages of economic recovery in Europe.
I hope that the foregoini:, me i ;rove to be of sone naafi in dwlinz; with this

difficult setter.

Faithfull: riure

honorable brldrew *. Mellon,
Lecretery or the Treasury,
igushinton, D. C.

The "open credits" of the French budget were,
In 1914

5,191,600,000 francs

In 1925

8,280,000,000 francs in gold

(basis 20 francs to the dollar).
The "antioipated receipts" were:

5,191,900,000 franos


8,290,000,000 gold franca

The "budgetary expenses" which represent, in 1925, an increase of 67% in
oomparison with 1914, show, nevertheless, diminutions in most of the categories,

notably: 537,200,000 gold francs for the Army and Navy and: 35,100,000 franca
for the expenses of Government and collection.

The increase in the expenses

is caused almost exclusively by the charges for the public debt, which increases
from 1,306,600,000 francs to 4,640,000,000 gold francs, to which must he added
384,000,000 gold franoe for advances to the pension fund, making a total


5 milliards of gold francs nearly.

The comparison of these budgets shows, moreover, that the direct taxes have
been much more increased than the indirect taxes, taxes for consumption and fiscal

The direct taxes provided one-half of the normal resources of the

general budget, just as the tax on incomes represents more than half of these
direct taxes.

Moreover, exceptional receipts: tae contribution on war profits, the liquidation of stocks which figure in the tuJaet of 1925 for

more than 300 million gold

franos ar3 bound to disappear.

From 1926 on it must be anticipated that the budget will have to be raised
to 35 milliards and a half, nearly, to be balanced, that is to say that it will
be necessary to increase taxes from 3 milliards to 3 milliards and a half of francs.
It must be added that the manag ment of the external commercial debt, which was




reckoned in the budget of 1925 at 1,100,009,000 francs, will call, in r-ality,
for the actual paying out by the Treasury of more than 2 milliards and a half
of trance, as the amounts for paying off were only provided for for one portion
of the debts and the rates of conversion were established at exchange rates
which must be increased today by more than Per'.

The internal debt of France is made up as follows:

19 24


Perpetual and long term debt)
Short term debt


Floating debt







To these 278,526,000,000 there must be added 715,000,000 six-year 'owls
which must be paid to the injured between August 1F,1925, and February lr, 1928.
The external debt (on November 30, 1924) amounts to
a) Political debt:
United States

b) Commercial debt

15,194,000,000 gold francs
15.816,000,000 gold francs
31,010,000,000 gold francs
5,017,100.000 gold francs

Total external debt
36,027,000,000 gold francs
Or 144,108 million francs.
lotal of the exte.4a1 and internal debt:
423 to 423 milliards and a half of francs.
The net receipts, on account of reparations and damages which the Frenoh Trea_
has received
since the Armis-ice, up to July 31, 19?5, amounted to about
530/gold marks, or 2,850,000,000 franos, while at the close of 1924 the mmouuL


of damages paid by the French Treasury amounted to 129 milliards of francs.


The Direct Taxes, whose importanoe has been shown above, comprise:

The succession tax amounting up to:
For 3 children alive or represented:
For 2
For 1 child
No children


The transfer duties (likewise a matter of inheritance) amounting to:

Fre parents to children
From uncle to nephew
From relatives beyond the fourth degree
and from persons that are not related




The taxes on incomes (cedulairee), which call for certain deductions
at the beginning (for example, 350 dollars, salaries and wages,
150 dollars for narried tax payers if their wives have no
personal revenue, and 150 collars per child of less than eighteen
years if I: does not receive wages) are as follows:
Rate for

Income from personal property:
French corporations
Foreign corporations
Land taxes
Industrial and commercial profits
Agricultural profits
Professional profits, non commercial
Salaries and wages



Rate Proposed
for 1926



The general tax on incomes rises as high as 44% and is increased,
when the tax payer is above 30 years of age, for bachelors or
for tax payers who have been married two years and are without

Indirect taxes.
They are extremely numerous and affect all forms
of production, consumption and the circulation of wealth.

If the taxes paid in France per capita of inhabitants are reckoned at $39.07
and the ::ational revenue of France, according to rather eYaggerated estimates, at

127 milliards of francs, or $6,350,000,000 ($161 per inhabitant), the taxes paid
by the French represent 24.20% of the revenue as compared to 24.2% for England and
11.5% for the United States, according tc, the valuation of the New York Trust



Budget of 1925
In gold francs
In paper francs
(Rate 4 to 1)
(In millions and hundreds of thousands)

dudgst of 1914

Credits opened


Public debt
Public offices
Public services:



Army and risky


Other ministries











Expenses of administration t...nd

Sundry expenses

Receipts anticipated
Taxes on revenue and capital
Indirect taxes and fiscal monopolies
State and domain cultivation
Various products
Receipts in course
Products obtained in Algeria
Exceptional resources
Anticipation of the provisional
Emission of Treasury bonls
Contribution for war benefits
Liquidation of stooks
Payments by Germany





















Post Office, telegraph and telephone
State railroads
Railroads of Abate -Lorraine
Various services

Of which:
Exceptional receipts (emission of
bonds or advances by the Tressury)












If the anvance 1 the pension fund anticipated for 1,537 millions were reckoned
the service of the debt would absorb more than 20 milliards o: paper francs,
or 5 milliards of gold francs.
Inoluding the receipts for post office, telegraph and telephone.
Not including the receipts for poet office, telegraphs and telephones h nceforth
put under the annexed budgets.
Not including the emission of 1,537 million Treasury bonds for advancer to the
war pension fund.

(Financial Laws of

July 15, 1914, and July 15, 1925)




FloAtinp, Debt

Bonds of the National Defense
(In millions of francs)

Previous to


Excess of

Deo. al, 1923
Jan. 31, 1924
Feb. 28
Mar. 31
Apr. 50
May 31
Juno 50
July 31
Aug. 31
Sept. 50
Oot. 51
Nov. 50










tion on November 30, 1924:
of the
f 1924 the partition/bonds of the National Defense and ordinary

71% of the total circulation


ation derived from the inventory of the Situation of France, 1924)



he Ministry of Finance for the fiscal year 1925)

th :sonde:



taken from the report of V. Louis Dauseet (Senate) on the

r bonds:
ths bonds:
onths )onds:








Short Term Debt

Date of Repayment

Nature of the Loan


Feb. 18, 1925
July 1, 1925
Sept. 25, 1925
Deo. 8, 1925
May 20, 1928
Feb. 1, 1927
Sept. 25, 1927

July 1, 1928
Dec. 8, 1928

May 16, 1929
May OD, 1929
Nov., 1930
Nov. 1, 1931
Nov., 1931
Feb. 1, 1932

July 1, 1932
Nov. 1, 1932
Nov., 1932
Dec. 8, 1932
June 27, 1933
Nov. 1, 1933
Nov. 1933
July 1, 1934
Nov. 1, 1934
Nov., 1934

Bonds of the National Defense, 1915-25 533,671,000
Credit National,
1922, 2nd emiesion 3,290,000,000
Three and five-year bonds
3, 6 and 10 year bonds, 1923, let
3, 6 and 10 year bonds, Sept., 1923
Credit National
Bonds, 1922, let
5 and 5 year bonds, 1922, repayable
Note (1)
at 101.50%
Credit National,
1922, 2d emission,
repayable at 101%
Note (1)
8, 6 and 10 year bonds, 1221 (let
series, repayable at 103%
Note (1)
Decennial loans, 1919 to 1929
3, 6 and 10 year bonds (Sept., 1923),
repayable at 103%
Note (1)
5% 1924 boAs at 10 years
Credit National 6%, 1921
1924, 5% bonds at 10 years
Bonds of the Credit National
let emission, repayable at 105%
Note (1)
Decennial loans, 1922-1932
Credit National 6%, 1921
1924, 51 bonds at 10 years
5, 6 and 10 year borde, 1923 (let
Note (1)
series) repayable at 108;
5, 6 and 10 year bonds (Sept., 1923)
repayable at 108%
Note (1)
Credit National,
6%, 1921
1924, 5% bodde at 10 years
Credit National, 1922 (Ed emission)
Note (1)
repayable at 105
Credit National, cl, 1221
1924, 5% bonds at 10 years

In addition, 715 millions of sexennial loans must be repaid between
August 16, 1925, and February 16, 1928. As their partition according to the date
the: fall due has not been published, it has been impossible to include them in the
present table.
(Statement fixed upon aoaordin,z to the arrangements of the decrees
of emission of the various loan.).

The amount of payment to be made cannot be fixed.
quantity of bonds which have been repaid at the previous periods when this same loan
fell due.

It will



(In millions of gold francs)


Bank of
En land
















19 56


19 37



























19 49



Other Debts


(Figures given from information gathered (1) from the Freno
press; (2) from the budget documents published since 1919, particular
The explanation of the reasons for the budget plan o
The inventory of the financial situation of France,
The parliamentary reports concerning the budget of t
of Finance)



Rate of the Inheritance Tax (1)


of the Inheritance

Three children
living or represented



Two children
living or

One child
No child
living or
alive or
represented Tepresented








Limit of the tax





(1) Las of June 25, 1920 and March 22, 1924.

Transfer Duties
lietween relh.tives

Net amount


From parents

3etween uncles
and nephews

beyond the fourth
degree and persona
not related.



of the tax









Tax paid in 1925 (1)
(Note is taken of the deduction of the
tax of the preceding year)
Per oent of revenue






Tax limit

Tax proposed for 1926 (2)

Per cent of revenue



9 9 77








The &mount of the general tax on reven12 is in.reased by 25% for taxpayers
who are more than 30 years old and are bachelors or divorced and who, not having ohildren,
have no one denendent on them.

The ease amount ie in3reased by 10 per cent for taxpayers who are more than
30 years old and were married two years on the first of January of the imposition of tax,
when, at that date, those taxpayers have no children and are found to have no person
dependent upon them.


Laws, Juc 25, 1920, March 50, 1923, and March 22, 1924.
Project of law intended to create new fiscal resources, proposed on May 25, 1925.










Limit of rate



United States(4)

RaLe for Propceed for
1925 (1) 1926 (2)



















Account taken of the deduction of the taxes for the previous year.
Proposed law for the creation of new fiscal resources riven in
on May 25, 1925.
Finano Act, 1920.
Revenue Act, 1924.

(Laws of June 25, 1920, March 30, 1923, md March 22, 1924)




A Frenoh bachelor, an industrialist on a small scale, having an income of
10,000 dollars (200,000 francs), comin;::, one-half from hie business and the other half

from personal property, paid in 1925:

Taxes on industrial and commercial profits:
9.80% on 100,000 francs
Tax on the income from personal property, 12 on
100,000 francs
Tax for the transmission of property to the bearer,
(a tax that hits the coupon), 0.84h on the
average rate on the stook exchange, say, 0.84%
on 1,500,000 francs
General tax on net income of 185,800 francs
Surtax on bachelors: 25% of the general tax
To wit, 29.77% of the total revenue




He will pay, in 1926:

A tax on industrial and commercial profits: 15% on
100,000 franos
A tax on the receipts from personal property 20f
on 100,000 francs
Duty on the transmission of securities to the nearer,
General tax on a net revenue of 152,400 franos
Surtax on bachelors

To wit, 35.34; of the total revenue



In the United States this taxpayer would only be subjected to the income
tax, 64.

Not having an income above $10,000 he would escape the super tax.

If he should die and leave his fortun-. to a nephew, taa latter woulc pay,
the inheritance tax being:

Value of the industrial capital,
Personal property
Transfer tax
Inheritanoe tax
To wit, 64.60% of the inheritance

1,000,000 francs


If the heir was a relative
beyond the fourth degree
of the deceased, or
no relationship to him, the
duties to be paid would
Transfer tax
The succession tax
To wit, 76.60% of the

1,245,912 francs



Transfer taxes on the oession of real property of commercial
funds, and of credits, eto.
Tax for registering judicial and extrajudicial acts (leases,
contracts, etc.)
Taxes on mortgages
Tax on capital insured against fire
Stamp duties on deeds and writings
Stamp duties on posters
Stamp duties on insurance contracts
Stamp duties on transportation contracts
Stamp duties on receipts, checks and transfers
Stamp duties on r,nmmeroial goods
Stamp duties crt. personal securities (shares and loans put out by the
Registration tax for trade marks
Tax on th3 operations dealt in on the Stook Exchange
Tax on the operations dealt in on commercial exchanges
Tax on the revenue of the personal property possessed by the corporation
Transfer taxes on the personal property possessed by the corporation
Tax on the proceeds of credits, deposits and securities
Tax on the amount of business
Custom and export duties
Taxes on statistics and on the development of external commerce
Taxes on navigation
Taxes on the cost of seats and of transportation oy railroad
Tax for transportation by other vehicles than railroads
Tax on automobiles
Taxes on verifying weights and measures
Licenses for drinks and public vehicles
Taxes on industrial and commercial profits
Municipal and departmental taxer
Tax on Chambers of Commerce
Tax on the income of personal property
Tax on the transfer of personal property




During thd fiscal year from May 1, 1923, to April 30, 1924, which was nearly
spent before the double tenth was established, the Societe des Acieries de Longwy
(actual capital, 100 million francs) paid before any distribution:
Taxes and dues

8,008,422 franos

It distributed among its shareholders


Leit these were obliged to pay to the Treasury
as taxes imposed on their coupons


So that their revenue was reduced to






When the State had taken in:
Taxes paid by the company:

8,008,422 francs

Taxes paid by the shareholders


We must add that the shareholders are


eeidss subject to the progressive

tax on their total income.

The example of the Longwy Steel Works is far from being singular.
At the coal minas of Blansy (capital 60 million francs) the taxes paid by
the oompany and the ehareholders, for the fiscal year 1924 amounted to 97% of
the net revenue of the shares.

The mines of Lens (capital 200 million francs) paid directly in 1924:

The Y_ ehared among their shareholders
On Whioh those had to pay to the State

7,519,702 francs

Their revenue was, therefore, reduced to


The share of the State was:

RI:: gig 4 171-2:faleg:

7,519,702 franos



In 1926 the taxes pain ty corporations will be notably increased
for the tariff proposed for the tax on industrial and commercial profits which
Aristinctly strikes all enterprises, is 15% instead of 9.60 %, as it was in 1925,

and the tax on the income from personal property will be raised from 121 to 20g.
After having paid the taxes to which it is subject, whether or not it
obtains profits, a share corporation, in a position when it can declare a profit
10,000,000 francs


Must pay as a tax on industrial and commercial profits 1,500.000


On the profits thus reduced tot





The shareholders must pay:
Tax on the income for personal
Transfer tax (valuation)

1,700,000 Fr.

And will not receive more than



The State will take in the sum of d,200,000 francs on the profits
alone, independently of taxes imposed for various reasons, notably on the total
amount of business in the course of the fiscal year.

G. Bendelari/E.
Sept. 18, 19 25

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