The Dominican Minister (Despradel) to the Secretary of State


Excellency: Acting under the instructions of my Government I have the honor to enclose herewith a copy of a letter which my Government is sending to the new Fiscal Agents of the external dollar loans of the Dominican Republic.

I take [etc.]

Roberto Despradel

The Dominican Secretary of State for Finance (Pichardo) to the Guaranty Trust Company of New York, Fiscal Agents of the Dominican Republic

Sirs: Under date of October 24, 1931, my Government, after careful study and consideration, enacted emergency legislation authorizing the temporary diversion of a part of the customs revenues from the payment of sinking fund on the Republic’s external debt in order to apply such funds to the maintenance of government activities requisite for insuring internal law and order. This emergency legislation provided for the payment to the Dominican Government of a maximum sum of $125,000.00 per month, or $1,500,000 annually, from customs revenues, after full payment of interest on all outstanding external bonds and of the necessary expenses of the General Receiver of Customs and of the Special Emergency Office created by the law. Any balance remaining in the emergency fund after payment of all such privileged expenses was to be paid over by the Special Emergency Agent to the General Receiver of Customs, who in turn was required to remit such balance to the Fiscal Agents of the Republic for the payment of the sinking fund of our external bonds.

The provisions of the Emergency Law were put into execution at the earliest possible moment, and have been faithfully complied with. Simultaneously my Government undertook the various and successive reforms in its general fiscal administration that it believed necessary to demonstrate its earnest desire to conform to the letter and spirit of the emergency legislation, viz: an efficient and correct administration of all government revenues in such a way as to justify the partial diversion of funds pledged for the payment of service charges of the foreign debt. A recapitulation of these reforms seems pertinent at this point. They include the following: [Page 621]

Punctual payment of interest on all outstanding external bonds and earmarking of excess funds for sinking fund purposes after payment of expenses of the customs and emergency organizations.
Maintenance of a balanced budget, and prompt payment of current appropriations for salaries and supplies.
Establishment of a scientific system of control over government expenditures.
Centralization of Government purchases in a reorganized Bureau of Supplies with resulting economies and benefit to the Dominican people as a whole.
Inauguration of internal revenue reforms under a competent foreign specialist.
Rigid economies in all branches of the public administration.
Gradual reduction of the floating debt under a special law enacted for this purpose (Law #229).
Inauguration of an economical and efficient public works program.

The foregoing measures cover almost the entire field of Dominican fiscal administration, and will demonstrate my Government’s good faith and earnest desire to conform to the principles of the Emergency Plan. It is my Government’s desire and intention to continue to enforce these internal fiscal reforms and to make them permanent features of the Republic’s fiscal structure, and special laws to this effect will be enacted where necessary to insure such permanency.

Asa purely temporary expedient, designed to prevent the threatened collapse of orderly Government in the Dominican Republic, the Emergency Law as originally passed has served its purpose well. As its name indicates, however, it could never be considered as a permanent solution of the nation’s fiscal difficulties. Furthermore, a year’s experience under the law has revealed certain defects even in its original form which should be corrected. For instance, it is now a foregone conclusion that the Republic will not be able to resume full payment of sinking funds aggregating $1,850,000 per annum by the end of 1933, not including arrears of approximately $4,000,000 that will have accumulated by that time. It is therefore obvious that in any case the period of the emergency must be extended beyond the time originally fixed in the law. Again, the provision in Article 7 that the emergency law shall become null and void and full sinking fund payments renewed in case the general fund revenues exceed $2,250,000 in any given semester is also impracticable, since even with the utmost economy it has been impossible to reduce the general fund expenditures to less than about $2,400,000 per semester. Such a provision should at least be based on some sliding scale arrangement. There are also several ambiguous provisions which should be cleared up in the light of actual experience since the passage of the law.

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All of these points are of relatively minor importance, however, as compared with the necessity of facing the entire external debt problem in a frank and open manner, and endeavoring to work out a permanent plan that will be mutually advantageous to my Government and to the bondholders. My Government is the first to recognize and admit the unwisdom of sinking fund provisions which would attempt to extinguish the Republic’s external loans at the rate of 8–1/3 and 10% per annum respectively, especially during a period of intense world depression when my country does not have sufficient resources to meet some of its most pressing vital needs. As such a permanent plan will probably require considerable time to perfect, my Government cannot afford to leave undone in the meantime anything that may promise to remedy its present depressed economic situation.

The Emergency Law, vital though it has been to the welfare of the Dominican people, has merely sufficed to hold together a precarious situation, and has not been far-reaching enough to affect general basic conditions which have a direct influence on such a situation. In other words, the efforts of my Government under the present law have necessarily been limited to carrying on essential processes of government on a greatly reduced scale, and sufficient funds have not been made available to stimulate economic activities on which final recovery must depend. It is the conviction of my Government that law and order having been safeguarded by the present emergency resources made available, it will be sound economy to carry out a modest program of vital rehabilitation and stimulation of the productive resources of the country without which a further dwindling of the national revenues can hardly be avoided. Such a policy would also seem to be vital to the interests of our foreign creditors, since a continuation of the declining tendency in revenues would obviously make it more and more difficult to pay even the interest on our external bonds.

The bare essentials in such a program include the maintenance of means of communication whereby the products of the country can be exported to foreign markets and the imports of merchandise, from which a large part of our revenues are derived, can be distributed in the local markets. Such activities would include the repair and upkeep of existing roads, the opening up of inexpensive new roads to tap productive areas now isolated from outside markets, the erection of sorely-needed bridges, the dredging of some of our ports which have been neglected for about four years, and the construction of other public works that will be productive of additional revenue. The funds that are available for such purposes, even with the aid of present emergency funds, are not sufficient to carry out a [Page 623] minimum economical program of maintenance and rehabilitation, covering essential activities; and further delay will endanger the Republic’s physical assets without which it could not maintain its present standards of living and stage of economic development. Additional funds are also needed for practical agricultural relief in order to bring about an increase in the volume of our products, thus offsetting as much as possible the low commodity prices now prevailing and conserving the country’s purchasing power.

It is difficult to see where funds can be obtained for such a program of reproductive rehabilitation over a period long enough to show real results except through a permanent change in the sinking fund provisions of our external loans or through increased taxation. In view of the great shrinkage in the national income, increased taxation is not believed to be justified or feasible except on a very small scale.

My Government, therefore, believes that it is urgent to amend the present emergency law to meet conditions that will undoubtedly continue to prevail beyond the end of 1933, and further to assist in making possible the program of internal rehabilitation herein discussed. My Government feels that it can be justly proud of its present public works organization and of the methods that have been adopted after a preliminary effort to carry on such activities through private foreign contractors. The fact that both the technical and financial aspects of the work will be efficiently handled and that full value will be obtained from the expenditure of every dollar would seem to justify the application of all possible funds for such reproductive purposes for a limited period of time rather than to use such sorely-needed funds for the purchase of our external bonds in the open market to the detriment of our international balance of payments and perhaps of the payment of interest itself.

My Government is confident that the program it desires to carry out, of which the amendment of the Emergency Law is merely a preliminary step, will be to the best mutual interests of the holders of our bonds and of the Dominican Republic. It is my Government’s idea to submit such a program to yourselves as the incoming Fiscal Agents of the Republic and to the consideration of a Bondholders’ Committee, immediate steps for the formation of which would be undertaken by my Government with the aid and advice of yourselves. The general features of this program to serve as a basis of discussion with yourselves and the Committee of Bondholders, would comprise (1) extension of the emergency law and possible amendment thereof; and (2) modification of the present loan contracts, with particular regard to a revision of sinking fund provisions.

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It is the belief of my Government, based on its experience under the Convention of 1907, that amortization payments based on the so-called “barometer of prosperity” principle, or a sliding scale, will result in a more rapid retirement of our foreign debt than would be possible under any rigid scale of payments that might be devised at present. It will be recalled that the 50-year bonds issued under that Convention were retired in a period of 19 years, i. e., in 1927 instead of 1958. There seems to be no valid reason why an arrangement based on a similar principle in harmony with the present outlook would not also give good results.

Very truly yours,

Paíno Pichardo