832.5151/194
Memorandum by the Chief of the Division of Latin American Affairs (Wilson)
Mr. Fred Kent, Supervisor of Exchange, Federal Reserve Bank of New York, came in and discussed the Brazilian exchange situation with Assistant Secretary Caffery, Dr. Feis, Mr. Livesey, and Mr. E. C. Wilson.
Mr. Kent was informed of Ambassador Gibson’s concern regarding [Page 71] exchange developments in Brazil, as set forth in Mr. Gibson’s recent telegrams and letters. Reference also was made to the correspondence between Mr. Kent and Senhor Figueiredo, copies of which had been furnished by Mr. Kent to Mr. Gibson. (The Department had not been informed by Mr. Kent in this matter.)
Mr. Kent said that he felt that Figueiredo was playing the game in better fashion now and realized that Mr. Kent was in earnest. He said, for instance, that he had found that Figueiredo had not only been operating in New York but also in London in transferring Brazilian sums from New York to London. These operations had resulted in transferring such a large amount of Brazilian sums to London in advance of coffee exports that insufficient funds would be available to cover the exchange requirements under last summer’s agreement with American exporters. Mr. Kent had brought this to Figueiredo’s attention with the result that the latter had recently transferred back from London to New York £600,000. Furthermore, Mr. Kent said that a New York broker, who did most of Brazil’s foreign exchange transactions, had recently sailed for Bio. Mr. Kent had commissioned this gentleman to speak plainly to Figueiredo, and felt that this visit would have beneficial reactions on Figueiredo. Mr. Kent said that these developments had occurred recently, and that he had written Mr. Gibson regarding them.
We then spoke of the Brazilian plan for servicing its foreign debt.48 Mr. Kent repeated the views he had already expressed as to the soundness (with the one revision mentioned below), in his opinion, of the principles followed by the Brazilian Government in protecting its national credit first. He said, however, that in writing the Brazilian Finance Minister he had made it clear that this expression of his views had been based on the assumption, which he was not in a position to verify, that the Brazilian plan comprised the use of all the foreign exchange which could be made available for debt service.
It was pointed out to Mr. Kent that the Brazilian proposal to give 100% service, interest and sinking fund, to the funding loans, while other national loans would receive only a reduced percentage of interest and no payment on sinking fund, was not an equitable arrangement. In the past these funding loans had been issued on the principle’ that Brazil was not defaulting in the service of any of its loans, the funding loans being issued to cover in full the coupons which were not paid in cash. However, now that Brazil was actually defaulting on its issues through an arrangement to pay only reduced percentages of the coupons, there no longer seemed any valid reason for giving these funding loans more favorable treatment than would be given to other national loans. The effect, of course, of the Brazilian proposal [Page 72] was to give the British, who hold the major part of these funding loans, much more favorable treatment than is given to American holders, whose bonds fall in the lower categories of the scheme. Mr. Kent seemed to acquiesce in this view.
It was also pointed out that if Mr. Kent’s suggestion were followed to place the national loans of category 3 in category 1, providing 100% service, this would require so much exchange that nothing would be left for national, state and municipal loans in categories following class 3. Mr. Kent also agreed with this.
In further discussion we pointed out our belief that it was essential that Brazil consult with the bondholders before taking action which would affect their rights fundamentally. It was also stated that the Department felt that in view of the White House statement of October 20 regarding the early formation of a central bondholders group to deal with this whole question of debts of foreign countries owing to American citizens,49 the best policy for this Government to pursue would be to urge on Brazil postponement of any action on the Brazilian plan until this bondholders committee could deal with the matter. We gave Mr. Kent for his confidential information a copy of our airmail instruction of October 24 to Mr. Gibson,50 with its enclosures.
We also referred to Mr. Gibson’s views, as expressed in recent telegrams, that the authority wielded by Mr. Kent in controlling exchange in this country was so powerful that we could hope to obtain, through proper use of it, what we want in Brazil, not only in the matter of exchange, but also in the bond matter and other questions affecting American interests. The unwisdom of the recent French action was discussed. Reference also was made to Mr. Gibson’s hope that no definite action might be taken by the signatories of the Exchange Agreement at their next meeting in November until he had an opportunity to express his views in the light of the general situation then existing in Brazil. Mr. Kent said that he was keeping Mr. Gibson fully informed of developments at this end, and would continue to do so.