The Chargé in Guatemala (Hawks) to the Secretary of State

No. 2753

Sir: I have the honor to report that at the request of President Chacón, I called upon him on January 29 and he asked me if I would assist him in the desire of the Government of Guatemala to obtain a loan. The Minister of Finance, Mr. Samuel Franco, was present at the interview. I replied that I would be very glad to be of any proper assistance in the matter. He stated that it was desired to obtain a loan to consolidate various of the outstanding debts of the Republic and to provide enough funds to put into operation the National Mortgage Credit Bank (see previous despatches), all of which would necessitate approximately ten or eleven million dollars. I told the President that I felt that he should realize that it might be difficult to obtain a loan at this time, as the bond market in New York was rather weak, but that I would be glad to discuss the details of this matter with the Minister of Finance and submit the proposal to the Department of State at Washington, in the hope that it might be able to interest American banking institutions therein. Immediately after this interview I called upon the Minister of Finance at his office and he stated that it was the desire of the Government to fund the following debts covering at present the following amounts:

Internal debt $ 37,271.67
Bonds of Ferrocarril al Norte 30,210.00
Bonds of Ferrocarril de Los Altos 2,790,000.00
Bonds of International Railways of Central America 2,408,000.00
Automatic Telephones, A. E. G. 620,535.65
Debt to Anglo-South American Bank, Ltd. 1,134,599.54
Construction of Ferrocarril de Oriente 830,000.00
(Branch from Zacapa to Salvador of International Railways of Central America) $7,850,616.86

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He said that two or three million dollars more would be necessary in order to establish the National Mortgage Credit Bank bringing the total to approximately eleven million dollars, the amounts to be allotted for the service of this funding debt being the same as those allotted previously to each individual debt, namely:

Internal Debt no special revenue
Ferrocarril al Norte no special revenue
Ferrocarril de los Altos 5 cents tax per bottle of aguardiente
3% Consular invoice tax
2% Parcel post tax
Annual revenues from the Railway and the Santa María Electric Plant.
International Railways of Central America 3% Consular invoice tax
2% Parcel post tax
Automatic Telephones, A.E.G. Monthly revenues from the telephones
Debt to Anglo-South American Bank. 50 cents of the two dollar per quintal export tax on coffee.

I asked Mr. Franco whether the revenue allotted to these various debts would be sufficient to service the loan contemplated. He replied that he thought so but was not sure. I then inquired what the attitude of the Government was concerning allotting a portion of the customs for the service of the loan. He stated that this had been discussed with the President but that the latter was not ready at this time to take such action. I mentioned the possibility that perhaps the bankers might not be willing to make any loan without a control of the revenue assigned thereto. Mr. Franco stated that, of course, he understood and appreciated that any bank lending money would wish to supervise the collection of whatever funds were set aside for the payment of the loan but that at the present time he did not believe that the Government would be willing to commit itself to handing over the customs, leaving aside the question as to whether or not such a measure could be put through the National Legislative Assembly. My conversation with the Minister of Finance was entirely personal and understood as such by him. I said that I would be very glad to submit his proposition to the Department of State with the request that it endeavor to interest banks in the United States.

With regard to the debts as listed above to be consolidated, it should be pointed out that it is probable that the internal debt amounts to slightly more than the figure given above, the same being true of the Ferrocarril al Norte. The advisability of including this latter debt in any funding operation is very questionable.… According to this information, these bonds have been bought at a very cheap price as a gamble with the hope that, in the event of a funding operation, a very large profit could be made. There also arises in this connection [Page 195] the possibility of certain persons trying to have the Department exert pressure upon the Government of Guatemala to have these bonds redeemed at a price near their face value. See the Legation’s strictly confidential despatch No. 2622 of October 25, 1929.12

Concerning the revenues received from the amounts to be allotted for the service of the above debt, the following figures may be of interest:

Five Cent Liquor [Tax]
1925 $313,432.00
1926 353,721.00
1927 351,418.00
1928 400,590.00
1929 271,737.70
(first six months)

The combined six percent Consular invoice tax plus the four percent parcel post tax:

1928 $1,195,825.78
1929 1,168,598.11

The fifty cents of the two dollar per quintal export tax on coffee:

1927 $499,628.00
1928 615,840.00

Accurate figures for 1929 are not yet available.

The revenue from the Automatic Telephones is said practically to cover the service on that debt.

Up to the present time there has been no profit from the Los Altos Railway nor from the Santa María Electric Plant and there is not likely to be for several years to come.

In the contemplated loan proposed by the Government, it is not proposed to include the British Debt nor is any provision made for the deficit in the budget which on December 31, 1929 is estimated to have been 1,973,852 quetzales and which, due to the lack of the necessary retrenchment in the Government administration, the decrease in imports and other causes, will probably be increased rather than diminished during the last six months of the current fiscal year.

Since my return to Guatemala I have been struck by the extreme pessimism expressed on all sides as to the financial condition of the Government and the country. I have discussed this situation with several people, including members of the Government, and everyone seems to agree that a practical state of general moratorium exists in which nearly everybody owes everybody else and nobody pays.

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As far as I have been able to ascertain, the Banco Central still maintains its legal reserves but there is not much doubt but that it has exceeded its lawful rights in the question of making loans on mortgages and thus a great deal of its assets are tied up in frozen paper of one kind or another. The impression seems to exist that the President does not realize the seriousness of the financial situation due to his being told by his close advisers that everything is all right. I have endeavored to impress upon various officials with whom I have discussed this matter informally the absolute necessity of not allowing the value of the quetzal to start falling below par as this would ruin the credit of the country abroad.

Either one of two types of loans might be feasible at present, one: a strictly funding loan plus sufficient money to establish the National Mortgage Credit Bank, such as is now proposed by the Government, or two: a funding loan plus money for the Mortgage Bank and an additional six or seven million dollars for essential public works, principally roads. It is the opinion of a great many people, in which I concur, that this type of loan with the proper control would be the better for the present situation as it would provide employment, increase imports and give the country a chance to recover itself. In order to obtain such a loan it would probably be necessary to pledge a portion of the customs receipts and, while the Government states that it is not willing to do so, it is my opinion that if it is necessary in order to obtain a loan the Government will agree to it.

The attitude of the general public has changed to a great extent during the past few months towards the question of a loan. Most of the people, both in and outside of the Government, who have knowledge of such things, freely admit that that is the only thing which will pull the country out of its present bad financial condition and I think that even the general public would approve of a loan but only provided that it was given the strictest control both as to receipts and expenditure …

I have [etc.]

Stanley Hawks
  1. Not printed.