NAWSA SUBJECT FILE Soviet Bonds Soviet Bonds ADDRESS OFFICIAL COMMUNICATIONS TO THE SECRETARY OF STATE WASHINGTON, D.C. DEPARTMENT OF STATE WASHINGTON In reply, refer to EE 800.51 W 89 USSR Blackwell, Alice Stone June 28, 1934 Miss Alice Stone Blackwell, 3 Monadnock Street, Boston, Massachusetts. Madam: The receipt is acknowledged, by reference from the White House, of your letter of June 9, 1934, protesting against holding the Soviet Government responsible for the debts of former Russian Governments and commenting upon the effect of such policy on American-Soviet trade. As of possible interest to you in this connection, there is enclosed a copy of a press release of May 5, 1934, which gives the text of a letter of that date to the Secretary of State from the Attorney General, stating the opinion of the latter as to the proper interpretation to be placed upon the terms of the Act of April 13, 1934, entitled: "An Act to prohibit financial transactions with any foreign government in default on its obligations to the United States", known as the Johnson Act. On pages 9 and 10 of this release appear the grounds upon which the Soviet Government Department of State DIVISION BUREAU EE ENCLOSURE TO LETTER DRAFTED ADDRESSED TO MISS ALICE STONE BLACKWELL -2 ment is considered to be in default. Your attention is also invited to the option of the Attorney General, as set forth in reply to question number (2), that the Johnson Act does not apply to the ordinary financial transactions incidental to trade and commerce. It may be added that the question of the development of trade between the united States and the Soviet Union is receiving the careful consideration of the Department. Very truly yours, For the Secretary of State: Robert F. Kelley Chief, Division of Eastern European Affairs Enclosure: Press release of May 5, 1934 DEPARTMENT OF STATE FOR THE PRESS May 5, 1934. The Secretary of State has received an opinion upon various questions pertaining to the Act of April 13, 1934, entitled "An Act to prohibit financial transactions with any foreign government in default on its obligations to the United States", known as the Johnson Act. The Department of State concurs in the interpretation of the Act expressed in the Attorney General's opinion. Following is the full text of the Attorney General's Opinion: "DEPARTMENT OF JUSTICE, Washington. May 5, 1934 "Sir: I have the honor to refer to your letter of April 17 requesting my opinion upon various questions under the Act of April 13, 1934, entitled 'An Act to prohibit financial transactions with any foreign government in default on its obligations to the United States,' which reads as follows: 'That hereafter it shall be unlawful within the United States or any place subject to the jurisdiction of the United States for any person to purchase or sell the bonds, securities, or other obligations of, any foreign government or political subdivision thereof or any organization or association acting for or on behalf of a foreign government or political subdivision thereof, issued after the passage of this Act, or to make any loan to such foreign government, political subdivision, organization, or association, except a renewal or adjustment of existing indebtedness while such government, political subdivision, organization, or association, is in default in the payment of its obligations, or any part thereof, to the Government of the United States. Any person violating the provisions of this Act shall upon conviction thereof be fined not more than $10,000 or imprisoned for not more than five years, or both. 'SEC. 2. As used in this Act the term "person" includes individual, partnership, corporation, or association other than a public corporation created by or pursuant to special authorization of Congress, or a corporation in which the Government of the United States has or exercises a controlling interest through stock ownership or otherwise.' -2- "Your questions, in the order in which they are set forth, and my views thereon are stated below: " ' (1). What Governments, political subdivisions, or associations are in default on their obligations to the United States?' "'Default' is a common word which conveys at once a known meaning, but as applied to particular situations, it is often a matter of uncertainty whether or not or when a 'default' has occurred. Concerning it, Chief Justice Eyre declared in Doe v. Dacre, 1 B. & P. 250, 258; 126 Reprint 887, 891, 'I do not know a larger or looser word than "default";' but as to civil liability the following definitions are enlightening: " 'As used in such an instrument (a contract), it can mean only the nonperformance of a contract,-- a failure upon the part of one of the contracting parties to do that which he had contracted to do.' (Sixteen hundred Tons of Nitrate of Soda v. McLeod, 61 Fed. 849, 851.) " 'In one sense, any failure is a default, whether it arises from the omission to perform a contract, or from a neglect of duty. In many reported cases the omission to pay a debt or to perform a contract is spoken of as a default.' (Burrill v. Crossman, 69 Fed. 749, 752.) "However, the word cannot safely be accepted as importing so inclusive a significance when it is used as a penal statute, as pointed out by the Supreme Court of Nebraska in State v. Moores, 52 Neb. 770, 757, upon consideration of a constitutional provision which rendered ineligible to public office 'any person who is in default as collector and custodian of public money or property,' which the court declared to be 'penal in its nature.' "Lipman v. Equitable Life Assur. Soc. of the United States, 58 F. (2d) 15, and Hartsuff v. Hall, 58 Neb. 417, each dealing with written instruments providing for payment at a stated time with grace, teacher contrary conclusions upon consideration of the context and probable intention as to whether 'default' occurred at the time specified for payment or at the end of the grace period, thereby indicating -3- that no absolute or rigid meaning is to be assumed in a civil case, and a fortiori in a criminal case. "In View, therefore, of the flexibility of the term, and bearing in mind that a penal statute is to be strictly construed against the imputation of criminality to an act which is not malum in se, I think it is required that we seek carefully from authorized sources the probable intent of Congress. In connection therewith your letter indicated particular concern as to Great Britain and other countries which have made so-called token payments, and as to the Soviet Government which has not yet, as you informed me, recognized as binding upon it the obligations incurred by prior governments in Russia. I shall, therefore, indicate to the extent that I properly can, my views in these instances. "On November 7, 1933, the President Issued the following statement: " 'For some weeks representatives of the British Government have been conferring with representatives of this government on the subject of the British debt to this country growing out of the World War. * * * " 'It has, therefore, been concluded to adjourn the discussions until certain factors in the world situation--commercial and monetary--become more clarified. In the meantime, I have as Executive noted the representations of the British Government. I am also assured by that Government that it continues to acknowledge the debt without, of course, prejudicing its right again to present the matter of its readjustment, and that on December 15, 1933, it will give tangible expression of this acknowledgement by the payment of seven and one half million dollars in United States currency. " 'In view of these representations, of the payment, and of the impossibility, at this time, of passing finally and justly upon the request for a readjustment of the debt, I have no personal hesitation in saying that I shall not regard the British Government as in default. ' "On the same day the Chancellor of the Exchequer addressed the House of Commons to the same effect, concluding with the President's statement that he would not regard the British Government as in default. -4- "A statement of similar import had been made by the President in June, 1933, shortly before certain installments upon the debts were due. It is unnecessary to repeat here the statement then made or to treat further of later statements by the President and their acceptance in good faith, except to say that Great Britain and certain other countries made partial payments on installments due in June, 1933, and in December, 1933, with the expectation and belief that they would thereby avoid a default. "In his annual message to Congress delivered at a joint meeting of the two Houses on January 3, 1934, the President stated: 'I expect to report to you later in regard to debts owed the Government and people of this country by the governments and peoples of other countries. Several nations, acknowledging the debt, have paid in small part; other nations have failed to pay. One nation--Finland--has paid the installments due this country in full.' (Cong. Rec. v. 78, p. 5.) It does not appear, however, that any further report in regard to these debts was transmitted to Congress prior to the enactment of the statute. "I find no record of the expression of any views in the Senate upon the meaning of the word 'default' when the bill was under consideration, but the matter was considered in the House, as indicated by the following excerpts from the Congressional Record. 'Mr. BANKHEAD. Under this bill, what would be the status of governments like England, that made a so-called "token payment," but has defaulted in the main? 'Mr. McREYNOLDS. The President of the United States, as I understand it, has held that they are not in default.' (Cong. Rec. Vol. 78, p. 6192.) 'Mr. BRITTEN. Does the gentleman agree with the gentleman from New York (Mr. FISH) that those governments which have made a small token payment will not be held in default by our Government?' 'Mr. JOHNSON of Texas. I am not so sure about that.' (Cong. Rec. Vol. 78, p. 6194.) * * * * * * * * * -5- "'Mr. JOHNSON of Texas. Yes; the language is broad and comprehensive, but the question of what constitutes a default is one that will have to be determined by the terms of the original contracts supplemented by any subsequent agreements that may have been lawfully made.' (Cong. Rec. Vol. 78, p.6195.) "'Mr. KLOEB. Since that time we have beheld the spectacle of all these debtor countries, save one, either actually defaulting in the payments of the installments as they became due or making a so-called "token payment" in order to avoid the ugly word "default".' (Cong. Rec. Vol. 78, p. 6197.) "'Mr. BRITTEN. Mr. Speaker, I am going to vote for this bill because I have, to my own satisfaction at least, concluded that any nation of Europe in default of any portion of its indebtedness, interest or principal, to us is included in the intention of the bill. "'I realize that in the following statement I am disagreeing with the chairman of the committee and probably with the ranking Member on this side, but on page 2, in speaking about the indebtedness it says, "While such government is in default in payment of its obligation or any part thereof." I fail to see why England with a surplus this year of $160,000,000 in her treasury, or France, with countless millions of gold in her treasury, more gold in her treasury per capital than we have, and governments of that type should be excluded from the provisions of this bill, and France is not, I realize, just because they made some insignificant token payments on account of their vast obligation to us. "'If the State Department were to exclude those nations from the provisions of this bill then Czechoslovakia, Great Britain, Greece, Italy, Latvia, Lithuania, and Rumania would be excluded because they have all made some small payment. "' My contention is that the State Department should not act that way, nor has it the authority to presume that because an infinitesimal payment has been made on an indebtedness of billions it takes that nation out of one class and puts it into a preferred class.' (CONG. Rec, Vol. 78, pp. 6197-6198.) -6- "Mr. McReynolds was in charge of the bill during its consideration by the House and, therefore, under the rules applied by the courts in considering such proceedings, his apparent view that Great Britain and other countries similarly situated were not to be deemed in default, is entitled to especial weight. "Moreover, the President, by signing the bill, participated equally with the Houses of Congress and his view as to the meaning of words employed in it is of great significance. I cannot assume that he believed Great Britain to be in default, within the meaning of the word as used in the bill, in view of his express statements on the subject; and from such information as I now have before me it would appear that Czechoslovakia, Italy, Latvia and Lithuania fall in the same category with Great Britain. I conclude, therefore, that these five countries are not, at the present time, in default under the terms of the Act in question. "Beyond this a specific answer as to what governments, political subdivisions, organizations or associations are in default on their obligations to the United States would seem to require a survey of date not immediately available to this office, but in general it may be said, in the words of the statute, that a 'foreign government, political subdivision, organization or association is in default' if it has failed 'in the payment of its obligations, or any part thereof, to the government of the United States,' according to its promise or undertaking to pay a fixed amount at a definite time, unless such default has been postponed or waived in some competent manner or by a transaction having that effect in law or good morals. Should any authoritative statement, in harmony with this opinion, be issued in the form of an administrative declaration that named countries are or are not in default, I should be inclined to follow it in so far as the Department of Justice is charged with the responsibility of institution prosecutions in cases -7- of violation, thereby removing misapprehension and uncertainty to those who desire to avoid conflict with the statutory interdiction; and should the question come before the courts it is reasonable to believe that they would honor any such administrative determination. "With regard to the status, under the Act, of a political subdivision of a defaulting country when the subdivision itself is not in default, attention is called to the fact that while explaining the bill in the House of Representatives, Mr. McReynolds stated that in such a case the political subdivision, such as a city in a defaulting country, would not come within the inhibitions of the bill if the city itself were not in default (Cong. Rec. Vol. 78. p.6200). I approve this view, not only because of the presumption arising from Mr. McReynolds' explanation, but because a reasonable interpretation of the statute itself supports the conclusion that the default of a foreign government would not be imputed to a political subdivision thereof, e. g., a municipality, so as to prohibit the purchase or sale of bonds or securities of the latter, if the municipality is not itself in default. "It has also been asked whether or not Canada, a member of the commonwealth of nations which compose the British Empire, is to be regarded as a political subdivision of Great Britain. The question should properly be answered in the negative, and this conclusion was suggested in Congress (Cong. Rec. Vol. 78, p. 6195), but it appears to be immaterial in view of my conclusion above stated concerning the intention of Congress as applied to the obligations of political subdivisions. Canada, I believe, is not in default. "'(2). To what types of transactions does the Act apply?' "The Committee Reports (S. Rept. 20 and House Rept. 974, 73d Gong.) recite that the bill was introduced following an investigation by the Senate Committee on Finance and the revelation therein that 'billions of dollars of securities *** offered for sale to the American people' were overdue and unpaid; that some of these 'foreign bonds -8- and obligations *** were sold by the American financiers to make outrageously high profits'; and stated a purpose' to prevent a recurrence of the practices which were shown by the investigation to be little less than a fraud upon the American people *** to curb the rapacity of those engaged in the sale of foreign obligations ****.' "This, I think, is indicative of a purpose to deal with such 'bonds' and 'Securities' and with 'other obligations' of like nature, observing the rule of ejusdem generis - that is, obligations such as those which had been sold to the American Public to raise money for the use of the foreign governments issuing them - not contemplating foreign currency, postal money orders, drafts, checks and other ordinary aids to banking and commercial transactions, which are 'obligations' in a broad sense but not in the sense intended. It was obviously not the purpose of the Congress to discontinue all commercial relations with the defaulting countries. "'(3). What constitutes a renewal of an existing credit?' "Your Legal Adviser has concluded, in the memorandum transmitted with your letter of April 23rd, that: "' 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. An instrument given in satisfaction or extension of an existing indebtedness would, it is believed, come within this exception.' "In general, I approve this statement, but obviously it will be a question of fact in each case whether or not what is done amounts in good faith to the mere 'renewal *** of existing indebtedness'. "' (4). Does the Act apply to acceptances or time drafts?' "This question appears to be sufficiently answered by the comments under Question No. 2, supra. It appears proper to add, however, that such transactions must be conducted in good faith, in order to be within the law, and not as mere subterfuge to circumvent its purpose. -9- " ' (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 Provisional Government, on account of loans made to that Government by the United States during the period of the war, the Provisional Government having been the immediate predecessor of the Soviet Government?' "The proceedings in the House of Representatives indicate acceptance of the view that our Government regards the Soviet Government as responsible for the obligations incurred by prior Russian governments. (Cong. Rec. Vol. 78, p. 6192.) The position of our Government in this respect accords with accepted principles of international law, as illustrated by the following authorities: "Moore, Int. Law Digest, v. 1, sec. 96, quoting Secretary of State Adams (August 10, 1818): "' No principle of international law can be more clearly established than this: That the rights and the obligations of a nation in regard to other States are independent of its internal revolutions of government. It extends even to the case of conquest. The conqueror who reduces a nation to his subjection receives it subject to all its engagements and duties toward others, the fulfillment of which then becomes his own duty.' "Halleck, Int. Law (3rd ed.) v. 1, p. 90: " ' Public debts, whether due to or from the revolutionized State, are neither canceled nor affected by any change in the constitution or internal government of a State.' "The same rule is stated, in substance, in Kent's Commentaries (12th ed.) v. 1, p. 26, and in an opinion of Attorney General Griggs, 22 Op. A. G. 583, 584. In connection with, and in support of, these statements the authors cite L Whart. Int. Law Dig., sec. 5; Hall, Int. Law, (4th ed.). pp. 104, 105; Rivier, Principes du Droit des Gens, I, pp. 70-72; United States v. MacRae, L. R. 8 Eq., 69; Vattel, Droit des Gens, liv II, ch. XII, § § 193-197; Grotius, De Jur. Bel., lib II, cap. II § 8. "This view, in fact, was stated in Congress (Cong. Rec. Vol. 78, p. 6192) to have suggested the insertion of the provision in Sec. 2 of the statute excluding from its operation public corporations controlled by the United States, which are permitted to engage in the transactions -10- prohibited to individuals and private corporations, if administratively determined to be desirable. I, therefore, regard the Soviet Government as in default, within the contemplation of the statute. " ' (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?' "Bearing in mind what I have just stated in response to your fifth question, I am aware of no principle of law under which a previously existing default is waived or overcome because of the mere pendency of negotiations 'with a view to arriving at the amount of the indebtedness due,' assuming that there is any uncertainty in this regard, although, of course, the matter might be affected by the outcome of any such negotiations. '' ' (7). Would the issue and sale in the United States of "scrip" or funding bonds in part payment of outstanding obligations be in violation of the Act?' "This question appears to present only a detail of the matter treated generally under Question No. 3, and the same answer is applicable. In other words, such 'scrip' or 'funding bonds' are authorized if issued in the bona fide 'renewal or adjustment of existing indebtedness.' "It is made unlawful, as I have said, 'to purchase or sell the bonds, securities, or other (similar) obligations of any foreign government *** issued after the passage of this Act, or to make any loan to such foreign government *** except a renewal or adjustment of existing indebtedness.' The word 'renewal' needs no definition by me - it is frequently used and commonly understood in banking, business and commercial transactions - and the word 'adjustment,' relating to accounts or claims, has been used in our statutes since the formation of -11- of the Government. (See the Act of September 2, 1789, 1 Stat. 65, and the Act of March 3, 1817, 3 Stat. 366). It is used, I think, in the sense of compromising or determining how much is to be paid, when and where, upon what terms and the like. Thus an adjustment of an existing indebtedness within the meaning of the Act is any lawful arrangement entered into in good faith between the debtor and the creditor which comprises or determines the amount to be paid by the debtor to the creditor and it may include other details other details of composition or settlement. Respectfully, HOMER GUMMINGS Attorney General. The Honorable The Secretary of State." Transcribed and reviewed by contributors participating in the By The People project at crowd.loc.gov.