Foreign Relations of the United States Diplomatic Papers, 1934, The American Republics, Volume IV

810.5151 Williams Mission/49

The Special Representative of the Department of State ( Williams ) to the Secretary of State

[ New York ,] September 4, 1934.

Dear Sir: I have the honor to submit herewith my report³ on the mission of investigation of American foreign exchange problems in Brazil, Argentina, Chile and Uruguay, which mission I have carried out in accordance with your letter of instruction, dated June 28, 1934.

It gives me great pleasure to report the able assistance rendered me by Mr. Donald Heath, of the State Department, who was officially designated to accompany and assist me, and also by Mr. Eric Lamb, who was loaned by the Federal Reserve Bank of New York. I also wish to express my appreciation of the cooperation of the American Government representatives in the countries visited, and also of the American business community. I wish to report, as well, the uniformly cordial reception of us, and the facilities afforded us, by the foreign government representatives.

We left New York on June 30, and spent the period July 13–23 in Rio de Janeiro, July 27–28 in Montevideo, July 29–August 4 in Buenos Aires, and August 4–10 in Santiago, returning to New York on August 28.

Very respectfully yours,

John H. Williams

American Foreign Exchange Problems in Brazil, Argentina, Chile, and Uruguay ⁴

Statement of the Problem

I

The exchange problem which it has been our mission to study in Brazil, Argentina, Chile and Uruguay, is mainly a result of the world depression. Value of exports was greatly reduced by the fall of world prices, and the inflow of foreign capital, which is always a characteristic of young countries in normal times but which was carried to extremes in the twenties, was abruptly cut off. Meanwhile, external public and private debt charges did not diminish, and in most cases merchandise imports decreased less promptly and drastically than did exports. This lack of balance in the international account was made worse, and the prospects for recovery blacker, by the defensive commercial policies pursued by the outside world.

In the main, and without minimizing the pre-depression mistakes made by these countries, especially their over-borrowing (for which the lenders were also responsible) or their subsequent mistakes, both in exchange control administration and in general policy, it seems clear that neither the origin of their exchange problem nor its solution is to be found primarily in acts or circumstances over which these countries have the principal control. A satisfactory general solution must depend upon world trade recovery and greater freedom of access to world markets.

In the meantime, the chief problem for these countries is to endeavor, so far as it lies within their power, to work toward a position of international equilibrium. Thus far, whether deliberately or by force of circumstances, they have tried three methods of achieving this result. The large gold outflows of 1929 and 1930 were of no avail because in a world where prices in all countries are falling sharply, as in the opposite case (such as war) where all prices are rising sharply, gold flow is a futile means of correcting an adverse balance of payments.

Depreciation of the currency, such as followed cessation of gold exports, also proved ineffective, largely by reason of the fact that this method also assumes for its success relatively stable (at least, not sharply falling) prices in the outside world, coupled with willingness and ability of foreign markets to buy. In a world of falling prices, of trade reduced to a minimum by high duties, quotas and other defensive measures, a world, moreover, in which currency depreciation was becoming the rule rather than the exception, no single country could hope for much immediate trade benefit by reason of its own currency depreciation.

Not only was further currency depreciation futile, under such circumstances, but it even came to be regarded as a positive evil, threatening on the one hand to produce an uncontrollable internal inflation which by raising domestic prices and costs would still further impair capacity to export, and on the other hand, to produce such a chaotic condition of the foreign exchange markets as to injure trade still further. There is another circumstance which appears to have played an important part in Latin American policy in establishing exchange control. Agricultural products are subject to inelastic demand conditions, and if the exporting country supplies an important fraction of the total coming upon the market, as is true of all these countries, any considerable stimulation of exports through exchange depreciation may itself contribute to break prices still further.

That considerations of the kind which have been cited have been much in the minds of those responsible for Latin American exchange policy has been abundantly illustrated during our trip. For example, Sr. Arteaga, Uruguayan Minister of Foreign Affairs, stressed the futility of permitting further gold export until trade and price equilibrium is assured. Dr. Souza Dantas, the Director of Exchange in Brazil, said he could not risk a premature relaxation of exchange control, because any sudden or large depreciation of the milreis would break the price of coffee. Dr. Pinedo, Argentine Finance Minister, said that the whole basis of the Argentine policy had been to prevent the external depreciation of the peso from becoming internal as well, and both he and Sr. Duhau, Minister of Agriculture, stressed the fact that the Argentine wheat producer can now cover his costs with wheat at 4.50 pesos, whereas in 1929, 7 pesos was a no-profit price; in consequence, Argentina does not need a complete recovery of world wheat prices in order to recover her export trade position in that product. Likewise, Sr. Ross, Chilean Finance Minister, stated that his policy is based upon maintaining for as long as possible the present gap between the external and internal depreciation of the peso, a gap which was at one time threatened by the internal currency inflation which followed in the wake of the violent external depreciation of the Chilean peso, but which he believes can now be maintained for a considerable period so long as the present depreciated peso is held stable in the exchange market.

The third method attempted for working toward a position of international equilibrium has been that of exchange control. Whatever may be said in criticism of this method and of the manner in which it has been operated, it is important to note at the outset that it was not established until the summer of 1931, when the depression was nearly two years old, that it was not resorted to until both gold export and currency depreciation had been tried, and that it was then resorted to not by one or two countries but by virtually all of the South American countries, acting independently of each other.

The purpose of exchange control, rightly conceived, is to establish an official fixed rate of exchange, and to so ration the supply of exchange created by the exports as to establish at this fixed rate a balance between the country’s incoming and outgoing payments. The method of control may be merely a system of supervision by the government or the central bank, of the exchange operations conducted by the commercial banks; or, if this method proves ineffective, the central bank or the government may actually take over the purchase and sale of the exchange. Most of the South American governments have gone through one or both of these phases of exchange control.

In all cases except Argentina, this attempt to produce a balance by rationing exchange at a fixed rate has involved either a complete default on the public external debt or some composition resulting in only partial debt service; and in all cases curtailment of private debt service and other non-commercial remittances has been involved. Undoubtedly, one important reason in some countries for the establishment of exchange control, besides those already mentioned, was the necessity for assuring to the government an adequate supply of exchange for debt service at a fixed (and not too high) rate which could be definitely budgeted for from year to year.

As we have heard it described repeatedly during our travels on this mission, the problem confronting this system of rationing exchange at an official rate is one of “not enough exchange to go around,” so that the distribution unavoidably raises many difficult questions of equity and expediency as between different classes of interests. Since the root of the trouble has been an insufficient surplus of exports over imports, it is not surprising that foreign exporters, as well as the foreign investors, should find themselves confronted, and their exports impeded, by this same condition. Either exchange has not been available at all, or a lag has developed as the importing country has found itself forced to draw upon its future supply of exchange in order to pay for past or current imports which, under the conditions, probably should not have been allowed to enter.

In this way, there has developed the problem of blocked or lagging balances, in addition to the continuing difficulties and uncertainties with respect to remittances on current trade account. A series of blocked funds agreements in 1932 and 1933, in Brazil, Argentina, and Uruguay partially cleared up these arrears and provided a means of spreading the payment over a period of years; but since that time some new accumulations have appeared in these countries. In Chile, no blocked funds agreements have been made except as part of its system of compensation treaties. (But see below, Report on Chile.⁵)

How these blocked balances should and can be cleared up has been one of the chief concerns of our investigation. The problem raises difficult questions as to equitable treatment of our commercial interests, many of whom have already consented to postponements under the earlier agreements. And on broader grounds, it should be recognized that until these arrears are disposed of and definite evidence is forthcoming that new accumulations are not piling up, there can be no general, satisfactory solution of the South American exchange problem. It was the failure to provide exchange to cover these lagging balances which was in large part responsible for the development of bootleg exchange markets, the appearance of which always constitutes a threat to the effective operation of the exchange control, and provides evidence that the system is not functioning successfully.

II

Confronted with these conditions arising out of “not enough exchange to go round,” countries having commercial or financial interests in these Latin American countries have to consider two alternative lines of policy. If the country’s trade position is strong, in that it buys more from the South American country than it sells, it is in a position, without waiting for any general solution of the latter country’s exchange difficulties, to force a special agreement whereby it is assured that the exchange which it creates shall be used to cover its own export and other exchange requirements. This is the policy which Great Britain has pursued with Argentina under the Roca Agreement.⁶ The same general basis also underlies the system of compensation treaties which many of the Continental European countries have made with Chile. And there is evidence, more recently, that Great Britain has been considering a similar arrangement with Uruguay. The second alternative is to await, and insofar as possible to assist in facilitating, a general solution which will clear up the South American country’s exchange difficulties as a whole. This is the policy which the United States has thus far pursued with all these countries, notwithstanding the fact that in two of them, Brazil and Chile, its trade position is strong.

One of the chief objects of our mission, therefore, has been to attempt to form a judgment, after first-hand investigation on the ground, as to whether, and under what conditions, the continuance of our past policy is justified, or whether, in view of all the circumstances, we must now adopt, where possible, the policy of special agreements in order to assure to ourselves an adequate supply of exchange cover. In the countries where our trade position is not strong, and where therefore such a solution is in any case impossible, the question has been whether it is possible by other means to secure more satisfactory treatment than that accorded to us in the past. In the separate reports which follow upon the individual countries I have endeavored to state my views as to the correct policy to be followed in each case, or the principal facts and considerations bearing upon the alternative lines of policy which are open to us. It will be sufficient in this introductory memorandum to set forth some general considerations.

Our past policy has been based upon recognition of the broad fact that special exchange agreements have the effect of canalizing trade, putting it in a strait-jacket, and doing away with those triangular trade relations which are essential if nations are to enjoy any degree of freedom to buy or sell particular products to best advantage. Since it is the foreign exchange mechanism which makes possible such multi-country relations, all devices for locking up exchange within the confines of particular trade channels through the exercise of pressure based on the strength of particular trade balance positions, has the effect of severely restricting world trade as a whole. They have, in fact, a far greater degree of restrictive effect than have protective tariffs. It has been the pursuit of such practices by some of the leading nations which has intensified and prolonged the greatest contraction of international trade that the world has ever seen.

As a corollary of this general truth, it should be recognized that this canalization of trade through exchange compensation or clearing agreements comes into direct conflict with the requirements of any general solution of the exchange-control country’s difficulties, since it deprives that country of power to reduce its total imports in accordance with some criterion of necessity or desirability and thus to achieve a position of international balance best suited to its present requirements and future growth. Instead of the exchange being rationed on the basis of the country’s needs and capacity for payment and transfer, it is allocated on the basis of countries, in accordance with the amount of pressure their trade position enables them to apply, with the result that the exchange-control country has no means of curtailing imports from countries with whom its trade is thus artificially canalized, even though such imports be non-necessities and luxuries; and may find itself forced in consequence to seek needed imports from other countries, even though it can now offer them even less satisfactory exchange arrangements than would otherwise have been the case. The difficulty of achieving, under these circumstances, any general solution of the exchange problem hardly requires further elaboration.

Recognizing the force of such broad considerations as these, which have heretofore formed the basis of our policy, it can be argued, nevertheless, that such a policy may not be tenable indefinitely in a world which to an increasing degree is resorting to trade canalization and special exchange agreements, and that we may therefore be justified in taking (or even forced to take) similar action. Especially can this view be argued wherever, notwithstanding our strong trade position, we have any clear reason to think that we are not being accorded treatment at least equal to that accorded other nationals, and are thus being penalized for our failure to pursue the more direct and selfish policy. This question has been raised in the State Department with respect to both Brazil and Chile, and it has been one of the chief assignments of this mission to investigate the facts in both these cases and to endeavor to arrive at a judgment with respect to our future policy. The question in Chile relates now only to the treatment of blocked balances, which is analyzed in some detail in our report on Chile. The question in Brazil is much broader, and relates as well to treatment on current trade. We have endeavored to satisfy ourselves as to whether any deliberate policy of according to us less than equitable treatment exists in any of the countries visited, and the basis for such treatment; and in particular in the case of Brazil we have sought to investigate the various rumors and differences of statement as to special transactions representing for us less than fair and equitable treatment compared with other nationals.

In dealing with questions of discrimination it is necessary to distinguish between a general restriction of imports, or other transactions requiring remittance, such as the discrimination in favor of necessities and against luxuries, and discrimination as between different nationals exporting the same class of product. Much of the post-war expansion of our Latin American export trade occurred in commodities which under present conditions cannot be regarded as necessities, and indeed some of them were bought only because our banks and investors were mistakenly liberal in providing capital which created in these countries a false atmosphere of high prosperity. Although individual importers may now oppose and even resent curtailment of their market, there may well be a valid basis for this kind of restriction. In all the countries, the government officials have complained to us that any relaxation of exchange restrictions is seized upon by the importers as an opportunity for increasing their importations. It therefore seems probable that even after exchange control is lifted there may continue to be some system of import licensing. How soon all such restrictions could be removed would depend upon the conditions affecting these countries’ balances of payment, including particularly the recovery of their export trade.

III

A major consideration, therefore, in attempting to decide as between these alternative lines of policy, is the prospect for general trade recovery in the South American countries. Having pursued thus far the broader policy calculated to assist world trade recovery, and having now in contemplation, as well, the policy of reciprocal trade agreements as a means of moderating tariffs and other obstacles to international trade, there would appear to be a presumption in favor of continuing upon our present course, if there is a nearby prospect of better trade and exchange conditions.

We have therefore sought especially to investigate, in each country visited, the present economic situation and the immediate trade outlook. It seems clear that during the present year there has occurred in each of the countries a fairly substantial improvement traceable primarily to a rise in world prices for its exports, and that as this improvement has taken place there has been some betterment of exchange conditions. If the present trend continues, it would seem reasonable to look forward to the achievement of a general solution of the foreign exchange problems.

This solution should take the form of a gradual lifting of exchange control, in favor of a free market. Though exchange control may have been necessary under the chaotic conditions of 1931, particularly in the face of a continuing fall in world prices, it is an artificial stop-gap device which is unlikely to provide any general or permanent cure for exchange disequilibrium. To prevent illicit dealings the governments have been forced to permit some operations in the free market, and in all the countries there has thus developed a complicated system of exchange, partially “controlled” and partially “free,” with frequently several gradations in between. This dual system now provides a means whereby the official control can gradually be reduced and a larger and larger portion of the exchange offered for sale in the free market.

That practically all of the governments visited recognize this procedure to be the final solution of their exchange difficulties has been indicated in our conversations with them. For example, Souza Dantas in Brazil hopes to lift the control entirely within a year, by placing a percentage of the coffee bills each month in the free market. In Argentina, Pinedo, the Finance Minister, stated that he regarded free exchange as the only sound system, and Gagneux, Exchange Control Director, explained that their present system, adopted last November, was designed expressly to permit a ready transfer to a free market system, as trade conditions warrant. The same policy is apparent in the new exchange decree announced during our visit in Uruguay. The only exception is Chile, where the Finance Minister clearly intends to retain the control; but even there, the purpose is to prevent appreciation of the peso rather than to restrict trade. Chile’s policy will be, apparently, to use surplus exchange obtained under the present system to clear up blocked balances and then to begin service on the foreign debt.

While the present trend thus appears to be toward trade and exchange betterment, it is not possible to estimate, in any more precise fashion, the probable course of events. But again it must be recognized that one factor working against the lifting of exchange control is the policy pursued by foreign governments in restricting their markets and insisting upon canalization of trade by compensation agreements and other devices. Any success which our government might have in inducing the European governments to renounce these practices would accomplish much for the general solution of the exchange problem. We have also to recognize that any similar action on our part, resulting in the extension of this restrictive system, would tend to postpone a general solution; whereas anything that our country can do to improve the balance of payments of these countries, whether by trade agreement, financing of blocked balances, debt conversion and adjustments, or in any other way will ameliorate not only their position but our own. At the same time, there is no reason why our government should submit to treatment which bears evidence of any deliberate policy of hostility or discrimination toward our commercial or financial interests, whether from the South American countries themselves or from the European countries which have interests there.

Report on American Exchange Problems in Brazil

During our stay in Rio de Janeiro, July 13–23, we devoted ourselves to two main tasks: (1) a detailed investigation of the technical operation of the Brazilian exchange control, for which the Controller, Dr. Souza Dantas, gave us every facility; and (2) discussion with our own governmental representatives, the Brazilian officials, and the American Chamber of Commerce, of possible solutions of our exchange difficulties in Brazil.

On the latter problem we discussed two main types of solution, a general solution which would promise betterment for ourselves equally with others, and a special solution which would assure to our nationals more adequate and prompt exchange cover without waiting for Brazilian exchange difficulties as a whole to clear up. We have also tried to ascertain whether we are now receiving treatment which is fair and equal to that being afforded other nationals, or whether Brazil has been entering into special arrangements with other governments or their nationals (see Appendix 1) which might justify or compel us in our turn to seek some special arrangement designed to protect our interests and assure us treatment at least as good as that accorded to others.

1 Special Solutions of Our Own Exchange Problems.

Our visit to Brazil came after a long period of study and discussions carried on by our government representatives and by the American Chamber of Commerce in Rio with the Brazilian officials. The Ambassador’s report on the situation, dated May 31, 1934,⁷ reviews the history of the problem, recites his failure to find proof of discrimination against us in his investigation of various rumors and complaints concerning special arrangements with other nationals, and concludes with discussion of four possible alternatives for improving the exchange treatment accorded to our exporters and other American interests requiring remittance from Brazil. Three of these alternatives deal with different possible methods of obtaining a sufficient percentage of the dollar exchange arising out of Brazilian exports to the United States to cover our exchange requirements. The fourth alternative discussed in the report is the granting of an American credit to Brazil.

A prolonged meeting which I held with the American Chamber of Commerce on Monday, July 16, made it clear that the Chamber is unanimous in the view that we should not wait for a general solution of the Brazilian exchange problem but should make some special agreement whereby a percentage adequate for our requirements would be allocated out of the dollar drafts created by Brazilian exports to the United States. The members emphasized the strength of our trade position, called attention to the fact that we have not shared in the increase of Brazilian imports which has occurred in the past year, complained of special arrangements made by Brazil with other nationals involving discrimination against ourselves, and referred to the fact that under the exchange control as now operated the Brazilian Government can take exchange not only for debt service but for extraordinary military or other foreign expenditure, or in order to repatriate bonds, to the detriment both of our current exchange requirements and of payments on account of blocked funds. In these circumstances, since we have no means of controlling the Brazilian situation as a whole, the Chamber strongly favors the special solution already mentioned, and states that the Brazilian Government, aware of the strength of our position and the reasonableness of our claims, would promptly consent to such an arrangement if our State Department should request it. … Attached to this report is a memorandum by the Chamber of conversations between it and Dr. Oswaldo Aranha, the Finance Minister, in thirteen meetings held between May 28 and July 9. (See Appendix 4.)

On Tuesday, July 17, Dr. Aranha and Dr. Souza Dantas made to us a definite proposal for a compensation or clearing arrangement between the Banco do Brasil and a committee to represent the New York banks, whereby dollars would be paid out promptly in New York as milreis are deposited on account of imports and other debit items in Brazil, balances of dollars remaining unrequired at the end of each month to be available to Brazil for meeting her requirements in other countries; this arrangement to be accompanied by a credit extended to the Bank of Brazil by the Export-Import Bank, or by a group of New York banks, to be used for immediate liquidation of all American blocked balances accumulated since June, 1933; this loan to be amortized annually and the amortization requirements to be included in the clearing arrangement.

This proposal, which we did not in any way invite, was obviously prepared in advance of our arrival. Dr. Aranha has promised to give us a copy of it in writing (See Appendix 3, Title 1.); but he has also made it clear that he wishes to reserve it for discussion with the Department upon his arrival in Washington as Ambassador. The Minister has further asked that it be kept confidential, apart from communication to the Ambassador.

II. General Solution of Brazilian Exchange Problem.

The solutions thus far discussed are special arrangements between ourselves and Brazil which rest on the strength of our trade position and seek to secure for us adequate and prompt exchange cover without regard to Brazil’s exchange position as a whole. In addition we have considered a more general solution, the purpose of which would be to secure a general equilibrium in the Brazilian balance of payments which would permit a lifting of the exchange control. Such a solution would require:

(1) Favorable external conditions for Brazilian exports, especially coffee.

(2) A rate of exchange which would stimulate exports and discourage imports.

(3) The pursuit by Brazil of an appropriate financial and economic policy designed to limit expenditures, especially foreign, and to avoid domestic inflation.

The policy would require also the formulation of a definite series of steps for the relaxation of control and should be accompanied at all stages by a definite reporting system on all exchange transactions which would enable the Controller to know precisely his position in order to prevent transactions which might upset the exchange market and defeat the purpose.

From our study of the statistics prior to our arrival and from our investigations here, we believe that the Brazilian situation is turning for the better. Coffee prices have held higher since last November and the balance of trade during the first five months of the year has been definitely more favorable than a year ago. The estimated balance of payments for 1934, prepared by Corliss, shows a net debit for the year of only $15,500,000, notwithstanding the fact that he uses in his estimate the relatively small export balance of 1933. Both Dr. Souza Dantas and Dr. Aranha estimate that with the present reduced debt service and this year’s more favorable export trade, the Brazilian account is now approximately in balance, were it not for the pressure of arrearages previously accumulated. The Chamber of Commerce memorandum, already referred to, contains the statement that, “There is now a noticeable betterment in the time elapsed from date of shipment of merchandise to date of receipt of exchange contract.” This statement was both affirmed and denied during our meeting with the Chamber, but we have the distinct impression that on the whole the lag in payment is diminishing and the amount of exchange available is increasing.

A further favorable factor undoubtedly is the appointment, last March, of Dr. Souza Dantas as the new Exchange Controller. … It is noteworthy that the American community, despite many complaints, offered not a single unfavorable comment on Dr. Souza Dantas. He impressed us very favorably, and we are confident that if he is given a reasonably free hand he will progressively improve the exchange control administration. He has stated to us that his purpose is gradually to reduce the “official” market in favor of the “free” and “grey” markets, and has promised us a memorandum setting forth the steps to be pursued in this process. (See Appendix 3, Title 2.) He estimates that under favorable circumstances he may be able to achieve his objective within a year. He thinks the essentials to the success of his plan are:

(1) To clean up by some funding or credit operation, blocked credits accumulated since June, 1933. (Neither the Chamber of Commerce nor the Exchange Controller has a statistical compilation of the amount of these credits. We have estimates from the Chamber of $12,000,000, $15,000,000 and $18,000,000 and Dr. Souza Dantas’ estimate is $20,000,000, for American funds alone.) Dr. Souza Dantas says that the present number of creditors is much more numerous and the individual amounts smaller than in the case of the blocked funds agreement of June, 1933; and apparently chiefly for this reason he favors the arrangement of an American bank credit through the Banco do Brasil …

(2) To relax the control of exchange only by gradual and definite stages. He is fearful that a sudden or drastic fall in the milreis would break the price of coffee, but he feels that a carefully conceived plan whereby percentages of the coffee bills (say 10% a month) were taken out of the “official” market and put into the “grey” or “free” market would have no such ill effect on coffee prices.

(3) That it will be necessary to maintain a careful control over imports. He has recently drawn up and put into effect a classification of documentary imports in three groups, in the order of necessity (See Appendix 2, page 6). As now operated the exchange control takes over a percentage of exchange for Government requirements (debt service, et cetera); the remainder is distributed among the imports in the following percentages: 50% of exchange to the first group, 30% to the second and 20% to the third. Exchange applications are given a chronological number in the category to which the import corresponds. The remaining percentages of exchange must be acquired in the “grey” or the “free” market. The plan evidently is not to deny exchange to any importer but to force an increasing amount of imports into the “grey” and “free” markets and at the same time to place increasing amounts of exchange, arising out of the exports, in these markets. Since many American products come in the last class of imports (non-necessitous and luxury products), the policy will probably not be popular with some of the American exporters; but there is an offset in the fact that though the price of exchange is higher in these other markets than the “official” rate, the exchange cover will, if the plan succeeds, be more promptly available. It should be noted too that many American exports come in the first class of Brazilian imports.

III. Conclusion.

It is apparent from this summary that our Government has a choice of two alternative lines of policy with respect to the Brazilian exchange problem. Though Dr. Aranha appears to wish to reserve the subject for discussion with the Department upon his arrival as Ambas sador, Brazil is evidently prepared to accept and even to suggest to us an arrangment for allocating an adequate percentage of our dollar drafts to cover our Brazilian exchange requirements. Dr. Aranha further wishes to arrange a credit to be used to liquidate the new blocked funds which have accumulated since June, 1933. It seems to me entirely possible, however, that the Department could, if it wished, obtain assent to the first half of this proposal without assenting to the second, provided some other disposition were made of the blocked funds accumulation. The Chamber of Commerce states that it would be interested in a plan for paying off the blocked funds provided the period did not exceed two years; it is not interested in a new six year plan. The advantage of this solution, from our point of view, is that it gives us assurance of prompt and adequate exchange cover provided out of Brazil’s own exports to us. The disadvantage is that it bears a resemblance to the Boca Agreement and the general European exchange clearing and compensation agreements to which the Department’s policy has heretofore been opposed. My understanding is, for example, that the Department was offered such an arrangement by the Chilean Government and refused it on grounds of general principle.

The proposal for a credit advance is unsound on the broad ground that Brazil’s present exchange difficulties are in part due to previous overborrowing, as evidenced particularly by the fact that Brazil has had to make two debt compositions during the depression, which have reduced her service charges on public debt by 60%, in contrast with Argentina, who has maintained her debt service intact. While this debt situation continues to exist it does not seem prudent for Brazil to accumulate still further debt … On the other hand, it would seem desirable to find some method of cleaning up the new blocked funds accumulations, in order to provide a sound basis for the gradual relaxation of exchange control on current business.

As against these special solutions, our Government might pursue a policy with Brazil looking toward a more general solution of the Brazilian exchange problem along the lines already indicated. With favorable conditions such as now appear to be in prospect it seems quite possible that within a year the control might be removed and our exchange requirements supplied under the conditions of a free market. This is the result that seems now to be working out in Chile and in Argentina.

Should we follow this course, it would seem wise and reasonable, however, to take an active part in Brazilian exchange control policy insofar as our interests are concerned. For example, we would appear to have a right to protest against extraordinary Government expenditures, repatriation of Brazilian bonds, discrimination in favor of other nationals, or any other disposition of exchange which would impair the position of American creditors or exporters, many of whom have already consented to wait for payment of blocked funds as well as to a reduction of interest on the public external debt. We could also make definite suggestions to Brazil as to the technical operation of her exchange control (See Appendix 2.). At present the control machinery does not provide, so far as we can find, any statistical record of the balance of payments position, although such a record should be the most obvious by-product of exchange control, and is indispensable both for an efficient control policy and for a program of gradual relaxation of exchange control.

The Department might consider whether it should not make direct representations to the Brazilian Government upon both of these points. It might take the position, for example, that for a definite limited period, it will not press for a special allocation of exchange to meet its requirements, notwithstanding its strong trade position, provided:

(1) The Brazilian Government will undertake to refrain from such unnecessary or unwarranted uses of the exchange as have been enumerated; and

(2) That it will improve its exchange control and exchange reporting machinery along the lines indicated.

After such a period, if these conditions have not been met and our exchange treatment has not definitely improved, it will reserve the right to suggest a special allocation of the exchange sufficient to satisfy our reasonable requirements.

Report on American Exchange Problems in Argentina

During our stay in Buenos Aires, July 29–August 4, we interviewed various Argentine officials, including especially Dr. Pinedo, Finance Minister, Dr. Duhau, Minister of Agriculture, Dr. Prebisch, the economic and financial advisor of the Government, and Dr. Gagneux, the Exchange Controller. We had a meeting with the American Chamber of Commerce; another with the Exchange Committee of the same organization, and individual meetings with American importers and bankers; and discussed our problems with the American Government representatives.

Under the Exchange Control system now in force, Argentina allocates to us more than twice as much exchange as is created by our imports. But since the greater part is required for debt service, we received only about half enough official exchange to cover our exports to Argentina. To put it another way, Argentina allocates to us as cover for our exports about as much official exchange as is created by her exports to us, and in addition supplies official exchange for dollar debt service^*; but this means that for about half of our exports to Argentina we must have recourse to the “free market” at a premium over the official rate, which has recently been around 15 percent. In allocating the exchange, Argentina discriminates as between imports from us which she regards as more essential and imports which she regards as less essential. It seems clear also, though on this we have had no definite admission, that as between similar imports from different countries, she discriminates in favor of countries, notably England, with which she has concluded special exchange agreements. But it was stated at the meeting with the Exchange Committee of the American Chamber of Commerce that the range of such products is not great. The method of discrimination as between different imports from us is the requirement of a prior exchange permit, imports receiving such a permit being entitled to official exchange and those not receiving such a permit being forced for cover into the free market. Action on the application for permit can and should be had before the import leaves the country of origin, unless the importer is prepared to provide the exchange cover through the free market.

Our current exchange position could be improved by inducing Argentina to provide more official exchange or by the removal, or narrowing, of the spread between the official and the free market rates. We have, in addition, the problem of how to release unpaid balances.

Means of inducing Argentina to allocate to us more official exchange seem unpromising. We have not the trade position to press for, or to benefit by, a compensation agreement, like the Boca Agreement, and have not favored such a policy even in countries in which our trade position is strong. We could create more dollar exchange by a bilateral trade agreement, but shall probably not wish to do so in the near future. An advance of capital or credit would create more dollar exchange, but we have seen no evidence that Argentina wishes to borrow or the United States to lend; and except possibly in connection with freeing blocked funds (discussed below), which would provide no additional current exchange, there does not appear to be any sound reason, on either side, for recommending this type of solution.

Termination of the special exchange agreements with other countries would also help our position, though the Boca Agreement probably impairs our position less than one might in principle assume; but the Argentine officials state frankly that they have responded unavoidably to pressure in making these agreements, and emphasize the fact that the agreements are terminable upon the termination of exchange control. We have received the impression that they have little enthusiasm for the Boca Agreement but see no way out of it at present. They also appear to feel, somewhat resentfully, that these agreements have not given them the assurance of their foreign market for beef which they expected. It would appear, however, to be both impolitic and futile to raise any questions respecting these agreements with Argentina, though it does appear that the United States has good ground, in logic at least, for pointing out to Great Britain the inconsistencies of her policy as between countries like Brazil in which her trade position is weak and countries like Argentina in which her trade position is strong, the policy being, as it now seems to us, to plead in the former countries for avoidance of compensation agreements, on broad economic grounds, and to press for such agreements in the latter, on narrower grounds of special advantage.

The remaining method of solution of our exchange problem lies in the achievement of equilibrium in the Argentine balance of payments, such as would permit the removal of exchange control and the emergence of a single exchange rate, equally applicable to all exporting countries, in a free market. The members of the Exchange Committee of the American Chamber of Commerce expressed themselves in favor of this solution, as both the most feasible and the most desirable. Whether, and when, this solution can be achieved depends upon a number of factors. The chief is world prices of Argentine exports, which have in recent months advanced substantially, materially improving the trade balance and giving rise to a distinctly optimistic atmosphere. This improvement has been accompanied by a narrowing of the spread in the exchange rates in the past two months, which appears to mean that more exchange is becoming available in the free market.^† By reason of her internal policy, which has resulted in a substantial fall in farm costs, Argentina is in a very strong position to take advantage of any improvement in world prices for her products, and does not require a return of prices to the pre-depression level. This matter of internal prices and costs in relation to external we have investigated in some detail, and have discussed with the Minister of Agriculture and with Dr. Prebisch.

The Argentine Government is also endeavoring to improve its balance of payments position by applying a priority list on imports and by effecting conversions of its foreign debt at a lower rate of interest. It is in a strong position to achieve the latter, as security markets strengthen, owing to its record of maintaining the full debt service during the depression. Two British loans have already been converted, and discussions are now proceeding with respect to others. The Argentine officials have not omitted pointing out to us that a conversion of their six percent dollar bonds into five percents would help their position considerably, but it will probably be some time before such an operation in our market could be successful.

The Argentines have also stated that under a system of free exchange they might not think it prudent to relax at once their system of import permits since there appears to be a strong tendency for imports to increase when control is relaxed or exchange conditions improve; they would have to be guided by actual experience.

One possible obstacle to an early removal of exchange control may be the fact that at present the Government makes a substantial profit in the official market by buying the exchange created by the exporters at a considerably lower rate than that at which it is auctioned off to importers having prior exchange permits. This profit has been used in part to buy grains from the farmers at an official minimum price. The Minister of Agriculture has informed me that the Government has now sold all its grain holdings and realized a substantial profit, but he took obvious pride in explaining how the spread in the exchange rates provided funds to finance such operations, and outlined a policy of building up reserves of this character to aid in supporting any agricultural production which might experience temporary market weakness. So long as these operations persist, they may provide a strong motive for retaining the present system of exchange control; but this possibility must be weighed against the counter-possibility that the producers, once they feel their foreign market is assured, may demand that the full price of the exchange, as in a free market, should come to them. This is the development which in Uruguay resulted (July 28) in a new exchange policy considerably enlarging the free market.

On the whole, I have received the impression that the Argentine situation is substantially improving, and that if the improvement continues it will result in a narrowing of the spread of exchange rates, the expansion of the free market, and eventually the removal of exchange control. How quickly this will occur cannot be estimated. One recent piece of evidence was the removal (August 1) of exchange control on small private (mainly immigrant) remittances, estimated at about 40,000,000 pesos a year, and the transfer of these operations to the free market. Another may be Dr. Gagneux’s statement to us that the present exchange control mechanism, established last November, was designed to permit an easy and rapid transition to a free market when and as conditions permit. Apart from such straws as these, the Argentine officials have carefully avoided making any definite statements or commitments respecting their future policy.^‡

Two remaining questions are the attitude of the American business community in Buenos Aires, and the problem of blocked funds. We have the impression that American export interests and bankers in this market feel that the treatment being accorded them is as satisfactory under the circumstances as can reasonably be expected. In their view the system of prior exchange permits combined with freedom of access to the free market after notice is served that permits will not be granted is acceptable until such time as conditions permit the removal of exchange control. Thus far, the Chamber of Commerce Exchange Committee has supplied us with no complaints of discrimination or citations of cases of unfair treatment, and on the other hand several of its members have stated expressly that we are being accorded fair and reasonable treatment, all things considered. On the other hand, they point out that the exchange control has undoubtedly been injurious to many of our small exporters, and that the present comparative absence of complaint is in part due to the fact that only the fittest now survive.^§

In the Chamber’s view, the most serious problem at present is that of liquidating the unpaid balances. We understand that the Chamber intends to supply us with an estimate of the amount of these funds. Dr. Gagneux, the Exchange Controller, gave us an estimate of 25,000,000 pesos (the American part only), and pointed out that creditors have now the option of liquidating through the free market.^ǁ The Chamber of Commerce Exchange Committee stated that to some extent liquidation was occurring in this way, though this method involves a substantial loss in the exchange difference (See Appendix 2.). The Government has offered to pay off blocked funds with five-year notes (similar to the arrangement offered Italy) but these are not acceptable, according to the Chamber, unless they can be discounted for cash (dollars) in the United States. The Exchange Controller is anxious to clear up the unpaid balances, and points out that the removal from the market of this potential pressure would be of great assistance. Both he and the Chamber’s Exchange Committee have raised the question whether the Export-Import Bank could be interested in a transaction of this character.

Our two main conclusions are:

(1) The United States appears to have little or no means of inducing Argentina to offer us more favorable exchange treatment except as her general position improves; and this improvement appears now to be under way.

(2) Both Argentina and our exporters wish to clear up unpaid balances. This may now be done through the free market and to some extent is being done, but this method involves an exchange loss. The alternative method of payment in five-year notes depends upon the discounting of such notes by the Export-Import Bank or some other American institution. Anything we can do to facilitate the liquidation of these balances will undoubtedly assist Argentina in her general solution of the exchange problem, and will thereby improve our own treatment on current trade account.

Report on American Exchange Problems in Chile

During our stay in Chile, August 4–10, we discussed the American exchange problems in considerable detail with the Embassy staff which, in advance of our arrival, had prepared two important memoranda, one on “Exchange Problems in Chile” and one on “Exchange and Compensation Factors affecting American Trade with Chile.” We then interviewed at the Embassy in the presence of the Ambassador and the staff, a number of Americans representing a broad variety of American interests in Chilean industry and trade. These men, who were interviewed individually, are:

Horace Graham	Director, Nitrate Sales Corporation.
Paul Miller	Comptroller, Nitrate Sales Corporation.
Leo D. Welch	Manager, National City Bank, Santiago.
Phil W. Bonsai	International Tel. & Tel. Co.
Percy A. Seibert	Manager, Braden Copper Company.
J. Floyd Owens	Comptroller, Nitrate Sales Corporation.
Edward J. Craig	Gen. Manager, Anaconda Copper Company.
George S. Laing	Gen. Manager, West India Oil Company.

Accompanied by Mr. Scotten and Mr. Scott, I then had an interview of an hour and a quarter with Sr. Gustavo Ross, the Minister of Finance. As the situation now stands, Sr. Ross is the final authority on all economic and financial questions and is his own director of exchange control.

I

There are four possible alternative policies for handling our exchange problems with Chile:

1) By compensation treaty, which would include preferential treatment of frozen credits at the official rate of exchange, which in terms of our old gold dollar would mean 16.55 pesos per U. S. dollar, and in terms of the new gold dollar 9.6 pesos per dollar.

2) A general agreement with Chile, along lines already described in the Embassy’s memorandum of March 27, 1934,⁸ but including also liquidation of frozen credits on most-favored-nation terms at the official rate of 9.6 to 1. This we understand to have been the State Department’s position. This general agreement would give us freedom from exchange control and an exchange rate on current trade equal to that furnished compensation countries. In addition, by this agreement Chile would undertake to repay in dollars those having dollar deposits in the “Caja de Prevision de Empleados Particulares” and to furnish dollars at the official rate of exchange to those having peso deposits in the “Caja.”

We understand that the Chilean Government has been willing to accept this agreement, in principle, in all respects except for its frozen credit provision; but that the State Department in view of this exception has not gone forward with the agreement, on the ground that to omit the frozen credit provision would represent acquiescence in less than most-favored-nation treatment with respect to this item.

3) A general agreement on the lines of (2) above as to current trade and the treatment of American depositors in the “Caja de Prevision,” but with either (a) an agreement to liquidate frozen credits at some other rate of exchange than the official rate of 9.6 to 1, or (b) an understanding that an equitable settlement along these general lines would be effected privately between the Chilean Government and American holders of frozen credits.

4) Acceptance of the status quo as to current trade; a definite agreement on the lines already indicated with respect to deposits in the “Caja de Prevision;” and acceptance of the status quo as to frozen credits, but with an understanding to be worked out, either by the State Department or privately, as to the best practical method for resolving this problem.

II

In approaching the consideration of these four alternative lines of policy we have borne in mind the long history of negotiation with the Chilean Government concerning our exchange problems, during which time the economic and trade position of Chile has materially changed for the better. This improvement has occurred particularly since the period of active negotiation began last November. Our Government has consistently refused to consider the first plan outlined above, a compensation treaty, on broad grounds of general policy. In pursuing the second alternative, the Department in the beginning was evidently much concerned with receiving most-favored-nation treatment with respect to current trade. But partly by reason of the pressure exerted through our Embassy, acting on the Department’s instructions, and in large part, by reason of the general improvement in Chilean trade, this problem has already been resolved without any formal agreement, so that today we are in fact receiving equal treatment with respect to current trade, exchange being made available to our exporters at the export bill rate of 25 to 1 and to the compensation countries at the official rate plus a premium which equalizes the price of exchange as between such countries and ourselves. A formal agreement, therefore, would accomplish nothing more than legalization of the existing status quo.

As the Department has consistently contended, such a formal agreement is unacceptable if not accompanied by an agreement with respect to frozen credits giving us in this respect also most-favored-nation treatment. All of the compensation treaties contain a provision for the liquidation of frozen credits at a rate which is better than the export draft rate now applied to current trade. Our problem has been how to secure equally favorable treatment on frozen credits without consenting to a compensation treaty. If now we should negotiate a general agreement with respect to current trade, and acquiesce in Chile’s refusal to include in it most-favored-nation treatment for our frozen credits, we should apparently be relinquishing what has been, from the beginning of the negotiation, a major contention of principle, for the sake of a general agreement which now can give us nothing more than the treatment we are already receiving.

III

Our visit to Chile has impressed us with the complicated character of the frozen credits question. It is not easy to determine what would constitute for us most-favored-nation treatment or how desirable such treatment would be if we could get it. The French and other agreements are based on the official rate of exchange (three pence gold); in terms of our devalued dollar this would be 9.6 pesos for 1 dollar, but in terms of the old dollar it would be 16.55 to 1. It can be argued that Chile was not responsible for our devaluation and is entitled to consider 16.55 to 1 as its official rate. But to get even this rate, which the Finance Minister firmly refuses except as part of a compensation agreement, it would be necessary to consent to a time schedule which might mean only very gradual liquidation. In the French agreement 20 percent of nitrate sales to France are blocked to provide exchange for frozen credits, so that unless nitrate sales are large, liquidation is slow. A number of the Americans interviewed, when asked whether they preferred slow liquidation at a good rate or faster liquidation at a worse rate, put greater stress upon the latter.

To provide exchange at the official rate for frozen credits, Chile compels the Nitrate Sales Corporation to sell exchange at that same rate, instead of at the much more favorable export draft rate. Since the nitrate industry represents largely American capital, such a solution of our frozen credits problem would be at the expense of an American interest. Our nitrate representatives, moreover, point out that since they use a considerable part of their exchange to buy American imports (including oil products, motors, electrical equipment, rubber, etc.), any such attempt to improve the position of American exporters on frozen credits would worsen our position in current trade. It should be pointed out, also, that most of the compensation treaties include only a portion of the frozen credits, so that they do not pretend to provide a complete solution of the problem.

To determine an equitable rate for the liquidation of our frozen credits, or the amount that would be liquidated were exchange offered, presents great difficulty. Part was frozen in July, 1931, when exchange control was imposed, and when the rate was about 8 to 1; but in reporting frozen balances creditors include as well the subsequent accumulations, when the rate was fluctuating from 8 to 60 to the dollar. A large portion of the frozen credits, moreover, has been invested in property or in securities, and in some cases large profits have been made. Some credits have been liquidated at the export draft rate, including some 18,000,000 pesos in response to two general offers made by the Finance Minister this year. Some credits are now so tied up that they cannot or will not be liquidated. This part includes 50,000,000 pesos used by Electric Bond & Share to buy up its local 8 percent debentures, effecting an important saving in interest. It probably should include also 18,000,000 pesos of bank deposits belonging to the Telephone Company, which appear to be destined, according to the local representative, for investment in Chile, in lieu of new capital from abroad, to carry out expansion in accordance with the company’s contract. Thus of 157,900,000 pesos of “frozen credits” reported to the Commercial Attaché’s office in response to his questionnaire, our inquiries would indicate that 18,000,000 pesos have been liquidated and at least 68,000,000 pesos cannot or will not be liquidated, leaving a total of about 72,000,000 pesos, which at the current export draft rate is less than $3,000,000. What part of this was blocked prior to July, 1931, and therefore is in equity entitled to the official rate, and what part since that time, when the importer was taking his chances, I am not able to determine. In addition, there are some $4,000,000 of frozen credits in the form of unpaid drafts, receivables, merchandise or other items requiring payment by the debtor in dollars. All these, presumably, are in a different category, representing sums not yet collected from the debtor (local importers, etc.). What portion of these debts may still be good, and at what rates the debtors should now be required to provide exchange present difficult questions. But in general, it seems clear that the total amount of collectible or transferable credits is substantially smaller than had previously been supposed. In particular, it should be pointed out that of the total estimated frozen credits (Feb. 21, 1934), only 53,800,000 pesos is represented by deposits in banks; and that from this amount there must be deducted at least 31,000,000 pesos, of which 18,000,000 has already been liquidated this year at the export draft rate and 13,000,000 represents the Telephone Company’s deposit at that time. These deductions would leave about 22,000,000 pesos, or less than a million dollars at the current export draft rate (or $1,333,000 at the rate of 16.55 to 1).

IV

Throughout a long interview the Finance Minister discussed freely his present policy, but consistently refused to consider any better rate for frozen credits except in connection with a compensation treaty. I am satisfied that except in response to pressure in the form of some genuine threat to Chile’s markets in the United States, he cannot be induced to alter this position.

His present policy with respect to exchange is to maintain the export draft rate at 25 to 1, equally for all countries, as to current trade, and to liquidate frozen credits at this rate, except as to the compensation countries. He has induced the British to furnish him a complete list of their frozen credits’ and has liquidated all but £40,000 of the British credits willing to accept this rate. He realizes fully, and pointed out in some detail, that some of the American credits do not now properly belong in the frozen credit category. He has made two general offers to liquidate our frozen credits at the export draft rate, and is convinced that he will in time succeed in clearing up the problem by this method. He asked us if the Embassy is able and willing to furnish a true list of frozen credits. He dislikes compensation treaties and is convinced that they have worked to the injury of the foreign countries which have insisted on them, and have resulted in a scarcity of exchange to finance their exports. He points out that Germany has not renewed the treaty which expired on June 30, 1934. He insists that the compensation countries themselves provide the differential in favor of their frozen credits in the high price for nitrate which prevails in these countries as compared with the price in England and the United States.

V

My conclusion is that preferential treatment for frozen credits, whether we mean by that treatment equal to that accorded to France and other compensation countries or merely a preferential rate as compared with current trade, cannot be secured except by a compensation treaty or by some other form of definite commercial pressure; and that in view of the relatively small size of the genuine frozen credits now remaining and the complicated status and character of these credits, making difficult the calculation of an equitable preferential rate, it would be unwise and impolitic to pursue such a course, since by it we would jeopardize the genuine good will which now exists, and might impair a trade position which appears to be distinctly favorable. If the Department should take this view, there would remain the question whether it wished, possibly after discussion with the American interests at home and in Chile, to acquiesce in the Minister’s request for a list of American frozen credits, to be provided through the Embassy, as the British have done, or would consider that such a list should be provided by the private interests concerned.

If this policy were pursued with respect to frozen credits, the broader question would be whether it is still advantageous to negotiate a general agreement respecting current trade. My own view is that in view of the fact that we are now receiving without agreement as good treatment on current trade as could be had by means of an agreement, there is little to be gained by a procedure which would involve a formal relinquishment of our contention for the principle of most-favored-nation treatment with respect to frozen credits. I should therefore be inclined to favor the fourth of the alternatives outlined in section I (pages 23–24⁹).

Report on American Exchange Problems in Uruguay

I

Our stay in Uruguay was limited to two days, July 27 and 28, but the American Chargé d’Affaires, Mr. León Dominian, had so planned our time that we were able to confer with the leading Uruguayan officials and American business men as well as our own government representatives. A midday conference with the American Association acting as an American Chamber of Commerce in Montevideo was followed by a round table conference with the Minister for Foreign Affairs, the President of the Banco de la Bepublica, the official bank, officials of the Foreign Office, representatives of American and Uruguayan business, and our official representatives. The following day included conferences with the Minister of Finance and officers of the Banco de la Bepublica and a final conference with the Minister for Foreign Affairs at his home.

Our arrival in Uruguay coincided with the announcement of an important modification in the system of exchange control, by the project of law and decree of July 28 (See Appendix 1).

Although complete control over exchange has been vested in the Bank of Uruguay since 1931, it has not been thoroughly effective. An artificially high rate of exchange was maintained which operated to delay the attainment of equilibrium in the balance of payments. The artificial rate gave the Government cheap exchange to service the external debt but was too high to check imports or stimulate exports. Also, it gave rise to smuggling and other evasions. Large accumulations of frozen credits have occurred of which to date only some 34,000,000 pesos have been funded through the issuance of the 5-year “amortizable obligations” leaving a backlog estimated between 20,000,000 and 25,000,000 pesos.

Partly, however, as a result of better prices for export products and also by reason of the reduction in outgoing payments, caused by cutting the interest on national external bonds to 3½ percent, equilibrium in the balance of payments (arrearages aside) was reached toward the end of 1933, and has since been maintained, according to the Government.

The new system of control is described as a concession to the agricultural interests and exporters, who have demanded freedom to sell their export bills at the “free” instead of the “official” rate.

The principal provisions of the new system are:

1. The broadening of the free market through permitting exporters to sell, depending upon the product, from 50 to 90 percent of the exchange resulting from exports of the principal products at the “free” rate, the balance to be disposed of to the government at the “official” rate.

2. The restriction of the use of official exchange to the service of the external debt, public services, and fuels, raw materials and other necessitous products.

3. The conversion of the backlog of unpaid balances by a new series of frozen credit bonds to be amortized within a period of 20 years and to bear not more than 4 percent interest.

4. All imports to be subject to license, the Government being empowered to reduce imports through its power to refuse licenses to 50 percent of their value in 1933.

situation of american interests under uruguayan exchange control

II

Until the middle of 1933, Uruguay apparently allocated to American interests more than double the amount of exchange made by our purchases of Uruguayan goods, although the amount was insufficient to prevent the accumulation of large amounts of frozen credits. Of the “amortizable obligations” issued to clear up these blocked balances, some U. S. $6 million represent dollar bonds, and unfunded unpaid balances of Americans now total, it is estimated, an additional U. S. $2.3 million.

During the past year, however, the Banco de la Bepublica has been restricting its allocation of exchange to American concerns, although it still seems to be allotting more than is created by Uruguayan exports to the United States. American firms received 46 percent less “official” and “compensated” exchange during the first six months of this year than during the corresponding period of 1933, although Uruguay’s exports to the United States have increased in recent months. In the “free market” established in February of this year, however, American interests have been able to purchase some exchange at a rate averaging 45 percent over the official rate and 5 percent over the rate fixed for compensated exchange.

During this time British interests have been able, we are informed, to obtain substantially sufficient exchange for their requirements, much of it at the favorable “official rate.” Exports to Great Britain, Uruguay’s principal foreign market, create enough exchange for British requirements, and the Minister for Foreign Affairs states that Great Britain has exerted pressure to obtain an agreement whereby all of the exchange created by her Uruguayan purchases be made available to her nationals. Interests of other countries with which Uruguay has “favorable” trade balances are also alleged to have been favored in exchange allocation during this period. We have no recent figures to measure the discrimination in exchange treatment from which American interests suffer, but its existence is freely admitted by Uruguayan officials, who point out that they are being forced towards a bilateral system of exchange allocation by the countries which are Uruguay’s chief markets. In addition, Uruguay also discriminates as between imports which she classes as necessitous and those which she regards as less essential. Thus, American oil companies during the first half of this year received $702,000 in exchange at the official rate whereas only $1,160,000 was allocated for all other American imports, of which one-half was at the favorable official rate and the other half at the 40% higher “compensated” rate.

The allocation of exchange to the oil companies is the subject of complaint by other American firms which point out that the allotment is charged by the control against the American quota of exchange although only a part of the petroleum products involved comes from the United States.

American bondholders also claim to be the object of discrimination through the action of the Uruguayan Government in 1933 in decreeing that interest on all its external bonds shall be paid at the flat rate of 3½ percent irrespective of the original coupon. This rate is full interest on the principal British issue—the Consolidated—whereas it is little more than one-half of the interest on the principal American loans, which bear 6 percent. The sterling loans which were the subject of consolidation, however, bore interest of 5 and 6 percent. It is understood that the Department is already informed that the Uruguayan Government maintains that no discrimination against American bondholders is involved. It is mentioned here because the reasons advanced by the Uruguayan Government for its reduction of interest on external obligations are the scarcity and high cost of foreign exchange.

It appears doubtful that the condition of insufficient exchange and discrimination in its allocation, in which American interests find themselves, will disappear under the new system of exchange control. According to our copies of the texts, the new law and regulations definitely provide that not only “import licenses” but “free” and “official” exchange as well will be apportioned according to quotas “for commodities and for countries” to be set up by the Bank of the Republic.

Further, the Minister of Foreign Affairs frankly stated that in order to preserve or extend her foreign markets, Uruguay is ready to make agreements offering exchange and tariff concessions. No definite agreements have as yet been made as far as we are informed although negotiations with Great Britain are in progress. The Minister also said that exchange concessions had been offered Italy in return for military purchases of Uruguayan meat.

Agreements of this kind, by corralling a greater share of exchange, might result in further restriction of allotments to American firms.

III

More dollar exchange is normally required for service of dollar bonds, frozen credit obligations, interest on American investments in Uruguay and imports from the United States than is provided by American purchases of Uruguayan products. A compensation treaty would, therefore, offer no solution of our exchange problem even if such agreements were in line with our general policy. It would be possible to increase the supply of exchange by a reciprocal tariff agreement but it seems doubtful that such an agreement could be decided upon in the near future.

There would appear to be no opportunity for effective protest against Uruguay’s system of allocating exchange unless Uruguay should further reduce her American exchange quota and require that the entire sum necessary for interest on her dollar bonds, in addition to the exchange necessary for imports from us should be derived from the exchange created by our purchases of Uruguayan products. This would leave little exchange for our imports. According to our information, Uruguay has so far been taking a considerable part of the exchange necessary for dollar debt service from the general exchange fund resulting from its exports to all countries.

The complaint has been made that the quota of exchange for American requirements is smaller than it should be because exchange for petroleum products brought in by American companies from Venezuela and other Latin American oil fields is charged to it.

A report on this question from our representatives in Montevideo would be desirable and, in case their investigation shows the complaint to be founded on fact, also a statement of their views as to the advisability of making representations. There are various angles to this problem. For example, the control authorities might require information as to whether the exchange necessary for payment of the oil really returned to the country of production.

Aside from the above possibility of obtaining some increase in our exchange allotment and the possibility of creating more exchange through a reciprocal tariff agreement, there appears to be no special solution of our exchange difficulties’ in Uruguay.

Apparently we shall have an exchange problem as long as Uruguay maintains any system of exchange control. Exchange control is inevitably accompanied by discrimination in favor of nations which are good customers for her products. Our problem will disappear when, through the achievement of equilibrium in her international account, exchange control is lifted. Our policy should, therefore, be one of assistance towards this general solution of the country’s exchange difficulties.

There has been an improvement in Uruguayan economic conditions and it appears very possible that Uruguay is now working definitely towards substantial freedom of exchange. President Terra has announced that this is the policy of his government. The new system is a step in this direction. The rural interests which are powerful, are pressing for abolition of control. A balance in the international account has apparently been obtained, and a balanced budget is forecast for this year. Uruguay has a relatively large gold reserve, a part of which according to the new exchange legislation she can use as a stabilization fund for the period of transition to exchange freedom, and, if necessary, in paying off a part of her frozen credit obligations. It is also reported that she is considering the use of part of the gold reserves to convert external bonds and thus reduce the outgo of exchange for debt service.

There is, however, a considerable opposition, including the importers and salaried classes, to any breakdown of exchange control which might involve further external depreciation of the peso. Also fearing the impairment of foreign markets for meat, a principal export, Uruguay stands ready to give exchange concessions through compensation agreements, a circumstance which might tend to prolong the period of exchange control.

If relaxation of exchange control is to be obtained it appears essential for the government to persuade the owners of the present large accumulation of blocked balances to accept payment over a period of years.

The objection of most American owners of blocked accounts to the acceptance of the proposed “frozen credit” bonds is understood to be that, being unmarketable, it is at present impossible to turn them into cash. If through the Import-Export Bank or some other institution these bonds could be discounted or otherwise made bankable on satisfactory terms, we would not only aid the American interests involved but would assist Uruguay in ending exchange control.

The new exchange control program provides for the issuance of “frozen credit” bonds to bear not more than 4 percent interest and to be amortized within 20 years. It is assumed that the latter figure is a maximum. If it is really Uruguay’s intention to issue 20-year bonds, it is to be doubted that there will be a very large subscription for them by holders of frozen balances unless a market for the bonds were made. We believe that inquiry should be made as to the Government’s intention with respect to the maturity of the proposed new issue of frozen credit bonds and that we should urge, in Uruguay’s own interest, that it be kept down to the shortest possible period. It is to be noted that Argentina’s endeavor to fund the remaining frozen credits by the issue of 5–year 2% bonds has so far not been successful. While it is possible that Uruguay may before long find it possible substantially to remove exchange control, the long view of her trade and exchange position is not too encouraging. Meat products are an important part of her exports and Uruguayan stock raisers fear that England, the chief market, may restrict her purchases as a result of the policy of Empire preferences and, recently, of protecting the livestock industry in the United Kingdom.

During our conference at the Ministry of Foreign Affairs, Uruguayan officials frequently referred to the effect of our 1930 tariff on Uruguayan exports to the United States. Uruguay was a relatively important customer of the United States prior to the depression and our investments, private and portfolio, yielded a good return. Uruguayan recovery is essentially dependent on her principal customers continuing to give her the same access to their markets that she formerly enjoyed.

IV

In conclusion it may be well to record that we were cordially received by the Uruguayan officials, particularly Señor Arteaga, Minister for Foreign Affairs, who represents the agricultural and livestock interests which apparently are exercising increasing control in government. He appeared gratified to learn that our views with respect to the advantage of relaxing exchange control coincided with that of his party. It is clear that the policy of this new group is to permit, through enlargement of the free market, a frank recognition of the external depreciation of the peso while at the same time endeavoring to prevent this depreciation from resulting in internal inflation. In this policy Señor Arteaga’s group has to contend, however, with not only the importing interests but also the heads of the official bank, who are apparently dominated by a conservative allegiance to what might be called preserving the integrity of the old peso. It seems not improbable that our assurance to Arteaga and his friends that in our view he was pursuing the correct policy, may serve in some measure to strengthen his hand. He and other government officials also appeared to receive very favorably our suggestions for the technical improvement of the exchange control, particularly the need for an adequate reporting service which would enable them to know their balance of payments position and to make use of this knowledge in working out the steps for further relaxing exchange control.

3. Infra.
4. No copy of the report is filed with the covering letter, printed supra. Printed from mimeographed report in the Department of State Library. Appendices not printed.
5. Post, p. 411.
6. See section entitled “Representations Regarding the Exchange Provisions of the Anglo-Argentine (Roca) Agreement”, Foreign Relations 1933, vol. iv, pp. 722. ff.
7. Not printed.
8. It should be noted, however, that about half the dollar bonds are now held in Great Britain. [Footnote in the original.]
9. See Footnote (**), Pages 21 and 22. [Footnote in the original. Reference is to footnote ǁ, p. 410.]
10. Dr. Pinedo, Finance Minister, said that he considered the free market, accompanied by exchange stabilization through gold flow, the only sound system; but he also stated that he does not intend to stabilize until he is certain of what other countries, especially Great Britain and the United States intend to do. [Footnote in the original.]
11. These views were expressed at our first meeting, which was with the Chamber’s Exchange Committee. At the second, and much larger, meeting with the Chamber as a whole, individual complaints were expressed. These appeared to come mainly from the representatives of the smaller exporters. [Footnote in the original.]

12. In this respect, since our departure from Buenos Aires on August 4, certain developments have taken place which have been reported in an airmail letter to us by the resident representative of The First Boston Corporation, Dr. Oscar Muller, under date of August 21, as follows:—

    “Around August 10 the peso started appreciating suddenly in the free market, going from 395 to 353 or just 4 above the official selling rate of 345. It looked indeed as if the whole system would have to be overhauled at a moment’s notice, but instead of that the Government started lowering the official selling rate from 345 to 337, and sold exchange in order to counteract too fast an appreciation. The result is that now we have the official selling rate at 338, and the free market rate at around 365, or a difference of about 8%. It would seem that the policy is not to permit unduly violent fluctuations. More than ever I believe the tendency of the peso is to appreciate gradually. The present situation is being taken advantage of by people who held peso balances and were waiting for permits. They give up waiting and go into the free market at a loss of say 8% to 10%, and in this way a great deal of unblocking of pesos is taking place with the problem of blocked funds finding its own solution.

    “After your departure grain prices rose still further, then they receded, but are firm once more.” [Footnote in the original.]

8. See section entitled “Efforts of the Department of State To Secure Equitable Treatment for American Interests With Respect to Chilean Exchange Restrictions,” vol. v, pp. 1 ff.
9. Reference is to p. 412.