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The following note on the origin of the Gold Discoun
and its legal status with respect to the Reichsbank Law and the
Experts' Plan examines these questions with particular reference
to the subject of the liquidation of the Gold Discount Bank and
Federal Reserve Bank of St. Louis

the legal propriety of the employment of the Gold Discount


2 -

T.D. No.222

deplorable state of poverty in which Germany is at present,
we are also suffering from a shortage of capital and of
credits, which must absolutely be remedied if we wish to
restore our economic prosperity. On the other hand, the
reconstitution of a real gold-ourrency in Germany is natu ally impracticable, until the complicated series of big questions
connected with the reparation problem are solved.
In my
scheme, I never dreamt of giving Germany a gold-currency
created out of her own resources, until all the complicat)d
political problems were settled. My sole object was alwa, s
to attract gold-oapital from abroad, or to borrow it from,
sources which have not yet been tapped, in order to benefit
the German industry. I considered that this appeal for
foreign capital would be more likely to succeed if it were
suggested to create a bank, and I may recall the fact that
up to the present all attempts made in order to attract
foreign capital to Germany for the use of our industry haw)
failed, with the exception if private credits received froro


"On the other hand, I consider that, by adopting the
form of a bank, the gold-capital of which would be safely
deposited abroad, and thus Oheltered from all risks, it mi,
be possible to attract this capital, which could then be
employed for financing German industries.
I opened negotiations with the Bank of England on January 1, and then had a
whole series of conversations with City men; they all gave me
the impression that the City of London was willing to help us
to carry out the scheme I had brought before them, It was
during these conversations that the Committee of Experts was
appointed, and began to discuss these questions at Paris in
the middle of January. ....
"Naturally, the ideas of the Committee of Experts
differed widely from my own.
The experts wished to create a
final gold-currency in Germany, in order to establish, on the
basis of a sound currency, the reparation payments which
would have to be made by Germany. .,,. Imbued with these
principles, when the experts discussed my proposal, they al-.
ways showed anxiety that it might injure or block their own
proposals. I endeavoured to convince them that this would not
be so, the negotiations on this point dragged on, as you know,
for several weeks, and ended in a series of stipulations of
which I will give you a brief summary
"The principal purpose of these stipulations was to
limit the numerical importance of the Gold Discount Bank; the
capital is to be limited to 200 million gold-marks, and the
right to issue banknotes to 100 million marks. I claimed the
right for this bank to issue notes for reasons which I shall

3 -

T.D. No.22P


explain later.
Out of this capital of 200 million gold uiar
the Reichsbank was itself to supply 100 millions. and would
buy a share in the remaining 100 millions, so as to secure
majority of the capital so long as the Gold Discount Bank
The statutes would provide that this majority
should confer the right to liquidate the bank, so that the
Reichsbank would be entitled to liquidate the Gold Discount
Bank at any cement it pleased. It is also provided that, ir
case of liquidation, the capital would be restored to the
shareholders under the conditions given above. It was fine
ly decided, in the form of a simple option, that, if a final
monetary organisation were to be created with the partieip.,
ation of the Reichsbank, or by the Reiohsbank, or in any oth
form whatsoever, the shareholders of the Gold Disoount Bank
would have the right to purchase shares at par in the final
monetary bank, so that they would not suffer by the liquidation, but could share once more in the undertaking. Another
condition is that this bank will remain free from all politi
al influence, and that it will naturally be prohibited to
issue or redeem Loans issued by the Commonwealth, the States
or the Communes".

Exactly a month earlier Dr. Schacht expressed himself at the
Koenigsberg Fair in part as follows

"I have been fighting for many months in favour of the creati
of a gold bank which must naturally be closely connected with
the Reiohsbank and the Renterbank, as we must oentralise our
gold policy in one spot., *
It was whilst I was in the
midst of this work that I was called to Paris by the Committe
of Experts.
I set forth my ideas to this Committee
On the
one hand I met with lively approval, on the other, I was
informed that it would not suffice to create a gold-bank
which would answer to present circumstances, but that a defin
ite gold-currency should be created in Germany. I replied to
these gentlemen as followss in principle I agree with you in
recognising that we should create this gold-currency in
I should gladly hear that you were willing to help
us to achieve this result.
I am also willing to believe that
in the course of the next fee': weeks, you will come to a unanimous agreement on this point in the report you will submit
to the Reparation Commission. But it remains to be seen what
results will be obtained from your report.
According to our
experience up to the present with regard to nearly all the
reparation negotiations, I am authorised to believe that not
only weeks, but months will elapse before your report will
result in a unanimous decision being adopted by the Allied
and Associated Governments. ¶e cannot afford to wait so
long.* * * *
I hope they (the Experts) will be reasonable


- 4 -

T.D. N9,222


enough not to thwart our efforts to create a gold-note bank,
which will provide us with an instrument making it possible
for us to recover and to work".

The foregoing public declaration by Dr. Schacht, at a
time when the Experts'Committee was still working, in executive
sessions, upon the formulation of the Plan,

hich was submitted to

the Reparation Commission some two months later, obliged the Expert
then sitting in Berlin, to make some open statement on the important
proposal announced by the President of the then Reichsbank. Almost
immediately, on February 10,1924, a communiqué was given to the
Press by the Committee.

According to Rufus C. Dawes (The Dawes

Plan in the Making, p.207), this statement was approved before
publication by "Dr. Schacht after conference with the heads of the
German Government"


The communiqué reads :-

"The work of the First Expert Committee has enabled it
unanimously to lay down the broad lines which it will recommend
for the establishment of a new German bank of issue on a gold
basis, which will exchange its own notes against those of the
Rentenbank and the Reichsbank.
"The general principles of this plan have been communicated
to Doctor Schacht, ho is very clearly of the impression,shared
by all the Experts themselves, that if it is put into execution
it will prove to be the most important step towards the definite
stabilisation of the German exchange and the balancing of the

"The Expert Committee will inform the Reparation Commission
that in its opinion the plan which the Committee will submit
should be put into prompt operation.
"Doctor Schacht has informed the Committee that, in maki
his plan for the formation of his gold bank, he is so arra ;ing
matters as to facilitate its absorption by the bank of iss a,
which will be proposed by the Committee.
"The Expert Committee will meet Doctor Schacht on the
eighteenth Paris."
On March 19, 1924, the Reichstag adopted two laws, the one
amending the old Reichsbank Law by enabling that Bank to acquire
shares of the German Gold Discount Bank and by extending the then

- 5 -

T.D. No.222


existing powers of the old Reichsbank as follows :The Reichsbank is entitled and required to
"Article 2.
carry out all transactions of the German Gold Discount Bank
for account of the latter. The President and Members of the
Board of Directors of the Reichsbank are empowered to belong
to the Managing Board and any other administrative or controlling organisations of the German Gold Discount Bank; Article 16
of the Law relating to officials of the Reich (Reichsbeamtengesetz) is not applicable.
Article 3. T4 Reiohsbank is authorised, in the event of
its taking over (Ubernahme) the German Discount Bank, to raise
its capital in proportion."
The seoond law adopted on the same date provided for the
establishment of the Gold Discount Bank, and the following
extracts from the Law are material to the present discussion:
"Article 1. Under the name "Deutsche Gol4diskontbank"
(German Gold Discount Bank) a Bank has been set up under the
direction of the Reiohsbank with private capital.
The Bank is
independent of the Government of the Reich.
It has authority
to issue pound sterling notes up to a total amount of five
million pounds sterling.
The notes are not legal currency.
* * * *
The Statutes are drawn up by the founders, and will
be published in due course.
For the period during which the German Gold Discount Bank has
the right to issue notes, the same right may not be accorded to
Banks which have no right of issue at the time of the coming
into force of the present Law. This provision becomes invalid
from the moment of the commencement of the liquidation of the
Gold Discount Bank. * * * * * * * * *

Article 5. x * * * *
The Reichsbank has tle right to liquidate the German Gold
Discount Bank at any time, with the consent of the General
Meeting of the German Gold Discount Bank.
* * * * * *

* *

Article 10.
The business management and the liquidation
of the German Gold Discount Bank are effected exclusively
through the Reiohsbank".

The Statutes of the Bank, agreed on April 7, 1924, were
published in the Reichanzeiger Of April 11, 1924, and the announcement was made that the Bank would commence business on 7ednesday,
the 16th of April, 1924.

The pertinent articles of the Statutes

T.D. No.222

- 6 -


may be quoted as follows :The "German Gold Discount Bank" was founded in
conformity with the Law of the Reich of 19 March 1924, for
the purpose of satisfying the justifiable credit requirements
of Germany, by means of the participation of home and foreign
capital and credits and of all the German reserves of gold at
disposal, making use of the privilege accorded to it to issue
bank notes.
* * * * * *
Article 2.
The object of the enterprise is the transacting of banking
business and the issue of bank notes (see Article 1 of the
"Article 1.



* * * *


Article 23. In the case of liquidation, the total capital
of the Gold Discount Bank together with the accumulated
reserves will be distributed amongst the shareholders in
proportion to the amounts paid in by them on account of
For that part of the business year which has
elapsed by the date on which liquidation begins, a special
dividend shall be paid in accordance with a balance sheet
to be drawn up the day before the Bank is liquidated.
Article 24.
When the process of liquidation is complete,
the books and papers of the Bank thus liquidated shall be
deposited with the ReichsbanL. The latter is also authorised to re-appoint the original liquidators or to appoint
fresh liquidators, should capital be discovered which is
subject to distribution."

On April 9, 1924, the First Committee of Experts
presented its Report to the Reparation Commission.

At that time,

a week before the Gold Discount Bank opened its doors, the Experts
expressed themselves as follows:

"Tho Interim Bank, - 7hile coming to this conclusion and
while reducing the general plan to details, the Committee had
to deal with an act r chare in tYJ z'ituator as it originally presen_ed itself
The kdummittee were informed that a
scheme for a gold bank was in preparation.
It was expressl
an. admittedly limited to providing the means of carrying on
foreign trade. When first submitted it contained some fdt,.,
the Committee would not have recommended, and it
omitted others which seemed to the Committee to be essential
to any permanent settlement of the problem as a whole.

- 7 -

T.D. N°222 A.

Moreover, an attempt to settle particular difficulties
in isolation and without reference to other essential
requirements J4)oeared to the Committee to involve certain



The Committee therefore without expressing any opinion
on the plan as given to them in outline, assured themselves
in consultation with the authorities responsible for
Germany's monetary policy that the bank would be so organized
as to facilitate its absorption into a new bank of issue
which might be set up in accordance with the recommendations
of the Committee."
Attention is called to the title "The Interim Bank"
and to the fact that there was nothing in the Law or the Statutes
relative to the Gold Discount Bank to justify the statement of the
Experts that the Bank was expressly limited to providing a means
of carrying on foreign trade.

It is true that in the Reichstag

discussions in connection with the passage of the Act paramount
importance was given to this phase of the Bank's immediate work but
in the text of the Law and the Statutes no such limitation was

Annex I to the Experts' Report, which gives the Plan for

the Organisation of a Bank of Issue in Germany, does not mention
the Gold Discount Bank which, indeed, was not in being at the time
of the drafting of this Annex.

However, an Organisation Committee

was provided for with wide powers to frame the corporate organisation of the New Bank and to prepare a proposed New Bank Law, new
Bank Statutes and other legislation which should effectuate the
general scheme and purposes of the Experts.

Dr. Schacht and

Sir Robert Kindersley were designated as members of this Committee

Under date of July 11, 1924, the Organizing Committee
addressed to the Reparation Commission, with covering reports,

T.D. N°222 A.

- 8 -

proposed laws and statutes relative to the Bank of Issue, the
Rentenbank notes and the metal coinage.

The covering report on

the Bank Law referred to a deviation from the original plan of the
Experts as regards the issue of capital stock (which had been
limited to issue against payment in gold and/or foreign bills, or
in exchange for the shares of the old Reichsbank) in the following

"A letter is attached hereto signed by the President of the
Bank and a member of the Reichsbank Direktorium undertaking to
do what is necessary to exchange the shares of the Gold Discount
Bank for shares of the Reichsbank and to proceed with the liquidation of the Gold Discount Bank."
The letter attached read in th,_ material part:-

34/36 Jagerstr.,Berlin SW 19.
'7th July, 1924.

To the Organisation Committee for the Bank;
Sir Robert Yindersley.
Dr. Hjalmar Schacht.
We hereby beg to state that after thr re-organisation of the
Reichsbank in accordance with the Dawes plan we shall take all
necessary steps to acquire all the shares of the German GoldDiscount Bank by exchanging them against new Reichsbank-shares
and to liquidate all transactions of the Gold-Discount Bank.
Signed: Hjalmar Schacht.

Particular attention is directed to the terms of the
foregoing letter of July 7, 1924, and to the language of the report
of July 11,1924 because, on the subject of liquidation, they are
deemed to be of cardinal importance.

In the draft Bank Law annexed to the covering report, and
later voted by the Reichstag, no mention is made of the liquidation

T.D. N°222 A.

- 9 -

of the Gold Discount Bank or to the nature of its future activities,
if any.

But the right of the Gold Discount Bank to issue notes is

specifically rescinded.

The three references in the Bank Law to

the Gold Discount Bank are next quoted
"Article 2. * *


* *

The right of the"Gold Discount Bank" to issue notes is rescinded
The notes in circulation on the coming into force of this
Law have to be called in and withdrawn. The Managing Board of the
"Gold Discount Bank" shall frame the detailed rules relating to
this matter".

"Article 5. * * * * *

The subscriptions to the new shares (i.e. of the new Reichsbank)
must be made in the form of gold or foreign bills at their current
gold values - except such shares as may be given in exchange for
the existing shares of the Reichsbank, or the shares of the "Gold
Discount Bank".
Subject to the provisions contained in § 52 above
"Article 53.
the Bank Law of the 14th March 1875 and the Laws amending the same
shall cease to be in force except the Law of the 19th March 1924
(Reichsgesetzblatt II, page 73). At the same time the provisions of the Rentenbank Ordinance of the 15th October 1923 (Reich&
page 963) and of the Law relating to the German
Gold Discount Bank of the 19th March 1924* (Reichsgesetzblatt II,
page 71) shall cease to be in force in so far as they are in
contradiction with this Law".

Taking these few provisions of the Bank Law in entire
isolation, it is clear not only that there is here no provision
looking toward the early termination of the Gold Discount Bank but,
on the contrary, that there is a stipulation which implies that
this Bank may be continued.

Whereas the Laws relative to the old

Reichsbank "cease to be in force" (with the inevitable consequence
that the old Bank ipso facto dies) the two Laws relative to the
Gold Discount Bank are specifically maintained except in so far as
they are in contradiction with the Law of August 30, 1924.


the provisions relative to the acquisition of the shares of the
Gold Discount Bank by the Reichsbank tend in the direction of an

Quoted in part on page 5 of this memorandum.

NoL 222 A.

- 10 -

anticipated merger of the smaller institution with the larger,
these provisions in and of themselves are not incompatible with the
possibility that the new Bank was merely to acquire all the shares
of the Gold Discount Bank, whose corporate existenoe as a subsidiary would be continued despite the fact that its power to issue
currency notes had been terminated.

But the provisions of the Bank Law, although controlling
in case of conflict, cannot be considered in entire isolation from
the Report of the Organising Committee, or from the Report of the
Experts, or from the general historical circumstances attendant

upon the enactment by the Reichstag of this domestic legislation
which had an international character and purpose.

Was any engage-

ment taken with regard to the future of the Gold Discount Bank

which was not incorporated in terms in the text of the Law but which
is nevertheless effective?

The Law must be read and interpreted in

the light of the other collateral documents and above all in the
light of the Report of the Organizing Committee which was submitted

to the Reparation Commission before it approved the Bank Law, and
to the Reichstag when it voted the Bank Law.

Both parties must,

reasonably, be deemed to have considered that the passage of the
Law would accomplish what the covering report said it was aimed to

To repeat, however, if a specific provision of the Bank Law,

as enacted, is irreconcilable with a concrete provision of the
covering report, or of the Experts

Plan, or of an anterior colla-

teral engagement, it is the final instrument, the Bank Law, which

But where there is no incompatibility in the provisions

T.D. No

- 11 -

222 A.

of the Bank Law with the engagements and provisions of the collateral documents in bari materia, both the Law and the attendant
engagements are to be given force and effect.
This brings us back to the quotations from the covering
report of July 11, 1924, and the letter from the Reichsbank of
July 7, 1924, which are quoted on page 7 above, and to the true
construction of their language.

The letter from the Reichsbank

speaks only, with respect to the question of liquidation, of
acquiring "all the shares of the German Gold Discount Bank" and of
taking all necessary steps "to liquidate all transactions of the
Gold Discount Bank".

A normal interpretation of this letter would

lead to the conclusion that it was an undertaking to wind up the

affairs of the Gold Discount Bank, unless the letter is to be given
the extraordinary meaning that as soon as all the transactions of

the Gold Discount Bank were liquidated then a series of new transactions would, or could, be commenced.

This normal interpretation

of the letter is in conformity with the statement of the Experts
in their communiqué of February 10, 1924, said to have been approv-

ed by Dr.Sohacht, to the effect that the Gold Discount Bank would
be absorbed in the new Bank and is also in harmony with the unusual

number of provisions relative to the mode and manner of liquidating
the Gold Discount Bank which were inserted in the Law and Statutes

relative to the Gold Discount Bank, and in further harmony with
the passage in the Report of the Experts concerning the absorption
of the "interim" bank.

Furthermore, that the Organising Committee

understood the letter of the Reichsbank to contain a promise to

- 12 -

T.D. No. 222 A.

liquidate the Gold Discount Bank and not merely its current trans-

actions, is established by the language of the Report of the Organizing Committee which gives a contemporaneous interpretation of
the representation of the Reichsbank in the following terms: "to
do what is necessary to exchange the shares of the Gold Discount

Bank for shares of the Reichsbank and to proceed with the liquidation of the Gold Discount Bank."

This interpretation loses nothing

of its value by the fact that it is signed by Dr. Schacht, the
first of the two signatories of the letter of July 7, 1924.


it was this joint interpretation which was submitted to the Repara-

tion Commission, acting for the Allies, when the Reparation Commission was asked to approve the Bank Law and attendant documents as
carrying out adequately the recommendations of the Experts'Committe(
In this connection it is to be remembered that the arrange-

ments relative to the Bank Law and other laws for the carrying into
effect of the Experts' Plan represent an agreement between the
German on the one hand and the Reparation Commission, acting for
the Allied Powers, on the other.

It is a matter of elementary

jurisprudence that if before an agreement is reached one of the

parties to the agreement communicates to the other his interpretation of a provision in the proposed agreement, and the other party
subsequently, without objecting to that interpretation, executes

the proposed agreement, the second party is thereafter estopped
from denying that the language of the agreement has the meaning
which the first party placed on it and communicated to the second
party before final acceptance.

In the instant vase, before the

- 13 -

T.D. No. 222 A.

provisions concerning the Bank Law and its relation to German
banking and currency provisions was approved by the Reparation
Commission and communicated to Germany, and before the Law was
enacted by the Reichstag, everyone was put on notice that it was
understood on the Allied side that the Law was so drafted as to
permit the liquidation of the Gold Discount Bank and that, further
the Allies construed the letter of the officials of the Reichsbank
as an engagement "to liquidate the Gold Discount Bank."


Reparation Commission accepted the Report of the Organizing
Committee and the draft legislation annexed thereto, on August 9,
1924, and forthwith transmitted them, approved, to the German

By this action the Commission, as the agent of the

Allies, adopted, as its own view of the meaning of the agreement

with respect to liquidation, the interpretation given by the
Report of the joint Organizing Committee.

No objection to this

interpretation of the Organizing Committee came from the German
side during the period August 9 - August 30. 1924, and on the
latter date, with the Report before it, the Reichstag voted the

Bank and other pertinent Laws, including a law generally approving
the acceptance of the terms of the Experts' Plan and the London

The text of the Bank Law, far from being in any way
inconsistent or incompatible with the Reichsbank letter of July 7,
1924, as


by the Organizing Committee and adopted by

the Reparation Commission, contained provisions which rendeyed

- 14 -

T.D. No. 222 A.

possible the easy execution of the understanding.

The Reichsbank

was authorized to take over the shares of the Gold Discount Bank
and the Laws conoerning the Gold Discount Bank were of necessity

maintained in farce (exoept in so far as they are inconsistent with
the Bank Law), first, because there was no engagement on either

side that the Gold Discount Bank should be liquidated at the very
moment of the adoption of the Bank Law, and, second, because the
fundamental Law relative to the Gold Discount Bank contained the
following enabling language which had to be kept in force to permit
the carrying into effect of the arrangement:
"Article 5. ***** The Reichsbank has the right to liquidate the German Gold Discount Bank at any time, with the
consent of the General Meeting of the German Gold Discount

While, therefore, it is literally exact, as stated on page

8 above, that the text of the Bank Law contains no apeoific mention
of the liquidation of the Gold Discount Bank, as a matter of sound
statutory interpretation Article 52 of the Bank Law has the effect
of incorporation by reference of the foregoing Article of the Gold
Discount Bank Law with the juridical result that the Reiohsbank is

now, and has been, entitled to liquidate the Gold Discount Bank
"at any time".

The consent of a general meeting of the interim

bank has become a formalism considering that the Reichsbank is the
sole owner of all the shares of the Gold Discount Bank.
On the basis of the foregoing record it is the considered
opinion of the undersigned that an impartial arbitrator called upon
to interpret the language employed by the parties would rule that

- 15 -

T.D. 1109 222 A.

there was an agreement that the Gold Discount Bank should be liquidated; that no date was set therefor;

that consequently the ope-

ration was to be concluded in a reasonable time; that what constituted a reasonable time depended upon questions of fact with regard

to the operations of the Gold Discount Bank, and constituted a
question to be decided amicably between the Reichsbank authorities

and the appropriate administrators of the Dawes Plan; that the
Reichsbank has to date, on the score of liquidation, not opened
itself to the charge of violation of the original agreement in view
of the tacit acquiescence, or even overt consent, of the responsible
Allied authorities to the postponement of the time of liquidation.
On this last point the Reichsbank would quite properly enter in
evidence the following excerpt from its annual report for the year
1925, and a copy of the resolution of the General Council of May 23,
1925 :-

"In this connection it should further be mentioned that the
German Golddiskontbank, which was deprived of its right of
issue (which had, however, never been utilised) with the
coming into force of the new Bank Law and had begun to liquidate its business, resumed its activities in April 1925 with
the consent of all parties concerned, since it seemed desirable in the interests of German economy to retain this practical means whereby those interested in foreign trade can obtain
foreign credits."
Resolution of May 23, 1925.

"The resumption of credits to be given by the Golddiskontbank has been approved."
It is equally the considered opinion of the undersigned
that from the outset of the negotiations to their conclusion it was
the intention on the Allied side wholly to liquidate the Gold
Discount Bank at a reasonably

early date.

It is by no means so

T.D. No. 222 A.

- 16 -

clear that on the German side it was the intention to liquidate the
Bank at an early date, or entirely.

Indeed, Dr. Schacht, in his

commentary on the Bank Law (Manz-u. Notenbankwesen, 1926), says
"It was intended from the beginning, upon the creation of the Bank
of Issue, to liquidate the Gold Discount Bank as an issue bank"(p,5)

An impartial arbitrator would not, however, endeavor to ascertain
the occult intention of the parties but would concern himself with
the interpretation of the reasonable meaning of the language of the
agreement which both parties finally adopted.

Virtually every

sincere legal dispute about the construction of an instrument arises
out of the fact that one of the parties deems that he did not origi-

nally intend a certain consequence which nevertheless flows from the
language of the accord which was ultimately jointly reached.

Finally, despite the space which has been devoted to the
question of liquidation, it is the view of the undersigned that
under present circumstances further debate on this subject as regards
the past is likely to be sterile.

The fact is that the Gold

Discount Bank has not been liquidated and that the Allied representatives have acquiesced in the situation.

The fact is that the

Reichsbank has the continuing right to liquidate the institution
"at any time".

The real present problem is whether or not the Gold

Discount Bank should be continued hereafter, or rather, the really
important problem from the viewpoint of the Experts' Plan and the
Bank Law is whether the Gold Discount Bank, if continued, may be
employed by the Reichsbank for the accomplishment of purposes which




T.D. No. 222 A.

- 17 -

are either prohibited to the Reichsbank by the Bank Law of August
30, 1924, or at least unauthorized by that Law.

To this latter

question the legal answer is an unqualified negative.

The provisions relative to the functions of the new
German Bank were at the

very heart of the Experts' Plan for the

stabilization, and the maintenance of the stabilization, of the
German currency, and it is not surprising to find that the Annex

which minutely details the essential powers of the proposed Bank
is numbered Annex I, and to find that the discussion in the main
text of the Report concerning the activity of the Bank is placed
at the very beginning.

The Experts, and later the Organizing

Committee, entered into the most precise details concerning the
prerogatives and scope of business of the Bank, with the clear
intent of safeguarding the Bank from activities which had brought

disaster in the past and with the intent of defining exhaustively
the field of its activity for the future.

The result of this care-

ful study and this deliberate prescription of limitations was finally enshrined in the bank Law of August 30, 1924, the preamble of
which reads as follows: -

"The following provisions shall henceforth apply
to the legal condition of the Reichsbank which was
incorporated by the Bank Law of March 14, 1875:"
This Law constitutes the charter of the Bank, and what is
not there contained is ultra vires for the Bank; and what is there
forbidden is definitively prohibited to the Bank, acting either by



- 18 -

T.D. No. 222 A.

itself or through one of its exclusive instrumentalities. The Bank
'Law is divided into nine sections containing fifty-three articles

which completely, carefully and finally outline the entire legal
status of the Bank and delimit the field of its legal operation.
Section IV defines with special care "The Bank's sphere of Business"
The Reichsbank is clearly restrained, if this Law and this Section
have any valuable import, to the sphere of business there so carefully described and it is forbidden, either itself or by a subordinate agency, to carry on the prohibited business acts which are set
forth it the Law.

Mile it is true that Article 53 of the Law

recognized the continued existence of the Gold Discount Bank



least until liquidation) which was to be wholly owned by the Reichsbank, is this enabling Article to be given a construction such as to
open the door to the effective destruction of the 52 preceding
articles concerning the legal condition of the Reichsbank? The mere
putting of this rhetorical question implies the necessary answer.
The Gold Discount Bank is now in practical fact, despite
its separate corporate entity, a department of the Reichsbank or,
in any event, an exclusive instrumentality of the Reichsbank. Not
only is the Reichsbank the sole owner, but the two Directorates are
interlocking, the management is identical, and even the offices of
the Gold Discount Bank are in the Reichsbank building.

The real

identity of the two institutions is accentuated by the device of the
Solawechsel that provides a method by which the Reichsbank can put
the Gold Discount Bank in funds out of the Reichsbank monies if and
when the interlocking and identical executives so desire. The sphere
of business of the Peichsbank having been deliberately and carefully-

a .4*-4

- 19 -

T.D. No, 222 A.

planned and defined, the Reichsbank is limited to that sphere and
it cannot employ an instrumentality which, cle facto, is substantial-

ly identical with itself, or, alternatively, is wholly and exclusively its subordinate agency, to accomplish purposes which are
forbidden to the Reichsbank by the Bank Law, or unauthorized thereby.

Any contrary conclusion renders all restrictions of the Ban

Law ourely illusory and would leave the Reichsbank more free to
carry on business in accordance with its unbounded and changing
discretion than it was prior to the Experts' Plan and the carefully
conceived Law of August 30, 1924.

The necessity of this conclusion is confirmed by the
existence of the General Council in which there is a foreign representation.

That foreign representation was avowedly created with a

view to affording guarantees to those who accepted the Experts' Plan
and to those who floated the German External Loan 1924, that the
Reichsbank would in fact be carried on in accordance with the spirit
and design of the Experts' Plan and subject to the protective limitations which were laid down by the Organizing Committee and incorporated in the Bank Law.

'Mile the exact prerogatives of the Gene-

ral Council are not set forth in the Law, in the instant case this
hiatus is not without advantages for if the Council have any useful
powers at all they must at least have the implied power of general
oversight of the activities of the Reichsbank with respect to its
observance of the fundamental aims and spirit of the Experts' Flan
and the essential provisions of the Bank's charter.

The guarantee

hoped for by the creation of the General Council falls utterly to


- 20 -

T.D. No. 222 A.

the ground if the Reichsbank is legitimately empowered through a
subsidiary instrumentality to carry on business unauthorised or
prohibited by the charter of the Reichsbank itself and if it can do
indirectly what is expressly unwarranted.

In the opinion of the undersigned the responsibility rests

upon the General Council and more particularly on the foreign
members thereof to see to it that the Bank Law is not evaded throup
the agency of the Gold Discount Bank, and to assume with regard to
the Gold Discount Bank the same surveillance which is exercised
over the Reichsbank.

If, as Dr. Schacht frankly states in his

memorandum to the General Council, dated March 11,1927, the existing Bank Law does not give the Reichsbank the necessary control
of the internal credit situation, and if such control be desirable
for the Central Bank, then the remedy is through an appropriate amend-

ment to the Bank Law duly passed through the proper channels and no t
by the employment of a subterfuge in the shape of a subsidiary and
wholly controlled corporation whose theoretical separateness is

This is the more true when there is the strongest 14k

lihood - if not almost the certainty - that the real obligation of
the Reichsbank with respect to the Gold Discount Bank, instead of
extending the scope of the latter and employing it as a means of
circumventing the limitations of the Bank Law, is in reality to
liquidate the institution at a reasonable date in agreement with th
Allied administrators of the Experts' Plan.

April 22, 1927.



t4 hi letter



T.D. No. 222 B,

May 7, 1927.


At the meeting of the (*choral Council on March 17, 1927,

Dr. Schacht and Sir Charles Addis were appointed a sub-commi4toe
"to exiimir.^ and report on the Question whether it is in accordance

with the intention of the Dawes Plan that the Gold hiccount Bank
is to be liquidated as soon as possible or, alternatively, whether
it is to continue its present activities".

Mr. Fraser's memorandum

of April 22, 1927, has already covered this question from the legal

It remains to consider it from the banking and finan-

cial point of view.

It is necessary, first of all, to review the work undertaken by the Gold Discount Bank from its organization in 1924 up
to the present time.

I. Review of the Activities of the Gold Discount Bank.
The Gold Discount Bank began operations on April 16, 19249
ceder a charter granted by law on March 19, 1924.

Its authorised

capital amounted to £10,000,000 sterling, half of which was subscribed by the Reichsbank and the other half by a consortium of


The Reichebank, for the purpose of paying its

- 2 -

amounting to £1,647,200.

T.D. N


222 B.

These the Reichsbank acquired in January,

1925, by exchanging its own shares for them, and thereupon became
sole owner of the bank.

From its organisation, the management of

the Gold Discount Bank has been in the hands of the Reichsbank, as

the law in fact contemplated, and the President of the Reichsbank
has been chairman of its Board of Control.
The law gave the Gold Discount Bank broad powers, but
the main function Which it performed from its establishment was

that of granting credits in foreign currenoies, mainly sterling
and dollars, for the benefit of German foreign trade.

In order

to enlarge its credit-giving facilities, it made arrangements


it could rediscount bills abroad.

Its business increased


- 3 e

T .D . No


222_ B.

*The resumption of credits to be given by the Gold
Discount Bank has been approved*.
In speaking of this action, the annual report of the Relobsbank
for 1925 remarks that:

"The German Gold Discount Bank, Which
had begun
to liquidate its business, resumed its activities in April,
1925, with the consent of all parties concerned, since it
seemed desirable in the interests of German eoonomy to retain
this practicai means whereby those interested in foreign trade
can obtain foreign credits".

The portfolio of the Gold Discount Bank thereupon begun to increase again, reaching a maximum in Ootober, 1925.

At the end of

1925 it stood at only slightly lees than 0,000,000, of Which
21,600,000 was rediscounted abroad.

During 1926 the export credit business of the Gold
Discount Bank again diminished in importance, coinciding with the
rapidly developing ease on the German short-time money market. At
the close of the year, the bills and checks in the portfolio amout

ed only to 2380,400, though the annual statement reported bills
under rediscount in the amount of £3,730,800. Practically all of
these rediscounts were with the Reiohsbank .

But while the work of the Gold Discount Bank in this
particular was growing rapidly less, it was undertaking new
functions in other directions. Early in January, 1926, the bank
declared itself willing to take over 3-5 year agricultural morta.


bonds of the Rentenbank-Kredit-Anstalt at 7 per cent, which

4 -

T.D. No. 222 B.

rest on long-term obligations generally, and hence toward reestablishing the German market as the main source of credit for
German long-term borrowers.

The Rentenbank-Ktedit-Anstalt was

somewhat slow to take advantage of the Gold Discount Bank's offer,
owing to technical difficulties in connection with registering the

mortgages, but by the end of the year the bank held RM 220,750,000
of bonds, maturing in approximately equal instalments on July 15,
1929, July 15, 1930, and July 15, 1931.

It may be remarked that

this generous use of Gold Discount Bank credit toward the close
of the year was not so much by way of planing fresh funds at the
disposal of agriculture as it was by way of refunding a large

part of the rentenmark agrioultural credits, which fell due on
November 30, 1926, in the amount of about 293 millions.
In Deoember,1926, the Gold Discount Bank entered upon a
second new undertaking, Which had to do with the sale to the
market of one-name bills, known as Solawechsel.

While, as has

already been indicated, the cost of long-term money was gradually
falling into equilibrium with long-term rates on foreign markets,
short-term money had at times reached the point of redundancy.

Cheap money on the Bourse had long been one of the causes of
active speculation, but the Reichsbank's own portfolio was too
small at the moment to permit it to sell bills to the market and

so effect

a correction.

It endeavoured to produce the same re-

T.D. No. 222 B.

vested in 3-5 year agricultural bonds, bore a rate varying from
4 1/2 to 4 3/4 per cent.

They matured in March, when they were

repaid with the exception of those purchased by the VerkehrsKredit-Bank, which at the request of the latter were renewed.

A second issue of RM 20,500,000 was made in January, maturing in

It is to be noted further that on March 7, 1927, about

RM 13,500,000 of Solaweohsel were under rediscount from the
market at the Reichsbank.

A third new undertaking of the Gold Discount Bank has
grown out of the arrangements, perfected early in 1927, for the
conversion of the 10 per cent mortgage bonds of several so-called
"Landschaften" into 7 per cent mortgage bonds.

The Gold Discount

Bank participated in a syndicate to finance the conversion, and

while the seasonal ease of money then prevailing has in a measure
given way to somewhat stiffer rates, 7 per cent mortgage bonds
still have a good market, and the syndicate has not been called
upon to furnish important amounts.
A fourth new undertaking of the Gold Discount Bank has
been its acceptance of deposits at interest from the Government
of the Reich.

The Reich placed with the Gold Discount Bank early

in 1927 RM 160,000,000 of the proceeds of the new Reioh loan,
for periods extending up to six months, at interest of 3 - 3 1/2
per cent.

Most of the money so deposited has been used for

buying reiohsmark acceptances in the market.

Partly because of

the large fund thus available, the rate on the private discount

market has remained fairly steady since February, ranging between
4 1/2 and 4 7/8 per cent, in spite of a marked demand for funds in other
Federal Reserve Bank of St. Louis

- 6 -


T.D. No. 222 B.

The margin above the interest paid to the

- 7 II

T.D. No. 222 B.

Analysis of the Business of the Gold Discount Bank.
From the foregoing paragraphs it appears that the Gold

Discount Bank has been operating from its very beginning in close
affiliation with the Reichsbank, but that since the early part of
1925, when the Reichsbank became its sole owner, the Gold Discount
Bank has been virtually a department of the Reichsbank, though
still maintaining its corporate identity.

While many of the

functions performed by the Gold Discount Bank have been of undoubted importance to the German economy, particularly in those periods
when their exercise was first undertaken, it is appropriate to
examine them now from a double standpoint; first, as to whether
if performed directly by the Reichsbank they would be consistent
with the essential functions of a central bank, and second, as to
whether these functions are of diminishing or increasing importance from the, point of view of the general situation.

Granting credits in foreign currencies to German foreign



The sterling capital with which the Gold Discount Bank

began operations gave it considerable facilities in this direction,
and it was able to grant acceptance credits in sterling, for
example, in precisely the same way as any other bank having substantial holdings of sterling funds makes a practice of doing.
The ordinary functions of a central bank are at least one step
Federal Reserve Bank of St. Louis

from this direct relation with the merchant.

The Reichs-

- 8 -

directly with the merchant.

T.D. No. 222 B.

Not infrequently, however, it has

been called upon to rediscount bills for the Gold Discount Bank,
a process which brought it through the medium of its subsidiary
into direct relation with the merchant.

The high character of the bills so rediscounted relieved
transactions of this sort from such risk as might otherwise attach
to them, and the universal scarcity of credit in the early years
of reconstruction gave such transactions a general utility which
the General Council recognised when it approved in March, 1925,
the resumption of this kind of business by the Gold Discount Bank.

At present, however, the German banks have adequate facilities for
granting credits to German foreign trade, and there is certainly
no need for continuing the Gold Discount Bank on this account.
The Gold Discount Bank, in fact, is not now so much a means

which is sought after for the purpose of granting credits of
this kind, as it is an investor seeking bills in the market in
competition with other buyers.

Its need to buy bills is the

direct result of other functions recently assumed, particularly
that of depositary for the Reich, to which explicit reference is
made below.

Taking over from the Rentenbank-Kredit-Anstalt 3 - 5

year agricultural mortgage bonds.- regarded
Federal Reserve Bank of St. Louis

This undertaking may be

as a measure of emergency relief to the agricultural

T.D. No. 222 1.

but of longer term.

The Golddiskontbank in this operation was

a convenient instrument which the Reichsbank used for the purpose
of exerting pressure on the banks, and so forcing a cheaper market
for agricultural mortgage bonds.

Leadership of the market in

times of emergency is to be expected from central banks, but it
is open to question whether the central bank should be in a
position to enforce its leadership through a subsidiary capable
of acting in competition with the commercial banks.

emergency which this action by the Gold Discount

Bank was designed to correct has entirely passed.

While the cost

of long-term credit to agricultural borrowers is still much above
what it was before the war, yet it is generally in line with the

cost of long-term credit to industry and only slightly more than
the cost of such credit to municipalities and States.


per cent mortgage bonds (Pfandbriefe) are now quoted in the
market at 102 to 103, and five per cent Pfandbriefe at around 92.
The fact that the mortgage bond market in March, even with mono:,

rates stiffening in other directions, was the most active in
recent years, is further evidence that special assistance from
the Gold Discount Bank is no longer required.*
C. Sale of 3-months one-name bills (Solawechsell.--


operation, upon which the President of the Reichsbank has written
a special
Federal Reserve Bank of St. Louis

7nemorandum to the General Council, was essentially an

- 10 -

T.D. No. 222 B.

subsidiary, to influence the money market in a manner roughly
corresponding to that frequently employed by central banks.


whereas central banks ordinarily sell bills or Government obligations to the market out of their own portfolios, and so withdraw
redundant funds from the market, the Reichsbank endeavoured to
accomplish the same result by having the Gold Discount Bank sell
its own promissory notes bearing solely its own name.

The Reichs-

bank itself entered into the transaction by expressing its willingness to rediscount these bills if brought to it from the market.
The volume of Solawechsel so rediscounted proved to be very small,
but no doubt the action of the Reichsbank added materially to
their attractiveness by assuring their complete liquidity.


is no object here in discussing the legal eligibility of these

notes for rediscount, which involves an examination of their
character as commercial bills.

Instead the question is whether

the whole transaction was consistent with central banking practice.

Assuming that the Gold Discount Bank was entirely separate

from the Reichsbank, not only as a corporate entity, but in its
administration and ownership, and granted the eligibility of the

bills, there can be no doubt but that the plan was not inconsistent with usual practice.

But the identity of ownership and

administration by which both maker and rediscount


were the same

tends to place the transaction outside the field of

11 ®

T.D. No. 222 B.

The emergency nature of the transaction arose from the
fact that the Reichsbank at that time had only a limited portfolio of bills, mostly of very short maturity, and that there

were no Treasury bills of the Reich either in its possession or
available for sale to the market.

Consequently the Reichsbank

did not have the means at hand to influence the market, and looked elsewhere for a substitute.

In two respects the situation

has now changed; there is no need for the Reichsbank to influence

the market by a sale of bills, because market rates are now in
contact with the Reichsbank rate;

and the Reichsbank now has

the largest portfolio it has had for many months.

There are

still no Treasury bills of the Reich, but for the moment neither
Federal Reserve Bank of the Reich
St. Louis

nor the market has need of them.

In ordinary course

- 12 -

T.D. No. 222 B.

E. DepositarL for public funds.--

This is without question

the most important of the new functions assumed by the Gold
Discount Bank.

The Reich loan, which provided cash far in excess

of the current demands upon the Treasury, revived the problem of
administering the surplus funds of the Reich.

At the same time,

it is to be expected that the proceeds of the loan, like the
surplus from taxation will in due course be exhausted in Government expenditure, so that this particular function of the Gold
Discount Bank may be of a trnrFf:ory character.

But in the

meantime other public or quasi -public funds are in prospect of

flowing to the Gold Discount Bank as deposits at interest.


gives an aspect of permanency to the new function.
So far as the Reichsbank is concerned, the problem of
the public funds has its origin in the desire tr c-rn interest
during such time as the funds are lying idle.

If the heads of

the various public institutions and the Reich Treasury itself

were not desirous of getting a return on surplus, reserve, or
idle funds, the main obstacle against placing them on deposit
at the Reichsbank would be absent.

The Reichsbank under the

law is not allowed to pay interest on deposits.

This prohibition

grows out of the obligations of the central bank toward the
currency and the situation of credit in general,-- or, as the

Reichsbank law defines it, toward the regulation of "the circula-
Federal Reserve Bank of St. Louis

of money

and the utilisation of available

T.D. No. 222 B.

13 -

aotion or not.

The possibility of competition with ordinary

banks is only an incidental factor; the main objection is the

implied limitation on the ability of the central bank to maintain
control of the money market.

In order to remain in contact with

the market and thus keep its rate effective, the central bank

must have unhampered power to affect the market either by withdrawing funds from it or by releasing funds to it.

If it is

consistently under the necessity of putting money out on the

market in order to pay interest to depositors, its control is
seriously limited; and it does not matter whether the money so
put out is its own or that of a subsidiary.
It is true that, as compared with the Reich shank, the

Gold Discount Bank exercises a greater latitude in making in-

vestments, and has even, as in the case of the RentenbankKredit-Anstaltis agricultural mortgage bonds, bought 3 to 5-year
bonds for its own account.

But there are distinct limitation on

the extent to which a bank of deposit can invest in long-term
obligations; and as to the various short-money markets, the
partitions formerly dividing them into separate compartments
are becoming thinner and lower, and it is doubtful whether any
considerable volume of funds can now be forced into one short
market without causing an outward flow in directions not desired.
The Gold Discount Bank lY
Federal Reserve Bank of St. Louis

already become an active applicant for

business in order to supplement the investments purchas-

14 -

T.D. No. 222 B

theretofore of granting credits solely in a foreign currency and


to grant reichemark credits as well.

A settlement of the problem involved in the administration
of the public funds is urgently needed, not only because of their
influence in the money market, but for other reasons which it is
unnecessary to discuss here.

The new loan of the Reich revived it

probably temporarily; and it postponed the opportunity then open
of providing in the shape of Treasury bills a highly liquid shortterm investment for Railway and other funds.

Pending the time

when such obligations may be offered on the German markets, and
without undertaking here to propose even in outline a plan for

the problem, it is to be noted that the supply of bills

T.D. No. 222 B.

- 15

III. The Intention of the Experts' Plan with respect to the
Gold Discount Bank.

There is nothing in the Plan which indicates that its
framers expected the Gold Discount Bank to remain in business or
to extend its functions.

Its implications, which find support

in a direct statement in a letter from the Reichsbank Organisation
Committee to the Reparation Commission, looked instead toward its
prompt liquidation.

But it is recognized that under the extra-

ordinary conditions of financial reconstruction which have prevailed in the last three years, it was not out of order that all
reasonable means should be employed to make the transition as
speedy and simple as possible.

The Gold Discount Bank proved

itself to be a highly useful instrument during a difficult period.

Consequently, it is desired if possible to lift the discussion of
the future of the Gold Discount Bank out of the plane of prior
commitment, whatever it may have been, and to place it on the
broader ground of central banking principle.
The Plan, both in the Report of the Experts and in the
laws passed in accordance with it, placed about the Reichsbank
the safeguards and gave it the responc,bilities essential to the
conduct of a central bank.

Inese safeguards and responsibilities

were expressed not only in general terms but in precise detail,

and the

detailed prescriptions are to be found not only in the

16 -

T.D. No. 222 B.

there forbidden is definitely prohibited to the Bank, acting
either by itself or through one of its exclusive instrumentalities.
The separate existence of the Gold Discount Bank as a
corporation distinct from the Reichsbank is technical rather than

The Gold Discount Bank is the Reichsbank's exclusive

instrumentality and in carrying out the intents and purposes of
the Reichsbank it has the practical quality of a department of
the Reichsbank.

Not only is the Reichsbank its sole owner, but

the two directorates are interlocking, the management is identical,

and even the offices of the Gold Discount Bank are in the building
of the Reichsbank.

The convenience of the arrangement is un-

and under color of it the Reichsbank administration has






t* IR letter at


T.D. No. 222 D.

BERLIN, May 24, 1927.

At the meeting of the General Council on March 28th 1927
the question has been raised whether the Deutsche Golddiskontbank
ought to be liquidated.

For the Reichsbank this is a question of

a formal and a material aspect.

As far as the formal aspect is concerned the opinion that
the Golddiskontbank ought to be liquidated is principally based
on the report of the Organizing Committee of July 11th 1924
according to which the liquidation of the Golddiskontbank was
provided for, but the time for such liquidation was not stipulat 441

The fact that the Golddiskontbank has so far not been


liquidated is not contrary to the spirit of the Dawes Plan,


principal point as far as the Dawes Plan is concerned is that the
note issuing privilege of the Golddiskontbank becomes invalid at
the moment when the new Bank Law comes into force.

The Managing

Board of the Reichsbank felt itself obliged to examine the legal
position in order to ascertain whether the existence and activity
of the Golddiskontbank rest on a legally secured and incontestable

The conclusion come to is that § 53 of the Bank Law


maintains the Golddiskontbank Law of March 19th 1924

- 2 -

transact through a subsidiary establishment of which the Bank is
the owner any business which the Bank itself is not allowed to do.
Whether such an opinion can be substantiated by legal arguments
shall for the moment not be discussed.

The Managing Board of the

Reichsbank does not wish to explain its policy in any way by
purely formal aspects.

Being the sole owner of the shares the

Reichsbank fully realises that fundamental restrictions exist
for the Board in regard to the management of the affairs of
the Golddiskontbank.

These restrictions are not the formal

stipulations of § 21 of the Bank Law

- the latter not having

been declared applicable to the Golddiskontbank by § 53 of the
Bank Law -

but they result from the position and function of

the Reichsbank as a note-issuing institution.

The Golddiskontbank may only follow such aims and tasks

which result from the position and functions of the Reichsbank
as a note-issuing institution.

The Golddiskontbank may only

assist the Reichsbank in its public functions


1 Bank Law);

the transactions of the Golddiskontbank must not impose

upon the Reichsbank any burden or entail any risks for the

The Golddiskontbank has so far acted on these principles.
Its activity was guided by the development of the German money
market. the
Federal Reserve Bank of St. Louis

Taking into consideration the transitory character of

Golddiskontbank, the Reichsbank applied itself to the liquidE.

- 3 -

be solved with the assistance of the Golddiskontbank, as
Federal Reserve Bank of St. Louis

the development of the German money market still

- 4 -

the public funds by granting interest.

All these means, which

the Golddiskontbank in the opinion of the nanaging Board of the
Reichsbank was, and, no doubt, still is entitled to employ, may
formally not be allowed to the Reichsbank itself.


they all lie within the policy of the Central Bank of Issue, and
on no occasion has any use been made of the Golddiskontbank for
any purpose which did not comply with the general policy of the

If the Reichsbank was compelled to make use of the

Golddiskontbank the reason is in the first line the imperfect
legal carrying out of the absolutely correct basic ideas of the
Dawes Plan.

The Managing Board of the Reichsbank has done everything in
its power to remedy these deficiencies by an adequate bank policy.
It has always urged that the Reichsfinanzverwaltung should not

work with surpluses, but should be supported by temporarily
engaging the short-termed money market as much as possible.


has suggested the amendment of the Reichsbank Law, this facilita-

ting the Reichsfinanzministerium the employment of the shorttermed money market by issuing Treasury Bills.

It has stipulated,

not without success, tolerable relations with the Reichspost by
means of proceedings.

At last, with great difficulty, it has

come to a provisional agreement with the Reichsbahn about the
administration of a part of its short-termed funds, and it hopes that
Federal Reserve Bank of St. Louis

early next year, an agreement with regard to all Railway

- 5 -

of the public funds hitherto made do not mean a satisfactory

It surely would be better, if the principle of the

Dawes Plan would have been carried out, i.e. to leave the public
funds of the Reich, Reichspost and Reichsbahn to the administration of the Reichsbank.


the Managing Board of the

Reichsbank would, as long as a more suitable settlement cannot
be brought about, act contrary to its duty, if it would not do
anything, to obtain as far as possible the control on the public

- in spite of the deficient legal provisions.
The Reichsbank in the meantime aims at a solution of the

problem as follows:

The funds of the Reichsfinanzverwaltung, Reichspost and
Reichsbahn as well as of the smaller authorities of the

- 6 -

with the Reichsbank on giro account not bearing interest.
If an investment is agreed upon, the neichsbank handles
the funds entrusted as a trustee and on commission.

The proceeds are credited to the parties giving the
moneys and paid in on their L.iro accounts.

The Reichs-

bank does not charge any fee for administration.

This programme can, of course, only be carried out by
degrees and gradually;

In particular, the current agree-

ments between the Golddiskontbank and Verkehrskreditbank,
running, till the end of the year, must not be broken off.

On the contrary they are deemed to be the first step
towards the direction indicated.

Germany still lives under anomalous economic conditions.
As the Experts' Report points out as well, normal conditions on
the money and capital markets are of vital importance to the
economic reconstruction of Germany.

The pith of the whole question lies therefore in the
practical demands of the policy of the Central Bank of Issue.

First of all, this means the necessity to control the currency
and the money market.

As lot g. as it is evident that vital needs

of Germany's trade and industry cannot be satisfied in any other
way, in particular as far as the Reichsbank is responsible,
allowance has to be made to these imperative demands which have under
Federal Reserve Bank of St. Louis

any circumstances to be taken into consideration, whatever

- 7 -

fundamental demands,these main principles and aims German trade and
the are:
reconstruction of of the Dawes

German credit, reestablishment of normal and settled c
on the money and capital markets.

To liquidate the Golddiskontbank immediately does

this purpose of reconstruction bit just means destruct

is the duty of the Managing Board to draw the attentio
heavy responsibility for such a resolution.

DATED MAY 24, 1927

Law concerning the German Gold Discount Bank, March 19,
1924 (Reichsgesetzblatt II p.71).

The Reichstag has adopted the following law, which is hereby
promulgated with the assent of the Eeichsrat.


A bank is being established under the direction of the
Reichsbank, out of private means and independent of the Government
of the Reich, bearing the name "German Gold Discount Bank",

licenced to issue pound sterling notes to a total value of
5 million pounds sterling.

The notes are not legal tender.

The G.G.D.Bk. has its seat in Berlin.

It has the character

of a corporate body of the civil law, the legal decrees concerning
companies of limited liabilities being applied so far as nothing
to the contrary is fixed by this law or the rules of the Bank.
The rules are drawn up by the founders; they will be made public.
As long as the privilege of the G.G.D.Bk. lasts to issue notes,
no such privilege can be conferred upon banks, which at the time
of coming into force of this law are not already banks of issue.
This stipulation ceases at the liquidation of the G.G.D.Bk.


The Bank is bound to have in hand as cover for its notes in
circulation at any time at least 50 per cent in gold or short

bills of exchange, the rest in discounted bills or checks


Bills of exchange in the sense of this stipulation are
banknotes and such bills, checks and claims, daily falling due,
payable abroad in foreign currency.

The conversion of all coins and exchanges, other than pounds
sterling, takes place at the last known London average closing

The maturity of bills must not surpass 3 months, bearing as
a rule the signatures of three, but at least of two persons
known as solvent.

The checks must bear the signatures of at

least two persons known as solvent.


The G.G.D.Bk. is bound to redeem its notes on presentation
at its counters in Berlin to their full nominal value.


redemption takes place at the option of the Bank through checks
on London, or transfer on London, or through notes of the Bank
of England.

The presentation for redemption does not signify

an order in the sense of § 2 of the law concerning the flight of

capital as formulated in the publication of January 26th 1923
(Reichs-Gesetzblatt I page 91).
§ 4.

The G.G.D.Bk. has to publish its rates of discount.

The privilege of the Bank to issue notes expires with the
right of the Reichsbank to issue notes, but not later than the

31st December


It may be prolonged by law.

named is interdicted to the Bank.
§ 7.

The shareholders have a claim to a yearly dividend of 8
per cent.

Should one year the dividend not be attained, the

amount short thereof is to be made up, as prior lien, out of the
net profits of the following years.

Out of the remaining net-profits 50 per cent have to be
diverted to the Reich as recompense for the grant of the privilege


of issuing notes.

An obligation to taxation of the notes does

not exist.


The stipulationsof the commercial code, regarding the entry
in the trade register and the legal consequences arising out of
same, do not apply to the G.G.D.Bk.

Also the stipulations of the commercial code contained in the
§§ 40 alinea 1, 180, 182, 186 to 209, 218 to 220, 227, 240, 243,

244, 252 alinea 3, 259, 265 alinea 2, 266 to 270, 277 to 279, 280,
281, 284 to 287, 289, 291, 292 alinea 1 number 2, 293, 295 alinea

3, 296, 302, 303, 309 to 311, 313, 314 alinea 1 no. 3, 4, 5,

315 alinea 1 no. 2, 319, as well as the decrees concerning the
gold balances of December 28th 1923 (Reichs-Gesetzbl. I page 1253)
do not apply to the G.G.D.Bk.
§ 9.

The stipulations of the stock exchange law concerning the

- 4 -

issue of a compulsory prospectus do not apply to the G.G.D.Bk.
§ 10.

The management and liquidation of the G.G.D.Bk. lies
exclusively in the hands of the Reichsbank.

All persons concerned with the management and direction as

well as with the control of the Bank are pledged to secrecy in
Opposing regulations to other

connection with all transactions.

The stipulations of the

laws do not apply to the G.G.D.Bk.

penal code and the decree of the public tax bill of the Reich
(Reichsabgabeordnung) remain untouched.
§ 11.

The G.G.D.Bk. is exempt of all taxes of the Reich, the
states and the communities with the exception of the bill duty
and as long as nothing to the contrary results out of alinea
Its business transactions

of the tax on bourse transaction.

and deeds are exempt of stamps and duties.

In handing over means of payment in foreign currency to
the G.G.D.Bk. the sellers enjoy the same abatement of tax prevailing by sales to the Reichsbank.

The redemption of the notes

(§ 3) is exempt of the tax on bourse-transactions.

The dividends to be paid by the G.G.D.Bk. are not liable to
the tax on capital yield.


§ 12.

stipulations of the legislation on foreign exchanges

- 5 -

?light of Capital in the wording of the publication of
January 26th 1923, Reichs-Gesetzbl. I page 91).

The notes of the G.G.D.Bk. do not count as foreign means
of payment in the sense of the legislation on foreign exchanges;
they are exempt of the tax on bourse-transactions § 2 of the
decree concerning the speculation in foreign exchanges of
May 8th 1923 (Reichs-Gesetzbl. I page 275) and the stipulations
in force regarding the unity quotation are applied to the notes
of the Bank, as far as the Government of the Reich does not
stipulate anything to the contrary.

The law becomes operative the day following its
Berlin, March 19, 1924.

U E B E R S E T Z U N G.

Law for the Amendment of the Bank Law,
March 19, 1924
(Reichsgesetzblatt II p. 73).

The Reichstag has adopted the following Law which with
the assent of the Reichsrat is hereby promulgated.

The Reichsbank and the Private Note Banks are empowered
to acquire and to grant loans on shares of the Deutsche Golddiskontbank.


The Reichsbank is entitled and is under the obligation to

manage the

whole business of the Golddiskontbank for the account


53 of the Bank-Law

of August 30, 192

Der Prdsident

BERLIN,S.W.19, den 6.2.2

Owen D. YOUNG, Esq.

Chairman of the Currency Sub-Committee

Hotel Adlon

Mr. Chairman:

As I have been informed to my regret that the Sub-Committee
dealing with the currency will finish their work in Berlin
shortly I beg to submit to you the following.

Immediately after having been appointed President of the
Reichsbank I have endeavoured for the recovery of German trade
to create a Goldbank, which, independent of the ultimate settle-

ment of reparations, of the budget and of our currency should be
in a position to act effectively and on a safe basis.


those endeavours your Expert Committee asked me to come to Paris
and to deposit my statements before the Committee.

I have given

to the Committee in Paris as well as afterwards in Berlin all
explanations wanted with that frankness, which I consider to be
indispensable regarding the most serious problems with which the
Committee as well as myself were confronted.

The Committee

informed me that they were agreeing with me about some essential
Federal Reserve Bank of St. Louis

but that the Committee had in mind a more ultimate plan

- 2 -

I have no doubt that an arrangement between the Reparation
Commission and the German Government about the ultimate plan of
a currency bank can be agreed upon in connection with an agreement
about the whole of the problems dealt with by the Experts
As a non-politician however and as a man who is in


businens and economic life for more than twenty-five years I beg
to call your attention to the most important point, that the
present state of German currency and German trade does not allow

to defer the measures initiated by me after my appointment.
actual provisory stabilising of German currency through the

Rentenmark has only become possible by exercising a strong
psychological pressure on all speculating circles and as a
consequence thereof

by an extraordinary shrinking of German

For the time Germany is to a very large extent living

on her stocks which give employment to her industry only to a
certain percentage.

The number of unemployed is enormous.

state cannot last any longer.


reople must try again to get

foreign raw stuffs and materials in order to employ commerce and
trade, but the necessary foreign exchange for that purpose are not
at hand.

Already since some time a greater demand for foreign

exchange is to be seen, against which no suffici=ent receipts of
foreign money are collected.

The lack cannot be filled up by

the private foreign credits, which during the last two months
in consequence of the provisory stabilisation of the mark have
been granted
Federal Reserve Bank of St. Louis

to our industry and commerce.

Those credits will

- 3 -

In view of that state and being formally responsible
to the German Government for that all necessary measures in
monetary policy shall be taken in time,

I beg to approach you,

Mr. Chairman, to ask your Committee for a declaration that the
Committee approves my endeavours in an immediate creation of a
gold bank, the outlines of which I have handed over to you,
delivering the necessary funds for our commerce and trade until
the time for an ultimate solution, as planned by your Committee
will have reached.

I consider myself in accordance with the

Committee that the creation of such a gold bank shall not in
any way prejudice the ultimate currency plan of the Expert

I am under the obligation to approach your Committee with
such a demand because the Committee has given official notice
that they in approving the fundamental features of my plan are
outlining a somewhat different ultimate currency project

As for

the creation of the gold bank planned by myself I am dependent
on the moral help of foreign countries, especially of the
various European central banks, a declaration of the Comnittee
in the sense that they approve my provisory endeavours is

Believe me

Mr. Chairman

Yours very truly

- 4 -

No. CE/No. 11.


'The work of the Pirst Expert Committee has enabled it


unanimously to lay down the broad lines which it will recommeld
for the establishment of a new German Bank of Issue on a gold
basis, which will exchange its own notes against those of the
Rentenbank and the Reichsbank.

The general principles of this plan have been

communicated to Dr. Schacht, who is very clearly of the impression,
shared by the Experts themselves, that if it is put into
execution it will prove to be the most important step towards
the definite stabilisation of the German exchange and the
balancing of the Budget.

The Expert Committee will inform the Reparation Commission

that, in its opinion, the plan which the Committee will submit
to it should be put into prompt operation.

Dr. Schacht has informed the Committee that, in making

his plans for the formation of his Gold Bank, he is so arranging
matters as to facilitate its absorption by the Bank of Issue
which will be proposed by the Committee.

The Expert Committee will meet Dr. Schacht on the 18th

instant at Paris.

Dr. Schacht agreed to the text of the draft communiqué

and warmly thanked the Committee.

M. Francqui explained that the Committee wished to

Federal Reserve Bank of St. Louis

what it was doing from what Dr. Schacht wished to do.



ON nailu1R/ 19,1924.

The bank to be founded not to be a currency bank but a
credit and discount bank.

The share-capital to be at least

200 and at a maximum 400 million marks.

Up to 100 millions of the

capital to be -ubscribed by the Reichsbank.

The shares to be

subscribed by the Heichsbank called "A" to have a controlling
vote, thus enabling the Reichsbank at any moment to liquidate or
to take over the discount bank.

The subscription on the shares

of the discount bank to take place in Germany and in foreign
countries chiefly with the central banks and in Germany with the
banks to become included into the syndicate to be formed by the

Subscribers will be obliged to exchange their shares

for new shares.

However, the Reichsbank or the new bank envisaged

by the Experts will have the right, irstead of exchanging the

entire amount of subscribed shares, to reimburse part of them in
cash, but only up to 50 A.

At the time of liquidation the accounts of the Bank will

be duly checked by an auditor nominated by the Governor of the
Bank of England.

Profits or losses will belong to, or be borne by, the
Federal Reserve Bank of St. Louis

of the Bank.


bank envisaged by the Experts.

The above undertakings will be taken by the Reichsbank,
which will supervise the Discount Bank.

To this end, it will

send a letter containing such undertaking to Nr
The shares called "B", bearing a minor vote, to receive in

compensation a higher dividend than the 'A" shares.

The sub-

scribers to receive an amnesty for having disregarded the various
ordinances as to "flight of Capital", taxation, etc., up to the
amount subscribed.

The coupons of the shares to be free of

taxation, but not the income in the hands of German holders.
The shares to be on bearer.
count bank to be excluded. to
Federal Reserve Bank of St. Louis

Every political influence on the disThe German Government to be bound

grant new rights of issuing notes for the time of the

7 -


C. Owen Young, Esq.


Place Vend6me
P a r i s.

Dear Mr. Young:

As you know I have hurried to come here because I am only
too anxious to start the Discount Bank for reason of the present
German currency position.

The situation here is still very

much on the point and I have to act very quickly but at the same
time very carefully.

Now there arises one difficulty, which

I want to explain to you and on which I want your advice, if you
will kindly give it to me.

We decided in Paris that the Discount Bank should be controlled by the Reichsbank, as to enable the Reichsbank either to
liquidate the bank or to take it over.

In discussing the plan

with the German bankers and in outlining the prospectus of the
Discount Bank it had to be decided in what case and on what
conditions the Reichsbank will take over or liquidate the Bank.
As to the liquidation, this is easy to answer but as to the taking
over, it is not.

Cur intention in Paris was that in case of

taking over the Discount Bank the shareholders of the Discount
Bank should exchange their shares against the respective amount of


of the new Gold Currency Bank, the definite shape of which

- 8 -

whether the Reichsbank shall liquidate the Discount Bank or take
it over for the Currency Bank.

If this would be stated in the

prospectus nobody would subscribe, on the other hand it cannot

be concealed from the readers of the prospectus; so the only way
out seems to be to liquidate the Discount Bank.

However I do not

want the Reichsbank to undertake towards you two alternative
engagements, of which it is stated beforehand that only one can
be carried out.

I should therefore like to ask you and your

Committee to agree with me about the following statements of the
prospectus and of the Reichsbank respectively.
1. Statement of the prospectus:
The Reichsbank to control by tree shares A the majority of the

General Meeting of the Discount Bank.

The Reichsbank to hold

these controlling shares for the time of existence of the Discount
Bank, such majority to be entitled to liquidate the Discount
Bank any time.

2. Statement of the Reichsbank:

In case of an international agreement with the German Government

through which the formation of one German General Gold Currency
Bank according to the suggestion of the Experts Committee is to
take place, the Reichsbank will use all its influence to include
the Discount Bank into such scheme within the lines of our
Paris conversations.

I shall feel very much obliged if I could have an
Federal Reserve Bank of St. Louis

telegraphic answer from you on the subject.



Sub-Committee on lurrency

Minutes of a meeting held in Paris on March 3, 1924.
Sir Robert KINDERSLEY being in the Chair.
Were present:

Sir Robert Kindersley, G.B.E., (United Kingdom)
M. Parmentier (France)
Professor Flora (Italy)
M. Emile Francqui (Belgium)
In attendance:

M. Mathieu, of the General Secretariat.
Specially summoned:

Dr. Schacht and Dr. Meyer.


The Sub-Committee and Dr. Schacht agreed on the following

modified text of the note handed in by Dr. Schacht on February
19th 1924, on his Gold Discount Bank scheme.

"The Bank to be founded not to be a mere currency Bank but a

credit and discount bank.

For share capital, a maximum of 200

millions is contemplated, of which 100 millions are to be subscribed by the Reichsbank.


The shares to be subscribed by the

called "A" to have a controlling vote, thus enabling the

- 10 -

central banks and in Germany with the banks to become included
into the syndicate to be formed by the Reichsbank.

"The Reichsbank will thus have through the "A" shares a

mreority on the general meeting of shareholders of the discount

The Reichsbank will hold these shares which give it the


majority, during the whole period of the existence of the discount
bank; this majority will have the right to liquidate the discount
bank at any moment.

"At the time of liquidation the accounts of the bank will

be duly checked by an auditor nominated by the qovernor of
the Bank of England.

"Profits or losses will belong to, or be borne by, the

shareholders of the Bank.

"In case of the creation of a Bank of Issue in accordance

with the suggestions which the Experts contemplate making to
the Reparation Commission, the shareholders of the Discount
Bank will have the right at the time of the liquidation of the

Discount Bank, to subscribe at par, to shares of the new Bank
of Issue if, and when formed, for a

nominal amount equal to the

nominal value of their shares in the Discount Bank.
"The shares called "B" bearing a minor vote, to receive
in compensation a higher dividend than the "A" shares.


subscribers to receive an amnesty for having disregarded the

ordinances as to "Flight of Capital", taxation, etc.,

- 11 C;overnment to be bound not to grant new rights of issuing notes

for the time of the discount bank's existence.

The seat of the

discount bank to be in Berlin, its management to be in the hands
of the Reichsbank.

The discount bank to co-operate in foreign

countries with the central banks.

"In case and as far as the discount bank shall issue notes,

it can only do so for a maximum total of 100 million marks gold,
and in exchange for foreign currencies, it mast always be covered
by gold or foreign valuta up to at least 50 gib.

The Reich to

receive a share in the profits of the bank of 50 A of the remaining
profit after a cumulative dividend of 8 A having been paid to
the shareholders.

The remaining 50$

to be reserved to the

As to the question on what foreign valuta the

accounts and the notes of the bank shall be based, this will
have to be decided according to practical requirements."

These arrangements are arrived at with Dr. Schacht on the

understanding that he is prepared to do his utmost to facilitate
the amalgamation of the Discount Bank and the Bank of Issue
when formed, in accordance with the minutes of the meeting
of the 9th February 1924.


R.M. Iindersley
Dr. Hjalmar Schacht.

Report of the Organisation Committee for the
Bank to the Reparation Commission.

A letter is attached hereto signed by the President of
the Bank and a member of the Reichsbank Direktorium
undertaking to do what is necessary to exchange the shares
of the Gold Discount Bank for shares of the Reichsbank
and to proceed with the liquidation of the Gold Discount

Berlin July 11th 1924

Hjalmar Schacht.






To the Organisation Committee for th
Sir Robert IZindersley

Dr. Hjalmar Schacht.

?/e hereby beg to state that after the reo

the Reichsbank in accordance with the Dawes Pl

take all necessary steps to acquire all the sh

German Gold Discount Bank by exchanging them a

Reichsbank shares and to liquidate all transact
the Gold Discount Bank.

As to the Dollarschgtze we shall consider
it will be in the interests of the Reichsbank
acquire the outstanding balance by purchase in
market or by redemption in dollars at maturity

President of the

Board of Directors of the

BERLIN, December 23rd 1924.
(To the Members of the
General Board)

The investments of the German Gold Discount Bank, i.e.

the holdings of bills and checks, to add the bills rediscounted, slowly declined from week to week from 10.5 million
on November 23rd to 8.8 million

on December 15th.


liquidation of these credits has to be done with the necessary
care with regard to commerce and industry, concerned thereof.
As regards the conversion of the shares of the Gold Discount
Bank into Reichsbank shares, provided by the consortium
contract (between the Board of Directors of the Reichsbank and
the Consortium for the placement of the German Gold Discount
Bank shares) and by Bank Law, there is now a decision of
the Board of the Reichsbank at hand, published on 21st of
December in the press, purporting that the conversion has to
take effect on January 1st 1925 and that the amount of new
Reichsbank shares required for this purpose, has to be emitted
in the limits of the increase of capital, decided upon

all public and quasi-public funds shall be entrusted to the Reichbank alone, an

that in the meantime no new business shall be

entered into 4 the Gold Discount Bank without previous consultat'c

by the President with the General Council.


- 2 -

issue which might be set up in accordance with the recommendations
of the Committee".

On July 11, 1924, the Reichsbank Direktorium addressed

a letter to the Organising Committee, consisting of Sir Robert
Kindersley and Dr. Schacht, stating that "after the
reorganisation of the Reichsbank in accordance with the Dawes
Plan we shall

take all necessary steps to acquire all the

shares of the German Gold Discount Bank .... and to liquidate
all transactions of the Gold Discount Bank".

It would be absurd to argue that this latter meant

that as soon as "all transactions" of the Gold Discount Bank

were liquidated,

it should be free to enter into a series


- 3 7.

No objection was raised in Germany to this statement the
Federal Reserve Bank of St. Louis

Organising Committee and accordingly on August 3C, 1924,





Bank, which was to grant credits in sterling and dollars, was
gradually falling into desuetude.

The time seemed ripe for

allowing the Gold Discount Bank, having served its purpose, to
terminate its existence by a natural death.


Germany's foreign trade at the beginning of 1925 was again in
danger of being starved by a lack of credit, and, in order to
supply the deficiency, the General Council agreed on March 23,
1925, to a temporary resumption of credits by the Gold Discount

By the end of 1926, the Gold Discount Bank's holdings of

bills, which had been as high as £14,000,000 in 1924 and

£9,000,000 in 1925, were reduced at the end of 1926 to no more
than £380,400.

The specific purpose for which the General Council

had consented to prolong for a time the life of the Gold Discount
Bank appeared to have been achieved.

The German banks were now

in a position to furnish an adequate supply of credit for foreign

The necessity of continuing the Gold Discount Bank for

that purpose had passed.

Once more tha road lay open to final

The occasion was frustrated by a new and unexpected

extension of the functions of the Gold Discount Bank on which it
appears desirable to offer a few observations.
Federal Reserve Bank of St. Louis

Agricultural Credits.

The first of the new activities to which the Gold

- 7 -

disposal of Agriculture.

A large portion of the proceeds was

utilized to refund part of RM. 293,000,000 of Agricultural credits
maturing on November 30, 1926.

The rate was fixed at 7 540, which

was well below the rate current at that time.

The general effect of the operation may be pronounced

wholly salutary in so far as it tended to lower the rate of interest for long term loans, and to re-establish the German market

instead of the foreign market as the main source of supply for
borrowers on capital account.

The success which attended this measure should not be

allowed to obscure the objections to its repetition.


in times of emergency is expected of Central Banks, but the
leadership should be exercised direct and not through the medium
of an agent bank which may be acting in competition with private
and joint stock banks.
over has happily passed.

The emergency it was designed to tide
Seven per cent mortgage bonds (Pfand-

briefe) are now quoted at 102 to 103 and five per cent Pfandbriefe
at about 92.

Agriculture credit is now in line with long term

credit generally.

The intervention of the Gold Discount Bank is

no longer required and should not be repeated.

The supply of

credit for agriculture, as an argument for the maintenance of
the Gold Discount Bank, has lost whatever validity it may formerly

have had.


- 8 -

abroad, the short term money market threatened to become redundant.

Speculation on the Stock Exchange was rife and the

Reichsbank, owing to the scantiness of its portfolio, was powerless to adopt the usual procedure of contracting credit by the
sale of its bills.

An endeavour was made to produce a similar

result through the agency of the Gold Discount Bank which sold
Rs. 72,600,000 of its own Solawechsel at rates varying from 4i to


They matured in Larch 1926 when they were repaid with the

exception of Rm. 50,000,000 purchased by the Verkehrs-Kredit-Bank,
which, at the request of the latter, were renewed.

A second issue

of Rm. 20,500,000 was made in January maturing in April 1927.


may he noted further that on March 7, 1927, about Rm. 13,500,000
of Solawechsel
Federal Reserve Bank of St. Louis

were under rediscount from the market at the

- 9 19.

The question remains whether, apart from the legal consid-

erations to which we have referred, the transaction can be justified as being in accord with central banking practice.

In so far

as the Bank was exchanging its three months' Solawechsel for 3 to
5 year agricultural bonds it was lending "long" and borrowing
"short", a practice abhorrent to sound central banking.
need not labour that point now.

But we

It may be admitted for th


that, on the hypothesis that the Gold Discount Bank is a separate
and independent banking institution and that Solawechsel are good

delivery under Article 21, Lhere could be no objection on that score.


But, as has already been shown, the facts are the reverse of this.
The validity of the Solawechsel has been called in ouestion and the

Gold Discount Bank, far from being separate from the Reichsbank, is
in fact identified with it.

It is clear that, if justification for

the transaction is to be found, it must be sought not in the Law or
in central banking practice, but in the emergency conditions it was
devised to meet.

What were these conditions?

The money market had

got out of hand and, with only a limited portfolio of bills of its
Since then the situation has undergone a change for
own and no Treasury bills of the Reich available, the Reichsbank
The official bank rate is now in
better in two respects.
had no other means of control open to it than to create substitute
contact with the market rate and further ,ontrol is no lon
bills in the form of Solawechsel of the Gold Discount Bank.
Secondly, the _:teichsbank has been able to increas

stantially its holding of bills and may reasonably look to

future for a supply of Reich Treasury bills which would pr

have been available now but for the recent issue by the Gov

- 10 -

of an internal loan of RIM 500,000,000.

It will no longer be

necessary to secure control by the creation of substitute bills or

to continue the Gold Discount Bank for this purpose.

Public Deposits.

We now pass to the third and by far the most important new

activity of the Gold Discount Bank
quasi-public funds.

- the custody of public or

The subject bristles with difficulty but the

details are familiar to the General Council and all we need do
here is to refer to one or more of the salient and essential
features of a problem which still awaits solution.
Federal Reserve Bank of22.
St. Louis

The Reichsbank is the government bank and, as such, is

at its discretion is essential to an effective control of currency
and credit.

The difficulty of making control effective would be

greatly increased if the Central Bank were obliged like ordinary
banks to place funds on the market, without regard to the monetary
conditions of the time, in order to earn the interest it pays to
its depositors.

Whether it does so direct or throuzh the inter-

mediary of a subsidiary like the

Gold Discount Bank makes no

Quid facit per alterum facit per se.

the Gold Discount Bank can exercise a wider latitude than the
Reichsbank in its long term investments (cf. para 15) but the
limits to this class of business are narrowly fixed for deposit

As for the various short money markets, they are tending

to become more mobile and it is doubtful if any considerable
volume of funds could now be forced into one A.thout causing a
compensatinz outward flow of funds into another.

It may not be

irrelevant to point out here that the Gold Discount Bank, which
w. s originally created to finance foreign trade, is nova an active
competitor in the home ma-,.ket and, not content with the issue of

credits in Dollars and Sterling, is now granting them in Reichsmarks as well.
of the
Federal Reserve Bank of St. Louis

A settlement of the problem involved in the administration
public funds is urgently needed, not only because of their


- 12 -

Pending the time when obligations of this kind may be


- 13 -

means should be employed to make the transition as speedy and
simple as possible.

The Gold Discount Bank proved itself to be a

highly useful instrument during a difficult period.


it is desired if possible to lift the discussion of the future of
the Gold Discount Bank out of the plane of prior commitment,

whatever it may have been, and to place it on the broader ground
of central bunking principle.

The Plan, both in the Report of the Experts and in the laws
passed in accordance with it, placed about the Reichsbank the
safeguards and gave it the responsibilities essential to the
conduct of a central bank.

These safeguards and responsibilities

were expressed not only in general terms but in precise detail,
and the detailed prescriptions are to be found

not only in the

Report of the Experts, but in the communications of the Reichsbank
Organisation Committee to the ReparationsCommission and in the Bank
Law itself.

The Bank Law constitutes the charter of the Reichsbank,

and what is not there contained is ultra vir= for the Bank;


what is there forbidden is definitely prohibited to the Bank,
acting either by itself or through one of its exclusive instruments.

The separate existence of the Gold Discount Bank as a
corporation distinct from the Reichsbank is technical rather than

The Gold Discount Bank is the Reichsbank's exclusive
Federal Reserve Bank of St. Louis

and in carrying out the intents and purposes of the

- 14 the Reichsbank.

The convenience of the arrangement is undeniable,

and under colour of it the Reichsbank administration has perforn :ed

functions which are forbidden to it acting in its own person.
Lach one of the three principal functions exercised by the Gold
Discount Bank, to which we have referred above, would in whole or
in part be impossible of performance in the name of the Reichsbank itself.

Indeed, the facility with which the Reichsbank can

do thins through the Gold Discount Bank, which it would be restrained from doing directly, furnishes the main motive for the
retention of the Gold Discount Bank as an operating instrument.
The real identity of the two institutions opens the way
not to action within the law but to evasion of the law.


Reichsbank is limited to a sphere of business deliberately and
carefully defined and it cannot employ an instrument which is
de facIa substantially identical with itself, or, alternatively,
is wholly and exclusively its subordinate agency, to accomplish
purposes which are forbidden to the Reichsbank by the Bank Law or
unauthorised by that Law.

Any contrary conclusion renders all

restrictions of the Bank Law purely illusory and would leave the
7Zeichsbank more free to carry on business in accordance with its

unbounded and changing discretion than it was prior to the Experts'
Plan and the carefully conceived law of August 30, 1924.
more, the
Federal Reserve Bank of St. Louis


fundamental obligations of the Reichsbank as a central


- 15 -

as Dr. Schacht stated in his memorandum to the General


0)14 \-v1
is setter of



1 0)-2





) 2-









BERLIN, October 20, 1927


The Agent General for Reparation Payments,


The Finance Minister of the Reich.


My dear Mr Minister:

I am sending you herewith, in accordance with our understanding,

a memorandum under this date which I have prepared for the German
Government, for the purpose of drawing attention to the present tendencies of public finance and credit policy and to the dangers which
seem to involve for the German economy, as well as for the execution of the Experts' Plan.

In view of its general nature, I am also

giving copies of the memorandum to the Chancellor of the Reich and to
the Minister of Foreign Affairs.

I shall, of course, hold myself at your disposal for further
conversations, in case you should wish, after reading the memorandum,
to talk it over personally with me.
I am, my dear Mr Minister,
Respectfully yours,


Agent General for Reparation Payments.

1 encl.



Octoi-,r 20, 1927.


I am presenting this memorandum for the purpose of calling attention to the dangers involved in the present economic situation, in
the hope that by doing so fully and frankly at this time I may render
some service to the German Government and to the German economy, as well
as to the international situation generally.

I approach the problem from the standpoint adopted by the Ex-

perts Plan, and reiterated in the conclusion to my last Report, "that
what is in the interest of the German economy is also in the interest
of the execution of the Plan".

In considering the interests of the German economy, I should
assume that the general aim of Germany, as of other modern industrial
states, would be the continuous development of industry and commerce,

both domestic and foreign, with a view to the gradual improvement of the
standard of living of her people.

For this the most favorable con-

ditions internally would seem to be the constant cheapening of production,

acc=panied by such increase of wages as cheapened production will permit and as will neither increase prices nor the cost of living.


2 -

Rut the development of industry

prices particularly favor stable trade.

and commerce also requires a steady supply of new capital, based on
savings at home or borrowings abroad;

and under prevailing conditions

in Germany there is need not only for the creation of new capital, but
also for the rebuilding of the old liquid capital destroyed by the war and
lost by inflation.

In Germany, therefore, there is a special need and

a special incentive for saving


and for careful spending as well.


these conditions, sound and well-ordered public finance, which underlies
the whole economic life, is of the utmost importance.

From the standpoint of the execution of the Experts' Plan,


accept at full value the often-repeated assurances of the German Government that its settled policy is to do everything within its power to
fulfil the obligations it has undertaken,

The aim of the Plan was to

put the problem of reparation to the test of practical experience, under
a programme which, as the Experts said, "adjusts itself to realities".

It is fundamental to this conception that the German Government should
permit the Plan to have a fair test, and, while the test is in progress,
that the German Government itself should exercise prudence in the management of its affairs.

Recent developments in public finance do not appear to be in the
interests either of German economic life or of the execution of the
Experts' Plan,

The evidenc(4 in fact, are accumulating on every side,

and more rapidly within recent months, that the German public authorities are

developing and executing constantly enlarging programmes of expenditure


and of borrowing, with but little regard to the financial consequences of
their actions.

The rising level of public expenditure is already giving

an artificial stimulus to economic life, and it threatens to undermine the
essential stability of the public finances,

If present tendencies are

allowed to continue unchecked, the consequence is almost certain to be
serious economic reaction and depression, and a severe shock to German
credit, at home and abroad,

The remedies consist primarily in reversing the present tendencies
toward over-spending and over-borrowing, and applying instead a regime of
strict economy and of ordered public finance.

These are remedies which

lie largely in the hands of the German Government, and, if they will act
promptly and effectively, the Reich and the other public authorities still
have it in their power to prevent a crisis,

The economic situation, though

it is already showing signs of tension, does not seem as yet to have developed points of immediate danger.

Moreover, some of the new expenditures that

threaten the most far-reaching consequences are still only in the stage of
discussion, and have not yet been authorized by law.

In presenting this memorandum, it is unnecessary to go much into

Each of my public Reports as Agent General for Reparation Payments

has pointed to various sources of danger that seemed to me to have appeared from time to time;

and my last Report, dated June 10,1927, warned

particularly against the tendencies of budgetary and credit policy.


have also had numerous conversations on these subjects with the Minister of
Finance, the President of the Reichsbank, and, less frequently, with the


Chancellor of the Reich.

In the following pages, I shall endeavour

to bring matters up-to-date, with a review of recent events in public
finance and credit policy, and to indicate the relation of these events
to the economic situation in Germany, as well as to the execution of the
Experts' Plan.


The Financial Policy of the Reich.

In my Report of June 10, 1927, I made the following general observations on the German budget

"The point that stands out most clearly in the
budgets of the Reich is the constantly mounting level
of expenditure.
The problem of checking the rising
tide of Government expenditures has, in fact, become
acute, and it requires the closest attention, not
merely from the standpoint of the Experts' Plan but
in the interests of the German economy as a whole.
At the same time, it is clear that the essential stability of the German budget remains unimpaired, and that
the problems presented by the budget should yield
readily enough to a steady application of sound principles
of budget-making."

The upward tendency of the expenditures and commitments of the
Reich clearly appears from the following summary of recent events.
On December 17, 1926, the Reichstag voted a supplementary budget
for the financial year 1926-27.

This added about 1,000 million reichs-

marks to the expenditures originally authorized for that year, bringing
them up to a total of 8,543 millions.

On January 5, 1927, the draft budget for 192728 was submitted to
the Reichstag, carrying estimated expenditures of about 8,525 million


On February 16, 1927, the Finance Minister made his budget
speech in the Reichstag, outlining the financial position of the Government.

With regard to budget policy, the Minister said
"We must arrange to get along with what we have
even if we have to postpone and reduce expenditures
for things which are desirable and useful ***** Our
burdens are so great that we must take advantage of
every opportunity to save *****Our tasks during the
next few years will be very difficult and bitter***
Years of restriction and struggle are facing us."

With regard to administrative reforms he said:
"A definitive financial settlement (between the
Reich and the States and communes) pre-supposes not
only a rationalized State administrative system, but
also a private economic system which is not shaken by
With regard to reparation payments, he referred first to the agreement
made last year for the settlement of the supplementary budget contributions,
and then said
"I look into the future with grave anxiety.
the Dawes agreement our payments out of the budget and
for the service of Railway bonds and for the service of
Industrial Debentures will increase next year a further
432 million marks, and in 1929 and onwards by a still
further 290 million marks. At the present moment, in
spite of t'e best will, I see no possibility of providing these sums, to which there will be added, beginning
in 1929, supplemental payments on the basis of the
index of prosperity *****Germany will continue to do everything in her power in order loyally to fulfil the obligations she has assumed, but to this end she must be furnished with the necessary pre-requisites*****For us the
pre-requisite for the execution of the Dawes agreement
it the strengthening of our economic life."

In the same speech, the Minister went on to propose that during
the financial year 1927-28 further expenditures should be incurred by raising official salaries "to the extent of what is financially possible"; and
he referred also ti the importance of indemnifying those who had lost their

6 -

private property abroad in the war.

Following the Finance Minister's budget speech, the tendency
of the Government's policy seems to have been in the direction of increased expenditure and enlarged commitments,
In spite of the necessity for economy urged by the Minister,

authorizations of expenditures carried in the 1927-28 budget were in-

creased by 600 million reichsmarks before its final enactment on April 14,

The only important reduction was one of about 45 millions in the

appropriation for canal and other new constructions,

Taking the so-called

ordinary and extraordinary budgets together, the total expenditures authorized amounted to 9,130 million reichsmarks, as compared with estimated
expenditures of 8,543 millions in 1926-27 and actual expenditures of
7,444 millions in 1925-26, - an increase of nearly 1,700 million reichsmarks
in the two years.

Of this increase, about 540 million reichsmarks were

for reparation payments under the Experts' Plan, with 67 millions additional
as a reserve fund for the controlled revenues,

Both the 1926-27 and

1927-28 budgets showed an excess of current expenditures over current revenues, amounting to over 850 million reichsmarks in each year.

To cover the

1927-28 deficit, the budget authorized loans of 466 millions and appropriated 390 millions from surplus and reserve funds,

It also left undisturbed

outstanding authorizations to borrow to the amount of 571 million reichsmarks, to cover outstanding extraordinary expenditures for 1926-27,
In the midst of the budget discussions, on March 14, 1927, the
Finance Minister of the Reich appeared before the Taxation Committee of the
Reichstag to urge the passage of a draft law postponing for a further two


years the definitive settlement of the financial relations between the
Reich and the States and communes, and providing in the meantime for
increased guaranties by the Reich to the States and communes.

On March

17, 1927, I addressed a letter to the Finance Minister of the Reich,

pointing out a number of considerations suggested by the Government's
proposals and emphasizing their importance in connection with the fulfilment of the international obligations of Germany under the Experts' Plan,

not merely as regards the immediate present but more especially as regards
On April 9, 1927, the law was passed, substantially in

the future.

accordance with the Finance Minister's recommendations, with results for
the public finances that I have already summarized in my Report of June
10, 1927.

The Government of the Reich in the meantime had made another

important concession to the States and communes, by agreeing to assume, as
from April 1, 1927, practically the entire responsibility for advancing,

when necessary, the supplementary funds required for purposes of unemployment relief beyond those furnished by employers and employees, though up
to that time the States and communes had been obliged to furnish fiveninths of these supplements.

The present financial settlement between the Reich and the States
and communes cannot be considered a provident arrangement for the Reich;

and it is open, as pointed out in my last Report, to fundamental objections
of principle.

These criticisms are fully confirmed by recent events. The

States and communes are now drawing larger payments from the Reich than
ever before, and will get the principal benefits from any increased revenues
that the Reich may collect from the income, corporation and turnover taxes
in excess of the amount required to fulfil the guaranty already given,


- 8

the same time, the responsibility for taxation and public expenditure
seems to become more and more confused.

Notwithstanding their increased

transfers from the Reich, the States and communes are pressing new demands
for still larger payments to meet their constantly increasing expenditures,

and the Reich itself has added to the confusion by bringing forward new
proposals for expenditure which still further burden the budgets of the
States and communes.

After the adoption of the 1927-28 budget, the question of increasing the salaries of official: became active, and when the Reichstag

adjourned in July it was understood that increases of about 10 per cent
were under consideration.

But, on September 11, 1927, before a meeting

of Government officials at Magdeburg, the Minister of Finance announced
that he had suggested and the Cabinet had approved "a considerable increase in the rate at first contemplated".

The rates of increase, he said,

would vary from 18 to 25 per cent, and the total cost to the Reich would be
325 millions annually, of which 155 millions would be for salaries and 170
millions for pensions and similar allowances.

It is generally assumed

that the States and communes, the Postal Service and the Railway will all
make much the same increases.

The total cost is variously estimated at

from 1,200 to 1,500 million reichsmarks annually.

To provide for the

additional expenses which the action of the Reich throws upon them, the
States are already insisting that increased transfers of revenue from the
Reich will be necessary.

As for the Reich itself, it appears from the

discussion before the Reichsrat on October 13, 1927, that in the opinion of
the Finance Ministry the Reich will be able to meet the costs of the salary
increases in its own services during the coming year only if its hopes for
an increase in tax receipts are realized.


The salary proposals of the Government are noteworthy, not
merely because of the large expense which they entail, but even more because
they have been made on the most sweeping basis, and in the way most likely
to bring serious conseouences for the general economy of the country.

They are apparently intended to apply cuite as much to pensioners and retired officials as to officials on the active list, while even for the
active officials they appear to contemplate a general increase in salaries,
without any effective attempt at administrative reform.
It is not for me to express an opinion on the merits of the
salary proposals, but it would seem as if the German Government could have
served its own interests better by using such substantial increases as an

instrument for securing the reform in administration of which so many announcements have been made in the past two or three years.

It may not even

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

But as

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

In addition to these general increases in pensions and in the
salaries of officials, the Government of the Reich is advancing two other
measures which seem likely to involve large new expenditures, one, the
proposal to compensate German nationals for loss or damage to private
property during the war, and the other, a general school law for the Reich.
Neither of these measures has as yet been enacted into law.

The first of

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


reichsmarks; but the draft law has not yet been presented to the Reichste
and it is not clear what means of financing are to be adopted or how far
the budget is to be burdened with the proposed payments.

In this connection,

I have already suggested in my letter of August 29, 1927, to the Finance
Minister of the Reich, some of the considerations that would be raised
from the standpoint of the Experts' Plan by an external offering of preference shares of the German Railway Company; the same considerations, of
course, would apply a fortiori to any external loan of the Reich that might
be proposed for this purpose.

As for the new school law, no information is available regarding
the probable costs, and apparently little consideration has been given as
yet to its financial consequences.

But it is noteworthy that serious mis

givings are being expressed in many quarters in Germany as to the cost of
the new law, and that the States and communes have already given warnings
that they will not be able to meet the added expense from their own resources and will want more money for the purpose from the Reich.


October 14, 1927, the Reichsrat rejected the draft law for a variety of
reasons, after first approving an amendment that would require the Reich to
bear all the cost.

Since then, the Government has submitted the draft law

to the Reichstag, in its original form, with a statement from the Minister
of the Interior to the effect that it is immaterial whether the Reich or
the States have to bear the cost, because in any event the burden will fall
on the German economy.

The Government appears to have refrained, however

from making any estimate of the cost of the new law, on the ground that
this cannot be done until its provisions are finally determined and the
distribution of the cost becomes somewhat clearer.

I do not mention this series of new expenditures and commitments
for the purpose of passing judgment on any of them individually.


indeed, does not fall within the functions of the Agent General for
Reparation Payments.

The German Government, under the terms of the

Plan, is left free to prepare and administer its own budget, and it acts
This very freedom, however,

throughout on its own responsibility.

implies a corresponding responsibility for the natural and probable consequences of its own actions.

These, it seems to me, can be summarized

briefly, as follows:


The Reich, by failing to exercise proper

restraint in its expenditures, is endangering the stability of its budget, the establishment and maintenance of
which was the cornerstone of the Experts' Plan for the
reconstruction of Germany.

The situation at the moment

is somewhat relieved by increasing revenues and declining

But any reaction in business would be likely

to reduce the revenues of the Reich and increase its liabilities for unemployment relief.

In these circIlmntances, and

with increasing reparation payments to face, this does not
seem to be the time to burden the budget with new permanent

With its own expenditures constantly rising, the

Reich naturally finds it difficult to induce the States and
communes to bring their budgets into proper order, particular-

ly at a time when the measures which the Reich itself


- 12 -

has initiated may add very greatly to their expenditures and throw many of their budgets still further
out of balance.

The States are already demanding

the reopening of the financial settlement for the pur-

pose of securing still larger transfers of revenue
from the Reich.

And the expected reduction of State

and communal real estate taxes which it was announced
in April would be one of the conditions of the financial
settlement, now appears more and more unlikely of realization, while in some cases, at least, increased local taxation may be necessary.

The result is a general lack of effective con-

trol over public spending and public borrowing.

In con-

sequence, unsound public finance is increasingly prevalent
in Germany; and the money which is so badly needed for
the development of German agriculture and industry is being absorbed, through taxes and public loans, in a scale
of public expenditure which seems to be incurred without

regard for the loss of liquid capital which Germany has
suffered and the urgent need of recreating this capital
through economy and careful spending.

Still more broadly, in their effects on economic

life, the mcasurcs taken by the Reich and other public authorities are tending strongly toward increased costs of
production, increased prices and increased cost of living.
The result i2 to negative, in large measure, the

benefits that might be expected to accrue from the
process of rationalization which German business and
industry have succeeded in carrying out since the
stabilization of the currency.

The tendency toward

higher prices already exists, partly as a result of the
high customs duties on imports of many staple products;

and it would be greatly stimulated if, as now seems probable, the Government's salary proposals should lead, on
the one hand, to demands for similar increases in general

business and industry, and, on the other, to increased
railroad tariffs, and the like.

Manifestly, all these

developments tend to raise the costs of production and
thus to diminish the capacity of the German economy to
compete for export.

As the experience of recent months

has abundantly shown, they operate also on the other
side of the German balance of payments, by greatly stimulating German imports from other countries.

Rising in-

ternal prices almost always have this effect, and under
present conditions the tendency is enhanced by the additional purchasing power which is being placed in the
hands of the public by the increasing expenditures of the
Reich and the States and communes.
The consequences of Reich financial policy, which have been summarized above,

must be considered also in connection with the financial policies of the
States and communes, and with the currency and credit policy of the Reichsbank.

There is naturally a close relationship between them, and an intimate

connection between the result(' attributable to them.


- 15 -

September 20, 1926, to the Finance Yinister of the Reich, with respect to
the Prussian external loan of 1926, and my further letter of November 12,

1926, as Chairman of the Trustees of the German External Loan, with
respect to both the Prussian and the Hamburg loans.

The foregoing figures for the domestic and foreign loans of the
States and communes, amounting altogether to about 2,600 millions, leave
out of account entirely their short-term or floating debt.

It is impos-

sible from the available figures to make a close estimate of the volume
of this debt, but from such casual evidence as has developed it seems already to be very large.

In part it represents loans directly obtained from

foreign bankers, in part loans obtained from German bankers but from
foreign funds borrowed by them, and in part ordinary domestic banking

The question underlying State and communal borrowing is not whether
individual loans should be placed in the domestic market or in the foreign
market, or at short or long term, but whether they should be placed at all.
To divert the borrowing of the State3and communes from one market to the
other, or to refuse it in one form and permit it in another, does not go to
the root of the difficulty.

Over-borrowing at home or abroad proceeds from

the same source, namely rising public expenditures, and it is by reducing
expenditures to the minimum that relief is to be found.

On the other hand,

balanced budgets and economical administration will give the best assurance
that when credit is needed for essential public purposes it will be forthcoming.

It is recognized, of course, that the Reich does not control the
States and communes in these matters.

But, when the States and communes

- 16 -

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

And under

the Constitution itself the Reich has a unique opportunity and even

responsibility for leadership, not merely because of its large transfers
of revenue to the States and communes but also because of its powers to
prescribe the fundamental principles and main outlines of their laws in
many matters of taxation and public finance.

The force of these consider-

ations has been recognized to some extent in the efforts that have been
made for the past two years and more to supervise the foreign borrowings
of the States and communes through an advisory organization established
for this special purpose.

These efforts, for whatever reason, have not

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

A new and truly

effective supervision, based primarily on the principle of controlling
public expenditures, is urgently needed at this time, both in the interests
of German credit and to safeguard Germany's economic recovery against the
dangers of over-stimulation and subsequent reaction as a result of overspending and over-borrowing by the public authorities.

The German Government's announcement of October 7, 1927, is
greatly to be welcomed, not only because it indicates that a revised procedure for supervising the foreign borrowings of the StatPP and communes
is under ccnsideration, but also because it points out the sound basis for

financial -oft= by stating that "in view of the entire present situation
in Germany any expenditure that is not urgent or economic, whether made

17out of foreign loans or from other sources, must be avoided".


is still not clear what practical measures will be taken to apply this
fundamental test to the spending policies of the public authorities, but
it is of the utmost importance that the Reich should exert a firm leader-

ship in this direction and that its leadership should have the sincere
and comprehending support of the States.


Credit and Currency Policy.

The present calendar year has also been cne of expansion in the
circulation of the currency and in the use of short-term credit, particularly that of the Reichsbank.

Any discussion of credit and currency must

necessarily center upon the policy of the Reichsbank, which is charged un-

der the Bank Law with the duty of regulating the circulation of money and
with providing for the utilization of available capital.

But however ex-

plicit the law may be, the financial operations of the Reich, the States
and the communes have themselves assumed the proportions of a separate
credit policy, frequently exercised in opposition to the credit policy of
the Reichsbank.

In effect, there have been two credit policies, both

operating at the same time and one often neutralizing the other.

The net

result of these different policies, though opposed to each other in origin
and purpose, has been in the direction of expansion, as is likely to be th
case when the public authorities are on the side of expansion and spending
The Reichsbank, for its part, reduced its discount rate on January
11, 1927, from 6 to 5 per cent, shortly before the offering of the 5 per
cent internal loan of the Reich.

The purpose, it was stated at the time,



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

The 7 per cent rate fixed on Cctober 4,

recognized this situation and was itself the consequence of events which
dated back to the spring.

The financial authorities of the Reich, the States and the communes, by working at cross purposes with the Reichsbank, have mad,, the wh ole

situation more difficult to manage and have contributed to the expansion.
The part played by rising budgetary expenditures and borrowings by public
authorities, involving heavy drafts on credit both foreign and domestic, has
already been discussed.

The Reich internal loan of last February, furthE r-

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

The various steps which have bee

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

Another disturbing influence which must be

mentioned is the management of the public funds and the public banks, whi ca

has been discussed at length in each one of my published Reports.

It is

unnecessary now to go into detail, but it is clear enough on the factstha t
the administration of the public funds and the public banks has tended VE ry

strongly to diminish the authority of the Reichsbank, and to deprive it


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

It has tended, no less directly, to depriv

the regular German banking system of its normal resources and to divert

great quantities of liquid funds into channels which ran counter to sound
credit policy.



-20The credit policy of

he bank of issue and the public finances

cannot for long be operated successfully on divergent lines; and there
would seem to be every reason, in the general interest, for formulating
and putting into effect a definite and comprehensive plan that will assure a properly coordinated policy.

The need for the adoption of such

a policy, based upon principles of ordered economic growth, and avoiding
undue use of credit, is particularly clear under present conditions, in
order that the prevailing expansion may not be carried to the point of



I have attempted to bring together in the foregoing pages the
accumulating evidences of over-spending and over-borrowing on the part of
the German public authorities, and some of the indications of artificial
stimulation and over-expaneion that are already manifesting. themselves.

These tendenoiea, if allowed to continue unchecked, are almost certain, on
the one hand, to lead to severe economic reaction and depression, and are
likely, on the other,

to encourage the impression that Germany is not

acting with due regard to her reparation obligations.

Internally, it is evident that an economic crisis would have the
most discouraging consequences for the German people, and that it would mean
a serious set-back to the reconstruction of German economic life.

It is

now nearly four years since the first stabilization of the currency, and
over three years since the adoption of the Experts' Plan.
period Germany has made remarkable progress.

During this

She has re-established her


erred t

in 1%It. Ler ui




BERLIN, November 5, 1927.

IV a 7229


The Finance Minister of the Reich


The Agent General for Reparation Payments.


My dear Mr Gilbert,

With reference to my letter IV A 7229 of October 21, 1927, in which I
acknowledge the receipt of your memorandum of October 20, 1927, suggested in
the course of our conversation at the end of September, 1927, as a basis for
further negotiations, I beg to send you herewith, in the name of the Government
of the Reich, a reply to this memorandum.

I entirely appreciate your intention to call the attention of the German
Government to the dangers which in your opinion may arise to the German economy
and the execution of the Experts' Plan through the present tendencies of public
finance and credit policy.

I recognise in particular that your statements are,

in accordance with the Experts' Plan, based upon the view that the furtherance
of the German economy serves at the same time the successful execution of the
Experts' Plan.

As you will see from the attached reply, the German Government is in
entire agreement with you in many points, whereas in regard to other points it
is compelled to say that it takes a different view of the present tendencies or
regards them as not quite so critical as you do.

With you, I indulge myself in the hope that the exchange of our views
will, by throwing light on the difficult questions discussed in it, render a
general service.

Looking forward to an early continuation of our oral exchange of ideas,


I remain, my dear Mr Gilbert,
Yours very sincerely,




German translation of the memorandum.

BERLIN, November 5, 1927.


The memorandum touches upon a number of most important questions connected with German national life and treats them from economic and financial

The Agent General for Reparation Payments certainly does not

fail to recognize that a large number of these questions have at the same time
great political importance; but, for reasons connected with his competence, he
refrains from considering this aspect,

He has repeatedly pointed out that it

is outside the limits of the duties entrusted to him to interfere in internal
matters and thereby to assume a responsibility for maintaining in Germany
financial order and security, which the Experts' Plan expressly left to
Germany herself.

The German Government is entirely in agreement with the

Agent General in this view, it therefore, in agreement with the Agent General
regards the memorandum as the occasion for a frank exchange of opinions arising out of the necessity for the constant cooperation on a basis of mutual
confidence which it has always emphasized.

In the following statements it will be attempted, in accordance with the
method of the Agent General, to explain the views of the Government of the
Reich toward the problems in question primarily from the economic and financial point of view.

Such procedure,however, makes it necessary to state that

this method of consideration cannot always be complete and cannot always


suffice for the formation of a faultless judgment.


of the creditor countries, it cannot be a matter of no importance whether the
Germany, from which the payments under the Experts' Plan are to be expected
is a country full of political excitement and internal unrest because a
number of questions of the vital importance of which the German people and its
Government are convinced, have not been solved or have been inadequately solved.

This view, moreover, is entirely in accord with the fundamental ideas of the
Experts' Plan.

There is

no doubt that there may be dissimilar opinions at

home and abroad on the question whether political necessities demand a solution as also in regard to the time and nature of the solution.

It is the

affair of the Government of a country to find the reconciliation between
these divergert


On such a balance depends not least of all a

decisive factor in the fulfilment of all international obligations, the will
of the nation as a Whole.

Since the Plan

entered into effect, the

Government of the Reich has done everything in its power to maintain, for
the payments under the Plan, the character of payments agreed upon by treaty,
with the result that no payment has been omitted and no obligation has been

To continue the test of the Experts' Plan on the same basis

will have to be the aim also of future collaboration between the Government of
the Reich and the authorities of the creditor countries.

The Government of

the Reich considered it necessary to draw attention to the above considerations, which it is convinced are known to the Agent General himself, because
the memorandum of the Agent General might in certain places give rise to
misunderstandings in the minds of those who are not in a position fully to
realise the meaning and the object of the exchange of opinions,'


Development and Status of Economic Life.

The memorandum of the Agent General states the dangers which threaten
the German economy and the execution of the Experts/ Plan as a result of overspending and over-borrowing by the German public authorities.

It considers

that the results of this credit policy will be increased costs of production,
greater difficulty in the formation of capital, artificial stimulus to
economic life and over-expansion as also increases in prices and in the cost
of living.

The Government of the Reich is aware that,

in view of

the peculiar development of Germany during the war and the period of
inflation,dangers may arise.
meet such dangers.

For its part, it will use all its strength to

It cannot however attribute the strains apparent in the

present economic situation primarily to the reasons enumerated by the Agent

Like the Agent General, the Government of the Reich regards it as the
aim of its economic policy to develop all productive forces in order to raise
the standard of living of the German people and at the same time to enable it
to fulfil the obligations incumbent upon ito
The Experts' Plan described the period preceding the beginning of the

Reparation year 1928-29, before the normal reparation payments begin, as a
breathing space for the restoration of the economy.

It also foresaw that this

restoration cannot be effected solely out of the savings of the German economy,

which accumulate only gradually, but also requires the assistance of foreign
credits, especially as the German economy is not freed from reparation
payments during the period of restoration, but, on the contrary, larger and
larger amounts Fre being withdrawn from it for payment to the creditor States,"


Since the stabilization, the German economy has been working with all
its strength to reconstruct itself.

The improvement in the economic posit ion

thus attained proves that the funds which have flowed into economic life f rom
domestic and foreign sources have been used rationally.

The replenishment of

the working capital of trade, the renewal of technical apparatus now being
carried on, and the extension of plant and the construction of new plant
testify to this.

This work of reconstruction has also made it possible to

reemploy 1.5 million people who were out of work at the beginning of this

During this period, the German economy has not only extended its

apparatus of production and supplied the labour necessary for the increase d

production, but it has above all satisfied also the needs of the masses wh 0
have in turn come back, on the whole, to normal wages.

he Th

efforts to increase exports were successful will be shown later.

The formation of capital within Germany itself is not inconsiderable, as
shown by the deposits in the savings offices, for example, and the total
deposits in all credit institutions.

It has however by no means sufficed; in

addition, the inflow of considerable amounts of foreign capital remained

The Agent General rightly emphasises that the peoples of other countries
have cooperated to no small extent by making their savings available in
liberal measure, though in the well-understood interests of both sides.

The amount of foreign indebtedness is not disturbing in view of the
magnitude of the values given as security and the productivity of the inve st
ments made out of it

Insofar as short-term foreign credits have been tak en

up and are not set off against short-term claims on foreign countries, the
anxieties arising out of them will have to be removed by the earliest
possible consolidation of these credits.

For the short-term indebtedness of

the public authorities, the Government of the Reich is planning a comprehensive consolidation in cooperation with the States and the communes.


Government of the Reich has already taken preparatory steps in this direction
with the collaboration of the President of the Reichsbank.

The private

economy is also making efforts in the same direction.

Foreign credits and loans were naturally followed to a corresponding
extent by imports of foreign goods, especially as Germany is largely dependent on foreign products to meet her requirements in raw materials and foodstuffs.

The Government of the Reich regards it as a particularly important

duty to reduce the necessity of importing foodstuffs by increasing the intensiveness of agriculture.

But the solution of this problem requires time

and in particular the use of large sums of capital for reducing indebtedness,
for technical readjustments and improvements, for agricultural improvements
(Meliorationen) and settlement on the land as also for strengthening the

position of agricultural labor.

It is at any rate the aim to work toward

a reduction in the deficit in the trade balance, by approaching the problem
from both sides.

There are already indications, moreover, that German in-

dustry is on the right road in this respect.

Since July of this year, the surplus of imports of raw materials and
semi-finished goods has fallen by an average of 16 % monthly.

During the

same period, there has been an increase in the surplus of exports of finished
goods of about 24 per cent.

Even though seasonal influences may to some

extent have played a part, this change in direction indicates nevertheless
that the German economy is realizing more and more the present limited capacity of the internal market to absorb goods and the necessity of strengthening exports.

The Government of the Reich has on many occasions during the

last year, called attention to the importance of the latter viewpoint to the
work of the German economy.


Germany has been able continuously to increase her exports since the

The average monthly figures of the net goods trade (reckoned

in pre-war values) are:

1924 = 428 million RM; 1925 = 550 million RM;

1926 = 612 million RM; 1927, January to September = 617 million RM; and 1927,
September, 692 million RM.

Exports of finished goods alone have increased from 332 in 1924, 394 in
1925 and 423 in 1926 to 446 in 1927.

In September, 1927, the amount of ex=

ports of finished goods was 502 millions reichsmarks.

In order justly to

appreciate the significance of these figures, one must remember that this

increase was simultaneous with an internal conjuncture and has exceeded the
figures which had just been attained during the preceding depression which
favored exports.

In such a development, extent and speed cannot always be

adjusted from the outset to the last degree of expediency:

Even if the develop

has in some places been excessively rapid, as the Agent General thinks

he has observed, it has by no means assumed such a considerable extent as
would give reason to fear a crisis.

The quantity of goods produced has in-

creased relatively more greatly than prices have risen.

Furthermore, the

price increases of 1927 are due to a considerable extent to the fact that
important goods considered in drawing up the index figure have gone up in
price on the world market.

In any case, an over-expansion of economic life would be attributable
only to a very small degree to measures of the public authorities.

Taxes and

internal loans create no additional purchasing power; the expenditure of funds
procured in this way represents merely a readjustment of existing capital.

The foreign loans and foreign credits of the prblic authorities, however considerable they may be, have, in view of tFe magnitude of the values involved
in the German economy as a whole, at any rate had no decisive importance for

- 7

an artificial stimulation of economic activity.

For the rest, they have


explained below, served predominantly productive objects.

The attention of the Government of the Reich is constantly fixed upon
the development of trade conditions, in order to ensure the greatest possible
uniformity in developments and to enable the maintenance of a stable pricelevel.

In view of the enormous and threatening increase in unemployment, it

sought in 1926 to help economic life get over the dead point.

As soon then

in the spring of 1927, an upward movement in the German economy was to

be observed the Government of the Reich stopped its measures for providing
work and did what it could to retard

the rate of speed and the extent of

the expenditures of the public authorities.

It is at the

sulting with the Economic Council of the Reich in order to create for the
future better legislative and administrative bases for assuring greater
reserve on the part of the public authorities in times of trade prosperity.

It is well-known that the Government of the Reich is furthering, to the best
of its power, the development of statistics and the work of examining into
trade conditions because it recognizes their importance to a timely under=
standing of the symptoms underlying trade conditions and the motive forces of
economic life

The measures to promote exports taken during the past period of trade
depression, such as the granting of export credits and export credit
insurance, have been developed by the Government of the Reich also during
the current year of improved trade conditions, insofar as this was financially
possible, because the Government, like the Agent General, places special
emphasis on a steadily growing increase of our exports.

Its cooperation in

the World Economic Conference, in the results of which the German Delegation
had a considerable part, is one of its activities in this connection°

- 8 -

The Government of the Reich is working with especial emphasis to complete
and to conclude its system of commercial treaties.

It may point particu-

larly to the conclusion of the Franco-German and the Germano-Jugo-Slav commercial treaties.

It is endeavouring to conclude commercial treaties with

Poland and Czecho-Slovakia.

In addition, the Government has introduced

measures of autonomous reductions of customs rates, in order, also from this
side to prevent a rise in the German price-level.

Finally, during the past

few days, by submitting a proposal in Geneva for the suppression of all export and import prohibitions prejudicial to economic activity, it has shown
its readiness to cooperate in the facilitation and reorganization of international trade.

As the Agent General himself emphasizes the effect of these

measures on Germany's exports depends largely on the extent to which other
countries, and especially Germany's chief creditors, show their willingness
to follow on their part a commercial policy which opens their markets to
Unfortunately, matters are still far from

German goods in similar manner.
satisfactory in this respect.

The most varied ob

German exports from developing in the way that is absolutely necessary to
equalize the German trade balance and in addition to realize the surplus upon
which in the long run, according to the Experts' Plan itself, the ,ransfer of
reparation payments depends.

The German Government observes with grave

anxiety this development in the countries constituting its export markets.
The German economy is still far from able to meet the deficit in the trade
balance out of its own resources.

As already remarked, not only is a further

and greater growth of exports necessary to achieve this, but above all imports
must be restricted by increasing agricultural basic production.

But the

position of agriculture is characterized by the extraordinary amount of postwar indebtedness, Which has increased to a total of RM. 6.7 milliards as a

- 9

result of unfavorable economic conditions in the years following the breakdown and the stabilization of the currency.

Only a part of this debt, i.e,

2.5 milliards, has been consolidated into long-term real credits.

The greater

part has been taken up at short -term and there is no possibility of meeting
from current revenues debts carried forward from previous years.


that portion of the floating debt which cannot be met out of current revenues
must therefore be consolidated into long-term real credits.

In this process

it will not be possible to evade a resort to foreign money in order thus to
smoothe the way for a more rational and profitable agricultural output and
thus to create the necessary condition precedent to a decrease in the importation of foodstuffs and to a revival of the home market for commercial products and to provide for increased absorption of domestic labor on the labor

Not the least important factor in the reconstruction of the German
economy is the maintenance and strengthening of German labor.

This proves

the productive nature of even the increased expenditures for German social

The impoverishment caused by war and inflation has caused a dis-

proportionate increase in the number of workers in Germany.

Furthermore the

German labor market is subject to far greater fluctuations than before the

For these reasons a systematic labor market policy and an effective

unemployment relief have become indispensable today.

The weakening of the

health and power of resistance of the population, the increase in the number
of insured persons and persons in receipt of social annuities as a result of
the war, the increased cost of medical relief and the loss of capital

suffered by the insurance organizations have called for increased expenditure
in respect of social insurance and social relief.

10 -

It is furthermore a natural duty of the German people to provide for
war-wounded and the survivors of those who fell in the war in such manner as
to protect these war-victims from want.

In spite of all expenditure thus far

only slow progress is being made in eliminating the most urgent shortage of
dwellings, as may be seen from the census of dwellings throughout the Reich.
Grave danger to the health and morals of the workers and their children is
to be feared, and the economy will be prevented from obtaining adequate
skilled labor, so long as this housing shortage continues.

The Government of the Reich knows itself to be in agreement with the
Experts' Plan in taking all these measures in the field of social relief,
for the Plan expressly recognises the necessity of preventing the standard
of living of the German population from sinking below the level of other

The greatest part of the observations in the memorandum on the problem
of credit and currency policy addresses itself to the Reichsbank, which is
directly responsible under the Experts' Plan.

The objections made against a

credit policy of the public authorities distinct from the credit policy of
the Reichsbank may be disposed of by the statement that, in negotiations
between the Reichsbank and the authorities in question, an agreement has been
reached on a joint leadership of monetary policy, including important matters
connected with the investment of public funds.
the case, endeavors are being continued.

Insofar as this is not yet

The Government of the Reich too is

of the opinion that any thwarting by other administrations of the currency
and credit policy followed by the Reichsbank must be avoided in the interests
of the uniformity and effectiveness of Reichsbank policy.

As it has done

hitherto the Government of the Reich will meet together with the Reichsbank
at the briefest possible intervals with a view to keeping the monetary

and credit policy in harmony with internal and external policy in general.



11.2211.191ment and S.IAIMQSIAngEillanCiaLL

I. Fundamental,

The reconstruction of the German private economy required and to some
extent still requires, as stated above, measures of an extraordinary nature.
The same is true of the reconstruction of the public economy, which neglected
most urgent matters, especially during the inflation period, and must make
good long-standing omissions. A return to the normal conduct of the public
finances presupposes a clear knowledge of the burdens incumbent upon them.
The Government of the Reich has been long and most energetically striving to
create such clarity. The problem involves the solution of questions connected
with the revalorisation, with the compensation to be paid to the war victims
who have suffered liquidation and forcible damage, and with the salary reform.
Other questions in this connection are the continuation of measures to
simplify administrative procedure and the tax system, as well as the
collection of statistics on the revenues and expenditures of all the public

The Government of the Reich is pressing for a settlement

of these problems in such a sequence of matters as will make it possible at the
end to find the definitive financial settlement, i.e., a financial settlement
that will not prove ineffective in practice because it is built up on a
public economy full of unsolved problems and uncertain burdens.

Only tills,

through a well-ordered financial administration, can that stability in the
conduct of public affairs be guaranteed which will put Germany's private
economy in position to produce genuine surpluses.

The Finances of the Reich.

1. An account of the general financial position and its development
since 1924 was given by the Finance Minister of the Reich in his speech of
October 26, 1927, to the Budget Committee of the Reichstag.

A printed copy of

12 -

Reference will only be made here to a few figures

this speech is attached.

likely to make clear the actual tendency of development.

In the first place,

one figure which clearly shows the extent of Germany's financial liabilities.

Germany's total war charges, i.e., the reparation payments together with all
internal liabilities which the Reich had to assume as direct results of the

war, call for over RM 35 milliards in 1927, or almost two-thirds of the total
ordinary expenditures and more than one-half the total ordinary and extraordinary expenditures of the Reich,

The increase in the total expenditures from 1925 to 1927 is mainly due:

to increased reparation payments,


to the cost of social insurance and unemployment relief,


to assistance to war victims,

d) to the debt of the Reich.

For these items alone the increase in expenditure amounts to more than
RM 1,500 millions, i.e., more than the amount of the increase in total expenditures after deduction of the transfers to the States and communes.
2. Ordinary Budget. -

In the ordinary budget approximately 2,6 milliards

are required in 1927 for the above-mentioned war burdens alone, insofar as
these are a charge on the budget, or approximately half the total ordinary
expenditures of the Reich, which without the transfers to the States amount to
about RM 5.8 milliards,

This does not include the sums which date back to the

inflation and became necessary in order to overcome the most urgent distress
caused by the collapse of the currency,

If we restrict ourselves to the war

charges at the amount given, the importance of these burdens becomes clear
when it is remembered that for 1913 the cost of the total administration of
the Reich was only 2.7 milliard marks.

When therefore, in spite of the

enormous sum for war charges which did not exist in 1913, the German Reich now

- 13 manages with an ordinary budget of R.i 3.8 milliards,

s.n in no case

mean budgetary conduct without regard to the reparation obligations.

It has

already been explained that the increases, insofar as they refer to social
outlay, likewise serve to promote the object of economic reconstruction.

The 1928 budget, which alone must carry 400 millions additional for
reparation payments, is being compiled on principles of the strictest economy
The Government of the Reich considers it at the present time a paramount duty
effectively to oppose continuous increases in expenditure, even in the
ordinary budget.

For it realizes very well the dangers which an unrestricted

rise even in justifiable expenditures would inevitably entail for the budget
of the Reich.

3. Extraordinary Expenditures. -

So far as the expenditures of the

extraordinary budget are concerned, they have been in special measure the
subject of the criticism of the Agent General.

The Governme

unreservedly agrees that there is indeed, in this extraordinary budget, cause
for grave anxiety as to future financial conduct.

It does not seem to the

Government, however, important at the present moment to raise the more
theoretical question as to whether an extraordinary budget as such seems
justified or as to whether possible technical faults might be found in the
distinction between the two budgets hitherto customary under the special
circumstances of Germany.

In any case, radical measures are required in orde3

to prevent the borrowings of the Reich from growing still further and to
consolidate the existing debt.

In regard to the first point, it is the

intention of the Government of the Reich to prevent, as far as possible, any
increase in borrowing requirements for the new budget year 1928 and to ask fo]

further authorization to borrow, if at all, only to a very small extent and
for unavoidable necessities.

As to the second question, concerning the

14 -

consolidation of existing loan requirements, it must first be remembered
that there is at present no prospect of placing loans.

On the other hand

some of the expenditures which present loan authorisations are intended to

cover are absolutely necessary and have moreover largely ben covered by
advances from the receipts of the ordinary budget.

Under this heading come

expenditures which were destined in the past to combat the catastrophic

consequences of unemployment and which have found justification in the
results already obtained.

But meanwhile the task has been undertaken of

subjecting the still outstanding part of these expenditures to a careful,
critical inspection, and in some cases of entirely abandoning them.


as this is not possible, the only thing left to do is systematically to
liquidate the actual programme of expenditures at such reduced speed that


is brought into harmony with the financial position and the capital market.

As was already done in the present budget year in relation to the previous
fiscal year, the total remaining after the above-mentioned inspection will
be taken over into the 1928 budget.

Even this, however, will not mean that

the funds will be actually expended in full in 1928; the contemplated
retardation will, on the contrary, have to extend over a longer period.


these proposals are successfully and calmly carried out, the period of high
extraordinary expenditures, the explanation of which lies mainly in the
stabilization crisis, may be looked upon as closed.


The Finances of the States and communes.

The judgment of the public financial administration of the States and
communes is very specially difficult for anybody who does not have the
historical development clearly before his eyes, not only on account of the
special duties imposed on these bodies by the war and post-war periods, but
also because the German communal system has always been entrusted with


special duties of a private economic nature.

The Government of the Reich

agrees with t::16, Agent General that the contracting of loans for administrative

purposes by the States and communes entirely forbids itself on the home
market, owing to the shortage of money, and also on the foreign market because
of the extreme caution necessary.

It is inherent in autonomous administration

that here and there expenditures are unavoidable which are not in keeping with
the law of strictest economy.

Such expenditures are certainly regrettable.

But they represent no considerable magnitude as compared with total expenditures.

The duties of the communes are not confined to administration.


contrast to other countries, the communal system in Germany, in particular
during the last third of the 19th century, developed in such a way that the
communes became responsible in not inconsiderable measure for the satisfaction of certain needs of the private economy.

This applies primarily to the

establishment and adequate administration of the public utilities.


opposed to countries in which even in earlier years sufficient private
capital was available, the supply of the population with gas, water, electric
light and the means of transportation necessary for the public has for
decades been, to a very large degree, practically placed in the hands of the
German communes.

No proof is needed of the fact that loans which serve the

necessary development and rationalisation of these services are productive in
the broadest sense, in so far as in this way private enterprise in the
commune is enabled to undertake new and fruitful activity.

On the other hand,

in making these productive expenditures and in considering the borrowing
desired to finance them, the communes must of course give due consideration
to the general situation in the German Reich.

In the opinion of the Government

of the German Reich, it would be entirely improper if a commune should try to
proceed in such matters on the basis of its own int erests and without regard

- 16 -

for the general currency and credit conditions of Germany.

The meaLI)res

which the Government of the Reich has taken, in cou,,ection with the borrowing
policies of the States and communes, Fre explained elsewhere.

A detailed enquiry into the loans contracted by the German public corporations shows that the figures publicly discussed do not justify the
conclusions frequently drawn from them in regard to the financial conduct of
these corporations.

In spite of the fact that if, for example, as is done

also in the memorandum, the external loans of the public corporations of
Germany since 1925 are estimated at 1,600 millions and the conclusion is
drawn that the public administrations have contracted as many loans as trade
and industry, an exact enquiry into the loans and the purposes for which they
were contracted shows the following picture:
In the period from January 1, 1925, to September 30, 1927, the Advisory
Office dealt with the following external loans:

a) Communal loans



584,965,200 r.r

b) State loans


550,500,000 RM

c) Agricultural loans (RentenbankKreditanstalt)


241,000,000 RM

d) Industrial loans (with State
or Communal guarantee)


253,608,750 RN


1,630,073,950 17.1

This survey shows that the total of 1,600 millions mentioned for public loans
includes those of the Rentenbank-Kreditanstalt, i.e., credits borrowed for
agriculture which alone total 241 millions and likewise credits for private
industrial concerns to the amount of approximately 254 millions.

it necessary at once to deduct about one-half milliard from the 1.6 milliard,
It may be pointed out further that, when making a comparison with figures for

17 -

non-public loans, the memorandum leaves agriculture entirely out of account.
The comparison requires however a further comprehensive explanation, if the
character of the loans contracted is examined in detail.

The following

tables, showing the objects of the loans with the sums demanded, will make
this clear.

In the period from January 1, 1925, to September 30, 1927, the following
applications and recommendations were made:

Communal loans:


State loans:





Distributed as follows:






Distributed as follows:


approx. 193,643,200
Means of transport "

Water (Hamburg)
Sea ports
Land clearance
(land improvements

Joint loan of the
Savings Bank and
Giro Association






mill. RM.



Used chiefly for electricity, gas, and water;
distributed among approximately 160 associations of communes.

The above figures show that the recommendations of communal and State
loans have been confined exclusively to those the proceeds of which were to
be used for productive purposes.

This applies also to the relatively small

amount of approximately RM 29 millions which is not itemized, but is included
under the heading "Miscellaneous".

For the most part the loans contracted by

the States and communes are intended for purposes similar to those served in
the natural course by the loans of industry.

The entire 1.6 milliards have

therefore benefited the reconstruction of the German economy and have not


served to increase that administrative outlay of the public corporations
from which the memorandum expects dangers,

So far, moreover, as concerns the budgets of the States and communes,
the memorandum repeats the criticism of the existing financial settlement
between these corporations and the Reich.

The Government of the Reich feels

that for its part too it may at the outset refer to the discussions which have
already taken place and to the statements made by the Finance Minister of the
Reich in the budget speech of October 26, 1927.
however, required on some points.

Special explanation is,

The Experts' Plan avoids imposing on the

Reich definite regulations as to the nature and date of the conclusion of the
financial settlement.

To show this, reference may be made to the frequently

mentioned passage in the Report:

"We do not pretend to be in a position to make detailed recommendations; the subject is a complicated one and involves the consideration
of social and political factors many of which have deep roots in
historic traditions,"
This fundamental idea has lasting justification.

been explained already that it is impossible to build up a definitive
financial settlement on the basis of a national economy not yet rationalized,

the capacity of which it is difficult to estimate and the agricultural
position of which is continuously unfavorable, in favor of public administrations which are as yet unrationalized,

A premature settle

upon the Reich permanent sacrifices which it will certainly be possible to
avoid in a subsequent solution under normal conditions.

When the present

shares of the States in the income and corporation taxes are attacked also
because they assure to the States a share in the growth of national prosperity
this conception can hardly be said to do entire justice to the historical
development of the German finances and the special characteristics of a
financial administration such as that imposed on Germany by the Experts' Plan.

- 19 When the new constitution was being drafted, the Reich took care to er..,are

an increase in its financial powers corresponding to the charges it Las to

Since 1919 it has not ceased to exercise its influence toward making

the financial system more uniform and clear.
over for itself the great personal taxes.

Thus already in 1919 it took

It claims the whole of the tax on

real and personal property, and in the case of the income tax and corporation
income tax it returns to the States only three-quarters of the proceeds which
formerly went in full to them and their communes.

As the R

ble for the fixed charges of the Experts' Plan, it has to rely to the widest
extent on those taxes which are relatively least affected by economic
fluctuations (taxes on consumption).

This fact was recognised, moreover,

when the securities under the Experts' Plan were assigned.

There then remains

no other way but to leave to the States a considerable part of the taxes
which adjust themselves to the ups and downs of economic development, with the
result that in good years the States are able to fulfil their cultural and

economic duties, whereas in bad years they must restrict their activities,
while the Reich continues to pay reparations.

Accordingly, if the provisional

financial settlement gives due consideration to the necessary security for
reparation payments, the Reich would be violating its obligations if it did
not take precautions against establishing its financial settlement too
hastily on inadequate foundations

The financial statistics necessary for the

definitive settlement, as to the importance of which the Government of the
Reich entirely shares the Agent General's views, have in the meantime been
expedited with the special acceleration consistent with the necessary care.

The German financial statistics for the fiscal year 1925 are on the point of

The most important part of them, the revenue statistics (taxes),

as well as the calculation of the additional requirements of the Reich, the
States and communes, are already completed; further publications are

immediately impending.

Concurrently with these statistics Germany has

compiled the financial statistics for the financial year 1913, 12 years ago.

The conclusion of the preparatory statistical work is no less essential than
a return to normal economic conditions in order to find a definitive

financial settlement which will protect the economic interests of Germany as
well as the objects of the Experts, Plan.

It is a natural demand, and one which neither the States nor the independent legislative bodies dispute, that in questions of public finance the
Reich should assume the leadership.

This also applies in respect of credit

policy, particularly insofar as in this connection the relation of Germany to
foreign investing countries is concerned.

Such leadership

rightly pointed out in the memorandum, be successful only if sincerely and
comprehendingly supported by the States and communes.

The extent to which

the provisions of the German Constitution are applicable here may be left out
of discussion in this connection.

At any rate the Government of the Reich is

devoting its greatest attention to the development of the financial affairs
of the States and communes and is taking care that the principles which it
considers right for itself are likewise observed by them.

Practical proofs

of this are afforded by the agreements on the foreign borrowing of States and
communes, which have just recently formed the subject of fresh negotiations
and the substance of which is known to the Agent General for Reparation

The most recent agreement was based on the decision of the Reich

Cabinet of October 7, 1927, already mentioned in the memorandum, which demanded that in view of the entire situation any expenditure that is not urgent
or economic, whether made by means of foreign loans or out of internal re=
sources, must be avoided.

21 -

Aside from constitutional obstacles, a direct control over the finances
of the States and communes for the purpose of examining financial conditions
as a whole meets with difficulties originating in the diversity of the publi
administrations concerned and in the diversity of the economic, political
and cultural factors which have to be taken into account.

The Government

of the Reich recognizes it to be its duty to bring this difficult problem
to an early solution which will take into account the well-understood
reconstruction and entire interests of Germany.


The Pending Bills.

A special word is required by the three Bills in which the Agent Genera
sees a special burden of the Reich budget and an increased pressure on the
budgets of the other corporations, namely, the salary reform, the final war
damage law and the school law.

1. The salary reform undoubtedly demands not inconsiderable funds; thene
however are not inconsiderably smaller than is assumed by the public.


amount required annually for the whole body of German officials, including
expenditure on the Railway and Postal service, may be estimated at RM 1,250
millions in round figures.

This sum will, however, be reached only if the

States and communes adopt the Reich settlement in all respects and without

Of the total sum, somewhat over RM 300 millions falls to the

share of the Reich.

But in considering this latter sum it must be remembere

that only the smaller part represents salaries of officials proper.


major part, viz., RM 170 millions, is intended for the victims of the war.

It is impossible to answer the question of increasing all these payments in
the affirmative or negative solely from the standpoint of financial policy.

On the contrary, this very question is one in the decision of which quite


different standpoints must have a part.

It is a case of protecting a very

large section of the German people from the most serious disturbance and of
restoring its confidence, partially shaken, in the guardianship of the State
This consideration plays also a special part in the case of war victims.
There is no need to draw upon sentimental reasons of a moral obligation and
social sympathy to justify the increases for those who were severely disabled
through the service of their fatherland.

The necessity of the increases

over the present admittedly quite inadequate rates of pay is justified by the
given political considerations alone.

The work of reconstruction must be

endangered if the State cannot give the most severely afflicted section of
the population even enough to preserve them from need and to secure the
standard of living guaranteed by the Experts' Plan and hitherto withheld.
The same applies to

Moreover, they are the persons on whom

the State has to rely in the execution of its will and whose attitude toward
it and its existence is of the greatest importance to the views of the natic n
in general-,

All circles of economic life too agree with the Government that

there can be no more serious impediment to the work of reconstruction than
the decline of German officialdom, renowned for its devotion to duty and its
integrity, into a state of unreliability.
tain the great asset of an official class.

Germany has every reason to mainThe present bill is nothing more

than the fulfilment of promises constantly reiterated by various Governments


The officials have subordinated their urgent needs to the higher standpoints
of the national welfare in praiseworthy manner,

They cannot reasonably be

put off any longer with further promises at a time when the work of reconstruction of the public administration must come to a certain conclusion,whe n

no distress in private economic life is observable in the degree that hitherto
existed, and when the state of the public finances permits action,

In regar


to the last consideration, it is pointed out that for the current financial
year the necessary funds are available as the result of savings arising out
of unemployment relief because of the improvement of the German economic

For the coming period adequate cover will be provided by the

receipts which may be expected from taxation, to which the salary reform will
also contribute, and in respect of which details are furnished in the speech
of the Reich Finance Minister mentioned several times above.

For the States

and communes the question lacks uniformity because financial circumstances
are not uniform everywhere.

It may be emphasized once more that for

purposes of salary reform neither an increase in the rates of taxation nor
even a rise in the tariff rates of the Reich Postal Service or the German
Railway Company is to be expected.

Naturally, a reduction of total requirements for salaries, by measures
of reorganization, is kept firmly in mind in connection with the salary bill,

Nothing however can be accomplished on these lines if the officials themselves do not collaborate in all necessary measures to this end with the most
unselfish devotion to duty and if they are not at any rate to some extent
relieved of constant apprehension that their existences are endangered.


Government of the Reich has for a long time been considering, particularly in
collaboration with the Reich Commissioner of Economies, a rational development
of its administrative apparatus.

In these questions of the political

structure of Germany, natural developments must not be violently pushed
forward nor hindered by undue timidity.

Like the Reich, the States and

communes will, not be able to avoid the pressure of economic development,

which necessitates the strict concentration of all forces and the simplification of the structure of these forces in all branches of private and public
economic life.

There are three goals which were indicated in the Finance



Minister's speech.
Reich itself,

of th

Firstly, the simplification of t1'

This has been undertaken on a large scale; the work will be

continued unceasingly and in closest collaboration with the Reich
Commissioner of Economies.

Secondly, the creation of sharp boundary lines

where the spheres of the functions of the Reich and the States overlap.
Here there are greater difficulties.

Since the first days of the stabiliza

tion, it has been tried to clear matters up here with a view to avoiding
double work.

Much has been done in this sense.

The creat

unemployment insurance under independent administration, which eliminates
such a border area from the dispute over competence, may be recalled.

Further work along these lines must be done so that really only those dutie

fall to the Reich which am runctiom_ c

the :thole German nation or which

single State cannot fulfil at all or only inadequately.

The third goal re-

maining is the simplification of the administrations of the States and
communes themselves, among whom valuable endeavors to continue the work in
this field are already voluntarily shown.

Nor is there any lack of schemes

which promise to materialize at an early date.

Mention need only be made of

the bill for the standardization of taxation, based upon the idea of overcoming the confusion of several tax administrative apparalises and of having
similar transactions performed bkra single administrative organ.

In the pro-

vince of supreme administrative jurisdiction also an endeavour is being mad e
to simplify the administration by setting up a Reich Administrative Court.
It is naturally the object of the Government of the Reich to attain similar
results in other spheres.

The necessary steps to this end have already been

In view of the entanglement of these things with the constitutional

structure of the German Reich, difficulties arise which cannot be thrust
aside merely by a reference to financial expediency.


- 25 -

required to find a solution which will not substitute new and greater
difficulties and frictions for those eliminated,
2. Final War Damage Law. - In connection with the final war damage law,
no undue claims are tc-ce made either on the capital market or on the taxpayer,

Merely insofar as the proposed use of certain assets of the Reich, i.e.,
primarily the interest on and proceeds of the sale of the preference shares
of the German Railway Company, is not sufficient for the purpose, will a call
be made on current budget funds for the relatively low balancing amounts.

Insofar as special questions of technical finance are concerned here, the
Government of the Reich reserves the right of further discussions with the
Agent General,

As the Agent General is aware, the Bill itself is a conse-

quence of the measures taken by Germany's former enemies and of the provisions of the Treaty of Versailles,

Article 297 i required Germany to indem-

nify her own nationals on account of these measures and in this manner the
liquidating countries were released from the obligation to pay compensation,

Those whose property was liquidated have been awaiting settlement of their
losses since 1919,

Wide circles of the German population have become in-

creasingly uneasy at this course of events,

To intervene here and to do at

least what can be done in accordance with the weak financial resources of the
Reich towards settling a fraction of these damages and promoting most
essential reconstruction, is an urgent necessity,

3. The School Law. at all in the near future.

The costs of the proposed school law play no part
For the first three years there will be no

additional charge in any event,

After that time, it is a question of

practical execution to what extent costs will arise and how great they will
be; in any case, this will largely depend upon the financial position of

- 26

those public administrations which are to assume the additional costs
There is no good foundation whatever for the exaggerated figures


published in this connection.

The school law is a solution to questions which are most intimately
bound up with the cultural traditions of the German people

- a solution

which is assured by the constitution of the Reich and which is especially
urgent, since under Article 174, paragraph 1 of the Constitution, the States
are unable to reorganize their education system by means of their own
legislation until the enactment of this Law.

As regards the effects of the additional expenditure entailed by the
three laws, accordingly, the German Government cannot recognize the conclusions of the memorandum.

It believes it has made clear that there is no

reason to fear in any way a threat to the principle of budgetary equilibrium,
which, like the Agent General, it regards as the corner stone of the Experts'

Within the budget, the payment of the reparation charges is more

than amply covered by the pledged revenues.

It must not be left unmentioned that the payments involved by the final
war damage law and the salary settlement, unlike the reparation payments
transferred abroad, do not themselves weaken Germany's capacity to pay the
reparation charges.

Here there are merely certain temporary readjustments of

purchasing power unlikely to have any economic effect on the conformation of
German imports or to result in any economically disadvantageous restriction
of exports.

In the foregoing the German Government has clearly set out its view of
the financial situation and of the probable productivity of the German

It remains only to clear up a misunderstanding that appears to

exist as to its view, which has never changed.

The memorandum mentions



budget speech of February 16th, in which the Finance Minister of the Reich,
referring to the reparation obligations of the next two years, stated that

"at the present moment he did not yet see any possibility of our being able
to pay these amounts "
present moment

But the translation in the memora
"At the

I see no possibility of providing these sums."


translation omits to render the word "yet", which according to German
linguistic usage has a decisive influence upon the meaning of the sentence.

When this faulty translation appeared in the foreign press, steps were taken
to correct it by reference to the official Reichstag protocol.


The attitude of the German Government toward the execution of the London
Agreement is clear.

With the Agent General, it regards the Plan as a means

of making a practical test of the solution of the reparation problem.
intends to contribute its part toward a fair test.
duties and sacrifices involved in doing so.
thus far in this consciousness.


It is fully aware of the

The German Government has acted

Its measures, explained in detail in the

foregoing, are intended to serve to promote the construction of a normal
national and political system, without which a further successful execution of
the Experts, Plan is hardly possible.

This aim includes the supreme endeavour

to preserve the fundamental pre-requisite of the Plan: equilibrium in the
budget of the public administration.

After the explanations given, even for

the outsider there can be no justification of the impression that "Germany is
not acting with due regard to her reparation obligations" and that the "German
financial policy of the past year has not been in the interest of the reparation obligations of Germany".

In particular, insofar as the cooperation of

the Government of the Reich in the work of the Transfer Committee is concerned,

from what that Government has done in practice during the last few years

- 28 -

there cal, be no doubt as to its real'ress to aid within the limits of a
ecol.cmic and financid policy.

The settlement of the Experts' Plan,

with its sharp distinction between the internal payment of reparations and
their transfer abroad, has been justly regarded by the whole world as the

greatest step forward in the reparation question; the positive duties which
the Plan places upon the German Government in respect of transfer are precisely delimited in the Plan (Annex VI).

The Government of the Reich affirms

that it has never artificially restricted the possibilities of transfer;
moreover it denies any intention of ever doing so in future.

The real tests

as to whether a genuine transfer within the meaning of the Plan is possible
in the long run are still to come.

As the Agent General himself aptly

remarks, and as will be seen from the statements of this memorandum, its
realisation depends largely on the economic policy of other
The Government of the Reich believes it should not close this memoranc
without giving expression to its firm hope that the confidence in the loYll

cooperation of all those concerned upon which the Experts' Plan was based
will remain the unshaken foundation of future collaboration.



Finance Minister of the Reich.

Copy No.

Confidential iAemorandlam


Members of our organization have asked for our opinion on the transfer
question which has been discussed in the press from time to time, and particularly
lately, in relation to the Davies Plan and reparations and the payment of debt service
on Germany's external loans.
''fie think it is not feasible to attempt to incorporate in a memorandum a

synopsis of this question.

It is, and all along has been, recognized as a very

large question and we consider it one which is hardly susceptible of being briefly
are reciting in this memorandum certain important details in this


situation, believing that such a statement may be of general aid, but it should be
borne clearly in mind that this recital is in no way intended to be a summary.
Article 248 of the Versailles Treaty places a first charge for reparations payments upon the entire assets and revenues of the German Reich and its constituent states.

The enforcement of this charge has been suspended during the

operation of the Dawes Plan.

The primary purpose of the Dawes Plan was to restore the credit of
Germany both externally and internally and at the sar:Le time to permit the largest

feasible reparation payments.
The Dawes Plan was made effective by :'hat is known as the London Agree-

ment, executed August, 1924.

Under the Plan the Transfer Committee has charge of

the transfer of German reparation payments to the creditor powers.

S. Parker Gilbert

is Agent General for Reparation Payments, and is Chairman of the Transfer Committee.
Under the Dawes Plan reparations payments are made by the German Government to the Transfer Committee, in marks.

It is stated in the Plan that reparation

Payments, in marks, are the definitive act of the German Government in meeting its
financial obligations under the Plan.

It is clearly understood in the Plan that the

duty of transferring marks into exchange for payment to various of Germany's creditors
is the duty of the Transfer Committee and not of

.hc German Government; and it may be

noted in this connection that the Transfer Committee shall not purchase exchange in
order to make transfers if the stability of the German currency is thereby threatened.
It is clear that the Plan itself contemplates that the transfer of the entire amount
of reparations from German marks into other currencies may not be possible at all
times or to the full extent of such payments, and a system, therefore, is set up
whereby accumulated untransferred marks nay amount to five billion marks, after which,
reparations payments are to be readjusted downward in order not to exceed this
amount of untransferred reparations.

In the event of "financial manoeuvres", so called in the plan, either
by the Government or by any group for the purpose of preventing such transfers, the
Transfer Committee may take such action as may be necessary to defeat such manoeuvres
and may waive the five billion mark limit mentioned clove.

Moreover, the Plan pro-

vides that the Government and the Reichbank shall undertake to facilitate in every

reasonable way within their power the work of the Co=ittee in making transfers of
funds, including such steps as will aid in the control of foreign exchange. This is
one of the provisions of the Plan which has been most under discussion.

Another phase of this matter which might be mentioned is that loans to
Germany seem to have been distinctly contemplated by the Plan.

It is probably not

too much to say that loans to Germany by the United States as well as to some extent
by Europe were regarded as essential to the successful working out of the Plan.
The two major tasks under the plan are (1), for Germany, by taxation or
otherwise, to provide sufficient marks to meet reparations payments as stipulated;

and, (2), for the Transfer Committee, with or without the aid of Germany as the case
may be, to transfer these mark payments into other currencies for reparation payments.
As to the first question, Germany's ability to pay in marks, although we express no
opinion are impressed by the views of certain people, whom we regard highly, that

there is no substantial doubt of Germany being able to do so, providing, of course,
that the German- economy is enabled to function in a more or less normal way.

0 Ow


It has been recognized from the inception of the Dawes Plan that at some
time or times during its operation questions would be raised about the transfer of
reparations and the payment of Germany's external debt service and that discussions
would, or at least might, take place about these euestions; but so far as we know,
nothing basically new in the Plan is disclosed in t'-:e current discussion or anything

which might not well have been contemplated at the time the Plan was inaugurated or
at any time subsequent thereto.
":e believe it has been generally assumed by the Banking fraternity in

the United States that regardless of any difference in view as to the technical
priority rights of reparations or debt service, from a practical viewpoint, a way
would need to be found whereby debt service is paid, unless confidence is to be
destroyed and a very critical situation created in all of Europe.
We believe it is inadvisable even to attempt to take any position from
a market viewpoint respecting the German securities which are outstanding. There Ian
be little doubt that in this, as in many other situations, there will be times when,
from a market viewpoint, the bonds will be either a good purchase or a good sale. 77e

assume it has been generally accepted that securities having the intrinsic merit of
various German issues floated in this market only yield the high interest rate which
they do because of the political and other considerations in-olved and because of
possible, or even probable, market fluctuations incident thereto. The total amount of
German securities which has been floated in this market beginning with the
P110,000,000 of Germany's external 7s is approximately ,1,100,000,000 requiring from
the point of view of international debt service and transfers today, a relatively
small amount.

The loans .:hick we ourselves have originated have been appraised and

set up, we believe, with the most meticulous care; and other issues floated in this
market, we must assume, have likewise been so handled. Under these assumptions it has
been, and continues to be, our belief that the good. German dollar loans, and so far

as we know, all such loans outstanding in this market will be paid principal and

Nov. 29th, 1927.


Mr. Roland W. Boyden of Rope, Gray,
Boyden & Perkins, who was formerly un
official representative of the United
States on the Reparation Commission,
delivered an address before the Academy
of Political Science in the City of New
York on November 18th. The following is
an extract from his address:

"The recent discussion about our advances to Germany have centered about
one point in particular.

What would happen to our non-government loans to Germany

if they come into competition with Germany's reparation obligations?

Suppose that

some time there should not be enough foreign exchange available, will the use of
exchange to meet non-governmental obligations be restricted?
"Te have on this point to deal with the powers of the German Government,
its obligations under the Treaty of Versailles and the Dawes plan, the powers of the
Transfer Committee under the Dawes plan, and tho powers of the Reparation Commission
under the treaty and the Dawes plan.

"The Transfer Committee has paver to make transfers, i.e., to purchase
exchange, but only to such extent as in its judgment does not endanger Germany's

currency stability. It cannot restrict the purchase or use of foreign exchange by
Germans for other purposes.

it can, of course, make suggestions to Germany herself

and Germany is under a general obligation to co-operate in making reparation transfers

"Germany herself has sovereign power to place legal restrictions on
exchange transactions.

Such efforts are usually in the long run futile, as well as

harmful, and they are now quite out of fashion.
"The Reparation Commission's present pomers seem limited to the priority
given to reparations by 1-rt. 248 of the Treaty of Versailles which seems limited to

the assets and revenues of the Reich and the constituent states.

Even this is not

strictly a prior lion, but Illat is technically knot:a as a "floating charge", not

applicable hen there is no default, and there is in my judgment no likelihood of
default, for Germany can certainly pay the marks to the Lilies.

The fact that

reparation payments, after being paid in marks, cannot be transferred is not a



There are other features which seem to safeguard Germany's non-governmentri

obligations against the possible application of Art. 248, but we need not go further.
"This rough analysis of the legal possibilities shows no cause for alarm.
But as a matter of fact it is hardly worth while to consider the legal technicalities
of the situation.

The fundamental safeguard is the obvious fact that it would be

financial folly for ,,nyone to place obstacles in the way of providing exchange for
the service of these non-governmental loans.

Germany's credit is bound up with them.

Any failure to meet them would destroy that credit.
on Germany's credit.

Reparation payments are dependent

It took five years after the 1rmistice to drive this lesson

home and make the Davies plan a reality.

It is inconceivable that any government should

ever want to learn that lesson over again."

One.of the most interesting of the books on the Dawes Plan and Reparations has recently been released.

It is "The Dawes Plan and the New Economics" by

Geo. P. Auld, formerly Accountant General of the Reparations Commission.

E. Stair.

Nov. 29th, 1927.

f.or of 'I/ 4 b- 7





The introduction of the draft Bill relating to salaries gives me an
opportunity of indicating the broad outlines of the general position in regard
to the financial policy of the Reich.

I cannot do this without glancing at

the development of our finances since 1925.

I regard it as the more neces-

sary that both at home and abroad apprehension on the score of our tendency
towards increased expenditure is being expressed.

My object is to explain

the factors which have led to this increase in expenditure, and which

- I

may say at once - have for the greater part shown themselves to be the result
of inevitable development.


The development of ordinary and non-recurrent expenditures between
1924 and 1927 is as follows (I base my calculations here for 1924/1926 on
the budget results including the outstanding balances and for 1927 on the
budget estimate):

these expenditures amounted in 1924 to 4.3 milliards, in

1925 to 4.95 milliards, in 1926

5.7 milliards and in 1927

5.76 milliards.

This shows that the expenditures increased between 1924 and 1927 by about
milliard, the most rapid increase being between 1925 and 1926 (about 750

It should be remembered, in connection with this tremendous

increase, that 1924 cannot really be taken as a starting point or as a
typical year for purposes of comparison.

The position was not stable enough

at that time for us to be able to regard 1924 as a normal budget year.


over, we have since 1924 been labouring under the necessity of making good


what was destroyed during the war and the Inflation.

The Reich had recovered

from the worst of the economic crisis, and had to devote that year to reconstruction and building up what had been destroyed.

In addition, there was

the anxiety in regard to the most precious possession left to us
capacity of the German people.

- the working

This work of reconstruction has inevitably

led in the last few years to increased expenditure.

The draft bills now in-

troduced by the Government of the Reich are part of this work and, only when
this development has in some measure been brought to completion, will it be
possible to speak of a normal budget which excludes any further increase in

I will now, if you will allow me, give a survey of the principal items
of increased expenditure in the last few years:

the expenditure on social

insurance and unemployment relief amounted in 1924 to 165 millions, in the
following years to 422 millions and 698 millions respectively;
is estimated at 615 millions.
expenditures since 1924.

for 1927 it

That means another tremendous increase in

No one can say that, having regard to the economic

situation which lies behind us, especially the period of terrible unemployment, this expenditure was unnecessary.

Expenditure on interest and sinking

fund of the public debt of the Reich amounted in 1924 to 200 millions and increased in the following years to 105 (?), 340 and 486 millions respectively.

This represents an increase of nearly 300 millions, which is mainly due to
expenditure in respect of loan liquidation.

Reparation payments amounted in

1924 to nil, in 1925 to 146 millions, in 1926 to 433 millions and in 1927 to
831 millions

- an increase of more than RM 800 millions as compared with

Those are only the budgetary payments;

the expenditure on social

relief and pensions amounted in 1924 to roughly 1 milliard, and in the following years to 1.4, 1.45 and 1.47 milliards respectively

- an increase of


approximately RM 400 millions.

These four items

an increase in the budget charge of about 2 milliards in 1927 as compared with

- an increase which must generally speaking be regarded as inevitable.

Against this there is a gradual falling off of internal war charges, which
amounted in 1924 to RM 999 millions, and in the next years to only 393, 305
and 176 millions respectively.

Let me amplify these figures, which speak for

themselves, by one more consideration.
rather looser sense

If we understand war charges in a

- that is, as including, besides the reparation payments

and so-called "internal war charges", war and military pensions, expenditure
connected with the ceding of territories, the Occupation and disarmament as also
other outlay arising out of the war -

it is seen that the amounts thus shown in

the budget of the Reich in respect of which there are no corresponding items
in pre-war budgets make up an extraordinarily high percentage of the total
expenditure of the Reich.

The war charges in this sense amount in 1927 to over RM 3i milliards,

that is rather more than half the total expenditure of the Reich, or RM 57
approximately per head of population.

On the other hand, the charge per head

of population in respect of the total expenditure of the Reich in 1913 amounted
to about M 41, or only about 7 /lOths of the expenditure in this financial year
in respect of war charges only.

These brief and rough indications are, I think, sufficient to show that
the increase in expenditure as compared with before the war and between 1924
and 1927 was and is to a large extent inevitable and in no way points to extravagance.

It is admitted that here and there there has been an increase in

expenditure which could have been avoided or which cannot be reconciled with
principles of extreme economy, but on the whole the increase in expenditure is
a result of the war, and, as I have said, determined by the necessity of

- 4 -

reconstructing everything that was destroyed during the war and the Inflation.

We have, particularly during the last few months, undertaken a considerable restriction of expenditure policy in the current financial year and
introduced a system of permanent control of expenditure, so that the
of strictest economy may be meticulously observed.


This work of reconstruction

discussed above includes the drafts announced by the Government in February of
this year and introduced subsequently.

I have already pointed out that,

with regard to the fact that the salaries of the officials have remained con
,iiderably below the salaries before the war in real purchasing power, the con

sequent distress and debts of the officials which have been increasing from
year to year and the resulting dangers to the State, an increase in the rates
of remuneration of the officials is incontestably necessary and brooks of no

This is not a fresh additional charge but a making good of the

failure to increase salaries in the last few years, with a view to maintaining
the working capacity, contentment and integrity of the German officials:
it is in fact an expenditure on reconstruction of undeniable political importance.

In the draft Bill, the economic position has been taken into account,

as it had to be.

Consequently the Government of the Reich could not publish

the draft on April 1 or July 1,1927.

It is this need of taking into account

the economic position which has prevented us from introducing the draft at a
time when it was not altogether possible, in view of the economic position, to
see to what extent expenditures could be covered.

If the draft is intro-

(raced at a moment when the measures for the simplification of the administra-

tion have just been introduced but not yet fully applied, it must be remembered
,hat those measures are only possible pith a really vital staff of officials,

who are not burdened with anxiety as to how they are to make both ends meet,


The same is true of the final Law for the liquidation of war damages.

Here again, it is a duty to make good what had inevitably been omitted in
this connection owing to the strained position of the finances and the ex
I would point out that, according to

c:essive obligations upon the Reich.

the Government draft, this will not entail a very great increase in the
charges in respect of the current budget, but that the additional expenditure is to be covered by utilisation of property of the Reich.

It is

quite a mistake when it is represented in foreign countries that a yearly
expenditure of RM 1 milliard will be necessitated for this.

As a matter

of fact, this sum is what is needed to meet the total capital requirements
of the country.

If I may be allowed to touch on the subject of the Education Bill,
Lhe introduction of such a measure is demanded by the constitution of the
Reich and consequently also represents an unavoidable duty.

In how far

the Education Bill before the Reichstag involves an increase in present
,tharges cannot yet be estimated.

It must be the aim and object of us all.

to carry out the provisions of the Education Bill as to assure the keepflg of any additional expenditure incurred by the public departments con-

aerned within the narrowest possible limits.
charges are involved for three years.

In any case no increased

The question does not therefore

arise at all as far as the current budget and the next two financial year,:
are concerned.

I would however like to say a word in regard to the over=

estimates which have been disquieting public opinion in the last few days,
a figure of 600 millions and even more having been mentioned.

One may ask

why this Bill was introduced in this (current) year of all others and why


1927 should have been burdened with the Bill relating to salaries of
officials, the Bill on the liquidation of war damages, and the Educatloo

Bill, why the Finanzausgleich had to take place at the beginning of this
financial year, why a skeleton law of the Reich had to be issued and why
an unemployment insurance Bill has been drawn up

- all of which Bills are

causing more or less apprehension in the public mind and involve a heavy
budget charge.

It would have been much pleasanter for me as Finance Mini

ster of the Reich if I had not had to undertake all this work during the
current financial year and a distribution of the work could have been effected here also.

There has however been no such distribution.

On the

other hand, we are in the last year of the so-called recuperation period the year of transition as far as our charges under the Dawes Plan are concerned.

The Government of the Reich was of opinion that for all these

reasons the matters in question should be dealt with now, in the current
financial year.

In regard to the question of cover, I would like to emphasize the
fact that the cover for the expenditure involved by the new settlement of
the salaries question can be found both in 1927 and 1928 in Germany withou t
any increase in taxation, exclusively by means of economies on the expendi.

ture side and the surplus revenues provided by the taxes (of course without
any increase in the tax rates).

I would like to consider now the develop.

ment of the financial position in 1927.

The financial position of the current budget year has, following
the upward movement of the conjuncture, developed more favourably than could
have been expected when the 1927 budget was established or even when it was

- 7 -

voted in the Spring.

On the revenue side, Income, Corporation and Turnover Taxes etc.

amount in the first six months of 1927 to 2 658 millions compared with the
budget estimate for the year of 5 306 millions, Customs and taxes on consumption etc. to 1 457 millions as compared with the budget estimate for
the year of 2 445 millions.

The estimated yearly results may not be

calculated by doubling the actual returns for the first half year, as but
few taxes are evenly collected throughout the whole year

- in the case of

most of the taxes a number of circumstances demand that a distinction be
made between the amount collected in the second half year and that collected in the first half year.

It is therefore necessary to regard the

individual taxes.

In regard to the Wages Tax which is estimated for 1927 at 1 200
millions, this yielded about 640 millions in the first half year.


result for the second half of the year may be presumed, on the strength
of previous experience, to be influenced by the greater number of unemployed persons and the amounts to be paid as rebate in respect of the tax,
between January and March.

These reduced receipts will however be set

off by increased receipts derived from the increase in wages and salaries
already introduced.

The returns for the whole financial year may thus

be calculated at about 1 270 millions.

The Tax on Income derived from

Capital deducted at the source (which was estimated for 1927 at 120 millions) yielded 76 millions during the first half of the year.

A similar

amount is not to be expected for the second half of the year, as the
majority of companies draw up their balance-sheets so as to coincide with
the calendar year, and pay their dividends in the first half of the financial year.

The preliminary estimate will however in any case be attained.


The probable yearly yield of other income tax was estimated at 1 300

About 650 millions were collected in the first half of the

financial year.

Here again the preliminary estimate will probably be

On the other hand, the Corporation Income Tax, which is estimated

at 400 millions and brought in 240 millions in the first half year will show
a certain surplus.

Only 372 millions approximately were received in the first half year
from turnover tax, which was estimated at 900 millions.
however there are two things to be considered.

In this connection

Firstly, the revenue from

the Turnover Tax is higher in winter than in summer, on account of the extra
Christmas business.

Secondly, there is in 1927 a reduction in the actual

amount collected and accounted for owing to the fact that on April 1,1927,
the system of quarterly payments was adopted.

Thus the turnover for two

months is absent in the first half year 1927 in the case of those paying
every month.

In the total result therefore there will be but a small

reduction, if any.

A minimum amount of 2 600 millions is guaranteed to the States as
transfers in respect of these taxes.

Whether this sum will be actually

reached or whether a certain amount will have to be advanced from the
guarantee of the Reich is not yet known.

In no event however will such an

advance, if any, amount to the sum provided for in the preliminary estimate,
but will probably amount to only 20 millions.

In the case of the Tax on Real and Personal Property, for which 470
millions was estimated, about 200 millions were received in the first half
of the year.

It should be remembered in this connection, that the assessmen'

for the Tax on Real and Personal Property in 1927 will not be completed until

- 9

November and December and that, on the basis of the assessment, a considerable
supplementary payment is to be expected in the case of some of those liable.
Further, agriculture, which had no quarterly payments to effect on August 15,
only had to pay it on November 15 together with that quarterly instalment.
The total returns will therefore be much below the assessed returns.
Succession Duty was estimated at 100 millions.
year, about 33 millions were received:
the whole financial year 1926.


During the first half of the

that is to say, about as much as in

For the whole financial year 1927, actual

returns of 70 - 75 millions may be expected..

That this figure is less than

the preliminary estimate is still largely to be attributed to the fact that

the tax-payers are short of liquid funds and therefore apply for respite of
payment in accordance with the provisions of the law relating thereto, and
that these applications are, in view of the position, often not refused.

Of the other Income, Corporation and Turnover Taxes etc., which are

- like the Tax on i.anded Property, the Automobile Tax and the Race-

betting Tax - merely transfer taxes, a certain not very considerable increase
of returns over estimates may be expected in the case of the Company Tax, the
Bourse Turnover Tax, the Tax on Insurances and the Transport Tax.

The Cus-.

toms, which were estimated at 890 millions, brought in 628 millions in the
first six months.

It should be borne in mind however that during this

period, as a result of the unfavourable harvest in 1926 and 1927, imports of
cereals have been unusually large.

It is not to be assumed that imports of

cereals and flour will be as great in the second half of the year.


total returns may therefore be estimated at about 1 150 millions.

The tobacco trade has developed satisfactorily during the current year
and there has been a considerable increase in output.

'Illereas the yield

10 -

from the Tobacco Tax was estimated at 700 millions for the year, 374 millions
were collected in the first six months, and it may be assumed that the estimates will also be exceeded during the latter half of the year.

A small

surplus may also be expected in the case of the Beer Tax, the yield from
which was estimated at 335 millions for the year, whereas roughly 180
millions were collected during the first six months.

The deficit in the

yield from the Sugar Tax will amount to approximately 75 millions as compared with the budget estimate of 275 millions, in view of the fact that
the tax reductions only make themselves felt from October onwards.

Provided that the economic position remains unchanged, surplus net
receipts of approximately 300 millions may be expected for the Reich from
all sources.

On the expenditures side the most important economies are to be found
under expenditure for unemployment relief.

The unexpectedly favourable

development of the labour market, due to the reduction to 350 000 of the
unemployment figure (excluding persons receiving emergency relief) has re,
sulted in an expenditure of only approximately 95 millions for ordinary
and emergency relief during the first half-year out of the 450 millions
entered in the budget.

During the second half of the year, approximately

50 millions will have to be expended to form a foundation for unemployment
insurance, whilst an amount larger than that for the first half-year will
have to be found for emergency relief.
quite 200 millions may be economised.

It may
In the

number of unemployed exceeded 1.8 millions (there were 1 225 000 on March
10), it was not possible to assume this.

The remaining economics effected on the expenditure side of the budget

are balanced by extra-budgetary expenditures and expenditures in excess of
the budget.

An adjustment of the surplus revenues and minus expenditures

therefore leaves an improvement in the probable effective results, as compared with the budget estimates, of roughly 500 millions.

Set off against

this however are the expenditures to be called for in the supplementary
budget, where naturally the amounts required for officials' salaries and
compensation to war victims play the chief part.
here refer to two further items of expenditure only:

execution of the com-

pensation procedure at present in force in respect of "liquidation" war
victims and mitigation of the distress caused by the floods.

The total ex-

penditures in the supplementary budget, the final amount of which has not
been definitively fixed, would amount to something between 250 and 300

Even taking the maximum figure of 300 millions, 1927 would still
close with a surplus of approximately 200 millions.

There are two points which must not be overlooked, in forming a complete picture of the situation.
Point one refers to the dangerously high extraordinary expenditures.

The extraordinary expenditures for 1926 and 1927 which have not yet been
covered by loans amount to more than 900 millions, roughly half of which has
up to the present been expended and provisionally met out of funds in circulation.

This was only possible owing to the fact that the funds in hand

and the budget surpluses (which also strengthen the said funds) for covering the outstanding expenditures of the ordinary budget had hitherto permitted this method of covering expenditure.


- 12 -

which these funds are assigned to their original purpose, i.e. to cover
ordinary expenditures, they must be replaced by other funds:

that is to

say, the loans provided to cover extraordinary expenditures must be actually
,aken up.

That is however quite impossible at the present juncture owing to

the position of the capital market.

The high figure of extraordinary

expenditures therefore presents a danger which must not be under-estimated,

and the extraordinary expenditures of the 1928 budget must therefore be
restricted to the lowest figure possible, and that part of the 1926-27 extraordinary budget funds not yet expended must be liquidated (in so far as a
further reduction is not possible here also), at least at the speed required
by the financial position and the state of the capital market.

We must free

ourselves from the necessity of taking up such extensive loans.
Point two is the prospect for 1928.

Excluding requirements under the

Liquidation War Damage Law, the 1928 budget will close with a surplus of
approximately 500 millions for the recurrent and non-recurrent expenditures,
although 400 millions more have to be paid for Reparation charges.

This is

however only the preliminary estimate of the Finance Ministry of the Reich
which has not yet been approved by the Cabinet.

The chief items of surplus expenditure in 1928 will be the salaries
reform and the increased Reparation payments.

These main items are however

set off by reduced requirements for unemployment and emergency relief as
compared with the 1927 estimates.

Further the non-recurrent revenues

entered for 1927, the surplus from 1926 amounting to 200 millions, the
working fund of 190 millions and the net profits from coinage of 145 millions


It will nevertheless be possible to balance the budget.
is made for a strict limitation of expenditures.


Moreover the actual

yield from taxation during the current year appears to justify the assumption that the total net proceeds for the Reich in 1928 are likely to be

roughly 300 millions in excess of the probable actual revenues for 1927.

The chief taxes the returns from which are thus assessed at a higher figure
are Income Tax, Corporation Income Tax, Tax on Real and Personal Property,
and Turnover Tax.

In the case of the Income Tax and Corporation Income

Tax, the favourable trade conditions of 1927 will make themselves felt to

the full extent only in 1928, in view of the final payments resulting from
the spring assessment for 1928.

The following figures represent the yield

from Income and Corporation Income Taxes in the last two years:

the Tax

on Wages produced 1 367 millions in 1925, 1 095 millions in 1926 and is
estimated to produce some 1 270 millions in 1927.

The corresponding

figures for the Tax on Income derived from Capital are 82, 95 and 120
millions, for the other categories of income tax 803, 1 064 and approxi
mately 1 300 millions, and for the Corporation Income Tax 186, 382 and
approximately 450 millions.

The point to be noticed here is the consider-

able increase of the other categories of income tax and the corporation
income tax, both absolutely and also in comparison to the Tax on Wages.
Even taking into consideration a certain fall in the Tax on Wages, 1928

may be expected to produce 2.9 milliards, (approximately 550 millions from
the Corporation Income Tax).

In this connection the displacement of the

Tax on Wages in its relation to the general position is of great interest.

Whereas the Tax on Wages in 1925 was still 300 millions more than the Tax
on Income derived frow Capital, other categories of income tax and

- 14 -

corporation income tax together, it has since that date steadily fallen
off in so far as its proportion to the other taxes is concerned.

Taking the Tax on Real and Personal Property, a higher yield may be
expected -

more especially in view of the general re-assessment of land

site values as at January 1, 1928, which will certainly be higher than the
values as at January 1, 1925, which were taken for the assessment of the
1927 tax.

In the case of the Turnover Tax, the change to quarterly pay-

ments which resulted in a certain falling-off in yield for 1927, will alone
provide a corresponding surplus of over 100 millions for 1928.


the control of all sources of revenue which had to be suspended for urgent
reasons and is of considerable importance will be resumed.
tax is to be entered for 1 050 millions in the 1928 budget.

The turnover
It is true th

this figure is based on the assumption that the general economic condition
will not change for the worse to any great extent.

A severe crisis would

affect not only the revenue but also the expenditure side of the budget,
more especially the items for emergency and unemployment relief.

In the

case of Customs and taxes on consumption etc. the probable yield for 1927
will be taken as a basis.

Taking the Customs alone, it might perhaps be

well to estimate the yield for 1928 at a somewhat lower figure in view of
the reduction of Customs rates as a result of (a) the policy of commercial
treaties and (b) the intention of the Government to reduce the autonomous
Customs rate, which was already notified in the summer.

We therefore prefe

not to take the annual yield for 1927 as a basis but to count on only 1 050
millions for 1928 for Customs.

The increased estimate of the yield from taxes and dues is not in
itself sufficient to balance the budget.

This will be possible only if th

balance from seigniorage in 1927 and the balance of the working fund
amounting to 62 millions and also the probable surplus from 1927 are entered
as revenues to cover expenditures.

This presentation of the budget, which

can naturallyte only a survey in view of the present position of the
budget negotiations, indicates that, while there is certainly no fear of
We have established the

a deficit, further charges cannot be assumed.


budget as strictly and economically as we considered permissible.

estimates are cautious, on the assumption that there would be no great
prosperity but also no great depression.

This being so, the figures have

been neither over-estimated nor under-estimated.

The whole work of

drawing up the estimates is based on the desire to reflect the real position as far as this is possible with such estimates.

I followed this

course because I particularly did not wish the 1928 budget to be delusive
but to reflect the facts as closely as possible.

The correctness of

these estimates is, as already remarked, conditional upon the economic
position of the country not being subjected to extraordinary depression
of a catastrophic nature.

The national economy developed very favourably

during the last six months.

This is clear not only from the unemployment

figures but from the increased yield from the tax on wages and other taxes
in the budget of the Reich.

We nevertheless consider that our entire

economic position must be carefully observed, for it is only by promoting
industry and by striving to cheapen production that Germanycan attain
success and increase her competitive power.

German industry has not yet

succeeded in the great competitive race with foreign countries.
flourishing but only at home.

Trade is

When discussing the whole position, we must

free ourselves from the idea that home prosperity alone can bring us what


- 16 -

is expected both at home and abroad.

The Govern

special value on the point that the financial position must not be regarded
from the point of view of taxation alone and that the charges on German
economy must be discussed in detail in all their effects.

the Reich is therefore of opinion that there can be no question of opening
fresh sources of taxation, but that the policy of reducing taxes begun in
1925 must be continued.

In 1925 a reduction of ai milliards was effected

by means of the great tax reform.

In 1926 there was a reduction of half

Our financial policy must and will aim in the future also at

a milliard.

reduced taxes.

I have already mentioned the opinion of the Finance Ministry

of the Reich on reducing Justoms.

I presume that the question of taxation

will be dealt with in the next few weeks as we shall in any casebe obliged
to examine this problem in detail in its relation to various legislative

The 1928 budget is to reflect the strictest economy.

We con-

sider caution in establishing expenditures to be absolutely necessary.


automatic and continued increase in expenditures must in the last instance
undermine the stability of our finances with all its attendant drawbackd
for the economy as a whole and consequently for the budget of the Reich.
The aim of the Government of the Reich to place the finances on a healthy
basis is opposed to such a short-sighted expenditure policy.
You will in this connection allow me one more word regarding the
relations between the Reich, the States and the communes.

The transfers in

respect of the chief taxes of the Reich form an important part of the Finanz-

ausgleich which today plays a decisive part in the relations between the
Reich, the States and the communes

Particularly sharp criticism at home

and abroad is in many cases making itself heard here.

We are frequently

- 17 -

advised to simplify the constitutional structure of the Reich and thus to

Under the most difficult circumstances, Germany endeavoured to

simplify her constitutional structure as far as possible in the Constitution of Weimar and the legislative enactments for its execution.


increase in the powers of the Reich, in particular in financial matters,
under the 1919 Constitution, is evidence of this, as is also the adhesion
of various States in the last few years.

The force here at work was not

external compulsion, but natural economic developments which we are unable
artificially to accelerate or artificially to repress.


policy is in the stage of development in Germany also.

The Reich does not

watch this development with supine contentment or passive submission.


would be contrary to all historical precedent and at the same time very
dangerous from the political point of view if all the States were compulsorily deprived of their independence, merely in order to effect economies
the amount of which it is hardly possible at present to estimate.


of the kind are bound to bring up a number of other and more difficult
questions than that of a more or less considerable saving in the cost of

In other States with a Constitution similar to that of

Germany the individual life of the separate States is thought to be of
great value.

Examples of this are the United States and Switzerland.

Our efforts in the Reich, States and Communes to obtain the maximum of
economy may well be so directed that we carefully promote any development
tending towards amalgamation and that the Reic,.h brings pressure to bear for

the reduction by the united endeavours of all parties concerned of the total
cost of administration.
never flagged.

In these efforts the Government of the Reich has

Three courses are open to it.

tion of the administration of the Reich itself.

First comes the simplificaThis has been undertaken


on a large scale and constant efforts towards simplification are made in
very close cooperation with the Economy Commissioner of the Reich.

A further

point is the clear delimitation of boundaries in cases where the functions of
the Reich overlap with those of the States.

Here the difficulties are

Since the first days of stabilisation attempts have been made to

clear matters up so as to avoid overlapping.

Much has already been done here.

In this connection we may mention the institution of unemployment insurance
which removes a border line question of the kind from the dispute as to jurisdiction and in so doing relieves both the Reich and the States of expense.
Further work must be done in this direction, and in the sense that the Reich
should in reality retain only such functions as devolve on the whole of the
German nation and cannot be carried out by the individual State, or not in a
practical manner.

The third essential is the simplification of the adminis-

tration of the States and Communes themselves.
the result of historical development;

The States and Communes are

they are part of an economic system

which they cannot well fail and which in the past they have not failed.


development entails the compulsion to extreme economy in the public administration in the interests of the nation as a whole, on vihich heavy burdens are

It is unnecessary to point out that here, as in every case of ad-

ministrative simplification, resistance has to be overcome.

On the other

hand, the States have on their own initiative given evidence of valuable endeavours to continue the work.

Several States have already called on the

Economy Commissioner of the Reich, in order to discuss in conjunction with him
means for the reorganisation of their administration.
endeavouring independently to reach the same end.

Other States are

But that we are at the

beginning and not the end of a mighty task will be denied by

one who follow

- 19

attentively the efforts now being made both in private and in State econow.
In this matter the Reich will always play its part.

It will be at the dis-

posal of the States with advice and, where this is desired, also with
It will take steps to ensure that, so far as is in

practical assistance.

any way possible, the means for overcoming deficiencies in the administration
are clearly shown.

The Reich can never hold the view that things as they

are are unchangeable;

on the contrary it considers its duty to be, every-

where to collaborate so as to simplify and clear up the general system, with
the object of reducing the cost of administration and in ,'.onsequence the

volume of public charges.

Connected with this is the much discussed question of the control of
the revenues and expenditures of the Federal States and Communes.

Here also

far-reaching claims are made, which however are in many cases based on premises not entirely reflecting the real state of affairs.
We shall deal first with revenues.

The Income Tax and the Corpora-

tion Income Tax, like the Tax on Real and Personal Property, were reserved
for the Federal States.

The Reich has taken over these taxes.

It gives

75 per cent of the Income and Corporation Income taxes back to the States
and reserves for itself 25 per cent of the proceeds together with the whole
of the Tax on Real and Personal Property.
ly clear.

The delimitation here is perfect-

The claim is now put forward that the transfers to the States

should be restricted to a definite sum, which is equivalent to excluding the
States from participation in the upward movement of enterprise.

It is true

that such a course might be discussed in a State Which was economically

It can however hardly hold good in a State where the underlying aim

of all work is always the return to normal conditions.

Any decision is

- 20 -

utterly impossible until we are clear as to what are the normal requirements
On this

for the regular working of the Reich, the States and the Communes.
point the Dawes Plan contains a noteworthy reference.

According to the

Plan the resources normally to be assigned to the States and Communes should
not exceed their legitimate needs.

Only when further assistance has to be

given by the Treasury of the Reich should such assistance be subordinated to
continually increasing central supervision by the Reich of local expenditure.

These recommendations of the Experts' Plan reveal the knowledge of the
Experts on the matters here under consideration, since they distinguish
between the general financing of the States and Communes and the granting
of extraordinary assistance.

The general financing of the States and Communes must be confined to
their "legitimate needs".

For these, no control of expenditure is provided.

It is the function of the financial settlement to determine the amount of
these legitimate needs.

The statistics which have now to be furnished are

intended to prepare the way for the regulation of the question by the definitive financial settlement.

In the present settlement we have an interim

solution introduced with the object of giving peace for work in the Reich and
States and time to establish the bases for a definitive settlement.


ly speaking it is thought abroad that the transfers to the States and Communes are too high;

the States and Communes think them too low;

the Reich

may under these circumstances well feel that it has found a middle course.
It would be highly dangerous, before the question of their requirements is
fully settled, arbitrarily to apply reductions to the revenues of the States,

since under the circumstances these might mean that States which have vitality
in themselves were unable to carry out their duties and were forced to bring
the machinery of Government to a standstill.

It is unnecessary to point out

- 21 -

that the Reich would then be burdened not only with heavy political responsibility, but also with costs the amount of which cannot be foreseen.


remains the duty of the Reich in the ensure that its own finances
and those of the States and Communes are as lucid as possible.

This object

is served by the tax unification Law, which endeavours to establish uniform
bases for the main taxes left to the States, to equalise their rates, and to
institute a joint administration by the Reich and the States for all important

Where special assistance is concerned, the Reich has ensured control

which is as far-reaching as possible in cases where it has not retained the
function of payment in its own hands.

In this connection, I may refer to

the strengthening of the measures of control which the Reich demanded and
obtained when it took over the charges for unemployment relief pending the
application of the insurance system.
control over the Communes.

Now a further step is demanded of us -

I think that no one with practical experience

can doubt that, without exaggerated administrative machinery, no effective
control by the Reich of revenues and expenditures is possible;

the machinery

in question would have to control 60 000 Communes and would tower above the
States, the result being to increase friction and so most acutely to disturb
the work of the administration.

If action which is useless or even dangerous

for the State is to be avoided, it is necessary to forego direct and general
control of the individual Communes by the Reich.

keeping the conception of autonomy, which is so beneficial for municipal administration, in accord with the general financial requirements of the Reich
and with the requirements of national enterprise.

For this task the States,

which are entrusted with the control of the Communes, are specially indicated.
The Reich should only intervene in order to avert dangers which cannot be


- 22 -

otherwise overcome.

For I certainly consider it necessary that the Reich

as the supreme authority should then interest itself in these matters.

to-day however the influence of the Reich is not lacking in either branch of

- the taxation branch or that dealing with loans.

The right of

protest under the financial settlement Law (Finanzausgleichsgesetz) protects
the Reich from communal taxes which might prejudice its own revenues.


Advisory Office on foreign loans, which is set up in agreement with the
States, watches over the loan policy of the States and Communes from the point
of view of the currency, the national economy and the finances of the whole
of Germany.

I will here merely record the fact that we have recently intro-

duced stricter regulations with which,

I feel sure, the States wil

their agreement, owing to the general interests clearly involved.


States and Communes, in the difficult matter of loans, have always subordinated their wishes to the general good of the Reich.
also has recently been subjected to special criticism.

But this loan policy
It will be necessary

to say one word in explanation of the standpoint of the Government of the

We take the view that the contracting of loans by the States and

Communes for administrative purposes cannot be permitted at the present time
owing to the shortage of money on the home market and the extreme caution
indicated on the foreign market.

The duties of the Communes in Germany

however are not exclusively those of administration.

In contrast to wealthier

countries, the development of the communal system in Germany and the shortage
of private capital for investment has made it widely necessary for the Comrunes to satisfy requirements of private enterprise which in a richer country
could have been satisfied from private sources.

The provision

for the

population of gas, water, electric light and the public means of transport i
Germany has in practice devolved to a great extent on the Communes.

It is

- 23 -

unnecessary to explain that loans for these services can be productive in the
widest sense of the term, in so far as they alone can enable private enterprise in the Communes to undertake new and fruitful work.

On the other hand,

it goes without saying that in these productive expenditures and the applications for loans which they entail the Communes have to pay due consideration
to the general situation in Germany.

On October 7 the Government of the

Reich declared that in view of the general position it was necessary to avoi


all expenditure which was not urgent or economic in natare, irrespective of
whether it was covered from external loans or inland sources of revenue.


so far as the Communes are engaged in the above-mentioned branches of privat


enterprise, no reasonable loan policy can admit a rejection in principle of
their applications to borrow.

In each individual case however it will be

necessary very strictly to enquire whether the general economic scheme submitted by a Commune guarantees the essential productivity of the expenditure
and whether it is really impossible for the expenditure to be met from
current resources, even if this should mean the withdrawal of other less
urgent outlay.

For in general earnest endeavours must be made to restrict

the public expenditures.

In so doing we do not follow external compulsion,

but recognise internal necessity;

for the total debt of Germany really give

cause for very great reserve.

I have attempted to give you in rather more detail a picture of the
financial situation.

Eay I now summarise the essential points;

in the fou

years of stabilisation the ordinary expenditures have risen by approximately
milliards in all.

The increase is, as I have explained, inevitable and

has its origin in a prudent financial policy.

Most of the expenditure has

gone to reconstruct possessions destroyed by the war and the inflation.

regard to the extraordinary expenditures, which have been considerably


- 24 -

augmented during the last few years, I hope as early as 1928 to reduce them
to proportions corresponding to a normal administration.
for 1927, war charges total
ture of the Reich.

Of the expendi tures

milliards, or more than half the total exp endi-

The heavy sacrifices demanded of tax-payers are evident

and are mainly to be attributed to the loss of the war.

In the past yea rs,

it was impossible to carry out the measures concerning the salaries of
officials and owners of liquidated property which public opinion in Germany
has for so long united in urging upon the Government.

The enforcement o f

these measures can no longer be postponed, in the interests of reconstruc tion

in Germany and consequently of the further execution of the Experts' Plan
They form the conclusion to the work of construction of the last few years.
They are not the first stage in an unsound financial policy, but the closing
stage in the work of reconstruction to be carried out in the transition

The Government of the Reich supports the utmost economy and the

very strict examination of all expenditure, since only in this way will i


be in a position to promote economic advancement in Germany and so to render
possible the fulfilment of the obligations assumed.

The Government of the Reich is fulfilling the obligations assumed to
their full extent.

It has made the annual payments and is now

- as ever -

endeavouring to the best of its ability to assist the work of the Transfer
Committee within the limits of a reasonable financial and economic policy
Germany has on many occasions given an assurance of her sincere desire to

er whole financial

ntributions are now

t of the actual

l standing under the



- 25 -

sign of growing reparation charges.

The main part of the expenditures cf

the last few years has gone to promote the reconstruction of the national

- the economy which has to bear the burdens of the Dawes Plan.


has further served for the re-introduction of a proper standard of living
which even the Dawes Plan allows to the German nation.

The general policy

of the Reich has been conducted in the knowledge that by every means in its
power, even if sacrifices are involved, it is essential loyally to fulfil
the London Agreement, which was described by the Experts who planned it as an
attempt to settle the reparation question on practical lines and with reference to economic considerations, by which, as we hope, its execution will
always be governed.

I shall here close this section, but am however pre-

pared to give further explanations in connection with events of the last few

I must however ask that this part of my speech be treated as


Transl. 5065.

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r.2. 17o


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A stable currency is not permanently possible without economic equilibrium.

When people speak of danger to the currency, many think only of

depreciation of the bank note.

But the term "currency" implies something more

than mere maintenance of the gold value of a bank note issue: it implies the
necessity for supplying the national economy with an adequate amount of stable
media of payment.

A bank note with a full gold or gold value cover may be able

to maintain itself even in countries whose national economy is disordered: a
currency, which is covered in part by creditor claims such as bills, requires
two solid foundations, a balance of external payments in equilibrium and a
balanced national budget.

In Germany the capital losses of the war and the

inflation periods and the withdrawal of income for reparation payments have
made heavy inroads alike or

budgetary equilibrium and on the balance of


So long as we were in the dark as to what we should have to pay in reparations, the equilibrium of the balance of payments and of the budget were
permanently menaced from without.

One of these menaces, the threat to the

budget, has been removed by the Dawes Plan.

We are no longer ignorant of what

burden we have to support, so far as payment in our own currency is concerned:

we know that from next year onwards Germany has to carry an annual reparation


charge of 2-h- milliards of reichsmarks.

But the Dawes Plan was not able to

remove the menace to our balance of payments.

The inherent aim of the Plan was

to have the 2-- milliards paid annually in foreign currency to the full amount,

so far as possible, in which connection it is indifferent to the German national economy whether the payments are made in kind or in cash.

As however the

authors of the Dawes Plan recognized the possible or probable impracticability
of annual payments to foreign countries on so large a scale, they made the
actual effecting of the payments dependent on the personal views of the socalled Transfer Commi'

All efforts to establish equilibrium of our balance

of payments are therefore , tject throughout to permanent uncertainty.


a tolerable total figure is fixed for the payments which Germany has to make
to foreign countries, there can be no effective results of the efforts to
attain equilibrium of the balance of payments.

In spite of the severe injury to the foundations of our national production as a result of the losses incurred, we have succeeded since the date of
the stabilization of the mark in maintaining the budget and the balance of
payments in equilibrium and the international, no less than the internal, purchasing power of the German currency on a footing of stability.

Measured by

the international exchanges, the reichsmark has remained stable between the
two gold points; and even when judged by the criterion of internal price movements the purchasing power of the mark has not been subject to any considerable

The only peculiar feature of our position is the fact that this

equilibrium is maintained, not merely in virtue of our own surplus production,

but as a result of credits received from foreign countries
not a regrettable circumstance.

That in itself is

When a country has been so denuded of mobile

capital as Germany has been owing to the war and the inflation, it is altogether

natural and justifiable that it should do as private business concerns do and



3 -

have recourse to credits for a transition period.

But it is essential to keep

in view the necessity of not allowing such recourse to credits permanently to
postpone the equilibrium of the balance of payments: it can only be allowed
temporarily to postpone the final balance, and such postponement cannot be
indefinitely continued.

No country can conduct its business permanently on

How long the ultimate settlement can be postponed depends in the first

instance on the readiness of those who supply the credit to provide the funds,

and the readiness of those who supply the credit depends as much as anything on
whether the interest and amortisation payments on the debt can be made available by the borrowing country in such a form as to be transferable to the
lender in foreign currency.

Here again it is conceivable that for a certain

period the interest and amortisation service of a debt can be met by fresh

borrowing: but the time must eventually come when the borrower has to finance
the service of the debt out of his own resources,

which means that foreign

borrowing is only justifiable insofar as national production is thereby
stimulated and enabled to lay by new capital in the form of savings.

The point therefore is, to what purposes the foreign credits are devoted.
There were countries even before the war which borrowed from abroad on a large

The most illuminating example of such borrowing is afforded by the

United States of America and the other countries of the New World in the nineteenth century.

In the case of all these countries the object of the borrowing

was the opening up of new colonial territory.

All these countries developed

their agricultural and mineral potentialities by the import of means of production which were procured with borrowed foreign money.

As they developca

their agricultural production and their production of raw materials, they
gradually paid back the loans which they had had from Europe.

It is only

necessary to analyse the history of the foreign trade of the United States or

- 4

the Argentine to find confirmation in figures of the fact that in the first
decades of their modern economic history these countries all showed an adverse
balance of trade because they imported more means of production than they were
able to pay for at the outset, while at a later period

- in the case of the

United States from about the eighties of the last century onwards, and in the
case of the Argentine from the end of the last century onwards -

they began

to pay off their foreign credits out of surpluses in their respective trade
balances, consisting principally of agricultural products and raw materials.

In new colonial countries this form of capital investment is a natural and
normal process.

The circumstances are very different in the highly industrialised
countries of Europe today and especially in Germany.
colonial territory.

Germany is not a

What colonial countries need for their development, that

is to say means of production, Germany possesses on the most lavish scale and,

where she does not possess them, is in a position to manufacture them herself.
The credits which Germany takes up cannot be paid for with foodstuffs and
industrial raw materials, which are readily realisable objects of trade in
every country, but only with finished products; and for the marketing of finished products there is the severest international competition throughout the

When therefore the advocates of extensive foreign borrowing in Germany

maintain, as they continually do, that the foreign credits are necessary for
the reconstruction of the German national economy, that is only true to a very
limited extent,

The German trade figures show that, apart from certain special

cases, we do not import means of production but foodstuffs, raw materials and
finished articles, especially the first two.

Undoubtedly Germany was denuded after the war on a very extensive scale of
stocks of raw materials and, if she was to employ her industry once more, it was

5 -

essential that she should replenish the exhausted stocks, which for the most
part could only be done by means of credit.

Insofar aE

this process of re-

plenishment has taken place on the scale reqaired for .,he immediate vital need!-;

of the German population, no objections can be made against it.

But where ov?.r

and above such imports raw materials have been imported on credit, this can
only be regarded as admissible to the extent to which finished products manufactured from these raw materials find their way on to the world market and so
help to pay off the credits, since there is no possibility for us of paying
them off by the export of raw materials as in the case of colonies.

It becomes therefore necessary to observe moderation in the volume of our
foreign indebtedness.

From the day on which the Dawes Plan was accepted down

to November 12, 1927 inclusive, 5

milliards of reichsmarks of long-term

foreign loans have been taken up according to the statistics of the Reichsbank.

We may estimate, on the basis of material collected by the Reichsbank from the
banks, that the total short-term indebtedness of the country is not very far
behind the amount of the long-term indebtedness, so that the total of the
country's foreign debt, short and long, may be put at something like RM 10

As against this indebtedness there must of course be put our own

creditor claims on foreign countries, which are not so easy to estimate but no
doubt amount in the aggregate to some milliards.

Whether our claims on foreign

countries are as short and as liquid as our short-term debts to those countries
is open to question.

But it must of course be remembered that Germany cannot

export commodities, as her creditors desire, without giving a certain amount of
credit to foreign countries.

So far as our present currency position is concerned, the essential consideration is that an annual payment of approximately RM

of a milliard is

required for the interest and amortisation of our foreign de'r,t


When in



addition we remember that in the current reparation year about RM 1 milliard
in cash will have to be transferred, and further that for some time to come we
shall have to reckon with the payment for the surplus of our imports over our
exports of merchandise (which is the first nine months of this year amounted
to approximately RM 3 milliards), it will be seen that an annual liability to
foreign countries of several milliards already exists.

It is true that Germany

acquires foreign exchange from exports and from transportation and other services carried out for foreign countries, and to some small extent perhaps from
capital invested once more abroad.

At the present time however the aggregate

of all these items is insignificant, and the adverse balance of payments has
so far been covered mainly out of loans.

One may therefore ask with justifica-

tion whether we are to continue borrowing from foreign countries a few more
milliards every year.

I imagine anyone can reckon on the fingers of one hand

when this system must end.

One favourite argument is that we were obliged to borrow abroad in order
to reconstruct private enterprise and to supply our money market with liquid
working capital.

By this borrowing, it is said, we rationalize our industrial

machinery and stimulate business inside Germany while at the same time cheapening production, as a result of which we shall later be enabled to pay off the
debts by means of increased exports.

From the same quarter comes the conten-

tion that we ought to import foreign money in order to lower interest rates in
Germany and so reduce the shortage of liquid working funds.

Underlying this

line of thought is the extremely uninformed view that the existence of dollars
in Germany in itself represents a form of capital.

Very few reflect that in

the last resource dollars can only be spent in America.

Dollars imported into

Germany can only be used for the payment of debts which we have abroad, or for
capital investment abroad, or in payment of foreign merchandise imported into

7 -


'We may here leave the first two alternatives out of account, as

they have little bearing on the German recovery.
of foreign commodities

In regard to the importation

- of which every borrowed dollar acts as a stimulus -

we have already seen that the articles imported are only in rare cases means
of production for direct rationalization.

Generally they are raw materials

and foodstuffs, of which only a small part is worked up here and sent out of
the country again; the greater part of them involve increased domestic consumption

- on credit.

How far the increased internal turnover increases the

export capacity of the industries affected is a question on which there is so
far no evidence either of theory or of practice.

There is one other use to which dollars can be put in Germany; they may
be presented to the Reichsbank with the request for the issue of banknotes in
exchange, and these notes are thereupon available for use within the country.
Up to the present the Reichsbank has done this on a very large scale.

When it

is remembered that at the time of the reconstruction of the German currency

the Reichsbank began with a gold and foreign exchange holding of practically
nothing, and that only a fraction of the foreign exchange subsequently received
by the Reichsbank was the property of Germans, it is clear that a considerable
part of the gold and foreign exchange holdings of more than RM 2 milliards,
which are now in the possession of the Reichsbank, has its origin in the
foreign money which has reached Germany in the form of loans.

The question now

arises as to how far the Reichsbank, when it gives German banknotes

in ex-

change for dollars, is making credit and capital available in Germany.


again there are theorists who hold that this is possible to an unlimited

extent and that the Reichsbank, for example, can issue banknotes for RM 20
milliards in exchange for 5 milliard dollars.

It is only necessary to put the

proposition to this extreme form in order at once to show the impossibility of

- 8 -

putting the theory into practical application.

A currency circulation in

Germany of 20 milliards would be nothing but an inflation and would be bound
find expression in an excessive rise in prices and wages.

A gold inflation c

immediately after the E

this kind took place in the United States of America

of the war, when the note circulation of the Federal Reserve system reached i
December 1920 the sum of over 3.3 milliard dollars.

The banks of issue set

themselves to counter the disastrous consequences of this gold inflation by E
systematic restriction of the note circulation, which in the course of 1921 m

contracted to 2.4 milliards, with the result that prices and the conditions c
production again became normal.

The currency circulation of a country must stand in some definite propor
tion to the extent of the country's economic activity.

It can no doubt be

larger when trade is brisk than it can in quieter periods; but the aim which
has always to be held in view is that the purchasing power of money should
observe as stable a tendency as possible in its relation to commodities and

The limit for the volume of circulation in Germany is not fixed by an

mathematical law.

It is a thing which has to be sensed from the various

phenomena of the country's economic life.

Attempts are frequently made to

compare our present currency circulation with the pre-war figures.

The total

circulation before the war was estimated at approximately 6 milliard marks.

This total included about 24 milliards of gold coins, a considerable proporti
of which did not circulate at all, but were hoarded in stockings and chests.
Generally speaking, the rapidity with which money circulated before the war
was certainly less than it is today.

On the other hand it is argued that the

level of prices today is about 50 per cent higher than before the war, so the
a higher volume of circulation is required in order to enable the country to
fin[nce its current payments.

Here again it is frequently forgotten that

- 9 -

payment transactions, in which no actual currency changes hands, have increased
to an extraordinary extent as compared with the pre-war period; that is to say,

a very much larger proportion than formerly of the business of the country is
transacted, not in cash, but by credit and debit entries in the books of the

The Giro and clearing business of the Reichsbank is about 50 per cent

more extensive than it was before the war.

Postal cheque business, which

deals in the main with precisely those small payments which previously were
made in cash, has approximately trebled in comparison with the pre-war period.
In addition there is the communal clearing business of the Girozentralen,
which represents an entirely new feature.

Considering all things therefore,

the Reichsbank takes the view that a currency circulation of approximately
RM 6 milliards or rather more, such as we have today, is adequate except in
abnormal periods, and should not be considerably enlarged under present circumstances if we are to avoid an upward movement of prices and wages, in other
words if we are to avoid inflation.

The present note circulation of the Reichsbank is covered in full, partly
by the gold and foreign exchange in the Reichsbank's possession, and partly by
its holdings of commercial bills.

Unless therefore the Bank is prepared to

increase its note circulation, it cannot take new foreign money and give German
currency in exchange, except in the event of its holding of bills being simultaneously reduced, that is to say, in the event of reduced recourse by the
public (i.e. by its bill clients) to its credit facilities.

The exchange of

German for foreign money by the Reichsbank means merely the substitution of
foreign credit for Reichsbank credit: no new credit facilities are created for
the German public.

Should foreign capital notwithstanding continue to come in

to the Reichsbank for exchange against Lerman currency, the only course open to
the Bank, if it 3.s to regain its freedom of action, is either to raise the

- 10 -

discount rate or alternatively to restrict bill credits.

Even the lay mind will

perceive the absurdity of such a position.

From what has been said, it will be apparent that the possibilities of
bringing productive capital into Germany by means of foreign borrowing are
extremely limited.

The process is complicated by the highly industrialized

character of German enterprise, to which there is no parallel in colonial

The additional capital which Germany undoubtedly requires must

therefore be obtained by some other means than foreign borrowing, and this
other means can only be the formation of domestic capital, which is conditional
on increased production and increased saving.

Increased production can find expression either in the form of a rise in
exports or in a fall in imports.

Both affect our balance of payments equally,

but they differ in respect of the conditions necessary for their realisation.
A rise in exports is dependent on the capacity and readiness of foreign markets
to absorb German goods (and so on the economic and commercial policy of foreign
countries), whereas a fall in imports depends more on the steady development
(which we can ourselves control) of economic conditions in Germany.
directions the Reichsbank has done what it could to assist.

In both

It has adopted a

series of measures to promote industrial exports, while by a further series of
measures it has helped to increase agricultural production with a view to reducing import requirements.

It is obvious that a country which aims at export-

ing to other countries cannot itself indulge in protection.

German commercial

policy is therefore undoubtedly following the right path when it aims at the
free market: but freedom of markets is only attainable if we have ourselves a
market as free as we can possibly make it.

It would be a mistake however to

make too much of this point alone, and to neglect the task of developing alike
the quality and the quantity of agricultural production: quality is as
important as quantity in this connection,


- 12 -

Reichsbank is obliged to provide for the utilization of available capital.
Its interest in the whole question is however considerably strengthened when
the public authorities incur debts to foreign countries and so artificially
sap the currency foundations of the Reichsbank.

An absolute essential for the maintenance of a gold currency is the
proper functioning of a free foreign exchange market, which means that th
Reichsbank must always be prepared to hand out a dollar for (in round figures
RM 4.20.

If therefore payment liabilities to foreign countries exist, which

are not offset by an adequate supply of dollars on the open market from other
sources, the Reichsbank is forced to part with dollars from its own reserves.

If it failed to do so, a premium over and above the price of RM 4.20 would
immediately be constituted for the dollar, which would be equivalent to the
depreciation of the Reichsmark on the international market.

In the event of

an increased demand for foreign exchange, the Reichsbank is not the last, but
the first, source of supply, since when a shortage of foreign exchange arises
holders of such exchange naturally keep back their reserves, unless circumstances force them to act otherwise.

Under the Bank Law th

obliged always to keep a definite amount (40 per cent) in gold and foreign
exchange as cover for its note circulation.

If it is required to produce so

much foreign exchange that it cannot maintain the 40 per cent gold and foreign
exchange cover, it is obliged in consequence to reduce its note circulation.
A few figures will illustrate this point.

When the Reichsbank possesses gold

and foreign exchange for RM 2 milliards, it can issue in return notes for
RM 5 milliards.

If from its two milliards one milliard in foreign exchange

is withdrawn, it must reduce its note circulation to RM ai milliards.


other words, in return for the surrender of RM 1 milliard's worth of dollars
it must withdraw ai milliards of reichsmarks from circulations and must therefore correspondingly restrict its bill holding and in consequence its credit

13 -

facilities also.

Whether it does this by raising the discount rate or by

restricting credits is in the first instance a matter of indifference.


a withdrawal of credit facilities means severe pressure on private enterprise
and must bring about the liquidation of stocks of commodities, securities,
foreign exchange and other capital investments.

The higher the annual liabil-

ity of Germany to foreign countries for interest and amortisation of loans,

for reparation payments in cash and for the financing of adverse trade
balances, the more threatening does the situation become for the Reichsbank
and in consequence for the currency supply of the nation.

Just because the

Reichsbank realises its responsibility for the maintenance of an adequate
circulation of stable media of payment, it cannot allow anyone who pleases to
contribute to the increase in our foreign commitments.

The question therefore

arises, at what point does the Reichsbank policy of restricting foreign borrowing begin to intervene ?

Public enterprise in Germany pleads the fact that like private enterprise
it is directly responsible for the economic exploitation especially of light
and power, and therefore it claims the same freedom in the issue of foreign
loans as has hitherto been granted to private enterprise.

This attitude

originates in the same mentality which conceives of the State as a third person
existing apart from the individual citizens, whereas actually the State is
nothing more than the collective body of citizens.

This false conception of

the State is a remnant of pre-republican times when the individual citizen
regarded himself as the enemy of authority.

Today, when public enterprise and

the public authorities are identified with the citizens as a whole, it is
quite obvious that public enterprise must take the lead in giving practical
effect to the principle of the maintenance of the welfare of the entire State.

I am not going into the question whether the undertakings run by the

- 11

authorities are worked more economically and more advantageously to society
than the undertakings of private enterprise, although it would be a very good
thing to test the comparative efficiency and profit-earning capacity of public
and private enterprise, and also the working of public monopolies which frequently are nothing more than a form of tariff policy concealing taxation.
Instead I would only point out that, so far as foreign borrowing is concerned,

public enterprise cannot be considered as a problem by itself because it
represents only one side of the public financial administration, and therefore the financial position of public enterprises taking up foreign loans
must be examined in relation to the public finances as a whole.

The indebted-

ness of a public undertaking differs fundamentally from the indebtedness of a
private undertaking in the fact that the private undertaking risks its own
head whereas the administrators of a public undertaking risk the heads of the

The private undertaking will therefore minutely examine the

question of profits in connection with any loan it contracts, whereas a
public undertaking will be governed by quite different considerations, more
especially by considerations of a general administrative nature.

The warning

to public authorities to restrict their foreign borrowing is therefore
particularly justified.

Of the RM 5- milliards (in round figures) of long-term foreign loans
hitherto contracted, public enterprise is responsible for ai milliards,
private enterprise for al- milliards, while i1- milliard represents semi-public

loans such as those of the Rentenbank-Kreditanstalt etc., all these being
round figures.

Of the RM 2 -i- milliards of foreign loans contracted by public

enterprise the Reich is responsible for quite 900 millions, a bare RM 300
millions represents guaranteed State or communal loans, while the balance of
RI 1,300 millions (in round figures) is about equally divided between the



- 17 -

The attitude of the Reichsbank to foreign indebtedness on the part of
public enterprises as opposed to the indebtedness of private enterprise is
quite comprehensible for the reason that public enterprises only produce
foreign exchange on a very small (and that a diminishing) scale;
of foreign exchange is left to private enterprise.

the production

In this case also private

enterprise is risking its own existence, whereas public enterprise is risking
the life of the business population of the country.

This will be clear if we

ask ourselves how the foreign exchange needed in Germany for the interest and
amortisation of our debts, for cash transfers and the financing of adverse
trade balances is to be obtained if and when new foreign loans, out of which
the greater part of these liabilities have hitherto been financed, should one
day cease to flow into the country.

If there should then not be enough

foreign exchange to meet our liabilities, and the Reichsbank should have to
part with its foreign exchange holdings and to effect a correspondingly severe
reduction of the note circulation, the result would be a crisis and a general
national liquidation.

The foreign exchange would have to be procured at all

our goods would have to be sold abroad at any price, and employers and

employees would have to make the greatest sacrifices.

The policy of the

Reichsbank must be directed towards preventing such crises as far as possible,
and it is therefore the duty of the Bank to utter a timely warning against
excessive foreign borrowing.

attitude of those who say


The Reichsbank cannot adopt the light-hearted
"Go on borrowing as long as you can and let the

future decide if, when the day of settlement arrives, we shall be able to produce the necessary foreign exchange or if we must declare ourselves unable to

No one in Germany is prepared seriously to contend that, if we continue

our present policy of foreign borrowing, we shall be able to produce the necessary foreign exchange, if indeed we can produce it at all, without incurring

- 18 -

a serious crisis;

and no one is prepared seriously to contemplate even a

temporary inability on the part of Germany to meet her international obligations.

That is why all reflection on the question leads to the conclusion

that excessive foreign indebtedness must be avoided by economy and sound administration at home.

The Dawes Plan left the definite fixing of our reparation liabilities
still unsettled.

Sensible people throughout the world are already agreed that

this state of affairs cannot continue ad infinitum.

It would be a great mis-

take to raise this question for discussion at the present time before the
expiration of the four years of probation.

I very much hope that the discussion

which has recently arisen in the international press as to the respective
priority of transfers for private and public loans will not make it difficult,
or even impossible, to execute the Plan loyally during the four probationary

To me the entire discussion on the priority of transfers seems quite

beside the point.

Every one will acknowledge - and the Dawes Plan itself with

wise foresight recognizes - that foreign loans were and still are absolutely
essential to the recovery of Germany, at any rate during the period of transition.

Industrial prosperity and the highest possible agricultural production

are essential conditions of the execution of the Plan.

The influx of a certain

number of foreign loans (not excluding a certain number of loans by public
enterprises) is inevitable for this purpose;

and if Germany has hitherto siown

and will continue to show complete loyalty in executing the Dawes Plan, we can
and must expect a similar loyalty on the part of our political creditors.


fortunately during the war and in the so-called Peace Treaty we have seen the
most unjust and foolish attacks on private property.

These attacks on private

property were undoubtedly one of the reasons why the bolshevist wave temporarily
swept over the country.

Indeed I do not hesitate to assert that these attacks

- 19 -

on private property gave bolshevism t-e pretext of a moral excuse.


the end of the struggle in the Ruhr, since Geneva and Locarno, however, we
have all returned to common sense, and under no circumstances can I conceive
of a repetition of the political machinations by which the private owner of
a German loan coupon in the United States or elsewhere - no matter whether the
coupon was issued by a private or a public body - was prevented from collecting:

the interest by a prohibition to Germany to make the payment.

The Power,

Which attempted to repeat such a prohibition, would completely annihilate its
own credit at a single stroke.

So long therefore as a highly civilised nation

of 60 millions is not artificially prevented by external political intervention
from the peaceful continuance of its work, so long as private enterprise in
Germany is guided by capable, honest business men of high standing, so long
is administered economically on sound principles, no
one who has trusted Germany financially will be disappointed.

There is not

the slightest indication that international politicians, German business men
or the German Government could now lack the good will and the ability to act csr
sound common-sense principles.

The practical impossibility of graduating the priority of the different
categories of German loans in the matter of transfer, places a corresponding.1

greater responsibility upon us in the matter of our foreign indebtedness.
But even the Dace, of urgent foreign borrowing must be voluntarily restricted

if the German money market is not to pass entirely out of the control of the
bank of issue and to be at the mercy of the arbitrary desires of borrowers.
The excessive influx of foreign loans in 1926, at a time when the market was
not in any inordinate need of funds, led to a cheapening of short-term money
on the home market, with the result that the Reichsbank lost touch more and
more with the money market and was finally compelled in spite of the Obvio


- 2C -

objections to reduce the discount rate in January 1927.

Although a discount

rate of 5 per cent was calculated to reduce the influx of foreign money, and
although the Reichsbank showed itself willing to place the abundant supply of
foreign exchange accumulated in 1926 at the disposal of commerce in return for
bills, the banks nevertheless took up a large amount of short -term foreign

money and used it tc expand their credit, thus compelling the Reichsbank once
again to raise its discount rate.

It will be seen that the discount policy

of the Reichsbank does not depend primarily, as in pre-war days, on economic
conditions, but is to a very large extent subject to the (arbitrarily manipulated) influx of foreign credits.

This danger to the money and currency policy

of the bank of issue can only be dealt with if all those who hold a leading
position in Germany, public or private, will realise their responsibility in
the matter.

We who have so long been accustomed to being led from above are

still suffering from the lack of the spirit of voluntary co-operation and
esprit de corps.

We appeal, and rightly, to the ideal of freedom and protest

against tutelage;

but there is a corresponding obligation to keep alive our

sense of responsibility to the community.

It will not do to blame the

authorities for every mistake, while we claim the right to irresponsible and
selfish action for ourselves.

In our young republic this lack of a sense of responsibility is still
conspicuous in more quarters than one.

Private enterprise showed a lack of

this sense of responsibility when it incurred short-term debts abroad at the
expense of the German currency at a time when the Government and the Reichsbank
were endeavouring to dam the influx of foreign loans.

It was lack of respon-

sibility, at a time when owing to the extreme scarcity of capital 7 per cent
mortgage bonds for lack of investors were barely at par, to create a boom in
stock exchange shares and to encourage the public - which had no spare capital

-21for such purposes - to run up debts for the purchase of shares at rates which
did not even offer the prospect of a 3 per cent yield.

It was lack of res-

ponsibility when a municipal administration erected palaces at a cost of many
millions and purchased private estates, while it declared in the same breath
that it could not build dwelling houses because the Reichsbank opposed a
foreign loan intended for the purpose.

It was lack of responsibility when

the Treasury accumulated huge funds by exaggerated taxation, and then employed
them in credit transactions or in the purchase of private undertakings.


was lack of responsibility for a State bank to claim a share of public funds
with the assertion that these funds were to be made available to local enterprise within the State concerned, and then to leave these funds for months
at a time on the Berlin Bourse.

All these examples, many more of which could be given, are due to
out-of-date conceptions saturated with the spirit of inflation.
time these conceptions should be abandoned.

It is high

It is therefore very much to

be welcomed that the Government of the Reich has now clearly and unmistakably
declared in its Reply to the Agent General's ;Memorandum that it intends to

make a clean sweep of these remnants of the inflation;

and it is equally to

be welcomed that the Government of the Reich declared on October 7,1927, that
"in view of the present position all expenditure which is not urgent or is

uneconomic, whether to be effected by means of foreign loans or of other
resources, must absolutely be avoided."

If we do not refuse to acknowledge the errors and mistakes which
have been made and are prepared to learn from them, we shall be entitled to
expect a just judgment on the part of foreign countries for the reason that ro
nation has ever been called upon to solve problems as difficult as those with
which Germany has been confronted since the war.

It will have to be

- 22 -

acknowledged that we have attacked the problem of recovering our pre-war
social and economic position with superhuman self-sacrifice, an iron will to
maintain order and unparalleled hard work, and that we have achieved more than
anyone had reason to expect in view of the historical circumstances.


today is one of the most powerful contributors to the recovery of international

In the future also we shall prove that we have the strength and

the will, in the midst of the European political maelstrom, to remain a free,

democratic, i.e., responsible nation, an axis around which the peaceful work
of civilisation can revolve.

Transl. 5111.

iaferred to in if:Lter of

0o-ord. Doc. No. 76 F


Deutscher Volkswirt
November 18, 1927.

Dr. Hjalmar Schacht, President of the

The memorandum of the Reparation Agent touches on the vital
ouestion of our nation.

How many people realise this ?


Reparation Agent has been in Berlin for three years with the sole
task of studying the capacity and willingness of Germany to pay in
order, after the expiration of the four probation years which the

Experts provided in the Dawes Plan, to render a judgment which will
be of very great importance in the definitive settlement of the
Dawes Plan.

The Reparation Agent regularly records his observa-

tions in his semi-annual public reports.

Who has read these re-

ports, which pave the way for the decision on the life of the German
people ?

If they had been read more extensively, the memorandum

could not have provoked among the public the surprise which it
actually caused, and it would have been impossible to attribute the
memorandum to any intrigue or any influencing by a third party.
With unprecedented clarity the semi-annual reports show how the
Reparation Agent interprets and carries out his task.


of the currency and budgetary balance are the two fundamental props
which the Experts' Plan pointed to for the execution of reparation



Again and again the reports refer to these two bases.

As early as May, 1925, the Reparation Agent deplored the
accounting system of the Reich budget and its lack of clarity.
Alieady in the report of November, 1925, he observes that the extraordinary receipt surplus has led to expenditures and made difficult
opposition against the expenditure wishes of political circles.
In the report of June, 1926, he again clearly points to the lack of
clarity in the financial tables.

The report of November, 1926,

urges early and greater moderation in expenditures and criticises


as the report of June, 1926, had already done - the tendency of
Reich, States and communes to grant loans and subsidies to industry
and agriculture and to make capital investments in trade and inThe report warns against tying up such surpluses and says


that under certain conditions the practice may lead to borrowing
merely because of faulty disposition of the Treasury.


taking the position of fundamental opposition towards the application
of an extraordinary budget, the report emphasises the dangers that
dubious items may be financed, not out of current receipts, but out
of extraordinary receipts, that is, loans.

The report of June, 1927, becomes very specially frank and

Here the Reparation Agent begins by explaining his

authorisation (perhaps doubt may have been cast on it upon occasion)
to deal with the budget and for two reasons.

budget has to make available direct contributions to the reparation
payments, and, secondly, because the Experts' Plan described a
balanced budget as absolutely necessary for the economic recovery


of Germany and for her capacity to pay reparations, and, finally,
because the transfer of the German payments to foreign countries
is influenced by the equilibrium of the budget.


repeated complaints as to technique, the June, 1927, report contains almost all the ideas which recur in the memorandum, particularly the constant rise of expenditures and the incorrect basis
of the financial settlement.

the Reparation Agent.

This, too, is no new discovery of

Already in the November, 1925, report

it is stated that the States and communes receive their payments
out of Reich taxes without regard to their actual needs, so that
some communes have been provided with a surplus of funds, whereas
others are in financial distress.

The June, 1926, report emphasises, as did the preceding
reports, the great importance of obtaining exact statistics on the
financial conduct of the various States and communes.

The Novem-

ber, 1926, report says very clearly that the strain apparent in
the budgets of many States and communes will, it is hoped, have the
healthy effect of reducing public expenditures;

but that, in

spite of this, borrowing on the part of the States and communes
seemed at that time unfortunately to have a rising tendency.


same report says, finally, that the endeavours of the Reichsbank
and the Reich Government to restrict at least foreign borrowings to
some extent had been up to then without success..

In the June,

1927, report, then, with express reference to the Dawes Plan which
appeared three years previously, the Reich is once more reminded of
its responsibility for a financial policy adjusted solely to the
necessary requirements of the States and communes.

All this does



of the Reich loan in 1927 to be a thwarting of Reichsbank policy.
sight weeks before the sudden decision to issue a Reich loan, I
said publicly before the Reichstag Committee for measures of subsidy
that there was a great difference between the short-term money rate
of the Reichsbank and the rates of the long-term capital market,
and I pointed out the contrast between the liquidity on the shortterm money market and the lack of absorptive capacity for longterm loans.

When the Reich needs credit, I continued, it must

consider whether it cannot go temporarily into the short-term money
market and resort to it gradually to meet a portion of its needs
so as to appeal to the long-term market for the satisfaction of
these needs only in part.

It was from this consideration that the

Reichsbank caused a change in the Bank law in July, 1926, providing
for the possibility of re-discounting Reich treasury bills in order
to facilitate a resort to the open money market on the part of the

If use had been made of this possibility, what the Repara-

tion Agent described as natural would have been accomplished,
namely, through the Reich treasury bills there would, firstly, have
been a natural temporary equalisation of the cash position of the
Reich budget, and, secondly, a natural regulator of interest rates
on the open. money market.

Loreover, the accumulation of great

public funds, either from taxes or from loans, which constantly
involved the danger of misuse, would have been avoided.
Anybody who has followed from report to report the more and
more outspoken statements and warnings of th-, Reparation Agent

must be filled with grave anxiety as to whither a Policy of
laissez faire is leading

Is not the example of the Prussian

6 -

loan, which the Reparation Agent mentions in his memorandum, a
further proof what harm to our credit and our general standing can
be done by this policy of letting things go ?

In two letters

written in September and November, 1926, the Reparation Agent expresses his opinion about the question raised by the first external
loan of Prussia, with the result that when a year later a second
external loan of Prussia is issued the question raised in the previous year is neither cleared up nor even discussed anew with the
Reparation Agent.


then people wonder that the Reparation

Agent raises objections to the issue of the loan and carrot explain
his action in any other way than by suspecting the President of the
Reichsbank of an intrigue.
What follows out of all this ?

It follows that we must

occupy ourselves much more intensively than hitherto with the actual
and psychological factors providing an important basis for the


formation of a judgment if, after the expiration of the four pa44..

years, we are to enter into a discussion of what has been accomplished up to that time under the Dawes Plan.

The first danger

which we face is that even now, as a result of a lack of interest
on the part of the public, the warning of the memorandum may be unheeded.

The second danger is that, instead of doing the most obvious

and most necessary practical things in regard to such questions raised
by the report of -;he Reparation Agent, as administrative reform,

central control of local finances, etc., we may approach the matter
from the viewpoint of the political disputes involved in federalism
versus centralisation, and thus get into discussions of principle

- 7 -

which at best can lead to results at only a very late stage and
It is necessary and

after severe conflicts of internal policy.

must be possible immediately to carry on a practical financial administration without raising the great questions of centralisation,
because only such an administration can bring us closer to a definite
solution of the Dawes Plan by peaceful means.
In earnest nobody doubts the good-will of Germany to pay
reparations to the best of her ability, but good-will alone is not
sufficient if there is not on hand sufficient strength to convert
this will in reasonable measure into action.

says that we are spending too much and borrowing too much, and there
are many Germans who say the same thing.

who raise in reply to the warning to spend less and to borrow less
the demand for an increase in purchasing power and for a greater
inflow of capital in the form of credit;

but, even if we were of

this view, we should have either to convince the Reparation Agent
that he is wrong, or we should have to seek to reach an agreement
with his views,

in spite of that, if we want to accomplish any-

And here it is not a question of words but of deeds.

must show the world by deeds that we can control ourselves.



German merchant enjoys an enormous credit in the world not only

because he is considered honest and reliable, but primarily because he is rightly considered to have a sense of responsibility.

Self-restraint and self-control

are what the Anglo-Saxon holds in

high esteem in forming a judgment of a man and what he demands of

8 -

intellectual and economic leaders.

a sense of responsibility not only in business, but in political
life, and that we know what self-restraint and self-control mean
and are determined to exercise them.



November 1927.

A birdseye view of the comments shows a surprisingly large number that

agree wi th Parker Gilbert's strictures in essence and urge thorough-going reform.
Outspoken criticism and disagreement are relatively scanty. Under the main topics
opinions in general agreement .vith the Agent General's point of view or indicative of
a cooperative attitude are indicated by "For", and those dissenting or antagonistic by



The Deutsche Tageszeiting says that in spite of inner opposition in every

good German the discussion may nevertheless be .velmmed as an at tempt to clarify
finalcial and economic conaitiois which is entirely necessary. Another paper points
out that "All have sinned", and leaving hypocrisy aside what we must now do is listen
to the warning of the Agent.
!Mat of the Lepers agree that the Agent General has not exceeded his fu
and that he has remained courteous and diplomatic throughout in his dealings. In
"he expresses views remarkably similar to those ocf the President of the Reichban
Another remarks that it helps Germans to get over the sharp tone of the
to know they are dealing not with an enemy of the German people but with the Comm
of the eredi for powers who sees as a cool calculator and pure financier.

Germans are reminded that he is the agent for their creditors, ahose d

it is to look out for the interests of his employers and to "tap the debtor warni

on the shoulder."


Two or three papers term the financial supervision of what are German
conditions, unjustified. The Agent has no rifitiot to be a "task master" or interve
in German internal political nutters.
The Ber liner Tageblatt says that many general and speci fi c eta t
the Agent General run parallel .with domestic criticism for a long time on G
financial policy. He shy s hardly anything that German critics themselves
already said.
One paper suggests that as Yr. Gilbert has daily conferences and
talks with many German leaders in business and industry probably they hav
themsblves too freely in criticism of existing conditions of which they di
and have thus given him an exaggerated idea of the situation.
The socialist paper "Vorwaerts" charges that
Gilbert's view
public economy are due chiefly to "the materially unjustified att
Reichbank, the large banks and the industrial leaders, who want to use the
Commissioner in order to have stronger weapons against the hated compet
public economy-."



Most of the papers agree that the Government's reply was not a
to Parker Gilbt's note in forcefulness and that it represented a synth

of the various views of the Ministers which was not finally edited -.vith a
refuting effectively Mr. Gilbert's specific charges. It evades the issues
The note scarcely touches on the grave question as to ho w the G
states and communes aregoing to raise the money f or their enlarged progra
The "clumsy attitude" of the Government as well as " the c caotrad
grave anxie
of Dr. Koehler made Agent General say he viewed future ).vi th

Summary of German press ...




Government administration must be rationalized. There is a great waste
in administrative relations between the Reich, states and cormunes ohich threatens
to crush the nation. If the Germans do not put their own house in order, foreign
control threatens.
So long as colossal maloractice in administration can be pointed to it
i s useless to refer to the oppressive burden of the Dawes plan.
Apparently no attempt is being made to provide for necessary budget expenditures by long-overdue administrative reform. The firm resolve of the Government

to take action is not clear in its reply and yet it is necessary to do sone thing.
The"Berliner Boersen Zeitung" assumes that all political on_ position will crumble in
the face of the seriousness of the situation.
Agains t

One protest is made against the lark of information !ix.. Gilbert displays
in his criticism of government administration. He seen to know nothing of the

Reich Audit Office.



Many papers emphasize t he point that the loans to Germany have been for
productive purposes. But the "Deutsche Volkswirt"points out that "the Government

sticks to the primitive theory that use of a loan for electricity, gas, etc. suffices
to DM ve it is productive. 71 th this sort of economics the Go vernment thinks it
can answer a document, .vhieh aside from a few incidental points, is formally and
theoretical ly irunpretnable.

Many of the loans in the interest of the whole people should not ha ee
been fisted.
German money requirements are still large, so it is well to listen to

Mr. Gilbert, whose ,judgement as to German conditions, the American business man

holds in high respect.
Additional loans, as in the case of large credits to an industrialist
will enable Germany to rehabilitate herself the faster and therefore be in a position
to pay over much greater sums than otherwise would be possible.
The borrowing i s really proof of desire to facilitate transfers.

It is feared that the discussions may affect leen possibilities, especially
in the Anerican market, and yet it would be to the advantage of the creditor nations
to continue the loans.

The loans to the communes have been for productive purposes and therefore

should not be criticized.
Even if the loans he ie somewhat inflated credit they have stimulated
bee inese activity and reduced unemployment.



Reorganization of state finances is needed but it is a slow profess.
Historical and political considerations are involved that apprently are no t
comprehended by the Agent General.

One eaper questions to what extent foreign funds released other funds

of the communes, :121ch were then invested in notorious luxury enterprises instead

of being used for necessara purposes.
Berliner Boersen ._:eitung believes it might have been better if the Government had not tried to justity eoznannal loan policy. Matters .vhihh were justified
in a time of great depres3ion are no longer valid todv.


Eo one except Dr. Koehler believes that the Reich will be able to finance
salary reform next year without tax increases. Among the doubters is ?artier Gilbert.

Summary o f Ger man pm e s




. Gilbert has ignored

and misunderstood t4e political history of

The press is unanimous in the opinion that the question of transfers is

He has also failed entirely to include cu
the many Sections within Gerru.ny.
not the Peic,th's business and that part of the memorandum mast be firmly rejected .
considerations in his arit Lei= of expenditures.
They believe it suffieient if they adopt no measures deliberately to hinder transfers.
The Belch government cannot be guided by financial and economic co
The reactionary "Deutsche :eitung" speaks of "the sneak). attempt to attend
alone but !Lust also act under state political considerations.
German responsibility, contrary to the clear sense of the Dawes plan, so as to include
The statements of the'task-master' on this point must be
the transfer problem.

rejected wi th all ener."
A''s in at




A few guarded references appear as to the necessity for the revisi
the Dames plan, mostly confined to the counselling of tact and amenability t
It is not the 'twit of Germany if her exports are diminishing.
direction of the Agent General nou in this crisis, so that he may be counted
It is
are hindered by trade policies and prohibitive tariffs of other countries.
to advise the revision later.
impossible to make payments to countries that will not receive German goods.

Pr L..52:3

The Agent General is thought to have greatly exaggerated the effects of
the new bills on the development of prices.




(Mr. Jay comments that
November 11, 1927. Financial Control, by Gustav Stolper.
this is the best article.)
"We do not think it is admissible to load the political responsibility
for the conflict and for its political and economic consequences on the Finance
The wrole Government is responsible, not only because it must
Minister alone.
bear the responsibility for German financial and economic policy, but also because
the impossible re,ly to Parker Gilbert was brought before the Cabinet for its
approval... The Government Imes that Gilbert's memorandum would be published on
",hat would have been
of tne world.
Sunday morning by all the great new
more obvious than for the Government to try to meet the unfavourable effects of
the document at the outset?...Nothing of the sort was done, and now we hear an
echo stronger, more unanimous and more hostile than any German governmental
The united front !-Tainst Germany seems to be
document has aroused since 1924.
re-established, not at the cry of Nationalist ministers and generals, but in the
name of economic reason, or, if that is preferred, of economic self-interest."
"The arguments of Gilbert are not all sound, but it would be the greatest
mistake which people in Germany could make to try to meet these arguments by agreeing with them in a few points and in return criticising all the more seventy some
In so far as it does not accept the authority of
other matters of formulation.
the Reparation Agent and thus does not go into material questions at all, the rest
It sees primarily the faults in the
of the world will take the opposite course.
German reply, which unfortunately talks around the Gilbert criticism in important
points...The subject of his criticism - an entirely justified and incontrovertible
criticism - is the fact that not even the attempt is being made to provide the
funds for necessary expenditures ,rimarily by a long overdue administrative reform...
Foreign countries do not interpret the German words as an explanation of the motives
of our action but as a threat, which the reply quite unnecessarily emphasises by
saying that upon the settlement of all triese matters depends the will of the whole
people to ;,ay...Foreign opinion does not understand that these expressions mean
nothing at all. Thy weaken the impression of the repeated honest assuran7e that
Germaey intends to fulfil her treaty obligstions loyally?"
"In the report of June 10th, the Reparation Agent spoke very plainly,
A Finance Minister somewhat
but he observed the polite form which is customary.
This report,
more familiar with the world would have understood what he meant.
push to lead Dr. ?'Oehler and the Government of the
too, was not a strong enough
rieich finally to begin an exhaustive discussion with the Reparation Agent.
The June Report
'seeks and months no reaction whatever came from the Government.
was ignored in exactly the same was as former signs of life from the ;:gent until
the crash came with the Prussian loan...Naturally the Agent emphasises again and
3ut unfortunateagain that it is not his affair how Germany administers her budget.
In their relation to their debtors bankers do not
ly this country has creditors.
let themselves be influence* by political considerations.'
That the Reich will be able to finance the salary reform next year without
Among the doubters
tax increases nobody in Germany believes except Dr. 7-oehler.
is Parker Gilbert...Summarising, the Reparation Agent says that the Reich is endangering the stability of its budget, and that there is a general lack of effective
These ideas a-e not strange to the
control of public sending and public borrowing.
readers of this paper...The note of the Government unfortunately goes )eyond the
It sticks to the primitive theory
line that can be defended with good reasons.
that the use of a loan for electricity, gas, etc., suffices to prove it is productive,
and says that the total 1.6 milliards of public borrowing abroad has not served to
With this
increase the administrative ex,enditure of the public corporations.
sort of economics the Government thinks it Can answer a document which, aside from
a few incidental points, is formally and theoretically impregnable."

Financial Control. by Gustav Stolper. Cont'd.
"That the deficit in the trade balance is described, on the one hand, as
the natural consequence of foreign borrowing, and that immediaely following the
statement is made that the German economy is still fcr from able to meet the deficit
out of its own resources - that is the deficit in the trade balance is described as
the cause of fo:eign credits - this is only a further example of the way in which
a foci anonymous officials put together tneir economic wisdom with a view to 'contradicting' the criticism of the Reparation 4ent...1iether :Iarker Gilbert is called
a bailiff or anything else for remsons of internal politics does not change anything.
The important fact is that the German economy, the German people and the Teich are
faced with the choice of living less well and being free, or of living in plenty and
laying for it with a lack of independence and with the constant dangers which any
A national financial policy is a financial
debt relationship brings with it.
pollOy of self-denial and sacrifice, not c financial policy of great words.
It introduces, we hope, a now chapter of
nole of Parker Gilbert is no episode.
German history, the chapter of the groat political reform, at the end of which
stands German liberty."

november 11., 1927.

VOSSISCHE 7417.1fiG



Writes a groat deal on financial matters.)

"Made In Germany4 by Georg Bernhard.
Ndvember 6, 1927.
"Some of the Nationalist papers have egain referred to the 'Dawes
fetters' and have circulated a mean expression which characterizes the aeparation
Parker Gilbert is not a taskAgent as the otask-master' of the German people.
master. Germany is not under financial supervision and the financial agent
appointed for taking care of the rights of the reparation creditors has no right
to intervene in internal German conditions. nut he has the right and duty to
*nor tney are the creditors of
look out for the interests of his employers.
Meese creditors are not only reparation creditors. America, at least,
is Germany's creditor as a result of her own free decision. Her banks and bcnkers
have furnished Germany with milliards in the form of public loans and private
credits. And even if Gernany did not owe a pfennig of reparation debts, she
would have to reconcile herself to the fact that her creditors would carefully
watch the development of the public finances and of the German private economy
and that they would exnress their opinion thereon."
"Germany's money requirements have by no means been satisfied as yet.
7e have always taken the vier that without further large loans
Oa the contrary.
from abroad the German economy will be unable to develop. From this there follows
the nerhaps not very agreeable, but possible consequence that the important thing
is not what c u.xiit ions in Germany actually are but whatopinion foreign codntries
have of German conditions.
For it will depend on the judgment of particul
11th the
the Americans whether they wish to become larger creditors of Germany.
extent to which. Germany's reparation burden will be reduced depends on this judoThis is the reason why the statemmts of Parker Gilbert are so extra ment also.
orlinarily important...If Mr. Gilbert, who enjoys American confidence, expresses
himself on German economic and financial conditions and if doubt as to Germany's
credit arises out of such utterances, lenericnn business people consider these
doubts in the same way as every business man in every country does woo lends out
money and whose experts express themselves in a doubtfu) manner on the creditstanding of the borrower."
"A possibility is that nermanyn confiding in her economic, technical
and mental forces, should accent as much foreign capital as ahe can obtain. With
this ce;:ital she will again earn money and resurrect herself.
And as a result
of a prosperous German economy it will be easier to pay two milliards than one
milliard under the other condition...Every thing depends on whether Germany con herself a big industrialist or a small merchant."
Federal Reserve Bank of St. Louis

Good paper - Represents old liberal spirit.)

November 5, 19Z7.
( ?)
"It is to be hoped this discussion will serve to make more clear to
foreign countries the difference between the functions of German communes and
But, aside from this, it cannot be denied
those, for instance, in America.
that the financial criticism of the Beparation Agent is largely justified, and that
the clumsy attitude of the Government, particularly the contradictory staterants
of Dr. Koehler, has contributed towards making it possible for the Agent to say
;;st can only hoe that no
that he looks into the future with grave anxiety.
further encouragement from outside will be necessary to make the Government carry
out the work of salary reform."
tovember 7, 1.90.
"The firm resolve to take vigorous action is not so clear in the Government's re,ly, although all the difficulties which, it is explained, stand in the
way of such a decision will not relieve us of the necessity of doing something...
The problem is in effect that the outgrown relation between the Belch, the States
and the communes and the great waste in this administrttive apparatus threaten to
Here we must take measures on our own initiative in the direction of
crush us.
For one thing has been mnde clear by the memorandum of the
unrelenting economy.
Beparation Agent, even to those who have up to now closed their eyes to its we
shall never be able to object against the Dawes Plan with spy prospect of suc::ess
and maintain that the internal payment of the charges pawed upon us is impossible
so long as we have not ordered our own affairs."
"The foreign borrowings of Germany are not a proof of a lack of will to
fulfil reparations, but, on the contrary, a proof of a strong desire to make the
During the period of
reparations charges bearable and to facilitate transfers.
transition we have been making ourselves strong in order to fulfil, in order to
It is a misfortune that the Agent, insufficiently
pay, in order to transfer.
enlightened, did not see these facts..- Practically speaking, we must now expect.that the inflow of foreign capital into Germany will be obstructed, and that, in
particular, the American capital market will be less inclined at least to accept
German public loans."


(Nationalist, Government Party.
Leading organ of German agrarian interests.)
The Great Discussion. by Dr. Erich 7:iens.
November 6, 1927.
"In spite of all inner opposition which the memorandum of the Reparation
Agent probably arouses in every good German and in spite of the feeling that
Germany's dependency on foreign rovers is here brought home to us with a sharpness
which we hnve experienced comparatively seldom during the past few years, the great
discussion between the Reparation Agent and the .each Government may in a certain
sense nevertheless be welcomed as an attempt to clarify our financial and economic
conditions, which is entirely necessary...The memorandm of the Peparation Agent
has force' the Reich Government synthetically and fundamentally to treat the whole
problem, - a thing which has long since been necessary for the education of the
German people...What helps us Germans to get over at least part of the very sharp
tone of the memorandum is the fact that we are not dealing with an enemy of the
German people, but with the commissioner of the creditor Powers who believes he is
only doing his duty in emphatically calling the attention of the Reich Government
The Reparation
to the material pre-requisites for German reparation payments.
Agent is an American, and only with American eyes, i.e., as a cool calculator and
pure financier, does he see and judge the intricate question of German reconstruction
and reparation policy."
Gilbert's concentrated attention to German financial
"Mlle one-sided,
policy, has given him the possibility of being an impressive critic who is undoubtedly competent in many thinns...It may be said that the objections of the Reparation
agent to the borrowing policy which a number of German communes have pursued during
the past few years run entirely parallel with the misgivings which Germans have also
advanced repeatedly...It may be true that on the books these foreign funds were used
Neverthefor other productive
primarily for electrical and water works
less the question remains open whether and to what extent foreign funds released other
funds of the communes which were then invested in notorious luxury enterprises instead
of being used for useful and necessary purposes thereby making borrowing abroad superfluous."
"We regret that in its reply the r'overnment failed convincingly to refute
the misgivings of the Reparation Agent against the wage and price effects of the
salary reform...In warning against firther increases in German costs of production,
 neanintion Agent appears primarily to fear the unfavourable influencing of our
Naturally he must realize that the protective customs and trade
trade balance.
Federal Reserve Bank of St. Louis


(Centre or Catholic Party, Government. Important paper, as its
editorial articles have considerable influence particularly on internal politics.)

Reparation 2olemic or Reparation Business?
Fovember 6, 1927.
"It is r;articularly to be welcomed that the reply of the Teich Government is entirely in a tone of calm objectivity, which perhaps vas not easy to
maintain in vier of the criticism which the Reparation Agent exercises. This
criticism is all the more surprising because Parker Gilbert recognises that the
assurances of the Government that it is doing everything in its power to meet
its financial obligations are worthy of full confidence."
"The Versailles Creaty itself provides that Germany shall indemnify her
citizens for their losses of property abroad; no' when these indemnities are to
It should therefore not surprise
be paid the Reparation Agent raises objections.
people abroad if the suspicion is aroused here and there in Germany that the
Repartion creditors want to prevent the reconstruction of German existences
"It is one of the rincipal merits of the Dawes elan that it took the
It would be
reparation problem out of the stage of political discussion.
extremely regrettable in the interest of Z.uropean peace if now a f.uitlees
polemic should take the place of the business-like liquidation of repartions.
In s,ite of all objective opposition
lie hope there is no reason for this fear.
to the criticism of Parker Gilbert, we do not deny that in many other points
there is agreement between his views and those of the Government."

(Extreme reactionary.)

The Task Master. by Dr. Bane.
November 10. 1927.
"The memorandum is noteworthy and fortunate because it lifts the veil
from a condition Mich up to the present was still concealed to big parts of our
nation in view of crafty propaganda...It gives us sincere pleasure that a description of the task master, which we created some time ago and for which we were
reproached by the Dawes enthusiasts, is now going through the press 'the bailiff
of the remains of a bankrupt Germany'.
This hits the nail on the head...How
stupidly and hatefUlly were we once opposed when we proved that the Dawes Plan
aimedat gaining control of the German economy and power in the German Statet
At that time we also referred to the con nest methods of worshipped "America",
i.e., of rlall Street capital, this greatest robber imnerialist of all times.
To -day we have the painful satisfaction of seeing this method of conquest uncovered with c:mloal open-heartedness in the book "Dollar Diplomacy" by Steering
and 'reeman.
"Whoever wants to know What the Dawes Plan and the American loans
mean' should read this education book of Shylock."
"Of those people who helped to prepare the Dawes Plan and who accepted
it, no one has the right to complain to-day and to shed crocodile tears. Parker
Gilbert is merely doing his duty, and this duty is based on the 'voluntariness'
of German policy of fulfilment.
:s regards the contents, the task -masher is
unfortunately right in some joints.
One does not have to be an American to
recognize the untenability of a Social Democratic State and economic system which
sacrifices to the Marxistic Moloch of 'public corporations' one private initiative
after the other and which supports a robbing tax system and an unbounded loan
policy to overfeed itself and to preserve the very dangerous condition of Marxistic party maleadministration. But the Reparation Agent's attack on the
financial polioy of the past yeer I. e., on Ioehler, is unjustified and malevolent."
"The most important and dangerous thing in the memorandum is the
sneaky attempt to extend German responsibility, contrary to the clear sense
of the Dawes Plan, so as to include the 'transfer problem'. The statements of
the task - master on this point must be rejected with all energy.
71hy does the
German Government not do this in its humble, obecilent and lame renly?...The
Government's reply does not say that Which is important, necessary and a mat,,er
of course; that as a result of our bleeding we are at the end of our possibilities,

and that 'by fulfilling' we have long since proved the 'impossibility of fulfil
Lent', for
Federal Reserve Bank of St. Louis which reason we must demand a chance of things."

(Socialist. Bitter enemy of Nationalist and
People's Party - also extremely hostile toward Communists.)

November 6, 1927.
"The criticism of the Reparation Agent is sharp in its contents but
entirely courteous in its form...That the Reparation Agent continually speaks
of extravagances of the States and communes is due to the fact that in the United
States similar administrative forms with like tasks do not exist or exist only in
Mr. Gilbert's views on the German +public economy are therea ver: small number.
fore due chiefly to the materially unjustified attitude of the Reichsbank, the
large banks and the industrial leaders, who want to use the Dawes Commissioner
in order to have stronger weapons against the hated competition of the public
economy...Je hope that the strained relations as a result of the exchange
But that such a condition could arise is the merit
documents will be overcome.
of a Government which through its composition and the undisciplined behaviour of
the largest s .larty in the coalition, has damaged the confidence of foreign countries
in Germany's honest will."


Good paper of liberal views.)

(People's Party, Government. Editorially the
paper has little influence. Unimportant politically.)
November 6, 1927. Bsr P. N.
"That the tone of the reparation Agent's memorandum is, in spite of the
unusual sharpness of the material, not unfriendly goes without saying in view of
the correct relations between i'arker Gilbert and the Reich authorities...As regards purely financial political problems, on the other hand, agreement ought to
be possible all the sooner since the majority of the German people is of the view
of the Agent General and the Government that very, very much must be simplified
and improved in the public finances.
Te must only be given time to master the
great difficulties which confront us."
Jovember 7t 1927.
"It is Tuestionable whether it would not have been possible to prevent
the Reparation ,gent from arriving at such an absolutely critical attitude and
whether it would not have been possible for Germany to eliminate through her own
free decision a number of the misgivings raised by Er. Gilbert."
"The Dawes clan as such is not the subject of debate to-day.
is, as the ':each Government has declared anew with all seriousness, determined
to fulfil it.
3ut the most important prerequisite for fulfilment is that in,creased merchandise exports be made possible for Germany.
The difficulties aryl
hindranoes which other countries place in the way of German exports work in the
direction of the destruction of the Dcres Plan because they make its self-evident
pre-requisites questionable...It is not new that representatives of the German
economy have requested the decisive authorities to rationalize the administration
and the public corporations. In a very important interview at the end of September,
Thyssen pointed to the danger if this most serious task is postponed until Germany
..:as in the midst of critical negotiations on the bearableness of the Dawes burden
and the fixation of tare total sum of reparations.
Such a procrastinating policy
must, he continued, make our position very diffioult...Uhrestri:ted credits led
Germany, to an extent, to over-estimate her own strength.
Such a psychological
reaction must not remain unheeded, and...a change of proce6ure is in order."

November 10. 1927. the 77ep-,ration Agent that loans must be placed only for productive purpo
"Thei.e is complete agreement bet Neen the Government of the necessity of an early
Reich and
its 001034" the German afrrrAmment recognised
of the financial relations between the Reich, the States and
nammunes...The disturbance caused in many quarters in regard to the fina
situation of the Reih laoks any foundation in fact.
The German Govern
has already given the assurance that budgetary equilibrium will be maint
for the fiscal year undar all circumstances.
Mere can therefore be no
that the equilibrium of the budget is endangered."



(People's Party;

2,ditorially the paper has little influence.)

November 10, 1927.
"There is complete agreement between the Government of the
Reich and the Reparation Agent that loans must be placed only for
productive purposes. In its reply the German Government recognised
the necessity of an early definitive solution of the financial reThe
lations between the Reich, the States and the communes.
disturbance caused in many quarters in regard to the financial situation of the Reich lacks any foundation in fact. The German Government has already given the assurance that budgetary equilibrium will
There can
be maintained for the fiscal year under all circumstances.
therefore be no suggestion that the equilibrium of the budY,et is enKO'LNISC1E VOLKSZEITUNG

(Centre Party;

November 9, 1927.


Important in
Represents conservative wing.
its views on domestic politics.)

"In America's Shadow."

"France stubbornly refuses to ratify the agreements with
England and the Lellon-Berenger agreement, saying that she receives
no foreign exchange. .'or this the German deliveries in kind offer
no substitute. Therefore by making more frequent and larger cash
transfers to the reparation creditors, Gilbert places them in a
position to be better able to meet their debt payments to America
This is the one side.
in cash.

" ::ht is to be done?

arm ourselves with patriotism and
Nothing would be more incorrect than to mor
E nation which earns nothing cannot m
structure is, moreover, much differen
overlooked this."

govember 5. 1927.
"It would have been politically, economi
a discussion on the i,racticability of the Do
even to regard the exchange of memoranda as a
ment has therefore expressly stated its inten
payment of the repnmtion charges has not been
be endangered if the future budgets of the Re
endangered in the future because the Minister
Reidhsbank are taking steps to maintain the s

Tam:1-EI TanG

(wationalistReggnormi eqictu u5lapnrRaiNNgi.4aper.)
November 6. 1927,,
"In spite of all attemits to make only economic and financial
obje.,,tions, the sharp reference to and criticism of Reich Government bills
under discussions are very similar to intervention by :arker Gilbert in the
sovereignty of the Reich...In view of the strained and obscure conditions in
which we still find ourselves, this optimistic belief in the constancy of good
business conditions is a very daring foundation for the Reich finances edifice.

The Pei* Government, however, cannot and will not let the present legislative
Por it cannot be guided by financial and economic considerations
measures drop.
alone but must also act under State-political considerations if it is to carry
out its political teaks."
November 9. 1927.
"The memorandum of the Reparation Agent now published keep correctly
Thee is no reason for attacks
771thin the limits of the powers given to him.
on him pe-sonally. Mr. Parker Gilbert raised in the memorandum no protest against
the bills now pending, and he likewise refrained from making any concrete izoNe7ertheless the gravity of the situation should not be under-estimated
His warnings may have a great effect on credit conditions even now."
in any way.
reverter 10. 1927. "That Does the Reparation Agent "ant?"
"The nest ton is why the Reparation Agent used such plain language.
have met our obligntions to the limit, and our payments are fully secured, so
that there is no doubt that they will be made in so far as the debtor is capable
of paying at all...The important thing in the memorandam4ies in the concluding
This must be rejected...
remarks, in which he makes us responsible for transfers.
We have undertaken 'lathing more than not to make any financial manoeuvves or to
adopt other measures deliberately intended to restrict transfers."

November 7, 1927.

"The Tageblatt correspondent states further that it is remarkable that the Federal :.reserve 6ank of New York was able to give the
American press the full text of the memorandum for publication in
the Sunday newspapers. He thinks this makes it clear that the competent authorities wart to bring the view,: of the Reparation regent to
the knowledge of the widest possible public. ether despatches from
New York state that, whereas these papers publish the full text of
the Agent General's memorandum, the reply of the German Government
is liven but little space._
"In the course of his speech at Liegnitz on November 5th the
leader of the Democratic Party, Herr Koch pointed out that
the person who must take the initiative in the reeision ernis the
Agent General, who would have to prows in 1929 that the Dawes Plan
Only then would the time come for the
could not be fulfilled.
great discussion with the Allies. Herr Koch went on to speak in
favour of administrative reform, which, he said, could be accomplished only by establishing the unified state."


The Reich Agrarian League (Reichs-Landbund) held a convention
in Berlin, November 7, 1927.
Dr. Adametz, who seoke on adminietrative and constitutional reform, said:
"Frederick the Great once said that a clever person must not only
do the right thing, but he must also do it at the rieht time.
responsible people in Germany missed the right time as regards a
If we do not ourselves
rationalization of our public administrations.
is threatening, in order, foreign control by foreign at present
soon put our own house which in practice has already - though countries
cautiously - begun with the last action of the Reparation Agent, who
under the Dawes agreement has no right to intervene in German internal political matteec.
"A part of the press attributes our sad financial situation exclusively to the oppressive burdens of the Dawes agreement. But we
must be clear that we cannot refer to the oppressive burden of the
Dawes obligations so long as - and not unjustly so - colossal malpractices in our public administrations may be pointed to."


November 5. 1927.
"One cannot evade the impres7ion that this memorandum was worked out
with the greatest care and thoroughness and that it will be Of decisive importcnoe
for our whole financial and repartion policy.
Boreover, it, gives much better
information about the actual status of finance and business tran the very general
statements of the German Government. Parker Gilbert says very hard words, but
nevertheless we need not doubt that it is his intention to warn the German Government in time...If there is anything in the German reply that can be welcomed it
is the part where the statement is made that Germany cannot adjust her whole
economic sitution to the execution of reparations.
The Parker Gilbert memorandum
is a work of eminent political significance; the German reply unfortunately is
less political than bureaucratic."


November 6. 1927.
"Parker Gilbert does not think his duties are confined to collecting the
_payments, but he believes he can take measures to prev,nt any possible complications.
In other words, his right of interference with economic and financial affairs is
We can do very little against this control, which we ourselves accepted...
In the reply of the German Government the whole impotence of an oppressed people
is a ...,arent."



November 5. 1927.
"aldh of what he says in undoubtedly true, and it is bitter that we
have to let a foreigner tell us these things only because we have not had the
energy to act with the necessary resolution...7e are glad the documents were
published because distrust is now removed, but we expect that the German Government will now take the bull by the horns and use all its influence to restrain
parliamentary bodies which Shaw too much inclination to spend money. 7e must
do everything to avoid the impression of bad will, because then we shall obtain
an earlier revision of the Dnwes Plan."

(Nationalist. Unimportant politically.)
November 5. 1927.
"The duty of the Agent General is to .i.rotect the interests of the
creditor states, and, if he thinks these interests are endangered, he must tap
Those who forced upon us the yoke of
the debtor warningly on the shoulder.
reparations ought to be the last to regard this as interference in our internal
Parker Gilbert carefully avoids exceeding the limits of his functions...
Aside from the schoolmastarly tone of his memorandum, which was perhaps not
intentional, the Agent General expresses views remarkably similar to those of the
President of the Reichsbank."

November 9. 1927.
"The Dawes Plan has left the responsibility for its success or failure
The reparation
Zhnt is its psychological weakness.
to the German people.
Agent says nothing about this in his memorandum, and the German reply intimates
nothing of the kind.
Thus the Reirktion gent gets the upper hand even in the
eyes of the German nation because the Government does not attack the fundamental
idea of his memorandum."

November 7, 1927.
"The reparation JIgent has carefully kept within the formal
limits of his office, but in fact he has told the Government that
it is no longer responsible to the Reichstag but to the Dawes Plan.
But his memorandum fails to prove that our financial policy has not
been in the interest of the reparation cbligations.

November 7, 1927.
"We must say that even if the Government is right that it was
necessary to increase the budget 1,70C millions in the past two
years, what is going to happen if there should be really an economic
depression when business can no longer pay taxes? If the Government's optimism is justified, the misgivings of the Agent will be
largely overcome. But in the opposite case will not our creditors
point to his warning and say that Germany has herself restricted her
capacity to pay reparations? The German reply leaves the possibility
of such an economic reversal entirely out of consideration, and that
is the worst thing that can be said about it. Nevertheless the Agent
must be told to keep within his proper limits in a number of points.
One statement of the Agent deserves the greatest consideration.
Many people in Germany think that our obligations end with the payments to the Agent. We are now told coolly and objectively that we
are obliged to facilitate transfers. There is no use denying the
gravity of these matters. The consolation that the Government itself caused the exchange of opinions helps but little. Unless it
takes into account the justified misgivings of the Agent, it will at
least open itself to the reproach of having given the Agent a cheap
opportunity to criticise things outside the limits of his office.


November 7, 1927.

"If things were really as the Agent sees them, we should be in
a bad way. We can only hope that he deliberately painted them too
black. His criticism would have a disastrous effect on our foreign
credit if it should be entirely approved, and if the reply of the
Government does not convince the reader.
We may expect that the

mea2ures promised by Dr. Kohler will dispose of the most important
objections of Gilbert."

November 8, 1927.

"There is an old proverb that anybody who contradicts somebody
stronger than himself acts rashly.
The Finance Minister acted in
accordance with this proverb when he sent the Agent General a long
reply to his memorandum.
"Mr. Gilbert's statement that what is in the interest of the
German economy is likewise in the interest of the Plan is nonsense.
So far as lack of any control over public expenditures is concerned,
just the contrary is true. Gilbert seems to know nothing about the
Reich Audit Office. He does not seem to understand anything about
the finances of the States and communes. We are sorry the democratic
press is exploiting the Agent's remarks. If we must dispute, let us
do it among ourselves and be unified against foreign influences."


November 8, 1927.

Opposition. Good financial paper with little
political influence.)

"The Party Leaders on the Einancial Dispute."

A leading Democrat says:

"Our well-known attitude and our criticism of the financial
policy are only strengthened by the statements of the Reparation
If savings .are to be effected, this must be done in
connection with the necessary administrative reform, which must be
carried out in the quickest possible way, preferably through the
creation of a united estate, which we have always auvocated.
In our
opinion, savings may also be effected by reducing the expenditures
of the army and navy."

A leading membernote the Center Party says:
"The of of the heparation Agent shows that the fundamental
financial questions now penning must be settled before the beginn
of the first reparation year.
If on the basis of Parker
Gilbert's memorandum foreign loans become impossible, this would,
view of the necessary capital requirements of the economy for pro
tive purposes, which cannot be raised within Germany, be fatal fo
the reparation payments which must be paid on September 1, 1928.
it is not to be assumed that anybody in Germany wanted to evade c
laborating in reparations and in the transfer."
A leading economist of the People';: Party says:

"The laws involved are the last step in the conclusion of th
new order of German domestic conditions introuuced by Dr. Luther
the necessary consequences of the currency reform ana of the adju
The rement of German price conditions to the world index.
lity of fulfilling the Dawes
nsiderably over-estimated Gerhave under-estimated her capital
economy. Germany's economic reshe nau to depend solely on the
er capital requirements.
ut also possibly the safety of
to us thus far. Foreign coun, in their own interests, therelaborate in the German reconted."

h Government did not simultanee reform in the Reich, and, what
not reach a binding agreement
ly inflated administrations must
form had preceded the salary rebe more considerate of the justiion there is no reason for uneasiof its duty and will see to it


that the budget in the coming years is really balances: and not
balanced artificially through the inclusion of loans which it is
impossible to float."
November 5, 1927.


"Reich Simplification and Reparations by Dr. Gremer,
Member of the Reichstag."

";dlen the total amount of the German reparation debt is fixed,
the abolition of the present financial control may be brought about
by supplanting the obligations of the Reich with a series of German
loans, the proceeds of whicn would go to the countries entitled to
regards this goal, the intention of the Reparation
agent probably does not differ from the intention outlined here, and
the interests of the reparation creditors would run entirely parallel
here with German interests. But for the practical solution of the
reparation question it will be of the greatest importance that at the
given time confidence is placed in Germany that she will later pay
the definitive sums which have been fixed in agreement with her.
This confidence will depend on the judgment made on Germany's capacity
and her good will."


Government Party.
Good financial paper
with little political importance.)

November 6, 1927.

Dr. 1.

"Is Gilbert Right?"

"If the Reparation Agent makes the public finances the central
point of his criticism, we must say, as the Reich Finance Sinister actually does, that he is right in many points with regard to the ultimate
It is regrettable that a stimulus is first required from
outside in order to bring the development of certain financial political connections into more rapid flux for it may be assumed that political opposition will dwindle in the face of the seriousness of the
situation which the memorandum of LI.. Gilbert illuminates.

;;e should therefore like to assume that it might have been better
for the Reich Government not to try to justify communal loan policy
and that, it should have been pointed out that the large projects of
the communes during the first years after the currency stabilization
succeeded in helping the economy and a number of unemployed through a
period of great distress.
To be sure, matters which were perhaps
justified in a time of very great depression are no longer valid today, and to this extent the criticism of the Raparation Agent on the
public expenditures is unfortunately justified. Accurate as the judgment of the Reparation Agent may be in general financial-political
matters, his criticism overlooks facts in important details. :entirely
incomprehensible is his reproach of the Reich Government in the transfer question.

The Reparation Agent may not be vindicated from great exaggerations with regard to the effects of the new bills on the development
of prices."
kiovember 6, 19k.7.

jr. J.

"AS regards the form, the author of the memorandum uses the language and tone which is customary in diplomatic exchanges of opinion,
without going a step beyond these limits. Li'. Gilbert is chiefly a
warner, often something of a schoolmaster, unfortunately too much of
Perhaps the Reparation Agent
a dictator, and hardly an adviser.
would not have used such sharp words if he had in the very beginning
countea on the publication of the memorandum. The shortcoming most
obvious in the train of thought of the Reparation Agent is a failure
to consider those inner-btate and internal political connections which
form the basis of the most severely criticized financial political
measures of the Reich Government.
"The financial laws must be carried out. This fact cannot be
changed in any way by the memorandum. The Reich Government will, in
conjunction with the parties, have to seek a compromise between this
necessity and the objections of the Reparation Agent so far as they
are objective and justified."


November 7, 1927.


"The New York correspondent of the B.L. adds that the memorandum
will have far-reaching consequences on the attitude of America towards
Germany, and that for the time being at least no German loans can be
placeL, in New York. l]ven if investors were not disturbed through the
controversy, the State Department would undoubtedly approve no more
The more serious consequence, however, he says, is that any
hope of an early revision of the Dawes Plan must be given up for at
least two years."


apposition. probably best Berlin newspaper from
news point of view.)

vember C, 1927.
"Mr. Gilbert said that he hoped to render a service to the
German Government and to the German economy as well as to the international situation by expressing his impressions and misgivings.
For this good intention the German people must be crateful to him.
..:any of the general and specific statements of the Reparation Agent
run parallel with the domestic criticism which has for a long time
Even the
been made on the measures of the German financial policy.
Reich Finance Linister recognizes the justification of some of this
Things are not going forward rapidly enough in
die tendency toward a unitarian state meets with political
and certain economic hindrances for which the Reich Government has
up to the present shown too much consideration. There can be no
doubt that the idea of a unitarian State has of late gained around.
The Reich Government must make good use of this psychological situation and to this end, it must be less considerate than in the past
of so-called insurmountable cbstacles."





November 7. 1927. "German Finances and The Dawes Plan."
"The Nationalist press in Germany committed a groat error in reproachIt committed another
ing Mr. Parker Gilbert with having exceeded his rights.
error in maintaining that, if Germany should be unable to fulfil the Dawes Plan,
Mr. Parker Gilbert clearly indicates
the Reich would not have any responsibility.
that it is the German Government itself that must bear the responsibility for its
actions...If the memorandum of Mr. Parker Gilbert had had no other result than to
make the Reich Cabinet declare categorically ,against the campaign in favour of
revision, it would not have been in vain."


(People's Party;

November 7, 1927.


"What are the Consequences?"

"It must be said that the German reply has one fault: it is
too long and lacks uny spirits The efficient product of the officials of various Linistries was stuck together, but one can
and, since the reply was intende to have
still see the cracks;
an effect abroad, it ought to have been "got up" more attractively:

"It would be a mistake to attack Parker Gilbert for taking
the step to which, atrictly speakin, he was not entitled.
would be a still 4reater mistake, however, to exploit the exchange for partisan purposes. :.either the Reich, the States,
nor the communes, nor any one political party has any reason to
feel like a Pharisee - all have sinned. lihat we must do now is
to listen to the warning of the Agent;
and, if the friendly

exchange of views can have a fruitful effect, Germany owes Parker
Federal Reserve Bank of St. Louisthanks:"




"The Agent General has made sharp criticism. It runs parallel on some matters with demands which have long since been made
in Germany. His criticism, however, goes much too far on these
points and fails to recognize political necessities. As the trustee
of the creditor Powers, the Agent General has done his duty."
Musson;; writes:

"We should like to see the negro state in which there are
parties and people who would dare to defend an Experts' Plan on
the basis of which its government would have to tolerate receiving
such a letter as Yr. Parker (Albert wrote to the Finance I.:inister
of the German Reich. Our republicans do not reproach Parker
Gilbert with a single word. He is not our trustee but the trustee
of our enemies, yes, our enemies, if we are still allowed to call
a cat a cat."





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