Foreign Relations of the United States, Diplomatic Papers, 1933, The American Republics, Volume V

837.51/1521

The Ambassador in Cuba (Guggenheim) to the Secretary of State

No. 1328

Habana, August 25, 1932.
[Received August 29.]

Sir: I have the honor to report on Cuban Government finances, and especially to submit my recommendations for the funding of the floating debt of the Cuban Government. As the Department is aware, the Cuban Government has desired for a long time to rehabilitate its credit by paying off its most pressing creditors. For this purpose, at various times, plans have been prepared quietly to issue paper of some character that might circumvent Article II of the Permanent Treaty. (See my despatches No. 544 of February 3, 1931,^87a No. 745 of June 15, 1931, and No. 773 of July 9, 1931.)

The Department has been currently informed of these and other developments in Cuban finances. My personal observations of the present status, based on a continuous study of Cuban Treasury Department statements in so far as they are available and supplemented from other sources, can be summarized as follows:

• First: The Cuban Government is in arrears on back salaries to Government employees to the extent of between six and eight million dollars.
• Second: In addition, there is a floating indebtedness that has been accumulating over a period of years, of say $30,000,000. (I hope to have an authoritative statement from the Government on this item in the near future.)
• Third: On December 31, 1932, a little over $8,000,000 will be due for interest and amortization of Public Works indebtedness. From present indications about half of this sum will be available from revenue, so that about $4,000,000 will have to be found in order to obviate a default at the; end of this year.
• Fourth: The regular budget is still unbalanced and unless the new tax legislation greatly increases revenues, or economic conditions improve, there will be a deficit of from four to five millions this fiscal year.

President Machado’s policy, caused largely by fear of political consequences to himself in case of default on Government obligations, has been, and I think still is, trying to avoid such default at all costs. Inasmuch as further formal borrowings have been denied to him, this has been accomplished in the past by increasing taxation, by deferring payments, by the augmentation of revenues through the seigniorage on the coinage of silver, by reduction of Government expenditures, and by wringing short term concessions from the bankers on payments due. Doctor Ferrara recently submitted to me confidentially some financial plans, for which he asked my support. If he can see some hope of success, he informs me that he would assume the portfolio of Secretary of the Treasury as acting Secretary, in addition to his other duties, when the present incumbent, Ruiz Mesa, takes leave of absence, in order to conduct his political campaign for a seat in the House of Representatives early in September.

Ferrara’s first proposal is to persuade the Chase Bank to relinquish the $500,000 monthly payments being made to it from the regular budget since last June (see enclosure to Embassy’s despatch No. 1229 of June 28, 1932⁸⁸) in order to apply this money to pay part of the back salaries of Government employees. The second proposal is to issue long-term low-interest-bearing bonds made attractive by a gambling feature, for the funding of the floating debt; and the third is to segregate from this general floating debt the amount due on the Capitol, which totals $1,300,000 and pay this off from income from the Ports funds, in the same manner as was authorized for the payment of the balance due Warren Brothers, over and above the $20,000,000 in Treasury Certificates which were issued to them. (See my despatch No. 1163 of May 13, 1932.⁸⁸)

I told Doctor Ferrara that, while I was disposed to be of any possible assistance to Cuba, I saw some difficulties in the plans that he outlined. I took the opportunity to reiterate what the attitude of our Government is in regard to additional borrowings by the Cuban Government at this time, and in particular referred him to my note to the President of June 27, 1931.⁸⁹

In regard to his first proposal, I pointed out that on December 31, 1932, the Cuban Government probably would be several millions short of the needed funds to meet the Public Works payments, that all of their persuasive power would probably be required at that time to get further concessions from the Chase Bank, and that it might, therefore, seem an inopportune time to suggest to the bankers that the agreement just entered into to repay $500,000 monthly be cancelled.

In regard to his second proposal, I told him that although I did not believe that the Cuban Government’s finances justified, under Article II of the Piatt Amendment, any increase in its bonded indebtedness, I thought that if the floating indebtedness could be reduced to a reasonable figure, and if the Chase Bank and associates were willing to make certain concessions, we might develop a plan to fund this floating debt eventually and give Cuba’s creditors some hope at this time. I have a plan in view which I told Doctor Ferrara I was not ready to discuss with him now. As a preliminary, however, I said I would be glad to have as accurate a statement as possible of the floating debt.

In regard to his third proposal, I told him that it was our view that all creditors should be treated alike. He said that the liquidation of the debt to Warren Brothers and Cuban contractors by use of revenues from the Ports fund was an accomplished fact. I replied that this, in my opinion, was an unfortunate procedure, especially as I understood that this arrangement had been consummated by questionable methods, in which Americans and Cuban officials had jointly participated, and, on account of the American participation, was anything but a source of satisfaction to me. In connection with the Warren Brothers indebtedness, see my despatch No. 657 of April 17, 1931.⁹⁰

The financial plan that I would recommend is the following

(a) That the Cuban budget be balanced for the fiscal year 1932–1933. (With good faith on the part of the Cuban Government, or better, through informal supervision by agents of the bankers, I think this can be accomplished.)

(b) By means of temporary assistance of the Chase Bank and associates, arrangements be made to meet the Public Works payments due December 31.

(c) Redemption of the $7,500,000 now outstanding of the original $20,000,000 Public Works Serial Certificates when due on June 30, 1933. (With perhaps a little leniency, in case of necessity, from the Chase Bank, it would seem that these payments could be met from revenues.)

Under these circumstances, on June 30, 1933, with the redemption of the Public Works Serial Certificates, the only Public Works indebtedness that will remain in the hands of the general public will be the 1945—$40,000,000 5½% Public Works Gold Bond issue. In addition, there will remain the $20,000,000 Chase Bank Credit secured by the remaining $40,000,000 authorized issue of Special Public Works Gold Bonds and the $20,000,000 Treasury Gold Notes in the hands of Warren Brothers and Cuban contractors. I would further propose that,

(d) An adequate Claims Commission be appointed to determine accurately the floating debt and make such reductions as might be possible. Perhaps this floating indebtedness could be reduced to, say, $20,000,000.

(e) Negotiations be entered into with the Chase Bank and associates for the cancellation of the $40,000,000 issue of Public Works Gold Bonds held as collateral by these bankers for the $20,000,000 credit and substitution of a new adequately secured $20,000,000 obligation of the Cuban Government.

(f) Negotiations be entered into with the Warren Brothers and Cuban contractors for the cancellation of the $20,000,000 issue of Treasury Gold Notes held by them and substitution of a new $20,000,000 obligation of the Cuban Government.

(g) Such negotiations, if successful, would eventually release $20,000,000 of authorized indebtedness of the Cuban Government which might be used to fund the Floating Debt.

If the principles of this plan could be carried out, which should be greatly in the interests of the Cuban people, there would be no increase in Cuba’s bonded indebtedness and no need for our Government’s interposing objection. The present status of the Cuban Government’s finances is such that, should the Government desire to increase its indebtedness by formal borrowing, there would seem to be cause for our invocation of the Permanent Treaty. Likewise, the political situation is so uncertain and the animosity to the present government so great that, should our Government fail to invoke the Permanent Treaty, there would be, in my opinion, a serious reaction against the United States. It would be contended that the United States Government was lending its moral support to financial arrangements made by American bankers for the perpetuation of the Machado dictatorship.

Cuban Governments in the past have successfully circumvented Article II of the Permanent Treaty by a general accumulation of floating indebtedness at a time of inadequate revenues. As a result, the $50,000,000 Morgan Loan of 1923⁹¹ and the $9,000,000 Morgan Loan of 1927⁹² were necessary, and now a loan of from $20,000,000 to $30,000,000 will be required, if the present floating indebtedness of the Cuban Government is to be funded.

Following my return on leave to the United States next week, I shall be glad to’ discuss this question with the American bankers, should the Department so desire.

Respectfully yours,

Harry F. Guggenheim

1. Not printed.
88. Not printed.
88. Not printed.
89. See despatch No. 745, June 15, 1931, from the Ambassador in Cuba, p. 546.
90. Not printed.
91. See Foreign Relations, 1923, vol. i, pp. 837 ff.
92. See 1927, vol. ii, pp. 528 ff.