Papers Relating to the Foreign Relations of the United States, 1921, Volume I
837.51/615
The Representative on Special Mission in Cuba (Crowder) to the Secretary of State
[Received October 15.]
Dear Mr. Secretary: Negotiations between President Zayas and the Morgan group of bankers proceeded rather satisfactorily for a week and then came to a kind of impasse, due to the failure of Zayas to commit himself in a definite way to a constructive financial program. An exchange of correspondence between them having demonstrated this situation, I sent this morning to President Zayas the enclosed letter. I am to see Zayas this afternoon. If he responds to the letter I have written him in a satisfactory way, and if the Department approves the commitments he may make, the temporary loan for $5,000,000 can be speedily consummated. This will give us a breathing spell and we may proceed with more thoroughness in the matter of the general loan for $50,000,000.
Personally I do not see how Zayas can delay much further the necessary commitments. The alternative, and I think he begins to see it, is that his Administration must fall, for no nation can live with daily default on its most pressing current obligations and ultimate default on the service of its Exterior debt. I am convinced that Cuba has but the one chance which I have attempted to give her to keep out of the list of bankrupt nations.
If Zayas should respond with the proper constructive financial program, and, the temporary loan is made, we shall have taken a definite step forward in the direction of the general loan and the effect upon public confidence ought to be very marked.
Party spirit is running pretty high in Cuba incident to the reorganization of political parties. The Department will not forget that the general elections for the renewal of the Lower House in its one half portion take place next year coincidently with our own; but the electoral period here opens in the month of April 1922, when Cuba will be plunged into the throes of another general election. The fact has doubtless claimed the attention of the Department and plans for dealing with the political situation next year are being formulated.
Very respectfully,
The Representative on Special Mission in Cuba (Crowder) to President Zayas
Dear Mr. President: Under date of October 3rd I transmitted to Your Excellency cabled instructions which I had received from my Government60 respecting pending negotiations. On October 4th and again on October 8th I received from Your Excellency partial replies, but there remain many parts of said instructions which concern the pending loan negotiations, and in respect of which a decision must be reached before I shall be able to submit final recommendations to my Government as to the terms and conditions upon which any loan may receive its sanction under Article Two of the Piatt Amendment.
Latterly we have discussed the advisability of a preliminary or advance loan of Five Million ($5,000,000) Dollars on the security of certain Bonds in the possession of the Cuban Government, to be followed by and repaid from a larger loan of Fifty Million ($50,000,000) Dollars. I have already informed Your Excellency that my Government would interpose no objection to this preliminary or advance loan if it is made as an integral part of a larger loan and upon terms and conditions which would enable my Government to regard it as an essential part of a constructive financial program, adequate to meet the present crisis of actual industrial and threatened governmental insolvency.
All along the negotiations between our two Governments have been obstructed by failure to agree upon what constitutes a constructive financial program for the Government of Cuba in the present crisis. I am convinced that little progress will be made in formulating such a program until there is substantial agreement in defining Cuba’s present financial crisis. I shall therefore address myself first to the task of giving the best definition I can of the present crisis, and will then attempt to indicate what, in my judgment, are the essential steps that must be taken to establish the solvency of the nation on firm grounds.
Preliminarily let me observe that on May 20th of this year, when Your Excellency assumed office, you were confronted with an industrial and financial crisis unprecedented in the history of Cuba. No previous incoming Chief Executive had been faced with such a perilous situation. The prosperity (partly artificial) which marked the years of the World War and the years immediately [Page 741] following was accompanied, as is not unusual in such cases, by personal and governmental extravagances. With the ending of the artificial war demands, came an industrial collapse affecting all classes of business in Cuba and revealing a general demoralization, both economic and moral, evidenced by the following facts:
Fifteen Banks which in normal times had transacted more than fifty percent of the banking business of Cuba, are at the present time undergoing costly liquidation. The stimulus of buying power in the nation, due to the very large profits made in the last few years, has been followed by a rapid decline in prices. Merchants who have bought or ordered large stocks of goods are able to dispose of them, if at all, only by slow degrees and at falling prices. The basic industry of the Island—the production of sugar, has been seriously crippled by the collapse of the world market for Sugar, due in large part to the present over-production. While no one can foretell when natural conditions will restore the sugar market to its normal pre-war position, those most competent to predict on such subject, feel that with the large unsold supply of this year’s crop in Cuba, a healthy condition of the sugar market can hardly be reached until the world’s production of sugar has become readjusted to the world’s consumption under the new conditions.
Reorganization of the Banks now undergoing liquidation is rendered very difficult, not only by existing instability and lack of confidence, but also by lack of legal safeguards. It cannot be denied that certain of these Banks which might command the necessary financial aid may not reorganize because of the absence of sane banking laws in Cuba. The enactment of such a law is one of the country’s most urgent needs, and yet nothing has been accomplished as yet along these lines. So too the loss incurred by many insolvent mercantile establishments has increased because of the archaic stipulations in the laws of Cuba regulating such cases, and the failure thus far to enact a bankruptcy and receivership statute adequate to meet the existing crisis.
The loss and confusion resulting from the necessary economic readjustment in Cuba may be minimized by constructive laws and governmental policies. When it is realized that industrial Cuba on her products and otherwise is still in debt to the outside world for huge amounts, estimated by some at Two Hundred Million ($200,000,000) Dollars, the danger of the situation and the necessity for a reestablishment of confidence, stability and economic order is most apparent.
The critical condition in which you found the whole industrial life of Cuba would have presented governmental problems of the first importance. The difficulty of solving these problems, however, [Page 742] was intensified by the position in which the Public Treasury was turned over to you by the prior Administration. Without attempting to set out all of the vital problems which have presented themselves to you in the past four months, I may mention some of them. As I view it, the crisis has the following fixed and definite elements about which we ought not to be in disagreement:
- First: The Government had a public debt (exterior and interior) aggregating about Eighty Five Million ($85,000,000) Dollars to meet the annual service of which the laws required you to place in the fixed budget an annual charge of approximately Ten Million ($10,000,000) Dollars.
- Second: In addition to the funded debt above mentioned, the Government had a floating debt, the exact amount of which has not yet been ascertained, but which is roughly estimated at Forty Six Million ($46,000,000) Dollars,—a sum almost equal to the total exterior funded debt of the Government of Cuba, which had been accumulating in the past twenty years. I am aware that the exact amount of this floating debt is still uncertain, but from the information which you have given me, the difference in the various statements of the amount of the debt is not large enough to reduce the gravity of the situation.
- Third: A large portion of the floating debt aforesaid was in the shape of outstanding checks, estimated to be between $6,000,000 and $7,000,000 in amount. The failure of the Banco Nacional, in which the greater portion of the Government Funds were deposited, left the Government without adequate resources to meet these outstanding checks. The actual currency reserve in the Public Treasury, I have been advised, amounted to about Five Million ($5,000,000) Dollars at the time you took office, and that this reserve has steadily been absorbed in payments imperatively required to be made, until today it stands at One Million Five Hundred Thousand ($1,500,000) Dollars.
- Fourth: The receipts of the Government during the last fiscal year, especially from Customs Revenue, were abnormally large due to high prices of imported goods, and possibly also to excessive importations. At the time Your Excellency assumed office, however, these abnormal receipts were rapidly falling off and you were faced with the difficult problem of keeping your Government functioning in the face of a staggering floating debt, with decreasing monthly revenues insufficient to meet current monthly expenditures.
- Fifth: While Your Excellency has been able to make substantial reductions in the Governmental expenditures, notably by the suspension of payments under the Gratification Law and the repeal of the Minimum Wage Law, nevertheless your reductions in expenditure have not kept pace with the reduction in revenue. The fact, therefore, remains that while you have been able to pay off many of the outstanding checks of our predecessor Government, the financial position of the Government today is not as good as on the day you took office, because each month you have incurred fresh current obligations in excess of the current receipts of that month.
I might carry the enumeration further to include many other fixed and definite elements of the present crisis without incorporating any disputed fact. I feel that I need not do so, as I am sure Your Excellency will concede the extreme gravity of the situation and that the peril to the Republic is imminent. Certainly it requires no argument to demonstrate how extremely dangerous it is to allow the Government currency reserve to fall below the One Million Five Hundred Thousand ($1,500,000) Dollars at which I understand it now stands; and that at that low figure a default on the public funded debt, with all the evil consequences that such a default would entail to the credit of the Republic, is seriously threatening. Confirming me in this view are the advices which reach me, seemingly reliable, that while checks have been given to all those who have presented coupons representing interest on the debt, some of those checks have not been paid. If this be true, there is, technically speaking, a default on the public funded debt today. Moreover we have to consider that because of the inadequacy of funds with which to make payment for current public services, large numbers of Government employees in essential services, such as schools, hospitals, street-cleaning forces, and the Police and Army, are behind in their pay. This would be a most serious thing for any Government at any time. It carries a peculiar element of danger to Cuba today because of the suffering of the people, due to the loss of their savings through bank failure and to the unemployment problem daily becoming more acute.
I am sure I need not further emphasize to Your Excellency the very great peril in the present situation. No Government can be certain that it can maintain an adequate protection of “life, property and individual liberty,” or an adequate prevention against the “recurrence of epidemic and infectious diseases,” while it is living from day to day in such an unstable condition as the Government of Cuba has been in during the past three months. It is pertinent here to observe that these quoted phrases from Articles III and V of the treaty between the Government of Cuba and the Government of the United States of July 2, 1904 (incorporated in the Constitution of Cuba) sufficiently establishes the fact that this discussion is directly relevant to matters of treaty stipulation and to the adequate fulfillment of treaty obligations.
A temporary remedy for this situation may be found in a temporary loan or loans, but what I have said makes it very plain that a pre-requisite for such loans is the making of a constructive program leading to a firm establishment of the public credit. The only permanent remedy, of course, is a further reduction of Governmental expenses or an increase in the Governmental Revenue, or both a decrease [Page 744] in expense and an increase in revenue. In considering a revision of the revenue upward, Your Excellency of course will have in mind the limitations imposed by Cuba’s depressed industrial conditions and that new revenue laws may provide revenue on paper that will not be realized in actual collections. People cannot pay what they have not got.
In the imposition of taxes under existing conditions it is vital to avoid destroying the source from which the taxes are derived, and for such a complicated undertaking it is most important that changes be made upon the recommendations of experts after an exhaustive study of the question. Cuba is the only country within my knowledge which undertakes tax revision without the most extensive reliance upon such expert assistance.
I am sure that I need not call your Excellency’s attention to the fact that a temporary loan of Five Million ($5,000,000) Dollars which it is now proposed to secure from J. P. Morgan & Company could only give temporary relief, and would be therefore futile unless it is made a step towards, and a part of, more comprehensive measures contemplated in order to place Your Excellency’s Government on a stable financial basis, and which makes it most incumbent upon Your Excellency’s Government to expedite.
This brings us logically to a consideration of the all important question,—What is to be Cuba’s constructive financial program?
Stated in other words, what are the steps necessary to be taken to establish Cuba’s public credit on that firm basis which will make it abundantly evident that the ordinary revenues are and will remain adequate, after defraying the current expenses of the Government, to pay interest and sinking fund charges on the public debt, including any addition thereto that may be negotiated; for until the revenues are made so adequate, the United States Government is without the authority to sanction, and the Government of Cuba without the authority to contract, any new loan? The negotiations now pending should furnish the answer to this question.
My Government in its most recent cable instructions has suggested for the consideration of Your Excellency one of the steps which ought to be taken, and information as to which in all necessary detail will be found in my communication of October 3rd. It is one of the points not discussed in the two partial replies which I have received to that communication. In effect I was instructed to say that the Department of State would not necessarily interpose any objection to the contraction of a temporary loan for Five Million ($5,000,000) Dollars as a part of a permanent loan and to be reimbursed from it, if Your Excellency would give a definite commitment in writing (for the confidential use of the United States [Page 745] Government if Your Excellency so desires) that the budget to be framed by you, under the authority of the budgetary bill now in conference, would not exceed Fifty Million ($50,000,000) Dollars; or else that Your Excellency would satisfy the Department conclusively that the Government of Cuba cannot be operated efficiently on less than whatever total of appropriation up to Sixty Five Million ($65,000,000) Dollars that Your Excellency may determine upon.
Of course Your Excellency understands and will give due consideration to the fact that this superior limit of Sixty Five Million ($65,000,000) [Dollars] was suggested at a time when it was contemplated that the service of the existing public debt should be provided for out of revenues of the State and within this limit. I note in the correspondence with J. P. Morgan & Company with which you have furnished me, there is a proposition to divert a part of the funds derived from the $5,000,000 temporary loan, to liquidate the interest and sinking fund payments on all the present exterior debt of the Government for a six months’ period following the date of the loan. The amount so diverted would, of course, have to be subtracted from said superior limit of Sixty Five Million ($65,000,000) Dollars.
We have not yet discussed this step by the State Department. In the form in which it is submitted, it seems to me that it should give Your Excellency neither difficulty nor embarrassment. In plain effect the Department assumes that a Fifty Million ($50,000,000) dollar budget will be necessary for the current year. Having made this assumption the Department asks that you demonstrate conclusively to its satisfaction and as a condition precedent to obtaining its sanction for a further loan, the necessity for a larger sum, not exceeding the superior limit above named. Understood in this sense the demonstration is one which I think Your Excellency has expressed willingness to make in our prior conferences.
The determination of what the public budget should be for the current year is somewhat complicated by the fact that three months, or one quarter of that year, has already elapsed, with expenditures, as I am advised, in excess of one quarter of the budget of even of Sixty Five Million ($65,000,000) Dollars. I am not so rigidly bound by my instructions that I could not consider the reimbursement of the budget for the current year in the amount you have expended out of receipts of that quarter to meet obligations incurred in the prior fiscal year, but of course in determining the amount to be reimbursed there would have to be deducted any increase in the floating indebtedness which has resulted from failing to pay obligations corresponding to the period from July 1 to September 30.
[Page 746]It is just as important to establish limitations upon the budget for succeeding fiscal years as for the current fiscal year, and Cuba’s constructive program cannot, in my judgment, omit making proper provisions in this regard. What should be established as a superior limit for the budget of 1922–23 can be determined only after exhaustive investigation and study. It may well be that the proposition to fix it at Fifty Five Million ($55,000,000) Dollars with an item of Five Million ($5,000,000) Dollars for unforeseen expenses incurred during that year, may be found a reasonable one.
After all, what we are trying to obtain is a safe margin of receipts over expenditures. It occurs to me to suggest to Your Excellency that it might be well to abandon the plan of a fixed maximum and to proceed, if practicable, along the lines of so limiting expenditures that they shall always bear a certain relation to the receipts. For example, conservative estimates of the receipts for the current year under the laws as they now stand—that is without revision—are that the receipts will not exceed Sixty Five Million ($65,000,000) Dollars, and possibly, even probably, may fall below that amount. In such an event you would of course have no margin with which to secure an additional loan, and you would be absolutely forced, in order to avoid default on the service of the public debt, to reduce expenditures below the amount fixed in the budget. Even with the new proposed tax revision, conservative estimates are that there will be a failure to collect sufficient revenue to establish a safe margin. My instructions, I repeat, are not of such a rigid character as to prevent me from discussing this new way of fixing the limit on expenses with reference to the receipts and to discuss with Your Excellency the margin of Ten Million ($10,000,000) Dollars proposed by Morgan & Company.
Additional assurance making it obvious to my Government that the proposed revision of the Internal Revenues is a dependable one, would be that it was predicated upon the prudent calculations and dependable estimates of an adequate force of competent experts. I do not think it would be unreasonable to ask, in view of the necessity we are under of presenting the result of the revision to the State Department at Washington, as security for the loan, to ask that there be associated with the expert force engaged in this work, a competent American expert in the same field.
What I have said in regard to method of revision of Internal Taxes applies equally to revision of the Customs Tariff, except that in the latter revision the services of experts are absolutely indispensable. I cannot too strongly stress the necessity for assurance that this work of Customs Tariff Revision will be entered upon immediately, and be prosecuted as expeditiously as possible. My [Page 747] judgment, as at present advised, is that a thorough revision of the tariff can be made to produce a larger increment of revenues to the National Treasury than can be produced from the revision of the internal revenue laws.
A still further assurance which it seems to me competent and desirable to be made is that at an early date Your Excellency will recommend to the Congress of Cuba and earnestly support before the Legislative Body the repeal of the law of August 9, 1919, fixing the salaries of Municipal Judges, thereby saving an item of expense in the fixed budget of about One Million Two Hundred Thousand ($1,200,000) Dollars.
It seems to me reasonable also to suggest to Your Excellency that you have within your authority a ready and most effective means of reinforcing the revenues in the face of their demonstrated or threatened insufficiency to produce the budgetary balance which we all know to be indispensable to the maintenance of the public credit. I refer to the lottery which does not figure in the National budget. A close study of the laws pertaining to the lottery leaves me without any doubt of your authority to fix the maximum price at which tickets shall be sold. If that price were advanced to $25.00 per ticket, there would, of course, be a loss of income to the monopolists who sell the tickets and to the holders of colecturías, but there would be a corresponding gain to the Treasury of an amount which I have heard estimated by the most competent people at from three to four million dollars. An assurance that this authority and discretion, which I feel the Executive has under existing laws, would be exercised to keep the nation solvent, would be but a fulfillment of Your Excellency’s statement made in the letter of April 30th of the current year and which in relevant portion reads as follows:—
“Among the revenues of the Government exists that produced by the National Lottery, which, in my judgment should not disappear, but should be the object of modification, as regards the sale of the tickets, so as to avoid having their legal price altered, and having this transaction be the means of undue profit to persons mediating between the Government and the venders.” (Italics my own)
A prominent place in the constructive financial program of Cuba will necessarily be given to a speedy enactment of a sane banking law under which banks may reorganize and existing banks be conducted under that wise public regulation which will safeguard the interests of the public and destroy that competitive private banking which has been such a prominent factor in bringing about the present industrial crisis.
Neither can we ignore assurances that the pending Exterior Loan Statute will be revised in such a way as to delegate to Your Excellency [Page 748] the authority to fix all terms and conditions in the loan contract and also to safeguard in the proper way the application of the proceeds of the loan to certain defined purposes.
These are some of the steps of an adequate constructive program which will permit the loan negotiations to proceed. Further discussion will undoubtedly suggest modifications of them and new conditions. As in the past, I stand ready to work unremittingly on this task, utilizing to the full all the opportunity extended with a view to expediting the action of my Government on all matters within its jurisdiction to consider and determine.
While in this communication I have not been able to conceal the anxiety I feel on account of the present crisis, I am clearly of the opinion that adequate remedial measures are within the grasp of Cuba’s Statesmen and that from this time on rapid progress will be made in the reconstructive policies which are the subject matter of this communication.
Very respectfully,