832.5151/605: Telegram
The Chargé in Brazil (Gordon) to the Secretary of State
[Received 8 p.m.]
117. 1. In my recent cables concerning Brazilian liquidation of American frozen credits I have necessarily conveyed some of the analysis and comments called for in the last sentence of the Department’s 63, April 24, 5 p.m. In further response thereto I feel I should add the following observations.
2. In connection with the proposed exchanges of communications between the Bank of Brazil and class C American creditors, I am puzzled as to how these can constitute negotiable evidences of indebtedness (Department’s 74, May 2, 2 p.m.) if they do not constitute binding contracts (Department’s 73, May 1, 8 p.m.) and I should much appreciate the Department’s clarification of this point.
3. It may be useful to the Department in further conversations with Aranha to recall (see my 106, April 25, 7 p.m.) that the Minister of Finance figures that he can set aside as much as £2,000,000 annually to take care of British and American backlog; that means £800,000 annually to take care of us and in view of the course of the negotiations up to now this entire amount should be applicable to our class C credits. In this connection please see fourth from last paragraph of my 116, May 3, 2 p.m.
4. In its consideration of this entire question I feel that the Department must have always present in mind the possibility that the foreign debt service plan of February 5, 1934 may break down within a few months. Repeated conversations in well-informed banking, business and political circles reveal a rapidly increasing belief that this eventuality must seriously be taken into consideration; may go so far as to place the time for it as close as 6 months hence. Color is lent to this belief by the recent thought of the iniquitous Army and Navy pay increase bill on top of the already heavy 1934 deficit which will be greatly increased this year; the recent sharp drop in the milreis may also be construed in the same sense.
5. I do not wish to sound too alarmist a note nor to go so far as to say that this eventuality is a probability but I do feel that I should caution the Department as to its possibility.
6. In other words to give frankly my “judgment of outcome of the measures contemplated” I feel that the proposed exchange of communications is a precarious solution and far less desirable than an emission of Bank of Brazil notes which can be discounted by the Export and Import Bank although as I stated in my 110, April 29, [Page 370] 7 p.m., I know that the Finance Minister will be very loath to agree to such an emission (in fact he said so in the course of the conversation I had with him this morning).