of their indebtedness than were the citizens of other nations if they joined this clearing-house agreement. If Mr. Palmer would be kind enough to proceed as briefly as possible in answer to that question, I should be glad to hear him. I should be glad to know where American nationals have any advantage over the citizens of the other nations, or where they stand upon an equal basis with the citizens of the other nations, in the collection or settlement of their indebtedness.

Mr. PALMER. Mr. Chairman and gentlemen, that remark I made was perhaps a little more general than I intended. What I intended to say was that the citizens of the United States would be better protected if the United States did not adopt the clearing system than if they did. I did not intend to differentiate between the citizens of the United States and those of any other nation as the remark would indicate. That was not my view.

Senator FALL. That is what I wanted to clear up.

Mr. PALMER. I am talking about the operation of the clearing system. Under the clearing system the friendly power on the one side and Germany on the other each undertakes to collect all the enemy debts within its territory and apply it to the payment of the credit of their own nationals. The result of that operation in effect is that the creditors of the friendly nation-I use that term instead of repeating "allied or associated nations"--are limited to the proceeds of enemy credits and the proceeds of enemy property in their own country.

In case a country does not become a part of the clearing system, the creditors of that country have the right to collect their debt from the debtors in Germany, which would otherwise be collected and the proceeds kept by the German Government; and in addition to that their Government has at its disposal the entire fund of enemy property in this country, by which it can, if it so desires, pay the uncollected portion of its citizens' debt. That is a brief statement of the financial difference between those two systems, and that is the foundation of the remark that I made which was quoted by the Senator from New Mexico, Mr. Fall. I find some difficulty in explaining that, because it is complicated, and it is not an easy conception to understand or to explain; but I have a very clear understanding of it, and if I have not made it clear I should like to go further.

Senator HITCHCOCK. Let me ask you this question: If John Smith in the United States has a claim of $5,000 against a German debtor, how would he proceed under article 3 if the United States adopts that, and also how would he proceed and how would he be protected if the other option is elected?

Mr. PALMER. If John Smith, a creditor in the United States, has a claim of $5,000 against a German debtor, if the United States does not adopt section 3, John Smith has the same contractual rights that he always had unimpaired, and pursuant thereto he has a right to demand and collect his claim from the German debtor. He also has the right, in case of dispute of his claim

Senator HITCHCOCK. That would be in the German courts?

Mr. PALMER. In the case of the dispute of his claim, instead of going to a German court, he has the right to appeal to the new court with a neutral president; and on top of that, subject to the action of the United States Government, he would have the opportunity to ask the United States to pay his debt out of the funds which the

United States has in its possession, derived from the enemy property and the proceeds of enemy debts collected in this country.

Now if the United States adopts the clearing system, the same creditor has no longer the right to collect his debt from the debtor in Germany. His only recourse is to the United States, and the United States would be obliged to pay him from the funds which they had received.

Senator HITCHCOCK. Where could he sue for the collection of his debt?

Mr. PALMER. He could not sue.

Senator HITCHCOCK. Where could he present his claim?

Mr. PALMER. To the United States Government. The result is that if the claims in the United States exceeded the amount of property collected by the Government, the resulting claim would be against the German Government only, which is not a very valuable asset at the present time.

So that you will see that the possibility of collection by the American creditor is double under one system as against the other.

Senator FALL. Each nation here has exactly the same alternative that is left to the United States?

Mr. PALMER. Oh, yes.

Senator FALL. Now under article 3, if we join the clearing-house system, the German Government guarantees the debts of its nationals?

Mr. PALMER. It guarantees the debts of its nationals in this way It gives as a credit to the other country the amount of the debt owed by its nationals to the citizens of that country. That is the bookkeeping transaction, which results in a balance one way or the other.

Senator FALL. I admit that whenever I run up against a proposition advanced by some auditor or bookkeeper, and it is a bookkeeping proposition, then I am lost; I know nothing about it. But I notice the provision in the treaty itself is that each of the high contracting parties shall be respectively responsible for the payment of such debts of its nationals.

Mr. PALMER. Yes.

Senator FALL. That may be just a bookkeeping entry, but the question is whether it is worth anything.

Mr. PALMER. What I am sure of is that under the operation of the clearing system that becomes a bookkeeping entry.

Now the condition which seemed to the American lawyers most serious under this system arises from the operation of that clause, because under it the United States Government would be obliged to guarantee the payment of an enormous amount of obligations, some of which are worthless, many of which can not be collected, and including, as far as the lawyers could determine, a class of obligations among which were our defaulted railroad bonds which became due before the war or during the war.

Senator FALL. And State bonds?

Mr. PALMER. No; not State bonds.
Senator FALL. Repudiated bonds?

Mr. PALMER. Well, I don't know. I never thought of that.
Senator FALL. I thought possibly you had thought of it.

Mr. PALMER. The result would be that the United States would find itself guaranteeing and paying to somebody the full par value of private and semipublic obligations, the actual value of which was a

What the effect would be on the German very much less amount. creditor I do not know. If the system operated, the German creditor might get 100 cents on the dollar for a railroad bond for which our citizens had taken stock. The American lawyers never could figure that out, and we never could get a satisfactory answer from the other powers as to how that would operate, and that was the stumbling block. When we could not cross that block, the ridiculousness of the United States guaranteeing all that vast mass of obligations in this country was an obstacle which no American lawyer could ever get

across.

Apart from that, however, I have personally taken a great interest in discussing the clearing system and ascertaining as far as I could how the originators of the system expected it to work; because if it was possible to devise a clearing system or rather a system of arranging mutually the debts between this country and Germany without a Government guaranty and without preventing our merchants from communicating and arranging their settlements in some way and without some of the other features which would cramp the system, it would be an advantageous thing..

In other words, if we could arrange with Germany a system to clear our debts which have been hung up through, we will say, a group of banks or some private institution, without involving the obligations or the friction of governmental interests, it would be an admirable thing to do. That is exactly the opportunity that is left to us now, if we desire to do so.

Senator KNOX. I want to ask you about this option. Do we have to give notice to get into the clearing house, or give notice to stay out?

Mr. PALMER. We have to give notice to get in.

Senator KNOX. Now, do we? I thought that, at first; but look at the text on page 351, at the bottom of the page. I will read enough * * * unless of it to get the substance of it. It says that "the provisions of this article and of the annex hereto shall not apply * * * notice to that effect is given." Does not "notice to that effect" mean notice that it shall not apply, rather than that it shall apply?

Mr. PALMER. I will answer that question in this way. When that clause was originally drawn it was drawn to require notice to stay out, and the United States representative objected to it very strongly, and the word "if" was changed to "unless," in order to give it the effect which I say. In other words, the clause was remodeled for the purpose of providing that in case any country desired to participate in this they must give notice. Otherwise they are left out. Senator KNOX. Does this language do so?

Mr. PALMER. I think so.

What effect?

Senator KNOX. It says that the provisions of this article and of the annex thereto shall not apply unless notice to that effect is given. Mr. PALMER. To the effect that they shall apply. Senator KNOX. No; it says "notice to that effect." The effect is that it shall not apply. I assumed that what you say you were trying to do was what had been done, but this language is really confusing. I do not know whether the French text helps it out any or not.

Mr. PALMER. The language says it shall not apply "unless" unless what? Unless notice is given.

Senator KNOX. Unless notice "to that effect" is given.

Mr. PALMER. Unless notice of some kind is given.

Senator KNOX. Notice that it shall not apply, it seems to me to mean. What I want to find out is whether we have got to give notice to stay in or to give notice to get out. That may be clear to other people, but it is not clear to me.

Senator SWANSON. Your interpretation is that that means that it shall not apply

Senator KNOX. My interpretation is that it means that notice shall be given that it shall not apply.

Senator SWANSON. And you interpret it that "to that effect," means that it shall not apply?

Senator KNOX. That it shall not apply; yes. You and I both thought it was the other way yesterday when we talked about it, that we would have to give notice to get in; that we are automatically out unless we give notice to get in.

Senator FALL. Yes; we are automatically out unless we give notice to get in, and I very much hope that we will not give any such notice, and I would very much like an imperative provision that we shall not give any such notice.

Mr. PALMER. This is clear, Senator, I think. It says "unless." Unless what? Unless some notice is given. Therefore, the alternative is that if no notice is given it does not apply.

Senator KNOx. It says "notice to that effect." The effect of that paragraph is that under certain circumstances it shall not apply. Mr. PALMER. Yes.

Senator KNOX. Therefore, it does apply unless notice is given. Mr. PALMER. No; it does not apply unless notice is given.

Senator HARDING. The succeeding paragraph says, on page 353: "The allied and associated powers who have adopted this article and the annex." Does that contemplate notice?

Mr. PALMER. If you do not give any notice yourself, it does not apply. It says so.

Senator POMERENE. Yes.

Senator PITTMAN. Leaving out intervening words, does it not read this way: "The provisions of this article and of the annex hereto shall not apply unless notice to that effect is given"? That is the language of this section?

Mr. PALMER. Yes, sir.

Senator KNOX. Unless notice to the effect that it shall not apply is given.

Senator PITTMAN. The first statement is that it shall not apply unless notice is given to that effect.

Mr. PALMER. Senator, I think the words "notice to that effect" should be interpreted for that purpose.

Senator KNOX. I should be very much disposed to defer it to the interpretation that this committee would put upon it, but to my mind it is very confusing here.

Senator McCUMBER. The matter is also in the French text, and we have here some very good French scholars, and I would like to ask some of them for their interpretation to see how the French agrees. The CHAIRMAN. It is very blind.

Senator FALL. Mr. Chairman, I have nothing further that I wanted to question Mr. Palmer about. I want, personally, to thank him for his explanation of the matter I inquired about.

The CHAIRMAN. Does any other member of the committee desire to ask Mr. Palmer any questions?

Senator MOSES. Mr. Chairman, referring to page 273 of the committee text, which is Annex II, paragraph 15, following article 244, I would like Mr. Palmer to explain the practical working out. Of course, there are many things in connection with the Reparation Commission which possibly these witnesses are not prepared to take up. Mr. PALMER. Is that in the reparation clauses?

Senator MOSES. Yes.

Mr. PALMER. I had nothing to do with that part of the treaty. Senator MOSES. Is Mr. Baruch familiar with that?

Mr. BARUCH. Yes.

Senator MOSES. I will ask Mr. Baruch about that when he comes on, then.

The CHAIRMAN. If there is nothing further that the members of the committee desire to ask Mr. Palmer, the committee are much obliged to him, and we will now hear Mr. Baruch.

STATEMENT OF MR. BERNARD M. BARUCH-Resumed.

Senator MOSES. Have you the text before you to which I have referred, page 273 of our text?

Mr. BARUCH. Will you give me the article?

Senator MOSES. It is Annex II, paragraph 15, following article 244 of the treaty, on page 273 of the committee print.

I would like to know exactly how that would work out, practically. Mr. BARUCH. It reads:

A certificate stating that it holds for the account of the said power bonds of the issues mentioned above.

Just let me go back to the beginning of this.

Senator MOSES. Look at the bottom of page 268 and the top of page 269.

Mr. BARUCH. Yes; I have it. This refers to the issue of so many hundreds of millions of marks of gold bonds.

Senator MoSES. Yes.

Mr. BARUCH. It says:

The commission will issue to each of the interested powers, in such form as the commission shall fix:

(1) A certificate stating that it holds for the account of the said power bonds of the issues mentioned above, the said certificates, on the demand of the power concerned, being divisible in a number of parts, not exceeding five,

Now, what is the question?

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Senator MOSES. It also provides that certain warehouse certificates shall be divided in a certain manner.

Mr. BARUCH. It says, "certificates stating the goods delivered by Germany on account of her reparation debt." For instance, if a certain power should ask a certain amount of machinery, orSenator MOSES. Dyestuffs?

Mr. BARUCH. Or dyestuffs, or raw materials for the building of roadways or of houses, she might be credited and receive a certificate for that.