832.5151/1095
The Ambassador in Brazil (Caffery) to the Secretary of State
[Received May 12.]
Sir: I have the honor to refer to previous correspondence concerning the three outstanding matters of interest to the Department at this juncture here in Brazil: the Brazilian foreign debt;21 the exchange situation; and the German-Brazilian situation.22 Needless to say, I [Page 345] wholeheartedly approve the present trade policies of the Department of State and I realize that the Department is not in a position to accept the suggestions of American business men in Brazil who desire the Department to bring pressure to bear on the Brazilian Government to force Brazil to grant exceptionally favorable treatment, as for instance a clearing house arrangement, in connection with trade and exchange to American commercial interests.
Needless to say also, I am wholeheartedly of the opinion that Brazil, in view of her very favorable situation in connection with commercial intercourse between the United States and Brazil, should make a determined effort to supply exchange for American commercial requirements. For the same reason she should make a determined effort to resume payments on her foreign debt. Also, she should make a determined effort to correct the unfavorable situation created by the existing compensation mark arrangement with Germany.
However, I deem it expedient at this point to invite the Department’s attention to the fact that the Brazilian authorities look on these matters with very different eyes. As Brazil sees it, the cold facts why she is not making any payment on her debts and why she is not granting spot exchange to importers to cover payments of American merchandize can be explained as a simple question of arithmetic. Brazil’s favorable trade balance has shrunk from $73,325,753 in 1936 to $17,010,584 in 1937. Her resources, both to make payments on debts and to grant exchange against imports, consist purely and simply of her trade balance. Under the Aranha Plan23 Brazil was committed to an external debt. How then, she says, can she possibly continue servicing her debts with only a trade balance of $17,010,584. Furthermore, governmental requirements for exchange have been increased since last November by about $35,000,000 (apart from the recently signed contract for munitions in Germany to be paid in compensation marks) for payments which must infallibly be made at regular intervals during the next several years to meet contracts which Brazil has already let for the purchase of nine destroyers (six to be built in England, the other three in Brazil from material purchased in the United States), plus the large number of airplanes contracted for in the United States. A comparison of the annual service on these armament contracts compared again with Brazil’s trade balance of $17,010,584 shows the impossibility of having exchange sufficient to meet normal commercial requirements. Putting the question in another way, should Brazil cancel all of her contracts for the purchase of armament, she would still be unable to continue [Page 346] the full service of the debts under the Aranha Plan. Furthermore, she still would not have sufficient exchange to meet all of her normal commercial requirements. Quite naturally, the exchange situation is variable and might be changed considerably should Brazil’s exports rise or imports fall to any considerable amount.
As regards the Brazilian-German situation, pure arithmetic no longer applies as much as it does to the other two issues. From a purely selfish Brazilian point of view the former compensation arrangement with Germany, which is still practically in effect, is highly advantageous. Under it, the Germans have increased their purchases of cotton from 17,022 tons in 1934 to 84,746 tons in 1937. The compensation marks obtained by Brazil for the purchase of this cotton can be used in one way only: the purchase of merchandize from Germany. The purchase of merchandize from Germany on the other hand means that the Brazilian consumer is able to buy most articles at least 24 per cent lower than he would if the compensation mark was not used and if he had to make payment in Reichsmarks. The Brazilian market, as well as most other Latin-American markets, is, as the Department is fully aware, a price market. In other words, it is price rather than quality which counts. The cheaper the goods the more desirable they are from the Brazilian standpoint irrespective (within reasonable limits of course) of their quality. Boiling down this situation still further, it simply means that the Brazilians are completely happy to do business with Germany on a compensation basis and have not the slightest desire to give up this trade unless they are forced to do so. As long as it is money in their pocket, our arguments from the long range point of view of dislocation of markets, free triangular trade versus bilateral trade, removal of trade barriers, et cetera, have a purely abstract significance which carry but little appeal to those directing the policies of Brazil today.
Needless to say also, were we to adopt retaliatory measures envisaging definite economic pressure, Brazil would change her policy overnight; would scrap the compensation agreement with Germany; cancel her contracts for armaments; grant exchange for American merchandize up to the limit of her ability, and would make some sort of an effort to give a partial service at least on Brazilian obligations held in the United States. Failing, however, to feel any economic pressure from the United States, Brazil quite frankly considers all of the many arguments which we have put forth throughout the past several years as “pure literature”.
(Referring to the armaments now being purchased by the Brazilian military and naval authorities, it is a fact that, having in mind the nationalistic tendencies now prevalent, the wisdom of those purchases is not questioned in Brazil. It is a subject on which there is probably [Page 347] near unanimity of opinion. The Brazilian people as a whole consider them necessary.)
Again, needless to say, notwithstanding the conditions described above, I am continuing day by day in my endeavors to persuade the Brazilian authorities to accord satisfactory treatment to American commercial interests: in connection with the exchange situation, I have been able to prevent, thus far, a new “congelado” and have hopes of receiving definitely more favorable treatment for American interests within a short time; in connection with the compensation mark business, the Minister for Foreign Affairs promised me only yesterday that he would sincerely attempt to reach an agreement, satisfactory to us, with Germany within the next few days; in connection with the debt matter, the situation is more difficult: however, it is my intention to see President Vargas in that connection within the next few days when I shall endeavor to persuade him to take a more favorable attitude than he has hitherto taken in regard to Brazil’s foreign obligations.
Respectfully yours,