Memorandum by the Economic Adviser (Young) of a Conversation Between Himself, the Chief of the Division of Latin American Affairs (Morgan), and Mr. Tillinghast of the Guaranty Trust Company of New York, February 28, 1927

Reference was made to telegrams and letters from Mr. Tillinghast and Mr. Loree, dated February 23 to 26,37 concerning the proposal of a loan to Nicaragua and the possibility of inflation of the currency.

Mr. Tillinghast referred to the urgent need of the Nicaraguan [Page 428] Government for funds in order to maintain its position and suppress the revolution. He doubted whether these funds could be procured by an ordinary Joan transaction; it was doubtful whether the pledge of the shares of the National Bank and the railway by way of security would appeal to American bankers. So far as Mr. Tilling-hast could see, the only recourse would be to an inflation of the currency. Mr. Tillinghast was of the opinion that probably an inflation of not more than 1,000,000 cordovas could be effected without serious consequences. Although he was very reluctant to consider inflation, he nevertheless believed that it might be justified as a last resort.

Mr. Morgan and Mr. Young indicated that, while the Department in principle would be disposed to raise no objection to a loan to the Nicaraguan Government for proper purposes and on proper conditions, the Department could not state that it would raise no objection to a policy of inflation. It was pointed out that the probability is that inflation, once begun, would lead to a serious loss of confidence within Nicaragua; that there would be a rush to convert local currency into foreign exchange; and that it was practically certain that the result would be depreciation of the currency, a rise in the rate of exchange, and depletion of the reserve fund unless the sale of drafts thereon should be stopped.

While Mr. Morgan and Mr. Young indicated that the Department would in principle be favorably disposed toward a proper loan, they made no statement that could be interpreted as a request that money should be advanced to Nicaragua.

A[rthur] N. Y[oung]
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