File No. 652.119/1368
The Ambassador in Spain ( Willard ) to the Secretary of State
[Received August 13, 1 a.m.]
For Leffingwell [from Davis]:
No. 6. Have had long conference with Prime Minister and other Cabinet members. With exception of June allotment of cotton, they are willing have balance of cotton and petroleum coming forward under present agreement paid for in pesetas at current rate. They propose to have Spanish syndicate of bankers establish credits in favor of American bankers or syndicate at satisfactory rate of interest for whatever amount we may require to cover purchases here, to be guaranteed by pledge of Government obligations and made available by 90-day bills renewable for periods required and rediscountable at Bank of Spain. They suggest that pesetas received from cotton and petroleum sold to Spain and in excess of pesetas [Page 1698] required to meet our Government purchases in Spain be applied in reduction of credit. Foregoing based on assumption we will deal as liberally as possible in allowing necessary exports to Spain.
Spanish banks cannot purchase foreign securities without Government’s approval and latter hesitates approve purchase of our Government’s obligations because embarrassments might arise with other governments which have been refused. Am, however, endeavoring to induce Spanish Government to approve of our placing from 50,000,000 to 100,000,000 pesetas of Treasury certificates here in order to cover our requirements, pending a time which would be required in obtaining pesetas through banking credits as above indicated and have suggested that such certificates might be made payable in six months with rights of at least one renewal. This matter will be presented at meeting of Ministers tomorrow evening. Doubtful if they will approve, but in case they do approve, I should like to know if would be legal and acceptable for you to cable text of obligations to be signed and authority to American Ambassador and myself to sign certificates on condition that proceeds be deposited with Bank of Spain to credit of Secretary of the Treasury. Presume it would be satisfactory to pay 5 per cent interest on such obligations. The premium on pesetas is damaging their trade with South America and Spanish officials realize advantages in having normal rate of exchange. They prefer to deal direct with New York and while willing to pay for American purchases under present agreement in pesetas at current rate, refuse to agree to payment in pesetas at par of exchange. They argue this would increase cost to Spanish importers and that by obtaining credits here to cover our requirements we could soon normalize exchange. We can therefore only make our exports payable in pesetas at par after expiration of present agreement. Doubt advantage of having our present sales to Spain made payable in pesetas at current rate of exchange when we can purchase at same rate in open market, which we are unwilling to do and which our banks would be unwilling to do, except to resell to avoid loss in present rising market.
Representatives here of British and French Treasuries are getting firm control of exchange market after two months of work. At first they had to purchase about £5,000,000 in bills but this they have resold besides additional bills amounting to 75,000,000 pesetas which they now have at their disposal. Aside from about $110,000,000 in balances accumulated by Spanish banks in London and New York during four years, British and French [believe that] balance of trade is now little if any in Spain’s favor and that, with proper management and comparatively small amount of money, market can be [Page 1699] put and maintained nearly at par. They desire to have us cooperate with them but have explained we can only assist indirectly.
If we can obtain credits to cover our requirements until expiration of present agreement we could thereafter grant exporters licenses only on condition that payment be made in pesetas at par of exchange and should be able within 12 months thus to obtain sufficient pesetas to cover our requirements and repay credits. From information thus far obtained think 25,000,000 pesetas monthly will cover our requirements after January 1 because it will then be impossible to purchase many horses and mules which represent majority of estimated expenditures for this half year. Prefer if possible to avoid necessity of 90-day renewable bills but this seems necessary to enable banks to carry credit with banks of Spain.
Present Allied offensive having good effect and should assist in negotiations, but while Spanish officials apparently are now willing to cooperate as above indicated, I am not at all sure they will comply and that negotiations may not fail or take another turn when we begin to close proposed arrangements. However, this advance information is given in order that you may cable immediately your general approval and any suggestions or instructions. Davis.