The Secretary of State to the Ambassador in the United Kingdom ( Bingham )

No. 1705

Sir: Reference is made to the Embassy’s despatch No. 2932 of March 15, 1937, transmitting copies of the note of the Foreign Office dated March 11, 1937,36 in reply to the Embassy’s note of February 16 with regard to the rubber situation.

There is enclosed herewith the text of a note in reply to the Foreign Office’s note which you are requested to transmit as a formal first person note.

In addition, you are requested to continue upon all appropriate occasions to keep before the appropriate officials of the British Government the serious interest of this Government in the operation of the international rubber restriction scheme.

In connection with the references in the note to local conditions as a limiting factor in production, you are requested to point out orally that it is reported that Sarawak has declared a tapping holiday from April 11 to May 10, 1937. Thus while it is contended in the Foreign Office’s note that it is no use increasing permissible quotas beyond a reasonable appraisal of actual production possibilities, there appears to be little or no disposition to take advantage of the possibilities in those areas which could produce more; but in fact action is taken for a complete cessation of production in one area in the face of the existing world stock situation.

The Department is also informed by the Trade Commissioner at Singapore that the consensus of opinion at the present time is that Malaya can produce the rubber quota for the remainder of the year notwithstanding labor conditions, providing the Government insists that producers meet their assessments or have them reduced. Although this Government would prefer not to become involved in actual details of administration or of revision of the rubber scheme, you may make such discreet use of this information as seems desirable [Page 903] to you in connection with numbered paragraph 14 suggesting closer coordination between the decisions of the local governments and those of the Committee.

You will note that in numbered paragraph 16 of the note enclosed herewith, it is urged that the Committee increase the rates of release for the last half of 1937. For your confidential information the American representatives on the consumers’ panel will probably present a vigorous request at the meeting of the Committee on May 25 for a revision of the quota for the last six months of 1937 from 90 percent to not less than 95 percent. This Government concurs in this request and if inquiries are addressed to you in connection with the suggestion in paragraph 16, you may indicate that such a rate of release is the minimum which would appear adequate to this Government.

Very truly yours,

Cordell Hull

Text of Note to the British Foreign Office 37

On March 15, 1937, upon instruction from my Government, I conveyed to you some preliminary observations on some of the more salient aspects of your note of March 11, 1937 (No. W 4455/97/50) in reply to this Embassy’s note of February 16, 1937, with regard to the situation which has arisen with respect to stocks and prices of rubber and to the deep concern of my Government therein. At the same time I indicated that fuller reply would be made when the text of your note had been received in Washington and opportunity had been had for its study. I am now instructed to submit the following comments:

1. The United States Government is led to continue this exchange of views and opinions regarding the operation of the rubber restriction scheme not for the purpose of establishing responsibility for the existence of the present situation in the rubber market, but because the interest of its citizens in having assurance of adequate supplies of rubber at a reasonable price is so great. The United States customarily consumes more than half of the world’s rubber production. The enterprises which purchase this rubber have found themselves faced since the inauguration of the scheme with a continuous rise in the price of rubber up to a point well beyond any calculations of costs of production. They have witnessed a substantial decline in available stocks. They have been faced with the uncertain prospect that these developments might continue further, at great cost to the American consumer [Page 904] and at a great potential loss to American interests. In the face of these circumstances, they have found various occasions when in their judgment the International Rubber Regulation Committee did not give adequate consideration to their presentation of the situation. In consequence there has been, and there remains, continued apprehension, natural to a situation whose past development has been as described, and which places the American consumer far more conclusively at the mercy of producing interests than in the ordinary market for an uncontrolled commodity.

2. This situation will not change until experience has demonstrated the complete willingness and ability of those in control of the rubber regulation scheme to provide such adequate supplies that world stocks can be built up at prices lower than those now existing and until the future maintenance of a supply and price situation more stable and reassuring than the present one is established.

3. Therefore, this Government sincerely hopes that the expectation of his Majesty’s Government that “in a short time the supplies of rubber will equal and then exceed the demand” will be found to be justified. It has noted the subsequent action of the International Rubber Regulation Committee in the meeting of March 16, 1937, increasing the rate of permissible exports for the last half of 1937 to 90 percent of the basic quotas. The fact, however, that after more than five weeks since this decision was announced rubber prices are still above a reasonably remunerative level to producers is clear evidence that the situation had been allowed to get sufficiently out of control that even this action was not adequate.

4. It is believed that in the note of March 11, 1937, the degree of concurrence of the consumers’ panel in many of the decisions reached by the International Rubber Regulation Committee has been unduly stressed. On the basis of information available to it, the United States Government finds significant instances in which the consumers’ representatives found themselves unable to concur in the decisions which the Committee reached. From the beginning the American consumers’ representatives in their attendance at the meetings of the Committee have felt themselves in a subordinated role in which they were required to adjust their requests to their anticipations of what the interests controlling the Committee would be willing to consider, without too severely straining their relations with the Committee. At various times, according to the reports received by this Government, they have been faced with clear intimations that in the event the presentations made either by them or by this Government went beyond what seemed reasonable to the controlling interests of the Committee, their future chances of getting consideration from the Committee would be impaired. This is recited not for the purpose of criticism, but in [Page 905] order that the British Government may appreciate the atmosphere in which from time to time the Consumers’ Panel has felt itself acting, and also as a partial explanation of what may have appeared to the Committee as concurrence.

5. It will be remembered that the consumers’ representatives are entirely without vote and that they have generally participated in the discussions only after preliminary agreement has been reached by the producers on the Committee. In the opinion of this Government, the present arrangements do not adequately fill the criterion of consumer protection which was laid down in Section 3 (d) of the general resolution of the London Monetary and Economic Conference of 1933.38 It is natural that the inadequacies of consumer representation should become clear only at times when developments in the market situation were of unusual character, such as have occurred subsequent to the middle of 1936.

6. Furthermore, regardless of the concurrence of the advisory panel in decisions of the Committee, this Embassy, upon instruction, presented orally to Sir John Campbell on September 24, 1936, the concern of the United States Government over the prospects that the then concurrent rate of release of crude rubber was not sufficient to meet the consumption requirements of the world and that as a result world stocks had been declining even more rapidly than anticipated and had reached a point where they created the possibility and danger of inadequate supplies and unreasonably high prices. These views the United States Government has continued to press in London and at The Hague, both formally and informally, with the utmost seriousness. It was foreseen clearly by this Government and should have been equally evident to the Committee that unless more prompt action were taken there would be a progressive depletion of stocks and corresponding increases in prices of rubber. In view of this record the United States Government cannot concur in the statement that it was not until towards the end of November that rising prices and increased rate of consumption were “seen by all concerned for the first time”. Had the September warning of this Government been heeded, more prompt action on the part of the Committee could undoubtedly have resulted in the earlier increase of production and shipment. Such action could have arrested the decline of world stocks before they reached a point deemed inadequate by producers and consumers alike and would have been reflected by now in releases equal to current consumption.

7. A considerable amount of stress is placed in the note of March 11 upon the fact that world consumption in 1936 exceeded estimates by [Page 906] approximately 50,000 tons. The fact that a difference of 50,000 tons or less than 3 weeks’ consumption could deplete stocks sufficiently to cause so marked a rise in price is of itself sufficient evidence that the plan has not been administered with adequate provision for stocks against just such a contingency. In this connection it may be recalled that in paragraph 3 (b) of the Foreign Office’s note of April 26, 1934,39 it was stated:

“There are several factors in the scheme on which the United States can rely for rapid price protection in the event of temporary fluctuations occurring. In the first place, both dealers and producers will be allowed, under the plan, to hold stocks of very considerable size. In the second place, it would be open to the Committee if the scheme comes into operation, (when stocks are approaching normal) to set up a buffer stock analogous to the proposed tin buffer stock. The members of the Committee, who it should be noted would be plenipotentiaries, and therefore able to vary the export quotas at short notice, would then have ample resources on which to draw in order to deal with temporary price movements. The existence of considerable stocks in the hands of producers and dealers, the power of the Committee to increase the quotas rapidly, the possible creation later of buffer stocks, the pressure from producers to be allowed larger export quotas, and the constitution of the Committee, should, as I am sure Your Excellency’s Government will agree, provide adequate safeguards against any artificial scarcity.”

8. In justification of the refusal of the Committee to adopt the advice of the consumers’ panel at the meeting of January 26, 1937, it is stated that the governments chiefly concerned, as well as the representatives of the chief producing areas, concurred that a further increase in the rates of release would not secure the attainment of the objectives desired. Your note further recalls that “rubber is not a factory product. Production cannot, in the nature of things, be very rapidly increased”. Awareness of this fact emphasizes all the more the inadequacy of the Committee’s action at the October meeting in deciding to set the rate of release at 70 percent for the entire first half of 1937 instead of 70 percent for the first quarter and 75 percent for the second period as suggested by the advisory panel. Had this higher objective been set at that time and had plans been laid in producing areas in accordance therewith, it would have been easier at the December meeting for the Committee to have set (say) rates of 75 percent and 85 percent for the first two periods respectively with some assurance that these rates of release could be met. This would, over the first six months, have averaged out to the rate of production which the advisory panel felt in December to be the minimum to be justified by the prospects of stocks and consumption [Page 907] and with which, according to your note, the Committee did not disagree. Further, if it is correct that production cannot be rapidly increased, it must be obvious that consumers will necessarily come to place less confidence in the usual proviso of the Committee, when setting its rates of release, that its decisions as regards permissible exports may be revised from time to time, if for any reason this should, in its opinion, be desirable.

9. In this connection also it is pertinent to refer to the assurances given in paragraph 3 (c) of the Foreign Office’s note of April 26, 1934, that

“a cardinal feature of the scheme now proposed is its flexibility. There will therefore be no danger of any situation arising, such as occurred under the Stevenson plan, the rigidity of which was one of the causes of its breakdown. Under the Stevenson plan the release of further supplies of rubber was contingent on prices reaching a certain level and was attended by considerable delay and consequent inconvenience to consuming interests. Under the present scheme, on the other hand, exports will be determined by demand. The Committee will be able to vary the export quota[s], without delay, in accordance with the increase or decrease in demand, and the working of the scheme should be such as to prevent any violent price movements.”

10. From the assurances in paragraphs 3 (b) and 3 (c) of the note of April 26, 1934, cited above, it is evident that at that time there was awareness of the necessity that ample provision be made, through the maintenance of adequate stocks, for meeting situations which might be occasioned by increases in demand and by the lag in the responsiveness of production to such increases. Such provision, however, has not been made.

11. The United States Government further believes that the responsibility of the governments concerned in the rubber restriction scheme is greater than that which seems to be indicated by your note with regard to the British delegates over whom “His Majesty’s Government have some measure of control”. I may recall that in a note from the Foreign Office, dated March 23, 1934,40 that is before the present restriction scheme was adopted, it was stated that:

“It is the governments, and not the producers, who will appoint the international committee that is to operate the scheme; … The Control scheme will be worked, not by producers, but by officials appointed by, and truly responsible to, the governments mentioned above.”

It is also necessary to recognize that the whole operation of the rubber regulation scheme rests completely on legislative action, supported [Page 908] by penalties enacted by the authorities of the respective governments concerned and that without such direct governmental powers no control scheme could possibly be operated with respect to rubber. This was recognized in the note of March 23, 1934, which stated:

“… the effective scheme must be one agreed, not by the private interests, but by the governments concerned. The governments therefore (which in addition to His Majesty’s Government include the Governments of the Netherlands, Indochina, Sarawak, North Borneo and Siam) must first accept the scheme and agree to put it into effect.”

12. With reference to the question of a “fair and equitable price, reasonably remunerative to efficient producers”, the United States Government would appreciate an expression from His Majesty’s Government as to what it considers such a price to be in present circumstances. It is noted that the price obtaining in the middle of February, 1937, “is admittedly higher than the fair and equitable level for the efficient producer as determined on the Committee’s costing basis”, but that such a price would be “substantially higher” than 15¢ (7½d.) per pound. It may be recalled that the United States Government made this same inquiry when the present restriction scheme was being set up in 1934 and that it was replied that “such a price has not been determined nor is it possible to do so”; that such a price depends on the degree of restriction which in turn depends on the demand and the cost of production. While the United States Government is not unaware of increases in the general level of costs, wages and prices over the past years, it cannot fail to point out that without definite objective criteria the concept of what is a satisfactory price tends to change with prices themselves. It also understands that, over a period of time, the unit cost of production is lessened as the rate of production increases. Furthermore, it draws attention to the fact that with prices substantially below existing levels or even below 150 a pound, a large part of the rubber producing companies were able to pay satisfactory dividends.

13. The United States Government much appreciates the willingness expressed by His Majesty’s Government to consider any proposals which might be made to increase the flexibility of the scheme and to secure at all times adequate supplies. It does not believe that it would be appropriate for it to make suggestions as to details of operation and administration, but it does believe that the experience of recent months, together with some of the explanation advanced in the Foreign Office’s note under reply, serves clearly to indicate justification for the suggestion that the whole basis of the present scheme should be examined at an early date in order that it may make more adequate provision for ample stocks and that it may be more adequately adapted to meeting increased demands for rubber. The Committee and the [Page 909] governments concerned have the responsibility of so determining the course of supply from existing capacity that adequate supplies may always be forthcoming at reasonable prices. Furthermore, the continued operation of the scheme is bringing to the fore the question of whether provision for new planting may not soon become essential. So far the restriction control scheme has operated in only one direction: to raise price and reduce stocks. The interests and governments which control the scheme must prove that the control is able to operate in the other direction as well: to keep the price reasonable and supplies adequate. There is small comfort to the purchasers of rubber in the fact that the failure of the control to work may be excused by local conditions; those who assume the responsibility for control must also assume the responsibility for local conditions.

14. It has come to the attention of the United States Government that the regulations of the local government control authorities have not always been adjusted so as to give full and prompt effect to the decisions of the Committee. Unless the local controls are so administered that each area is able and permitted promptly to respond to increases in the rates of permissible exports, action by the Committee cannot alone suffice to assure supplies and prices of rubber. When all major producing areas are under control, failure of any one to fill its allotment acquires a significance for world supplies which does not obtain when alternative sources of supply may be freely drawn upon. The suggestion is ventured therefore that the Committee and the governments concerned may wish to give consideration to the question of better coordinating the administrative control in the several producing regions with the decisions of the Committee.

15. The record of the past several months clearly demonstrates that a basic requisite of a stable price level for rubber is the existence of sufficiently large stocks to discourage speculative movements. This is also recognized in your note of March 11, 1937, which states, “No control scheme, which is unsupported by the possession of large stocks under the controlling authority, can control such a situation fully, over a short period; and it is common knowledge that speculative movements of this kind occur periodically, whether a control scheme is in existence or not, and often irrespective of the long-term position”. The fact that, as your note points out, all commodities, controlled or uncontrolled, have been subject to sudden changes in demand, gives all the more force to the suggestion that a control scheme which aims not only at a reasonably remunerative price but also at a stable price should make ample provision for just such contingencies which may be expected to occur but whose timing may not be exactly predictable. Whether the larger stocks, for which the need is clearly indicated, should be permitted to be carried outside the regulated areas, or by [Page 910] dealers or producers in the regulated areas, or in the form of a buffer stock under the control of the Committee and at its financial risk, are details which would be more appropriately decided by the Committee.

16. Meanwhile, the United States Government again urges most strongly that the British Government instruct its delegates on the Committee to seek to secure rates of release which will impose no restriction upon the maximum possible output, consistent with orderly production, until world stocks are restored to a level substantially higher than those prevailing at present and, in any event, not less than six months’ anticipated consumption. Although it cannot be denied that the rates of release provided for the year 1937 are notably in excess of those for the preceding year, it must be recalled that estimates of consumption are also greater, that the rates of release in 1936 were adjusted to a further diminution in world stocks, and that the base from which the comparison of increased release is made is thus an artificially low rate. Even if world production of rubber reaches the rates of permissible exports now envisaged and if world consumption does not exceed present estimates, there will be added to world stocks in 1937 only some 60,000 to 80,000 tons over the stocks at the end of 1936. A restoration of world stocks to around 500,000–525,000 tons would, in the opinion of the United States Government, still be insufficient to give firm assurance that the experience of recent months could not be repeated, and it is for this reason that it urges that the Committee increase the rates of release for the last half of 1937.

17. With reference to the strengthening of provisions for safeguarding consumers’ interests, it is not believed that any useful purpose would be served by the addition of a representative of the United States Government if he were to act merely as an adviser and observer as do other members of the consumers’ panel. Neither is it believed that any substantial improvement could be achieved by increasing the powers of the consumers’ representatives by, for example, extending full voting privileges to them, so long as the representation remained numerically unequal between producers’ and consumers’ representatives, as it is at present. It is suggested, however, that every effort be made to assure that members of the advisory panel are consulted before the definite crystallization of opinion and judgment in the Committee and that they be permitted to join in all discussions of the Committee rather than only those portions of the meeting to which they are now admitted.

18. The United States Government is by no means certain that the worst phases of the threatened shortage of rubber have passed and that arrivals of rubber in the principal consuming countries will soon [Page 911] equal the current rates of consumption and will, in addition, permit a beginning in the recovery of world stocks toward an adequate level. It hopes, however, that it will be made abundantly clear by the Rubber Committee that it is the firm intention of the Committee to maintain production and stocks at such levels that the present situation cannot again arise. The simplest test will be the course of the price of rubber. As your note suggests, the principle of regulation of an important raw material in the interest of orderly supplies and reasonable prices fair alike to producers and consumers is not of itself objectionable to the United States Government. It feels that the administration of the rubber regulation scheme at least temporarily failed to meet these criteria and it is still apprehensive that the scheme, unless further revised, does not contain adequate assurances that it may not fail again. It feels that its repeated expression of concern when the plan was first under consideration has been amply justified and it is for these reasons that it has again continued to press its point of view upon His Majesty’s Government.

19. Finally, the United States Government wishes again to refer most earnestly to the importance, particularly at the present juncture in world affairs, of avoiding by all practicable means any appearance of unreasonable restriction upon the supplies of basic raw materials. If it appears that a commodity as important as rubber is being regulated with a view to inordinate gains, even though the supply is restricted impartially to all consumers alike, the discontent of those areas which find themselves largely dependent upon other countries for their raw materials cannot fail to be enhanced, and the confidence of peoples of all consuming countries that the materials essential to satisfactory conditions of life can be obtained on reasonable terms through the peaceful methods of trade will be weakened.

  1. See footnote 25, p. 894.
  2. Transmitted by the Ambassador in the United Kingdom to the British Secretary of State for Foreign Affairs as the Embassy’s note No. 2520, May 1, 1937.
  3. For correspondence concerning this Conference, see Foreign Relations, 1933, vol. i, pp. 452 ff.
  4. Foreign Relations, 1934, vol. i, p. 653.
  5. For text, see telegram No. 127, March 23, 1934, from the Ambassador in Great Britain, Foreign Relations, 1934, vol. i, p. 637.