862.51 Bondholders/211a: Telegram
The Secretary of State to the Ambassador in Germany (Dodd)
131. Please deliver following note to Foreign Office, advising Department which will release for publication 2 days later:80
“I am instructed by my Government to recall to your attention some of the particulars of the unsatisfactory treatment of American holders of German bonds and to repeat with emphasis the protest of my Government against the discriminations practiced against them in comparison with the treatment extended other holders of similar or identical securities on grounds of their nationality or domicile.
“(1) Under arrangements announced by the Reichsbank for the 6 months period January 1, 1934 to June 30, 1934, 30% of the interest due on German medium and long term foreign obligations other than the Dawes and Young Loans was to be paid in foreign exchange and the remaining 70% in scrip convertible at 67% of its face value. Under this announcement foreign holders of German medium and long term obligations could look forward to receiving during the first half year of 1934, 76.9% of the face value of their coupons. However, under protocols entered into by Germany with the Netherlands and Switzerland, such holders resident in those two countries were assured of receiving the full 100% face value of their coupons. These arrangements appear to have been carried out with respect to security [Page 397] holders in other countries but the scrip procedure for coupons maturing in the first of 1934 has not yet been made effective for holders resident in the United States through the failure of Germany to complete the necessary technical arrangements.
“(2) With respect to coupons maturing since July 1, 1934, the Reichsbank announced May 29, 1934, three alternative offers to holders of securities other than the bonds of the Reich Government itself, namely:
- “(a) Against surrender of his coupon, the coupon holder should be entitled to receive 3% funding bonds of the Konversionskasse in the same principal amount as the nominal amount of the coupon and in the currency of the coupon. These funding bonds were to mature January 1, 1945. The payment of principal, interest and sinking fund on them was to be guaranteed by the German Government and was not to be subject to the operation of any transfer restrictions.
- “(b) The Reichsbank gave an undertaking subject to withdrawal to purchase the coupons at 40% of their face value at any time commencing 6 months after the due date of the respective coupons. The Reichsbank reserved the right to withdraw this offer on 30 days notice and it is understood that such notice was given November 3, 1934.
- “(c) The Reichsbank further stated: ‘Creditors who do not desire to accept either of the foregoing alternative offers and who accordingly determine to keep their coupons retain all rights under the coupons.’
“Since July 1, 1934, the German Government is understood to have entered into payment agreements with the governments of several other countries granting bondholders who are nationals of or reside in such countries terms more favorable than those announced May 29, 1934. Agreements of one type, negotiated notably with the Netherlands and Switzerland, provide for the payment in cash in the currencies of those countries of coupons up to an amount not exceeding 4½ percent, any amount due in excess of 4½ percent being applied to amortize the bonds held in the respective country. An agreement of another type, concluded with Great Britain November 1,81 provides that the German Government will offer to all British holders of medium and long term German obligations which were in the beneficial ownership of British holders June 15, 1934, funding bonds bearing interest at 4% per annum, but otherwise in accordance with the terms of the offer contained in the Communiqué of May 29, 1934.
“It appears from the available information that holders of German non-Reich obligations in most if not all important creditor countries other than the United States have been offered terms superior to those offered American holders either as involving immediate cash payment or as involving a higher rate of interest on the funding bonds tendered.
“(3) The German Government has arranged to pay in full in foreign currencies the October 15, 1934 coupons of Dawes Loan bonds held in all countries other than the United States in which the loan was [Page 398] floated. With respect to American holders, 50% cash payment was available from funds transferred by the German Government prior to July 1, 1934. The German Consulate General at New York announced November 11, 1934, that in order to obtain payment of the remaining 50% in reichsmarks, the coupons should be presented at the office of a bank in Berlin and the amount paid in reichsmarks will be credited to a Reichsmarks Account in Berlin and can be disposed of by the holders with permission of the Reichsbank for limited purposes such as investment in Germany or the payment of travel expenses for temporary visits in Germany. The discrimination against American bondholders is aggravated by the fact that the general bond entered into October 10, 1924, between the German Government and trustees for the bondholders 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.
“(4) With respect to the German Reich Six Percent External Loan of 1930, the so-called Kreuger Loan, full particulars of the treatment of this obligation of the German Government do not appear to have been published. It is understood, however, that pursuant to an agreement reached August 28, 1934, between the Swedish and German Governments,82 the German Government is paying 75 percent of the face value of the coupons due July 15, 1934, on the $104,000,000 of these bonds held by Swedish creditors. $21,000,000 of bonds of this same issue are held by the Irving Trust Company, trustee in bankruptcy of the International Match Corporation. (The Irving Trust Company states that as such Trustee it represents more than 20,000 separate individual and corporate holders of obligations of the bankrupt and that these bonds constitute the principal asset of the bankrupt estate.) It is understood that no offer of payment in whole or in part has been made to the American holder of bonds of this issue and it does not appear to be compromised within the terms of the offer of May 29, 1934, which dealt with non-Reich bonds.
“(5) No coupons of the Young Loan have become due since July 1, 1934. It is understood that pursuant to the loan contract, interest for the first month of this coupon period was duly transferred in foreign exchange to the loan trustee. Subsequently the German Government has negotiated agreements with the governments of all countries other than the United States in which the loan was floated providing for full payment of Young Loan coupons held in these countries. The general bond entered into June 10, 1930, between the German Government and the Trustee for the holders of bonds of the Young Loan contains a clause that all bonds of the loan shall rank pari passu in all respects, irrespective of date or place of issue or otherwise. The American holders are therefore entitled by express covenant of the German Government to expect full payment of the coupons due December 1, 1934.
“The foregoing is the detailed record of the discriminations practiced against different categories of American holders of German medium and long term obligations during the year 1934. In sum, while the individual German debtors continue to make provision in reichsmarks to meet their obligations, effective payment to Americans [Page 399] of coupons due in 1934 has been prevented except with regard to the Dawes and Young coupons due during the first half of the year and of part payment of the Dawes Loan coupons of October 15, 1934, while the best tenders extended to American holders (but not yet implemented) involve an increasing measure of discrimination in favor of holders who are of other nationality or domicile.
“In its announcements of policy the German Government has not only disclaimed any intention of repudiating German loans but has consistently emphasized its determination to honor them. In practice, however, the policy of relating debt payments to the balance of commercial exchanges between Germany and each individual creditor country has inevitably produced the above-stated result of general discrimination against bondholders resident in the United States. The claim that debts should be paid only from direct sales of goods in the creditor country is inacceptable and dangerous as dislocating the relation between debtor and creditor, and tending to establish a new principle that any international debtor can in effect repudiate all or part of indebtedness that could be paid from exchange derived from triangular and multilateral trading. As an expedient to oblige foreign countries to accept German exports over and above what their markets would otherwise take, it seems to offer little promise of even temporary and partial success to compensate for the destructive general effects of such a policy.
“My Government has heretofore called attention to the degree to which the development of cooperative economic relations on its part is impeded when confronted by a policy of national discrimination and of disregard of express obligations voluntarily incurred toward great numbers of private citizens of the United States. It cannot but believe that this policy will be replaced by one more equitable and that steps will be taken at an early date to remedy the discriminations and neglect which have affected American holders of German securities.”