817.51/1928

Memorandum by the Economic Adviser (Young) of a Conference on the Nicaraguan Financial Situation, May 23, 1928

  • Present: The Secretary of State, Mr. Olds, Mr. White, Mr. Morgan and Mr. Young; General McCoy; Dr. W. W. Cumberland; Mr. Bailie and Mr. Breck of J. & W. Seligman & Co.; Mr. Loree, Mr. Tillinghast and Mr. Shriver of the Guaranty Company.

The bankers, having examined the report and financial plan prepared by Dr. Cumberland, called by appointment for the purpose [Page 543] of discussing their possible action in relation to the Nicaraguan financial situation. Dr. Cumberland participated in the conference at the instance of the Department.

Secretary Kellogg stated that he is deeply interested in the working out of a suitable plan for dealing with the financial difficulties of Nicaragua, and that, assuming that the plan to be devised would be fair and just to Nicaragua, he would be prepared to have it taken up at the present time. Mr. Bailie and Mr. Loree stated that the question of terms on which a loan might be made would depend to a considerable extent upon whether the Secretary of State would be willing to authorize the inclusion in the prospectus of the loan of certain statements regarding the interest of the United States in Nicaraguan affairs. Secretary Kellogg stated that the United States is deeply interested in Nicaraguan affairs, both because of the possibility that a Nicaraguan canal will be built and because of the concern which this Government has by reason of the recurrent internal disturbances of the country. As to the form of statement to be made, the Secretary of State would be prepared to authorize a statement that he would aid in the execution of the financial plan by assisting in the selection of competent American experts. He stated that he had no authority to approve the terms of a loan. In the course of the discussion it was suggested that the bankers formulate a tentative statement of what they would like to say in the prospectus. They undertook to do so.

In reply to a question by the Secretary of State, the bankers stated that in principle they are in agreement with the main provisions of Dr. Cumberland’s financial plan. They had, however, some suggestions as to changes which it was agreed they would discuss with him. They felt that at the present time it would not be advisable for Nicaragua to refund either the outstanding balance of about $3,297,000 of the loan of 1909 or the customs guaranteed bonds outstanding in the sum of about $2,372,000. They believed also that Nicaragua should not borrow such a large sum that money would be held for any considerable time before being needed. They considered it preferable that additional series of loans be floated for the further needs of Nicaragua, as might be deemed advisable. Dr. Cumberland stated that he is personally in agreement on that point, and that his original suggestion of a larger loan had been made because he felt that the bankers might deem it necessary to refund the existing bonds. He believed, however, that the Nicaraguan Government would wish to feel reasonably assured that subsequently funds would be forthcoming in amounts sufficient to carry out the construction of desired public improvements and for the payment of claims.

The possibility of hypothecating 51% of the stock of the National Bank of Nicaragua and maintaining its control in the hands of the [Page 544] bankers, rather than selling the institution, as recommended by Dr. Cumberland and recently desired by the Nicaraguan Government, was also discussed. The conclusion was reached that the choice between hypothecation and sale was one properly to be made by the Nicaraguan Government.

Similarly it was concluded that the question whether it would be preferable that roads rather than a railroad be constructed was also a matter for determination by the Nicaraguan Government, in the light of the facts and arguments set forth in Dr. Cumberland’s report and also in the light of further examination of the subject by experts. As to the existing railroad, the bankers were of the opinion that no large loan would be necessary, and that its requirements might be met out of current receipts to a large extent. They also were of the opinion that a direct loan to the railroad would not be as satisfactory a procedure as for the Government to borrow directly any sums that might be found necessary for the purposes of the railroad.

There was also discussion of the subject of arbitration of disputes. Dr. Cumberland stated that he had not included in his plan specific provision for adjustment of disputes, because he felt that, with the proper personnel, disputes would lend themselves to adjustment without any formal provisions. The bankers stated that they would prefer a statement to the effect that any disputes arising under the plan would be settled by the arbitration of the Secretary of State or of an arbiter appointed by him. This suggestion was agreeable to Dr. Cumberland and to the representatives of the Department.

It was agreed that the bankers would give further consideration to the financial plan and would discuss details with Dr. Cumberland, after which they would again consult with the Department of State.

A. N. Y[oung]