SALE OF FOREIGN BONDS OR SECURITIES IN THE UNITED STATES MONDAY, JANUARY 11, 1932 UNITED STATES SENATE, The committee met at 10 o'clock a. m., pursuant to adjournment on Friday, January 8, 1932, in the committee hearing room in the Senate Office Building, Senator Reed Smoot presiding. Present: Senators Smoot (chairman), Reed, Shortridge, Couzens, Thomas of Idaho, Jones, Harrison, King, George, Connally, and Gore. Present also: Senator Johnson. The CHAIRMAN. The committee will come to order. Senator JOHNSON. Before we begin with the testimony, Mr. Chairman, I should like to request-or if Mr. Dennis is here he might be sworn. The CHAIRMAN. Mr. Dennis, you will please come forward, hold up your right hand and be sworn: You do solemnly swear that the evidence you are now going to give in the hearing being held by this committee will be the truth, the whole truth, and nothing but the truth, so help you God. Mr. DENNIS, I do. TESTIMONY OF LAWRENCE DENNIS, NEW YORK CITY (The witness was duly sworn by the chairman of the committee.) Senator JOHNSON. Mr. Chairman, I offer for the record, first, an article appearing in the Baltimore Sun of yesterday, Sunday, January 10, 1932, by Mr. Drew Pearson, particularly for the purpose of having in this record the letter of S. Parker Gilbert, a different communication from that which heretofore I have put in the record; and the letter as well of Sir William Leese concerning German loans. I read the letter of Mr. Gilbert so that it may be a part of this hearing and of this record. The letter is dated at Paris, November 3, 1926, and is as following [reading]: I am constantly amazed at the recklessness of American bankers in offering to the public the securities of German States on the basis of the purely German view of article 248 of the treaty of Versailles. It is true that the article is a difficult one to interpret, but one thing at least is clear, namely, that the Reparations Commission and the allied governments have never accepted the German point of view as to the meaning of the article. UNCONVINCED BY VIEW I should personally go further and say that from a legal standpoint the argument for the German position impresses me as unconvincing. In any event, the fact remains that the treaty of Versailles is not a unilateral document and it follows, I think, that a German interpretation of it which is not in any respect accepted by the other signatory governments has no legal importance. It is a simple matter, of course, to get letters from the financial authorities of the German states seting forth the German point of view and I can easily understand the willingness of the German authorities to sign letters stating the German point of view, but it does seem to me difficult to justify the action of the American bankers in offering the securities to the public on the basis of such letters without giving the slightest hint that the German point of view is not accepted by the Allied governments and that, in fact, the Allied point of view is diametrically opposed. CALLED GERMAN CONTENTION I have just noticed in the New York Times the American prospectus for the recent loan of the State of Hamburg. I don't know whether this is a prospectus which the office That is, the office to which Mr. Gilbert is writing, one of the international bankers had to pass on, but it does seem to me open to much the same criticism. It is a German view as I understand it that article 248 is in suspense so long as Germany faithfully performs her obligations under the expert's plan, but this is purely a German contention and it has not been accepted by either the Allied governments or any of the reparations authorities. I offer as well the letter of Sir William Leese, dated October 26, 1926, which Mr. Gilbert placed before the Reparations Commission and before certain American bankers, and which was open to all international bankers then and subsequently, when they were making their various loans. I do not read all of that letter unless the chairman desires it, but I state its contents. The CHAIRMAN. It will go into the record. Senator JOHNSON. I state its conclusions so that there may be no mistake from that point. I quote from the letter: Upon this point Which means the point which he makes both prospectuses that is, the prospectuses in respect of German loans to which he refers in his letter are in my opinion substantially untrue and misleading. There is one other thing I wish to put in the record. The CHAIRMAN. Right there your article will be made a part of the record. GILBERT OPPOSED REICH LOANS IN 1926-LETTERS TO BANKERS REVEAL STAND TAKEN BY AGENT GENERAL FOR REPARATIONS-WARNED BY KELLOGG BRITISH EXPERT CHARGED PROSPECTUSES ISSUED TO BOND BUYERS WERE MISLEADING. By Drew Pearson (Washington Bureau of the Sun) WASHINGTON, January 9.—Further evidence of how American officials tried to stem the tide of American loans which the bankers poured into Germany to the extent of $1,300,000,000 during the past decade was revealed to-day in the form of a letter written by S. Parker Gilbert, agent general for reparations, to representatives of a leading banking firm. Other letters and cablegrams exchanged between Gilbert and banking representatives also have come to light. all pointing to the fact that Germany was being overloaned and that reparations payments had priority over private loans. CHARGES MISREPRESENTATION "I am constantly amazed at the recklessness of American bankers in offering to the public the securities of German states on the basis of the purely German view of article 248 of the treaty of Versailles," Gilbert wrote to representatives of the bankers as early as November 3, 1926. He went on to point out that the bankers connected with the 1926 loan to the State of Hamburg had misrepresented the situation in Germany to the American public. Secretary of State Kellogg in letters addressed to all American bankers floating German loans had "rged that the American investing public be warned of the risks in Germany in view of the fact that reparations were placed before private debts. KELLOGG ISSUES WARNING "The department believes that you should consider whether you do not owe a duty to your prospective clients fully to advise them of the circumstances," Mr. Kellogg had warned. Another letter which Mr. Gilbert placed before the Reparations Commission and before the State and Treasury Departments was one written by the British financial expert, Sir William Leese, of the Bank of England, who held that American bankers had failed to warn the American investing public and that the prospectuses issued to bond buyers were "substantially untrue and misleading." Mr. Gilbert's letter was especially concerned with the $20,000,000 loan to the Free State of Prussia in the autumn of 1926 and with the loan of $10,000,000 to the state of Hamburg floated at the same time. The banking syndicate for the latter consisted of Kuhn, Loeb & Co., International Acceptance Banks (Inc.), Brown Bros., J. Henry Schroeder Banking Corporation, and Lee, Higginson & Co. TEXT OF LETTER GIVEN Bankers for the Prussian loan were Harris-Forbes Co., Brown Bros., Equitable Trust Co., International Acceptance Banks, and J. Henry Schroeder Banking Corporation. Mr. Gilbert's letter, dated Paris, November 3, 1926, follows: "I am constantly amazed at the recklessness of American bankers in offering to the public the securities of German states on the basis of the purely German view of article 248 of the treaty of Versailles. It is true that the article is a difficult one to interpret, but one thing at least is clear, namely, that the Reparations Commission and the allied governments have never accepted the German point of view as to the meaning of the article. "UNCONVINCED BY VIEW "I should personally go further and say that from a legal standpoint the argument for the German position impresses me as unconvincing. In any event, the fact remains that the treaty of Versailles is not a unilateral document and it follows, I think, that a German interpretation of it which is not in any respect accepted by the other signatory governments has no legal importance. "It is a simple matter, of course, to get letters from the financial authorities of the German States setting forth the German point of view and I can easily understand the willingness of the German authorities to sign letters stating the German point of view, but it does seem to me difficult to justify the action of the American bankers in offering the securities to the public on the basis of such letters without giving the slightest hint that the German point of view is not accepted by the allied governments and that, in fact, the allied point of view is diametrically opposed. "CALLED GERMAN CONTENTION "I have just noticed in the New York Times the American prospectus for the recent loan of the State of Hamburg. I don't know whether this is a prospectus which the office (to which Gilbert was writing) had to pass on, but it does seem to me open to much the same criticism. It is a German view as I understand it that article 248 is in suspense so long as Germany faithfully performs her obligations under the expert's plan, but this is purely a German contention and it has not been accepted by either the allied governments or any of the reparations authorities." The letter of Sir William Leese, dated October 26, 1926, which Mr. Gilbert placed before the Reparations Commission and before certain American bankers who consulted him as further evidence of the risk involved in Germany, follows in full: The question upon which I am asked to advise is whether certain statements in the prospectus issued by the city of Hamburg and State of Prussia in connection with their recent loans conflict with the terms of the German external loan of 1924. The statements to which I am referring relate (a) to security and (b) to the retention of acquisition of foreign currency. "In both prospectuses it is stated that no part of the state revenues or priority has been pledged by the state in question as security for any loan and a covenant is given that in the event of any future pledge or charge the bonds of the present issue shall be secured by such pledge or charge equally and ratably with other indebtedness thereby secured. "In each case it is further stated that some of the enterprises in which the state is interested have to make early payments to the Reich in respect of obligations under the Dawes plan in the same manner as private industries of like character. "In the Prussian prospectus, but not in the Hamburg prospectus, reference is made to article 248 of the treaty of Versailles and to the fact that certain specific revenues are pledged to secure the payments which have to be made by Germany under the Dawes plan. 66 ACCURACY IS QUESTIONED "Notwithstanding this reference in the Prussian prospectus, the impression which both prospectuses are calculated and perhaps intended to make on the mind of the investor is that the general charge imposed by the Treaty of Versailles upon all the assets and revenues of the German Empire and its constituent States' no longer affects the assets and revenues of the constituent States, but has been superseded or satisfied by the Dawes plan. 6 "It is necessary then to consider the accuracy of this impression and if it is inaccurate, the possible effect upon holders of the 1924 external loan and of the newly issued State loans. "It may well be that so long as Germany performs her obligations under the Dawes plan, no further charge could, consistently with that plan and with the London agreements, be imposed. For an essential feature of the plan is the ultimate definition of Germany's obligations. But the treaty charge has not been superseded and a failure by Germany to comply with the Dawes plan might make it necessary to assert the treaty charge. "IMPRESSION CALLED INACCURATE "It follows that the impression made by the prospectus is inaccurate and it appears to me that the inaccuracy might have been avoided. For since article 248 enables the Reparations Commission to exclude particular assets and revenues from the treaty charge, the State issuing a loan in terms which state or imply that its assets and revenues are not subject to any charge should first safeguard its position and that of the bondholders by applying to the commission for the necessary exemption. "In what way were then our holders of the 1924 external loan and the State bonds, respectively affected? And can any conflict arise between them? "1. The direct obligation of the German Government, which is not, in the legal sense, a security or charge. "2. A first charge on the payments provided by the Dawes plan. "3. A first charge by way of collateral security on the controlled revenues. 66 SECURITY IN DAWES PLAN "The 1924 loan therefore rests for security on the Dawes plan. It is not supported by the general treaty charge, but only by its payments made under the plan and collateral security, which, as part of the plan, is given for this. |