The President's News Conference

GERMAN FINANCIAL CRISIS

THE PRESIDENT. I have had requests from a considerable number of correspondents for discussions with me as to the background on this debt and German situation. I think it is rather more fair that if I am going to have a discussion I should have it with the whole of the press. If I am going to discuss this thing as I see it at the moment, it must be on the consideration that it is purely background material; that there is to be no quotation or ascribing to the White House, or anything of that kind. If you want the facts as I see them on that basis, I am willing to assist, but it is purely background to assist the correspondents themselves. I am able to give you these facts because they necessarily flow through this office. I want it clear it is for your advice so you can have a better understanding of what is going on. Otherwise I cannot deal with matters like these.

Now, the reparations postponement has in our view taken the most dangerous strain off the whole situation. It obviously placed $400 million of money available to the German Government, and relieved the strain on foreign exchange to the extent of $400 million, and therefore is necessarily a very considerable contribution towards the reconstitution of German finance and industry. That settlement cured the possibilities of international dissension over the situation which, of course, were looming very large, and cleared the atmosphere of that difficulty. What is more, and of equal importance, it greatly relieved the political strains in Germany so that the government goes on with orderly processes instead of disturbances.

Now, the present situation has resolved itself solely into a banking situation, in which there are elements of popular panic. The measures that have been taken by the German Government yesterday and today ¹ are very strong and courageous measures, and should go a long ways to get that sort of mob psychology laid and to regularize that position.

1 On July 13 and 14, 1931, the German Government closed all stock exchanges and all banks except the Reichsbank. The holiday ended on July 15, but reopening was accompanied by stringent restrictions on withdrawals and foreign exchange transactions.

In the matter of this banking crisis there are three fairly distinct elements. There was the usual case in Germany, as there has been in all parts of the world, of overextension of some banks. They, under the strain of depression, would have been in difficulties anyway, but this situation necessarily brings them to the surface. The bank that failed yesterday ² --the larger bank--had about the same capital and surplus as the United States bank in New York which failed without creating a ripple in the financial fabric of the United States. In other words, the effect of that failure, coming at this time, had a much greater effect on popular minds than it merited and rather more emphasis in this country than the size of it warranted.

² Darmstaedter und National bank (Danat Bank), third largest bank in Germany.

The rather deeper than superficialities of isolated instances of weak banking was the situation of German finance in general. Germany does her foreign trade on somewhat more extended terms than any other country in the world. She gives longer terms in the sale of goods, and in the handling of that they have developed the custom or practice of issuing acceptances against these foreign trade bills and selling those acceptances to banks all over the world--in foreign currency, dollars or sterling or whatever the case may be. The foreign bills are payable to Germany in the currency of the country which received the goods. No doubt they have a considerable amount of these bills pledged. They are secured on foreign trade operations and therefore are self-liquidating bills, but they are usually for longer periods than the periods of their acceptance. They issue these for instance, carrying a 12 months credit to some foreign buyer of goods, by say 3 months acceptance, and then renew.

As the result of the situation that existed before the 20th of June, when I made the proposal for a holiday, the people in Germany had started a flight of the mark as it is called. That is an inheritance from 8 years ago when the value of the mark disappeared, and the natural tendency of the people when they see any disturbance coming on, as evidenced by the visit of the German Minister to London, ³ for instance, is to immediately endeavor to cover their marks in foreign currency. That created an instant strain on the exchange market, but worse than that, it created a feeling amongst the holders of these acceptances that the situation in Germany was disturbing, and a good many of those holders presented them on their expiration for payment, and they were not prepared to take renewed acceptances.

³ German Chancellor Heinrich Bruning and Minister of Foreign Affairs Julius Curtius visited Great Britain from July 5 to 10, 1931.

So you have two strains there--the first one over the flight of capital-the flight of the mark by the threats of disturbances inside Germany, to secure foreign exchange in a panic that the mark might depreciate, and then its reaction abroad. And that, of course, multiplied the exchange difficulties, and as you know, resulted in a large drainage of gold reserves and exchange from Germany.

The announcement of June 20 brought that state of feeling to an end, and it remained sound for 4 or 5 days. The movement of exchange was normal, but the delays in coming to a conclusion again recreated fear in Germany, and then the fall of the mark started over again with its repercussions abroad again. So that those strains finally developed into a more or less popular panic, which began on Monday.

Now, the German Government has taken very strong measures to curtail the internal flight of the mark and to stop the panic by giving more time to have it over and by guarantees of bank deposits, and a whole long list of activities, which we all hope are going to bring that internal panic to an end.

Now, that is sort of an isolated question. That is a matter the Germans have got to solve for themselves. Foreign banking discussions with foreign bankers are continuing. Naturally, the foreign banks await the result of these measures in Germany, and so far as our bankers are concerned, they naturally await the consideration of some sort of definite plan, in which the European banks, being on the ground, necessarily have to take the lead and our people assist. There have been no pledges taken in that direction, but everybody is of the mind to help. Those discussions are still going on, so that except for possible minor contradictions in public opinion between France and Germany, the situation is one of just a purely internal and domestic question of banking crisis inside Germany, which is not based on the fact that the German banks are not sound or that the Government cannot get through it but to a panic feeling among the people. And, as I have said, that feeling is internal. It cannot be cured by any amount of action on our part. The general tendency in all of these situations is to rather overexaggerate them. They find their solution in rotation, and I am very much in hopes that the activities of the German Government are going to solve the domestic problem they are confronted with. Their government is in no difficulty. Their budget is amply balanced by action taken. So that they have one particular problem, and the problem is one then of foreign exchange and local panic conditions, with a sound financial background behind it.

Time always helps in these things, and there is no occasion for any exaggerated anxiety about it. Of course, it is a matter that concerns us all very greatly. We want to see a solution for it. It retards the world generally and creates necessarily weakened or insecure commodities and securities, and all that sort of thing, but my own impression is that time solves these things, and cooperation if it can be developed helps out. That is the situation as I see it. I hope it will be of help to you.