832.5151/1095
The Secretary of State to the Ambassador in Brazil ( Caffery )
Sir: The Department has read with interest your despatch no. 567 of May 6 last in which you refer to three of the important questions in the existing relations between this country and Brazil, namely, the Brazilian foreign debt, the exchange situation and Brazilian-German trade practices.
It is noted in the concluding paragraph of the despatch aforementioned that notwithstanding adverse conditions enumerated in preceding paragraphs you are continuing in your endeavors to persuade the Brazilian authorities to accord more satisfactory treatment to the interests of this country. The Department desires to commend you for these efforts, which appear already to have produced certain definite results.
With reference to your statement that should this Government adopt retaliatory measures envisaging definite economic pressure the Brazilian Government would immediately accord the interests of the United States more favorable treatment but that failing economic pressure Brazil frankly does not consider seriously the various arguments advanced by this Government in support of its liberal trade policy, the Department has assumed that the Brazilian Government has been making earnest efforts to satisfy this Government in regard to [Page 348] the limitation of compensation trade, the discontinuance of German subsidies on exports to Brazil, and the granting of exchange for imports from the United States. I may state for your strictly confidential information that the present Brazilian Ambassador remarked at the Department shortly after his arrival in Washington that his Government did not intend to sign a new compensation agreement with Germany. It would seem evident from your despatch no. 525 of April 20, 1938 and from the enclosures of your despatches nos. 510 and 546 of April 13 and April 26, 1938,24 respectively, that the Brazilian Government has not been complying with the requests of the German Government in the matter of compensation trade, as evidenced by the fact that Germany is withholding purchases of Brazilian cotton. Encouragement, too, has been found in your telegram no. 114 of May 1725 reporting that the Bank of Brazil was again reducing the discount of compensation marks, as well as in your telegram no. 116 of May 1925 regarding the exchange situation.
On pages 2 and 3 of your despatch of May 6, it is noted, you outline reasons why the Brazilian Government does not consider that it can reasonably be expected at this time to accord the interests of this country more favorable nonpreferential treatment, and you first cite in this connection the fact that Brazil’s active trade balance was reduced to approximately $17,000,000 in 1937. It is assumed that the Embassy does not accept this consideration as constituting a valid reason why the Brazilian Government should not grant without delays exchange for the importation of goods from the United States or why it should not initiate conversations with the representatives of the American holders of Brazilian governmental bonds. The seventeen million dollar figure resulting from Brazilian official statistics is based, of course, upon valuation of German goods in the Reichmarks, instead of compensation marks, with the result that the country’s true trade balance in 1937 was probably more than sixteen million dollars larger (reference is made to pages 5–7 of the report of the Consulate General at Rio de Janeiro of April 14, 1938 entitled “German Compensation Trade with Brazil in 1937”).25 Moreover, it is not seen how the 1937 balance of trade can be viewed as a criterion of the country’s capacity to make debt payments in 1938. You remark that the exchange situation might be changed considerably should Brazil’s exports rise or imports fall to any considerable extent. The reverse is, of course, also true. The trade balance of 1937 was produced under exchange parties that do not necessarily have any close relationship to the parties [Page 349] that are being established this year. You have without doubt noticed the articles in the Economist (London) of March 12, 1938, which discussed the trade balance and reached a reasoned estimate of £59,500,000 for Brazil’s exports in 1938, after allowing for the effects of the change in coffee policy.
It would appear for the foregoing reasons that the Brazilian Government cannot legitimately defend its failure to provide debt service by a mere reference to the country’s trade balance in 1937. It would seem more pertinent, with respect to the bearing of Brazil’s 1937 trade figures upon capacity to make debt payments, to observe that the country’s exports last year amounted to approximately $347,600,000 as compared with about $286,600,000 in 1934, the first year of the operation of the “Aranha plan”. The Economist article makes this comparison and states that “there is no room for doubt that Brazil, if she were willing, could before long resume the Aranha level of payments.” Analysis of this character has produced outside of Brazil a predominance of opinions opposed to those that you set forth as prevalent in Brazil.
On page 3 of your despatch you refer to German purchases of cotton in Brazil amounting in 1937 to 84,746 tons and comment that the compensation marks obtained by Brazil for these purchases could be utilized only for the purchase of merchandise from Germany. This conclusion would appear to be valid in so far as it pertains to the employment of the compensation marks involved, but as you are undoubtedly aware, the communications exchanged between the Brazilian and German Governments on June 8, 1936 limited the quantity of Brazilian cotton that could be purchased in compensated currency to 62,000 tons per year.
Very truly yours,