A copy of a memorandum prepared by the Legal Adviser for the Department
is enclosed herewith for your confidential information. I shall
appreciate an early expression by you on the questions stated in the
Department’s letter of April 17, and will be glad, if you so desire, to
confer again with your representatives on the subject.
[Enclosure]
Memorandum by the Office of the Legal
Adviser6
[Washington,] April 21,
1934.
Questions Raised by the Act Approved April
13, 1934, To Prohibit Financial Transactions
With Any Foreign Government in Default on Its Obligations to the
United States
The following questions have been specifically raised with the
Department of State.
- 1.
- What governments, political subdivisions, or associations are
in default on their obligations to the United States?
- 2.
- To what types of transactions does the Act apply?
- 3.
- What constitutes a renewal of an existing credit?
- 4.
- Does the Act apply to acceptances or time drafts?
- 5.
- Is the present Soviet Government, as the successor to prior
Governments of Russia, to be regarded as in default, in view of
the fact that no payment has been made on the bonds issued to
the Government of the United States by the Kerensky Government
on account of loans made to that Government by the United States
during the period of the War, the Kerensky Government having
been the immediate predecessor of the Soviet Government?
- 6.
- However the last question may be answered, can the Soviet
Government be considered in default to the Government of the
United States pending negotiations that are being had with a
view to arriving at the amount of the indebtedness due from the
Soviet Government to the Government of the United States?
- 7.
- Would the issue and sale in the United States of “scrip” or
funding bonds in part payment of outstanding obligations be a
violation of the Act?
These questions will be briefly discussed in numerical order.
Question 1. The first question can, it is
believed, be answered generally by saying that any government, or
political subdivision, or association which has given a promise to
pay a definite amount of money at a designated date and has not paid
the definite amount is in default unless the Government of the
United States has agreed that payment may be postponed or need not
be made.
The issue of bonds, securities or other obligations of any
organization or association acting in behalf of a foreign government
or political subdivision thereof would be prohibited if the
government or subdivision were in default.
Since there is no agency of the Government other than Congress
authorized to modify the promises which foreign governments have
made to pay money to the Government of the United States, there, of
course, can be no case presented in which consent to delay in making
payment or discharge from the obligation to pay arises.
Question 2. In answering the second question
it is necessary to consider the origin and history of the Act of
April 13. The Act of April 13 is the result of investigations
conducted pursuant to Senate Resolution 19, introduced by Senator
Johnson on December 10 [9], 1930 [1931].7 The purposes to be accomplished by the bill are
fairly clearly indicated by Report No. 20 of the Senate Committee on
the Judiciary accompanying S. 682. The following quotation from that
Report indicates the abuse which the bill was intended to correct:
“These foreign bonds and obligations, of course, in some
instances were issued and were sold in good faith; while in
some instances, the testimony has demonstrated that they
were issued by the borrower merely to obtain money, with
little expectation of redemption, and were sold by the
American financiers to make outrageously high profits, and
both had reasonable cause to believe that the American
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public purchasing
such bonds or other obligations would be the ultimate
sufferer.”8
It would seem from all that has taken place that what the Act was
designed to accomplish was to prevent purchase of bonds, securities,
and obligations of foreign governments and their sale and
distribution among purchasers in the United States who act in the
belief that they are making investments. It is not believed that the
Act was designed to prohibit ordinary business transactions or to
suppress the usual facilities of trade such as negotiations of bills
of exchange or the purchase or sale of currencies.
Question 3. Bonds, securities, or other
obligations issued for the purpose of renewing or adjusting existing
indebtedness are excepted from the prohibitions of the Act. It would
seem that any instrument which would be issued for the purpose of
replacing the evidence of any existing indebtedness would constitute
a renewal or an adjustment of an existing indebtedness. If new bonds
were issued to replace old ones, it would seem that such a
transaction would be permissible. Any instrument given in
satisfaction or extension of an existing indebtedness would, it is
believed, come within this exception.
Question 4. Considering the background of the
Act of April 13, I do not believe that it should be regarded as
prohibiting acceptances or time drafts given in ordinary commercial
transactions. On this point I quote the following from Corpus Juris, Volume 46, page 847, speaking
of the term “obligation”:
“When the term is used in a statute its significance must be
gathered from and governed by the purpose and context of the
enactment.”
Under this statement citations are made to numerous court decisions.
Some of these court decisions held that bills of exchange, checks or
orders of the Treasurer of the United States, a debt on open account
not secured by a written instrument, and a draft drawn by a bank and
protested, are not obligations. It seems clear that the courts
attributed a restricted meaning to the term “obligation”.
Considering the origin of the Act of April 13, the purposes which it
is intended to accomplish, and judicial decisions declaring bills of
exchange and other instruments to be not obligations within the
statutes, I believe that acceptances or short time drafts could
properly be regarded as not coming within the prohibitions of the
Act.
Question 5. The Provisional Government of
Russia, the Kerensky Government, was overthrown on November 7, 1917,
and was succeeded by the Soviet Government. By a decree issued
January 28, 1918, the Soviet Government annulled all foreign loans.
The Government of
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the
United States loaned the Kerensky Government $187,000,000, and
payment has not been made by the Soviet Government on the evidences
of indebtedness held by the Treasury of the United States. The
Soviet Government succeeded to the obligations of the Kerensky
Government in respect of loans made by the Government of the United
States to the Kerensky Government. The Soviet Government has not
made payments on those evidences of indebtedness but on the contrary
the obligations have been repudiated. It would follow that the
Soviet Government is in default.
Question 6. If the position stated under
Question 5 is correct, it is believed that the Soviet Government
remains in default, notwithstanding that negotiations are pending
with the Soviet Government relating to the debt of that Government
to the Government of the United States.
Question 7. It is believed that the issue of
“scrip” or funding bonds would be regarded as a renewal or
adjustment of existing indebtedness and should not be regarded as in
violation of the Act.
The question has also been raised whether the purchase and sale of
foreign currency is prohibited by the Act. It is not believed that
currency would be an obligation within the meaning of the Act. There
would be as much justification for regarding currency as outside the
terms of the Act as there would be for regarding bills of exchange
as not being within the prohibitions of the Act.
A question has been raised also as to whether postal money orders,
pension checks, checks, dividend or interest warrants, pay checks,
consular checks, coupons on bonds, checks on central banks for
various purposes, would come within the scope of the Act. It is
believed that the history, purposes and language of the Act would
not justify a conclusion that instruments such as are here mentioned
would be regarded as bonds, securities, or other obligations.
A question has been raised also whether foreign branches of American
banks are exempted from the prohibitions of the Act, and whether the
Act applies to American banks in Puerto Rico and the Canal Zone.
Both questions, it is believed, are answerable in the affirmative.
The Act is applicable only to places subject to the jurisdiction of
the United States. Transactions of American banks in foreign
countries would not be consummated in the United States. American
banks in Puerto Rico and the Canal Zone are in places subject to the
jurisdiction of the United States.
Another question is whether loans to foreign banking corporations on
securities of nations in default would be prohibited by the Act. The
answer to this question would depend on whether the foreign bank
were acting as agent of a foreign government in default, and whether
the lending bank took title to the securities of the foreign
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government. It is not
believed that the making of loans to foreign banking corporations
would be a violation of the Act, even if securities of nations in
default were received as collateral unless the foreign bank borrowed
for a government in default or took title to the securities. If,
however, it became necessary for the lenders to take title to the
securities in satisfaction of the loan, they would not sell the
securities in the United States without committing a violation of
the Act.
It should be noted that the inhibitions of the Act apply only to
transactions of governments in default on obligations to the United
States.
