The Chargé in Brazil ( Gordon ) to the Secretary of State
[Received 8:55 p.m.]
41. My 39, February 14, 6 p.m. and Department’s 20 February 9, 4 p.m. As to probable effect of new regulations on American interests: With all imports having to be covered in the free exchange market the natural tendency will be for the milreis to weaken and there would seem to be some temptation for the Brazilian authorities to let this tendency go unchecked to a certain extent as a sop to Brazilian exporters of goods other than coffee (especially cotton) who sell their goods in foreign currency prices and heretofore have received full proceeds of their bills. To the extent such a policy is pursued, Brazilian importers obliged to pay more milreis for articles purchased from the United States will curtail such imports.
On the other hand, there is of course a realization of the evil of a sharp and sudden drop in the milreis and my guess would be that [Page 348] the policy above indicated will not be pursued very far. When it is felt that the Brazilian exporters in question have received sufficient compensation through milreis depreciation the Bank of Brazil may well step in with a more active control of the supply of free market exchange. An administrative circular issued to banks last night concerning the operation of the regulations of February 11 provides that commercial applications for free market exchange will only be granted automatically if the documents prove that it is to cover imports; if the intended remittance covers profits or dividends the desired exchange can only be procured upon the explicit consent of the fiscal authorities. Although the Exchange Director informs me today that this measure is only for the purpose of keeping a more accurate record of such remittances as well as providing a means of proof that disguised capital transfers are not being effected, I am still inclined to feel that if the milreis gets too much out of hand this measure will be utilized by the Bank as a means of substantive control of the free market.
There is also always the rather unpleasant possibility that the Bank might decide to use some of its exchange accumulated at official rates as a stabilization fund in active support of the milreis.
Moreover, if some kind of a credit were secured to be diverted to the liquidation of the entire backlog, European as well as American, this should tend to keep the milreis steady and to avoid the curtailment of imports pending such time as exchange control could be completely lifted. I gather that the Brazilian financial mission may have reached tentative agreements with bankers in the United States for a credit to be applied to the liquidation of this backlog conditioned on similar agreements being reached in Europe, primarily in London. However, this is necessarily only my inference and belief, and any definite information the Department can give me as to the activities of the Brazilian mission in connection with obtaining a credit will be of great assistance.
The bulk of American representatives here are primarily interested in imports from the United States and they of course would welcome the clearing up of their backlog by some such credit operation as would enable them to take Bank of Brazil notes for their milreis now tied up on deposit against uncollected bills if these in turn could be discounted, preferably with the Export and Import Bank, without recourse to the importer, to the maximum amount legally permissible (which I understand is 80 percent); they also would naturally like to have this credit operation provide for a lien upon a portion of the dollar exchange created by our purchases from Brazil and I think the more enlightened of them realize that an international loan to clear up the whole backlog would be preferable and therefore that if such a lien [Page 349] were applied to dollar exchange it would equally have to apply to other foreign exchange created by purchases from Brazil.
If a credit operation of this or any other nature to clear up the backlog were only to be liquidated in 3 years or upwards when the Bank of Brazil by using all its available exchange might clear up the backlog in 2 years the Bank would clearly have that much more leeway to use its exchange reserve to support the milreis in the open market.
I have gone into this matter at some length in order to try to give the Department the picture as fully as I have been able to work it out throughout this week, but I may sum up succinctly by saying that as far as I can see now the adoption of these new regulations should not prove unduly adverse to American interests.