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F E D E R A L R E S E R V E B O A R D X-U0U5

STATEMENT JOR THE PRESS

For Release i n Morning Papers , Monday, May 5, 1924.

The Federal Reserve Bul le t in for May w i l l con ta in the fol lowing summary of the provisions of the r e p o r t t o the Reparations Commission made "by the committee of exper ts on the German "budget and currency s t a b i l i z a t i o n .

The May is sue wil l a l so contain t he complete o f f i c i a l English tex t of the r e p o r t s of the two committees ( the so-cal led Dawes and McKenna r e p o r t s ) . Copies of r ep r in t s of the t ex t of the r epo r t s can be obtained from the Federal Reserve Board a t a nominal charge.

REPARATION PAYMENTS AND STABILIZATION OF GERMAN CURRENCY.

Report of Experts to Reparation Commission.- During the month the p r i n -

cipal event of i n t e r e s t has been the report of the committees of experts appointed

by the Reparation Commission to make an inquiry in to f i s c a l and monetary conditions

in Germany and t h e i r r e l a t i o n t o the problem of r e p a r a t i o n s . Af te r r ece iv ing the

unanimous approval of the Reparation Commission the repor t s of the experts were

accepted by the German Government and favorably received by the Governments of the

All ied countr ies as o f f e r i n g a p rac t i ca l basis f o r a so lu t ion of the problem of

r epa ra t i ons . In view of the importance of these r e p o r t s , which a r e r epr in ted in

f u l l elsewhere i n th i s i s sue , the present review suoorrarizes the proposed program

of ac t ion contained in the recommend a t ions of t h e committee on budget and currency-

Under i t s terms of re fe rence t h i s committee was to consider "means of

balancing the German budget and the measures to be taken to s t a b i l i z e i t s

currency." The e s s e n t i a l f e a t u r e s of the plan recommended by the committee

are a schedule of repara t ion payments to be made by Germany d i r e c t l y out of

taxat ion and through the imposi t ion of 9 mortgage debt upon German rai lways

and indust ry; the separa t ion of co l l ec t ions in Germany, for which t h e German

Government i s to be held r e spons ib le , from the t r a n s f e r of funds abroad, which

i s to be control led by a. committee represen t ing the Al l i e s whose func t ion i t

Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

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w i l l be to make the maximum t r a n s f e r s consis tent with maintenance of exchange

s t a b i l i t y ; the establishment of a new bank of issue to un i fy and. s t a b i l i z e

German currency; and the f l o t a t i o n of a fo re ign loan intended to a s s i s t in the

establishment of the bank and in enabling Germany to meet her most urgent im-

mediate ob l iga t ions .

The committee regards i t s proposal as one i n d i v i s i b l e whole and con-

s iders i t e s s e n t i a l to i t s successful operat ion that the repor t be adopted in

i t s e n t i r e t y . I t furthermore points out tha t vvhile the plan does not "attempt

a so lu t ion of the whole repara t ion problem, i t foreshadows a set t lement ex-

tending in i t s app l i ca t ion fo r a s u f f i c i e n t time to r e s t o r e confidence, and a t

the same time i s so framed as to f a c i l i t a t e a f i n a l and comprehensive agreement

as to a l l the problems of repara t ion and connected quest ions as soon as

circumstances make t h i s pos s ib l e , "

In considering the conditions e s sen t i a l to the r e s t o r a t i o n of

Germany's c red i t and the establishment and maintenance of s t a b i l i t y in budget

and currency, the committee based i t s report on the assumption that the f i s c a l

and economic un i ty of Germany w i l l be r e s to red . Furthermore, the committee

recognizes tha t Germany's present f i n a n c i a l conditions are such tha t r epa ra t ion

payments can be made from her ordinary budget revenues only a f t e r a period of

recupera t ion . The repor t says: "At the time of our i nves t iga t ion Germany was

passing through an acute economic c r i s i s , the d i r ec t r e s u l t and the culminating

point of a deprec ia t ion of the currency so ca tas t rophic as p r a c t i c a l l y to

destroy the currency and reduce the budget to a l l but a shadow. The habi t of

saving has been destroyed and i t w i l l require time and the r e s t o r a t i o n of con-

fidence to r e e s t a b l i s h i t . The ex i s t i ng wealth i s mald i s t r ibu ted in an almost

unpara l le led degree. The cessa t ion of deprec ia t ion , wi th the consequent r e -

moval of the premium on exports and the s t a b i l i z a t i o n of p r i c e s a t a l eve l which


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i s momentarily, a t any r a t e , above tha t of the world l e v e l , has had important

r eac t ions . F i n a l l y , t h e s t a t e of employment and the f i s c a l and economic ma-

chinery of Germany have been v i o l e n t l y deranged by the events of 19-3* & r e tu rn

to normal condi t ions in t h i s respect can not be e f f e c t e d ove rn igh t . "

In i t s ana lys i s of the problem of s t a b i l i z a t i o n of the Germany'-'

currency and ba lancing the German budget, the committee' d i s t i n g u i s h e s sharply

between t h e two phases of the problem, the amount of revenue Germany can make

ava i l ab le f o r the r e p a r a t i o n account and the amount which can be t r a n s f e r r e d

to f o r e i g n c o u n t r i e s . Since the probable amount of the budget surplus and

other c o l l e c t i o n s on r epa ra t i on account can be nore d e f i n i t e l y es t imated than

the amount which can be made a v a i l a b l e f o r payments abroad, the repor t p resen ts

a schedule of annual payments over a s e r i e s of years , but does not undertake

to es t imate the amounts tha t can be converted in to f o r e i g n cur renc ies without

causing i n s t a b i l i t y of exchange. The l i m i t s w i th in which payments can be made

abroad a r e def ined as fo l lows : "The funds r a i s ed and t r a n s f e r r e d t o the A l l i e s

on the r epa ra t i on account can not in the long run exceed the sums which t h e

balance of payments makes i t poss ib le to t r a n s f e r without currency and budget

i n s t a b i l i t y ensuing." The e n t i r e plan r e s t s upon t h i s d i s t i n c t i o n between the

co l l e c t i ons in Germany on r epa ra t i on account, which a r e measured by the German

taxpayers ' capaci ty t o pay, and the t r a n s f e r of funds to t h e A l l i e s , the volume

of which depends in the f i n a l ana lys i s on Germany's balance of i n t e r n a t i o n a l

payment s . Schedule of C o l l e c t i o n s . -The committee, in view of i t s terms of r e f e r e n c e , Aid not undertake

to determine the t o t a l amount of r e p a r a t i o n payments, but worked out a p lan of

annual payments t o be inc lus ive fo r any p a r t i c u l a r year of a l l poss ib l e charges

fo r which Germany may be l i a b l e to the A l l i e s , w i th the unders tanding t h a t any


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addi t ion to one category of charges can only be made a t the expense of another .

The f i r s t four years of the operat ion of the plan are regarded as a rper iod of

recupera t ion and t rans i t ion . , with a gradual increase of payments to the f i f t h

year , when the amount to be paid reaches a standard t o t a l . During the f i r s t

two years no payments are to be made out of ordinary budget r e c e i p t s ; in the

following years the payments from t h i s source a re increased so t h a t in the

standard year the budget furn ishes one-half of the t o t a l payments. The plan

f u r t h e r provides f o r a fo re ign loan and for the co l l ec t i on of i n t e r e s t upon a

mortgage indebtedness to be placed on German r a i l r o a d s and indus t ry . Essentia

de l i ve r i e s in kind are to continue and t h e i r value i s to be included each year

in the t o t a l of payments prescr ibed by the plan. The amounts which i t i s

estimated Germany w i l l be in a pos i t ion to pay during the per iods of r e -

cuperation and t r a n s i t i o n and the standard amounts spec i f i ed f o r subsequent

years are given in the following schedule, which des ignates the several sources

from which the funds a re to be derived. Provision is made fo r modif ica t ion of

the amounts se t f o r t h in the schedule during the t h i r d and f o u r t h years in

accordance with the y i e l d of ce r t a in cont ro l led revenues and f o r add i t ions to

the standard payments t o be determined by an index of p r o s p e r i t y .


t5-SCHEDULE OF COITZCTIONS

(In ' .mil l ions of gold marks)

X-U045

Budget morato-rium period

Trans i t ion period

Standard year

I F i r s t Year

Second Year

1 1

Third Year

1

Fourth Ye.,r

F i f t h and subsequent

years

j 1 . . . . . . 110 500 1,250 Vi a. lllcXL J U UUgC V — — — —

T? A 4 1 A O v*l 800 200

110 500 1,250

In t e re s t on railway bonds Sale c f railway preference

800 200 595

500 125

550 660 660

In te res t on i n d u s t r i a l bonds —

595

500 125

O O

300 290

300 290 11 dilu vl V wU-A

Total 1,00C 1,220 1,200 1,750 2,500

Sources of co l l ec t ions -In the proposed schedule, as shown above, no co l l ec t i ons on repa ra t ion ac-

count are expected t o bs made out cf funds derived from the ordinary budget during

the two years of recupera t ion or so-cal led budget moratorium. I t i s a requirement

of the plan, however, tha t f o r these two years taken as a whole ordinary revenues

and expenditures sha l l balance-

In the t h i r d year the budget i s expected to cont r ibute l l u , 0 0 0 , v 0 gold marks.

in the fou r th year 500,000,000 marks, and in the f i f t h and subsequent years

1,2^0,000,000 marks, which cons t i t u t e s one-half of the t o t a l standard payment.

The cont r ibut ions of the budget to repara t ion payments a re t o be secured by the

control and supervis ion of revenues derived from taxes on tobacco, a lcohol , sugar,

and beer , and from customs r e c e i p t s . During the t r a n s i t i o n period, the t h i r d and

fou r th years , p rovis ion i s made for increases and decreases in payments within the


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l imit of 250,000,000 marks, dependent upon the y i e l d of these controlled revenues

It i s estimated that these revenues w i l l y i e l d in the standard year over

2,000,000,000 marks, against which reparation payments w i l l be a f i r s t charge.

Any excess of y i e l d over t h i s charge w i l l be avai lable to the German Government

for ordinary expenditures. Beyond indicating the t o t a l amounts to be paid from

budget and the guarantees provided by the controlled revenues, the committee does

not undertake to prescribe methods of ra i s ing revenue, but Germany i s l e f t f ree

to devise such f i e c a l arrangements as seem best adapted to her condit ions. The

committee does, however, commend to the German Government certain methods of

taxation which have been worked out by technical experts.

A proposed foreign loan of 800,000,000 gold marks i s to bd the chief source

of reparation payment during the f i r s t year. This loan i s intended to "serve the

double purpose of assuring currency s t a b i l i t y and financing e s sen t ia l de l iver i e s

in kind during the preliminary period of economic rehabi l i ta t ion ." The re la t ion

of th i s loan to the proposed bank of issue and i t s use as a bas is of currency

s tab i l i za t ion i s considered l a t e r in th i s review.

Other proposed sources of payment are interest on railroad and industr ia l

bondsr the sa le of railway preference shares, and the transport tax. The com-

mittee places upon the German railroads a to ta l valuation of 26,000,000,000 gold

marks, and against th i s to ta l i t s plan provides for the issue of 11,GOO,COO,000

of mortgage bonds, 2,000,CO,COO of preference shares, and 13,000,000,000 of com-

mon stock. The mortgage bonds, which shall be guaranteed by the German Government

are to be turned over to the Reparation Commission and are to bear in the standard

year a rate of in teres t of 5 per cent and an amortization charge of 1 per cent,


The income from these bonds, which increases during the f i r s t four years , i s the

p r inc ipa l source of payments lur ing these yea r s . Of the preference shares, one-

four th i s to be turned over to the German Government and th ree - fou r ths to a company

which i s to take over the operation., of the r a i l r o a d s . This company i s to be ad-

ministered by a board of d i r ec to r s represent ing the Reparation Commission, the Ger-

man Government, and the holders of the preference shares . From the sa le of i t s

preference shares the Government i s to make repara t ion payments in the second year

amounting to ^00,000,000 marks, and in case the sale of these shares f a i l s to

y ie ld t h i s amount the d e f i c i t i s to be made up by an in t e rna l loan . The common

stock i s to be issued to the German Government, which w i l l have au tho r i ty to hold

the stock or to s e l l i t , as i t p r e f e r s . Through redemption of the bonds and the

repurchase of the pre fe rence shares the plan provides a means f o r the German Gov-

ernment u l t imate ly to regain control of the r a i l r o a d s .

TJpon German industry the plan places a mortgage amounting to 5»000., 000,000

gold marks to be represented by bonds, the burden to be d i s t r i b u t e d a-rong ind i -

vidual concerns and guaranteed by the Government. The y i e l d of these bonds in the

standard year (5 per cent i n t e r e s t plus 1 per cent amort iza t ion) i s to be a source

of repara t ion payments beginning with the second yea r . The tax now lev ied on r a i l -

road t r an spo r t a t i on i s r e t a ined and, beginning with the t h i r d year , i s t o be a d i -

rec t source of r epa ra t ion payments up to 290,000,000 marks. Total payments under

the schedule, as shown in the t ab le , are to increase from 1,000,000,003 gold marls

in the f i r s t year to 2,500,000 ,000 gold marks in the standard, y e a r .


—8— X—U0U5

• Commensurate t a x a t i o n . ~

A guiding p r i n c i p l e used by tne committee in determining t h i s schedule of

annual payments was that the German people should bear a burden of t axa t ion as

heavy as t ha t borne by the peoples of the a l l i e d countr ies - the p r i n c i p l e of

commensurate t a x a t i o n . This p r inc ip l e , which i s considered j u s t in i t s appl ica-

t ion to Germany, i s a lso deemed to be economically des i r ab le , because i t tends

toward competitive equa l i ty in in t e rna t iona l t rade between Germany and the Al l i es

The placing of a mortgage debt of 16,000,000,1?0 marks upon German r a i l r oads and

industry i s in recogni t ion of the f a c t tha t a l l bonded indebtedness in Germany

has been v i r t u a l l y extinguished through the f a l l of the mark, Railroads and in -

dustry, which through the deprecia t ion of the German currency have been re l i eved

of a large pa r t of t h e i r burden of bonded indebtedness to inves to r s , a r e to con-

t r i b u t e unde r . t h i s plan to currency and f i s c a l r e s t o r a t i o n and to repara t ion pay-

ments through the assumption of a mortgage debt to the Reparation Commission.

In t e re s t payments on t h i s mortgage debt into repara t ion account w i l l under the

plan take the place of the annual i n t e r e s t charges which were borne by German en-

t e r p r i s e s in tho years before i n f l a t i o n . No mortgage debt i s placed upon a g r i -

cu l tu re , but i t i s recommended that the German Government, in case i t deems i t

des i rab le , impose such a mortgage in favor of the regular budget. Certain ob l i -

gat ions, i t may be noted, have already been imposed upon a g r i c u l t u r a l land

through the levy which guarantees the rentenmarks.

Two considera t ions are indicated by the committee which might lead to a modi

f i c a t i o n of the annual t o t a l s spec i f i ed in the schedule - growth of i n d u s t r i a l

p rosper i ty and changes in the value of gold. For the purpose of enabling the


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Al l ies to . share in the growth of German industry and t rade , an index of prosper-

i ty i s proposed, which, a f t e r the f i r s t f i ve years , may indicate var iab le addi-

t ions to the standard payments on reparat ion account. Thus the payments, instead

of being modified by changes in the value of exports alone as i s contemplated un-

der exis t ing arrangements, w i l l under the proposed plan increase in accordance

with a composite index based upcn s t a t i s t i c s of railway t r a f f i c , population

growth, t o t a l fore ign t rade , consumption of tobacco, sugar, beer , and alcohol ,

budget expenditures (excluding reparat ion payments), and per capi ta consump-

tion of coal . There i s no provision for decreasing the standard payments on the

basis of the prosper i ty index, but in case i t indicates a reduced capacity fo r

payment in any year the amount of the deficiency i s to be deducted from any fu ture

supplementary payment based on the index, A f u r t h e r modif icat ion i s provid-

ed fo r on the bas i s of changes in the value of gold which, in case they exceed

10 per cent of i t s value in 1928,.may r e s u l t in f u t u r e years in a corresponding

increase or decrease of annual reparat ion payments.


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Transfer of funds to A l l i e s - A more important f ac to r in i t s poss ib le

e f f e c t upon t o t a l r epara t ion payments i s the p rov is ion which p laces a d e f i n i t e

l imi t upon the accumulation of r epa ra t ion funds in Germany in excess of the

amount tha t can be t r a n s f e r r e d abroad without r e s u l t i n g in undue f l u c t u a t i o n of

exchanges * In case co l l ec t ions on repara t ion account a r e in excess of what

Germany *s balance of payments wi l l make i t poss ib le to remit to the Al l i e s , a

l im i t i s placed upon the accumulation of repara t ion funds in Germany* Up to

2,000,000*000 marks these funds, which a r e to be deposi ted in the new bank of

i ssue , may be used in short- term c r e d i t operations in Germany. If the accumula^

t ion continues beyond th i s amount and up to ^,000,000,000 marks, the funds may

be used by the A l l i e s in Germany in the purchase of bonds and other forms of in-

vestment, When, however, the t o t a l amount of these funds reaches S,000,000,000

marks provis ion i s rnde for a decrease of payments out of t he budget

and the t ranspor t tax and for t he i r discontinuance to the extent tha t t r ans fe r s

can not be ef fec ted* Even, before the funds accumulated reach th i s t o t a l the

payments may be modified if in the judgment of the t r a n s f e r committee i t appears

tha t f u r t h e r accumulation i s a menace to the f i s c a l or economic s i t u a t i o n of

Germany or to the c r e d i t o r count r i es . In case the t r a n s f e r committee d i s -

covers concerted f i n a n c i a l maneuvers by the Government or by ind iv idua l s to i-*re-the

vent / t r a n s f e r , the t r a n s f e r committee may undertake whatever measures a re nec-

essary t o defeat these maneuvers and i s authorized under these circumstances to

accumulate funds beyond the l im i t of 5>000,000,000 marks.

In d iscuss ing the r e l a t i o n betwesi c o l l e c t i o n ~ that i s , the German

taxpayers 1 capaci ty to jjay ~ and remit tance abroad - tha t i s , Germany * s capaci ty


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to pay the A l l i e s - recogni t ion i s made in the r epor t of the f a c t t h a t the

amount t h a t can be pa id abroad by means of an economic surplus in i n t e rna t iona l

t rade i s "by comparison with the budget, incapable of c lose c a l c u l a t i o n , 'un-

manageable *, and too e l a s t i c . Tut l i m i t s se t by economic balance, i f im-

p o s s i b l e of exact determinat ion, a re r e a l . For s t a b i l i t y of a coun t ry ' s

currency to be permanently maintained, not only mast her budget be balanced

but h e r earnings from abroad mast be equal to the payments she mast make

abroad, including not only payments f o r goods she imports but sums pa id in

r epa ra t i on . Nor can balance of -the budget'i i t s e l f be permanently maintained

except on the same c o n d i t i o n s . " Thus the amount which the exchange pos i t ion

makes i t poss ib le f o r the Al l i e s to t r a n s f e r not only l im i t s the r e c e i p t s t o

the A l l i e s on r epa ra t ion account but a l s o u l t imate ly p laces a l i m i t upon the

c o l l e c t i o n s to be irade in Germany. Faced with t h i s l imi t a t ion the committee

does no t undertake to make a d e f i n i t e est imate of the amount which can be

t ransmi t ted , but makes the volume of t r a n s f e r s depend upon the a c t u a l exchange

s i t u a t i o n as i t develops in experience.

BAfik of I s sue - Reference has already been made to the proposed bank

of i s s u e , which i s to serve as the deposi tary of r epa ra t ion funds co l l ec ted in

Germany and i s regarded by the committee as an e s s e n t i a l agency f o r t h e creat ion

of a u n i f i e d and s t ab l e currency. Establishment of the Benten'oank, through

which the reca i t s t a b i l i t y of Gernan currency has been brought about , i s viewed

by the committee as not a f fo rd ing , in the absence of other measures, an adequate

guaranty of permanent s t a b i l i z a t i o n . Such s t a b i l i t y the committee bel ieves i s

e s s e n t i a l to the maintenance of a balanced budget and the r e s t o r a t i o n of German


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credi t . The commit tee provides safeguards that reparation payments wi l l

not lead to i n s t a b i l i t y of exchange through the control i t places in the

hands of the transfer committee, and proposes to maintain the gold value of

the domestic currency by means of the establishment of the new bank of issue

and through the l imitat ions placed upon i t s note- issuing power.

The bank i s to perform the usual functions of a central bank and

may, in fac t , be established through a reorganization of the Reichsbank. The

capi ta l of the bank i s to be 400,000,000 gold marks, of which one-fourth i s to

represent the f ixed asse t s of the Reichsbank and the remainder i s to be offered

for sa le in Germany and abroad. The bank i s to have the exclusive r i 6 ht , with

certain minor qual i f i ca t ions , to i ssue notes, and a l l other notes now in c i r -

culation are to be gradually withdrawn. Against these notes the bank i s re-

quired to maintain a normal reserve of 33-1/3 per cent in gold, s table foreign

exchange and gold cred i t s with foreign banks. The purpose i s to keep the

currency stable in re lat ion to gold and as soon as conditions w i l l permit to

place i t upon a convertible bas is . Against i t s demand deposits the bank i s to

maintain a reserve of 12. per cent in gold, with certain further provisions re-

garding l iquidi ty of a s s e t s . The bank i s intended to be primarily a bankers'

bank, though i t may make loans d irect ly to the public , with safeguards as to

type and naturity of paper to be discounted. I t i s to be the f i s c a l agent of

the German Government, but entirely free from governmental control , and i t s

power ,to la id to the Government and to State enterprises i s s t r i c t l y limited.

It i s contemplated that the new bank of i s sue , which w i l l either,

supersede the Reichsbank or be the outcome of a reorganization of that bank,


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wi l l absorb the r e c e n t l y organized gold discount bank ( the so -ca l l ed Schacht

B&nk). This l a t t e r bank i s considered an in ter im arrangement express ly l imi ted

to providing the means of carrying on fore ign t rade and thus supplementing the

Eentenbank, whose operat ions and currency issues a r e l imi ted to domestic t r ade .

According to the committee 's p lan , the Eentenbank i s to be l i q u i d a t e d . With

the pass ing of the Eentenbank and the absorption of the gold discount bank,

the new bank of i s sue i s intended through i t s operat ion a t home and abroad to

take over the f u n c t i o n s which a t p resen t a re performed by both of t hese in-

s t i t u t i o n s .

Proposed Administrat ive Machinery - Provis ion i s made in t h e plan f o r

machinery to adminis ter the bank of i s sue and the r a i l r o a d s , and f o r the estab-

lishment of a t r a n s f e r committee. Administrat ive arrangements wi th reference to

the bank provide f o r an organizat ion committee cons i s t ing of the p r e s iden t of the

Beichsbank and one member of the committee of exper ts ; and a f t e r i t s e s t ab l i sh -

ment a general board of 14 members, 7 e lec ted by German stockholders and 7 f o r e i g n

members, represent ing United S ta t e s , Great I r i t a i n , France, I t a l y , Belgium, the

Netherlands, and Switzer land, to be appointed by the organizat ion committee, and

l a t e r s e l f p e r p e t u a t i n g . This board i s t o elect the pres ident of t he bank, who

mast be approved by the pres ident of t he Reich, and f o r the f i r s t s i x months of

the bank*s operation i s t o be the pres iden t of the Beichsbank. The board i s

to have general superv i s ion of the operat ions of the bank, and the ac tua l ad-

min i s t r a t i on i s t o be in charge of a manaE.ine board t o cons i s t of German na t iona l s

appointed by the p r e s i d e n t subjec t to the approval of the general board and . the

p r e s i d e n t of the Reich. In add i t ion t he general board sha l l e l e c t a banking

commissioner to superv ise the maintenance of reserves and tne i s sue and re -

demption of n o t e s .


- 14 - X-4045

The r a i l r o a d s a re to be operated by a board of IS d i r e c t o r s , ; 9 of whom

a re to be appointed by the t rus t ee of the mortgage bonds and 9 by the German

Government. Af t e r the s a l e of the preference shares the holders of these

shares w i l l e l ec t fou r d i r e c t o r s and the Government w i l l appoint f i v e . Of

the d i r e c t o r s appointed by the t r u s t e e , f i v e may be of German n a t i o n a l i t y . The

chairman of t h e board and the general manager sha l l be Germans. The fore ign

members of the board of d i r ec to r s wi l l se lec t the commissioner of rai lways who

i s to exerc ise superv i s ion over the operat ions of the roads, and in case the

railways f a i l to y i e l d ne t revenues s u f f i c i e n t to meet the requi red repara t ion

payments, i s to t ake over the func t ions of the general manager.

The Reparation Commission wi l l appoint a t r u s t e e of bonds and a.

commissioner of c o n t r o l l e d revenues. The t r u s t e e w i l l receive and hold tne

rai lway and i n d u s t r i a l bonds and w i l l have cnarge of tne sa le of tnese bonds

and the co l l ec t i on of i n t e r e s t payments. The duty of the commissioner of con-

t r o l l e d revenues w i l l be to supervise the repara t ion payments out of budget, and

in case of de fau l t to take complete charge of the con t ro l l ed revenues.

All opera t ions in connection with tne t r a n s f e r of funds to ti>e A l l i e s

and the investment in Germany of accumulated funds i s to be in cnar^e of <» t r a n s -

f e r committee appointed by the Separat ion Commission, With t h i s committee w i l l

r e s t the decis ion to suspend c o l l e c t i o n s when the funds exceed the s t a t ed l imi t

of 5,000,000,000 marks. This committee wi l l include in i t s membership the anient

f o r r epa ra t ion payments, who i s to be the p r i nc ipa l r ep re sen ta t i ve of the Rep-

a ra t i on Commission and i s to coordinate the a c t i v i t i e s of a l l the agencies pro-

posed by the p lan .

Foreign Loan — Funds a r i s i n g from the proposed fore ign loan of


- 15 - x -uou-5

800,000,000 gold marks, to which re ference has been made in connection with the

f i r s t y e a r ' s r epa ra t ion payments, w i l l be deposited in the bank to the c r e d i t

of the German Government and wi l l c o n s t i t u t e a cont r ibut ion to i t s reserves

and thus enlarge the ba s i s of i t s currency i s sues . The loan w i l l a l s o help to

overcome the acute shor tage of l i qu id funds in Germany and wi l l a s s i s t in meet-

ing her immediate and more urgent obl iga t ions to the Al l i e s , p a r t i c u l a r l y in

making payments in Germany fo r goods to be del ivered on repara t ion account.

In commenting upon the c r ed i t pos i t ion of Geraany in connection with

the proposed fo re ign loan and upon the use to be made of the funds thus ra i sed ,

the repor t s t a t e s tha t -

"A considerable sum can c e r t a i n l y be ra i sed upon the good secur i ty

that the plan provides , with a c lea r prospect of improved i n t e r n a t i o n a l p o l i t i c a l

p o s i t i o n and of s t a b i l i t y .

"The ques t ion i s , t he r e fo re , whether the claims upon Germany can be so

reduced by agreement amon^ the a l l i e d c r ed i to r s as t o come within t n i s p o t e n t i a l

c r e d i t . If they can, then obviously the grea te r the reduction the more moderate

the sum to be r a i s ed , and the grea te r the p robab i l i t y of Germany success fu l ly

ra is in b : a loan. If n o t , then, the loan wi l l not be forthcoming, s t a b i l i t y can

not be insured, and n e i t h e r t h i s p lan nor any other can come in to be ing .


« •

- 16 - X-4045

"The successful launching of the scheme depends, therefore, upon three

main factors: ( l ) Limitation of payments for a l l purposes to 1,000,000,000

gold marks, of which at least 800,000,000 mast be spent in Germany for the f i r s t

year, and thereafter to such sums as are available under the plan during the

succeeding, years; (2) cooperation between the A l l i e s and Germany in securing

p o l i t i c a l conditions w^ich wi l l inc l ine the investors of the world favorably

toward the German loan upon £ood security; (3) a loan of 800,000,000 gold

marks, which wi l l serve the double purpose of securing currency s t a b i l i t y and

financing essent ia l de l iver ies in kind during the preliminary period of economic

rehabil i tat ion,"

Currency Stabi l izat ion and Reparations - Flotation of t h i s external

loan w i l l be one of the f i r s t pract ical steps in the carrying out of trie plan,

a f ter the acceptance of the report by the Governments concerned, and wil l t e s t

the acceptabi l i ty to the investing public of the security offered by the plan.

Banking credits of a short-term character have already been granted by ITew York

and London bankers in connection with the recent establishment of the gold dis -

count bank in Gernany, The establishment of foreign credits as a means of

s tab i l i z ing currency in relation to gold was the plan followed by a number of

other European countries during the past year, and t-ie resul ts of tn is metnod

of currency s t a b i l i z a t i o n were described in the previous issue of the Federal

Reserve bul le t in . In e f f ec t taese plans establ ish a &old exchange standard and

may be regarded as const i tut ing an intermediate arrangement between depreciating

paper money with wide f luctuations in exchange and currency s t a b i l i t y on tne gold


- 1% - X-4045

standard. Currensy reforms under taken in Europe have been in the d i r e c t i o n of

r ees tab l i sh ing the connection between domestic cur renc ies and gold by l inking

them to s tab le fo re ign exchanges. In those count r ies whose budgetary pos i t ion

was not immediately a f f e c t e d by the payment of r epa ra t i ons , t n i s method of

currency reform has r e s u l t e d in a g rea te r s t a b i l i t y of exchange. In Germany

the balancing of the budget and the s t a b i l i z a t i o n of the currency i s complicated

by repara t ion o b l i g a t i o n s , but in i t s proposals the committee nas considered

currency s t a b i l i t y as e s s e n t i a l to the r e s to ra t i on of German c r e d i t and .nas

made the maintenance of s t a b i l i t y a limiting, f a c t o r upon the payment of

r epa ra t ions .


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