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N RDEN 11900 -11910



NOV 24 1924









"erAArtif,m 7/As



G- cc,


1.44 VAN





November 24, 124.


Dear Gates:

It wax a great

pleasure to have your letter of iioveeher 11, ene I

such intereoted, indeed, in ail that you :rote.
bearing on your .work en Gilhert's


was very

'every scrap or ncwa coming from Berlin

retie. eagerly, az.. I

only ecrey tnet

= get so

little of a more authoritative sort thar wbat is appearing in the, newspapers.
back, Get Z have not yet seen him.


Owen is

I shall today or on isanesOay et our

directors' meeting.

The last part of your letter is really no more than I expected, and frankly, I

expected it becaise thst is
refer could find a

*iv! d-eciAion.

means of dealing

If only our other frienne to whom you

with their own situation, what e

woild be ;'or them, for us end for

spiendid thing it

whole eorld.

There hee been a good deal of discue..1 on of Gen tan borrowings in
es:ecielly on sedii-Uovern.:.entel inane.,

Some heeitaLion exists in ti

this market,

such e tbooe of the 3tetes and municipalities.

mines o.r benere becteueo of two outaten:Ing

One is the pe3sibie extent to which reparetion .:.,yrr,..3nts, by ;Lich I reen actual trans-

fers uucear the tireceion of the AgeLt,
enc:. amortiwation @1

nlizjit in n:ture ye:-?.ra ioterfere Aitn the interest

Gt--',Oital loans placed in tbie country, ano the other is t e possible
1.:V:lal of ..:o-ne part of the pre-wer aebta of a public

extent to whi

It *.:ay be fortunate that these doubts exist, as they may serve, to be e
over -optimism end eyceeeive torrowing, which would be ban for

All that you write


in the hallos of


Toth borrower and lender.

your associates is most intereeting. it seems as

the general management of the whole affair is now not only in

eck upon

strong hands, but


parties who kill work for the general good. You will


Gates W. hicGarrag, Esq.


find your association with Audis in every way satisfactory.
times re- arced


While his views may be at

over-cautious and old-fashioned, he is a man of ouch sterling


character and sound good sense, that it is
in the past when in Rolland,

joy to work -with him.

have heard splendid things of him.

I have met Dr. Bruins
The °tilers we

ali know about.
I am so glad at the good word you :,end of Gilbf_rt.

Shepard Morgan 4th you and quite r. home atmoephe:
beat wishes.
Very sinct, ely yours,


Gates 5. licGarreh, Esq.,

Agent General for Reparation Payments,
5S Luischetrasne,
Berlin, Germany.

You uili sho-ly have

'Co all of you 1 cJna my



September 15, 1925

Benjamin Strong, Esq., Governor,
Federal Reserve Pank,
rew York, N. Y.
Dear Governor Strong:There will be a meeting of the
Advisory Council, New York Chapter, American
Institute of Banking, at Mr. McGarrah's office, on Tuesday, September 22nd, at 3.15 P.M.
Please endeavor to be present.
Yours very truly,

(gat L4th




OF rl




rL.) r iVcD


eptember 16, 1925.

Harry H. Elliott,

Decrtary to Mr. McGt.rrah,
St36.1.3 Street, Nei, York.

Deer Sir:
Unless something very unforeseen happens,

Mr. Strong will trninge to be present at a meeting of the
Advisory Council, New York Chapter, Americtx Inbtitute of
Banking, et Mr. McGerreh' a office, on TueadLy, LepteMber

22d, at 3:15 p.m.
Very truly yours,

secrete ry to
Mr. Benj. Strong.






September 17, 1925

My dear Governor:Es-A-ea-0464-'4
I have just received your private letter of the 14th

of September, 1925, in answer to my letter of the 10th of September
about the statement issued by the Finance Ministry.

I have since written

you two other letters, and I understand that Bruins has also sent you a
copy of his letter of the 15th of September to Sir Charles Addis, all of
which will make the situation somewhat clearer.
I have no reason to think that Schacht has not been acting
quite fairly in the whole 'ratter.

On the contrary I think his position

has been perfectly sound, and I strongly sympathize with it.

The fact is

nevertheless that Schacht is acting under heavy pressure, arising primarily
from the rather serious divergence between the policy of the Reichebank
and the policy of the Government.

This naturally puts him under some


I think it becomes increasingly clear, as I have already
written you, that the statement issued by the Finance Ministry was largely
a political manoeuver, and that the statement itself may not mean much
actual change.

On the other hand, it will not do to ignore what the German

Government is actually doing, and from this point of view the chief significance of the statement, and in fact its chief value, is that it shows the
Government's hand much more than, I think, it intended to do.

There is

no doubt at all that the Seehandlung (The Prussian State Bank) and the
Reichskreditgesellschaft are doing an extraordinarily large business, much
of igkiek it with public funds.

with funds

The Seehandlung probably operates chiefly

of the Prussian State and of the Reichs Post, .rile the


Reich and
Reichskreditgesellschaft is entirely owned by the Government of the
certainly depends, directly or indirectly, on the funds of the 1,eichs.


to tell, what the exact
one seems to know, or at least, no one is willing
the disposal of
facts are, either as to the nature of the various funds at
being handled through
these two institutions, or as to the amounts which are

The Reichskreditgesellschaft, for example, never issues a

business about as large as
of its condition, though it is supposed to be doing a
that of the Diaconto- Gesel] schaft.

Its officials, for example, are openly

Germany, and have
boasting of doing one of the largest banking businesses in
stands in the
even been saying recently that the Reichskreditgesellschaft

Seehandlung holds in
same relation to the Government of the Reich that the
relation to the State of Prussia.

As nearly as I can find out, moreover,

to act as a
it seems to be the practice of the Reichskreditgesellschaft
understand that it
kind of rediscount bank for the other German banks, and I
"D" banks.
occasionally makes rather large rediscounts even for some of the

The Seehandlung does occasionally publish a statement, but not a

informative one.

According to its latest statement its deposits are

hundred million marks
at a. very high figure and have increased by several
during the past three months.

Generally speaking, the management of the

Seehandlung seems to be thoroughly bureaucratic, and frequently stupid.
be a tenI am writing you this much in detail because there may
everything is
dency, perhaps even on Schacht's part, to maintain that
this situation.
all right and that there is no danger to the Reichsbank in
quibbling about
There has already been, for example an amazing amount of
that any one
what are or are not public funds and you can be almost sure
funds does it with
here who makes a statement about the disposition of public

mental reservations as to what the term means.

That, in fact, is the one

week, for it does
great beauty of the Finance Ministry's statement of last


frankly include the principal categories of public or semi-public funds
under the definition.

From the point of view of transfer, the question

is manifestly of the utmost significance.

I do not see, for example, how

I can be expected to regard the Reichsbank as the Central Bank for purposes
of forming a judgment about the possibilities of transfer when the German

is using at least two or three other institutions to perform

central banking fundtions and leaving


Reichsbank to act as the

guardian of the count y's reserves of gold and foreign devisen, while depriving it of its natural resources and of the necessary control over

In letter and in spirit the policy that the German Government

is following, violates, it seems to me, the provisions of the Plan, and

it comes dangerously near to amounting to a "financial maneuver" within
the terms of the Plan and the London Agreement.

From every point of view, it seems to me of the utmost
importance now that the issue has been more or less

openly raised, to ex-

plore as completely as possible the facts in the situation and to


appropriate action to correct the German Government's policy.
Sincerely yours,


The Honorable
Montagu L. Norman,
Governor of the Lank of England,
Threadneedle Street, E. C. 2,



I am treating this letter as entirely private to you, and am not
sending anything of the sort to either Addis or Bel).

OCT o.j

"14 8400E








Mgt 77474


September 22, 1925

Benjamin Strong, Esq., Governor,
Federal Reserve Bank,
New York, N. Y.
Dear Governor Strong:-

There will be a meeting of the
Advit-ory Council or ne Nevi York Chapter, American
Institute of Banking, at Mr. McGarrahlo office, on
Tuesday, October sixth, at 3.15 P.M.
Please endeavor to be present.

very trul

/7/ /


7th October, 1925.

The President of the Reiohsbank, Dr.3ohacht,

paid a visit to the Government of Badsm at Iarlsruhe on
October 5th.

He made a speech on the economic, necessities

of German industry to repre:icntatives of the various

branches of tne Government of Baden and industrialist

He began by assuring his audience that there was
no danger of new inflation.

The gold currency in Germany

was absolutclo secured by the laws in effect.

Before the

war the amount of currency in circulation was 6 milliard

It was now over 5 milliards in spite of the territorial

losses caused by the Versailles Treaty.

Cermany had at her

disposal a gigantic apparatus of production which lacked the
necessary lubrication in the form c)

operating capital. Dr.

Schacht considered it .;ut of the question for German indus-

try to be reconstructed by means of foreign resources.

Foreign countries did not have such a far-reachint interest
in reconstructing German industry, and the:' would not continue

to pleas funds at its disposal without limits.

In orie respect

the Hesitation of foreign investors was a good thing, for
during the inflation period the expropriation of German
industrial enterprises and German agriculture would have
been a simple matter.

As matters now stood, there was no

danger of an alienation of German industry, for the amount
of German stooks held abroad vas ver;, small.

The amount of foreign indebtedness, Dr.Sohaoht
estimated, including the Dawes loan, varied between 3 and
3i milliard M.. of which about It milliards were lone-term

The total amount of funds in banks was

6 milliard

I. in April, 1924, but in August 1925, over


-wen if deductions were made for errors, these figures
But the 31 milliards

proved a great increase in savings.

of foreign of edits had an important effect upon

the German ourrency situation beoause it involved
a threat of a

certain inflation.

ven to-My foreign

credits played a role in German price fixin6 because
purohasing power had been inoiecse. by means of them.

This was the explanation also for the adversity of the
trade balance, because foreign credits had made it
possible to make purchases abroad.

The only way to

counteract this danger was to restrict foreign credits
to the absolute minimum and to resort to them only for

increasing agricultural and export production, for only
in this manner could foreign exchange be obtained

Furthermore, foreign credits shoilld be examined

with great care and te borrowing of t:.e communes abroad
should be disa,,proved most severely.

penditure must be examine

ver-; public ex-

tobe dispensed with. it The first peopl
discover whet_er
ore.its were the industrialists.


must not forget in their financial p
was the welfare of their citizene.

Under normal conditions
would result in the aocumulation of

Germany wonli very 000n b

position to help herself frost capita

Then the Reichobank would disappear

At the present time the rigorous att

was causing strong disapproval, spec

cote: ?rtes of modern size, who w rc anxious to have a
little more inflation.

But th,.1r demand would be

refused und,,-..r all circumstanses.

;.t the present time the distribution of avail-

able public funds were not favourable.

Both pr..vate and

public institutions ke?t their hands or liTaid funds
because they were still suffering from t":le 110ohnlecy of
tle lack k-of eapital.


Short-tern loans were made sag not

If the lagisal eensevienec: were drawn and the

fande invested at lent- terms, thew would reaoh the person,
whn not n.. tided theu.

lar!.e ;tort of the publis funds shoat&

Maras the chief

be invested in lonuterm oredits.

cause a: the distress amonc acricul--ure, which was not

mocuatocied to work with shortterm credits.

;ne reason

for t e continuation of a permanent crisis was that
both invest,ais ana borrowers were doint busieeus on

a bass of shortterm credit::.

cllane in this

res,,:ect wou d be mach more effective than foreirn loans.

)rchacht referred then to the practice If
industrw is carryint larLo :stocks of raw matcrialeand
finishe4 t,00as in oontrast to foretrn praotiee.

prow:ice, he said, must be abandoned, and, furthermore,

industrw must look about with a view

o i _.,:rovirw its

in conaludiaL, DrSehacht de:onlA

f.l.ttaeks ma-le upon him in te :-.onservative

a, n

prelw for Us rteent rtmarks *boat
said t'!,,t


)awt's Plan.


?at in :le cane position as


before the war, he considered it %legible to raise V
for a 'erica of years.

lie only* feared that

Germany would not be given this chance.

In any case,

he said, he thought it was entirel,- wrong for a German

to say that the payments could not be made.

The thing

to say was that the payments could be made if German, were
allowed to make the


Markets must be opened, and

Germany must not be enoiroled by Custom o barriers.


eastern States especially had the am-Ation to develop

selfsifficient industries.

If such a polik

folloyed, the payments could not be made, and ';urope

could make no progress.
in makir

Germany had ever, interest

iurope into a inje economic unit.


second condition precedent for the fulfilment or the
Dawes Plan was that GerMany be given Vac,: a colonial
field of activity.
In te di;,cuseion Which followed Jr. Sc acht's

address, repreentativee of the wholesale trade Pnd the
communes spoke. .Dr,Johaoht said that ne believed they
were unanimous in principle, anj that the course of
events would brinL V:lem closer togethcr also in practice.


Conversation with Dr. Schacht.


At Your Alnellenoes suggestion I arranged a conversation with Dr. Schacht which took place this morning at
the Reichabank.

We touched upon the following topics: -

J. Schacht leaves for America to-morrow morning the

8th inst.

As was to be expected, he said certain American news-

papers had made all sorts of conjectures regarding the object of
this visit; for instance - one newspaper (the Chamber of Commerce

Journal) had suggested that the proposed visit had for its object
the raising of a loan to Germany, without which the execution of the
Demes Plan would be seriously endangered.

Dr. Sohacht observed

that all such conjectures were pure shots in the air and had absolutely no foundation in fact.

Indeed, it was his intention immediately

von his arrival in America to point out to the newspaper men that he
wanted nothing from their oountry at all, that his object was primarily one of courtesy in return for a visit made to him this summer

by Mr. Strong of the Federal Reserve Bank.

What he would seek in

America was above all atmosphere; at the same time, he would like
to arrange for such co-operation in central banking policy as was

necessary between great issuing banks.

The internal situation.
Turning to the internal position in Germany Dr. Schacht

observed that there was a very real crisis due mainly to illiquidity.
It had been found expedient from the point of view of general economic
and financial stability to come to the aid of certain firma - for
example, the Stinnes, Hombacher and the Stumm concerns.

In all

these cases, however, the balance sheets had shorn that there was
a considerable excess of assets over liabilities, that in effect


while the firma were generally sound, no liquid assets were
available to get them over the "dead points".

Dr. Schacht,

however, added that the Stumm intervention would probably be
the last of its kind; if other cases should arise, they would
merely be concerned with such undertakings whose establishment
and stability would not warrant Beichebank support and which consequently would be allowed to go to the wall.

DelleitSf Public funds in Private banNine institutions.


At your request, i discussed the questions raised in
Sir Charles Addis' letter of the 2nd October in regard to the

deposit of public funds in private banking firma in competition
with the Reichsbank and asked Dr. Schacht which action he thought
would be most useful.

Dr. Schacht started out by observing that this question
had been the subject of discussion between Mr. Parker Gilbert and
himself, further, that appropriate resolutions had been passed on
the same question at a recent meeting of the General Council of
the Reichsbank.

While he was sympathetic to the point of view

taken by Mr. Parker Gilbert, Dr. Schacht frankly observed that he

could not be expected "to conspire against his own Government" in
conjunction with the Dawes Authorities. (to use Dr. Schacht's expression).

As a matter of fact he had this whole question very

much at heart and had already adopted the following lines of action:


(a) with regard to the Post Office; the present position was that ont
of a total sum of 600 million R.M. 41. 30 million sterling) held in

public funds by that department the Reichsbank administered about
160-170 million R. M. (1 8 - ej million sterling).

Dr. Schacht

had discussed the position ibith Herr von Schlieben, the Finance Minister,

and as a result of his negotiations, Dr. Schacht hoped that be would
be able to arrive at an agreement, whereby the Post Office would deposit

its public funds in the Reichebank.



There remained the railways.


On this question

Dr. Schacht expressed very definite views.

He first of all

repeated what he told me many months ago that the Verkehrsbank
was a mistake and that it ought to have been suppressed from the

It was not, however, in his power to take any action,

as its activities did not lie, within the orbit of the Bank Law.

Mr. Parker Gilbert, however, had a very strong legal case.


original plan in regard to the railways, as set out in the ft-

parte/ Report provided that all funds accruing to that administration should pass through the new bank (i. e. the reorganised &slobsbank).

If Mr. Parker Gilbert were to take a strong line in this

question Dr. Schacht did not see what possible opposition could be
raised; in this matter it appeared to Dr. Schacht that this was a
clear case for action on the part of Mr. Gilbert.
Treating the subject of public deposits as a whole, Dr.
Schacht believed that all these difficulties regarding the deposit
of public funds would disappear automatically, as it was his firm
belief that the returns from taxation in the future would not be so
great as those of the past; if, however, considerable tax surpluses
were to continue to accrue, it .:ould be rather the duty of the Govern-

ment to reduce the present level of taxation.

The Ruesjan Loan.

I asked Dr. Schacht whether the Reichabank or the Seehand-

lung were participating in the Russian loan which has just been arranged.

Dr. Schacht observed that he, for his part, would refuse

to recognize a signature of the Russian Soviet Government just as
he would refuse to accept a signature by His Majesty's Government
as business transactions on such a basis would be bound to acquire
political colouring.

On the other hand, if a bill was presented

to the Reichsbank bearing two signatures of well-known, responsible



2e /l! 74)



November 4, 1925

Dear Governor:I nand you herewith E'or perusal and return
letter addressed to me,,KY Agent General for Reparation Payments
dated October 16, 1925, ana also copy
a .litter addressed by
tim to Governor Norman on September 17, 1925, also cosy of a
speech wnicn Dr. Schacht deliverea at Carleruhe on October 5th,
and copy of a memorandum which the Fine.ncial Attache at the
British Embassy prepared for Lord D'Abernon summarizing the 0297versation with Dr. Schacht on the morning of October 7, 1925.

I desire to emphasize the contents of the Agent
General's letter to Governor Norman anu to say that I think the
Federal Reserve Boar, anu the Federal Fe:serve Bank of New York
snouin oe extremely careful about commi,ments to the R,:lensbank
until such time as the Agent General and the Transfer Committee
are satisfied that the German Government is acting entirely within
the spirit of the Dawes Plan ant not maintaining a position that as the Agent General say:: - comes exceedingly close to a "financial manoeuvre".
Yours very truly,

American Member of tne General
Council of The Reichsbank
Benjamin Strong, E8(i., Governor,
Federal Reserve Bunk or grew York,
New York, h. 1.





Berlin, October 16, 1925.


My dear Governor:

I am preparing a more comprehensive letter to you on the subject of
public funds and the Reichsbank's policy, but it will not be ready for another
day or two.

In the meantime, it may be helpful to you to have copies of a few

additional exhibits.

I am accordingly enclosing, for your confidential information,

copies of the following documents:

My letter of September 17, 1925, to Governor Norman, indicating
my innermost thoughts about the situation, particularly in so far as
(I have not hitherto sent a copy of this
concerns Schacht's attitude.
letter to anyone, but it still holds good, and it may be useful for
you to have it in connection with Schacht's visit.)

A speech which Schacht delivered at Karlsruhe on October 5, 1925,
This, of course, is not conas reported in the Frankfurter Zeitung.
Aa you will notice, it takes quite a strong position against
municipal borrowing abroad.

A memorandum which Finlayson, the Financial Attache at the British
Embasey, has prepared for Lord D'Abernon, summarizing a conversation he
had with Dr. Schacht on the morning of October 7, 1925.

The memorandum from Finlayson is particularly interesting.

It is quite

characteristic, for example, for Schacht to have said that he could not be expected

"to conspire against his on Government."
the chief weakness in his position.

As a matter of fact, it is the cue to

It is natural enough that Schacht should be

embarrassed in relation to the Government,.for it is his own Government which is
doing its best to circumvent the Reichsbank's credit policy by carrying on an independent credit -olicy of its own.

of the Government fairly and

Schacht might be expected to fight this policy


squarely, whether there were a reparations problem or not.
necessary in his own interest as a Central banker.

It would seem to be

But the effect on Schacht is

rather to encourage him to try riding both horses, and he sometiLes gets mixed up
in the stories he tells to different people, and even to the same person on difFor example, on the luestion of the Finance Liinister's statement

ferent dates.

of Septerhber 8, 1925, he told me a few days afterwards that he was thoroughly dis-

turbed by the statement, and everything he said and did for a few days indicated
clearly to those around him, as, for example, Bruins and the L: embers of the Direk-

torium, that he was perfectly furious that the Finance Linister should have issued
such a. statement.

l',.bout two weeks later, when the meeting of the General Board of

the Reichsbank was approaching, he spent half an hour telling nE that he had seen
the Finance Linister's statement before it was issued and had approved it, on the
theory that if it was issued it would put the Finance Linister more or less in his

power by reason of the admission on the part of the Government that it was willing
to take as low as 7 1/2 or 8 per cent on its funds, thus leaving it open to Schacht
to offer as high a rate to them through giving then bills out of the Reichsbank's

Schacht spent about an hour at the General Board meeting telling the

same story.

To a certain extent it is true, of course, that the Finance Linister's

statement may hel_. in forcing the Government's hand on the question of interest,

but I cannot believe that Schacht's analysis of it from this point of view is anything more than an afterthought.

One thing that may attract your attention in Finlayson's memorandum is
the statement, attributed to Schacht, to the effect that I have;



any dcnger of its being tampered with in the post.
Faithfully yours,
(Signed) S. Parker Gilbert

Gates W. LcGarrah, Esq.,
Chairman of the Board,
Mechanics & Lietals National Bank,
20 Nassau Street,
New York,
3 encls.

2(2, /4),(Arrit/ (Wree


02/ /

February 3, 1926

Mr. Benjamin Strong,
c/o Federal Reserve Bank,
New York, N. Y.
Dear Mr. Strong: -

The time is rapidly ap-

proaching when the American Institute of
Banking should knov. what their position is
going; to be financially and I have called
a meeting of the P.dvisory Council for Wed-

nesday afternoon, February tenth, at the
Mechanics & Metals National Brunk at 3.30.

I hope very much that you can be present.

Yours si






October 14, 1925

Mx. Benjamin Strong,
33 Liberty Street,
New York, N. Y.
My dear Mr. Strong:

Thank you very much for arranging
matters so that I may have Dr. Schacht at luncheon on
October 22.
I am counting upon you as one of my guests.
I hope you can come.
The luncheon will be at India House
at one o'clock.
In order not to trespass on your
dinner guests, I am limiting my banker invitations to
you and Mr. McGarrah.
I shall try to get together a
fairly small group of worth while industrial and railroad
people with a flavoring from the legal profession..

Yours sir ce e


October 15, 1925.

My dear Mr. Sterrett:

I am glad that it could be arranged for you
to entertpin Dr. Schacht, for I know it will be a
pleasure to him.
And I am happy to accept your kind invitatio
to be one of the party at luncheon on Thursday,
October 22.
Looking for,,ard to seeing you, I as
Sincerely yours,

58 Pine Street,
New York City.

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