Lee, Higginson & Company to the Assistant Secretary of State ( White )
[Received June 10.]
Dear Sir: In our letter of February 24, 193118 we stated we believed
“that the Dominican Government to be successful in raising a loan must first convince bankers that (1) the proceeds will be honestly and efficiently disbursed for constructive purposes and that (2) fixed charges of interest and sinking fund will not be so heavy but that the probable customs revenues will be more than ample, not only to meet all interest and sinking fund charges, but to leave annually a reasonable surplus for the Dominican Government as well”,
and we therefore recommended:
adding that should the Dominican Government agree,
“the next step to be taken when market conditions make it possible would be either—
- The borrowing of sufficient short-time funds for a year, let us say, through the bankers selected to do the financing. Long-time bonds authorized by the Convention in an amount in excess of the loan would be given as security, or—
- The distribution of the long-time bonds themselves to investors”,
and emphasizing that for reasons set forth in that letter
“We believe refunding necessary at the earliest possible moment in order to put Santo Domingo on a sound financial basis”.
We were subsequently informed by the Department of State19 that the Dominican Government accepted the conditions enumerated in our letter of February 24, 1931 and that upon the nomination of the Department, President Trujillo had appointed Mr. William E. Dunn to advise him on financial questions and to discharge the functions specified in the plan we outlined in our letter of February 24.
Mr. Dunn has now reported in writing and orally regarding the financial and economic situation of the Dominican Republic as disclosed to him in the course of his investigations. We have studied his report and have conferred with him and are pleased to find that he entertains a hopeful view as to the economic and financial future of the Dominican Republic. We are also pleased to observe that his judgment regarding the necessity for internal financial reforms agrees with ours and that he shares our opinion as to the importance of refunding the present External Debt of the Republic at the earliest practicable moment in order to reduce the annual burden of debt service. It is also a matter of satisfaction to observe from the memorandum of May 5th, 1931 transmitted with the undated letter we received from you early last month,20 that the Department of State is in general agreement with these and the other recommendations made in Mr. Dunn’s report.
As you will recall, we pointed out in our letter of last February that market conditions made it impossible to consider at that time either a refunding operation or new short-term or long-term financing. In the conference which Mr. Blair had with you on May 8 you were informed that conditions had not improved, and we regret to have to state that the situation of the investment market at the present time is even more unfavorable than in February or in May, and we can not give any [Page 101] assurance that there will be an improvement in the immediate future. In these circumstances, as you can readily understand, we are unable to undertake any commitment at this writing regarding the consummation any further loan operation for the Dominican Government.
We believe, however, that regardless of market conditions, there are certain specific steps which the Dominican Government should take immediately in order to improve its financial position and prepare the way for ultimate new financing. It is our opinion that, even in a favorable bond market, new securities of the Dominican Republic could be sold advantageously only if the bankers could demonstrate satisfactorily to the investing public that Dominican finances were on a sound basis, that is, for example, that government expenditures were being and would continue to be supervised and controlled in the interest of economy and efficiency by a competent financial adviser, that the budget had been actually balanced and would be kept in balance, that government revenues were sufficient to justify the incurring of additional debt, that new sources of revenue were being developed and that the present heavy burden of debt service would definitely be lessened as soon as possible through a refunding operation, which, by extending the term of the debt, would decrease the annual requirements for sinking fund instalments.
We suggest therefore, as the first concrete steps toward the realization of a satisfactory financial program for the Dominican Government, that the Department of State reach an understanding with the Dominican Republic, providing,
- For the definitive appointment by the Dominican Republic of a
financial adviser in the person of Mr. William E. Dunn, or some
other expert nominated by the Department of State, pursuant to a
contract approved by the Department of State between the
Dominican Government and such financial adviser, which contract
should stipulate inter alia:
- that the financial adviser thus appointed or a successor approved by the Department of State should hold office for a period of at least two years, regardless of whether or not new financing is effected;
- that as soon as new financing for the Dominican Government is effected by the bankers, the term of office of the financial adviser originally appointed, (or a successor approved by the Department of State), shall, thereupon, be extended, so that during the entire life of any new loan or loans a financial adviser acceptable to the State Department shall be in office and possess all powers which, in the opinion of the Department of State, may be necessary to insure the successful discharge of his functions;
- that the financial adviser should have full authority under laws to be enacted by the Dominican Government to control the expenditures of the Dominican Government, to prevent waste and inefficiency, to institute such accounting and financial reforms as [Page 102] are calculated to improve the economic and financial position of the Republic, and in general to assist the Dominican Government in obtaining the full benefit of the program adopted by it on the recommendation of the Dawes Commission, together with such other reforms as may be deemed advisable and proper;
- that the financial adviser shall be specifically authorized to represent the Dominican Government in an examination of the items constituting the present budget deficit, and on behalf of the Government to agree upon the sums to be allowed to the claimants in respect of the unpaid items constituting the current deficit;
- that no expenditures from the proceeds of any new financing shall be made without the approval of the financial adviser who, for that purpose, shall have powers equivalent to those conferred in 1913 upon “the Minister or Secretary of the Legation of the United States in the Dominican Republic” and “a person designated … by the Receiver General of the Dominican Customs”, (see Treaties, Conventions, etc., 1910 to 1923, volume III, pp. 2572–2573);
- that the financial adviser shall be authorized and required to propose to the Dominican Government such new taxation and other revenue measures as he deems calculated to increase the Government’s revenues without unduly burdening its taxable resources;
- that the financial adviser shall in general be clothed with all the powers which in the opinion of the Department of State are necessary to insure the successful discharge of his functions.
- For the definite balancing of the 1931 budget at a total not to exceed $8,500,000 or such other figure as may be approved by the State Department.
- For the limitation of the total of the 1932 and 1933 budgets to a figure not to exceed the total of the 1931 budget as balanced, except in so far as actually available revenues during those years exceed actual 1931 receipts, and then only as approved by the financial adviser.
- For the prohibition of any government expenditure or obligation unless funds are actually available therefor.
- For an undertaking by the Dominican Government and the approval thereof by the State Department, that in connection with any new loan or loans that may be issued by the bankers, the Dominican Government will enact any legislation and enter into any agreement with the State Department that may be necessary for the purpose of constituting as customs revenues the charges levied under Law 190 and providing for their collection by the General Receiver of Dominican Customs under the provisions and during the term of the Convention of December 27, 1924.
- For the appointment of a committee consisting of a chairman to be selected by the President of the Dominican Republic, of the financial adviser and of a third member to be designated by the Department of State, such committee to examine and audit all items composing the present budget deficit, and to fix the amounts to be paid in full settlement thereof, no item to be approved that is not supported by adequate evidence of Government liability for the amount allowed.
- For the immediate consideration by the Dominican Government and the Government of the United States of a financial plan contemplating the issue, as soon as market conditions permit, of a refunding loan to be governed by the terms of the Convention of December 27, 1924, such loan to be retired through a sinking fund calculated on a basis substantially to reduce the present heavy annual sinking fund instalments on the existing debt of the Dominican Republic and to retire the bonds by maturity.
We feel that an understanding between the Dominican Government and the Government of the United States along the foregoing lines and the active efforts of a competent financial adviser in effecting economies and improving the financial administration of the Dominican Republic will provide a favorable and sound basis upon which a previously agreed upon program of new financing can be carried out when market conditions permit, and we hope that the Department will see its way clear to approving a procedure of this nature, as in our opinion nothing will give the investing public more confidence in the stability and solvency of the Dominican Republic than such concrete evidence of cooperation between the United States Government and the Dominican Government, particularly when such cooperation may be expected to yield tangible results along the lines of governmental economy and efficiency. In the meantime we are working on the technical points involved in any new financing that might be undertaken for the Dominican Government, so that when an understanding along the lines outlined above has been reached by the Dominican Government and the Government of the United States, and when conditions in the investment market permit the raising of additional funds for the Dominican Government, as much as possible of the preliminary work incident to either a short term, long term or refunding operation will have been completed, and advantage of any improvement in the bond market can be taken with a minimum of delay.
In conclusion, may we point out that, under the terms of the 5½% Customs Secured Bonds of the Dominican Republic maturing in 1942, the Republic covenanted that “no future bonds of the Republic will be issued secured by customs revenues … unless the annual average customs revenues for the five years immediately preceding amount to at least 1½ times the total charges on all obligations secured by the customs revenues, including charges of any new loan”. The decline in customs revenues during 1930 and 1931 has been so substantial that unless steps are taken to increase the amount of such revenues either by adding thereto the proceeds of the charges levied pursuant to Law 190, or in some other way, the amount of new customs secured bonds of the Dominican Republic which might be issued in connection with a new financial program may be seriously limited so long as bonds of the 1942 issue enjoying the foregoing covenant remain outstanding. [Page 104] It also appears that certain provisions of the bonds of the 1940 maturity were intended to extend similar protection to those bonds also and that as a consequence the Covenant quoted above would operate so long as bonds of either the 1942 or 1940 maturities remained outstanding. In these circumstances it is clear that, given favorable market conditions, the most satisfactory form of financing which could be undertaken would be a refunding operation which would permit the retirement of all bonds of the 1940 and 1942 maturities and the issue of new customs secured bonds in a total amount sufficient to effect such retirement and to provide the additional funds required by the Dominican Government.
We feel that it should be clearly borne in mind that the adoption of a program such as that outlined above cannot but have a most beneficial effect upon the internal economic and financial position of the Dominican Republic and that by promoting in this way the fundamental prosperity of the country, the government will be enabled to retire its entire external debt more rapidly and regain its complete freedom of action with respect to its customs revenues, thus bringing to an end the foreign participation in the administration of the customs of the Dominican Republic established under the Convention of December 27, 1924.
Very truly yours,