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b) )77 ),&aA4, (12S0r) 121'23 E.273 B or C. Et) M B. d. No. of Telegram POST OFFICE TELEGRAPHS. If the receiver of an Inland Telegram doubts its accuracy he may have it repeated SENT At on payment of half the amount originally paid for its transmission, and If it be found that there was any Inaccuracy the amount paid for repetition will be refunded. Special conditions aro applicable to the repetition of Foreign Telegrams. Time handed in To THIS FORM MUST ACCOMPANY ANY ENQUIRY RESPECTING THIS TELEGRAM. om efix Charges to pay By Office of Origin and Service Instructions Words 1:0 ky 1 Office Stamp OFFICE OF THE AGENT GENERAL FOR REPARATION PAYMENTS TELEPHONE: /01 N RDEN 11900 -11910 TELEGRAPHIC ADDRES*CV AGENTREP, BERLIN NOV (J NOV 24 1924 Yfr/;u,--7---feAo 14 V4 . 07/1/444 eD Ct/r-( o "erAArtif,m 7/As A.44-d GaQ-0 a144 G- cc, "// e1:2-1/-G4- 1.44 VAN BERLIN 0)(i° 33 LUISENSTRASSE $ November 24, 124. 1.),..e.720.1AL 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 Is 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. i'essibly 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 character. 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 about in the hallos of disinterested 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 largely parties who kill work for the general good. You will ; Gates W. hicGarrag, Esq. #2 find your association with Audis in every way satisfactory. times re- arced 11/24/24. While his views may be at over-cautious and old-fashioned, he is a man of ouch sterling 41 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, ) /6k_) 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 v._4 20 NASSAU STREET NEW YORK 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 Secretary r t EDERAL PESci"' P""( LviL OF rl YO7,1, 16 r-s rL.) r iVcD :rTh 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. -1,r ( -7141 14) Iet PRIVATE 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 restraint. 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 -2* Reich and Reichskreditgesellschaft is entirely owned by the Government of the certainly depends, directly or indirectly, on the funds of the 1,eichs. No 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 them. statement 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 specially 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 -3- 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 Government is using at least two or three other institutions to perform central banking fundtions and leaving the 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 credits. 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 take appropriate action to correct the German Government's policy. Sincerely yours, (signed) S. PARKER GILBERT The Honorable Montagu L. Norman, Governor of the Lank of England, Threadneedle Street, E. C. 2, LONDON SPGIVIC PS: I am treating this letter as entirely private to you, and am not sending anything of the sort to either Addis or Bel). /FILEs OCT o.j il.ft "14 8400E _If C i 911 i4_, 20 NASSAU STREET NEW YORK liAiip. Mgt 77474 r 0 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. You very trul /7/ / a 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 representatives. 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 M. 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 credits. The total amount of funds in banks was 6 milliard -2 I. in April, 1924, but in August 1925, over milliards. -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 again. 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 could ore.its were the industrialists. T must not forget in their financial p was the welfare of their citizene. Under normal conditions would result in the aocumulation of annuall,:. 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 3 e 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. repaid. 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 eluipment. 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 atilt )awt's Plan. le ?at in :le cane position as If 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. The 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. The 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. MINUTE SubJect: Conversation with Dr. Schacht. ,/r At Your Alnellenoes suggestion I arranged a conversation with Dr. Schacht which took place this morning at the Reichabank. (1) We touched upon the following topics: - aikagglatcliaLtaAltaajt; 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. (2) 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 -2- 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. (3) 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 all its public funds in the Reichebank. 0 -4- There remained the railways. (4) 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 beginning. 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. The 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. (5) 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 -5- 2e /l! 74) c ztreer; 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. N.1 THE AGENT GENERAL FOR REPARATION PAYMENTS ro, PRIVATE Berlin, October 16, 1925. i 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.) (1) A speech which Schacht delivered at Karlsruhe on October 5, 1925, (2) This, of course, is not conas reported in the Frankfurter Zeitung. fidential. 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. (6) 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 2 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 portfolio. 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; 4 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 c.-47-4;:efr- 02/ / t/C)-1/?'. 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 erely, (tc' - 56 PINE STREET NEW YORK 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.