632.6231/46: Telegram

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

121. Department’s 68, May 6, 2 p.m. The proposed German-Brazilian commercial modus vivendi is still in an inchoate stage. The details has [have?] not been definitely formulated and when formulated will be subjected to modification in the course of negotiations. The information contained in my 117 simply indicated the general ideas then in the minds of Foreign Office officials. As yet Germany has not been brought to initiate negotiations as has been hoped and Macedo Soares has gone so far as to telegraph his views on the subject to the Brazilian Ambassador at Berlin.

Replying to the Department’s inquiries, paragraph (1), the agreement according to present Brazilian intentions will cover a wide range of Brazilian exports and also of imports. Paragraph (2). Brazilian exporters will have to turn over i. e. sell to the Banco do Brazil through local German banks 35 per cent of the proceeds of their sales in Germany in compensation marks at the official exchange rate now 3.7 milreis, but, as the Banco does not wish in future to hold or deal in compensation marks, the German banks here will then be forced immediately to repurchase from the Banco the very marks just sold to it and will be forced to pay the open market rate now 5.5 milreis. This will ensure to the Banco the same profit as it secures on its acquisitions of other currencies and will free it from further dealings in compensation marks. Paragraph (3). Under the arrangement the exchange department of the Banco do Brazil, as agent of the Brazilian Government, will undertake to see that commercial export contracts to Germany shall not be granted exchange authorizations in excess of the export quotas which shall have been established. The matter of the enforcement of the quotas on German imports under the agreement has not been worked out, but this control is likely to be in the hands of the Brazilian customs authorities.

The situation already existing, which has been forced upon Brazil by Germany, has had the practical result of favoring German imports very strongly. It has been my understanding that Germany has been using compensation marks in her trade with the United States. The contemplated new German-Brazilian agreement is intended expressly to favor the English and American exporters to this market and this is, in fact, its primary purpose. Brazil feels that the English and American merchant classes must not be too deeply estranged and also that the German market is not a permanently secure one. The new arrangement will change the situation by affording formal recognition [Page 252] from Brazil of the compensation mark system which has hitherto received merely a tacit toleration; but on the other hand, it will, by its operations, cut down German imports into Brazil as well as the Brazilian exports to Germany very substantially, thus favoring American and English interests here.