The Secretary of State to Diplomatic Officers and Certain Consular Officers

Diplomatic Serial No. 681

Sirs: The following discussion of questions arising in connection with the negotiation of foreign loans by American bankers is transmitted in view of inquiries and suggestions received from diplomatic officers.

(1) The Department expects its diplomatic officers to extend to responsible representatives of legitimate American interests, without discriminating between competing American interests, such assistance as may be consistent with their other duties and their diplomatic character (see Instructions to Diplomatic Officers of the United States, March 8, 1927, Paragraphs VIII–10, XI–1, XI–7, XI–10, XI–11, XVI–4, and XVI–7). The Department must of course rely largely on the good judgment and sense of propriety of its representatives as to the form of proper assistance. Such assistance normally may include aid in the establishment of contacts, the giving of information, and the making of judicious suggestions, but diplomatic officers will carefully avoid acting as intermediaries or participating in private business transactions, or taking responsibility for decisions of the private American interests concerned.

It will be recognized, however, that assistance in the negotiation of loans is affected with considerations of special delicacy, not only because of the reserve customary in any relationship affecting important credit transactions, but also because of tendencies evident in several quarters to emphasize, exaggerate, or misunderstand any relationship of the Department or its officers to financial negotiations. While this does not preclude the assistance normally given to American interests, special care should be taken that the record with respect to financial negotiations be clear and self-explanatory and that diplomatic officers in no way inadvertently lend color to claims or imputations that there exist, between the Department and bankers interested in negotiating foreign loans, relationships involving the responsibility of the Department in connection with such loans.

Thus, for example, in cases where there is no obvious occasion for recourse to missions for a letter of introduction, it may be well discreetly to discourage such requests or to satisfy them by giving merely a card of introduction. Similarly, missions should discourage [Page 313] the transmission of private messages through official channels, or, where the conditions are such as to justify the use of official channels, as in the case of authenticating the signatures of important papers, the text of the message should be self-explanatory as to its private origin and the occasion for the channel of transmission (see Diplomatic Serial No. 28 [280], July 9, 1924).44 A United States Senator has cited such a telegraphic authentication as evidence of the Department’s sponsorship of a private loan.

Information which diplomatic officers can give in reply to inquiries of bankers is, in the nature of the case, merely supplementary to information otherwise available to them—a well-known manual lists under twenty-five heads “some of the points” to be considered in purchasing foreign Government bonds. Presumably it will be oral, personal in tone, and accompanied with some disclaimer of relieving the bankers of any part of the responsibility toward bond buyers which the ethics and practices of investment banking impose upon them with respect to sponsoring flotations of foreign and domestic issues alike. In this connection the following is quoted from the Annual Report of the Secretary of the Treasury for the year ended June 30, 1926:

“The question of the soundness of a particular loan is not one upon which the Federal Government should pass, but it is the banker floating the loan in this country who must decide this question in the first instance, and it is the investor using his savings to acquire the security who must finally decide whether or not the risk is to be accepted. The test of the security of a foreign loan does not differ from the test of the security of a domestic loan.”

(2) Suggestions have been received that in connection with the Department’s announcement of March 3, 192245 (see Diplomatic Serial No. 118, May 16, 192246), the Department should require of American bankers, in the case of loans for industrial purposes, a guarantee that the books of the borrower have been audited by responsible accountants, or that the Department should at least ask its missions abroad whether they know of any reason why the Department should object to a loan.

The Department, in its announcement of March 3, 1922, and its letters to bankers pursuant to the announcement, has uniformly stated that it will not pass upon the merits of foreign loans as business propositions, nor assume any responsibility whatever in connection with loan transactions. In view of the consideration that if the Department in some instances raises questions of the investment merit of particular loans, it may soon be considered to have no doubt [Page 314] of the investment merit of a loan when it expresses none, correspondence pursuant to that announcement is the most inappropriate occasion for giving bankers credit information.

American bankers may at will, and frequently do, have recourse for information to the Department of Commerce, which is charged with the dissemination of commercial information and which has established in the Bureau of Foreign and Domestic Commerce a Finance and Investment Division. This is the normal channel for inquiry for such bankers as may desire to supplement other available information with that obtainable from the information services of the Government. Subject to such censorship and editing as the Department may undertake, reports of foreign service officers on financial subjects are transmitted in routine to the Department of Commerce. It is felt that only in case of information presumably not available through this or other channels to bankers exercising due diligence would there arise the exceptional case of any ethical obligation on the part of the Department of State to volunteer credit information to bankers writing the Department for the entirely different purpose of allowing it to express its views on the possible national interests involved in a contemplated loan.

While the Department feels that in view of their responsibilities bankers contemplating the issue of foreign loans must rely primarily upon independent investigation and study and only incidentally upon Governmental sources of information, the Department welcomes the interest which diplomatic officers have taken in reporting particular credit situations regarding which they feel concern.

Such reports are carefully observed by the Department of State and other Departments and, in view of the breadth and importance of American interest in foreign investments, they may serve a very useful purpose through such confidential dissemination as they may be given by the Department of Commerce or as information in the possession of the Department in the event of direct consultation of the Department by interested American citizens.

The Department indicates objection to loans only in view of important interests of national policy. Regarding situations of this degree of importance it will ordinarily have in its possession sufficient information to guide its action without ad hoc consultation of its missions. At times it has consulted its missions upon receiving an inquiry from bankers but the establishment of a routine practice of doing so would not be justified in view of the simplicity of the questions involved in most loan inquiries and of the importance of promptness in replying to them in order that important operations of American bankers be not subjected to the delay often incident to Governmental procedure.

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(3) It will be advisable to bring to the attention of Commercial Attaches or Trade Commissioners the policies herein set forth, particularly in the event of negotiations for a Government loan. American officials of Departments other than the Department of State should act in any relations with foreign officials only with the full knowledge and approval of the diplomatic officer in charge of the mission.

I am [etc.]

Frank B. Kellogg