832.5151/430: Telegram

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

238. Department’s 132, September 20, 5 p.m. Information submitted in my despatch 410 of August 31 calls for revision in the light of subsequent developments. First to answer Department’s questions:

The only countries having blocked Brazilian exchange, and this in its entirety are Greece, Rumania, Germany, Czechoslovakia, Yugoslavia, Turkey. I am informed that the aggregate amounts of blocked exchange approximate $1,200,000.
Not anticipated these countries will cease to block Brazilian credits on completion of purchases in question for reasons given in detail below.

In the interest of clarity it should be pointed out that this is not a measure affecting Brazil alone. These countries have as part of their national policy declared to all countries, and not to Brazil alone, that they have much foreign exchange and can buy from other nations only in their own currency. Brazil is there on exactly same footing as other countries as regards blocked exchange.

I am definitely assured that Brazil has no exchange arrangements, formal or informal, direct or indirect, with any of these countries; she is simply faced with a situation of fact and has not acquiesced in the arrangement any more than we have acquiesced in the blocking of American money in Brazil. Since she has no other choice Brazil is allowing credit balances to accumulate in the countries mentioned with the hope of liquidating them eventually. This is part of a carefully considered policy, based on the coffee problem. Brazil wishes to retain her markets in the countries which are now blocking exchange, where she has a definite outlet for substantial quantities of coffee. As matters now stand if the coffee is not taken up by those markets the National Coffee Department would be obliged to purchase and burn it, and therefore, quite aside from retaining future markets, it is felt more advantageous to have funds blocked in European banks than “to have coffee ashes in Brazil”.

The total of the armaments contracts signed amounts to approximately $6,000,000. With the exception of small amounts, payments will be spread over a period of 42 months. Eighty percent of the contracts is for machine guns from Denmark, a country which has not blocked exchange. Czechoslovakia gets 10 percent, with payment (one-half at sight and one-half in 6 months) from funds already blocked in that country; Germany 3 percent; the United States approximately 1½ percent; and France a smaller amount. (In this connection I am informed that, although these contracts were signed by [Page 593] the Minister of War, objections have been raised and means found to reopen the question of machine guns involving 80 percent of the total, with the result that there are to be tests within the next few weeks in which American firms will compete.)

I am given definitely to understand that these purchases were decided upon by the Minister of War without any pressure from the countries where the materials are made.

While the Director of Exchange is frankly opposed to purchases of this character because they retard the execution of his plans, he maintains that an expenditure of $6,000,000 spread over nearly 4 years for a country the size of Brazil with run-down military equipment cannot be looked upon as unreasonable. The authorities here recognize the diminishing sales from the United States to Brazil and deplore it, but they point out that it is due to higher prices and shorter terms of credit. England is prepared when necessary to grant 5 years; Germany 4% years (50,000 pounds worth of industrial machinery was purchased by São Paulo company on that basis last month). In this connection Souza Dantas states that if he is successful in securing a revolving credit and clearing arrangement in the United States the problem created by the American method of giving only short-term credit will be solved, and that there will remain only the question of our competing upon a price basis. Souza Dantas contemplates an exchange arrangement with Germany, which will be discussed with the German economic mission which has just arrived from the Argentine. Brazil has taken no initiative in this matter, it being a German proposal. Germany had a favorable trade balance with Brazil of approximately 850,000 pounds last year. Souza Dantas maintains that Brazil can only gain in such an arrangement in that she will sell more coffee to Germany.

I venture to point out that Brazil has no exchange agreement with France, as might be inferred from the second sentence of the Department’s telegram. The President of the Bank of Brazil, as reported in my despatch 290 of June 12th63 offered in writing to set aside 30 percent of export bills, but inasmuch as France was already getting a larger proportion this proposal has not even been acknowledged.

I have ventured to give the foregoing in some detail as you propose to discuss the exchange situation with Aranha. He is better qualified than anybody to discuss the question inasmuch as he was largely instrumental in evolving the present situation. Furthermore, he is still in a position to act more effectively than anyone now in Brazil, either to influence the Minister of War in his purchases or the Minister of Finance in the handling of exchange problems.

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