632.6531/28: Telegram

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

170. My 168, July 17, 6 p.m. Boucas informs me that at this morning’s meeting of the Federal Foreign Trade Council those opposed to the compensation system were successful in securing the adoption of measures they consider best calculated to minimize the objections of [to?] the German compensation arrangement. The Board for the supervision and control of purchases under the compensation system now directed by Boucas although this is to remain confidential and he is to remain in the background. The regulations which he has drawn up are based largely on the Argentine regulations on this subject. They were approved by the Foreign Trade Council this morning and are at present awaiting the signature of the Minister of Finance. They provide that all imports from Germany must receive previous approval here which is equivalent to a system of import licensing. In addition no bank will be allowed to maintain an over-bought position in compensation marks thus correcting one of the most objectionable features of the whole situation.

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As regards Italy, the original intention was to have an informally negotiated arrangement along the lines of the German arrangement but I understand that as a result of our unremitting expressions of interest the original plan has been abandoned, that the Italian question was not brought before the Trade Council this morning as planned but that probably in the near future it will be brought up in a different form, namely, figures will be agreed upon as representing the normal trade as between the two countries, that commerce between Brazil and Italy up to that figure will be financed with currency of international acceptance and anything above that will be subject to trade on a compensation basis; it is assumed that the figures for 1934 will be agreed upon.

Those opposed in principle to the compensation system hope that the foregoing measure will serve to protect the legitimate interests of those countries which maintain free commerce.

I am informed by one of the most influential bankers here who himself is definitely opposed to the compensation system that he believes the German arrangement will prove to be much less obnoxious than originally anticipated because of the fact that the formalities and complications in handling individual transactions are so great and the profit of the banks so considerable that the merchants find much less profit than they had expected.

The same banker informed me that the Bank of Brazil has now liquidated its compensation marks position and that from now on banks will not be permitted to maintain an over-bought position in this currency.

A high official of the Foreign Office told me today that our constant manifestations of interest had, he believed, prevented Macedo from taking precipitate action in this matter and he felt it important that I continue making frequent inquiries.

I have already made the remarks outlined in your 99, July 19 [18] 4 p.m., in various conversations with Macedo. In spite of the encouraging outlook at the moment negotiations are to be continued with Italy and other countries and the outcome is unpredictable. I feel it would be prudent to ask Aranha to keep our interest and concern in this matter clearly before the President.