462.00R296/5215½
The Ambassador in Germany (Sackett) to the Secretary of State
My Dear Mr. Secretary: I was invited by Chancellor Brüning Thursday afternoon, October 1st, to have tea with him alone in his residence and I found that he wanted to go over with me the situation as it had developed since your visit here. As his conversation contained his personal opinions I thought it was better to send it in the shape of a letter than have a despatch go through embodying these rather confidential matters. However, I am enclosing an extra copy of this letter to the Under-secretary, Mr. Castle, in case you should be absent from Washington.
I was with the Chancellor the better part of an hour and he was very frank in discussing the French visit25 and his impressions, as well as the financial situation to-day and the difficulties which would have to be faced in the future. He was pleased with the French visit and thought that it laid a foundation of good feeling from which a considerable improvement in economic relations between the two countries could be anticipated. He told me that no matters of political import were mentioned by the French or by the Germans under an agreement to confine the conversations for the present to economic subjects, as the political matters were of a nature so delicate that the present state of feeling, in France at least, could not be counted upon for support.
He said that he and Laval talked to some extent about the coming visit of Mr. Laval to Washington.26 He told me, however, that he feared you would find Laval adamant on the question of disarmament. It was evident to him that the French Government felt that they could not maintain themselves in office if they recommended any lessening of armaments on the part of France; that M. Laval declared the French people looked upon the French Army and Navy as the sole reliance in a coming struggle against Bolshevism throughout Europe and that the French peasant would never accept the doctrine of Bolshevism and demanded protection to the fullest against it. I asked Dr. Brüning if the French officials held personally the same view they ascribed to the peasants and he said that he thought they did. I then asked him if he thought the reason given—fear of Bolshevism—was the controlling influence of the French attitude. He smiled rather broadly and said that if I asked his private opinion he did not think it was; that he thought there was a fear that any diminution in the French protection might invite hostile combinations [Page 327] of other countries in Europe which would be dangerous to the French. He spoke of the unfortunate condition which nearly always arose, when a country had become powerful and rich, and feared the jealousies of other countries and said it was a repetition of history.
He spoke also of his conception of the French attitude on the question of reparations, intimating the French appeared willing enough to give up their share of reparations which in turn would pass to the United States of America, but were far from any willingness to yield on the nonpostponable portion, though he was careful to say that in their discussions no definite statements took place concerning reparations, as the subject had a political background. Neither was anything said of boundaries or treaties.
Dr. Brüning then went on to rehearse the recent developments of the situation in Germany financially. While the “Stillhaltung” has now been signed by all parties and is in effect, there is still a very decided drain continuing on the bank reserves. In fact the Friday statement (October 2, 1931) of the Reichsbank, which came immediately after our conversation, shows that the covering of the currency had dropped from 40.1 per cent to 31.2 per cent within a week. Chancellor Brüning anticipated this most unfavorable result at the time of our conversation, but in particular he said what worried him more than that was the appearance, since England gave up the gold standard, of continuing withdrawals from savings banks in all parts of Germany, which had become quite emphatic during the last week. This creates a difficulty from loss of confidence which it is very hard to overcome—if it can be done at all. He had spoken of that to Monsieur Laval and Laval had told him that a similar situation was developing in France and that many peasants of means were purchasing gold bars and storing them away in lock boxes. Dr. Brüning says it indicates the wealth of the French peasant when those bars are worth about 250,000 Francs. This slipping of devisen, gold cover, and savings accounts comes on top of a very decided shrinkage in tax revenues of Germany. The fact that people are not making money affects the returns from the income tax and in addition many people are in a financial condition where they have no money to pay taxes which they actually owe. The actual balancing of the budget becomes a very difficult matter and one for which he cannot yet effect the solution. He feels that he has imposed almost the limit of taxation and that further measures in that direction would create the greatest unrest and antagonism and result in the resignation of the Cabinet.
He told me that the time for him to present his next year’s budget is not later than December 15th, though it might be possible to hold it, he thought, until January 15th, by which date he would have to disclose in the Reichsrat the program for the coming year, both from [Page 328] the disbursement and from the income sides. He told me that there were two things in connection with presenting this budget of the utmost importance if Germany were to carry on. One was that the “Stillhaltung,” i. e., the credits which under that agreement remain in Germany for a period of six months, will have to be extended. That there is no possibility of these credits being then collected as they represent to-day practically the working capital of the industries of the country. In the second place, unless he can get further relief from the reparations payments beyond the year of the President’s present moratorium he does not see how it is possible for Germany to go through. The embarrassing part to Dr. Brüning is that unless he can know by the time his budget is presented that reparations can further be postponed and unless he can know that the “Stillhaltung” will be extended, he cannot present a budget that will show a balance, for the amount of available resources which he has cannot meet either of those two drains upon the country. He asked me directly whether I thought arrangements could be made to continue the “Stillhaltung” of the loans that are now here from foreign countries for a period say of five years, then to be met by annual payments extending over several years and whether President Hoover could, if he understood the desperate plight of the German treasury, see his way clear to take further steps in the reparation matter. I called his attention to the fact that the money covered by the “Stillhaltung” agreement was not a Government proposition, but was a matter of the individual banks as far as the American capital involved was concerned. That it was not a matter to be taken up by his Government with our Government, but taken up by the Reichsbank with its creditors, all of whom were known because they had signed the “Stillhaltung” agreement. This he, of course, immediately recognized and he said that he should consider some method of approach to the creditors which could lead to a further extension of those credits, but was anxious for such assistance as our Government could render to persuade the banks.
He went over in detail the many measures which he had taken affecting German economic life to bring about a betterment of the situation. He said that the people had submitted to them, hard as they were, and the results obtained had been remarkable and that the spirit of self-help was strong and vigorous, but that the actual results were not sufficient to clear the deficits that he is facing. He impressed me with his earnestness regarding the desperate situation he faced, unless some definite arrangement on these two matters can be effected before the 15th of January, which seems to be a deadline, when he must expose the German situation. As I understood him, he believed that he could carry on if there were no more withdrawals of the loans now remaining in Germany and if the obligation of reparations is for some [Page 329] time set aside. Our conversation did not envisage the question of cancellation of reparations, but as I understood it, the absolute necessity of its further postponement for some definite period is crucial.
He then went on to tell me of the political difficulties which he should encounter to save his Foreign Minister, Dr. Curtius, and he is not at all certain but what Curtius will have to leave the Cabinet. Speaking quite frankly I could see he, as well as others, think that Curtius was most unfortunate in his action at Geneva over the customs union27 and failed to take advantage of the opportunity to announce a policy which should have taken the form that in view of the probability of an understanding among a wider group of nations, Germany and Austria would willingly postpone for some time the institution of the customs union. The Chancellor and others felt that such a statement would have been just as effective in satisfying the French demands and that it was a serious mistake in view of the German Nationalists’ attacks to renounce it completely on the spot. This on top of previous attacks on Curtius’ foreign policies seems to be the general feeling of the press and is the basis of the insistent demand for Curtius’ resignation. One of Brüning’s troubles which he acknowledged to me is that he cannot find any other person suitably prepared to become the Foreign Minister; that while he might undertake the work himself for a month or two he is not physically able to continue indefinitely.
Dr. Brüning is very much disturbed, as are all the Government officers, over the Hamburg election (covered in my despatch No. 1191, September 30, 1931,)28 which took place on Tuesday, September 29th, and which indicated such a remarkable drift to the radical left and radical right. Brüning feels, therefore, that it is necessary to do everything to avoid a general election, because he says that if a general election were held at this time that same drift to radicalism would appear all over the country and would undoubtedly result in a radical parliament with a radical government, the first move of which, in its present frame of mind, would be a repudiation of foreign debts, which, as Dr. Brüning says, would destroy forever German credit. This Hamburg election took place during the visit of the French Ministers and was the basis of a considerable part of their conversations as showing the trend of Eastern Europe.
As another Cabinet Minister, Dr. Wirth,29 told me on Tuesday evening the attitude of many of the voters was that in the last eight years they had tried the Socialist Government, which had not led them out of their difficulties, and they had tried the Conservative [Page 330] Government, represented by Dr. Brüning and his Cabinet, which, while it had made many moves, was confronted to-day with a situation worse than when it came into power. Dr. Wirth said the popular feeling was that there seemed to be no ability in any Conservative Government to improve conditions and while the electorate had nothing but promises from the radical elements there was so little to lose it was probably best to give them a chance to try their hands. In other words, such is the pulse of the electorate, which is so largely made up in Germany of those who have nothing to lose and to whom any change may seem beneficial.
Dr. Brüning went over the increasing difficulties which come from the English financial situation, particularizing as to its effects on the bituminous coal business. Germany, having a large production, will now be undersold by the English coals, as there is no possibility, in Dr. Brüning’s view, for Germany to secure lower wage production costs through abandonment of the gold standard, following England’s lead, as practically Germany’s whole indebtedness is payable on a gold basis. Unfortunately, he says, many of the contracts of German concerns, including many of the sales made to Russia in the past few years and which have not yet been liquidated, as well as shipping contracts, i. e., charters for freights to all parts of the world, and much of their export trade, as for instance cotton industries, for which long-time credits must be given in the southern hemisphere, have been financed on the basis of the English pound and payment will be made in a depreciated currency. This will affect seriously Germany’s balance of trade for a considerable period to come and add to her difficulties materially.
He told me of growing financial difficulties in the countries lying to the northeast, east, and southeast of Germany and said that he was fearful of the banking situation in Czecho-Slovakia, although it was not generally appreciated how serious were the difficulties there.
Dr. Brüning said Laval hopes in going to Washington that he can persuade Mr. Hoover that one of the things that should be done immediately was the calling of a general conference of the four larger powers of Europe and the United States to consider measures looking to not only the general economic relief, but to stabilization of the interrelation of the currencies of the principal nations. While the German-French committee that has been set up during the French visit can treat of many matters of mutual interest to these two countries, the recent development of the currency situation in England called now for a much wider circle which he and Laval believe could only originate through the President of the United States and he hoped that Mr. Hoover would find it possible to institute such a conference.
In the course of our conversation the question of a possible relief from the overcrowding of Germany and growing unemployment in [Page 331] her industry, which would be of benefit to all the countries, came up. Dr. Brüning felt that the institution of a German colony under her own administration in some part of the world, where surplus population could be located, would relieve an overcrowded situation in this country and would thereby be of great benefit to the other nations, but that he as a German could not make such a proposal, because it must be agreed to by the allied nations and there would be attached to it, in his judgment, such impossible political conditions as would render its acceptance and availability impossible. He felt that the institution of such a colony would be most beneficial and he also felt that it would be so beneficial in its effects to the other countries that if the proposition could come from some Government opposed to Germany in the war its chance of successful development was very much greater.
Referring again to the matter of reparations, I talked to him about whether Germany would proceed to call upon the Basle Committee, provided for in the Young Report, and his reaction to that suggestion led him to say that such a move on the part of Germany was not possible until after the monies now loaned in Germany have become further stabilized through the extension of the “Stillhaltung” agreement, as such a call by Germany for instituting that committee would affect everybody who had money here in the shape of loans and the credit of the country would be so disturbed that there would be no hope of the loans so vitally needed being retained here.
While I apologize for the length of this letter I have tried to outline Dr. Brüning’s views without comment on my part. I shall add, however, that he has made concrete the difficulties which I recognize as developing in the German situation.
Very truly yours,