The Minister in Ecuador ( Gonzalez ) to the Secretary of State
[Received August 7.]
Sir: In confirmation of my telegram No. 39 of July 31, 11 a.m., 1936,34 I have the honor to report that a control over all exchange operations, excepting those of mining companies, was established and became effective immediately by a decree dated July 30, 1936,35 and published in the press of July 31, 1936. The corresponding Registro Oficial has not yet appeared but it is believed that the text contained in the local press is accurate.
The decree provides that only the Central Rank of Ecuador may purchase, sell and hold foreign currencies; and that local banks having deposits in foreign currencies, either in Ecuador or abroad, must transfer those deposits to the Central Bank at the rate of 10.50 sucres to the dollar. It further provides that no one, excepting mining companies which are governed by special laws or contracts, may export products of the country unless the corresponding proceeds in foreign currency are first delivered to the Central Bank. In the case of consignment shipments, irrevocable orders covering the same must be delivered to the Central Bank. The rate of exchange shall be fixed by the latter, but for the moment it shall be maintained at the current rate of 10.50 sucres to the dollar. Article 11 provides that imports in the future may be made only upon the authorization of the Central Bank of Ecuador “which will pass upon the petitions, being empowered to refuse to grant the permission and to sell the corresponding draft when it is in the public interest.” Article 12 directs that the customhouses shall refuse to clear any shipment the importation of which has not been authorized. Article 14 provides that all merchandise entering in the customhouses and the importation of which has not been duly authorized, shall be confiscated. Substantial fines and imprisonments are established for violations of the Exchange Control Law.
This drastic measure has come as a very great surprise to the country which has not been familiar with the heavy drain on the gold stocks due to excessive imports and, to some extent, a lack of confidence in the financial policy of the Administration. Needless to say, confusion was [Page 519] the key-note yesterday which necessitated a statement in the press this morning by the Secretary of the President which reads as follows:
“Alarming and unfounded rumors having been spread relative to the scope of the decree issued on Drafts, I have been directed by the President to state that this measure is due solely to the purpose of the Supreme Government to protect the present exchange of the sucre with relation to foreign currencies.
“The only purpose is to prevent the speculation which some institutions of the country were endeavoring to make, which institutions with only this object and without any real necessity, have been withdrawing large sums in dollars, to the extreme that one of them in less than 25 days has requested more than Two hundred thousand dollars; as well as to restrict the importation of luxury articles which because of their very nature are unnecessary and only cause the emigration of gold abroad.
“The present law does not establish, nor will it establish, two rates of exchange, as a malicious attempt has been made to interpret it, but it will only safeguard the collective interest by maintaining, at least, the present equivalent of the dollar with the sucre and avoiding, in this manner, a difficult situation for the country as would have been caused if the Government had not decided to impose this measure which high national interests required.”
The issuance of his decree coincided with a meeting of the Chambers of Commerce of Ecuador which is now taking place in Quito. Immediately a motion was proposed that in view of the ruinous results on previous occasions of exchange control laws, including the one of last year which destroyed in part Ecuadorean credit abroad, which retarded the development of exports and which profoundly affected national industry and caused the flight of capital, the Conference should address the President petitioning him to annul the Exchange Control Decree. After some debate the motion was left pending until a committee interviewed the recently appointed Minister of Finance, Alberto Wither Navarro, who is to take office today, and ascertained the reasons which induced the Government to take this measure.
In my political despatch No. 418 of June 30, 1936, as well as my financial despatch No. 419 of the same date,36 I indicated the precarious position in which government finances were as a result of immoderate expenditures, and the acute situation of the sucre because of excessive imports and a lack of public confidence. The Department will also recall the measures which former Finance Minister Avilés was endeavoring to impose against foreign companies in order to obtain from them deposits to the order of the Central Bank of Ecuador which would increase the gold reserves of the latter. Upon the resignation of Mr. Avilés these measures were immediately discarded [Page 520] and there was a slight improvement in the general situation. However, it is now apparent that public confidence had been seriously undermined and, according to the statement of the Secretary of the President, that certain interests were taking steps to protect their sucres, if not speculate, in the event of the depreciation of the currency. The international balance of payments was most unfavorable to Ecuador in 1935, and it was reported that the situation had been worse during the first five months of the current year. Therefore, if in addition to this condition there had been a run on the sucre, the exchange control measure was essential to prevent an immediate fall in its international value.
This development in Ecuadorean financial policy which creates a new barrier to trade and which will, in all probability, have an immediate adverse effect on our export trade with this country, is most regrettable especially since it is the direct repercussion of the immoderate policies of the former Finance Minister. However, I cannot help but feel in the light of all the circumstances, that a temporary drastic measure of this nature is far more desirable than would have been the complete collapse of the local currency as would certainly have occurred if immoderation and speculation had been allowed to continue uncurbed. I shall follow the situation closely and report promptly any discriminations against American trade.