The Ambassador in Brazil (Morgan) to the Secretary of State

No. 4028

Sir: I have the honor to refer to the Department’s telegraphic instruction number 15, dated January 21, 12 noon, and in compliance therewith to submit the following preliminary report concerning the complaints with respect to Brazilian exchange restrictions and other policies that have been brought to the Department’s attention:


Such complaints may be enumerated as follows:

“That exchange restrictions have caused huge deposits of milreis to be accumulated.” (Consulate General Despatch 236, January 12, 1933,18 page 2);
“That American interests have not received equitable treatment in the allocation of exchange”. (Same reference);
“That through its exchange monopoly the Brazilian Government improved foreign exchange; concomitantly it improved coffee quotations so that coffee prices in the United States would not benefit by improvement in exchange. The improved exchange permitted the Brazilian Government to pay less for its foreign exchange cover for service on British loans, and since coffee prices in the United States were not permitted to take advantage of the forced improvement in exchange, the American coffee buyer bears the brunt of the difference in exchange and thus contributes to the payment of a portion of Brazil’s indebtedness to Great Britain.” (Consulate General Despatch 230, December 29, 1932,18 page 6, numbered paragraph 4);
“That the foreign loans being serviced by the Brazilian Government were all obtained from Great Britain, including a coffee loan, the proceeds of which were used to force higher prices upon the American public which consumes more than half of Brazil’s coffee. Furthermore that the United States obtains no favorable treatment from Brazil, and that it can only obtain favorable treatment by placing a duty on coffee. Also that with the proceeds of coffee taxations, which in reality come from the pockets of the American public, Brazil is attempting to raise the price of coffee and is paying the British while American loans languish.” (Same reference, numbered paragraph 5);
“That Brazilian taxation amounts to about 85% of the total charges f. o. b. steamer Brazilian ports on coffee now exported from Brazil, and that a large part of this tax collected has been used to purchase surplus stocks for destruction, and for the service of British loans, some of them made to finance artificial control of coffee prices, which further enhances the cost to the foreign consumer. Meanwhile service on American loans to Brazil languishes. This despite the fact that during 1931 the United States purchased from Brazil $104,277,843, of which $90,000,790 was coffee, and that during the same year the United States sold Brazil goods to the total of $33, 113,899, thus leaving a balance in Brazil’s favor of $71,163,944.” (Same reference, page 6a, numbered paragraph 8);
That the Federal Government is servicing the “Schroeder Coffee Loan to São Paulo of 1930” at the rate of over £5,000,000 per annum, whereas it is obligated to service it at the rate of only slightly over £2,000,000, thus reducing the available exchange supply. (Same reference, Enclosure 4, page 4, first and second paragraphs);
That the “special exchange deals” believed to have been entered into by Brazil with certain nations deprive United States nationals of exchange cover. (Same reference, page six, first paragraph);
That although the United States provides 43% of the available exchange coverage, and requires only 14%, it does not receive this share. (Same reference, page 6, penultimate paragraph and table at bottom of page);
That Brazil has resumed payments upon certain French loans—an act which may under present circumstances “be interpreted as indirect discrimination against the holders of the remaining Brazilian bonded foreign obligations, all of which, with the exception of the two English funding loans, have had amortization stopped and interest paid in scrip”. (Letter dated November 3, 1932,20 from the President of the American Chamber of Commerce for Brazil to the Embassy); and
That the Brazilian Government was “drawing up programs calling for the purchase of a large amount of armament and munition, totalling over 1,000,000 Contos—and in accordance with the general foreign policy advocated by the United States Government that armament purchases by countries in arrears on their debts are to be discouraged—and the payments for it under existing conditions would cause further difficulties in the exchange market as at present controlled”. (Same reference.)


a) It is true that American enterprises operating in Brazil have been unable to obtain full exchange cover, and that in consequence [Page 33] they have accumulated great sums of milreis awaiting such cover. This situation, however, is not peculiar to American enterprises, but applies in even greater degree to British and Canadian interests, as well as to others, and it results from the inescapable fact of the inadequacy of available exchange cover to meet both the needs of Government and of commerce. Under the circumstances, exchange control became inevitable as the Government obviously would arrange to protect its own interests;

b) If by this statement it is sought to imply that in the allocation of such portion of the available exchange supply as is distributed to local commercial applicants there is discrimination against American interests, it is believed that the charge could not be supported by evidence. (See Embassy’s despatch No. 3998, December 14, 1932.)21

If it is meant that American interests are deprived of exchange, to which they feel entitled by virtue of the fact that the greater portion of such exchange is provided by the United States, as a consequence of “exchange deals” and “loan service” arrangements between Brazil and other countries, there would appear to be some justification for the assertion, as will be indicated in following comment.

c) It is difficult to estimate the ultimate balance of such factors as are mentioned in this item. The general advantages of the lowered cost of dollar exchange might well be set against the margin on coffee prices withheld from the American consumer. However, the complaint really concerns the intricate procedures that for many years have characterized the coffee policy of Brazil. As the greatest, but not sole, consumer of Brazilian coffee, the United States inevitably has contributed most heavily to such profits as Brazil has derived from those procedures.

The reference in this item to “Brazil’s indebtedness to Great Britain” is discussed in the paragraph next below;

d) When endeavoring to estimate the significance of references to “British loans” being serviced by Brazil, consideration should be given to historical factors. Brazil’s bankers have been British for well over a hundred years, whereas American bankers only recently entered Brazil. A result of this situation is that the Funding Loans of 1898 and 1914 are Sterling Loans, and as they were effected with the object of extricating Brazil from grave financial difficulties, their service is regarded as a prior obligation of the Federal Treasury.

To state that Brazil is “paying the British while American loans languish” might lead to the assumption that all British loans are being serviced, while American loans are not. In this connection, the Department is referred to Appendix I of the Report submitted to the Brazilian Government by Sir Otto Niemeyer, July 4, 1931.

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Of the fifteen Sterling loans shown in that Appendix as outstanding January 1, 1931 with a nominal aggregate value of over £100,500,000, only two, the 1898 and 1914 funding loans with an aggregate value of slightly over £21,000,000, are being serviced in cash. The remaining British loans were included in the 1931 funding arrangement, being with two exceptions included in the second, 40-year, series of scrip. The four Federal Dollar loans, having an aggregate value January 1, 1931 of over $143,000,000 also included in the 1931 funding agreement, are embraced in the presumably more favorable first series, 20-year scrip, provision. Certain French loans likewise, with exceptions to be discussed later, are embraced in the 1931 funding arrangement.

In addition the Federal Government is responsible for and is servicing the 1930 Schroeder loan to São Paulo mentioned in item “f”, over one-third of which, however, was originally placed in the American market.

Virtually all Brazilian State and Municipal loans are in default, the Sterling, Dollar, and Franc bonds being, of course, on an equal footing. Contrary to a widely entertained opinion, the United States does not hold a preponderant share of such loans, as is shown by the table printed on Page 245, of the Report of the Secretary of the Commission for Financial and Economic Studies of the States and Municipalities of Brazil transmitted with the Embassy’s despatch No. 3949 of September 15, 1932.22

The “Rothschild Credit

While no published information concerning the so-called Rothschild Credit is available, the following description of the transaction has been orally supplied to the Embassy by Sir Henry Lynch, the resident representative of Rothschilds:

Sir Henry Lynch pointed out that for one hundred and twenty years Brazil has looked to England for its financial and banking advice and support; that Rothschilds for the past thirty or forty years especially have handled the major part of Brazilian finances and are in fact its fiscal agents; that during the recent years of prosperity, when American bankers entered this field, Brazil was relieved to some extent from the tutelage of the British bankers, and turned to New York—whose bankers were proffering abundant loans and credits. (The Brazilian Traction Light and Power Company, Ltd. at about this time induced their New York bankers, Dillon, Read & Company, to enter this field and take up some of the Brazilian financing.)

When the period of prosperity began to decline, the New York banks (Sir Henry Lynch named only the Guaranty Trust Company and the Chase bank, but referred indirectly to others) became alarmed [Page 35] at the status of their Brazilian accounts—which he said showed overdrafts in the cases of the two Banks last named of over ten million dollars each—and began quietly but hastily closing them out.

The result was that Brazil was suddenly called upon to pay up its New York accounts, and in doing so depleted the Treasury. In the emergency, Brazil appealed of course to Rothschilds who, with their associates (some of whom I inferred also held Brazilian overdrafts) made an agreement whereunder Brazil was given the assistance so urgently required.

Rothschilds required that a definite Schedule of Amortization of the Credit then established be agreed to by Brazil, whereby payment of service was to begin in February, 1931, and to be completed in January, 1932. However, a period of grace was allowed, and payments only began in February, 1932. In July, 1932, the São Paulo insurrection occurred,23 in view of which the schedule was again modified, payment of one-half and of three-fourths of the monthly quotas being accepted. It is understood that approximately £4,105,000 of the credit has been liquidated, and that the entire credit will be disposed of within the next five months, that is to say, by May or June, 1933. Although exact figures showing the modified payments are not available, it is probable that the transaction has followed approximately this course:

Amount of credit £6,510,000
Payments Feb.–June, 1932, inclusive, at rate of 1/12 monthly £2,712,500
Payments July–Aug., 1932 at ½ normal monthly rate 542,500
Subsequent payments at undetermined rate 850,000 4,105,000
Outstanding as of Jan. 31, 1933 £2,405,000

If payments henceforth are made at the rate of 1/12 monthly the credit can be disposed of May or June, as stated.

While the statements made by Sir Henry Lynch no doubt emphasize the British and Brazilian viewpoints, and convey the implication that the Rothschild Credit really resulted from and probably even facilitated the honoring of dangerous overdrafts being carried by American bankers, I am confident that they set forth the situation very accurately.

e) The reference in this item to Brazil’s coffee policy and to service on British loans while American loans languish has been answered by the comment in section “d”.

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It is agreed that the position of the United States as the principal source of exchange cover entitles its commerce with Brazil to greater participation in the available cover.

f) The Department’s files, notably Despatch No. 3337, April 29, 1930,25 contain material relating to the so-called Schroeder Loan of 1930 to São Paulo. In connection with the present situation, it should be pointed out that over one-third of that loan was originally allocated to the United States.

It apparently is true that this loan received service last year to the extent of about £5,000,000, and that if the amount still outstanding (about £17,000,000) should be serviced at the rate called for under the terms of the loan agreement, about £3, 190,000 (not £5,000,000) would be devoted to its service in 1933. Unconfirmed and semi-confidential information indicates, however, that plans may be under study whereby this heavy service rate—which not only lessens the exchange supply but is otherwise onerous to Brazil itself—will be modified.

g) It has been virtually impossible to obtain authoritative information concerning the “special exchange deals” that are quite generally believed to have been entered into by Brazil with numerous countries. In this connection the Department’s attention is respectfully invited to the Embassy’s despatch No. 3849 of May 13, 1932,25 and subsequent correspondence relating to the reciprocal acquisition of coal and coffee by Brazil and Germany.

There are enclosed herewith a copy of a communication from the Commercial Attaché dated January 31, 1933, and a copy of an item26 appearing in the Monthly Bulletin of the British Chamber of Commerce of Brazil, dated October, 1932, both of which discuss the subject.

It must be borne in mind that the European and other countries with whom such arrangements apparently have been made, themselves have put into force exchange restrictions and that they are equipped with banking machinery through which those restrictions can easily be applied. Some of them, furthermore, have established import quotas. In order, therefore, to assure a market for its coffee, which is a vital matter to Brazil, the Brazilian Government has of necessity, if not willingly, entered into arrangements which would assure to the nationals of the countries concerned the coverage for their exports derived from purchases of coffee.

These special arrangements place American commerce at a disadvantage, both as to trade itself and with respect to the exchange supply.

It is understood that … it is the intention of Brazil to undertake to cancel all such arrangements as are at present in existence.

h) This was dealt with by the comment on item “e”;

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i) As the Department will recall (Embassy’s despatch 3809, March 10, 1932,27 and enclosures) certain special arrangements were made with France at the time the 1931 Funding Agreement was made, looking in part to the fulfillment by Brazil of an award of the Permanent Court of International Justice at The Hague. While the arrangements unquestionably withdraw from the market certain much needed exchange cover, it is not apparent that objection properly can be made.

j) It is obvious that no objection can properly be raised to the action of the Government—which only a few months ago engaged in a three months’ struggle for its very existence—in equipping itself with armament, even though in doing so it further drains the inadequate supply of exchange cover. As a compensating factor in this instance much of the money employed (the total involved does not, of course, approach the sum of 1,000,000 Contos mentioned) in the purchase of armament was expended in the United States.


The essential factor in the situation to which the foregoing complaints and comment relate is simply the insufficiency of the available exchange cover fully to meet the requirements of Government and of business. The Government has met the situation by the curtailment of service on the major portion of its foreign obligations, continuing to service in cash only those which it apparently properly regards as obligations of honor; and business is being compelled to meet it, through restrictions imposed by the Government, by receiving less than its requirements for exchange transfers.

I do not believe that any useful purpose would be served by formal representations to this Government with respect to the manner in which it is utilizing the exchange cover it appropriates. It is probable that excessive amortization of the Schroeder Loan is taking place, and that there may be question as to the propriety of the resumption under present circumstances of cash service on the French loans herein mentioned. There is no doubt, of course, as to the unfairness of the arrangements apparently entered into through the Brazilian Coffee Council with several foreign nations. This last condition, however, as indicated elsewhere in this report, may be removed by action voluntarily taken by the Brazilian Government, and the former promises to become less serious as the service requirements diminish or end—as they promise to do in the cases of the Rothschild and Schroeder obligations.

The gravest problem, in my opinion, is that which is created by the enormous volume of impounded milreis. It is physically impossible [Page 38] at present to transfer them abroad. They constitute accordingly not only a dead weight in themselves, but a serious risk to their owners in view of the ever present possibility of further political disturbances in Brazil which might conceivably result in the depreciation of the milreis to the point where such accumulations would become of little or no value. A further danger to which the holders of these accumulations are exposed is the possibility of drastic action in the nature of a governmental blockade. That is to say, the Government desiring, as is well known, to hold exchange at its present level, if not still further to improve it, and viewing the accumulation of milreis as a constant threat to the exchange rate, might determine to decree an absolute prohibition for a period of years against the exchange transfer of the deposits of milreis belonging to the major foreign interests involved—whose identity and holdings are, of course, known to it.

In compliance with the Department’s instruction that I express my opinion as to the procedure that should be followed, I have the honor to suggest that I be authorized to discuss the situation informally and orally with the appropriate Brazilian authorities. It would be my purpose in such conversations to bring to their attention the sentiment very generally entertained by our nationals engaged in business in Brazil that American interests are not receiving the equitable treatment in matters of exchange to which they are entitled in view of the preponderant position of the United States as a customer and source of exchange, and to endeavor to impress upon them the desirability of undertaking, in conjunction with the interested parties, some plan designed to meet the situation created by the ever increasing accumulation of impounded milreis. In this latter connection, it is probable that the efforts of the American Chamber of Commerce for Brazil (see enclosed Memorandum on Exchange Transactions in Brazil), seconded by the United States Chamber of Commerce and the other American organizations whom it has consulted, will soon result in the preparation of a formula which, upon presentation to the Brazilian Government by the American Chamber of Commerce for Brazil, and under instructions from the Department, I could appropriately support.

Yours respectfully,

For the Ambassador:
Walter C. Thurston

Counselor of Embassy

Memorandum of the American Chamber of Commerce for Brazil on Exchange Transactions in Brazil

The foreign exchange restrictions which Brazil has imposed, have had such disastrous effect upon American export business that the American Chamber of Commerce for Brazil, after spending several [Page 39] months studying the problem of exchange restrictions as at present constituted in the country, has come to the conclusion that the time is proper for further modifications to be considered by the Brazilian Government in its present exchange control measures. Among the suggestions offered for immediate action, are the following:—

1.—The Chamber feels that it is important that the government thru the Banco do Brasil, continue for the present its control of foreign exchange buying and selling rates, but to prepare the way for a gradual relinquishment of that control. Before this be considered, however, it is of prime importance that the problem of accumulated milreis awaiting conversion into foreign currencies, be satisfactorily solved. These accumulations as at September 1932, amounted to approximately one million contos, based upon data carefully compiled by this Chamber. This burden hanging over the exchange market has a distressing effect on all international commercial transactions into which Brazil enters and should be removed, as soon as possible, in order to start the milreis on the road to a healthy basis of freedom from control measures. At the present time there is no foreign credit available to liquidate these accumulated balances and only future exports can be counted on to furnish, gradually, the required exchange cover, unless, of course, world conditions should improve rapidly, thereby making credit available to Brazil in New York, London and Paris.

2.—Owing to the fact that it seems to be impossible for the Bank of Brazil to estimate with fair certainty what the current requirements are to be for importations and remittances of interest and service on invested foreign capital, and as this Chamber of Commerce is opposed to any regulatory measures that would affect imports from the United States into Brazil, and further, as the Brazilian Government, thru the National Coffee Council and Bank of Brazil, has executed several agreements of a barter or compensating nature with various countries, and has others ready for execution and still others under study, this Chamber feels that the interests of United States Commerce with Brazil can only be safeguarded by a similar compensating agreement being immediately executed between the proper entities in Brazil and the United States. This Chamber, after giving due consideration to the matter, also recommends that it be suggested to the Brazilian Government that such agreements be standardized as to type and privileges and further suggests that those countries purchasing exports from Brazil be given the opportunity of having the exchange cover produced by such exports allocated to nationals of the importing country under the terms of such suggested standardized agreements of a barter or compensating type. Furthermore, inasmuch as the United States sells a predominant share of the imports into Brazil and buys a still greater predominant share of their exports, and recognizing that there exists certain indispensable requirements for exchange cover to the Brazilian Government, such as for diplomatic representation abroad, as well as for the further reason given below, this Chamber also recommends that less than the entire amount of exchange produced by the exports to the United States be allocated to that country. This amount, however, shall not be less than 75% of the value of such exports from Brazil to the United States.

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The bills, drafts or other form of credit arising out of the exports are to be handled by the proper banking entities in Brazil, in so far as milreis are concerned, and in the United States as regards the dollar transactions, the balances in New York are to be duly allocated to the commerce of the United States in accordance with the distribution to be indicated by a mutually appointed Committee in New York City, on which will be represented the major United States exporters to and major importers from Brazil.

3.—A desirable object in not requiring that the entire amount of exchange produced by exports to any one country be allocated to that country, is to permit Brazil to accept and put into execution a further suggestion from this Chamber. There seems to be no doubt but that Brazilian Foreign Trade is in need of further and more varied exports, as, at the present time, 73% is provided by a single item and 92½% is represented by ten exported products; that stimulation to the remaining hundreds of exportable products could be effected by placing them upon a free list insofar as any restrictions as to the sale of the export bills or credit instruments derived from them, is concerned. Such a measure would not only be of great assistance to commerce in general, but would provide the entering wedge for the lifting of all restrictions on exports, in that other items could be added to the free list, as the general conditions of the exchange situation warranted. Thus a gradual and logical approach to a return of unrestricted healthy commerce is provided. This suggestion embodies the placing on such a free list, at the present time, all but the following products:

Frozen and chilled meats
Fruit and nuts
Oil producing seeds

The Chamber of Commerce for Brazil feels that the present conditions are such as to permit the Brazilian Government to place the suggested measures into effect in the immediate future, so that their beneficial effect may be felt even before the end of this year.

  1. Not printed.
  2. Not printed.
  3. Not found in Department files.
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  5. Not printed.
  6. See Foreign Relations, 1932, vol. v, pp. 390 ff.
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  9. Neither printed.
  10. Not printed.