862.51 Interest/10
The Ambassador in Germany (Sackett) to the
Secretary of State
No. 1475
Berlin, February 10, 1932.
[Received
February 19.]
Sir: Confirming my telegram No. 30 of
February 10, 2 p.m.,2
I have the honor to transmit herewith copy of a self-explanatory
communication of February 9, from Dr. Dieckhoff, Ministerialdirektor of the Foreign
Office. The aforesaid communication is in response to
representations which I made personally to Dr. Dieckhoff after conferring with Mr.
Frank L. Downey, the representative of
Sullivan &
Cromwell, the attorneys acting on behalf of
the American Founders Corporation. In addition to acquainting Dr.
Dieckhoff with the point
of view of the Department, as outlined in its telegrams Nos. 211 of
December 24, 1931, and 2 of January 7, 1932,3 I argued the case
with him on the basis of a memorandum* in which Sullivan &
Cromwell set forth their contentions in
favor of exempting foreign holders of German internal securities
from the reduction of interest rates imposed by Emergency Decree of
December 8. Dr. Dieckhoff
professed to be impressed by the cogency and equity of the arguments
advanced on behalf of the American Founders Corporation and assured
me that the attitude of the Foreign Office would be favorable.
[Page 378]
As the Department will observe from the enclosure, Dr. Dieckhoff’s efforts to effect a
settlement were unavailing. After lengthy deliberation, the
Reichswirtschaftsministerium, in conjunction with the Ministries of
Justice and Finance, reached a decision unfavorable to the
petitioners. The juridical argumentation, as the Department will
note, is based on the thesis that no agreement was entered into
between the American Founders Corporation and German debtors which
would be impaired by a reduction in the rate of interest payments,
that the American company, having bought its securities in the open
German market, was pari passu with other
foreign owners of such securities, and that the aforesaid reduction
of interest payments did not constitute confiscation of property as
would the compulsory transfer of the rights of one person to the
State or to some third party. An analogy was made to the effects of
abandonment of the gold standard.
I have not had an opportunity to study this case in the light of
precedent, if any. My impression, however, is that the case is
clearly not “iron-clad”. The purchase of the securities in question
was speculative, the holders had, I understand, no protection from
possible German currency depreciation, and, it might be argued in
general that they could not have expected to fare better than other
purchasers of the same securities.
If the Department desires to press the case, I believe that, while
formal diplomatic representations would not in themselves be able to
effect a direct settlement with the German Government, they would at
least make possible an admission of the claim to international
arbitration. Should a decision be reached whereby the German
Government would be obliged to restore the original contractual
rights of the holders of the securities, a precedent would be set
which would enable other foreign holders of German securities,
mortgages and commercial obligations in general, to press similar
claims successfully. It may be presumed that large amounts would be
involved in such an event.
I shall await the instructions of the Department before taking any
further action in the premises. Mr. Downey was
fully informed of the nature of Dr. Dieckhoff’s communication to me. He is communicating
with his principals who are expected to discuss the matter with the
Department.
Respectfully yours,
[Page 379]
[Enclosure]
Dr. Dieckhoff of the German Foreign Office to
the American Ambassador (Sackett)
Berlin, February 9, 1932.
My Dear Ambassador: In our conversation
of January 8, you were good enough to call attention to the case
of the American Founders Corporation, and you asked if the
Foreign Office could not in support of the petition addressed by
that company to the Reichswirtschaftsministerium use its good
offices in favor of amending the so-called Fourth Emergency
Decree of the President of the Reich in such a manner as to
exempt the securities held by the American Founders Corporation
from the reduction of interest provided for on said decree. In
the meantime, the question has been thoroughly studied by the
Reichswirtschaftsministerium; I am sorry to say, however, that
the decision arrived at is unfavorable to the petitioners.
The Memorandum prepared for the Reichswirtschaftsministerium by
the American Founders Corporation, copy of which you left in my
hands, assumes that under the terms of the Emergency Decree of
December 8 and of the accompanying Regulations of December 23,
the securities held by the American Founders Corporation are
effected by the compulsory reduction of the rate of interest.
This assumption is correct. The interest provisions of the
decree do not affect obligations issued abroad, nor German loans
floated abroad, nor financial operations in the nature of loans
that have been carried out in foreign countries. The securities
owned by the American Founders Corporation do not come within
any one of these three categories. They are, all of them, German
obligations officially traded on a German stock exchange.
According to the express wording of the Regulations, such
obligations are in no case to be considered as issued abroad and
their rate of interest is, accordingly, to be reduced. There
can, of course, be no question of a loan floated abroad, nor
even of a financial operation in the nature of a loan.
The Memorandum attempts to show why, in the opinion of the
American Founders Corporation, the provisions of the Emergency
Decree should be changed in their favor, and it is argued that
such a change would be possible without interfering with the
effective operation of the decree. We are unable, I am sorry to
say, to accept that view. The considerations that have led to
exempt from the interest reduction provisions the three
categories mentioned above do not apply to the case in question.
No agreement has been entered into between the American Founders
Corporations and German debtors which would be impaired by a
reduction of the rate of interest
[Page 380]
payments, and the American company having
bought its securities in the open German market can not claim or
expect a better legal position than any other foreign owner of
such securities. To agree to the request of the American
Founders Corporation would go far beyond the exemptions written
into the Regulations of December 23rd. To extend still further
these exemptions, which are to be regarded as an extreme limit,
would interfere with the very purpose of the whole action. The
necessity mentioned in the Memorandum of establishing genuinely
foreign ownership would be more of a technical question and an
issue of secondary importance.
The Memorandum of the American Founders Corporation finally
refers to the treaty of commerce existing between the United
States and Germany4 and in characterizing
the reduction of interest as a confiscation of property suggests
that the decree violates the terms of said treaty. Yourself, my
dear Ambassador, seemed to share that opinion. In reality,
however, the reduction of interest does not constitute
confiscation of property, i.e. the compulsory transfer of the
rights of one person to the State or to some other person no
more than, for instance, the abandonment of the gold standard
would constitute a confiscation of property. It is rather a
measure intended to facilitate the return to pre-war conditions
with regard to the lending of money in Germany. The Emergency
Decree reestablishes 247 of the German Civil Code which provides
that a debtor, who has contracted for a rate of interest
exceeding 6 per cent per annum shall be entitled to withdraw
from his contract after giving due notice of his intention to do
so: a right which, according to the Civil Code, can neither be
excluded nor limited by any provision of the contract. This
provision was repealed in the period of inflation. It is in
harmony, however, with a theory of law that has again become
prevalent within the last few years, namely that a contract
obliging a debtor to pay more than 6 per cent interest on his
debt fastens an unbearable burden upon him which he must be in a
position to throw off, and that interest agreements of this sort
jeopardize society and the State. Simply to re-enact 247 Civil
Code would, in any event, have caused serious difficulties, if
for no other reason because of the relationship existing between
mortgages and the bonds of mortgage institutions. The agreement
adopted in the Emergency Decree is meant to help overcome these
difficulties. You will recall in this connection that after
exempting from the interest reduction the three above-named
categories the reduction applies only to such legal relations in
respect of which it may be assumed that the contracting parties
intended to submit to the rules and principles of German
law.
[Page 381]
No one would deny that the purchases by foreign residents of
interest-bearing securities were highly welcomed in Germany,
providing, as they did, in no small degree for the credit needs
of the home market. But the lowering of an unreasonable interest
level was the first prerequisite of the economic and financial
recovery which the German Government is determined to bring
about. While a measure of this sort was bound to injure
creditors both at home and abroad, it may, at least, be expected
to make the capital claims underlying all these interest
obligations more secure than they were before.
Believe me [etc.]
