Despatch No. 1629 of November 30 indicates that at that time the Austrian Government desired that the funding of the relief credit bonds and the subordination of the lien of these bonds to the new Federal loan be not considered together. It was apparently the intention of the Austrian Government to propose to the International Relief Bonds Committee meeting at London that the relief creditors subordinate the lien of their bonds and that as soon as the new loan has been floated the question of entering into a general funding arrangement for the relief credits be taken up.

On December 14 the Department was informed by Mr. Leffingwell of J. P. Morgan and Company that discussions were going on in London between the Austrian Government and the European Relief Creditor States. It will be remembered from Reparation Commission Annex 3258 B-1, a copy of which was transmitted to you by a letter of October 21, 1927,1 that an International Relief Bonds Committee, representing the Governments of Denmark, France, Great Britain, Holland, Italy, Norway, Sweden and Switzerland met in Treasury Chambers, London, and, on or about July 14, 1927, agreed with the Austrian Government to replace the bonds of Relief Series B of 1920 with renewal bonds maturing January 1, 1943, and bearing 5% interest. You will recall that a secretary of the American Embassy at London attended meetings of this Committee during the last half of 1924. The Department, however, has since that time not been in direct touch with the proceedings of the Committee. It may be noted, in passing, that the settlements which this Committee has negotiated with relief debtors have been much more favorable to the creditor governments than the settlements which the United States has negotiated with its debtors.

The Department has orally assured the Austrian Minister that his formal proposal for the funding of the relief debts would be given prompt consideration by this Department and by the Treasury Department. In this connection, you will note the statement of the Austrian Minister that his Government has made the same proposal to the governments of the eight other relief creditor States.

Since substantial unanimity of action on the part of these governments will be required if the proposed funding is to be carried out, there is no occasion, pending further developments, to consider making at this time any affirmative commitment regarding the eventual attitude of this Government. This Department, however, feels that, if you concur, the Austrian Minister might now be informed that this Government is in principle disposed to consider at this time an arrangement for payment of the relief obligation commencing in 1943, but that it desires a more specific statement of the proposal

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before a further expression of views can be given him. Before addressing any communication to the Minister, however, I shall be glad to have an expression of your views on the subject. I shall also be glad to receive such comment, if any, as you may care to make as to the desirability of the Government of the United States endeavoring to keep in touch with the discussions between the other relief creditor States and the Austrian Government.

For convenience of reference in connection with the general subject, I transmit herewith for your confidential information a copy of Annex 3271 D-2 of the Reparation Commission, which contains documents bearing upon the proposed loan, including a statement of "reasons which led the Austrian Government to submit a proposal for authorization to contract a loan to cover capital expenditure". I have [etc.]

For the Secretary of State:

W. R. CASTLE, Jr.
Assistant Secretary

863.51 M 82/1

The Under Secretary of State to Mr. R. C. Leffingwell of
J. P. Morgan & Co.

WASHINGTON, December 23, 1927. DEAR MR. LEFFINGWELL: I beg to acknowledge the receipt of your letter of December 14 stating that discussions are going on in London between the Austrian Government and the European Relief Creditor States. With reference to your statement that the suggestion has been made that this Government might wish to be represented in these discussions, I may say this Department has received no suggestion from the Austrian Government or from any of the Creditor States that it should participate in or keep in touch with these discussions.

Thanking you [etc.]

863.51/876

ROBERT E. OLDS

The Minister in Austria (Washburn) to the Secretary of State No. 1664

VIENNA, December 28, 1927.
[Received January 23, 1928.]

SIR: With further reference to my despatch No. 1656 of the 14th instant, in relation to the projected new federal loan, I have the honor to report that following Dr. Schüller's return to Vienna at the end of last week I had a brief conference with him on Saturday last

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and a more extended one today. As a result, I find that the facts reported in my despatch under reference were, in the main, correct. They were supplied to me by a Minister Plenipotentiary attached to the Foreign Office who was acting in Schüller's absence.

The latter tells me that at the first meeting of the International Relief Bonds Committee on the 2nd instant, he announced the willingness of his government to proceed promptly to some funding arrangement for the old relief credits, but again emphasized Austria's great desire, as I have heretofore reported, to disassociate this funding arrangement from the new loan negotiations. The various members of the Committee, according to Schüller, expressed their sympathetic understanding with this attitude, but added in substance: "You state that you are willing to make some funding proposal. Can't you give us some hint of what this proposal is to be before we take action on your request to subordinate to the new loan the securities pledged to the old relief credits?" Furthermore, the position of the Dutch representative, set forth on page 2 of my despatch under reference, was not lost on Schüller. He thereupon outlined his idea of a funding proposal, a synopsis of which he cabled Minister Prochnik. He assumes that Prochnik promptly got in touch with the Department. The International Relief Bonds Committee took the adjournment until December 12th, as I have already reported, and Schüller advised his government of what he had done. The result was his telegram of instructions of December 8th, to which allusion was made on page 3 of my despatch No. 1656. These instructions practically embodied Schüller's recommendations. He thereupon made his formal proposal on December 12th, and on December 13th he transmitted it in writing to Prochnik. This time he did not telegraph the latter and presumably the Minister's advices reached Washington almost coincidently with my before-mentioned despatch No. 1656 of December 14th.

Pursuant to the promise made on page 5 of the despatch just referred to, the following is a copy of the Austrian Government's formal funding proposal submitted as an aide memoire to the International Relief Bonds Committee on December 12th:

"The Austrian Government submit the following proposal:

They undertake the obligation of paying from 1943 onward during 25 years 40 million schillings annually, that is to say a total of 1000 million schillings.

The Austrian Government reserve the right to pay from 1929 during five years 10 millions annually and then during ten years 15 million schillings per annum, these sums with 8% compound interest until 1943 to be deducted from the sum of 1000 million schillings.

After having paid off in this way 200 million schillings before 1943 the Government would then have to pay 26.24 millions for 25 years."

In my despatch No. 1656 (page 2) I alluded to the contention of the bankers, Montagu Norman and Morgan, that the Austrian Government could not be required to arrange for any relief credit settlement prior to 1943. This contention, I ascertained upon enquiry, is based upon these statements in the prospectus published by the American bankers when the reconstruction loan was issued:

"By the concerted action of the principal nations of the world, including the United States of America, claims against Austria for relief bond charges have been subordinated to this Loan, and claims for reparation charges have likewise been subordinated by the Reparations Commission.33

The Reparation Commission, by their Decision dated February 20, 1923, have suspended for the purpose of the Guaranteed Loan, for the period of 20 years and for such further period as may be necessary until the full repayment of the Loan, the lien for reparation charges on any revenues which may be pledged as security for this Loan.

By the concerted action of the principal nations of the world, including the United States of America by a joint Resolution of Congress approved April 6, 1922, liens against Austrian assets created after the Armistice in respect to relief credits, have also been postponed for the period of twenty years."

Before submitting his aide memoire, Schüller took the precaution of submitting it to the bankers. Norman gave his approval immediately and Morgan, upon the plan being referred to him in New York, after some days did the same.

I gather that, while members of the International Relief Bonds Committee gave expression to their own opinion approving the Austrian proposal as a basis of negotiation, it was intimated that some alterations would probably be asked for by the governments interested. In fact, I have been permitted to glance through an informal aide memoire on this subject which is regarded as a confidential document. Objection was made to supplying a copy to the Reparation Commission on the ground that it was a part of the proceedings of a secret session. The main points of this informal aide memoire are:

1. The International Relief Bonds Committee accepts in principle the proposal of the Austrian Government with the understanding that the arrangement will not give rise to any objection by the trustees of the League loan.

2. The total sum to be paid back should approximate 1,250 million schillings and not 1,000 million as proposed. (In this connection, I may say that Schüller informs me that he arrived at the sum of 1,000 million schillings by adding to the 848 million total amount of the principal of the relief credits, the accrued interest up to the

"The following omission is indicated in the original despatch.

present time at a low rate of interest. This differs from the understanding of Minister Wildner as reported by me at the bottom of page 3 of my despatch No. 1656.34 The outstanding relief credit bonds, as I understand, carry interest at the rate of 6 per cent, and Schüller admits that on this basis the total amount due would more closely approximate the 1,250 million schillings. He asserts however that the idea of paying any interest upon credits of this character arising out of supplies furnished in time of dire need to feed a starving population is repugnant and that it was never really contemplated that interest would be exacted. He ventures the opinion that Secretary Hoover, having charge of the relief credit operations, never seriously believed in the repayment of the principal, to say nothing of the interest.)

3. The payment of 10 million schillings annually for five years, beginning in 1929, appears to be satisfactory, but for the second period of five years an increase of payments from 15 million to 20 million was suggested. There was some further suggestion that beginning in 1943 the period of annual instalments should, if necessary, be somewhat extended so as to provide for the payment of 1,250 million schillings instead of 1,000 million.

4. Annuities should be made payable in gold schillings.

5. Relief debts should retain their full priority over reparations as now provided.

The Austrian aide memoire and the counter aide memoire of the International Relief Bonds Committee are regarded as only affording a basis for negotiation. The Austrian Government does not believe that it will be required in the end to pay 1,250 million schillings. Schüller, as I have heretofore reported, feels that his government should get in principle from the United States as favorable treatment as the United States accorded Italy. This, he realizes, is hardly possible because the relief credit settlements must all be on the same basis. The Austrian actuaries have figured out that Italy will pay back in the end about 26 per cent of what she would have been required to pay on any normal interest funding arrangement, whereas the proposal of the Austrian Government as made in the before-mentioned aide memoire means, so the actuaries figure, that Austria obligates herself to pay 37 or 38 per cent of the amount for which it would be liable taking into account the 6 per cent rate of interest. On the basis of the Austrian proposal the United States would stand to recover about $28,000,000 on account of the approximately $24,000,000 Grain Corporation loan, whereas on the basis of the informal counter proposal of the International Relief Bonds Committee the United States would in the end recover, as I understand, from $32,000,000 to $34,000,000. Having the Italian precedent in mind and taking into account the intrinsic character of the original loan, the Austrian Government hopes that the United States will