The Ambassador in Brazil (Morgan) to the Secretary of State

No. 1324

Sir: Confidential. On May 21st [31st] the Embassy informed the Department in a confidential telegram of 3 p.m. that Sir W. G. Armstrong, Whitworth & Company, Ltd., and Vickers, Ltd., known as Vickers-Armstrong of England, had made a proposal to the Brazilian Government to erect a marine arsenal and works for the manufacture of arms, ammunition, iron and steel plates, etc.; for the building of all kinds of ships and the construction of airplanes and munitions of war. The proposal provided that the group should enjoy full liberty to accept private orders, ceding the necessary lands for the erection of said works and facilitating the exploitation of the iron and steel industry. On June 24th the Department replied to this telegram stating that American shipbuilders would probably be interested in making a proposal of a somewhat similar nature.

. . . . . . .

Upon examination the proposition proves to be more ambitious than my telegram represented and to call also “for the manufacture of material used in time of peace”, which can only mean structural steel for building materials, rails and so forth. The proposal purports to be the result of an invitation from the Brazilian Government and the contract reveals that Vickers-Armstrong is to be granted a monopoly for fifty-five years, which the Government will finance. When the works are completed they will be leased to the constructors, although they will revert to the Government at the expiration of the lease. Raw and finished material can be imported from Great Britain without the payment of customs duties, which under the plea of being utilized in connection with the plants of Brazil, could cover many articles used in this country, which Vickers-Armstrong would not manufacture here.

The acceptance of the proposal of Messrs. Vickers-Armstrong would close the open door to many foreign products because in order to meet the interest which the Government would pay upon the investment it would be forced to place orders with the British concessionaires.

The contract provides that disputes between the contractors and the Government shall be settled by arbitration and the resulting concessions shall be tried in England and shall be subject to, and regulated and affected by, the order of the British Supreme Court.

The history of this proposal should be studied in connection with that of the Itabira Iron Ore Company, a British enterprise with head offices at London, incorporated by Rothschild, Baring Brothers [Page 207] and Sir Ernest Cassel, which some time ago purchased the “Conceição” and “Esmeril” deposits of iron ore in the State of Minas Geraes for about $600,000. This group also controls to a large extent the Victoria and Minas Railway which leads from the mines to the sea coast at Victoria in the State of Espirito Santo, north of Rio de Janeiro. These iron deposits, which are of excellent quality, are situated at Itabira de Matto Dentro, are estimated at 99,000,000 cubic meters and capable of producing 296,000,000 tons of ore.

The presentation of the Vickers-Armstrong proposition at this time is directly due to the presence of the Bunsen Mission in Brazil.10 Sir Maurice de Bunsen asked the Foreign Minister to receive Mr. H. J. Lynch, the representative of Davidson, Pullen & Company, the Rio de Janeiro representative of Vickers, Ltd., together with Mr. Edwin Hime of F. H. Walters Company, the local representatives of Sir W. G. Armstrong, Whitworth & Company. A few days subsequently and while the Bunsen Mission was still in Brazil these gentlemen presented the draft contract.

This action should be accepted as a conclusive proof of the commercial and industrial purpose which animated that mission and of the intensity, directness and persistence of the present Brazilian drive, not only to secure a fair share for Britain of Brazilian commercial business but to establish monopolies, which as in the case of the monopoly of the Western Telegraph Company would jeopardize the commercial opportunities of other nations. This feature of the matter is one which the Department will not fail to observe and which is based on an objectionable principle, which is of far-reaching and threatening importance to those of our iron and steel manufacturers who together with the manufacturers who use those materials in construction works wish to hold the place to which they are entitled in the Brazilian and South American market.

I have [etc.]

Edwin V. Morgan

Draft Contract between the Brazilian Government and Vickers-Armstrong of England

Draft of a preliminary agreement made between the Brazilian Government (hereinafter called the Government), party of the first part, and Messrs. W. G. Armstrong, Whitworth & Co., Ltd., and Vickers, Ltd., (hereinafter called the contractors), party of the second part.

Clause I

The contractors obligate themselves to undertake, in conformity with the Government’s views, the construction and subsequent exploitation [Page 208] of an arsenal to be constructed on the most modern plans possible, the Government to grant all necessary concessions for the manufacture of arms and ammunition, the manufacture of iron and steel plates, etc., shipbuilding of all sorts, construction of aeroplanes, and the manufacture of all material for military needs, granting the contractors full liberty to accept any and all work for private parties; the Government undertaking the obligation to place with the contractors orders for everything which it may require that may be manufactured by the contractors, also to cede all the lands necessary for the construction of the arsenal and to grant all possible concessions for the exploitation of the iron and steel industries.

Clause II

The Government shall deliver to the contractors sufficient and proper lands for the erection of the arsenal and for the other purposes designated in this contract.

The Government will also deliver to the contractors all Government arsenals and ships, etc., which are suitable to the fulfillment of the ends of this contract, as well as any additional lands, shops, machinery or other material necessary to the proper fulfillment of the said contract, all of which to be free from taxes and to be so held in trust by the contractors during the life of this contract.

Clause III

The Government shall guarantee the contractors all necessary facilities for the rapid and economical construction of the arsenal. For this purpose the Government shall disappropriate waters, quarries, rights-of-way, and other holdings which may become necessary.

Clause IV

Everything which relates to this contract shall be considered as belonging to the Federal Government, and as such subject to the same burdens and obligations, and shall enjoy the same advantages, exemptions and privileges as are peculiar to Government property and undertakings.

With the exception of the stamp tax, the contractors shall be exempt from all taxes or imposts of whatsoever nature, at present in force or which may be enacted, and all material and diverse objects imported by them, for the execution of the work as undertaken, in accordance with certificates signed by the Fiscal Commission, shall be exempt from all import duties and charges, including the tax of 2% gold for the conservation of the port.

[Page 209]

Clause V

Work shall be begun immediately upon the signature of a definitive contract and shall be completed with the greatest possible urgency.

Clause VI

The Government shall make monthly payments to cover the certified expenditures on the work undertaken in Clause I until the conclusion of said work.
Such payments shall be made in Government gold bonds, freely negotiable, bearing interest at 5% per annum, to be amortized in 55 years from date of first payment.
The amount of interest during the first five years from the date of the first delivery of bonds, shall be paid in similar bonds and after that period, shall be paid in specie.
When payments are made in bonds the total of each monthly payment shall be increased by a sum, according to quotations, equal to the discount on Brazilian Government 5% Bonds of 1913 in the London market on the last day of the month preceding that in which such bonds are delivered. Example: If the sum total of the monthly payment should be … 70,000 pounds and the 1913 Loan be quoted at 70, the Government will deliver bonds to the amount of 100,000 pounds.
Bonds issued for the payment of this contract shall constitute a separate and distinct issue, free from all Brazilian taxation.
The Government may make payments in Treasury gold notes during the period of construction, provided such notes bear a declaration that they will be converted into regular bonds on or before the termination of the period of five years, to count from the date of first payment.
The delivery of all such bonds or Treasury notes shall be made to the contractors in England and the Government shall pay the cost of all stamps thereon.

Clause VII

Upon the completion of the work undertaken in Clause I the contractors shall take the same under lease from the Government, for a term of fifty-five years, to count from the first payment, for an annual rental equal to the amount of interest at 5% to be paid by the Government, in accordance with the stipulation in Clause VI, paragraph 2.

At the end of the sixth year, after the date of the first payment, the contractors shall pay an additional amount of ½% per annum, [Page 210] as a reserve fund for the amortization of the total amount of bonds issued. This rental and the reserve fund shall be paid semi-annually in London to the financial representatives of the Government, fourteen days in advance of the due date for the payment of the interest on the bonds. The reserve fund, to be accumulated at the rate of ½% per annum, shall be invested semi-annually in the purchase of bonds when below par, or by lot when at par or above par.

Clause VIII

The contractors shall have complete control of all work in the shops, docks, etc., and of the repair and construction work as stipulated in Clause I, during the full term of the lease. Upon the termination of said lease, and when all amounts due to the contractors shall have been paid, all of the property, in a perfect state of conservation shall revert to the Government without any indemnity whatsoever. Should the Government not desire to take over the management, this contract may be extended for a further fixed period of time, subject to such modifications as may be agreed upon.

Clause IX

The contractors may undertake and execute orders for the repair and construction of merchant and private vessels, and participate in any subsidies and other concessions granted to stimulate maritime construction as a national industry, whether such be granted by the Federal or State Governments. The contractors shall also enjoy the same rights relative to the importation of material, machinery, etc., etc., as are enjoyed by private establishments in Brazil. The contractors may also under-take other work for which their equipment may be adequate.

Clause X

The arrangements set forth in Clause IX shall be subject to the condition that all Government work shall have preference over all other work.

Clause XI

The Government shall guarantee to the contractors the construction of a determined number of gross tons of steam or motor vessels per annum and also the repairing of all Brazilian men-of-war and other Government ships. The construction and repair of said ships shall be effected, always when possible, in the yards established by virtue of this contract. In case of construction in the yards of the contractors in England or elsewhere, the Government shall grant permission for said transfer.

[Page 211]

Clause XII

Aside from the capital employed in the construction of the works enumerated in Clause I, the contractors shall provide a large sum to cover cost of material, provisions, combustibles, salaries, etc., the total of which cannot at present be determined. It is convenient to maintain the capital of construction (which shall be known as initial capital) separate and distinct from the capital secondarily mentioned (which shall be known as working capital).
Should the returns on all Government and outside work entrusted to the contractors not be sufficient to enable them (after the payment of salaries, wages, insurance, renewals and other expenses necessary to the maintenance and efficient working of the establishment) to pay the rental and reserve fund per annum—that is to say 5½% on the initial capital and a further 15% on the working capital—the Government shall pay to the contractors, in money, the amount of the yearly deficit.

Clause XIII

The Government may, at any time after the completion of the works enumerated in Clause I, upon six months’ previous notice, annul the lease referred to in Clause VII, subject to the following terms and conditions:
By repaying to the contractors its working capital plus interest at 5% per annum together with any additional expense which they may have incurred or for which they may have rendered themselves liable, and by giving to the contractors a complete and full acquittance of all resultant claims or demands.
By assuming responsibility for all contracts made by the contractors, either in England or Brazil.
And, if necessary, by making agreements with the holders of the bonds or Treasury notes referred to in Clause VI and representing the initial capital.

Clause XIV

The contractors, during the period of lease referred to in Clause VII, will have preference for the construction of any other arsenals including fortifications with necessary armament, munitions, and magazines necessary for their defence, and for the fortifications, munitions and magazines of Rio de Janeiro or any other locality and also for the barracks, hospitals and quarters for the civil and military staffs of said arsenals and fortifications.

[Page 212]

Clause XV

All of the works contemplated in this contract shall be executed in accordance with such plans and specifications as may be agreed upon.

The cost of the works shall be the actual cost to the contractors, plus an amount equal to 15% thereof, in order to insure to the contractors a commission, or profit, on the execution and completion of the works.

The contractors shall submit, for the Government’s approval, an estimate of the cost of the works, as they progress, which estimate shall be agreed upon between the Government and the contractors as a working basis.

If the real cost of the works, after their termination, exceeds the estimated cost agreed upon, the constructors will not receive any commission or profit on the amount by which said cost exceeds the estimated cost.

If, on the other hand, the real cost of the works, after their termination, is less than the estimated cost agreed upon, the contractors will receive, from the Government, sum in excess of the calculated commission equal to one-half of the amount of economy effected.

It is evident that this condition is a guarantee that the work will be executed with the greatest despatch and economy and will also be a guarantee to the Government that it will not have to pay more than is necessary for the proper execution of the work.

The English Government has made many contracts on this basis and, with the difficulties and confusion peculiar to present conditions, cannot conceive of another plan which so well protects the interests of the Brazilian Government.

Clause XVI

If any doubt or misunderstanding should arise between the Government and the contractors relative to their rights and obligations as stipulated in any of the clauses of this contract, such doubt or misunderstanding shall, in due time and at the request of one of the parties, be submitted to and decided by two arbiters (one appointed by the Government and the other appointed by the contractors) together with a third party who shall be selected by the two already appointed, but before they shall have assumed their duties. The submission of their written judgment, at the request of one of the parties, shall be equivalent to an embargo or finding by any of the departments of H.B.M. Supreme Court of Justice, and the resultant concession or concessions shall be tried in England and be subject to, regulated and affected by all of the appeals, consequences [Page 213] and effects of an arbitration made by order of said Supreme Court. In case the two arbiters cannot agree upon the nomination of the third, said third arbiter will be chosen by a Committee of the British Admiralty.

  1. For papers relating to the British mission referred to, see Foreign Relations, 1918, Supplement 1, vol. i, pp. 685, 689, and 690.