temberg cities including Stuttgart, Frankfort am Main, Nuremberg, State of Oldenburg; and definite approval imminent for a few others now pending. Question 3: Board has jurisdiction as to foreign financing by states as well as communes. Question 4: The Board does not have jurisdiction over industrial loans. [Paraphrase] For reasons explained in my despatch 295, September 15, very effective control cannot be exerted by Advisory Board over loans to municipalities. It is stated by the Acting Chief of the Advisory Board that it would be necessary to amend the constitution in order to make control by the board effective, as the various states can at any time withdraw their consent to be represented on the board. It is not my impression as matters now stand that the Advisory Board or any other German agency will be in a position in the long run to control effectively the obtaining of loans from abroad. Please inform Department of Commerce. SCHURMAN 862.51/2141 The Assistant Secretary of State (Harrison) to the Secretary of State [WASHINGTON,] November 19, 1925. DEAR MR. SECRETARY: The situation with respect to the general subject of German loans seems to be as follows: Prior to October 9th, it was the practice of the Department to suggest that American bankers assure themselves that the financing in question would increase the productivity of Germany, and to call their attention to the provisions of the Dawes Plan, and, when necessary, to the provisions of Article 248 of the Treaty of Versailles. Subject to the foregoing, and in the light of the information at hand, the Department then stated that it offered no objection to the financing in question. The Department also used the customary formula in pointing out that it did not pass upon business risks or assume any responsibility. 71 From October 9th, the Department has been using the new formula "1 which brought about objections on the part of the bankers, and a revision of which is now under consideration. You will recall the statements made by Dr. Schacht and the claim that a new situation has been brought about by a change in the policy of the German Government. However, after repeated inquiries by cable to the American Embassy at Berlin, the most that "See telegram No. 184, Oct. 17, 7 p. m., to the Ambassador in Germany, p. 177. can be said is that about October 21st a public announcement was made by the Advisory Board that it would take a stiffer attitude with regard to municipal, commune, and state financing, and, according to our information, the Board has done no more than to reduce somewhat the amount of proposed municipal and state financing. Recently, Mr. Gilbert made public a statement of the attitude of the Agent General and the Transfer Committee with regard to the question of transfers. From the foregoing, it will be seen that there has been little, if any, actual change in the situation since October 9th which in itself would justify us in modifying the formula which has been used since that date. In accordance with your instructions I have discussed the matter informally with Mr. Winston," and I gather that as a matter of policy he does not wish to prevent German financing but merely, in stating that there is no question of Government policy involved which would justify us in making objection, to call the attention of the bankers to the question of productivity, difficulty of transfer, and, when necessary, Article 248. I attach a rough draft of a formula which he has sent me.78 I have not yet ascertained what position Mr. Hoover is likely to take since the receipt of the last report from Mr. Schurman, a copy of which was sent to him. So far as I can see, the reasons which led the Department to adopt the formula of October 9th and since that time, have not been modi fied in any substantial degree. It would not appear to be wise, therefore, to depart in any great measure from the position taken in the formula of October 9th except as to the change in the situation brought about by Mr. Gilbert's public statement. I beg, therefore, to submit a revised formula for your approval." L[ELAND] HARRISON] 862.51/2122b The Secretary of State to the Secretary of the Treasury (Mellon)** [WASHINGTON,] November 20, 1925. MY DEAR MR. SECRETARY: I have examined with considerable care the proposed letter to be sent out to bankers suggested by Mr. "Garrard B. Winston, Under Secretary of the Treasury. 73 Not found in Department files. 74 A similar letter was addressed on the same date to Herbert Hoover, Secretary of Commerce. Mr. Arthur N. Young, Economic Adviser to the Department of State, took these letters personally to Mr. Mellon and Mr. Hoover and discussed with them and with Mr. Winston, the Under Secretary of the Treasury, the proposed form for letters to interested bankers. For a sample of the revised letter to bankers, see letter to Harris, Forbes & Co., November 21, infra. 75 Winston with some changes suggested by Mr. Hoover. It seems to me that, having deliberately adopted the form of letter which has been sent to all the bankers, we ought not to depart from it any more than is made necessary by changed conditions, because I am sure the matter is bound to come up in Congress and that we would then be asked why we had entirely changed the form of our letter. I am enclosing a copy of the original form of letter which we have been sending out, in which the proposed changes and additions are underscored and the omissions put in brackets.76 There is one change which I think we could consistently make, i. e. to omit the part of the letter in brackets on pages three and four which indicates that the bankers should satisfy themselves as to the attitude of the Transfer Committee and inform their clients of the situation. They have inquired of the Transfer Committee and Mr. Gilbert has made a public statement to the effect that the Committee is not in a position to give any assurance concerning the payment of interest or amortization of German loans floated abroad. I am sorry to say that this statement has not received the publicity and attracted the attention that it should have, and therefore I think we ought to call attention in the letter to just what he said. This puts the bankers on notice. I am willing therefore to omit the part of the letter in brackets if you feel as though, on account of their inquiries from Gilbert, we should not continue to send this portion of the letter. I also think at this stage of the proceedings it is sufficient for us to continue to call attention to the fact that the German authorities are not in favor of indiscriminate German loans. It would be all right for us to ask them whether they have received the consent of the Advisory Board if we knew that any such board was going to exercise any real control. Up to the present time, we have no such information after repeated inquiries to Berlin; in fact, we are advised by our Ambassador that there is no likelihood that there will be any real control exercised. Please let me know as soon as possible whether you agree, since, as you know, several German loans are now pending before this Department. Very sincerely yours, FRANK B. KELLOGG 76 Not found in Department files. 76 Marked copy not found in Department files. 862.51 D 88/ The Secretary of State to Harris, Forbes & Company WASHINGTON, November 21, 1925. SIRS: I beg to acknowledge the receipt of your letter of November 14, 1925," regarding your interest in a proposed loan of $3,000,000 to the City of Duisberg for the purposes and under the terms set forth therein. Since the flotation of the German external loan provided for by the Dawes plan, offerings of German loans in the American market have aggregated, according to the information before this Department, about $200,000,000, and it appears that a considerable volume of additional German financing is now in contemplation. In addition to the public offerings referred to above, the Department is informed that a large amount of private bank and commercial credits has been extended to German interests during the past year. In these circumstances the Department believes that American bankers should examine with particular care all German financing that is brought to their attention, with a view to ascertaining whether the loan proceeds are to be used for productive and self-supporting objects that will improve, directly or indirectly, the economic condition of Germany and tend to aid that country in meeting its financial obligations at home and abroad. In this connection I feel that I should inform you that the Department is advised that the German Federal authorities themselves are not disposed to view with favor the indiscriminate placing of German loans in the American market, particularly when the borrowers are German municipalities and the purposes are not productive. Moreover it cannot be said at this time that serious complications in connection with interest and amortization payments by German borrowers may not arise from possible future action by the Agent General and the Transfer Committee. In this connection, your attention is called to a public statement by Mr. Gilbert on November 11, 1925, to the effect that the Transfer Committee is not in a position to give assurances concerning the payment of interest or amortization on German loans floated abroad." While the Department of State does not wish to be understood as passing upon the interpretation or application of the provisions of the Dawes plan, or upon their effect, if any, upon loans such as the one now under consideration by you, it believes that in the interest of yourselves and of your prospective clients you should give careful consideration to this question. 77 Not printed. See telegram No. 194, Nov. 13, from the Ambassador in Germany, p. 182. While the foregoing considerations involve questions of business risk, and while the Department does not in any case pass upon the merits of foreign loans as business propositions, it is unwilling, in view of the uncertainties of the situation, to allow the matter to pass without calling the foregoing considerations to your attention. In reply to your inquiry, however, I wish to state that there appear to be no questions of Government policy involved which would justify the Department in offering objection to the loan in question. I am [etc.] For the Secretary of State: LELAND HARRISON 862.51/2145 The Ambassador in Germany (Schurman) to the Secretary of State No. 511 BERLIN, November 24, 1925. SIR: Referring to previous correspondence on the subject of German public loans, and with special reference to my telegram No. 196, dated November 14, 1 p. m., I have the honor to report that, according to a statement of the Beratungsstelle (Advisory Committee) of the Finance Ministry, the following public loans have been authorized since November 14: The City of Duisburg, 3 million dollars. The City of Dresden, 5 million dollars. The Central Bank of Baden, 15.7 million marks. The Landesbank of Hessen in Darmstadt, 4 million dollars. In this connection it is interesting to note that the Government circles have finally come to realize that they must at least make a show of instituting some effective control of public loans. Reports from Dr. Schacht, which they have received recently, have convinced them that, in view of the attitude of the Department of State in Washington, it has become urgently necessary for the Finance Ministry here to endeavor to persuade the American Government that the German Government is prepared to take appropriate measures to put in a system of effective control of public borrowing. Therefore, I assume that when Dr. Schacht returns, a good deal of play will be made of carrying this out. As I have often intimated before, however, in view of the continuing scramble for Municipal loans, and in view of domestic constitutional difficulties, I am not very sanguine as to the ultimate success of these endeavors. I have [etc.] JACOB GOULD SCHURMAN |