The restoration of Austria. Agreements arranged by the League of Nations and signed at Geneva on October 4th, 1922, with the relevant documents and public statements

TABLE OF CONTENTS

LEAGUE OP NATIONS PUBLICATIONS

II. ECONOMIC AND FINANCIAL

1922

8, Restoration of Austria. Agreements C. 716. M. 428

arranged by League and relevant docu- 1922,11
ments

9. Provisional Economic and Financial Com-

iTilttee, Note on Plan for International
Clearing House. By. A.E, Janssen E.F.S,270

C. 716. M. 428.

LEAGUE OF NATIONS

THE

RESTORATION

OF

AUSTRIA

AGREEMENTS

arranged by the League of Nations and signed at Geneva
on October 4th, 1922

with the

RELEVANT DOCUMENTS AND
PUBLIC STATEMENTS

2 I. 6 d.

<'.

•1^^

rl^^^

v,t«

C. 716. M. 428.

1922. X.

[Distributed to the Council
and the Members of the League.]

Geneva, October 19th, 1922.

LEAGUE OF NATIONS

THE

RESTORATION

OF

AUSTRIA

AGREEMENTS

arranged by the League of Nations and signed at Geneva
on October 4th, 1922

with the

RELEVANT DOCUMENTS AND
PUBLIC STATEMENTS

CONTENTS

Page

I. Pr6face by Sir Arthur Salter, Director of the Economic and Financial

Section of the League of Nations 5

II. Correspondence transmitted to the Council of the League by the British

Cabinet :

(1) Letter from the Austrian Minister in London to the British

Prime Minister, August 7th, 1922 15

(2) Reply from the British Prime Minister, August 15th, 1922 16

(3) Telegram from the British Cabinet to the Secretary-General

of the League, August 25th, 1922 17

III. Minutes of the Meeting of the Council of the League held on August 31st,

1922 (Speech by M. da Gama, President of the Council) 18

rV. Minutes of the Meeting of the Council of the League held on September 6th,

1922 (Speech by Dr. Seipel, Chancellor of the Austrian Republic) ... 19

V. Resolution adopted by the Council of the League on September 6th, 1922 24

VI. Extract from the Records of the Meeting of the Third Assembly of the

League held on September 30th, 1922 (afternoon). [Speeches by Lord
Balfour (Great Britain), M. Mensdorff (Austria), Lord Robert Cecil
(South Africa) and M. Leon Bourgeois (France) 25

VII. Resolution adopted by the Council of the League on October 4th, 1922 ... 31

VIII. Minutes of the Meeting of the Council held on October 4th, 1922. [Speeches

of Lord Balfour (British Empire), M. Hanotaux (France), the Marquis
Imperiali (Italy), M. Pospisil (Czechoslovakia), M. Adatci (Japan),
M. Quinones de Le6n (Spain), M. Hymans (Belgium), M. Tang Tsai-
Fou (China) and Dr. Seipel (Austria) 32

IX. Protocols Nos. I, II (with Annexes and Explanatory Note) and III, signed

at Geneva on October 4th, 1922 39

X. Reply of the Financial Committee of the League to the questions referred

by the Austrian Committee of the Council 48

XI. Resolutions adopted by the Economic Committee of the League 57

757363

LEAGUE OF NATIONS

THE RESTORATION OF AUSTRIA

PREFACE.

ACTION TAKEN BY THE LEAGUE IN 1921,

The League of Nations was first asked to study the problem of the restora-
tion of Austria in March 1921. After a conference in London in that month,
the League was informed that the Governments of Great Britain, France, Italy,
and Japan had decided to release, for a period of years to be determined later,
their hens in respect of all claims against Austria, whether for rehef credits,
reparation obligations, or the costs of the armies of occupation. This decision
was subject to the conditions that other interested Governments would agree to
a similar postponement and that Austria was prepared to place the administra-
tion of assets in the hands of the League under the International Credits Scheme.

This scheme was then under the control of the Financial Committee of the
League, which therefore at once met, and on April 4th, 1921, stated the main condi-
tions on which it considered that the restoration of Austria could be achieved.
Among these conditions were the early decision by the 13 other Governments
holding hens upon Austria to agree to a similar postponement, a decision by all
the 17 Governments that the postponement should be for a sufficiently long
period, such as 20 years, and the wiUingness of Austria herself to undertake
drastic internal reforms. At the same time, the Committee sent a delegation
to Vienna, which studied the position on the spot from April 15th to May 10th,
1921, and recommended a far-reaching and detailed scheme, which was approved
by the Council of the League and forwarded to the Supreme Council of the Allies
on June 3rd, 1921. It was a cardinal feature of these recommendations that
Austria could only be saved by a comprehensive scheme, including internal
reform, sufficient credits, and a central control of these credits which would
ensure that they were so used as to assist, and secure, the internal reform.

At the time when this scheme was framed, Austria's credit position (apart
from the hens upon her assets) was relatively good, and had not been seriously
impaired by fears as to her social and political stability. It was believed, and
with reason, that, as soon as her assets were free, they would serve as a sufficient
security for private credits without the need for Government guarantees ^.

The scheme was not put into operation, because the negotiations with the
many Governments whose consent was necessary to the release of the liens encoun-
tered many difficulties and proved to be very protracted. It was not before July
1922 that a way appeared to be opening for a scheme based upon the use of Aus-
tria's assets.

In the meantime, by February 1922, Austria's needs had become imperative,
and, unless assistance had been forthcoming, a collapse must have taken place
in the early part of this year. In this crisis. Great Britain, France, Italy, and
Czechoslovakia came to the rescue by providing for assistance from pubUc funds.
Great Britain advanced £2,250,000 (of which £250,000 was required for the
repayment of an earlier debt), France made provision for the advance of 55
miUion francs, Italy made provision for the advance of 70 million lire, and Czecho-
slovakia arranged to supply 500 miUion Czech crowns. Of these sums, the British

1 The full documents relating to this scheme havebe en published. (" Financial reconstruction ol
Austria ". Report ol the Financial Committee of the Council, with relevant papers.)

S. d. N. 650 (F.). 650 (E.). 10/22. Imp. R^unles. S. A. Lausanne.

a-dyancc has been entirely expended, but considerable proportions of the French
and Italian grants, and a smaller proportion of the Czechoslovak grant remain
available (as will be seen below) to assist in the initial stages of the new scheme.
These advances were clearly distinguished from the earlier credits, the
repayment of which was to be postponed for 20 years. Some of them (such as
the British advance) were specifically to be repayable out of the first loans raised
by Austria ; others (such as the Czechoslovak advance) were based upon certain
assets specially released by the Reparations Commission for the purpose, with
the stipulation that these securities would be incorporated into any securities
upon which a League of Nations loan scheme might ultimately be based ; all
remained as a pressing and inevitable charge upon Austria's immediate budgets.

THE APPEAL TO THE ALLIED POWERS AT THE LONDON CONFERENCE

IN AUGUST 1922.

By these means, an actual collapse was arrested in the first six months of
this year. But the advances sers^ed no further purpose. They were granted
independently by the several Governments ; they were subject to no central
control. They were, as was natural in the circumstances, consumed for current
needs and were not the basis of any effective reform. Austria's financial disor-
ganisation proceeded, and at an accelerated pace. The crown was, in August
1922, worth only ^/jq of its value six months before, only about ^j-^qq of its value
a year before, and only ^/js.ooo of its gold value.

The Austrian Government made a desperate appeal to the AlUed Powers,
then meeting in London. The Austrian Minister stated that some of Austria's
assets had at last been released to form securities for a loan, "but the foreign
bankers who, a year ago, were still wiHing to grant such a loan, to-day declare
that it is impossible to do so, because to them and to the general pubhc the
continued existence of Austria has become doubtful. The bankers consider the
revenues offered by the Austrian Government a sufficient financial guarantee ;
they demand, however, a second guarantee, which can only be given by the Chief
Allied Powers. " He stated that Austria was attempting to establish a Bank of
Issue to which the right of issuing notes would be transferred from the Govern-
ment, in order to arrest the depreciation of the crown, and that Austria was
embarking on a programme of budget reform and economy. He added, however,
that " everything depends upon whether, during the period required for the
carrying through of the financial reforms, a foreign loan will give Austria the
assurance that she will not have to resort to the printing press again in order
to cover the requirements of the State, otherwise the financial reforms would be
definitely doomed to failure. A further depreciation of the krone must neces-
sarily render impossible the indispensable purchases of food-stuffs and coal from
abroad and lead to such social upheavals as would constitute the gravest dangers
for the peace of Central Europe and would mean the end of an independent Austria.
Every day by which the assurance of the foreign credit is delayed renders it
doubtful whether the measures which Austria is taking for her own salvation
will then still be possible. "

He therefore appealed for Government guarantees to assist in raising a loan
of £ 15,000,000.

REPLY OF THE ALLIED POWERS.

This communication was considered by the Supreme Council, on behalf
of which, Mr. Lloyd George, on August 15th, 1922, replied that " the represen-
tatives of the Allied Governments have, therefore, come to the decision that they
are unable to hold out any hope of further financial assistance being given to
Austria by their Governments. They have agreed, however, to a proposal that
the Austrian situation should be referred to the League of Nations for investi-
gation and report, the League being informed at the same time that ,having
regard to the heavy burdens already borne by the taxpayers of the Allied Powers,
there is no prospect of further financial assistance to Austria from the AlUed
Powers, unless the League were able to propose such a programme of reconstruc-
tion, containing definite guarantees that further subscriptions would produce

substantial improvement and not be thrown away like those made in the past,
as would induce financiers in our respective countries to come to the rescue of
Austria. The representatives of theAllied Powers have reached the above decision
with much reluctance and from no lack of sympathy with the Austrian people,
but they have been obliged to take into consideration the crushing taxation which
their respective countries already support in consequence of the war."

This correspondence was then forwarded to the League with the request that
it should be placed on the agenda of the next session of the Council.

CONDITIONS UNDER WHICH THE PROBLEM WAS REFERRED TO

THE LEAGUE.

The reply of the Allies to the Austrian Government was not such as to
afford any relief to the anxieties for the immediate future. Its request to the
League was only " for investigation and report ", and it was coupled with the
statement that the Allied Governments were unable themselves to hold out any
prospect of further financial assistance, and that there was no hope, therefore,
unless a scheme could be devised which would attract money from private sources.
In this crisis, in the interval between the London Conference and the meeting
of the Council of the League, Monsignor Seipel, the Austrian Chancellor, visited
Prague, Berlin and Verona to discuss the situation of his country with the
Governments of Czechoslovakia, Germany and Italy. It was clear to the
world that the financial and economic disorganisation and the imminent dangers
of social distress and disturbance had developed to a point at which they had
created also a grave political problem. It was also clear that, in this political
situation, it was more than ever hopeless to expect that private credits would
be forthcoming on the basis of Austria's own assets. Her best securities, her
revenues from the customs and the tobacco monopoly, however sufficient in nor-
mal circumstances, could not be relied upon in the event of serious social or
political disturbances. No scheme was possible unless they could be supple-
mented by Governmental guarantees ; and these guarantees, difficult in any
event, would be more difficult unless something could be done to relieve the poli-
tical tension.

THE LEAGUE'S METHODS OF WORK.

The Council was thus confronted with a complex problem, political as well
as financial in its character. At its first meeting on August 31st, 1922, it at
once instructed the Financial Committee to examine the financial aspects of the
problem, while carefully reserving any decision as to whether it would undertake
any responsibility for the problem and, if so, on what conditions. It then deferred
further discussion on the subject till the following Wednesday, September 6th,
1922, partly to enable the Financial Committee to proceed with its work and
partly to give time for Monsignor Seipel, who desired to present Austria's case
in person, to join the Austrian Delegation at Geneva. On September 6th, he
made his appeal ^ in a pubUc meeting of the Council. He described Austria's
distress and explained the need for a guarantee for a loan to help her through the
period when she was achieving reform and release from some of the impediments
to Austrian commerce. He added that Austria was ready to accept a system
of control as a corollary to assistance, and expressed the opinion that, with such
assistance, she could soon become economically self-sufficient. He concluded,
however, with a grave warning that without such assistance the condition of
Austria constituted a serious danger to the peace of the world, which it was the
duty of the League of Nations to examine and avert.

It should be noted that the Austrian representative, in making this appeal,
and in all subsequent meetings of the Council and its Committee, when
dealing with the Austrian problem, was himself a member with full and equal
rights in accordance with Article 4 of the Covenant, which provides that " any
Member of the League not represented on the Council shall be invited to send
a representative to sit as a member at any meeting of the Council during the

1 See page 19.

— 8 —

consideration of matters specially affecting the interests of that Member of the
League. "

The Council next invited Czechoslovakia also (represented by its Prime
Minister, Dr. Benes) to join the Council for this question, and formed a
Committee (the Austrian Committee) entrusted with the direction of all further
work upon it. The Committee consisted of five members of the Council so
constituted, viz : Lord Balfour (Great Britain), who was asked to preside over
the discussions, M. Hanotaux (France), the Marquis Imperial! (Italy), Dr. Benes
(Czechoslovakia), and Monsignor Seipel (replaced, when he was absent, by
Dr. Griinberger, the Austrian Minister for Foreign Affairs).

The composition of the Committee thus expressed the Council's sense
of both the importance and the range of the question. It continued throughout
to direct the work, meeting twelve times between the date of its appointment
and the date of the signature of the Protocols on October 4th, 1922. It will be noted
that the hitherto separate and independent negotiations were now transferred
to a single committee which worked continuously and consisted of the represen-
tatives of all the Powers chiefly concerned, including the Prime Ministers of
two of them.

The composition of this Committee, and the subsequent organisation of
the work, afford a typical example of the methods of the League. The Committee
used throughout the League's technical organisation. At once determining
the general outline of the questions requiring solution, it divided them among
the different expert committees at its disposal. Within the general outline,
the Financial Committee gave its advice, which, in fact, as will be seen, included
a comprehensive scheme of financial assistance and administrative reform. Work-
ing within the same general programme, the Economic Committee considered
what immediate economic measures could usefully be recommended. At the
same time, a Legal Committee, drawn partly from legal experts of the several
Delegations and partly from the permanent staff of the League, advised on such
legal questions as presented themselves in the course of the work. The Austrian
Committee of the Council kept in its own hands the specifically political aspects
of the problem, and maintained its control over the work of the above Committees
by considering interim reports as they proceeded with their studies.

The Financial Committee ^ which was first consulted consisted of members
who met, as did the members of the other Committees giving technical assistance
to the Austrian Committee of the Council, not as representatives of the different
Governments, but as experts invited by the League to give their best professional
advice. The signature of their reports did not, therefore, in any way commit
the Governments to accepting its recommendations. At the same time, the
different members were naturally in a position to estimate, with some special
knowledge, the probable poHcy and attitude of their respective countries. Their
work was done at Geneva, during the period of the third session of the Assembly,
for which Delegations of representatives of the countries concerned were present.
The conditions were favourable for the working out of a scheme which should
be both adequate in its provisions and not impossible of acceptance, and for
an understanding by the Governments whose assistance was required of the reasons
for which the precise scheme put before them was recommended.

THE FINANCIAL COMMITTEE'S REPORT.

The Financial Committee was first asked to consider, in consultation with
the Austrian Representatives, what measures were required and were practicable
to secure budget equilibrium ; after what period, with these measures, the result
desired should be obtained ; and what deficit in terms of gold must be con-
templated as inevitable during the intervening period.

The Committee repUed that the main economies should be secured by the
reform of State industrial enterprises and the reduction in the number of officials.
It pointed out that State enterprises at present involved a loss of 170 million
gold crowns a year (£7,800,000). The railways alone involved a loss of 124 millions

• The members of the Financial Committee who were present during these discussions -were:
M. .Ianssen (Chairman), M. Ahai, M. Avenol, Sir Basil Blackett frepiaced at later meetings by Mr. Fass),
Dr. PospisiL, Sir Henry Strakosch, with the addition of M. Maggiorino Ferraris and M. A. Sarasin,
who were co-opted for the purpose.

— 9 —

(£5,700,000), largely because, while wages follow the cost-of-hving index,
the railway tariffs were only one-fifth of what they would be on that basis. The
loss should cease within two years and, in view of the important transit trade,
the railways should ultimately become a source of profit. With regard to officials,
the Committee pointed out that Vienna, as the capital of a country of six millions,
has more State employees than when she was capital of an Empire of over 50 mil-
lions. It considered that within two years a third of the expense, amounting
to 130 million gold crowns (£6,000,000) ought to be saved. With these measures,
the "normal budget" should be reduced to about 237 milhon gold crowns
(£10,900,000). Simultaneously, the yield of taxation must be increased and
within two years should reach 237 million gold crowns — and so balance the
budget — and thereafter exceed it. In the two years, however, while this process
of reducing expenditure and increasing revenue is incomplete, a total deficit of
520 million gold crowns (£24,000,000) is probable, or 650 million gold crowns
(£30,000,000) including the sums required to repay the advances made this year
and not covered by the postponement arranged for the credits given in earlier
years.

The Committee was next asked what securities Austria could offer for
private credits. It replied that, apart from the forests and salt monopolies
(which were proposed as security for the new Bank of Issue), the proceeds of the
Customs and the tobacco monopoly should be available as security for a loan,
and, if necessary, the impoi fonder as well. The Customs and tobacco
monopoly alone should, with the necessary administrative reforms, give an
annual yield of 80 miUion gold crowns (£3,700,000), which exceeds the estimated
cost of the interest and amortisation of even the maximum loan of 650 miUion
gold crowns.

In the unanimous opinion of the Committee, therefore, the securities were
ample for the credits required for the transition period, on the vital conditions
that the reforms recommended are carried through and that external and internal
order are assured.

With the main conditions of the financial problem thus estabUshed, the
Committee, in answer to further questions from the Austrian Committee of
the Council, proceeded to study in detail how the deficit for the two years could
be met, and what fonn of control was required in the interests of the reforms
and of the securities on which the loan was to be based. Its recommendations
will be more conveniently summarised after some account has been given of
the subsequent negotiations.

The Financial Committee, in presenting its report, pointed out that no
financial scheme could in itself save Austria. " Behind the problem of financial
and budget reform remains that of the fundamental economic position. Austria
cannot permanently retain a sound financial position, even if she attains it for the
time, and maintain her present population unless her production is so increased
and adapted as to give her (with her " invisible exports ") an equiUbrium
in her trade balance as well as her budget. This balance is at present seriously
adverse, partly, but certainly not wholly, as a result of inflation and currency
dislocation. AH possible measures, whether by the ameUoration of the inter-
national economic relations, the encouragement of the conditions which would
increase Vienna's entrepot, financial, and transit business, or of those which
will attract further private capital towards the development of her productive
resources, are therefore of the greatest importance. These are, however, outside
the Financial Committee's province. If the appropriate financial policy is adopted
and maintained, the Austrian economic position will adjust itself to an equili-
brium, either by the increase of production and the transfer of large classes of
its population to economic work, or economic pressure will compel the population
to emigrate or reduce it to destitution. At the worst, this would be better
than the wholesale chaos and impoverishment of the great mass of the town
population which must result from the continuance of the present financial
disorganisation, which affords no basis for such economic adaptation as is pos-
sible. "

— 10

THE ECONOMIC COMMITTEE.

0

Simultaneously, the Economic Committee ^ of the League considered whether
it could make any immediate suggestions which would assist in this wider and
longer task of the re-estabUshment of the trade balance. It recognised that the
basis must be found in the financial scheme and that on this basis the economic
position must be gradually built up. It therefore confined itself for the time
to certain preliminary suggestions. First, recognising the objections at present
maintained to the full application of the Porto Rosa recommendations, it advised
the conclusion of conventions and bilateral agreements between Austria and
each of the Succession States, based, as far as possible, on the Porto Rosa Pro-
tocol, but with such modifications as might be possible and advisable to intro-
duce in order to adapt them to each special case. Secondly (while endorsing
the adviu? of the Financial Committee as to State enterprises), the Economic
Committee called attention to the need for reform by Austria of both her internal
economic system and the conditions of her external trade.

LAST STAGES OF THE NEGOTIATIONS,

Meanwhile, the Austrian Committee of the Council had itself been discussing
directly the terms of a political declaration designed to give confidence in the
political and economic integrity and independence of Austria. The whole scheme
was gradually developed, with the assent of the different delegates of the Govern-
ments, and on the last day of the Assembly (September 30th, 1922) the Council
was able to report that, though its task was not fully accomplished, there was
a good prospect of a complete scheme being signed with the assent of the Govern-
ments concerned within a few days.

This result was achieved on Wednesday, October 4th, 1922, when three pro-
tocols were signed, covering, with their annexes, which include the Financial
Committee's report, the whole of the Council's scheme ; and these signatures
indicated the complete and unreserved assent to every part of the scheme of the
Governments of Great Britain, France, Italy, Czechoslovakia and Austria.

The first of these protocols, signed by all the above Powers and open for
the signature of all countries, contains a solemn declaration that the signatories
will "respect the political independence, the territorial integrity, and the sove-
reignty of Austria ; that they will seek no special or exclusive economic or finan-
cial advantage which would compromise that independence ; and that, if the
occasion arises, they will refer the matter to the Council of the League and comply
with its decisions." Austria herself, in the same protocol, enters into correspon-
ding obligations. Protocol No. II, with its annexes, states the conditions of the
guarantee of the loan, the obligations of the guaranteeing Governments, and the
powers and duties of the Committee composed of representatives of those Govern-
ments. It is signed by the four principal guaranteeing Governments and by
Austria, and is open for signature (with suitable modifications as to the extent
of their guarantee) by all other countries able and willing to participate in the
financial scheme. Lastly, Protocol No. Ill sets out separately the obligations
of Austria and the functions of the Commissioner-General, who is to collaborate
with her in her programme of reform and its execution. From these protocols,
taken together, emerges the League's general scheme.

SUMMARY OF THE SCHEME.

The basis of the scheme is the political integrity and economic independence
of Austria and the Declaration (Protocol No. I) designed to ensure it. Aided by
the confidence which it is hoped this Declaration will create, Austria is to com-
mence a programme of reform (including economy in expenditure and increased
revenue from taxation) which will ensure the balancing of her budget by the
end of 1924. In the meantime, the excess of her expenditure over the revenue

' The Economic Committee constituted a special Sub-Committee for this purpose consisting of
M. Serruys, M. DvoraCek, M. Guarnebi, M. Heer and Sir Hubert Llewellyn Smith.

— 11 —

available from normal resources during these two years — estimated at a
maximum of 650 million gold crowns — will be met by the proceeds of loans.

These loans will, for the reasons given above, be guaranteed by external
Governments, in addition to being secured on assets which (if the reforms are
successful and order and stability maintained) will be sufficient without appli-
cation to the guarantors. The guarantees will take the form of a definite guarantee
of a stated proportion of the interest and amortisation by each guaranteeing
Power. The Governments of Great Britain, France, Italy and Czechoslovakia
have each guaranteed 20 %, or 80 % in all, in addition to covering a certain por-
tion of the risk of other guaranteeing Powers ^.

Only 20 % ^ remains, therefore, to be covered by guarantees from all other
countries. Assuming that this remaining percentage is secured, the future sub-
scriber to the loan will not only have the security of the assigned assets, but,
if they fail, will have every fraction of his interest and amortisation further
assured by the guarantee of a specified Government (80 % of the total by the
four Governments named above). The guaranteeing Governments themselves
will be subject to no cash liability so long as the assigned assets prove sufficient
for the service of the loan.

With the prospect of resources from these loans, Austria will be relieved
from the necessity of financing herself by the issue of paper money and so causing
the precipitous fall of the crown, which renders all efforts at budget equilibrium
futile and destroys any stable basis for the economic life of the country. The
scheme therefore assumes, and regards as essential, the establishment of the
proposed Bank of Issue under certain definite and specified conditions. The
Austrian Government will surrender all right to issue paper money, and will
not, except with special authorisation, negotiate or conclude loans.

Austria, therefore, in carrying through her reforms, is no longer building on
the shifting basis of a continuously depreciating currency. Hitherto she has
been in the unhappy position of knowing that she could not stop inflation until
her budget balanced, and could not balance her budget while inflation continued.
Now for the first time she has a prospect of having at her disposal the funds
required to carry her over the necessary transition period.

But the successful accomplishment of the reform programme, on which
both Austria's prosperity and the value of her assets depend, will necessarily
be a difficult and painful task. The scheme therefore includes the appoint-
ment of a Commissioner-General, whose duty will be to ensure, in collaboration
with the Austrian Government, that the programme of reforms is carried out
and to supervise its execution. He will derive power from his control of the dis-
posal of the loans.

"The Austrian Government agrees that it may not dispose of any funds de-
rived from loans... except by authorisation of the Commissioner-General" ; but
the conditions which he may attach to his authorisation "shall have no other
object than that of assuring the progressive reahsation of the programme of
reforms and of avoiding any deterioration of the assets assigned for the service
of the loan."

The officer to be entrusted with this great responsibiUty is not the represen-
tative of the guaranteeing Powers. He is an officer of the League of Nations.
He will be appointed by and responsible to the Council of the League, of which
the Austrian representative is, when Austrian matters are discussed, a full and
equal member. Indeed, the Council, in approving the scheme, added a resolution

' The Financial Committee raised its original estimate of the budget deficit of 520 milliou
gold crowns to 650 millions in order to include the repayment of advances made this year by Great
Britain, France, Italy and Czechoslovakia. It is necessary that all the guarantees should apply to the
whole of this sum, in order that the loans — or, more correctly, the "loan", though it will, of course, be
issued in instalments at different times as Austria's needs and market conditions may determine — may
have the same character and be based on the same securities. In order, however, that any States not
interested in the repayment of the advances may limit their liability to a guarantee of a proportion of
the total sum required by Austria tor her other needs (520 million gold crowns), Great Britain, France,
Italy and Czechoslovakia have entered into a speci al arrangement by which they cover the risk of all
other guaranteeing countries so far as it relates to the additional sum of 130 millions. The effect of this
rather technical arrangement is that any country can undertake to guarantee a stated percentage of
the loan with an effective responsibility which is limited to that percentage of a total of 520 million gold
crowns, instead of 650 million gold crowns, while the maximum liability of the tour principal guarantee-
ing Powers reaches a total of 84% instead of 80%.

^ This, for the above reason, does not necessitate any effective liability on all Powers of more than
20% on 520 millions (or 16% on 650 millions).

— 12 —

that the Commissioner-General should not be drawn from any of the principal
guaranteeing countries (nor from countries bordering upon Austria). His primary
concern will be identical with that of the Austrian Government and the per-
manent interests of the Austrian people : namely, that the measures to enable
Austria to achieve a position of self-supporting independence shall be successful ;
the due maintenance of the value of the securities of the loan will, of course, be
a part, but a part only, of the general programme which it will be the duty of
the Austrian Government to frame and execute, and his to supervise. The Com-
missioner-General will live at Vienna. He will report monthly to the Council
of the League. His functions will end as soon as the Council judges that the
financial stability of Austria is assured.

In addition to the League's Commissioner-General, there will be a "Com-
mittee of Control of the Guaranteeing Governments." This Committee, of which
the Italian member will be President and the Czechoslovak member Vice-Pre-
sident, will be formed of the representatives of the guarantors with votes pro-
portionate to the guarantees they have offered, and will watch their special
interests. It will not be in permanent session, but will meet from time to time,
not in Vienna but normally at the seat of the League. The approval of this Com-
mittee by a two-thirds majority is required to the main conditions under which
the loan, whose interest and amortisation are guaranteed, is to be subscribed ;
and it will, by the same majority, determine the conditions of the payments
should the guarantees actually be called upon. For other purposes, the Committee
works normally by a majority vote. It receives the monthly reports presented
by the Commissioner-General to the Council ; it may ask him for information
as to the progress of the reforms, and may make representations to him with
regard to safeguarding the interests of the guarantors. If the assigned revenues
are insufficient for the service of the loan, it may require the assignment of addi-
tional securities.

In exercising these rights, the Committee communicates not with the Aus-
trian Government but with the Commissioner-General. The Committee and
each guaranteeing State have a right of appeal to the Council en cas d'abus.

The rights and powers of both the Commissioner-General and the Committee
are carefully defined so as to restrict them to the precise objects in which they
are concerned — the execution of the reform programme and the maintenance
of the value of the securities — and to avoid any infringement of the sovereignty
of Austria and the full responsibility of her Government.

The essential features of the agreement arrived at are thus a programme of
financial reform extending over two years ; provision to meet the deficit during
this period by guarantee loans ; the arrest of the collapse of the crown ; the super-
vision of the Austrian Government's execution of the scheme within carefully
defined and restricted limits.

THE SPECIAL DIFFICULTIES AND TASKS OF THE NEXT FEW

MONTHS.

It will be well to add to this general outUne a note as to particular difficulties
of the earlier stages. The Governments' promises of guarantees require ratifi-
cation by the respective Parliaments, and loans can only be issued on the basis
of — and, in practice, some time after — such ratifications. It is of great impor-
tance that the ratifications should be secured before December 31st of this year.
As soon as they are secured, any deficit which may thereafter accrue between
that time and the issue of a long-term loan can be met without great difficulty
by the issue of Austrian Treasury Bills in gold crowns or foreign currencies,
subject to right of redemption from the immediately prospective loan.

The period up to the end of this year presents special difficulties. It is
estimated that, during it, there will be a deficit of 120 to 160 million gold crowns.
The Financial Committee hopes that it may be possible to meet it by the issue
of three- or six-months Treasury Bills (to be issued in Austria by the Austrian
Government and purchased by the Austrian banks), secured partly by the
unspent portion of the credits arranged by the French, Italian, and Czechoslovak
Governments early in this year, and partly by a first charge on the Customs and
on the tobacco monopoly.

During this same period, between now and the end of the year, it may be
convenient to add that the following further action is required :

— 13 —

The Austrian Government should at once communicate certain immediately
practicable reforms.

It must frame, in collaboration with the Commissioner-General, or, pending
his appointment, with a delegation from the League, a programme of reform
calculated to secure budget equilibrium by the end of 1924.

It must present to the Austrian Parliament a draft law giving, during two
years, to any Government which may be in authority, full powers within the limits
of the programme to take all measures to assure budget equilibrium by the
end of 1924 without the necessity of securing further approval by Parliament.

The Bank of Issue should open ; and the issue of notes by the Austrian Gov-
ernment should cease.

The Commissioner-General and the Committee of Control of the guaranteeing
Powers should be appointed.

Additional promises of guarantees to complete the 100% should be obtained
from other Governments than those which have at present signed the Protocol.

The promises of guarantees should receive parliamentary ratification.

This is the scheme now presented by the Council with a definite undertaking
(subject to parhamentary ratification) of the Governments of Great Britain,
France, Italy, and Czechoslovakia to guarantee between them (both as to interest
and amortisation) over four-fifths of the necessary loan ; and with the correspond-
ing undertaking by the Austrian Government to take the measures and to submit
to the control required by the scheme.

Other countries are invited to contribute towards completing the remaining
portion of the guarantees — less than one-fifth — which still remains to be covered,
and all countries are invited to sign the poUtical declaration. (See Protocol No. I.)

The discussions and speeches which accompanied the preparation and the
presentation of the scheme clearly express the Council's sense at once of the
possibiUty and of the extreme difficulty of the task which still remains. The
problem was given to the League at a moment when Austria was on the very
verge of disaster, her financial disorganisation almost complete, her currency
almost worthless, her social and political stability in obvious danger. From
such a position recovery is not easy. When the scheme was presented at the
public meeting of the Council on October 4th, it was thought well to quote with
special emphasis the following grave statement of the Financial Committee :

" Austria has for three years been living largely upon public and
private loans, which have voluntarily or involuntarily become gifts,
upon private charity and upon losses of foreign speculators in the crown.
Such resources cannot, in any event, continue and be so used. Austria
has been consuming much more than she has produced. The large
sums advanced, which should have been used for the re-establishment
of her finances and for her economic reconstruction, have been used
for current consumption. Any new advances must be used for the
purposes of reform ; and within a short time Austria will only be able
to consume as much as she produces. The period of reform itself, even
if the new credits are forthcoming, will necessarily be a very painful
one. The longer it is deferred the more painful it must be. At the
best, the conditions of life in Austria must be worse next year, when
she is painfully re-estabhshing her position, than last year, when she
was devoting loans intended for that purpose to current consumption
without reform.

" The alternative is not between continuing the conditions of life
of last year or improving them. It is between enduring a period of
perhaps greater hardship than she has known since 1919 (but with
the prospect of real amelioration — thereafter the happier alternative),
or collapsing into a chaos of destitution and starvation to which there
is no modern analogy outside Russia.

" There is no hope for Austria unless she is prepared to endure
and support an authority which must endorse reforms entailing harder
conditions than those at present prevailing, knowing that in this way
only can she avoid an even worse fate."

— 14 —

Complementary to this warning, and not inconsistent with it, is the confidence
expressed by the Austrian Chancellor that if Austria can find the indispensable
aid from outside, she can " become self-supporting sooner than is usually thought
possible. Austria possesses agricultural resources which only require to be
intensified ; she possesses old-established industries which have only been pre-
vented by the war, and its consequences during the post-war period, from ob-
taining the capital required to work them ; she possesses the untapped resources
of her water-power, which it has so far been impossible to exploit adequately.
But her most precious possessions are her excellent geographical situation and,
above all, her intelligent and industrious population. "

It is with these dangers and with these hopes that Austria, with the aid and
support of the League and of the Governments which are assisting her, has to
climb up " the precipitous but not impossible track " towards financial reform
and self-supporting economic independence.

J. A. SALTER,
Director of the Economic and Financial Section.

• October 5th, 1922.

— 15 —

II.

CORRESPONDENCE TRANSMITTED TO THE COUNCIL
OF THE LEAGUE BY THE BRITISH CABINET.

1.

LETTER FROM THE AUSTRIAN MINISTER IN LONDON
TO THE BRITISH PRIME MINISTER.

London, August 7th, 1922.
Mr. Prime Minister,

I have been instructed to address to you, as President of the Inter-Allied
meeting, the following Note, and to beg you to bring it to the knowledge of the
statesmen participating in the dehberations.

The Austrian Government is faced with momentous decisions.

During the last few days the Reparation Commission has at last released
some of Austria's assets in order to render possible the taking up of a foreign
loan. But the foreign bankers, who a year ago were still wilhng to grant such
a loan, to-day declare that it is impossible to do so, because to them and to the
general public the continued existence of Austria has become doubtful. The
bankers consider the revenues offered by the Austrian Government a sufficient
financial guarantee for the desired credit ; they demand, however, in addition,
a second guarantee which can only be given by the chief AlUed Powers. For
this reason the last resort of the Austrian Government is to appeal, through the
enclosed memorandum, to the Powers and to address to them the urgent request
that they should undertake a partial guarantee for the loan, for which such secu-
rity is offered by the Austrian Government as is acknowledged by the financial
experts to be adequate.

The experience of the last two years has shown that the Budget can only
be balanced if the currency is stabilised simultaneously. For this reason, Austria
is at the present moment, and out of her own resources, estabhshing a new Bank
of Issue, tor which the capital is supplied by Austrian banks. At the same time
the revenue is, as far as possible, put on a gold basis ; the expenditure, already
reduced by the abolishing of subsidies for foodstuffs, is being further diminished
by the sale — already effected or about to be effected — of unprofitable State
concerns, by the reorganisation of the railway and postal services and by the
reduction, at first by 10 %, of State officials. In order to cover for the next
few months the deficit, which, as a result of the progressive depreciation of the
krone, is rapidly increasing, an internal forced loan will be taken up. The Gov-
ernment and Parliament have decreed by law that the printing-press shall
no longer be resorted to for the State and its requirements. Anyon- knowing
the situation will agree that this finance plan, already fixed by law, embodies
Ihe utmost exertions of which the present Austria is capable.

Everything depends upon whether, during the period required for the carrying
through of the financial reforms, a foreign loan will give Austria the assurance
that she will not have to resort to the printing-press again in order to cover the
requirements of the State, otherwise the financial reforms would be definitely
doomed to failure. A further depreciation of the krone must necessarily render
impossible the indispensable purchases of foodstuffs and coal from abroad
and lead to such social upheavals as would constitute the gravest dangers for the
peace of Central Europe and would mean the end of an independent Austria.
Every day by which the assurance of the foreign credit is delayed renders it doubt-
ful whether the measures which Austria is taking for her own salvation will then
still be possible.

For this reason the Austrian Government begs the Powers to decide at
once whether they are prepared to assume a partial guarantee for the Austrian
loan of 15 milhon pounds sterling.

If against all expectations this last hope were also to prove chimerical, the
Austrian Government, knowing that to save the situation they had tried in vain
all means which lay in their power and which constituted the utmost exertion
oi the people, would have to call together specially the Austrian Parliament
and to declare, in agreement with it, that neither the present nor any other Gov-
ernment is in a position to continue the administration of the State. At the
same time they would, before the Austrian people and the public opinion of the
whole world, have to make the Entente Powers responsible for the collapse of
one of the most ancient centres of civiHsation in the heart of Europe, and would
have to lay into their hands the future fate of Austria.

I have the honour to be,

with the highest consideration,
Mr. Prime Minister,

Your obedient servant,

(Signed) Georg FRANCKENSTEIN.

LETTER FROM Mr. LLOYD GEORGE TO BARON
GEORG FRANCKENSTEIN, AUSTRIAN MINISTER IN LONDON.

London, August 15th, 1922.
Sir,

I have the honour to refer to your Notes dated August 7th and 13th, 1922,
respectively, in which you asked me to bring to the notice of the Inter-Allied
Conference a request by the Austrian Government that the Allied Powers should
assume a partial guarantee for an Austrian loan, and to state that I brought
the matter before the Conference, which considered it at a meeting held yesterday
afternoon.

The representatives at the Conference of the Allied Governments gave the
most careful attention to the request put forward, and in connection with it
they reviewed the grants already made to Austria by their Governments. As
you are aware, substantial financial assistance has been accorded by the Allied
Governments to Austria since the war. The French Government has granted
to Austria, sums of approximately £3,500,000, and in addition the French Par-
liament has voted this year the sum of 55,000,000 francs. The ItaUan Govern-
ment has already granted Austria 280,000,000 lire, and the Italian Parliament
has voted recently a further grant of 70,000,000 lire. The total contributions
of Great Britain since the war amount to £12,500,000.

These substantial payments unfortunately appear to have produced no
permanent improvement of the Austrian financial situation, which, on the con-
trary, has gone from bad to worse. The last credit by Great Britain, granted in
the spring of this year, amounted to £2,000,000 and was given in the hope that
it would definitely enable Austria to become solvent. The situation disclosed
in your two Notes shows that this hope has not been reahsed.

The representatives of the Allied Governments have therefore come to
the decision that they are unable to hold out any hope of further financial assis-
tance being given to Austria by their Governments. They have agreed, however,
to a proposal that the Austrian situation should be referred to the League of
Nations for investigation and report, the League being informed at the same
time that, having regard to the heavy burdens already borne by the taxpayers
of the Allied Powers, there is no prospect of further financial assistance to Aus-
tria from the Allied Powers, unless the League were able to propose such a pro-
gramme of reconstruction, containing definite guarantees that further subscrip-
tions would produce substantial improvement and not be thrown away like
those made in the past, as would induce financiers in our respective countries
to come to the rescue of Austria. The representatives of the AlUed Powers have
reached the above decision with much reluctance and from no lack of sympathy
with the Austrian people, but they have been obliged to take into consideration
the crushing taxation which their respective countries already support in conse-
quence of the war. They do not feel that they would be justified in caUing upon

- 17 -

their heavily burdened nationals to assume further obligations for the benefit
of Austria, which has, in the few years since the war, already received so much
from them with such disappointing results.

I have the honour to be, Sir,

Your obedient Servant,

(Signed) D. LLOYD GEORGE.

3.

TELEGRAM FROM THE BRITISH CABINET
TO THE SECRETARY-GENERAL OF THE LEAGUE OF NATIONS.

London, August 25th, 1922.

Notes from and to Austrian Minister were sent to you for consideration of
Council at next meeting. Question should therefore be added to agenda.

— 18 —

III.

MINUTES OF THE FIRST MEETING (PUBLIC)

OF THE TWENTY-SECOND SESSION

OF THE COUNCIL OF THE LEAGUE OF NATIONS

(Held at Geneva, August 31s/, 1922, at 4 p.m.).

SPEECH BY M. DA GAMA, PRESIDENT OF THE COUNCIL.

Present : All the representatives of the Members of the Council, and the
Secretary-General.

The representative of Austria was invited to take his seat at the Council
table.

M. DA Gama, representative of Brazil (President), submitted a proposal
in the following terms in regard to the procedure to be followed in dealing with
the question of Austria :

" This problem is, as we all reaUse, at once of the gravest importance and
the greatest urgency. The Council will doubtless, therefore, desire to arrange
a procedure which will both admit of careful consideration of the problem now
submitted to it and will also avoid any waste of time.

" The Austrian problem has, of course, already been studied in detail by the
Financial Committee, and the Council made definite recommendations as to
the conditions on which it considered the Austrian finances could be put upon a
stable and permanent foundation.

" For reasons which I do not now need to recall, unhappily no effect was
given to those recommendations, and the fundamental evils from which Austria
was then suffering remain and in an aggravated form.

" We have now been asked again to examine and report in even more difficult
circumstances, and the Council will doubtless desire to consider very carefully
whether it is in a position to assist in solving the problem in its present state,
and, if so, upon what conditions. The problem has at the present moment many
aspects, some of which are graver than when the Financial Committee last exam-
ined the question. One important element, in any case, however, in the question
as now presented, is the financial position, with the changes which have occurred
in the last eighteen months.

" I suggest, therefore, that the Council should at once, this afternoon, instruct
the Financial Committee again to examine the question so far as it falls within
its competence, and report to the Council as soon as possible.

" I suggest as to its terms of reference that the Committee should take the
question as defined in the relevant portions of the letter written by the British
Prime Minister on behalf of the Powers at the London Conference to the Austrian
Minister, and should furnish a report on the financial aspects of this question as
one element of the problem with which the Council is confronted.

" I suggest, secondly, however, that without waiting for the completion of
the work which will begin at once, but must necessarily take some httle time,
the Council should set aside a definite day, say Wednesday next, for hearing at
length the exposition of the Austrian situation in all its aspects by the Austrian
representatives, who are now with us.

" The Council will, of course, throughout, conduct its discussions and arrive
at its decisions in continuous consultation with the representatives of Austria.
It is one of the fundamental principles of the Covenant that a country, though
not formally a Member of the Council, becomes a Member with full and equal
rights when questions especially affecting its interests are being discussed. "

The procedure proposed by the President was approved.

— 19

IV.

MINUTES OF THE THIRD MEETING (PUBLIC)

OF THE TWENTY-SECOND SESSION

OF THE COUNCIL OF THE LEAGUE OF NATIONS

(Held on Wednesday, September Qth, 1922, at 4 p.m.).

SPEECH BY Mgr. SEIPEL, CHANCELLOR OF THE AUSTRIAN REPUBLIC.

Present : All the representatives of the Members of the Council, and the
Secretary-General .

Mgr. Seipel (Chancellor of the Austrian Republic) and M. Grunberger
(Austrian Foreign Minister), representing the Austrian Republic, and M. Ben^s
(Prime Minister of Czechoslovakia) were also present.

M. DA Gama (President) stated that the Council had met in public session
to consider the situation of Austria. This question had been referred to the Council
by Mr. Lloyd George on behalf of the Allied Governments represented at the
Conference of London.

The general conditions of the problem before the Council were well known.
The Council had decided to invite the representatives of the Austrian Government
and of the Czechoslovak Government to take part in its deliberations. He
was glad to welcome Mgr. Seipel and M. Benes.

Mgr. Seipel and M. Benes came to the Council table.

Mgr. Seipel made the following statement to the Council :

" It is with profound emotion that I come to-day before the Council of the
League of Nations to plead my country's cause. At this solemn moment I cannot
help recalling the time when we pacifists saw in the League of Nations a great
but distant ideal. We Austrian pacifists assembled, with the best minds of other
nations, around M. Henri Lammasch to strive for this idea with voice and pen.
We did so because at that time latent confUcts were already ripe — confhcts
which we saw with horror culminate in the world-war. It is true that during
and after the war, scepticism appeared to prevail over ideahsm ; it is true that
the idea of the League of Nations failed to prevent the war. This scepticism
was confirmed even when the idea of the League of Nations was put into practice.
Was not this League created by the very Treaties which, though they put an end
to war, were far from bringing us a real peace ? Did not the League of Nations
appear to be an instrument in the hands of the victors ? Yet within a short time,
enemies of yesterday have been admitted to the League of Nations, Austria
amongst the first. I appear therefore before you to-day to beg you to help my
country, which is a Member of the League of Nations — I who have never lost
faith in the reconciliation of peoples and in a new order higher than individual
nationahsm and including the whole world.

" Objections may perhaps be raised that it is not for the League of Nations
to procure credits for a State which is threatened with ruin. But Austria is not
approaching the League of Nations to-day solely in order to ask for financial
help. The League of Nations would certainly not be departing from its noble
task by helping Austria — on the contrary. There is no more essential part
of that work than the maintenance of the peace of the world. The fundamental
idea of those far-sighted men who created the idea of the League of Nations was
to dispel the difficulties which, but for its intervention, would threaten the world
with an outbreak of war. If this is to be the work of the League of Nations,
is not the League within its rights in preventing those disputes from arising ?
Is it not better to prevent evils whose disastrous consequences it would be hard
indeed to remove ? That is the case now with Austria.

— 20 —

" I need not describe to you what those disastrous consequences would be.
Austria can no longer check the depreciation of her currency, which becomes
more disquieting every day, and our people, who have endured such terrible
suffering and who are perhaps even more crushed by fear for the uncertainty
of their future than by the physical misfortunes of the present time, are menaced
by actual decimation through hunger and cold. These disasters would not only
endanger the maintenance of order within the heart of Europe ; they would
involve the ruin of a territory which, although comparatively small, plays an
important part in the commerce and productivity of the world. These disasters
would also cut off the western peoples from direct communication with their
important markets in the ( ast ; the creditor States of Austria would certainly
lose their money, whether reparations or interim credits granted after the war.
But above all it would mean the disappearance of one of the most valuable and
most ancient centres of civilisation in the world. It would, moreover, be a serious
blow to the Treaties of Peace, for it would afford a proof that the new Austria
which they created is incapable of existence, either now or in the future. A
wide gap would be formed in the centre of the map of Europe, which, by force
of attraction, would drag all its neighbours down into the same abyss, and would
thus upset the balance which, apart from Austria, is even now only with
difficulty maintained.

" The League of Nations has before it in the Austrian question one of the
noblest of tasks ; if it succeeds, if its authority prevails — and we ask for
nothing but to recognise that authority — if it is able to lead the Governments
and peoples towards a real world-peace, the world will believe in it. In that case,
the League of Nations, to which I have the honour to speak to-day, will be that
League of Nations which has been the dream of men of good-will throughout
the world.

" But, gentlemen, you may ask me why Austria considers herself authorised
to speak to you thus. It is her distress which drives her to it, and in order to
show you the extent of that distress, I will venture to put before you the follow-
ing few figures :

100 Swiss francs were equal :

on July 1st, 1919, to 567 Austrian crowns

» 1920, to 2,702 »

» 1921, to 12,200 »

» 1922, to 360,000 »

"One Czechoslovak crown, the value of which had not as yet reached four
Austrian crowns on July 1st, 1920, was equivalent to 10 Austrian crowns on
July 1st, 1921, to 364 Austrian crowns on July 1st, 1922, and has at present
reached a maximum of 3,000 Austrian crowns.

'• All the Members of tlds Council, with this evidence before them will, I em
sure, realise that such a depreciation, which is almost unique in the financial history
of the world, must entail the most disastrous economic consequences for a country
such as Austria, which has to import from neighbouring States, whose exchanges
are so high, articles essential for everyday Ufe. How are we in future to buy
corn, coal, sugar, etc ?

" Two years ago we had to struggle against the dearth of goods which was
then felt throughout the world. At that time the Powers, realising the painful
situation of our country, granted us help by sending us food. Since then the
situation has completely changed. The question of supplies is no longer a prob-
lem of goods ; it is now purely a financial problem. This situation must ine-
vitably produce once more a scarcity of goods in our country. It is only because
of the terrible depreciation of the Austrian crown that the population of Austria
finds itself once more, in 1922, completely unable to procure the necessities of
life.

" The price of bread in Austria was for a considerable time comparatively
small owing to the State subsidies. But immediately these subsidies were brought
to an end as a result of the financial situation of Austria, a large increase in price
was, of course, inevitable. We could never have foreseen, however, that prices
would double in a few we ks and would reach a gigantic figure. A loaf of bread,
which only cost half an Austrian crown in time of peace, now costs 6,000 crowns.
I need not dwell further on the disastrous consequences of such prices.

— 21 —

" A kilo of coal imported into Austria from the Czechoslovak Republic,
which a year ago cost 8 crowns in Vienna, now costs 400 crowns ; and remember
that this high price is not confined to food alone. A shirt, for example, which
could be obtained in peace-time for 6 crowns, now costs nearly 200,000 crowns.

" These few examples will prove to you that no State in the world could exist
under such conditions.

" But you will ask me this question : Has everything possible been done
to cope with these misfortunes ? We have no wish to deny that the Powers,
and the League of Nations in particular, have given careful study to the Austrian
problem. In the spring of last year, indeed, the Financial Committee of the
League of Nations prepared a complete financial plan which would have saved
Austria. As you know, the fundamental basis of this financial programme was
the suspension of hens on Austrian resources. It was laid down that the Austrian
Government should take financial steps which would affect the whole economic
life of the country simultaneously with the granting of the credits promised at
that time.

"When the Austrian Government realised the difficulties which unexpectedly
prevented the granting of these credits, it decided to take action by itself and
to effect financial reforms within the country ; it increased taxation with all
possible speed, with the object, and in the continual hope, that credits would
be forthcoming.

" In spite of the international political difficulties which arose, the Government
then decided to abolish the subsidies on foodstuffs, which weighed very heavily
on the State exchequer ; and by abandoning the idea of acting only in conjunction
with foreign help, it brought to the forefront the principle of saving Austria by
her own means.

" At the same time the Government took all steps to call for an urgent suspen-
sion of hens. Seeing that all its efforts were unavaiUng, it finally decided to
propose that the liens should be suspended in respect of certain sources of revenue
which it considered essential for the establishment of a new Bank of Issue and
for the minimum credits which it hoped to obtain from abroad. It finally
secured the liberation of these sources of revenue a few weeks ago, after
unforeseen delays.

" But a further disaster immediately arose. The keystone of the financial
reforms based on the efforts of Austria alone was the Bank of Issue. This was
to be created by the resources of the Austrian banking institutions, in order
to prevent any further depreciation of the crown in the future.

" It was then that foreign capital threatened to compromise the financial
plan which we had established with so much trouble. As you know, two of the
largest Austrian banks, the Anglo-American Bank and the Bank of the Austrian
States, were converted after the war into EngUsh and French institutions. But
foreign capital, having taken an interest in the new Bank of Issue throiigh these
two institutions, confused our efforts to save Austria by her own means with
the question of foreign credits, and obliged us to plead our cause before the Great
Powers at the Conference of London. At the same time, when the Austrian prob-
lem was referred to the League of Nations, the directorates of the two banks
in question demanded such important changes in the statute of the new Bank of
Issue that the negotiations on this subject were still unfinished when I had to
leave Vienna.

" The final decisions of Paris were still awaited, so that the success of our
best efforts was compromised by the foreigner, whose good faith, nevertheless,
I willingly recognise.

" But, gentlemen — I must ask the question — why have we received this
treatment ? Very probably because, in spite of the most exhaustive enquiry, it
has not yet been estabhshed clearly whether or not Austria to-day could live on
her own resources. You would doubtless like to hear our own opinion on this
subject. Allow me then, before answering you, to invite you to make a distinction
which seems to me to be essential. The Austria of to-day, as constituted at the
end of the war by the Peace Treaty, left to her fate — well, the latter Austria is
unable to live and will be unable to live for some time to come. The distressing
state of our economic life proves it. Torn suddenly from the union with our neigh-
bouring countries, separated from all the territories which furnish them with
raw materials, the Austrian people has been obliged to find, little by little, new
economic foundations ; burdened with a heritage too heavy to bear, they are
making great efforts to adapt themselves to a new state of things. If foreign help,

— 22 —

promised by the covering letter of the Treaty of St. Germain, fails them, and, if,
as has been lately the case, the task is rendered more difficult — then, gentle-
men, the new Austria will not be able to live, but if Austria finds the foreign
help which is indispensable she will be able to hve sooner than might be
supposed. Austrian agriculture only needs to be intensified. Austria possesses
a long-established industry which the war and its consequences have deprived,
till now, of the necessary funds ; she possesses the latent wealth of her hydraulic
forces, which it has not been possible sufficiently to exploit ; but her greatest
wealth is her excellent geographical situation, and, above all, her gifted and
industrious population. To recover from the terrible shocks of the revolution,
she needs only a little mental peace and normal economic conditions. And allow
me to lay stress upon one point in this line of thought which is particularly im-
portant. Austria must be saved from the artificial shackles imposed upon her
traffic and commerce, shackles which neither the Brussels Conference nor the
Porto Rosa decisions were able to break. Here not Austria alone but the whole
of Central Europe is concerned.

" What is Austria asking from the League of Nations ? The London
Conference again referred the Austrian problem to the League of Nations, and
we hope, we pray, that this time it was not with a view to further enquiries, which
will cause a loss of precious time, but with a view to rapid decisions. In the
opinion of the most competent financiers, the guarantees which we are able to
offer after the suspension of the hens in question need the guarantee of all the
Powers, or at least of several of them, in order to enable us to obtain
sufficient credits :

(1) To arrest the rapid decline of our monetary system — a decline
which makes any budgetary calculations both for the State and for
individuals impossible and augments from day to day the cost of living ;

(2) To permit the State to exist during the period of transition
until the strengthening measures already taken and still to be taken
have become efficacious ;

(3) To permit some reduction of officials and to push on the devel-
opment of her enterprises by means of the necessary funds ;

(4) To utilise in the future the resources already mentioned, by
improving agriculture, setting industry upon its feet, exploiting the
hydraulic forces, and to give to the population a foundation for a cer-
tain future.

" We have been assured that the Powers which will participate by their
guarantee in the work of the economic reconstruction of Austria and the rep-
resentatives of international capital who will assist financially or with credits
will continue to exercise a certain control over employment of the credits granted
and over our general national economy. I will reply with all the frankness
which our situation demands :

(1) We admit that such a control is inevitable and natural.

(2) It is understood that such a control will not affect the sove-
reignty of Austria ; for it would be harder and more humiliating
for our people, whilst keeping a semblance of sovereignty, to lose their
political liberty than once and for all to renounce their independence
and become part of a great political entity, and so obtain a share of
sovereignty in that of a great State.

(3) For this reason we earnestly desire that the control over the
use of the credits should become effective without delay. There is no
doubt that dependence, unless it really brings reUef, is humiliating, but
it would be unreasonable to refuse, simply for reasons of prestige,
a remedy which would bring about a cure.

(4) We could not, of course, accept this control unless sufficient
credits were granted at the same time. For nothing could justify the
control of an independent State except the real help accorded to her.

" Gentlemen, I took the liberty at the beginning of my speech of referring
in a few words to a point which I should like to emphasise. The Austrian problem
in its present phase is very largely a poUtical problem. I explained to you the

— 23 —

financial situation, and I have now shown how difficult it is to separate financial
from political consideration and how great is the influence which pohtical
considerations may have upon the practical possibilities and financial solutions.

" The fact that the Austrian problem, that is, the problem of maintaining
the independence of Austria, has become a fundamentally political question,
suggested to me the idea some days ago of visiting some of our neighbours
to consult them upon this problem. I did not wish to submit the question to the
League of Nations without reaching an understanding with our neighbours.
This visit had, however, I frankly admit, another object. The Austrian people,
rather than perish in isolation, will do everything in their power to make a last
effort to break the chains which are oppressing and strangling them.

" It is for the League of Nations to see that this effort does not endanger
the peace of the world or our relations with our neighbours."

24 —

V.

RESOLUTION ADOPTED BY THE COUNCIL OF THE LEAGUE

ON SEPTEMBER 6th, 1922
[TWENTY-SECOND SESSION, FOURTH MEETING (PRIVATE).]

The Council decided to nominate a Committee instructed to examine
the Austrian problem as it had been referred to the Council by the Inter-Allied
Conference of London and as it had just been submitted to it by the Austrian
Chancellor.

The Committee would comprise representatives of the British, Czecho-
slovak, French, Italian and Austrian Governments. It would be authorised, if
necessary, to hear the representatives of other countries which might be interested
in certain aspects of the question ; further, the Council put at its disposal the
whole of the technical organisations of the League, including economic, financial
and legal experts.

NOTE.

In the interval between September 6th and 30th, the Austrian Committee
of the Council, the Financial and Economic Committees and, in general, the
technical organisations of the League, worked out, in detail, the scheme ulti-
mately embodied in the Protocols (see Preface).

25 —

VI.

EXTRACT

FROM THE RECORDS OF THE TWENTY-FIFTH PLENARY

MEETING OF THE THIRD ASSEMBLY

(Saturday, September 30ih, 1922, at 3 p.m.)

President: M. Edwards.

COMMUNICATION BY THE COUNCIL.
The President :
[Translation.]

Gentlemen, as you know, the Council has been studying during the last few
days the question of Austria.

The Council has informed me that it wishes to make a communication to
the Assembly on this subject through its Rapporteur, the Right Honourable
the Earl of Balfour, after which the Austrian delegate will be requested to speak.

I have no doubt that the Assembly will wish to hear these communications.
(Assent.)

If this is agreed to, I will first of all call upon the Right Honourable Lord
Balfour, Rapporteur, to address the Assembly. (Applause.)

Lord Balfour (Great Britain) :

Ladies and gentlemen, the President has asked me, before we all scatter to
every quarter of the globe not to meet again in this hall probably for another
year, to give you such information as is in my power with regard to the work
which has been done in connection with the great Austrian problem.

I regret, ladies and gentlemen, not to be able to do what, at one moment,
I had hoped to do, which is to give an account of a completed transaction, of a
matter in which all had already been done by the Council of the League to arrange
the machinery and to make the necessary provision for deaUng with the Austrian
crisis. Though I am not in a position to give you that completed statement,
my colleagues on the Council and I myself feel that so much has been done, so
great has been the progress we have already made, and so important have been
the stages which we have already passed, that it would have been doing you and
us an injustice if I did not takethis opportunity of letting you know the broad
outlines at least of the task which we are in process, I believe, of accomplishing
and the measure of agreement at which we have already arrived.

Now, ladies and gentlemen, let me say that, though a complete and detailed
agreement has not yet been reached, nevertheless the spirit of agreement which
has reigned over all our deliberations in the Austrian committee of the Council and
in the Council itself, offer, so far as I can judge, the happiest augury for a final
and successful issue of our labours.

This is not the first effort which the League has made at the invitation of the
Powers to give material and effective assistance to Austria. I think that it was in
1921 that the first of these efforts was made. We then laid before the world our
scheme for aiding the Austrian Government to aid itself. An essential part of
that scheme was the hberation of the Hens which bound certain debts in such a
manner that they could not be effectively used for Austria's reconstruction.

Those hens had to be released by a very large number of nations, and when a
very large number of nations are concerned, separately and individually, in any
transaction, the length of time which is apt to be taken may well be fatal to the
best-laid schemes. In this case it was fatal, and by the time the last of these hens
had been released, the economic condition of Austria had so sunk that no mere
release of liens, nor even the other assistance given by the Great Powers, was
sufficient by itself to raise Austria again to the position of a solvent State.

— 26 —

We therefore, when we were a second time invited to intervene, found the task
was one inevitably harder, inevitably more complicated, inevitably requiring a
novelty of treatment which was not either foreseen or indeed required when we
first came into touch with this problem. We have to deal with a nation in which
the currency has undergone the most rapid and the most disastrous depreciation,
a nation in which production is falling far behind consumption, in which the defi-
cit is great and is growing, in which there are vast numbers of government
employees whom it would be difficult to prove were required for the service of the
State and in which even what were before the war the most productive sources of
revenue are now not merely no longer sources of revenue but sources of serious
deficit.

It will be admitted that the problem, therefore, which we have to face is one
of very great difficulty. Two things are plain. Austria cannot get on without
some pecuniary assistance from other nations, or, let me say, without some assist-
ance from sources outside herself. Austria cannot get on without such assistance,
and yet such assistance can never be given her, and never will be given her, as
long as she is in the hopeless condition of national bankruptcy with which she is
now faced.

This problem was the one that presented itself to the Council and to the Aus-
trian Committee of the Council. We felt that there could be no loans to Austria
without the reform of Austria, while at the same time there could be no reform
of Austria without loans to Austria. Austria could not recover left to herself by
her own efforts, and yet who was going to help her ? Who was going to lend her
money unless there was clear proof that she was herself going to put an end to
the state of things which had brought her to her present unhappy condition ?

No loans without reform ; no reform without loans. Those were the two
principles which we had to consider and which we had, if possible, to reconcile.

Let me take those two questions in order. Let me take, first, loans and then
reforms. Do not suppose that the difficulty of loans is the difficulty of finding
what would ordinarily be called a good security for those loans. A well-governed
Austria has ample security for loans ; there is no difficulty about that at all. You
may ask, then, "Why cannot Austria go, like other nations in need of money,
into the open market and ask the great financial centres of the world to lend
her financial resources on the securities which she can produce?" The reason is
the one I have already indicated. No-one will lend to Austria unless Austria can
produce not only what are called good securities for the loan but some clear
prospect that the State will be henceforth governed on those sound financial
principles on which alone the pennanent stability of the State depends, a sta-
bility without which no wise lender is going to risk his money.

If it is clear that the private lender will not come forward in the existing
condition of Austria and lend money simply upon Austrian securities, what is
the remedy ? There is but one remedy, and that is that other nations should
supply the guarantees, furnishing that basis of credit which Austria herself is
incapable of supplying. On that the Council and the Austrian Committee of the
Council are entirely agreed. Moreover, in the most important respects, I think
you will admit that we have found a method of carrying out that object.

Four nations have each agreed that, speaking very broadly, they will take
twenty per cent each of the total loan required to enable Austria to pay her way
during the two years which our financial advisers tell us must elapse before an
equilibrium is arrived at in the Austrian Budget. I do not propose to trouble you
with the figures to-day, for I am only dealing with the broad outlines of our policy,
but we may say roughly that something over 500,000,000 gold crowns is what
Austria, according to the calculation of our experts, needs, in order that she may
be put on a sound basis. However that may be, and without going into details,
broadly speaking, the four nations are in agreement that each shall supply twenty
per cent of the total.

The four together, again speaking only in round numbers, may be expected
to guarantee eighty per cent of the total requirements of Austria. That leaves
twenty per cent undealt with. I am glad to say that we know already that some
other nations are prepared to contribute towards that twenty per cent, and I
have great hopes that the whole of the twenty per cent may be fully guaranteed
when the nations which have money to lend, or are able to guarantee, see the whole
scope and value of the plan which we propose. I think that gives you a fair
general idea of the loan side of the plan on which we are engaged — the method
by which money shall be suppUed by the individual lender on the security of
various States to meet the needs of the Austrian Government.

— 27 —

I now come to the second — the most important, and in many respects the
most novel — part of the plan that we are carrying into effect. The second part,
you will remember, dealt with Austrian reforms. That the reforms are required
no Austrian and no observer of Austrian affairs is likely for one moment to deny.
Large sums have been contributed to Austria from outside during the last two
disastrous years, but they have, under the existing system, no more than sufficed
to enable the Austrian Government to get on somehow or another from day to
day. They do not contain in themselves the smallest element of permanence ;
they are unable in the slightest degree to contribute to the permanent establish-
ment of Austrian credit.

Now what are the conditions which, in our view, are required for this scheme
of reform ? In the first place, we are of opinion that, since it is inevitable that
there shall be some external influence acting in co-operation with the Austrian
Government, it shall be made quite clear, first to the Austrian people and then
to the world at large, that no interested motive presides over the action of any
of the guaranteeing Powers, and that we are all mutually engaged one to the
other, to the League of Nations and in the face of the world at large, that no
interference with Austrian sovereignty, no interference with Austrian economic
or financial independence, shall be regarded as tolerable or possible under the new
system. We have therefore prepared a very carefully drawn protocol, which
contains this declaration on the part of the great guaranteeing Powers — I hope
other Powers will also sign it, but in the first instance on the part of the great
guaranteeing Powers — that they have no selfish ends to pursue in connection
with this great effort at reform. That is the first step. (Applause).

And let me say in that connection that, valuable as I regard this protocol,
which will be, I trust, signed in a few days, I attach even more value to the fact
that it will be signed, and that all the negotiations up to its signature will be carried
out, under the auspices of this League. That is the great guarantee against
separate interests being allowed to prevail over international interests. (Loud
applause.)

I think every Austrian citizen may rest assured that, while undoubtedly
there must be, under the guidance of the League and through the machinery
which is going to be provided, a control exercised over the financial policy of
Austria that can only end in benefit to his country, and that when at the end
of two years Austria finds herself again a solvent nation, she will be so
without having lost one shadow or tittle of any of that sovereignty or that
supremacy over her own affairs which we all desire, and, indeed, are bound, as
Members of the League of Nations, to preserve. (Applause.)

The control, therefore, which will be exercised over Austrian policy is a
control entirely for the benefit of Austria. Of course it is necessary, absolutely
necessary, if you are to get money from the independent, individual investor.
At present, any prudent investor looking at the state of Austrian finances, seeing
how far the expenditure exceeds the receipts, seeing that in every direction
pubUc money is being lavished and from how few sources adequate public money
is coming in, will say at once : " You may talk to me of securities, but unless
the State to which I lend manages its financial affairs better than the Austria of
to-day, I should be a fool if I did lend." I believe that to be a system under which
the control, working as it must work if it is to work successfully in daily harmony
and co-operation with the Austrian administration, will be able to carry out the
necessary reforms, not without difficulty, not, indeed, without suffering, not, per-
haps, without for a brief period augmenting the distress which already prevails
in Austria, but yet in no long time, after no unnecessary interval, bearing fruit
of incomparable value in the direction of turning Austria again into a self-res-
pecting, solvent, economically sound community, capable of holding up its head
among all the nations of the world.

Therefore, ladies and gentlemen, control is necessary. How do we ensure
control ? We ensure control, the kind of control and the only kind of control
which is legitimate but the control which is necessary, by another protocol most
carefully drawn up by which the Austrian Government and Parliament and people
will pledge themselves to be partners with us in this great effort at national
rehabilitation.

That is, perhaps, as important as any other work on which we have been
engaged ; and we have been assisted in that work, I am glad to think, by the
Chancellor of Austria himself, who has taken part in the deliberations of the
Sub-Committee, whose advice has always been at our disposal, and who has

— 28 —

shown himself throughout most clearly appreciative of all the difficulties and
all the needs of the country of which he is the head.

Therefore I think you will see that the broad scheme, which I hope will
be brought to a technical conclusion in a very few days, consists in the main
of providing this guaranteed loan, of seeing that it is properly expended in Austria,
and, in co-operation with the Austrian Government, of ensuring that it shall
only be expended in Austria if, accompanying their expenditure, those great
reforms are carried into effect which, painful as they may be, are absolutely
necessary if Austria is ever to recover.

I hope I have made quite clear the broad outhnes of our plan, because it is
only the broad outhnes with which I have dealt. But do not suppose that there
is the least desire or intention of keeping back from the League or from the public,
to whatever nation they may belong, all'the details and all the data on which
our conclusions have been based. When we are in a position to feel that we have
accomplished our task, as I have already told you (and I hope we may begin
in a very few days), there will be a public seance of the Council, and at that public
seance all the documents and all the provisions will be made public and the whole
world will be taken into our confidence.

In the meanwhile I trust that what I have said may be regarded by most
of my hearers as giving a sufficient outline — and it is not more than an outline
— of the policy we are pursuing and the grounds on which we are pursuing it.
No greater object has ever been presented to the League. In my opinion this
is the fateful moment for the Austrian Republic. If this scheme goes through,
as I beheve it will, there is no reason why Austria should not recover herself ;
there is every reason why she should recover herself, and then there will be
removed from the map of Europe what is now a blot upon it ; there will be remov-
ed from the world of commerce and finance what is now a burden rather than an
assistance to the economic well-being of the world, and we shall have restored to
self-respect and ultimately — I hope to full prosperity — a country which is
one of ourselves, and with whom all of us must sympathise.

But if, on the other hand, which I do not think will happen, either by the
fault of Austria or by an unhappy accident, this effort of the League of Nations
should fail, great will be the failure not merely for the League but for the world
at large.

We cannot tolerate in our midst these dereUct States, an unhappiness to
themselves, a danger to their neighbours, and a burden upon the industry of the
world. If, as I firmly beUeve, we are successful in bringing this great work to
an issue, the benefits which we shall confer upon others will not be confined
to the limits of the Austrian Republic ; they will spread far and wide over the
whole of Europe, and, through Europe, over the world ; and we shall have done
something really important, really material, and really lasting to remove from
ourselves the charge that we are unable to deal with the economic difficulties
of the world, and to remove from the world the heavy burden which those diffi-
culties are now inflicting upon it. (Loud applause.)

M. Mensdorff-Pouilly-Dietrichstein (Austria) :
[Translation.}

Ladies and gentlemen, you have just heard from the lips of the man best
qualified to speak on the subject an accurate description of the present state
of the ryuestion of granting financial aid to Austria and of the proposed financial
reforms. I ask your permission to add s few words on behalf of the Austrian
Government to express our deep and sincere gratitude to the League of Nations
and especially to the Members of the Council for having undertaken this task,
which, we sincerely trust, will be brought to a successful conclusion and will
give our country the prospect of a less anxious and less gloomy future than could
be anticipated before the League of Nations undertook the responsibility of this task.

We cannot, however, conceal from ourselves the fact that it will not be pos-
sible for all the difficulties to be surmounted nor for the anxious problems which
pre-occupy our Government to be entirely solved. I confess that I had sincerely
hoped — no doubt like many of the Members of this Assembly — that the end
of this session of the Assembly would coincide with the signature of an arrangement
which, without limiting the independence of Austri?, would guarantee her financial
reconstruction ; such an arrangement, accepted and signed here by the repre-
sentatives of all the nations which were affording us their friendly assistance.

— 29 —

would have borne witness to the fact that the League of Nations had itself taken
in hand this great reform which was to be carried out under its auspices.

It has proved impossible to complete this arrangement before the end of the
Assembly ; but the Council remains in session, and we have every reason to hope
that it will take cognisance of the agreement which will settle the questions
under consideration as a whole and not piecemeal. The manner in which this
task has been accomplished by the eminent statesmen on the Council, who have
devoted long hours to the study of our financial reform, is our best and surest
guarantee that this important and difficult undertaking will be crowned with
success.

Our Government wishes to express here and now its deep gratitude to the
countries which have already stated that they would give their guarantee for part
of the loan ; and the Federal Chancellor, Mgr. Seipel, particularly wishes to thank
most heartily and sincerely the statesmen representing these Powers, who have
displayed a tireless zeal and an unwearying patience in the study of this serious
problem, and who have been able to overcome all the difficulties which stood
in the way of solution.

The Austrian Committee of the Council has had the good fortune to have the
Earl of Balfour as its chairman. I need not tell you here how valuable his co-
operation has been to us ; his authority and his talent have never shone with
greater effect, and I should like to say personally, as one who has had the advan-
tage, during many years, of hearing a large number of his most famous political
speeches in the House of Commons, that I have never felt a warmer or a more
sincere admiration for him than during these last meetings of the Committee
in the offices of the Secretariat. {Loud applause).

Although the closing of the session and the departure of the Members of
the Assembly make it impossible for a final agreement to be placed before you
to-day, we confidently expect that this agreement will be concluded and submitted
to the Council in a very short time — as Lord Balfour has already stated.

In addition to the four Powers which have already guaranteed four-fifths
of the loan, a few other countries have promised their assistance, which will be
welcome. I will only mention one of them : Belgium, to whom we wish to express
our sincere gratitude for having undertaken to guarantee a portion of the loan.

We hope that this example will be followed, and that the sympathy which
has so often been shown to us here will also be expressed in the form of partici-
pation in the guarantee of that relatively small part of the loan which is not yet
covered by the guarantee of the four Great Powers to which I have referred.

As this is the Assembly's last meeting, I do not wish to detain your attention
longer, but I cannot conclude without repeating, on behalf of the Austrian Federal
Chancellor, that, when once the agreement is concluded, Austria will lose no time
in putting into force all the measures which on her side she has undertaken.
She will do this with energy and determination and will not allow herself to be
discouraged by criticisms, but will carry out without delay the task which falls
to her share. (Loud and prolonged applause.)

The President :
[Translation.]

Although Lord Balfour's announcement is not open for discussion, I believe
Lord Robert Cecil has expressed the desire to put a question.

If the Assembly has no objection, I will therefore call upon Lord Robert
Cecil to speak. (Applause.),, ^

Lord Robert Cecil (South Africa) :

Mr. President and gentlemen, I am sure the Assembly is profoundly grateful
to the Council for all its efforts in this matter and to Lord Balfour for his efforts
and for his admirable statement this afternoon. We all hope, and we have
a right to hope, from his statement, that this great work is going to be successfully
accomphshed. We welcomed particularly his statement that as soon as a result
was reached there would be a full exposure of all the facts and documents. The
only question that I venture to put to him is this : that if, contrary to all our
expectations and hopes, success were not reached, can the Assembly understand
that, nevertheless, there would be a full statement and exposure of all the nego-
tiations leading up to that unhappy result ?

Lord Balfour (Great Britain) :

I do not anticipate, any more than Lord Robert Cecil does, the unhappy
catastrophe to which he made distant allusion. I cannot bring myself to believe

— 30 —

that our efforts will end in failure. Nevertheless, he has put to me a direct
question. He has asked me whether in this very improbable event there will
still be a Council held in public in the course of which all the documents and
all the facts will be made pubhc.

I can assure him that that will be the case. There will be a public meeting
of the Council, and nothing that we have to reveal will remain concealed.

The President :
[Translation.]

M. Leon Bourgeois will address the Assembly.

M. Leon Bourgeois (France) :
[Translation.]

Gentlemen, I thought that this meeting would be devoted solely to Lord
Balfour's declaration and that no discussion, nor even any questions, would
follow after the masterly statement of the case which has been presented in so
complete and detailed a manner by the first British Representative.

But since a question has been asked, I should like in turn to express very
simply and in a few words my desire — which must be the desire of all of us —
that to-day's meeting should not terminate upon a note of doubt or uncertainty,
but that, on the contrary, it should end on a note of confidence and faith. (Loud
and unanimous applause.)

The task to which the Council of the League of Nations has put its hand
was undertaken with such full recognition of all its duties and obligations, in such
entire agreement with the Austrian Government, and with such an earnest con-
viction that its proposals were fully adequate to meet the present needs and the
sincere and unconditional desires of the Austrian Government, that success
cannot fail to crown an enterprise undertaken in such a spirit.

I may add that this undertaking is in conformity with the spirit of the whole
League of Nations and with the methods employed in other matters discussed
in this session of the Assembly.

During those historic discussions on the question of disarmament (in which
— I hasten to remind you — we had the assistance of Lord Robert Cecil himself),
and in our discussions on the possibility of an intervention by the League of
Nations in Eastern affairs, we have laid down principles, established methods
and indicated Unes of conduct which will henceforth constitute precedents for
the regular procedure of the League of Nations. Those are the principles which
have been apphed by the Council of the League and by Lord Balfour, its dis-
tinguished Rapporteur, on this subject ; and they have been applied with a
strictness and conscientiousness which could not be exceeded.

I therefore end my speech as I began it : Let us terminate this session with
a demonstration of confidence and faith. (Loud and prolonged applause.)

— 31

VII.

RESOLUTION ADOPTED BY THE COUNCIL OF THE LEAGUE

ON OCTOBER 4th, 1922, AT THE
TWENTY-SECOND SESSION, SEVENTH MEETING (PRIVATE).

The Council received from the President of the Conference of the Prin-
cipal Allied Powers, held in London on August 15th, 1922, a request to study
the situation in Austria.

The Council invited the Austrian and Czechoslovak Governments to sit
on the Council. A Committee, composed of delegates of Great Britain,
France, Italy, Austria and Czechoslovakia, was asked to prepare the resolutions
to be submitted to the Council. These proposals have just been received by the
Council.

In accordance with these proposals, the Council approves, with the addition
of the provisions mentioned below, the scheme submitted — Protocols No. I,
II with annexes, and III.

It agrees to accept the duties and responsibilities involved by the proposals,
and recommends that every State desiring to assist in the reconstruction of Aus-
tria by taking part in the execution of the scheme should adhere to Protocols
Nos. I and II.

The Council invites the Austrian Committee to continue to watch over
any developments in the situation, in order that it may be in a position to pre-
sent a report whenever such a step is considered necessary.

The Committee is asked to nominate without delay the Commissioner-
General mentioned in Protocols Nos. II and III ; this nomination shall be ratified
by the Council. It is understood that this Commissioner-General should not
belong to one of the four Principal Powers taking part in the loan, or to one of
the countries adjoining Austria.

The Council, on the proposal of the Guarantor States, which have signed
Protocol No. II, decides that the presidency of the Committee of Control of the
Guarantor States shall, as long as the system of control ^ defined in Protocols
Nos. II and III remains in force, be filled by the Itahan member of the
Committee, and the vice-presidency by the Czechoslovak member of the
Committee.

The French text of the Protocols and annexes shall be the authentic text.

^ It is understood that the period of control in question does not refer to the special control
envisaged in paragraph 4 (last line) of Protocol No. III.

— 32

VIII.

MINUTES OF THE EIGHTH MEETING (PUBLIC)
OF THE TWENTY-SECOND SESSION
OF THE COUNCIL OF THE LEAGUE OF NATIONS

(Held on Wednesday, October 4ih, 1922, at 4.30 p.m.).

Present : All the representatives of the Members of the Council, Dr. Pospisil
(Representative of Czechoslovakia), Mgr. Seipel and M. Grunberger (Repre-
sentatives of Austria), and the Secretary-General.

Lord Balfour (British Empire) said " I was commissioned to give a general
outline of the scheme we are adopting to deal with the Austrian problem, when
I spoke to the Assembly on Saturday last. Those who were present will remember
that I had to admit that the scheme was not then completed in all its details,
but that a very large measure of agreement had been arrived at. Though the
prospect certainly gave great hope that we should come to such a successful
arrangement, that arrangement had not then been reached. I now rejoice to tell
you that the consummation then doubtfully looked for has now been reached,
and, whether representing the interests of Guaranteeing Powers or repre-
senting the League of Nations through its Council, we are all agreed, and all
the details are now finally settled.

" Before I attempt again to indicate the character of that arrangement, I
feel bound to offer my sincere thanks to two groups of people to whose untiring
energy, patience and tact this happy result is largely due. The first of these is the
Italian Delegation. Some of the difficulties to which I alluded on Saturday at the
Assembly were due to points over which there were temporary differences of
opinion of a very difficult and very technical character which had not been
completely settled with the Itahan Government. If we have reached, as we have
reached, a complete and satisfactory arrangement of these subjects, we owe it
largely to the work of the Marquis Imperiah and his colleagues, who have
been untiring in their efforts to make perfectly clear the Unes of thought which
we at Geneva were desirous of pursuing, and who have rendered, I venture
to say, services which cannot be over-rated with regard to the final agreement
which has been so happily reached.

" The other group of persons to whom I should like to pay a tribute is the
Secretariat of the League of Nations which, at all events, knows the kind of work
which a crisis Uke this throws upon it. When you have got to carry on
these compUcated transactions in two languages largely by telegrams which
arrive at all hours of the night, when you have got to prepare all the papers for
the frequent meetings which have to be called before these things are finally
decided, only those who know the amount of labour constantly thrown upon
them by such an occasion as this are in a position to say how great is the debt
of gratitude which all owe to the untiring labours which the Secretariat has
undertaken.

" I say nothing — for I think I hinted at it before — of what we owe to the
Financial and Economic Committee, without whose advice and without whose
help we never could have done the work which we now have accomplished. But
all that you will be able to judge, for the reports which they have made — docu-
ments of great abiUty carried out by the experts of many countries — will stand
as a monument to what such investigations should be, and without their aid the
Sub-Committee of the Council, on whose shoulder the responsibility of all this
work has mainly rested, could never have carried out the functions entrusted
to them.

" You will remember that we were asked by the Supreme Council to undertake
a solution of a problem to which they, for one reason or another, felt themselves
unequal, and which they thought — and I hope not incorrectly — might perhaps
be solved by the machinery of the League of Nations. What was that problem ?
Generally speaking, we all know it was the economic condition of Austria, but

— 33 —

I think that if I venture to read an extract from the report of the Financial Com-
mittee you will have an idea more authoritative and more precisely expressed in
words than I could possibly give to you in any abstract of my own. The
Financial Committee expresses itself as follows :

" 'Austria has for three years been living largely upon pubhcjand
private loans, which have voluntarily or involuntarily become gifts,
upon private charity and upon losses of foreign speculators in the crown.
Such resources cannot, in any event, continue and be so used. Aus-
tria has been consuming much more than she has produced. The large
sums advanced, which should have been used for the re-estabhshment
of her finances and for her economic reconstruction, have been used
for current consumption. Any new advances must be used for the pur-
pose of reform, and within a short time Austria will only be able to
consume as much as she produces. The period of reform itself, even if
the new credits are forthcoming, will necessarily be a very painful one.
The longer it is deferred the more painful it must be. At the best, the
conditions of life in Austria must be worse next year, when she is pain-
fully re-establishing her position, than last year, when she was devoting
loans intended for that purpose to current consumption without reform.

" ' The alternative is not between continuing the conditions of
life of last year or improving them. It is between enduring a period
of perhaps greater hardship than she has known since 1919 (but with
the prospect of real amelioration — thereafter the happier alternative),
or collapsing into a chaos of destitution and starvation to which there
is no modern analogy outside Russia.

" ' There is no hope for Austria unless she is prepared to endure
and support an authority which must enforce reforms entaiUng harder
conditions than those at present prevailing, knowing that in this way
only can she avoid an even worse fate.'

" No words could more clearly, more forcibly, or, I would say, more tragi-
cally express the realities of the tremendous problem with which the League
of Nations was called upon to deal, and you will observe that it requires every
possible sacrifice from two parties. In the first place it requires a great effort
on the part of the Austrian Government itself ; but the Austrian Government,
whatever its good intentions, whatever its resolution, whatever its courage, would
be absolutely helpless unless other nations are prepared to come forward and
use their credit to enable Austria herself, by her own efforts, with this assistance,
to extricate herself from the appalling position which the extract I have just
read reveals to you in such expressive words.

"As I said on Saturday, there are two things which have to be done. Austria
must reform herself. Other nations must provide credit in order that Austria can
reform herself, and the difficulty, the essential difficulty of the whole thing is
this : How are you going to arrange a system under which people will be pre-
pared to lend their money to Austria in the position which I have just described?
How are you going to get Austria, unless you lend her money, to start upon
the precipitous but not wholly impossible track which we are expecting her
to climb over these mountains of economic difficulty? Many of our problems
have necessarily been concerned with arranging for the system of credits, of
guarantees to be given, in order to enable Austria to draw upon the private
lender throughout the world. They are complicated, they are difficult. You will
perhaps be content when I say that all these essential details are contained in
a three formal protocols ^ which will be signed to-day, that those protocols will be in
the hands of the public. The Guaranteeing Powers, as you know, are, in the first
place, the large guarantors, France, Italy, Czechoslovakia and Great Britain.
They are going to guarantee, roughly speaking, four-fifths of the sum required.
Outside the Umits of those four Powers, we know we are going to get some sup-
port from other nations, though we do not yet know the limits of that support,
but I have every hope that the fifth, or what is approximately the fifth, of the
whole sum required will be obtained from these additional sources of supply.

"Now, that being the general aspect of the question looked at from the point
of view of those who are providing the guarantees for the money, let me des-
cribe the subject from the point of view of Austria and of the League of Nations.
How is the expenditure of this money to be regulated? You have just heard from

' See pages 39 to 47.

— 34 —

the extract I read from the report of the Financial Committee that much
of the money which many nations have given to assist Austria has really had
no effect except that of temporarily postponing the evil day of national ruin and
bankruptcy. How are we going to see that the loans which we are prepared to
guarantee receive a better fate ? The machinery consists of three parts. I men-
tion them not in their order of importance, because they are all vitally important.
The first I would mention is the Committee of Guaranteeing Powers. We have
felt that the nations which supply these guarantees must have some say in the
broader questions of finance which the subject necessarily involves, and we have
provided a scheme by which the guaranteeing nations shall constitute a com-
mittee of control, which shall be kept carefully informed of all that is going
on, and which shall, on certain broad aspects of the problem of raising the
money, be able to give its opinion and to see that no injury is done to the lender.

" I turn from the lender to the Power to which the money is to be lent and to
the position which the League of Nations is going to occupy in seeing that that
money is spent for the reform and rehabilitation of Austria itself. That task throws
a great responsibility upon the Austrian Government. The Austrian Government
is fully conscious of all the weight of that responsibility. It knows well that
it, more than anybody else, will, in the near future, be master of its own
fate. The last thing that we desire to do is to interfere in the slightest degree
with Austrian independence or Austrian sovereignty, and we have indeed formally
entered into an arrangement amongst ourselves — amongst the guaranteeing
nations, to which I hope many other nations will subscribe — we have entered
into a solemn arrangement which will be laid before you in one of the three pro-
tocols which will be signed to-day. We have arranged that none of us is to ex-
tract any separate advantage or interfere in the smallest degree with the series
of elaborate transactions which I am endeavouring to describe. Austria evidently
must, on her side, enter into effective pledges to carry out the reforms which
are absolutely necessary. Those reforms are going to be no easy task. It will
not be a smooth path that the Austrian Government will have to pursue in the
immediate future, though it is one at the end of which every success is likely to
be reached. The Austrian Government owes it to the League of Nations, it
owes it to the Guaranteeing Powers, to give effective assurances that, so far as
it is concerned, it will carry out these reforms, however difficult they may
seem in the immediate future, and will thus gain not only prosperity for itself
but earn the confidence of those who collaborate with it.

" Now I am not going to describe at length the pledges Austria has given, or
the poUcy she has promised to pursue, but I will read one paragraph from the
third protocol, which indicates in the clearest manner its tenor and importance :

" The Austrian Government will forthwith lay before the Austrian
Parliament a draft law giving, during two years, to any Government
which may then be in power, full authority to take all measures, within
the limits of this programme, which, in its opinion, may be necessary to
assure at the end of the period mentioned the re-estabhshment of
budgetary equilibrium without there being any necessity to seek
further approval by Parliament."

" You will observe how far-reaching that promise is, for it gives the Austrian
Government once and for all, during the two years, not only the right but the
power to see that the series of reforms necessary again to make Austria a solvent
and economically sound community are carried out. That indicates the part
which Austria is going to play in this great drama.

"Now let me say what the League of Nations is going to do.

" The duty of the League of Nations will be to appoint a High Commissioner
who shall, in conjunction with the Austrian Government, in constant intercourse
with it, be responsible to the League of Nations, and who will work for the general
policy of economic reform, on which the future of Austria depends. The con-
clusion of the Financial Committee is that in two years, if these reforms are
carried out, the Budget of the Austrian Government will be in equilibrium. I
have just described to you how difficult the task is, but that task will surely
be capable of accomplishment if the High Commissioner appointed by the
League, with all the authority of the Powers, and, above all, with the dis-
interestedness which that position involves, is able, by constant intercourse with
the Austrian authorities, to insist that this programme of reform shall be effec-
tively accomphshed. That gives you, in very rough outline, the great lines of
a scheme which surely is not lacking in true statesmanship. It may fail, some

— 35 —

part of its machinery may break down, but I hope for better things. I am con-
fident that no scheme more hkely to succeed could have been evolved. If you had
asked me two or three weeks ago whether I thought any scheme so well appor-
tioned, so well suited to carry out its purpose, or expressing in the circuit of one
coherent plan both the lending Powers of the world, the administrative powers
of the League of Nations, and the method of bringing those two into full and
close harmonious co-operation with the Government of Austria — if someone
had said can you devise such a scheme, I should have expressed the gravest
doubts. But the work has been accomplished. I do not think, whatever the
result may be, that the League of Nations need be ashamed of the work it has done ;
but, after all, it is not of the League that I am thinking so much as of the future
of Austria. We all have in view her rehabiUtation, and I am certain that if the
Austrian people and Government will throw themselves wholeheartedly into
the work of carrying out this important, difficult, but necessary reform, the
result will be that Austria, who has been a Member of the League for only a few
days more than a year, will feel that she has looked to her sister nations, and
has looked to them not in vain. I feel certain that she will on her side carry out
the noble though not easy task which we are throwing upon her and that she
will take the full advantage of all the liberaUty of the Guaranteeing Nations,
of all the administrative capacity we can place at her disposal, and of all those
instruments of rehabiUtation which together will place her among her sister
nations, in a position of prosperity, of solvency and of self-respect, and enable
her to become again a great factor in European civiUsation. "

M. Hanotaux (France) said : " I was authorised by the Government of
the French RepubUc to adhere, on its behalf, to the draft Convention submitted
to the Council by its Sub-Committee. In complete agreement with the British,
Italian and Czechoslovak Governments, and with the other Governments which
joined in guaranteeing the international loan for the reconstruction of Austria,
the French Government adheres to the whole scheme on which this guarantee
has been based, and rejoices in the success of the work which, on its initiative,
has been entrusted to the League of Nations.

" In spite of the heavy burdens which France has to bear, she has no intention
of avoiding any of her obligations in the cause of European solidarity. She
hastens to offer her assistance to a country the historical past of which has been
so intimately linked with her own, in order to allow that country to escape from
its present embarrassments, and by its own effort, and in full independence, to
enjoy a happier future.

" Above all, it is the wish of France to help towards the maintenance in Central
Europe of stabihty and peace. This is her chief aim here, as everywhere ; and
whenever peace is threatened by any danger, France will work to remove that
danger. In the midst of a new Europe, based upon the Treaties of Peace,
France will always assist in enabling the nations to enjoy that tranquillity
which is their sole desire. The League of Nations is an organisation specially
devoted by its founders to the realisation of this unanimous desire, and the
Government of the French RepubUc, which has from the first seen in the League
a triumph for the victory of justice, has given the League its full confidence
and its most sincere co-operation in the carrying out of its mission.

" The French Government rejoices particularly in the spirit of harmony and
conciliation which has prevailed throughout the difficult negotiations which
to-day have come to an end. Of all the work accompUshed by the League of
Nations, this is perhaps the most important, since it is based upon the deepest
sentiments of humanity and will have the greatest effect on history.

" I have received authority from my Government to adhere to and to sign
the Convention. It only remained for me to thank all those who have helped
the Austrian Sub-Committee : technical experts, secretaries and all the staff
whose work has been so intensive during the whole period."

The Marquis Imperiali (Italy) said : " I am particularly glad to be able to
state, on behalf of the Italian Government, that Italy adheres to the agreement
now before the Council.

" The situation of Austria is extremely serious, and she could not have been
saved without the generous efforts of all the countries which are most concerned
not only with the future prosperity of Austria but also with that of Europe
and of the whole world.

— 36 —

" It was inevitable that my country should feel keenly the sacrifices attendant
upon this effort in view of her heavy financial responsibility, Italy being one
of the countries which has suffered most severely from the war.

" Italy, however, attaches so great an importance to the independence and
vitaUty of Austria that she has thought it her duty to accept this fresh
sacrifice.

" The whole world must be struck by this example of Christian solidarity
between nations which, after being divided by the passions of war, are to-day
affording one another a cordial and brotherly assistance.

" I wish to thank my colleagues most sincerely for having waited three days
in order to announce the result of our work. The brief delay involved has not
been without its uses. The modifications in the scheme which I requested on
behalf of my Government have been accepted in a fine spirit of conciliation, and
have helped to make more harmonious the collaboration between the Govern-
ments concerned and the organisation set up by the League of Nations. This
is a great guarantee of the success of the scheme, and experience will afford
additional proofs of its utihty.

" No outside assistance can be efficacious without an heroic effort on the part
of the Austrian people themselves. In this effort, the Italian Government
and the Italian people give their full sympathy to Austria. It will also be ne-
cessary in the future to strengthen the financial measures contemplated by a
series of economic provisions for the re-establishment of the normal life of the
country.

" The reconstruction of Austria is the first problem of world importance which
the League of Nations has been called upon to solve. I hope that the assistance
thus given, which fully respects the national dignity and sovereignty of Austria,
may be a happy augury for the future of the League, of which Austria is a Member,
with the same rights and the same duties as the other Members.

" In my long career, I have had the honour of signing many international
Acts, some of which have been of great importance. I wish to state that, in
putting my signature to this agreement in my capacity as representative of the
Government of the King of Italy, I am thoroughly conscious of serving the cause
of peace and of co-operating in the great work for the reconstruction of Austria. "

Dr. PospisiL (Czechoslovakia) said : " M. Benes has requested me to express
his deep regret at his inabiUty to assist personally in the last stages of the work
of the Austrian Committee of the Council, and, in particular, at his absence at
the meeting which marks the completion of the work.

" The Czechoslovak Government has followed with the greatest interest the
Committee's efforts to reach a solution of the Austrian problem, and it accepts
that solution with the greatest satisfaction, since, in the view of my Government,
the solution is in harmony with the principles which have inspired the policy
of my Government since the foundation of the Republic, with regard both to
the general problem of European reconstruction and, in particular, to the financial
reconstruction of Austria.

" The principles which have guided Czechoslovak poUcy in these problems
can be summed up in the idea of ' moral disarmament ' which has dominated
the discussions, during the third Assembly, on the question of disarmament.

" Czechoslovakia holds that the League of Nations is the only body which
can carry out a work of this nature and importance, involving the collaboration
of a great number of Governments, of the Austrian people and of the Austrian
Government, which, thanks to the methods employed, will retain its full
sovereignty.

" I hope that the unanimous spirit of solidarity and good-will which has guided
the Austrian Committee will be maintained during the period of execution, and
will allow of success in the difficult work which remains to be done.

" The Czechoslovak Government is convinced that the Austrian Government,
which has itself taken part with so much ability in the work of the Committee
and also the Austrian people as a whole, will co-operate in the most loyal and de-
voted fashion in the general effort."

M. Adatci (Japan), having been invited by the President to speak, recalled
the fact that the Japanese Delegation had for many weeks followed with the
greatest interest the developments in the important question of Austria. Japan
was a distant country, and was herself at the moment undergoing a serious

— 37 —

ecenomic and financial crisis. But public opinion in Japan had followed, and was
continuing to follow, this question with anxiety and interest. He was thus
certain that he would relieve the anxieties of his Government and of the public
opinion of his country by letting his Government know by telegram of the happy
conclusion of this work, which was necessary not only for the reconstruction of
Europe but also for the peace of the whole world.

For these reasons, he was glad to be able to express, on behalf of his Govern-
ment, the most complete satisfaction at the result of the Council's work.

M. QuiNONEs DE Leon (Spain) stated that Spain viewed with greatest
sympathy the work of the League of Nations for the reconstruction of Austria,
and was considering the possibihty of herself co-operating in the execution
of the work. For reasons outside his control, he had only been able to inform his
Government of the scheme at a date too recent to allow of a decision being taken
before the meeting of the Council.

The well-known sympathy of Spain for Austria rendered needless any insistence
on the value of the scheme now before the Council. He had not failed, however
to point out to his Government its great importance and its practical utility
for the reconstruction of Austria.

M. Hymans (Belgium) associated himself with the views expressed by all
the other Members of the Council. The League of Nations had just accomplished
a great work, and he wished it every success. As the Council was aware, the
Belgian Government, despite the heavy burdens which it had to bear, had decided,
in a spirit of international co-operation, to join in the work and to offer its own
guarantee within the limits of its capacity.

M. Tang Tsai-Fou (China) adhered entirely to the arrangement submitted to
the Council for the reconstruction of Austria. He was not yet aware whe her his
Government would be able to take an effective part in the financial side of
the question, but he was empowered to assure the Council of the moral support
of his Government, since his country fully sympathised with the cause of the
people of Austria. He could therefore state that China fully associated herself
with the noble work which the League of Nations had just undertaken.

Mgr. Seipel (Austria) said : " On September 6th I appeared before you, the
Council of the League of Nations, in order to lay before you the anxieties, doubts
and needs of Austria. Anxiety compelled me to ernphasise the doubts which
filled the minds of many of our people, when the London Conference, finding
that it was unable itself to afford the guarantees for the economic reconstruction
of Austria, again referred our cause to the League of Nations.

" The League of Nations took a great step forward when you, gentlemen,
appointed the Austrian Committee, of which, besides Austria herself, only such
Powers were members as were prepared from the outset not only to help us,
but also to admit all other States to a share in their activities, and who, moreover,
were not inspired by the ambition to act entirely on their own authority, but,
preferring to act under the direction of the League of Nations, thereby ensured
success.

" The Austrian Committee needed time for its work. It needed more time
than the anxious impatience of the Austrians, who feared for the existence of their
country, were prepared to allow ; the time expended was, however, short in the
opinion of those who, taking an active part in the negotiations, came to learn
the number and magnitude of the difficulties to be surmounted. When, on this
occasion, we appeared before the League of Nations, we were firmly resolved
not to go away until the relief work for Austria was organised, either by the League
or, faihng that, without its help. Thank God we can say to-day : The League
of Nations has not failed us ; the great idea lives — • the idea that a Supreme Court
exists, composed of members of the nations themselves ; a court which, when
a people is in such dire need that it cannot help itself, will effectually call upon
the others to help, and which will perhaps by so doing unostentatiously relieve
the world of burdens laid upon it by the sins of the past. Yes, this great idea
lives.

" The success on which the League of Nations can congratulate itself to-day
is due to the untiring perseverance with which all those to whom it has entrusted
the task have worked for the Austrian cause. It was a great pleasure to me to
be present at some of the meetings of the Council and to have an opportunity
of witnessing the zeal of its Members and the efficiency of its methods. To
watch the Austrian Committee at work under the chairmanship of Lord Balfour

— 38 —

roused my highest admiration as a public man, and the results it has achieved
fill my Austrian heart with gratitude. I wish to express the profound gratitude
of my country to all the eminent men who, in the Council or at the Assembly,
in the Austrian Committee and in the Secretariat and the various permanent
committees of the League of Nations, have worked for the solution of the prob-
lem we have submitted to them. I earnestly hope, for their sakes and ours,
that the scheme they have worked out in the course of these weeks will soon become
a living reality and an established fact.

" It is mainly for we Austrians to make this work of the League live. We
beg you to believe that we are prepared for action. In accordance with the
institutions of a democratic State, I shall, on my return, have to give an account
of every word I have said, every promise I have made, every obligation I have
undertaken. There will probably be a few weeks of sharp opposition. If you
hear anything of the kind, do not be surprised, do not draw wrong conclusions.

"The scheme for the economic reconstruction of Austria, which has been
drawn up by the League of Nations and the Austrian representatives in closest'
collaboration, imposes solemn responsibilities on all parties, including the League,
the States called upon to furnish a special financial guarantee, and on Austria
herself. In approving this scheme, I am fully aware of the great and heavy
demands I shall have to make upon my Government, the Austrian Parliament
and upon all classes of the Austrian people. But I am not deterred by doubts ;
and I beg you, too, gentlemen, to lay aside all doubts ; Austria will not fail
to make every sacrifice she considers necessary. For even if a Government
should lack the courage to carry out unreservedly all the obligations we have
undertaken here, the Parliament will be stronger, and will, in case of need,
appoint another and a better Government, since it will assuredly not undertake
the responsibihty of rejecting the promise of salvation now held out to Austria
by the League of Nations — and behind the Parliament stands the whole Aus-
trian people. This people demands to live, it claims to fill its appointed place
in the great family of peoples, and will therefore not shun the sacrifices without
which no assistance, however wiUingly given, is of any avail.

" How we shall rejoice, gentlemen, when, in a few years' time, an Austrian
chancellor can again appear before the League of Nations or its Council and say :
' Austria is rehabihta ted, her economic administration is sound, her people are
living, if not in affluence, at least not in crushing poverty; Austria has proved
that she can manage her own affairs. You may now set her free from financial
control. '

" That will be a glorious day for Austria, and not less glorious for the League
of Nations."

The President wished, before declaring the session at an end, to express
his profound satisfaction that the current session of the Council had closed in
such a striking act of international solidarity. This satisfaction was all the
greater when compared with the general apprehension which existed only a few
days ago, and with the spirit of discouragement which existed in Austria itself.
The Council rejoiced at the solution which had been obtained and wished Austria
the return of that prosperity which was due to her after her long and painful
period of distress.

— 39 —

IX.
PROTOCOL No. I.

[Translation. J

DECLARATION.

The Government of His Britannic Majesty, the Government of the
French Republic, the Government of His Majesty the King of Italy,
AND THE Government of the Czechoslovak Republic,

Of the one part,

At the moment of undertaking to assist Austria in her work of economic
and financial reconstruction.

Acting solely in the interests of Austria and of the general peace, and in
accordance with the obligations which they assumed when they agreed to become
Members of the League of Nations,

Solemnly declare :

That they will respect the political independence, the territorial integrity
and the sovereignty of Austria ;

That they will not seek to obtain any special or exclusive economic or
financial advantage calculated directly or indirectly to compromise that inde-
pendence ;

That they will abstain from any act which might be contrary to the spirit
of the conventions which will be drawn up in common with a view to effecting
the economic and financial reconstruction of Austria, or which might prejudi-
cially affect the guarantees demanded by the Powers for the protection of the
interests of the creditors and of the guarantor States ;

And that, with a view to ensuring the respect of these principles by all
nations, they will, should occasion arise, appeal, in accordance with the regula-
tions contained in the Covenant of the League of Nations, either individually
or collectively, to the Council of the League, in order that the latter may consi-
der what measures should be taken, and that they will conform to the decisions
of the said Council ;

The Government of the Federal Republic of Austria,
Of the other part.

Undertakes, in accordance with the terms of Article 88 of the Treaty of
St. Germain, not to alienate its independence ; it will abstain from any nego-
tiations or from any economic or financial engagement calculated directly or
indirectly to compromise this independence.

This undertaking shall not prevent Austria from maintaining, subject to
the provisions of the Treaty of St. Germain, her freedom in the matter of customs
tariffs and commercial or financial agreements, and, in general, in all matters
relating to her economic regime or her commercial relations, provided always
that she shall not violate her economic independence by granting to any State
a special regime or exclusive advantages calculated to threaten this independence.

The present protocol shall remain open for signature by all the States which
desire to adhere to it.

In witness whereof the undersigned, duly authorised for this purpose, have
signed the present Declaration (Protocol I).

Done at Geneva in a single copy, which shall be deposited with the Secre-
tariat of the League of Nations and shall be registered by it without delay, on
the fourth day of October, one thousand nine hundred and twenty-two.

(Signed) BALFOUR. (Signed) SEIPEL.

G. HANOTAUX.
IMPERIALI.

I krCmAr.

POSPISIL.

40 —

PROTOCOL No. 11.

fTranslation.J

With the object of assisting Austria in the work of her economic and financial
restoration, the British, French, Italian, Czechoslovak and Austrian
Governments have by common consent drawn up the following provisions :

Article 1.

Tlie Austrian Government may create, under the guarantee resulting from
the present Convention, the amount of securities necessary to yield an effective
sum equivalent to not more than 650 millions of gold crowns. The capital
and interest of the securities so issued shall be free from all taxes, dues or charges
for the benefit of the Austrian State.

Article 2.

The expenses of issue, of negotiation and of delivery, shall be added to the
capital of the loan as fixed under the preceding article.

Article 3.

The service of the interest and amortisation of the loan shall be assured
by means of an annuity provided by the revenues assigned as security for this
loan in accordance with the provisions contained in Protocol No. III.

Article 4.

The yield of the loan may not be employed except under the authority of
the Commissioner-General appointed by the Council of the League of Nations
and in accordance with the obligations contracted by the Austrian Government
and set out in Protocol No. III.

Article 5.

The British, French, Italian and Czechoslovak Governments, without prejudice
to action by other Governments which may accede to the present Convention,
undertake to ask without delay from their Parliaments authority to guarantee
(subject always to the approval by the Austrian ParUament of Protocol No. Ill,
and to the voting by that Parliament of the law contemplated in Article 3 of
the said Protocol) the service of the annuity of this loan, up to a maximum of
84 per cent., to be shared under special arrangements between the parties con-
cerned.

Article 6.

Each of the four Governments shall have power to appoint a representative
on the Committee of Control, the functions of which are determined by the pro-
visions set out below. Each such representative shall have twenty votes. Those
Governments which may agree to guarantee the remainder of the annuity which
is not covered by the guarantee of the British, French, Italian and Czechoslovak
Governments, shall in like manner have power either to appoint one represen-
tative each, or to agree among themselves to appoint common representatives.
Each representative shall have one vote for every 1 % guaranteed by his Gov-
ernment.

— 41 —

Article 7.

The method of application of the guarantee, the conditions of the loan,
the issue price, the rate of interest, the amortisation, the expenses of issue, of
negotiation and of delivery, shall be submitted for the approval of the Committee
of Control constituted by the guarantor States. The amount of the annuity
necessary for the service of interest and amortisation of the loan shall likewise
be approved by the Committee of Control. Every loan proposed by the Aus-
trian Government, and not faUing within the conditions of the programme
contemplated in Protocol No. Ill, shall first be submitted for the approval
of the Committee of Control.

Article 8.

The Committee of Control shall determine the conditions under which the
advances by the Governments should be effected in the event of the guarantee
coming into operation, and the method of repaying such advances.

Article 9. •

Within the limits fixed by the contracts under which they are issued, the
Austrian Government shall have the right to effect conversion of the loans with
the consent of the Committee of Control ; it shall be obhged to exercise this
power on the request of the Committee of Control.

Article 10.

The Committee of Control shall have the right to require the production
of periodical statements and accounts and any other information urgently
needed in regard to the administration of the revenues assigned as security ;
it may bring to the attention of the Commissioner-General any administrative
changes and improvements calculated to increase their productivity. Any
changes in the rates producing such revenues which might be such as to reduce
their minimum total yield, expressed in gold, as this may be determined before
the issue of the loans in order to provide the necessary annuities, shall first be
submitted for the approval of the Committee of Control. The same rule shall
apply to proposed contracts for the concession or farming out of those revenues.

Article 11.

In case the yield of the assigned revenues should be insufficient and should
involve a possibihty of bringing into operation the guarantee of the Governments,
the Committee of Control may require that other revenues sufficient to meet
the service of the annuity shall be assigned as security.

Any draft instrument or contract which is likely materially to change the
nature, condition or administration of the pubUc domain of Austria shall be
communicated to the Committee three weeks before the instrument becomes
final.

Article 12.

The Committee of Control shall meet from time to time at such .dates as it
may itself determine, preferably at the seat of the League of Nations. It shall
communicate only with the Commissioner-General, who shall be present or
shall be represented at the meetings of the Committee of Control. The decisions
of the Committee shall be taken by an absolute majority of the votes present ;
provided always that a majority of two-thirds of the votes present shall be
required for any decisions under Articles 7 and 8.

An extraordinary meeting of the Committee of Control shall be convened
on a request supported by not less than ten votes.

— 42 —

Article 13.

The Committee of Control, or any one of its members, may demand any
information or explanations as to the elaboration and the execution of the pro-
gramme of financial reform. The Committee may address any observations
or make any representations to the Commissioner-General which it recognises
to be necessary to safeguard the interests of the guarantor Governments.

Article 14.

In the event of abuse, the Committee of Control or any guarantor State
may appeal to the Council of the League of Nations, which shall give its decision
without delay

Article 15.

In the event of any difference as to the interpretation of this Protocol, the
parties will accept the opinion of the Council of the League of Nations.

In faith whereof the undersigned, duly authorised for this purpose, have
signed the present Protocol.

Done at Geneva in a single copy, which shall be deposited with the Secretariat
of the League of Nations and shall be registered by it without delay, on the fourth
day of October, one thousand nine hundred and twenty-two.

(Signed) BALFOUR. (Signed) SEIPEL.

G. HANOTAUX.

imperlu.l
jkrCmAr.

ipOSPISIL.

rm'-fDRifv.^ ri ^5-

— 43 --^

ANNEXES TO PROTOCOL No. II.

f Translation./ : v

• -■•.<:/•- : PREAMBLE..;...; -.^, .. ., .-...^. ... ,, .^. ^^^^

1. The guarantee granted by the States signatories of Protocol No. II shall
be employed for an Austrian loan of 650 million gold crowns, bonds for which
shall all be of the same character and shall offer the same security, the Financial
Committee having calculated that the Austrian deficit needs to be increased
from 520 to 650 million gold crowns so as to take into account the advances
made by certain Governments in the course of this year, which carry the
right to repayment either from the proceeds of the loan organised by the
League of Nations, or in securities enjoying the same guarantees and the same
advantages.

2.. In order, however, that the advances which may result from the guarantee
of that part of the Austrian loan which should be devoted to the repayment
of advances already made may not devolve on States not interested in this repay-
ment, and in order that the sacrifices which may ultimately have to be asked
of those States should not be greater than those which would be entailed in the
guarantee by them of a loan of 520 milhon gold crowns, the Governments entitled
to repayments from the Austrian Government (the British, French, Italian and
Czechoslovak Governments) have laid down the provisions which form the subject
of Annex. B. . ^^yvib J -.A?

ANNEX A.

The French, Italian and Czechoslovak Goyefnmehts undertake to assign for
the guarantee of the issues of Treasury bonds or similar Treasury operations,
guaranteed by the gross receipts of the Customs and tobacco monopolies and
envisaged in the report of the Financial Committee ior the period previous to
the Vote by the various Parliaments of authority lor, the guarantees, the balance
of the advances promised in 1922 to the Austrian Government, the total amount
of which was fixed at

France 55 million francs.

Italy 70 million lire.

Czechoslovakia 500 million Czechoslovak crowns.

By the word "balance" should be understood not only the sums not yet
paid in respect of the above totals, but those which, having been paid, might
be capable, by reason of their present employment, of being liberated for a different
use with the consent of the Austrian Government. As soon as this has been
obtained, the balances, as here defined, should be placed without delay at the
disposal of the Austrian Governmentrto be utilised — under the authority of the
Commissioner-General or of the Provisional Delegation of the Council — in the
Treasury operations referred to above.

As soon as the legislation voted by the various ParUaments authorising
guarantees shall have obtained a total of at least 80 %, the balances of the advances
thus utilised as guarantees shall be liberated and reimbursed to the Governments
interested.

Done al Geneva on October the fourth, one thousand nine hundred and
twenty-two.

(Signed) BALFOUR.

G. HANOTAUX.

IMPERIALI.

f krCmAr

1 POSPISIL.

ANNEX B.

The apportionment of the guarantee between the four Governments, British,
French, Italian and Czechoslovak, provided for in Article 5 of Protocol II and

— 44 —

paragraph 2 of the preamble, shall take place in accordance with the following
provisions :

(1) The guarantee of the annuities corresponding to the sum of 130 miUions
required for the reimbursement of the advances referred to in the first paragraph
of the preamble, shall be apportioned as to one-third to each of the British, French
and Czechoslovak Governments.

(2) With regard to the sum required for the reimbursement of the Czecho-
slovak credit, amounting to about 80 million gold crowns, the Czechoslovak
Government undertakes to limit to 60 million gold crowns the total of the reim-
bursement which it will have the right to claim from the proceeds of the loan.
It will accept in payment of this share of 60 millions, bonds of this loan issued
over and above the total of the effective subscriptions. With regard to the balance
of this claim, it will be satisfied that it should be covered by securities in Czecho-
slovak crowns and enjoying the same rights and guarantees as the bonds of the
loan, but it is understood that these securities shall not benefit by the guarantee
of the other Governments, and may be issued in excess of the sum of 650 milhons.

The British and French Governments, which are entitled, by the terms of
their contracts, to complete reimbursement of the amount of their advances
out of the proceeds of the first loan, accept a scale of progressive repayment,
charging the larger part of the repayment on the later instalments of the loan.

Italy shall have the right of reimbursement out of the proceeds of the loan,
in accordance with a scale of payment identical with that adopted for the
Enghsh claim, on that part of its advance which shall not have been repaid after
having been utilised in accordance with the terms in Annex A. In the case of
the guarantee coming into force, Italy shall, in respect of the guarantee of the 130
millions, be responsible only for the liability appertaining to that part of the
annuity of the loan which corresponds to the total.

To the extent to which Italy shall thus be led to assume a portion of the
guarantee of the 130 miUions, the share of the guarantee borne by France, Czecho-
slovakia and Great Britain shall be correspondingly diminished.

Done at Geneva, the fourth day of October, one thousand nine hundred and
twenty-two.

(Signed) BALFOUR.

G. HANOTAUX.

IMPERIALI.
|KRCmAR.
IPOSPISIL.

EXPLANATORY NOTE.

From a comparison of Article 5 of Protocol No. II (which fixes at a maximum
of 84% the guarantee to be given by the four Governments and to be apportioned
as may be arranged) with the Preamble and with Annex B, it follows :

That each of the four Governments undertakes to guarantee 20% of the
annuitv corresponding to the capital of the loan floated to meet the deficit of
520 millions ;

That the apportionment of the guarantee for the remainder of the annuity,
which corresponds to the difference (130 millions) between the total of 650 and
this sum of 520 millions, will be made in accordance with Annex B.

(Signed) BALFOUR.

G. HANOTAUX.
IMPERIALI.
|KRCmAR.
IPOSPISIL.

Geneva, October 4th, 1922.

— 45

PROTOCOL No. III.

[Translation.]

The undersigned, acting in the name of the Austrian Government, and
duly authorised for this purpose, declares that he accepts the following obliga-
tions :

(1) The Austrian Government will ask its Parliament to ratify the political
declaration signed by it which is the subject of Protocol No. I.

(2) The Austrian Government will, within one month, in collaboration
either with the Commissioner-General, whose functions form the subject of para-
graph 4 below, or with such provisional delegation of the Council of the League
of Nations as may be appointed for the purpose, draw up a programme of reforms
and improvement, to be realised by stages and designed to enable Austria to
re-estabhsh a permanent equilibrium of her budget within two years, the general
outline of which is defined in the report of the Financial Committee (Annex).
This programme must place Austria in a position to satisfy her obligations by
the augmentation of her receipts and the reduction of her expenditure ; it will
exclude any recourse to loans except under the conditions determined by it ;
it will prohibit, by the terms of the statutes to be drawn up for the Bank of Issue,
which is to be created, any further monetary inflation.

It should further enable Austria to assure her financial stability on a perma-
nent basis by a series of measures leading to a general economic reform. The report
of the Economic Committee dealing with this aspect of the problem shall be duly
communicated to the Commissioner-General.

It is understood that, if the first programme should appear in practice to
be insufficient to re-estabUsh permanent equilibrium of the budget within two
years, the Austrian Government will be bound, in agreement with the Commis-
sioner-General, to introduce therein the modifications appropriate to the result
which it is essential to attain. The Austrian Government will ask its Parliament
to approve the above-mentioned plan.

(3) The Austrian Government will forthwith lay before the Austrian Par-
liament a draft law giving, during two years, to any Government which may
then be in power, full authority to take all measures, within the limits of this
programme, which in its opinion may be necessary to assure at the end of the period
mentioned the re-establishment of budgetary equilibrium without there being
any necessity to seek for further approval by Parliament.

(4) Austria accepts the nomination by the Council of the League of Nations
of a Commissioner-General who shall be responsible to the Council and remov-
able by it. His functions are defined in broad outline in the report of the
Financial Committee.

His duty will be to ensure that the programme of reforms is carried out
and to supervise its execution. The Commissioner-General shall reside at Vienna.
He may provide himself with the necessary technical personnel. The expenses
of the Commissioner-General and of his office shall be approved by the Council
and supported by the Austrian Government. The Commissioner-General shall
present monthly to the Council a report upon the progress of the reforms and the
results achieved. This report shall be communicated without delay to the mem-
bers of the Committee of Control.

The Austrian Government agrees that it may not dispose of any funds derived
from loans, or undertake any operation with a view to discounting the proceeds
of loans, except by authorisation of the Commissioner-General ; provided that
the conditions which the Commissioner-General may attach to such authorisa-
tion shall have no other object than that of assuring the progressive realisation
of the programme of reforms and of avoiding any deterioration of the assets
assigned for the service of the loan.

If the Austrian Government considers that the Commissioner-General has
abused his authority, it may appeal to the Council of the League of Nations.

The functions of the Commissioner-General shall be brought to an end by
a decision of the Council of the League of Nations, when the Council shall have

-- 46 —

ascertained that the financial stabihty of Austria is assured, without prejudice
to any special control of the assets assigned for the service of the loan.

"(5) The Austrian Government will furnish as securities for the guaranteed
loan, the gross receipts of the Customs and of the tobacco monopoly, and, if the
Commissioner-General should deem it necessary, other specific assets determined
in agreement with him. It will not take any measure which in the opinion of
the Commissioner-General would be such as to diminish the value of such assets
so as to threaten the security of the creditors and of the guarantor States. In
particular, the Austrian Government may not, without the approval of the Com-
missioner-General, introduce into the rates producing the revenues assigned
as security any changes which might be such as to reduce their minimum total
yield expressed in gold as this may be determined, before the issue of the loans,
m order to provide for the necessary annuities.

The yield of the gross revenues assigned as security will be paid into a special
account, as and when collected, for the purpose of assuring the service of the
annuity of the loans. The Commissioner-General may alone control this account.
The Commissioner-General may require such modifications and improvements
as may increase the productivity of the revenues assigned as security. If, not-
withstanding such representations, it should appear to him that the value of these
assets is seriously prejudiced by their management by the Austrian Government,
he may require that this management shall be transferred to a special admini-
stration, either by the constitution of a Government monopoly or by the grant
of concessions or of leases.

, 6 (a). The Austrian Government undertakes to grant no concessions
which, in the opinion of the Commissioner-General, might be such as to compro-
mise the execution of the programme of reforms.

(b) The Austrian Government will surrender all right to issue paper money
and will not negotiate or conclude loans except in conformity with the programme
above set out and with the authorisation of the Commissioner-General. If the
Austrian Government should consider itself obliged to envisage the issue of loans
not covered by the conditions of the programme contemplated in this Protocol,
it would first submit such plans for the approval of the Commissioner-General
and of the Committee of Control.

(c) The Austrian Government will ask its Parliament to make such modi-
fications as are considered necessary, in accordance with the report of the Financial
Committee (Annex), both in the statutes of the Bank of Issue and, should the
occasion arise, in the Law of July 24th, 1922 (Bulletin des Lois No. 490). The
statutes of the Bank of Issue shall assure it complete autonomy in its relations
with the Government. The Bank should be responsible for the cash transactions
of the State, it should centralise the Government's receipts and payments and
should furnish periodical financial statements at the dates and in the form which
may be determined in agreement with the Commissioner-General.

fd) The Austrian Government will take and carry out all decisions neces-
sary for the full realisation of the programme of reforms, including all necessary
administrative reforms and the indispensable alterations in the legislation.

(7) The Austrian Government will take all measures necessary to ensure
the maintenance of public order.

(8) All obligations defined above relating to the functions of the Commis-
sioner-General or to financial or administrative reforms, so far as they relate
to a period subsequent to January 1st, 1923, are conditional and shall not become
finally binding until the British, French, Italian and Czechoslovak Governments
have confirmed their promised guarantees by the approval of their respective
Parliaments.

Nevertheless, the Austrian Government definitely undertakes :

(a) to take as from the present date all measures in its power
to reduce the deficit ; these measures are to include, in particular,
increases in the railway, postal and telegraphic rates, and in the sale
prices of the products of the monopolies ;

(b) to submit immediately to the Austrian Parliament the draft
law contemplated in paragraph (3), which will give for two years to
the Government now in office, or to any succeeding Government, full
authority to take all measures which in its opinion may be necessary

— 47 —

to assure the re-establishment of budgetary equilibrium at the end
of that period ;

(c) to prepare immediately a programme of reform, to set in motion
the necessary legislative action and to apply the first measures of exe-
cution contemplated by the programme, between the present date
and January 1st, 1923.

(9) In the event of any difference as to the interpretation of this Protocol,
the parties will accept the opinion of the Council of the League of Nations.

The present Protocol shall be communicated to those States which have
signed Protocol No. II signed at Geneva on October 4th, 1922.

In faith whereof the undersigned, duly authorised for this purpose, has
signed the present Protocol,

Done at Geneva in a single copy, which shall be deposited with the Secre-
tariat of the League of Nations and shall be registered by it without delay, on
the fourth day of October, nineteen hundred and twenty-two.

(Signed) SEIPEL.

48 —

X.

REPLY OF THE FINANCIAL COMMITTEE

TO QUESTIONS REFERRED BY

THE AUSTRIAN COMMITTEE OF THE COUNCIL.

The Financial Committee has the honour to report that it has studied the
questions referred to it by the Austrian Committee of the Council, in consul-
tation with the Austrian representatives, and is now able to submit the follow-
ing repHes, which represent the unanimous opinion of the Committee.

QUESTION 1 \

The Financial Committee is requested to consider, in consultation with the Austrian
representatives, what measures are required and are practicable to secure budget
equilibrium, and after what period it considers that, with these measures, the result
desired should be obtained.

Answer.

The answer to this question cannot be given with certainty, for the period
depends essentially upon the resolution and the authority of the Austrian Govern-
ment in carrying out the drastic reforms recommended. But if this vital condi-
tion is realised, the Committee considers that it should be possible to attain
budget equilibrium in two years, and it is on this basis that the further recommen-
dations are made.

The main measures required for this purpose are :

(a) Reform of State Industrial Enterprises.

State industrial enterprises should be either suppressed if merely useless,
or run by the State upon a commercial, i. e., paying, basis, or, in suitable cases,
transferred to private management by concessions. The abolition of loss under
these heads would involve a total annual saving of about 170 milhon gold crowns.
The most important instance is that of the railways, which at present involve
a deficit of 124 million gold crowns. The reason is partly the excessive number
of employees, which should be reduced, and partly the low tariffs. While wages
follow the cost-of-living index, the tariffs have only been raised to about one-
fifth of what they would be on this basis. Under the Treaty of St-Germain,
these low tariffs apply also to transit trade, and, therefore, benefit the for-
eigner. The Committee considers that the railways should cease to involve loss
within the period of two years, and, in view of the important transit trade,
should ultimately be a source of profit.

(b) Reduction of Officials.

Vienna, as the capital of a country of 6 millions, has more State employees
than when she was the capital of an empire of over 50 millions. The Committee
considers that an effective reduction of gold expenses by at least one-third
should be effected within the transition period.

In addition, the subventions to the local administrations to assist them in
paying their own officials on the basis of the cost-of-hving index should be sup-
pressed.

These reforms would give an annual saving of 130 milhon gold crowns.

' The replies to questions 1, 2, 3 and 4 give only the summarised conclusions of the Com-
mittee, and not the detailed reports on which they are based. The replies to these questions were dated
September 15th, 1922.

49

QUESTION 2.

The Financial Commillee is requested to consider what deficit, in terms of gold,
must be contemplated as necessary during the intervening period.

Answer.

The Committee estimates the total deficit during the period of two years
as 520 milUon gold crowns, to which must be added the sum required to reim-
burse certain advances made this year, raising the total to 650 million gold crowns.
To enable the reforms to be effected, this sum must be available from credits.

This estimate is based upon the following " normal budget ", which allows
for the above refomis :

Expenditure (normal budget). Millions of gold crowns.

Public debt 52

Pensions 42

Civil service 100

Army 20

Social assistance 23

237

It should be possible to obtain 237 million gold crowns in taxation by the
cad of two years. This amounts to only 40 gold crowns per head and should be
ultimately capable of increase ; but the difficulties which now result from low
assessment during a period of depreciation and those of a different kind which
follow immediately upon a stabilisation make the full attainment of this figure
at an earlier date improbable.

QUESTION 3.

What securities can Austria offer for private credits and what is their approximate
gold value ?

Answer.

The most suitable securities should, with the necessary administrative
reforms, yield the following annual returns :

Millions of gold crowns.

Forests and domains 1

Salt 1

Customs 40

Tobacco 40

Of these, the first three are assigned as security in connection with the new
Bank of Issue under the Austrian Government's plan for the Bank. On a conser-
vative estimate, however, of these claims, this would leave 28 millions of the
Customs available as a second-rank security, in addition to the 40 millions from
the tobacco monopoly as a first-rank security.

Moreover, the Committee considers (see answer to Question 4) that the plan
for the new Bank of Issue can safely be modified so as to leave the whole of the
Customs as a first-rank security for the credits required for the transition period.

In addition, the impot fonder should, if necessary, be available (with reform)
as a further first-rank security.

The service of a loan amounting even to the maximum of 650 million gold
crowns should not exceed about 70 million gold crowns.

In the unanimous opinion of the Committee, therefore, the securities are
ample for the credits required for the transition period, on the vital conditions
that the reforms recommended are carried through (and the necessary measures
taken to ensure sufficient authority to give confidence that they will be carried
through) and that external and internal order are assured.

50 —

QUESTION 4.

The views of the Financial Committee are requested on the proposed Bank
of Issue for Austria.

Answer.

The Committee considers that the estabhshment of a Banl< of Issue is a useful
and indeed vital part of the measures required for Austria's re-estabHshment.

The Committee considers, however, that : —

(a) The capital proposed, 100 million gold francs, is altogether excessive :
30 millions should suffice ;

fb) The guarantee by the State of the capital of the Bank and of an adequate
return upon it, secured by a first charge on the Customs, should be relinquished.
This should be possible if the other measures for the re-establishment of Austria's
finances are adopted.

(c) The capital should be raised by private subscriptions. If public funds
must be used, the public interests should be sold out to private holders at the
earliest opportunity.

fd) The present provision that directors and substitutes elected by general
meeting require the confirmation of the Federal Government should be eliminated.

The Committee desires, however, to emphasise the fact that the Bank can
only be of use in re-establishing Austria's credit organisation if the drastic reforms
required to estabhsh budget equihbrium are also taken (and the necessary credits
for the transition period are obtained) ; and that, even so, it cannot be perma-
nently successful unless her economic position is also gradually established.

QUESTION 5 \

Under what conditions can means be proposed for covering the deficit during
the period of transition ?

Answer.

I. The Financial Committee estimated that the deficit to be covered by
means of loans during the first two years is in the neighbourhood of 520 million
gold crowns, plus a sum to cover certain advances made this year which raises
the total to 650 milUon gold crowns. This is a budget deficit, and, in the first
instance, it is Austrian currency, not foreign currency, which is required to meet
it. It may be expected, therefore, that, once Austria's internal credit is re-estab-
lished, a considerable proportion of the deficit will be covered by internal loans.
But at present Austria's credit is non-existent, and neither internal nor external
borrowing is possible for her until the following financial conditions have been
satisfied :

(1) The Austrian Government must forthwith (without waiting for any
decision by the League of Nations) take all measures within its power to prevent
an increase of the deficit (such as raising of railway, postal, telegraph, and tele-
phone charges, increases in the prices at which the products of the tobacco and
salt monopolies are sold, etc.

(2) A control must be organised and set to work, and evidence must be
given of the full co-operation of the Austrian Government in securing its efficient
functioning.

(3) The Customs revenues and the tobacco monopoly, subject to the
necessary improvements in administration, must be allocated as security for
loans.

' Tlip replic<; to questions Tt anrt 0 wcrp dntotl September IStli. 1022.

— 51 —

The re-establishment of Austria's credit is further dependent on the adop-
tion of various other measures already under discussion by the Austrian Committee
of the Council, such as : the guaranteeing of Austria's territorial and economic
integrity, under the auspices of the League of Nations ; the improvement of Aus-
tria's economic international relations, as well as of her internal economic struc-
ture ; the establishment of an efficient gendarmery throughout Austria ; the estab-
lishment of the proposed Bank of Issue ; and the cessation of new issues of
paper money.

When all these measures have been taken and have proved their value, it
is reasonable to hope that Austria may be in a position to borrow, both internally
and externally, on her own credit. But it would be vain to expect that such
reforms could be effectively initiated unless, at the time of their initiation, the
Austrian Government and people were able to look forward with some certainty
to the achievement of their final purpose of re-establishing financial and eco-
nomic equilibrium. Moreover, the deficit begins to accrue at once, and the neces-
sa:ry credit on which loans can be issued to provide ways and means for covering
the deficit will not exist for many months unless some basis for credit is found
from outside Austria.

The Financial Committee is therefore driven to the conclusion that a suc-
cessful reconstruction of Austria is impossible unless some of the Powers are
prepared to guarantee the loans required to cover the anticipated deficit. It is
recognised that such guarantees cannot be given in most cases without the consent
of the Parliaments of the guaranteeing Powers, but, if promises of guarantees
subject to parliamentary confirmation can be secured at once, these would provide
the necessary basis of credit on which the initiation of the reforms depends.
The guarantees must cover the full maximum deficit, since it would be both
difficult and perilous to embark on the full programme of reform if the means
for completing it were not visible from the beginning. This does not necessarily
mean that the guarantees for the whole sum will actually come into operation,
and it may well prove that the guarantees eventually involve no actual cash
liability upon the guarantors. It the reform programme succeeds, there is reason
to hope that some part of the maximum deficit can be provided internally or
without external guarantees, and that the revenues of the Austrian State will
amply secure the service of the guaranteed loans without recourse to the gua-
rantors. But it remains true that guarantees covering the whole total are an
essential pre-requisite. The larger the number of guaranteeing Powers, the broader
will be the basis of confidence.

II. We proceed now to sketch the practical steps to be taken to deal with
the deficit, on the assumption that the reforms indicated are irdtiated and pro-
mises of guarantees up to the total of the deficit have been given by various
Powers.

The period of transition can best be examined in four stages, viz. :

First stage : jrom the Promise of Guarantees till the Initiation of the Control.

During the first stage, it is essential that the Austrian Government should
take all possible measures for reducing the deficit, but otherwise no change from
present conditions will be possible.

Second stage : from the Initiation of the Control till the Ratification of the Gua-
rantees by the respective Parliaments, say December 31s/, 1922.

It is assumed that the new Bank of Issue will open its doors within a few
weeks, and the control to be set up under the auspices of the League of Nations
will begin to function. We estimate that from 120 to 160 miUion gold crowns
will be required to cover the deficit during this second period.

We believe that this sum can be met, so far as it is not covered by the reserve
at the disposal of the Austrian Government at the moment of the initiation of
the control, on the following lines : There are available out of the unspent por-
tion of the French, Italian, and Czechoslovak credits, sums understood at the
date of this report to amount to about 45 million gold crowns.

If the lending Governments agree, these sums could be used as part security
for three- or six-months Treasury Bills (expressed in gold crowns, or in some
foreign currency) to be issued in Austria by the Austrian Government and

- 52 -

purchased by the Austrian banks. The Bills might be further secured by a first
charge on the Customs and on the tobacco monopoly. Possibly the gold belonging
to the old Austro-Hungarian Bank might also temporarily be used as security
for these Treasury Bills, instead of being deposited in the new Bank of Issue.
It would be a matter for arrangement between the Government and the banks,
which are largely concerned in the Bank of Issue, which of the two uses for the
gold is preferred. The Austrian banks might reasonably be asked to accept
these conditions as their contribution to the success of the reforms.

Third stage : from Ralilicalion of the Guarantees to tlie Issue of a Long-term Loan.

As soon as the Government guarantees become available, .Vustrian Treasury
Bills in gold crowns or loieign currencies can be issued, subject to right of redemp-
tion out of the proceeds of the prospective loan, secured either as proposed during
the second period or by the guarantees of the Powers. The method of using the
guarantees can best be discussed in connection with the fourth period. It is
important that action by the Parliaments of the guaranteeing Powers should
not be delayed beyond December 31st, 1922.

Fourth stage : from tlie Issue of the Loan to tlie End of the Transition
Period, December 31s/, 1924.

If any guaranteeing Government so prefers, it can, of course, obtain power
to lend money direct to the Austrian Government out of its own resources. We
assume, however, that most Governments will prefer to confine their a.ssistance
to the grant of a guarantee. There are at least three alternative forms under
•which such guarantees could be given :

(a) Each of the guaranteeing Powere might assume a joint and
several responsibility for Austrian loans to be issued up to a maximum
total of 650 millioji gold crowns. Such a guarantee would ensure the
placing of the loans on the most favourable terms, but we are of opi-
nion that it is politically impossible to secure such a joint and several
guarantee.

(b) Each Government might guarantee a loan to be issued by
Austria on the security of the pledged Austrian assets, plus its own
guarantee, up to a given maximum, whicli would be an agreed propor-
tion of the total required ; e.g., supposing that ten Powers agreed to
give such guarantees in equal proportions, there would be ten types
of Austrian loans, all .secured on the same Austrian assets but gua-
ranteed separately by different Powers. Such a plan would greatly
restrict the market for Austrian loans and postpone for a long period
the date at which Austrian credit could be expected to be strong enough
for an Austrian loan to be placed without external guarantee.

^ (c) The guaranteeing Powers might agree to guarantee an agreed
proportion of a single Austrian loan, issuable in one or more instalments
as required ; e. g., supposing, again, that there were ten Powers giving
guarantees in equal proportions, each instalment would be guaranteed
as to 10 % by each Power, and while the pledged assets would be secu-
rity for the whole, the individual guarantors would be responsible to
the extent of 10 % only.

We are inclined to favour tliis alternative, but the exact application of the
guarantees is a matter which can best be determined by the issuing house, or
group of issuing houses, which will be called upon to cany through the actual
operation of issuing a long-term loan. An early decision will, however, be neces-
sary as to the form in which the guarantees are to be applied to the issue of Trea-
sury' Bills proposed during the third period.

It is unnecessary to pursue these technical details further at the present
stage. Our object in alluding to them is to indicate generally the nature of the
guarantees which must be asked for from the various Governments, and the
necessity for the legislation which authorises such guarantees being drawn in

* This third alternative (c) v\ as tiie one adopted by llie Austrian Coiiiiiiitu-c of the Cuuneil.

— 53 —

terms sufficiently wide to cover various eventualities. We are convinced, however,
that, if such guarantees are given, there will be no insuperable obstacles in
placing all necessarj- loans in due course either in Austria or in money markets
outside Austria, provided always that the Austrian Government and people
have, in the meanwhile, proved that they are deserving of the assistance proposed
by contributing by all means in their power to the efficient working of the reform
plans and of the control established by the League of Nations.

QUESTION 6.

The Financial Committee is requested to state its opinion as to the conditions
which are essential in any control that may be instituted in order to give effect to
the recommendations made by the Committee with regard to the re-esiablishmenl
of Austria's budget equilibrium and her credit.

Answeb.

The aim of the controlling authority should be to assist the Austrian Govern-
ment and collaborate with it in carrying out the programme of radical reform
upon the reahsation of which depends the possibility of borrowing.

This programme must be adopted in advance by the Austrian Government,
sanctioned by the Council of the League of Nations, or its Austrian Committee,
and voted by the Austriau Parliament. But the vote of the Austrian Parliament
cannot be regarded as a mere approval of general principles, which will leave
the Austrian Government under the obligation of applying for specific legis-
lative authority to carry out the series of measures of reform, involving reduc-
tion of expenditure and" increase of taxation, which will have to be taken to put
the plan into effect. The initial approval should be clearly understood as con-
ferring on the Government full powers to take decisions of every kind in agree-
ment with the Controlling Authority, provided that they are in conformity with
the approved programme and are directed to giving effect to it.

This programme, which will have been sanctioned by the League of Nations,
will, further, become the charter of the Controlling Authority and the source
of its powers. The Controlling Authority's task will be to ensure that it is carried
into effect, but it will have no mandate to insist upon measures which go out-
side the limits of the programme or are contradictorj' to it.

In order to be in a position to fulfil its mission, the Controlling Authority
must have the right to determine the nature and form of the accounts, state-
ments or periodical returns which it will require to be submitted to it ; to ask
for any information which it may regard as useful from any departments |,of
Government ; to verify, or cause to be verified, any accounts which it may think
fit ; and to make investigations on the spot if it so desires. The Bank of Issue,
which will be the cashier of the State, should centralise all the accounts of receipts
and expenditure and submit periodical returns to the Controlhng Authoritj',
certifying receipts, expenditure and credit balances of the various departments
of the Austrian State. No borrowing operation of any kind should be carried
out without the prior authorisation of the Controlling Authority.

The produce of the revenues pledged for the various loans and the produce
of any loans should be placed to the credit of special accounts in the Bank of
Issue, and such accounts should not be allowed to be drawn upon without the
prior authorisation of the Controlling Authority.

QUESTION 7 K

The Financial Committee is requested to draw up a detailed report on the nature
of the control to be established in Austria.

Answer.

In compliance with this desire, the Financial Committee has the honour
to commend to the attention of the Austrian Conomittee of the Council the follow-
ing observations, which express its unanimous opinion.

1 l>aLc<i September 2(jtli, 1922.

— 54 —

The organisation of a form of control to be applied to Austria raises Tiew
problems,- for the solution of which precedents can only be appealed to with the
greatest caution.

The functions of control, as the Austrian Sub-Committee has already defined
them, on the recommendation of the Financial Committee, are to be imposed
itt' accordance with a detailed scheme invested with a twofold authority :
that of the Council of the League of Nations and that of the Austrian
Parliament.

As regards the Austrian Government, which is to be endowed with full
powers to give effect to this scheme, it is the duty of the Control Authority to
insist upon the execution of the scheme.

Hence it follows that : (1) the appointment and the dismissal of the agents
of the Control Authority must rest entirely in the hands of the Council of the
League of Nations, under the authority of which the execution of the scheme
is to be carried out ; and (2) that the Council cannot regard the execution of the
scheme as a matter with which it has no further concern, and that periodical
reports ought to be submitted to it setting out the progress of the work of
reform.

It may, however, be asked whether the Council ought to confine its duties
within these limits.

It would appear that, if defects or abuses should be ascertained in carrying
out this scheme, the Council should continue to be the supreme authority to con-
sider them .

It is, however, desirable that the agents of the Control Authority should
have undivided responsibility, and that'^the Council should not be involved, as
the result of constant or frivolous petitions, in interference in the financial admi-
nistration of Austria. Only by defining in accurate terms the cases where an appeal
can'.be made to the Council for a decision,jand the party to whom this right of
appeal should be granted, will it prove possible to eliminate these disadvan-
tages.

Among the parties interested, the first place must be given to the Austrian
Government.

Consideration, however, should also be given to the rights of the guarantor
Governments. The latter, indeed, cannot remain indifferent to the progress of
a^policy which aims at healthier^conditions. They will wish to know whether
the latter will have the effect of diminishing or increasing the risks attaching
toitheir guarantees, but it must be clearly understood that only abuses which
are of a nature to endanger the satisfactory execution of the programme should
give rise to an appeal.

How can the guarantor Governments be enabled to protect their interests,
which demand that the programme of supervision should be properly carried
out ?

It would appear prima facie that the duty of supervision cannot be entrusted
to representatives of the guarantor Governments. The supervision must be
carried out under the control of the Council of the League of Nations alone. In
the interests of Austria herself, in order that the Council may fully maintain
ts superior authority and carry out its role of arbiter, it would be impracticable
to confuse the task of supervision, which is to be accomplished in its name, with
the representation of the Governments concerned, which possess a recognised
Hght of appeal. It would, however, be reasonable that the rcpresentativeslof
*he guarantor Governments should form a committee^and should hayeithe right
*o examine the execution of the programme and to receive necessary informa-
tion for their enlightenment. Ufftf MM

What relations would in that case be established between this committee
and the supervising authority ? iii* . ' *;<

If the Council is to remain the supreme authority, it would no doubt be
undesirable that this committee .should be in daily communication with the
Controller. We therefore propose that the committee should meet periodical^
— every three or six months, for example — and for preference at the seat of
the League of Nations. In any conference with the representatives of the Control
Authority, the committee would be entitled to ask for any information or expla-
nation, but it would not have the right to give instnictions. If any serious

— 00

difficulties should arise, or should there by any question of serious abuse, the
Council would be called upon to arbitrate in the matter.

The further question arises whether the duty of supervision should be en
entrusted to a single agent or to a body of persons. In order to reduce to a mini-
mum the expenses of control and to ensure the necessary uniformity of view,
a single controller would be highly preferable. It should be open to him to secure
the help of technical assistants.

The costs of control would be fixed by a decision of the Council of the League
of Nations, and would be charged upon the Austrian budget.

The control would come to an end, as a result of a decision of the Council
of the League of Nations, when that body was of opinion that the financial stabi-
lity of Austria had been attained by the execution of reforms, without prejudice
to any special control of the guarantees given to secure the interest on the loan.

GENERAL STATEMENT AS TO AUSTRIA'S POSITION.

The Financiar Committee has necessarily confined its examination of the
measures required to re-establish Austrian finances within the sphere of financial
considerations. It recognises that, apart from these considerations, there remains
the problem of the fundamental economic position of Austria. Austria cannot
permanently retain a sound financial position, even if she attains it for the time,
and maintain her present population, unless her production is so increased and
adapted as (with due allowance, of course, for her important invisible exports)
to give her equilibrium also in her trade balance.

This balance is at present seriously adverse, partly, but certainly not wholly
as a result of inflation and currency dislocation. All possible measures, whether
bj' the ameUoration of the international economic relations, the encouragement
of the conditions which would increase Vienna's entrepot, financial, and transit
business, and of those which will attract further private capital towards the
development of her productive resources, are, therefore, of the greatest impor-
tance.

These are, however, outside the Financial Committee's province. If the
appropriate financial policy is adopted and maintained, the Austrian economic
position will adjust itself to an equilibrium, either by the increase of production
and the transfer of large classes of its population to economic work, or economic
pressure will compel the population to emigrate or reduce it to destitution. At
the worst, this would be better than the wholesale chaos and impoverishment
of the great mass of the town population which must result from the continuance
of the present financial disorganisation, which affords no basis for such economic
adaptation as is possible.

The Committee feels bound, in conclusion, to issue one word of grave warning.
Austria has for three years been living largely upon public and private loans,
which have voluntarily or involuntarily become gifts, upon private charity and
upon losses of foreign speculators in the crown. Such resources cannot, in any
event, continue and be so used. Austria has been consuming much more than
she has produced. The large sums advanced, which should have been used for
the re-establishment of her finances and for her economic reconstruction, have
been used for current consumption. Any new advances must be used for the
purposes of reform ; and within a short time Austria will only be able to consume
as much as she produces. The period of reform itself, even if the new credits
are forthcoming, will necessarily be a very painful one. The longer it is deferred
the more painful it must be. At the best, the conditions of life in Austria must
be worse next year, when she is painfully re-establishing her position, than last
year, when she was devoting loans intended for that purpose to current consump-
tion without reform.

The alternative is not between continuing the conditions of life of last year
or improving them. It is between enduring a period of perhaps greater hardship
than she has known since 1919 (but with the prospect of real amehoration —
thereafter the happier alternative) or collapsing into a chaos of destitution and
starvation to which there is no modern analogy outside Russia.

There is no hope for Austria unless she is prepared to endure and support
an authority which must enforce reforms entailing harder conditions than those

— se-
at present prevailing, knowing that in this wav only can she avoid an even worse
fate.

The following members constituted the Financial Committee when studjing
the above questions :

Chairman : M. Janssen.
Members : M. Arm.

M- AVENOI..

Sir Basil Blackett.

Mr. Fass (substitute for Sir Basil Blackett).
Dr. PospisiL.
Sir Henry Strakosch.
Temporary members : M. Maggiorino Ferraris.

M. A. Sarasin.

57 -

XI.

RESOLUTIONS ADOPTED BY THE ECONOMIC COMMITTEE

OF THE LEAGUE.

(1) The Economic Committee notes that objections are raised by certain
Succession States to securing at present the immediate putting into force of the
Porto Rosa recommendations regarding commercial relations. It is of opinion
that, at the present time, the means most likely to promote the economic recon-
struction of Austria would be to adopt and extend the application of the principle
contained in Article 2 of the Protocol of Porto Rosa, by encouraging and hasten-
ing the conclusion of conventions and bilateral agreements between Austria
and each of the other Succession States, such conventions and agreements to be
based as far as possible on the Protocol, but with such modifications as it may
be thought possible and advisable to introduce in order to adapt them to each
special case.

(2) The Economic Committee is of opinion that, while, on the one hand,
the amelioration of the financial situation of Austria is an essential condition of
her economic reconstruction, nevertheless, financial assistance would by itself
undoubtedly be insufficient for such reconstruction if Austria did not seriously
set herself to reform the conditions both of her economic regime and of her
foreign trade, and if she did not adopt a programme calculated to render produc-
tive the State undertakings which are at the moment a serious charge not only
on her budget but on her whole economic system. The granting of any loan
must be conditional upon her giving definite undertakings regarding the reforms
and programme mentioned above.

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THE FINANCIAL RECONSTITUTION

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League of Nations.

Provisional Eeonomie and Financial Committee,

FINANCIAL SECTION.

NOTE ON THE PLAN FOR
AN INTERNATIONAL CLEARING HOUSE

By M. A. E. JANSSEN,
Director of the National Bank of Belgium.

LEAGUE OF NATIONS.

PROVISIONAL ECONOMIC AND FINANCIAL COMMITTEE,

FINANCIAL SECTION.

Note on the Plan for an International Clearing House.

By M. A. E. Janssen, Director of the National Bank of Belgium.

The International Financial Conference held at Brussels in 1920 was unani-
mously of opinion that the League of Nations might usefully exert its influence
with a view to promoting certain reforms; amongst others it mentioned the desir-
ability of making some progress as regards the question of the creation of an Inter-
national Clearing House.

This question is not a new one, and had been the subject of various detailed
proposals even before the world-war of 1914.

In 1908, M. Luzzati, the Italian statesman, who has brought so much renown
to his country, made a most interesting statement on this subject to the Institute
of France.

Certain persons of different nationalities, amongst whom I may mention
M. Wolff, Professor at the University of Breslau, and Mr. Cortelyou, Secretary
of the United States Treasury, also proposed the co-operation of Banks of Issue
at times of crisis.

The question was fully examined at a Congress held at Brussels in 1912 by the
International Economic Union, and the conclusions reached were embodied in a
resolution which may be recalled here.

I.

"The International Economic Union expresses the desire that European Banks
of Issue should hold international conferences.

"The object of these conferences would be to examine all proposals for improving
and perfecting the present system of international payments, and to make pre-
parations for the carrying out of plans recognised as expedient and feasible.

"Moreover, conferences of this kind are essential in order to render possible
the effective co-operation of Banks of Issue in exceptional circumstances.

II.

"Amongst the projects which could be put into practice at once by a Confer-
ence which included delegates of the Central Banks, the International Economic
Union calls attention to the following:

"I. The establishment of a system of international transfers for the benefit
of holders of current accounts in Banks of Issue.

" 2. An International Clearing House which would adjust the debits and
credits of all adhering banks by the clearing system.

" 3. The reciprocal collecting of any foreign bills which they may hold.

" 4. The issue, at the request of the public, of international letters of credit
or cheques by one bank on another.

III.

' ' In their present isolated position it would be difficult for Banks of Issue to
take up the above proposals. Hitherto all kinds of considerations have caused
them to hesitate to take any action abroad in connection with the development
of the system of international accountancy. The holding of conferences will
necessarily lead Banks of Issue to co-operate with a view to ascertaining what
improvements it may be possible to introduce into the organisation of international
credit and methods of payments. As regards the difficulties of application, whether
of an objective or personal nature, they would become clearly apparent, and the
discussion of them would not be merely theoretical. "

In order to appreciate the purport of these proposals, it is desirable to recall
briefly how international payments are made.

S. d. N. — 375 — 5/22. — Imp. Alar.

In practice, settlements between one country and another are generally effected
by clearings ; that is to say, by an exchange of drafts and cheques and by direct or
indirect remittances. These operations are settled by means of the current
accounts which the banks, which in each financial centre specialise in exchange
operations, carry with one another. In some circumstances these international
clearings are more difficult ; they are effected, however, by means of a series of reci-
procal actions and reactions, by the movement of goods and, above all, of securities
rather than of specie. Further, in accepting bills of exchange against cheques —
that is to say, bills payable at maturity against other bills payable at sight — the
banks also alter the balance of accounts ; this amounts to a credit operation in that
the term of maturity is postponed. Before the war, however, whenever for various
reasons the system of clearing was not employed and payment was demanded, it
was found that the system which often operated with considerable success was an
adjustment of the bank rate by the central Banks of Issue.

When the balance of payments was momentarily upset, the rates of foreign
exchanges were immediately affected by it. The balance standing to the credit
of foreign countries had to be paid and the metal reserves of the Banks of Issue
were drawn upon. In order to arrest the outflow of gold, the usual remedy was
rapidly to raise the official bank rate; but even this was not effective unless the
Central Bank controUed the money market sufficiently to have an effect on the
open market rate. This procedure induced foreign creditors to take advantage
of the increased interest on the debtor exchange; for this reason they postponed
the time for demanding payment of the balance, and consequently the gold reserve
remained at the Central Bank as the covering for payments at sight, banknotes
and balances standing to the credit of current accounts.

In addition to the system of the adjustment of the bank rate, properly so-called,
various Banks of Issue had recourse to fiduciary currency in order to avoid inroads
upon their holdings. Banks thus succeeded in avoiding purely temporary increases
in the bank rate.

Sometimes the rise in the bank rate did not produce the expected result. In
spite of the bait offered by a high rate of interest, capital nevertheless left the country
either because there was no longer any confidence in the credit of the debtor market
or because of an urgent need of specie in foreign countries. Thus, in November
1907, the Bank of England raised the official rate to 7 per cent., but did not succeed
in checking the export of gold to the United States, where an acute financial crisis
was raging. But for a timely intervention on the part of the Bank of France,
in the form of a direct consignment of gold to the Bank of England, it would not
have been surprising if the bank rate in London had risen to 10 per cent., at the
risk of causing profound disturbance in English trade, and, as a result, in Con-
tinental trade. Similar situations also arose in 1890 and 1906.

In these circumstances, M. Luzzati would have liked, by an international
arrangement — the basis of which would be discussed and fixed by a Conference
composed of delegates from the Banks of Issue — to ensure a more satisfactory
division of the amounts of gold required to prevent excessive rises in the bank rate.
He suggested in particular: " France, Italy and Russia might make loans to England;
Austria to Germany; and thus England could render greater help to the United
States. That, at least is how matters stand to-day; to-morrow they maybe the
reverse. Who knows whether the helping countries maj^ not become the countries
in need of assistance ?" This is what has actually happened !

This plan had much to commend it ; it was based on the fact that, as the result
of the interdependence of the great financial markets, any national financial crisis
reacted internationally by obliging foreign banks to intervene by sending consign-
ments of gold. The bank rate policy then practised by Banks of Issue merely
tended to aggravate a crisis. This struggle for gold, represented by the reciprocal
raising of the bank rates, was allayed by the furnishing of gold credits.

We must recall the circumstances in which the intervention of the Bank of
France took place.

In 1890, one of the greatest banking houses in London — the House of Baring —
was on the point of suspending payment. As a result, there was a great disturbance
in the London market. The official bank rate was already 6 per cent, and as the
Bank of England is not empowered to pay its notes in silver, and as, moreover,
its charter limits the possible margin between its notes and its gold reserve, it had
no other means at its disposal but further to increase its bank rate. But if the
Bank of England increased its rate still further at that moment, when there was
already a difference of 3 per cent, between the London and the Paris rates, the Bank
of France would alm.ost certainly have been obliged to imitate its neighbour and
to raise its own bank rate, to the detriment of French trade.

4

In these circumstances, the Bank of England approached the Bank of France,
asking it for help in order to maintain its gold reserve at a level which would enable
it to avoid the necessity of raising its rate above 6 per cent. The Bank of France
did not hesitate to send a favourable reply to this proposal, in the interest of the
commercial relations of the two countries, and still more in that of French trade,
and, most of all, in the interest of the Parisian money market. It thereby avoided
a financial crisis which was threatening in England and which would have reacted
acutely upon the French market. An advance of seventy-five millions in gold
was granted to the Bank of England for a period of three or six months at its own
option against the discount at 3 per cent, of English Treasury Bonds, and on the
express condition that this sum would be returned in the same metal to the reserves
at Paris. The Bank of England thus succeeded in carrying out its functions without
contravening the Act of 1844, in spite of the disturbance of credit on the London
market caused by the faU of the House of Baring. This action on the part of the
Bank of France was the subject of a question by M. Francis Laur in the French
Chamber on January 17th 1891, and M. Rouvier, who was then Financial Minister,
replied that the Bank had acted on this occasion with the authorisation of the
Minister responsible. On several occasions since then the Bank of France has thought
fit to take similar action. We quote below two extracts from the records of the
Bank of France, making clear the conditions under which this course was adopted.

In the first place, we find the following in the report on the operations of the
Bank of France for the year 1906:

"The tightness of money, which accompanies a development of business such
as that which we are witnessing at the present moment throughout the world,
has not failed to arise, without, however, causing any prejudicial effects in France.

"The European markets have been affected to a very large extent because
unaccustomed demands have been made upon them from all parts of the world,
and particularly from the United States. The bank rate has rapidly risen. It
reached 6 per cent, in London, and even this increase proved insufficient to check
the outflow of money, and there was reason to fear that the financial tension,
if not relieved, would be felt in France and would compel us in our turn to raise
our bank rate.

" In these circumstances we had a double duty. We had, on the one hand,
to provide the market both at home and abroad with the necessary reserves to
prevent the rise in the exchange, which would inevitably have reacted on our country.
On the other hand it was our duty to avoid encouraging speculation, which would
have been bound to cause a great rush of business, and might have resulted, if
not averted in time, in a crisis. The Bank of England has fulfilled this double
role as far as it was permitted to do so.

"In pursuance of a financial policy which has hitherto been justified by events,
we have discounted English paper and provided the London market with the funds
necessary to enable it to emerge from this difficult position.

"We did not part with our gold without due consideration, and without being
certain that it was directed to centres where it would prove of real service and where
we had a real interest in preventing a possible crisis, from the point of view of
French trade.

"The Bank of France has, therefore, fulfilled its essential function of controlling
and adjusting the bank rate in the national market; it has secured this result by
various means, but in particular, and above all, by a procedure which has, moreover,
met with general approval. The extent of its reserves has enabled it not to limit its
action to the French market alone. The difficulties came from abroad, and the Bank
went to the actual source of these difficulties in order to allay them and to assure, by
action in the London market, the stability and moderation of the bank rate in Paris.

"By utilising the power granted by our statutes to discount bills on foreign
exchanges, we substituted for these bills an equal quantity of gold, which was sent
to those centres which at the moment had real need of our assistance, with the
certainty of seeing our gold returned.

"The formation of a holding in foreign bonds, which had, moreover, already
been provided for in our balance-sheet, had hitherto only been regarded by Banks of
Issue as a means of protecting the reserves of metal in the event of a rise in the
exchange. Our gold reserve was so great as to enable us to place at the disposal
of a neighbouring friendly country the bullion reserves necessary to avoid a financial
tension which might soon have obliged us to take defensive measures ourselves.

"At the same time we refused to discount paper presented with the obvious
purpose of obtaining means for excessive speculation abroad.

"Owing to these various measures, which were rendered possible by our large
national reserves, we were able to maintain the trade rate of discount for the year
1906 at 3 per cent. "

Similar action was taken in the following year. The Governor of the Bank
of France, in his report on the financial year of 1907, referred in the first place to
"the crisis — much more acute (than that of the preceding year) — which began
at New York in the second half of October (1907), threatening the European
exchanges with sudden and violent effects," and he continued as follows:

"The first market to be seriously affected was the London market, which,
owing to the wide field of its business and the intricate nature of its relations, is
more closely bound up than any other with the American market, where the
scarcity of gold, which had disappeared from circulation under the influence of a
want of confidence which drove everyone to realise, neutralised the effect of consign-
ments and arrivals of gold from abroad.

"The increase of the Bank of England rate to 5'/* per cent, did not succeed
in checking the drainage of gold, which was in demand, owing to the considerable
premium to which it rose within a few hours in the principal towns of the United
States.

' ' We could not hide the fact that, in face of such a panic (specie was only lacking
in circulation because it was being hidden away), no practical result would be obtained
by having recourse to successive increases in the bank rate; such measures would
only prove a drain on the circulation and would compel us, like our neighbours, to
fix an exorbitant bank rate.

"Instead of adopting this course, which would have been entirely fruitless,
what had to be done was to place at the disposal of the Bank of England, as rapidly
as possible, resources still greater than in the preceding year, in order that it might
forward them to the New York Exchange without weakening its legal reserve.

"We were thus contributing to the preservation of the controlling markets,
and it was, of course, to our own interest to send reinforcements to points where
the critical conditions threatened to involve us in the general crisis.

"The recourse to this efficacious operation, for the second time, in 1907, was
nothing more than the regular application of our constitutional statutes.

" You are aware that the Bank of France should never under any circumstances
make any use of funds reserved to cover those of its notes which are not represented
by available securities maturing within periods determined by its regulations.

"Moreover, we did not hinder the dispatch of direct consignments of gold to
New York, occasioned by the normal discount of French commercial bills; and
in the same spirit of friendly solidarity as in the preceding year, in the same form
and with the promptitude required by the circumstances (but avoiding implication
in the crisis), we guaranteed to the London market available funds to the amount
of more than 80 million francs in American gold currency.

"Our balance sheet thus contains, for the second time and for a short period,
foreign bills, all the amounts of which are to be repaid to us entirely in gold by the
various drawees and which only temporarily — but in a very profitable form —
take the place of the sums which we have been able, without any difficulty, to raise
on our extensive reserves, in order to preserve the French market from a financial
panic the intensity of which is almost without precedent.

"Though, as a result of exceptionally serious circumstances, this friendly sup-
port was not sufficient to enable London to avoid fixing a rate of 7 per cent. — which
obliged us to raise our own rate of discount by Ya per cent, and to raise the rate
for advances from 4 to 4V2 per cent. — it is only too certain that if we had not come
to the aid of the great and friendly neighbouring market, we ourselves should
certainly have been driven to take measures which would have been still more
harmful to our commerce and our industry.

"The measures which we took have thus enabled us to preserve for our own
nationals the inestimable advantage of a discount rate which is still lower than
in all other countries and is free from sudden fluctuations.

"At the end of December the margin between the official rate at Paris and the
official rate in London and Berlin was still from 3 to 3V2 per cent."

It should be pointed out that the Bank of France was not the only one which
carried out this policy of direct intervention in the foreign markets. The Austro-
Hungarian Bank also sent gold to Berlin in 1907 with the object of avoiding an
excessive monetary tension there and preventing a rise in the bank rate, which
would have reacted on the price of money at Vienna.

This occasional mutual aid of Central Banks by means of reciprocal gold loans
has proved so successful that there is no need to demonstrate its utility ; it is suffi-
ciently proved by the preceding statement.

It is doubtless impossible to transform into diplomatic agreements or permanent
arrangements the spontaneous good offices and wise co-operation of which the
Bank of France gave an example, but it is desirable that this far-sighted policy

should be imitated by the Banks of Issue, which present circumstances have placed
in possession of great financial wealth.

Before the war the objections to this course were principally of a political
nature, but to-day rich and poor alike are suffering so greatly from the state of
financial instability that it is being realised that co-operation is becoming more
and more indispensable in the interests of the nations.

Such was the situation before 1914. During the war and until the first months
of the year 1919, international payments between allies took the form chiefly of
advances from one State Treasury to another, the heavy burden of which impov-
erished Europe is now bearing. The financial disturbances caused by the world-
war have seriously hindered the working of the delicate mechanism to which, before
1914, the Banks of Issue held the key.

But it is none the less true that clearing still plays a predominant part in the
liquidation of international accounts.

To be convinced of this, one need only read the able study of the foreign
exchanges which has just been published by M.Jules Decamps, Director of the
Economics Department of the Bank of France. But when we speak of clearing,
we pre-suppose that there is something to clear, and, unfortunately, as a result
of the economic instability prevailing in Europe at the present time, too many
countries have many debts and few assets.

A constantly unfavourable commercial balance, combined with large issues
of unconvertible paper money, have brought about a loss of equihbrium, of which
the present rates of exchange are merely the reflection.

Thus the favourable influence which the establishment of an international
clearing-house may exercise must not be exaggerated.

The present situation of the foreign exchanges is the result of causes so deep
and so well known that it cannot be effectively remedied by a mere improvement
in the methods of international payments.

Having regard to the preceding considerations, a system of international
transfers for the benefit of holders of current accounts in Central Banks of Issue,
supplemented by a clearing house, could, with a little mutual good-will, be estab-
lished within a short period.

In this connection, mention should be made of the Convention concluded
in 1885 between the Banks of Issue of the three Scandinavian Kingdoms — the
Royal Bank of Sweden, the Bank of Norway and the National Bank of Copen-
hagen.

In accordance with the charters of these banks, each of them is authorised
to make current account deposits up to a specified amount in the Central Banks of
the two other countries, and the credit balance of these current accounts may
be considered as forming part of the metal reserve on which the issue of notes is
based. The three Central Banks utilised this power to conclude the Convention,
■ the purport of which we reproduce below :

1. Each of these three banks shall open a current account with each of the
others; on this account they may issue cheques payable at sight, even if
this involves an overdraft; all sums ma}' be paid in to their respective
credits.

2. No interest will be charged on credit or debit balances, nor will any com-
mission be charged on transfers.

3. Cheques may also be drawn on the head offices of the three banks or on the
branch of the Bank of Norway at Christiania or Bergen.

4. None of the banks is authorised to draw on the others for the purpose
of profit.

5. No cheque may be issued for an amount less than five thousand crowns.

6. No commission is charged on the issue or collection of cheques.

7. Notice must in all cases be given of the issue of cheques.

8. Debit balances must be paid up at the request of the creditor bank.

9. When the balance of an account is drawn in specie, the creditor will assume
the risks and defray the costs of consignment.

10. If the bank from whom the debt is claimed has a credit balance with the
third bank, it may settle the debt by delivery of a cheque on that bank.

11. All payments under the above articles will be made in gold pieces of 20
or 10 crowns.

12. Accounts will be rendered quarterly.

13. The Convention may be denounced and become imperative after notice
given three months in advance.

To sum up:

The three banks have non-interest-bearing accounts with each other, and
each bank is entitled to issue cheques on the others even without previous
arrangement. The banks may require the amount due to be remitted in gold, but
any bank which requires such remittance must itself bear the cost of transport.

The application of this Convention greatly facilitated business relations
between Norway, Sweden and Denmark.

Consignments of gold, which had previously been very frequent between
the three countries, considerably decreased.

It should also be noted that the three banks mutually entrust to each
other the cashing of bills of exchange, the amounts of which are placed to the
credit of their reciprocal current accounts.

The Convention concluded between the three Central Banks of the Northern
Kingdoms proves that Banks of Issue may render great services to commerce by
facilitating international payments, without in any way prejudicing their individual
autonomy.

Further, the Governments themselves have created an international system
of money orders, transfers and clearing operations, and here we allude to the Con-
ventions concluded between the postal administrations. An examination of these
Conventions furnishes the best proof that an agreement is possible between Banks
of Issue on the subject of transfers. It should be pointed out that the postal admin-
istrations have shown a progressive and enterprising spirit, because the arrange-
ments concluded between the countries adhering to the Universal Postal Union
have always given proof of a happy combination of co-operation between the
members of the Union and respect for the complete autonomy of each State.

International money orders were arranged by the Paris Postal Convention
of June, 1878, in accordance with the revised arrangement of Madrid on November
30th, 1920. The amount of these orders must be paid in by the sender and paid
out to the receiver in specie ; but each administration has the power either to receive
payment or to pay in any paper money which is legal tender in its own country,
account being taken, if necessar}^, of differences in the rates of exchange.

Each administration has the power to fix the maximum amount for the orders
issued by it, on condition that this maximum does not exceed 1,000 gold francs.

Subject to any arrangement to the contrary, the maximum amount for money
orders payable in any one country is the same as that adopted by that country
for issue.

When one and the same sender issues on the same day and in the same place,
to one and the same receiver, several money orders, the total amount of which exceeds
the maximum adopted by the country of destination, the receiving office is author-
ised to pay the orders in instalments, so that the sum paid to the receiver on any
one day does not exceed this maximum.

Subject to any arrangement to the contrary between the administrations
concerned, the amount of each money order is expressed in the currency of the
country in which payment is to take place. For this purpose the administrative
authority of the country of origin itself determines, if necessary, the rate of conversion
of its own currency into the currency of the country of destination.

The administrative authority of a country of origin also determines, if necessary,
the rate to be paid by the sender when this country and the country of destination
have the same monetary system.

This system of international payments is very conveniently supplemented
by a central accounts and liquidation office with headquarters at Berne. This is
really an International Clearing House, and we think it would be well to give certain
details as to its working.

The administrations belonging to the Universal Postal Union have to draw
up, at periods determined by common agreement, reciprocal accounts relating
to the various branches of postal traffic (mail in transit, packages of declared value,
postal parcels, telegrams, newspapers, subscriptions, postal orders).

These balances include:

(a) The calculation of assets and liabilities based on special accounts and
vouchers.

(b) The transfer of the sums arrived at by this calculation to a general account,
and the ascertainment by the means of the net amount (balance) for which
each administration is indebted to the others.

8

Until 1892 the liquidation of the balance by the debtor office to the creditor
office was effected by means of a draft or consignment in specie. This proceeding,
which involved the creation of a large number of special accounts, was extremely
burdensome and gave rise to numerous difficulties. The administrations concerned
incurred considerable expenses by the purchase and sale of the drafts used in the
liquidation of the various balances. The establishment of an International Clearing
House would necessarily lead to a great simplification of the above-mentioned
method of accounting. The question was discussed at the Vienna Postal Congress
in 1891 and, on July ist, 1892, a Central Accounts and Liquidation Office was
established at Berne and attached to the International Office of the Universal
Postal Union.

The International Office at Berne undertakes the balancing and liquidating
of accounts of every kind relating to the international postal and telegraph services
between the administrations of the countries of the Union.

After having worked out and adopted their accounts, the administrations
send to each other an acknowledgment of their liabilities, expressed in francs and
centimes, stating the matter and the period covered and the balance arrived at.

Each administration sends monthly to the International Office a table showing
its assets under the heading of "Special Accounts", together with the total of the
amounts due to it from each of the administrations, members of the Union; every
credit appearing in this table must be authenticated by an acknowledgement
from the debtor office.

The International Office ascertains, by comparing the acknowledgements,"
whether the tables are correct, and the liabilities of each administration are carried
forward into a summarized account. Then the International Office reduces the
tables and summarized accounts to one general balance-sheet showing:

{a) the total liabilities and assets of each administration;

(b) the debit or credit balances of each administration, representing the dif-
ference between the total debit and the total credit ;

(c) the sums to be paid by some of the members of the Union to a particular
administration; or, inversely, the sums to be paid by the latter to the others.

The totals of the two classes of balances under (a) and {b) must necessarily
be equal.

When the total amount of the assets and liabilities of each administration
is ascertained, the International Office decides what payments are to be made —
that is to say, it states to which administrations payments must be made by the
debtor administration.

As far as possible it ensures that each administration only has to make one
or two separate payments in order to square its accounts.

It should be noted, however, that any administration to which another
administration is habitually indebted to an amount exceeding 50,000 francs has
a right to claim payments on account. These payments on account are entered
by both the creditor and debtor administrations at the foot of the tables sent to
the International Office.

Such are, in brief, the provisions regulating the clearing of postal accounts.

The preliminary draft of the plan summarised the advantages guaranteed
by the new organisation as follows:

1. "Supposing that there are 11 associated administrations and that a system
of money orders is in operation between them, there will be, under the present
accounting methods, no monthly accounts and 55 general clearing accounts
regarding money orders alone. The adoption of the proposed procedure would
have the immediate effect of abolishing these latter accounts.

2. "The liquidation of the 55 accounts in question at present calls for the
same number of special drafts. The new plan would reduce this number to about
10; this reduction would involve a considerable reduction of expenditure under
the heading of 'Purchase and Sale of Drafts.' Ten will also be sufficient when the
general account to be settled between the various offices includes services other
than money orders.

3. "As the new procedure provides generally for the use of negotiable drafts
in the great commercial centres, the difficulties, supplementary expenses, etc.,
resulting from the acquisition of drafts for a smaller amount or payable in towns
of less importance will be obviated."

A real step in the direction of a system of international postal transfers has
recently been taken in the agreement concluded between twenty-six countries
at Madrid on November 30th, 1920. The essential provisions of this agreement
are as follows:

1. Any person having a postal current account in one of the countries which
is a party to this agreement may order money to be transferred from his account
to a postal current account kept in another of these countries.

2. Each administration is authorised to fix the maximum amount of the
transfers which the holder of an account may order either in a single day or during
a specified period.

3. Each administration is free to comply with all the regulations imposed
by the public law of its own country, particularly as regards the export of capital.

4. The administration in any of the contracting countries is authorised to
suspend, either wholly or partly, the transfer system, when exceptional circum-
stances warrant such a procedure.

5. Each administration shall itself fix the rate of conversion of its currency into
the currency of the receiving country for all transfers ordered by holders of accounts.

There can be no doubt that the introduction of a system of international
postal transfers will prove advantageous to the business world.

As regards financial policy, the international transfer system will be productive
of good results. Coin and banknotes which are at present in circulation in the
various countries will thereby become available for other purposes. The transfers
do not involve any handling of specie, since they are effected by entries in the
accounts. A double transaction involving the use of specie — the pa5dng-in and
the paying-out — is thus dispensed with.

The international postal transfer system is certain to develop greatly, in view
of the increasing number of persons with postal current accounts in countries
where the postal cheque system has been established.

On December 31st, 1921, the number of accounts which had been opened
was as follows:

Germany 759.830 Serb-Croat-Slovene State . 6,923

Danzig 3,895 Luxemburg 2,240

Austria 177,465 Netherlands 49.330

Belgium 65,514 Switzerland 42.740

Denmark 3,538 Czecho-Slovakia 63,739

France 112,000 Hungary 40.475

Japan 180,683

The system of transfer is operated, on the one hand, by the Central Bank,
and, on the other, by the Post Office and the great private banks with their numerous
agencies. The Central Bank can only have a limited number of branches, and these
are opened only in important areas. The Post Office, thanks to its thousands of
agencies and oifices, is in a certain sense the natural extension of the bank, for the
more agencies there are, the more widely does the transfer system extend its rami-
fications. Transfer operations are thus carried on by two organisations which
supplement each other and between which the establishment of direct relations
was a logical development.

Thus, in principle, any person in possession of a postal cheque account may
transfer any portion of his deposit to any transfer account in the Central Bank.
Conversely, any person who has a transfer account in the Central Bank may transfer
any sum to any postal cheque account, thus obviating a direct payment at the
Post Office, with the consequent charges. This arrangement undoubtedly offers
substantial advantages to persons with postal cheque accounts and those with
transfer accounts at the Central Bank.

In Banks of Issue transfer operations are rightly regarded as among their
most important duties. Hitherto transfer or clearing operations by Banks of Issue
have been confined to the territory of the State which granted them the right
to issue notes.

Several years ago the Universal Postal Union instituted international postal
orders or letters of credit. We have just given an account of a new international
postal transfer organisation, which is likely to prove of great importance when the
postal cheque system attains its full development. Why, it may be asked, should
direct relations not be established between the Banks of Issue for the purpose of
enabling transfers to be made ?

Most Banks of Issue at present possess bills on foreign countries in their port-
foHos; some have current accounts in foreign banks. Seeing that the holding of

10

funds abroad is now regarded as normal and legal, there would be nothing to prevent
a part of such funds being placed on current account in a foreign Bank of Issue.
Each bank would, moreover, be absolutely free to determine, at its convenience,
the maximum amount of such account, and any creditor bank would have the
right to demand payment at any time of the sums which might be due to it.

As Banks of Issue, on principle, pay no interest on deposits kept on current
account, it will always be possible to transfer the balance or part of the balance
to current accounts opened in foreign private banks which pay interest. This
practice is adopted by private persons who at present have money on current
account in Banks of Issue.

Banks of Issue might also authorise each other to receive payment of bills
of exchange which they hold on foreign countries and issue international letters
of credit or money orders at the request of the public.

The sj'stems of transfer operations between holders of current accounts in the
Banks of Issue may be supplemented by an International Accounts Office, which,
after the manner of the Berne Postal Clearing Office, would set off, by means of
clearing operations, the debit and credit sides of the accounts of each bank which
was a party to the arrangement, leaving only the balances for final adjustment.

The clearing organisation acting for the twelve reserve banks in the United
States of America and employing the " Gold Settlement Clearing Fund" established
at Washington, might also, to a certain extent, serve as a suitable model in
drawing up the agreement to be concluded between the Central Banks.

Some will assert that the foregoing constitutes a very modest reform. They
dream of vast schemes, of monetary peace, and thus recall all the hopes and illu-
sions which came into prominence about 1865 when many persons believed that
they could succeed in establishing a universal currency or a universal bank.

At that date metalhc money was of predominant importance, but since then
an economic development of deep significance has taken place. It was brought
about by the extended use of improved methods of payment — by an advance
from cash to the banknote, from the banknote to the cheque, and, by means of
the cheque, to transfer and clearing operations.

We must not be understood to imply that the importance of precious metal
has diminished ; on the contrary, indeed, it is more than ever the basis of all these
numerous substitutes which take the place of coin; it is only the actual circulation
of precious metal which has fallen off. As the circulation of paper-money has
increased and the use of exchange and credit instruments, such as cheques, drafts
and clearing operations, becomes more widespread, standard money is used to an
ever-decreasing extent in business transactions. Gold provides the security for
the subsidiary metallic currency and the whole of the note issues, and it performs
this ofiice by being accumulated in ever-increasing quantities in the vaults of the
Central Banks of Lssue.

Thus, in the majority of countries, the most important duties of Bank of Issue
are related to currency, for the issues of banknotes are not augmented merely to
meet the increased requirements of credit, but also to take the place of, and represent,
specie which has largely passed into the reserves in the banks. The public rightly
finds that the note, cheque and draft are more convenient in use.

The value of this mass of paper-money is mainly dependent upon its being
convertible into coin ; experience, however, shows that this convertibihty is by no
means constant in all countries, and may in many circumstances be considered
as highly problematical.

The securities for convertibility are of two kinds :

1. The coin and bullion in the vaults of the issuing institutions.

2. The credits which form the remainder of the assets. When the credits
are commercial and liquid, notes can be reimbursed whenever they are presented.
This, however, is not always the case. We must never lose sight of the position
of Banks of Issue in their relations with their Governments, — i. e., the amount of the
advances which the banks have made to them in one form or another.

When a Bank of Issue merely lends the Government its capital, there is no
occasion for anxiety, because the capital of a Bank of Issue is regarded as nothing
more than a guarantee fund. But when the bank lends the State more than its
capital — i.e., when it lends it either a part of the private deposits which it receives
and which may be withdrawn from it at any time, or sums which have accrued
to it as a result of the excess of its notes in circulation over and above its'metallic
reserve — the danger becomes very great, because the deposits or the notes issued
are no longer covered.

11

The financial history of the nineteenth century and of the 1914-1918 war
shows that Governments have frequently had recourse to the credit of their Bank
of Issue, and have forced it to increase its note circulation. The banks agree to
create paper in this way which is not backed by coin or commercial biUs only on
condition that they are freed from the obligation of repaying in cash; the conse-
quence, often inevitable, of advances to the Treasurj' is therefore the estabUshment
of an inconvertible currency.

It may therefore be stated as a general principle that the monetary position
of a country is dependent upon a real balance in its budget and the satisfactory
working of its paper-money system.

Any excess of floating debt in the form of Treasury bonds, discounted by the
Banks of Issue, may itself suihce to disturb the money market.

Advances made to States by Banks of Issue can be justified by the imperative
needs of public safety. However, this is not always the case. In times of crisis or on
the pretext of difficulties, Governments continue to use and abuse these facilities;
the world to-day, unfortunately, offers only too many illustrations of this practice.

Excessive issues of paper money immediately affect the rates of exchange.
No limit can be fixed for the fluctuations in the exchange between a country with
metallic money and a country with inconvertible currency.

If the trade balance becomes unfavourable, as is usually the case, gold is
required to pay the foreign creditor. No gold is supplied by the Bank of Issue; it
is taken from the currency, and a premium on gold is inevitable.

A paper-money system has always been regarded as inconsistent with the
very principle of a monetary convention; yet to prevent this state of affairs is
easier said than done, because circumstances which it is impossible to control may
compel Governments to adopt such a system.

M. Louis Renault, a French jurist, who is certainly qualified to speak on matters
of international law, has brought out very clearly the vulnerable side of conventions
dealing with the monetary system :

"By a convention of any kind," he writes, "freedom of action is restricted,
since an obligation is assumed to observe certain rules, and since, so long as the
convention lasts, it is only possible to be released by the consent of the other con-
tracting parties. For that reason, only temporary conventions or conventions
which may be denounced should be concluded. For that reason also each State
must, even during the period for which the Convention is in force, retain full freedom
of action on all really essential matters. These are the grounds on which serious
objections may be brought against any monetary union. The monetary system
is of such importance in the economic life of a nation, and it may require the adoption
of measures so essential to the very security of the country, that it is dangerous
to renounce freedom in this matter. The country runs the risk of suffering heavy
losses or failing to fulfil its obligations, which is equally regrettable."

Monetary unions cannot really be compared with other unions, such as the
Telegraphic Union and the Postal Union. The Telegraphic Union, which was
founded at practically the same time as the Latin Union, dates from May 17th,
1865; at present it extends all over the world, to the general satisfaction of all
concerned. This result is due to the fact that it is concerned with administrative
objects and that the modifications which require to be made in administrative
services can be quite easily effected without the necessity for interfering with prin-
ciples of legislation.

The right of determining the monetary system constitutes one of the essential
attributes of sovereignty, and, if we exclude the case of small States which may
occupy an exceptional position, it is dangerous for a country to renounce any part
of this right and to bind itself in this connection to a foreign Power. Experience
shows that it is the most prudent country which in these matters suffers from the
failings of others, while, when each country preserves its freedom, each must support
the burden of its own errors and its own mistakes.

Bamberger, who has always shown remarkable insight into currency questions,
wrote: "Money, in the international sense, cannot be regarded otherwise than
as of correct weight and of full value. It follows, therefore, that to enter into a
monetary convention with a State is tantamount to imposing upon it an obligation
never to undertake a war, nor to undergo a revolution or an internal economic
crisis — a promise which is equally foolish on the part of both of the contracting
parties and consequently doubly foolish in the case of reciprocal obligations."

There is doubtless something very alluring to certain minds and flattering to
the imagination in this sort of fraternal union of nations in the monetary sphere.
But theory is not sufficient to bring about such a union. If we go to the root of the
matter, and the idea is compared with actual facts, numerous objections are dis-
covered, and nothing can compensate for the serious dangers which result from

12

agreements between independent Governments on a matter so closely connected
with their respective rights of self-government.

The history of monetary unions which were concluded during the last century
serves to confirm these views.

The monetary convention entered into between the States of the German
Zollverein in 1837 and 1838 may be credited with introducing a certain measure
of order into the anarchical monetary conditions which prevailed in many small
States beyond the Rhine; but it must not be forgotten that these States formed
a political federation and that they had reciprocally renounced certain attributes
of sovereignty — a renunciation to which independent States might not submit.

The Austro-German monetary union which was concluded in 1857 was a
deplorable failure.

As regards the Latin Union, founded in 1865, it has experienced disappoint-
ments of every kind, and the number of conferences and additional acts itself
bears witness to all the difficulties involved.

With these facts before us, we are of opinion that, under present conditions,
the monetary system must be national and that political unity must be the pre-
cursor of a common monetary system.

For that reason many schemes which have been conceived and investigated
by notable thinkers can only be regarded as capable of realisation in the more or
less distant future, and their fulfilment must be regarded rather as the crowning
economic achievement of a new international political situation, which it is the
special task of the League of Nations to create in the course of time.

However, while respecting the full autonomy of each State, I am convinced
of the value of periodic conferences, attended by directors of Banks of Issue, for
the purpose of considering in common the discount policy, the stabilisation of the
value of gold and the establishment of an international system of transfers sup-
plemented by a clearing office.

At present the intercourse between Central Banks is limited as a rule to informal
friendly relations. Something more is required, and I feel convinced that discussions
between directors of Central Banks of Issue might lead to the valuable result of
introducing a certain measure of order into the internal monetary policy of many
States.

The main difficulty arises from the fact that Banks of Issue are too often merely
a political tool in the hands of Governments who themselves are the sport of the
political parties on which they depend.

Ministers of Finance would be in a much stronger position to resist the demands
for expenditure made by their colleagues if they were expressly forbidden to resort
to the dangerous expedient of discounting Treasury bonds in the Banks of Issue.
When the exchequer is empty and it is no longer possible to obtain money by the
artificial, dangerous and speedily fatal device of the printing press, then wiser
councils frequently begin to prevail. Happy the countries where the directors of
Banks of Issue have sufficient independence to say " No" to the demands of Govern-
ment poUcy.

It is necessary to safeguard Governments against their' own weakness. If in
the future the provisions indispensable for the maintenance of a sound paper cur-
rency should be settled by an international agreement, internal monetary legislation
would become more stable and conform more closely to true monetary principles,
because it would be placed under the protection and guarantee of an international
convention.

In this connection the consistent co-operation of Banks of Issue would be of
great value in investigating the best methods of returning to normal conditions.

Certain countries will be able, by economy and labour, to return by degrees
to the former gold parity.

Other countries, where the evil is already too serious, will be unable to escape
bankruptcy by having recourse to the devaluation of their money through the
establishment of a new gold parity.

AU the various cases require to be investigated in the light of economic principles
and special circumstances.

International trade is fatally prejudiced by the instabiUty of the exchanges,
which inevitably renders any buying or selling transaction in foreign countries a
speculative operation.

The Banks of Issue which, before the war, were responsible for the preservation
of the monetary standard and the maintenance of the exchanges within strictly
defined limits, are in the best position to determine the basis of the monetary
reconstruction of Europe.

A. E. JANSSEN.

April 1922.

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