Foreign Relations of the United States Diplomatic Papers, 1934, Europe, Near East and Africa, Volume II

611.6231/291½

Memorandum by Mr. Rudolf E. Schoenfeld of the Division of Western European Affairs

[Washington,] October 26, 1934.

1. The United States Government has noted with growing dismay the lengthening list of discriminations practiced by the German Government against American interests during the past fifteen months.

2. Beginning with the discriminatory action favoring holders of German securities resident in Holland and Switzerland, which followed upon the promulgation of the German Transfer Moratorium Decree of June 9, 1933, and continuing under subsequent arrangements, made pursuant to the terms of that decree, whereby the initial discriminations were not merely maintained but broadened to include additional issues and additional national groups, American investors in German obligations have been obliged to witness a progressive deterioration of their position in disregard of generally recognized principles of equality of treatment and in contravention of definite commitments on the part of the German Government.

3. The various discriminatory practices have been currently brought to the attention of the German Government. Yet their existence and extension have continued unchecked, a situation which renders it essential that this Government restate its position.

4. With respect to debts, the United States Government feels, as already made known to the German Government, that during any emergency period, such as the present, when the latter considers itself compelled to reduce current transfer of service on debts, the treatment accorded American creditors should be as favorable as that given any other creditors of the German Government or of German interests.

5. A review of the record will show that this obligation has not been observed.

6. On June 30, 1933, the Reichsbank, as the competent German agency, announced, pursuant to authority granted it under Section 3 of the Transfer Moratorium Decree of June 9, 1933, that during the half year July 1, 1933, to December 31, 1933,

(1) interest and amortization payments on the seven percent German External Loan of 1924 (Dawes Loan) would be transferred in full;

(2) interest on the five and one-half percent German Government International Loan of 1930 (Young Loan) would be transferred in full;

(3) all other interest and dividends due from regularly recurring maturities derived from fixed interest bearing medium and long term indebtedness would be met to the extent of fifty percent in foreign exchange; and

(4) the remaining fifty percent due on items included under (3) would be met by scrip certificates issued by the Conversion Office in Berlin.

7. Since the conversion rate for scrip was fixed at fifty percent of its nominal value, holders of German obligations abroad, other than the Dawes and Young loans, were to receive seventy-five percent of the interest maturing during the period from July 1, 1933, to December 31, 1933.

8. Yielding to pressure from Dutch and Swiss interests, the German Government entered into special agreements with the Dutch and Swiss Governments^* whereby persons resident in Holland and Switzerland were assured of receiving foreign exchange to the full value of the scrip issued to them.

9. By this procedure holders of German long and medium term obligations resident in Holland and Switzerland were paid in foreign exchange the full one hundred percent value of coupons maturing during the second half of 1933 whereas American holders of similar obligations were reimbursed only to the extent of seventy-five percent of the face value of their coupons.

10. With the approaching expiration of the moratorium arrangements for this period, the Reichsbank on December 18, 1933, announced that for the six months’ period January 1, 1934, to June 30, 1934, existing arrangements would continue in force with the single modification that thirty percent of the interest due on obligations other than the Dawes and Young loans would be paid in foreign exchange and the remaining seventy percent would be met in scrip. The conversion rate for such scrip was subsequently fixed at 67 percent with the result that foreign holders of German medium and long term obligations could look forward to receiving during the first half year of 1934 76.9 percent of the face value of their coupons.

11. In renewed protocols entered into by Germany with Holland and Switzerland,^† holders of German medium and long term obligations resident in those two countries were again assured of exceptional treatment; scrip in their hands would be converted at its full face value. Residents of Holland and Switzerland thus continued to receive the full one hundred percent face value of their coupons whereas holders of similar German obligations resident in the United States were obliged to content themselves with a return of not more than 76.9 percent of the face value of their coupons. It should be added that, in practice, this scrip procedure has not yet been made effective for holders resident in the United States through incompletion of the necessary technical arrangements.

12. In reply to representations made by this Government regarding the manifest injustice involved in these arrangements, the German Government took the position that the threat to its trade position in Holland and Switzerland, which yields a heavy surplus of exports over imports, was such that it felt compelled to acquiesce in the arrangements in question.

13. When the second six months’ period of the Transfer Moratorium was nearing an end, the German Government sought to arrive at a mutually satisfactory arrangement with its creditors in an extended conference during April and May, 1934, but a meeting of minds and general agreement could not be achieved. On June 14, 1934, the Reichsbank, as the competent German agency, announced that the arrangements then prevailing would be discontinued on July 1, 1934; that from that date holders of German medium and long term obligations abroad might for the succeeding year have the option of accepting for their maturing coupons ten-year three percent funding bonds or cash foreign exchange in an amount of forty percent of the face value of the maturing coupons, with the proviso, however, that this forty percent would be paid not earlier than six months from the due date of the coupons and that the offer would be revokable on thirty days notice.

14. This offer which involved a full moratorium for six months at least was subsequently modified by agreements with individual countries to such an extent as to render it practically unrecognizable.

15. With Great Britain a payment agreement was entered into on July 4, 1934,⁷³ whereunder interest on bonds of the Dawes and Young Loans held in Great Britain were assured payment in full.

16. In an agreement with Switzerland,^‡ the German Government, in return for continuing export opportunities, accepted the obligation to permit payment in full, out of the surplus of its clearing account in Switzerland created by payments of Swiss importers of German goods, of interest coupons of the Dawes and Young loans held by residents in that country; the payment also of interest up to four and one-half percent on other bonds and fixed interest bearing securities; the application of interest payments in excess of four and one-half percent to amortization account; the full payment of rents; and the payment of stock dividends up to five percent minus income tax derived from capital and of more than five percent up to four and one-half percent plus one-half of any excess over that figure. Under this agreement holders of bonds of the Dawes and Young loans resident in Switzerland continued to receive the full one hundred percent face value of their coupons of these loans; and assuming that the average interest rate of other fixed interest bearing securities was six percent, they received in foreign exchange at least seventy-five percent of interest due on such obligations.

17. A similar agreement^§ entered into by the German Government with the Netherlands entitled holders of German obligations resident in that country to receive the same privileges that were granted to residents of Switzerland.

18. With Sweden an agreement^║ covering payments was likewise entered into which is reported to provide for full service of the interest due on bonds of the Dawes and Young loans held in Sweden and for the payment of four and one-half percent interest (instead of the six percent originally fixed) on the extensive investment in the Kreuger International Match Loan held by Swedish interests.

19. With France, Germany is understood to have acquiesced in the use of funds in its clearing account in Paris to meet the full service on bonds of the Dawes and Young loans held in France.

20. With Belgium a clearing agreement provided for meeting full service of the interest on the Dawes and Young loans held in Belgium as well as limited service on other long term loans and on the obligation covered by the German marks agreement. The rates at which the latter were to be met are not publicly known.

21. With Italy, Germany is likewise understood to have entered into a clearing agreement^¶ under which service on holdings of the Dawes and Young loans in the hands of residents of Italy is to be met in full.

22. All of the foregoing arrangements have been predicated upon the condition that Germany’s exports to the individual creditors should be in excess of its imports, thus providing the surplus funds to meet service on these loans.

23. The arrangements for servicing German medium and long term obligations held in the United States are very different. In a Communiqué made public on October 13, 1934, the German Government announced that it had put at the disposal of the trustees of the Dawes loan, foreign exchange which insured a fifty percent payment of the coupons due on October 15, 1934; that insofar as coupons could not be met because of the lack of special agreements, holders would be given the opportunity to receive payment in Reichsmarks the transfer of which would be regulated by the same principles as apply to the disposition of register marks.

24. Since the transfer of register marks has recently been attended with a discount approaching fifty percent, holders of bonds of the Dawes loan in the United States may thus expect eventually to collect approximately seventy-five percent of the face value of the October 15th coupon.

25. The October 13th announcement fails to indicate the fact that since July 1, 1934, no transfer of foreign exchange to meet interest on the Dawes loan bonds held in the United States has been made, while in the case of holders in other creditor countries this service is being met in full. Thus persistence in the present arrangement augurs an even further discrimination in the future against holders of such bonds resident in the United States.

26. This differential treatment is irreconcilable with the specific commitment of the German Government itself as embodied in the “general bond” entered into on October 10, 1924, between the German Government and the trustees for the bondholders, paragraph three of which contains a provision that “all bonds issued by the German Government in respect of the Loan shall rank pari passu irrespective of date or place of issue or otherwise”.

27. Transfer of the foreign exchange necessary to meet the interest on the Young loan is likewise understood to have been interrupted since the first of July. No arrangements looking toward the full service of the interest on bonds of that issue held in the United States appear to have been made by the German Government. On the other hand, the agreements cited in the preceding paragraphs indicate that obligations of the Young loan held by residents in all of the other countries in which parts of the loan were originally issued, are assured of full service. In the event that anything less than full payment of the coupons of this loan held in the United States is made while others are being met in full, this will likewise be not merely a violation of the general principle of equal treatment but will also contravene the pari passu clause which is embodied in the “general bond” entered into on June 10, 1930, between the German Government and the trustees for the holders of bonds of the Young loan.

28. The contrast in treatment is patent. Of the eight countries in which parts of the Dawes and Young loans were floated, the holders of such obligations in the United States are alone denied full service on their holdings.

29. The arrangements for payment to the residents of certain other countries of interest on German medium and long term obligations, other than the two issues cited, constitute a further discrimination against holders of corresponding obligations resident in the United States. Specifically the arrangements providing for the payment of four and one-half percent interest on German bonded indebtedness, other than the Dawes and Young loans, held in Switzerland, Holland and Sweden represent more favorable treatment than is contemplated in the case of similar obligations held by residents of the United States. The latter have merely the ten-year funding bond or forty percent foreign exchange option which is provided by the Reichsbank announcement of June 14, 1934. Discrimination against holders of such German bonded indebtedness lies not merely in the lower interest rate but also in the fact that the forty percent foreign exchange option is effective at the earliest after a time lag of six months whereas in the special arrangements in favor of holders in Switzerland, Holland and Sweden, they are subject to no similar delay.

30. The action of the German Government with respect to the payment of interest on the bonds of the Kreuger Loan held in Sweden must also be signalized as an aggravated instance of discriminatory treatment. No provision appears to have been made to pay interest on the appreciable proportion of this loan held in the United States.

31. These instances present abundant proof of the disproportionate sacrifices imposed upon holders of German obligations resident in the United States as compared with those resident in the other countries which are the major creditors of Germany.

32. The United States Government has likewise watched with growing concern the policies of the German Government during the past year with respect to equal opportunities for trade. The multiplicity of devices and restrictions on imports instituted by the German Government has served to deprive American commercial interests of access to the German market on equal terms with the interests of many other countries. The rapid succession of clearing agreements, quota systems, and monopoly controls embodied both in new German trade treaties and in domestic decrees have been instrumental in diverting trade from its normal sources and in restricting the opportunities of countries such as the United States where the bilateral trade balance has been adverse to Germany.

33. An early instance of action on the part of the German Government detrimental to American trade interests occurred when the German Government, in an agreement with Yugoslavia on September 14, 1933, granted that country a customs quota of 8,000 tons of dried prunes.⁷⁴ Under its most-favored-nation commitment to the United States, the German Government granted to American interests a customs quota in an equal amount.

34. In September, 1933, the United States Government made representations respecting the principle involved in this action of the German Government⁷⁴ pointing out that the relative previous position of the two countries in the trade had been heavily in favor of the United States and that the quota thus fixed represented a disproportionate cut in American exports and a heavy increase in those of Yugoslavia, a situation which seemed incompatible with the spirit of the most-favored-nation clause.

35. The German Government, however, maintained that its action was strictly in accord with its obligations.

36. Subsequently in a Trade Agreement with Holland signed on December 15, 1933, the German Government granted Holland an import contingent on fatbacks which permitted entry at a conventional rate of twenty Reichsmarks per one hundred kilos in an amount equal to sixty percent of the quantity imported from Holland in 1932.

37. Under its most-favored-nation commitment to the United States the German Government likewise granted American exporters a contingent in an amount of sixty percent of American exports of this commodity to Germany in 1932.

38. The United States Government took no exception to the action of the German Government in this instance. It feels compelled to point out, however, the inconsistency in the methods pursued by Germany in fixing import contingents or quotas in these two instances. In the case of fatbacks, Germany allotted quotas to Holland and the United States in a proportion corresponding to their previous relative position in the trade in a given year. Holland thereby preserved its relative preponderance in Germany’s imports of this commodity. The favorable proportion was as a matter of fact increased by the fact that the quotas in this instance were calculated on a year when Dutch exports of the commodity in question were at their highest point and American exports were at their lowest point. In the case of prunes, Germany allotted absolute quotas which enabled Yugoslavia’s share of the trade to rise at the expense of American exports. The fact that Germany thus resorted to the system of equal quotas in one instance, when such action threatened the primacy of American exports of a certain commodity (prunes) to the advantage of a third country and that in another instance it pursued the system of relative quotas when such action would preserve the relative primacy of a third country’s trade in a given commodity (fatbacks) represented an inconsistency in method which it was not possible to avoid interpreting as a conscious discrimination against American trade in Germany.

39. Representations were likewise made to the German Government in connection with its action in allocating to Denmark, Holland and Hungary increased quotas of lard whereas American lard exports were heavily curtailed. It was pointed out that German imports from the three countries in question in 1934 bore no relation to their previous relative positions in the trade.⁷⁵

40. The quotas were apparently the result of new treaties with Holland, Denmark and Hungary^**, although the treaties themselves were in general so vague as to give little or no clue regarding the amounts of goods which Germany would admit under them. The Danish treaty, for example, provided that a monopoly system would be instituted for certain animal products, including lard, but gave no indication of the amounts that Denmark might export to Germany. The treaties provided, however, for a system of Mixed Committees which should regulate the flow of trade in the various commodities between those countries and Germany. The secrecy with which these operations were attended and the apparent withholding of essential information could not fail to arouse suspicion as to their intent.

41. In a note verbale No. 242 of June 1, 1934,⁷⁶ the American Embassy at Berlin brought to the attention of the German Government complaints of the heavy cut in German import permits granted for American lard while imports of lard from other sources, notably, from Holland, Denmark and Hungary were expanding rapidly. This Government took the position that treatment consonant with its most-favored-nation rights required the granting to American interests of a share corresponding to their previous relative position in the trade.

42. In a reply dated July 2, 1934,⁷⁶ the German Government pointed out that it had established for American lard interests a quota of forty percent of their average share of German imports from 1931 to 1933. It went on to observe that “quite generally it may be said regarding the question of discrimination raised here that it is a recognized principle of international commercial policy not to apply most-favored-nation treatment to such commodities as constitute the object of a state monopoly or of an institution similar to a monopoly”.

43. Since the German Government has meanwhile created twenty-five import control boards which are understood to be in the nature of monopolies and which cover the entire range of German imports, the German Government has apparently sought to release its entire import trade from the limitations of possible relative equal treatment and to have deprived of all substance the most-favored-nation commitment embodied in its still valid treaty of Friendship, Commerce and Consular Rights with the United States.⁷⁷

44. The German Foreign Office observed further in its note of July 2, 1934, that independently of the monopoly arrangement the possibilities of importing foreign lard and other raw materials into Germany, were decisively determined by the lack of foreign exchange. It added that as cash foreign exchange was required to make payment for American lard, the issuance of the necessary acceptance certificates under the quota previously envisaged could not be justified. It also stated that developments had brought about a situation in which the quotas alone were no longer decisive but rather the amount of available foreign exchange. It explained further that if other countries could nevertheless continue to make full use of their quotas this was due to the fact that clearing agreements existed which obviated the need for transferring foreign exchange to pay for such imports and, therefore, in the case of those countries quotas might even be exceeded, if necessary.

45. The United States Government has watched with close attention this development of German commercial and financial policy. It has likewise taken note of the intimations embodied in official German communications, notably the German Foreign Office note of July 2, 1934, already referred to, and the German Embassy’s note of June 16 [15], 1934, regarding the debt situation, indicating inability to envisage measures looking toward greater participation by American interests in German trade or to extend equally favorable treatment, as compared with other countries, of German indebtedness held in the United States, before commercial negotiations have been entered into for trade concessions.

46. The German Government has by this policy sought to make the fulfillment of its commitments both in the field of finance and in the field of trade contingent upon the state of its direct bilateral commodity trade. Under such a system, access to the German market and the value of a German debt abroad are determined by the disposition of the creditor government to exert pressure, irrespective of prior agreements or contractual rights.

47. The United States Government has no disposition to underestimate the transfer difficulties that at this time beset the German Government, but the expressed position of the German Government and the manner and method of the measures which it has resorted to have forced the United States Government to the conclusion that there has been a wilful and conscious policy of pressure and discrimination designed to force it into unjustified concessions.

48. While in no sense desiring to disclaim its intention to contribute in every possible way to the revival of world trade, this Government nevertheless feels compelled to observe that it cannot accept the German contention that the responsibility rests upon the United States, as a creditor of Germany, for making adjustments of its trade relations with Germany a preliminary to the observation by the latter of its existing obligations.

49. With respect to debts, this Government desires to reiterate the position embodied in the Aide-Mémoire which was left with the German Foreign Office by the American Ambassador to Germany on July 16, 1934,⁷⁹ namely, that the United States Government considers it an inescapable responsibility of the German Government to extend to American investors treatment that is no less favorable than that which is or may be accorded to the investors of other countries and that it does not feel that this expectation can be made contingent upon its entering into special agreements as new and additional inducements to the observance of that obligation.

50. As regards trade, the United States Government feels that the same reasoning applies with equal force to the treatment which American commercial interests may expect of the German Government and that continued observance of the existing commitment represented by the unconditional most-favored-nation clause embodied in the Treaty of Friendship, Commerce and Consular Rights between the United States and Germany is a prerequisite to that mutual confidence in which alone fruitful commercial relations between the two countries are possible.

1. Swiss Protocol signed October 7, 1933. Dutch Protocol signed October 28, 1933. [Footnote in the original.]
2. Signed January 20 and February 24, 1934, respectively. [Footnote in the original.]
73. Great Britain, Cmd. 4640, Germany No. 2 (1934): Anglo-German Transfer Agreement Together With an Exchange of Letters, etc.
74. Signed July 26, 1934. [Footnote in the original.]
75. Signed July 26, 1934. [Footnote in the original.]
76. Signed August 28, 1934. [Footnote in the original.]
77. Signed September 2, 1934. [Footnote in the original.]
74. See Foreign Relations, 1933, vol. ii, pp. 478 ff.
74. See Foreign Relations, 1933, vol. ii, pp. 478 ff.
75. See pp. 424–433, passim.
76. Signed with Holland December 15, 1933; Denmark March 1, 1934; Hungary February 21, 1934. [Footnote in the original.]
76. Not printed.
76. Not printed.
77. Foreign Relations, 1923, vol. ii, p. 29.
79. See telegram No. 90, July 12, 10 p.m., to the Ambassador in Germany, p. 378.