The Minister in the Dominican Republic ( Schoenfeld ) to the Assistant Secretary of State ( Bundy )

Dear Bundy: I have read carefully your letter of June 1, regarding the floating debt question. I think I understand the main point thereof that the funding of the floating debt must be considered an increase of the public debt within the meaning of Article 3 of the Convention and should not be approved by us in present circumstances. I sympathize, too, with your feeling that the less we have to do with this question the better.

There seem to me, however, to be some general considerations that may be pertinent. The first of them is that the Dominican Government debt, whether “public” or plain, was increased. We did nothing about it when the accumulation of this debt began. To that extent the Convention was set at naught since the security underlying the foreign bonds was in fact correspondingly decreased. Further, Dominican legislation exists namely, laws 205, 206, and 229, at least, defining priorities affecting the payment of the floating debt or contemplating the funding thereof. We have not assumed responsibility for any of this legislation, but it would seem that we can not disclaim a very active interest in it, having failed at the beginning to insist upon the budget being balanced to prevent the accumulation of debt. It is possible to say that we are not concerned with any phase of the Dominican Government’s finances except in relation to the recognized foreign debt. Nevertheless, certain financial operations of the Dominican Government, including the Emergency Law, have been carried out in disregard of the Convention and outside the scope of its provisions. If we entertain the hope, as I think we do, that the system represented by the Convention will be restored as soon as possible, then, it seems to me, we are under some obligation to use any authority or influence we have to bring about a workman-like and complete financial program here to facilitate that restoration. An important part of any such program would seem to be an adequate arrangement for handling the floating debt. I should not consider the issue involved [Page 601] in Article 3 of the Convention one that we need hesitate to face squarely.

The Emergency Law does seem to me to be a more real obstacle in the way of the proposed funding for the reason that the next budget, if it includes service on a funded internal debt, would probably have to be built upon a diversion of money from sinking fund on the foreign debt to the new service. The history of the Emergency Law, as shown in official declarations of the Dominican Government at that time and in the language of the Law, involved direct references to the need of additional funds for maintaining current functions of Government. The Dominican Government’s appropriation of this money to its current use was sought to be justified by these references. I am at a loss to know how to reconcile these facts with any provision for service on the floating debt if funded but I doubt whether Article 3 of the Convention is as serious an obstacle as these facts are.

There are two more points. I do not see how the Dominican Government could long prevent rank political and personal favoritism in settling claims if those claims continued to be thought of merely as outstanding bills to be settled from revenue available during the yearly accounting period. If these bills were left indefinitely in this form, creditors would indulge in the unseemly collection scramble … which causes demoralization out of all proportion to the amounts involved. Then, keeping the floating debt in this vague form induces extravagance on the part of the Government. Having to make no systematic budgetary provision for the settlement of such bills, the Government is apt to go on as if they did not exist and to think that it is doing a great job if it succeeds in preventing further piling up of floating debt. If, for instance, the Dominican Government ends this year without a deficit this will be considered—and it will be—a great triumph for the financial policy of President Trujillo. I fear it would be asking too much of human nature … to expect the Government to consider outstanding bills for prior fiscal years an obligation hardly less sacred than current expenses and, consequently, to tighten the national belt still more to pay such bills, while provision for meeting these charges is left indefinitely outside the budget. Similar reasoning may seem to apply to suspension of amortization on the foreign debt, but there is a great fact, in relation to this debt, that there exist a Convention, a Receivership, Fiscal Agents, Bondholders and the United States Government, whereas the holders of the floating debt are merely an inchoate group, including American individuals and firms.

A possible lead towards a constructive solution to meet your point may be found in the 10% salary reduction under Law No. 229 which remains, thus far, outside the budget. The amount it yields is not [Page 602] great in relation to the floating debt. But the law does establish certain priorities among the categories of floating debt. If the 10% were included in the budget, where it ought to be, the priorities might be reshuffled and provision made for segregating the money for payment of recognized claims accordingly, stipulating in the finance law that similar budgetary provision is to be made annually until the floating debt is paid off. The 10% should be in the budget, chiefly, in order to make it easier to follow the application of the funds to the payment of floating debt.

All this may not bring us very much nearer the solution of the problem but, as you were kind enough to suggest my doing so, I have taken the liberty of stating these preliminary views about it.

Sincerely yours,

H. F. Arthur Schoenfeld