The Ambassador in Brazil (Gibson) to the Secretary of State

No. 410

Sir: I have the honor to inform the Department concerning a series of contracts for armaments and equipment which were recently signed by the Ministry of War.

It is reported that the Ministry has signed contracts with armament firms in Czechoslovakia for approximately $3,000,000 covering rifles, heavy armaments and shells. Another contract was signed with a concern in Sweden manufacturing the Matson machine gun for approximately $2,000,000. Another contract was signed with manufacturers in Holland for Zeiss sighting equipment for approximately $650,000. Concerns in Belgium and Germany received contracts amounting to approximately $2,000,000 for material for a projectile factory and forging shop. But one contract was placed in the United States and that for about $100,000 with Niles Machine Tool Company. It is understood that this contract is for precision machinery.

I have been informed that practically all of these contracts originally provided for part payment with the order, part payment before shipment and from 25% to 35% of the balance after inspection and acceptance in Brazil. The Minister of Finance, however, is said to have called in the representatives of various concerns with whom the contracts had been made and after pointing out that it was impossible [Page 589] for the Government to make cash or immediate payments as prescribed, suggested that they accept the notes of the Bank of Brazil bearing interest at 4% and payable monthly over a period of seventy-two months. The suppliers objected to this on the grounds that its prices had been based on very definite terms and that in some cases the materials were already packed for shipment. The Minister then advised the factories’ representatives that he would not sanction the transactions unless they accepted the Bank of Brazil’s notes over a period of five years. It is understood, however, that the Czecho-slovakian suppliers would be permitted to draw against accumulated Brazilian credits in Czechoslovakia for immediate payment up to the extent of those credits.

Shortly after receipt of the above mentioned information, a member of the Embassy staff called upon Dr. Marcos Souza Dantas, Exchange Director of the Bank of Brazil, and discussed in a friendly manner the question of the purchase of armaments in European countries in its relation to the exchange problem. Dr. Souza Dantas stated that within the last few years the Brazilian Government had been accumulating large credit balances in various European countries. He stated that these credits had been definitely blocked by the various governments and that really, for all practical purposes, they do not represent an available supply of exchange for the Bank of Brazil. He further stated that he had proposed to the American creditors of the Bank of Brazil the transference to their accounts of those European credits, but that his offer had been refused. He also stated that, of course, so far as he and the Minister of Finance were concerned, they looked upon such expenditures with great misgivings, but that this is a matter over which they have no control. He again pointed out that, in a measure, this was simply a means of liquidating Brazil’s frozen assets in the countries in question.

While it is believed that the Brazilian Government has blocked credits in Czechoslovakia and Germany it is not known whether such credits exist in Sweden and Belgium.

One school of thought here believes that by using the blocked credits known to exist in Czechoslovakia which are sufficient to meet the requirements of the suppliers, the Brazilian Government is favoring nations which withhold remittances for Brazilian sales at the expense of countries such as the United States, which has followed a policy of free exchange movement.

In view of the fact that it appears to be the definite policy of the Department to discourage the purchase of armaments, I did not feel justified in using the Embassy’s influence in an attempt to have some of the contracts in question placed in the United States. An expression of the Department’s views on this subject would be of value to me.

Respectfully yours,

Hugh Gibson