Office of the Historian

832.5151/1260½

The Brazilian Minister for Finance (Souza Costa) to the American Secretary of the Treasury (Morgenthau)44

[Translation]
[Rio de Janeiro,] December 2, 1938.

My Dear Mr. Morgenthau: Mr. Eurico Penteado has sent me, through your Foreign Office, the message you were kind enough to [Page 364] address to me and my Government, on behalf of the American Government.45

2.
First of all, I wish to renew the expression of my appreciation which I endeavoured to convey in my telegram after having duly informed my President.
3.
The cooperation between our two countries has been hindered by the difficulty which Brazil, due to her economy and finances and in spite of her Government’s desire to do so, has found to adjust itself to the rules that the American economy and finances have imposed to the life of your country.
4.
The assistance that your country has offered to mine, brings nearer the fulfillment of my Government’s wish for a more effective and real communion of interests and a closer solidarity between the United States and Brazil.
5.
When I visited the United States, in the summer of 1937, we considered the possibility of making a gold deposit with the Federal Reserve Bank, utilizing the currency available in the foreign market and carrying out credit operations on the basis of that deposit, as agreed.
6.
The world’s economic conditions, on the second half of last year, which influenced the Brazilian economy, and became worse as a consequence of the exchange policy followed during my absence, prevented the completion of our program and compelled us, in order to avoid greater losses, to reestablish the exchange control.
7.
In November 1937, due to the attitude of the various producing countries, we modified our coffee policy, reducing, in this manner, the surplus of our trade balance to the extent of the difference of the gold price. This compelled us to temporarily suspend the payments on our foreign debts.
8.
Since last May, this exchange policy has shown its results and, from then on, we have had surpluses in our trade balance, notwithstanding the fact that the figures given in the statistics, during periods of exchange control, always shows results below the reality, as result of fraud, which cannot be entirely avoided no matter how severe the control may be.
9.
The facts show that we are approaching more and more the point where we will be able to reestablish the free exchange, although for this we might have to wait a little longer than desirable. To hasten such a solution, at the present time, would bring a fall on the value of the milreis and a still larger reduction of the purchasing power of Brazil. This, of course, would not only be against our own interests but against [Page 365] the common purpose we are endeavouring to reach—a greater development of trade between our two countries.
10.
Once reestablished the situation that will allow us to give up the exchange control and return to the policy of free exchange, we will immediately create the Central Reserve Bank along the lines we have studied before, with the exclusive power to issue currency.
11.
When a convenient external purchasing power, well adjusted to the economy of the country, has been obtained—through the equilibrium of the international balance of payments, during a more or less lengthy period of time, the Central Bank will maintain the stabilization of the exchange rates with regard to the principal currencies, using, for that purpose, an “equalization fund”, which will be set up little by little, should it be impossible to organize it in any other way.
12.
The fundamental condition for the success of this monetary policy is a balanced budget, against which the requirements for the economic development as well as those of the national defense press constantly upon.
13.
The Government has just ordered a study in each of its branches of all the public requirements to be taken care of, which were listed to be carried out along the lines of a well ordered plan to be organized in accordance with our possibilities.
14.
The promptness with which we will be able to take care of such requirements will allow us, in some way, to reach successfully the aims we have in view and, therefore, the cooperation of your country in that way will be highly valuable, facilitating the execution of a program that will assure the expansion of our economic forces. Only through such cooperation we will be able to take care of our other requirements, including the commitments of the past.
15.
The purchase of all the economic equipment we need to solve our problems of land and sea transportation, if made on the American market, on long terms, would allow us to consider immediately, as a whole, those we need most.
16.
I do not find it necessary to emphasize the high significance that it would mean to us the possibility to assure, within a short period, the development of the national production.
17.
The possibility of meeting our immediate requirements through a financing plan for the sales of material, which would be within our capacity to pay, would practically assure a balanced budget.
18.
The establishment of a Central Bank allowing the continuation of the monetary policy and the defense of the value of the currency, would place Brazil in an economic position which could easily be safeguarded, in line with the international policy of your country.
19.
The diversity of situation in which we find ourselves compels my country to look for, by other means, the resources which we lack [Page 366] and must obtain, even though by so doing we are sometimes obliged to forsake principles which are in accordance with our traditions and our habits, but are not suited to the requirements that confront us.
20.
The fulfillment of the requirements we have mentioned, carried out methodically, within the real possibilities of our budget, and the creation of a Central Bank for the execution of a monetary policy that will be able to give a relative stability to the purchasing power of the milreis, not only in the internal but also in the international markets, constitute the principal aims of our financial and economical policy.
21.
The collaboration that the Government of your country offers to us is, therefore, highly opportune and can decidedly contribute to the success of our purposes.
22.
The policy that, since November 1937, has been followed with regard to coffee assures for that product a situation which at least will secure for it stability of prices, and there is no reason to forecast a greater fall in its value.
23.
In the same way, the imports of the country do not show a tendency to increase, especially, if the purchases of economic equipment to be made by the Government will be granted by long term payments.
24.
Therefore, only the relatively small arrears that exist in connection with the payment of imported merchandise—about £3.500.000—would act as a lowering factor in the event of it being immediately reestablished the free exchange market for the payment of imports.
25.
If a credit would be obtained, allowing such liquidation in a reasonable length of time, all difficulties for the normalization of the exchange market would be overcome, in which case the control would be maintained only in relation to the transfer of capital, interests and other remittances of non-commercial nature.
26.
To be able to judge to what extent Brazil can take advantage of the cooperation you have offered us for the solution of the difficulties of other nature,—and as such we understand those related to the necessity of economic reorganization and national defense,—it is indispensable, in order to present any concrete suggestion, to know the maximum length of time which could be granted us for the purchase of such economic equipment. The proposals so far have been made by Belgian, and especially German producers, allowing us a term of not more than six years, which, evidently, would curtail very much our purchasing capacity.
27.
The last proposal I received of a financial nature, was from a group of Swiss bankers. It was forwarded to me by Senator Molard, President of the Commission of Public Works of the French Senate, who acted, however, in a strict personal character and without any interference from the French Government.
28.
The plan was considered interesting and is under study by experts of my Department. The plan can be outlined as follows:
a)
Organization of a corporation having French-Brazilian capital, which would undertake to execute the indispensable public works having remunerative character. The capital for that purpose would be recruited abroad, the Brazilian Government being called upon to guarantee a minimum dividend to the shareholder.
b)
The opening of a credit in French francs for the sole purpose of permitting the creation of the Central Bank of Issue and promote the soundness and stability of the currency.
28.
[sic] In connection with this plan, the Government would promote the nationalization of the external debts, replacing the bonds in foreign currency by bonds in Brazilian currency, according to conditions to be agreed upon.
29.
I must, in the first place, explain to you that this conversion is contrary to the impression that we always entertained that the agreement as to the debts ought to be made on the basis of the currency contracted for.
30.
We recognize the great convenience of promoting immediately the necessary negotiations for this agreement but it looks to us that it can only be examined in a useful way for the mutual interest of the bondholders and my Government, after the solution of the two aforesaid problems. Once this problem is settled, the national increase of the export of our products will permit the carrying out of any reasonable scheme.
31.
I have attempted to show to my distinguished colleague the outline of the difficulties which we have to face and the results which I have so far obtained, as well as the means through which the cooperation offered by your Government may be very useful to us, speeding the results and increasing our mutual relations both commercial and political.

Awaiting confidently your reply and with my best personal regards,

Sincerely yours,

A. De Sz. Costa
  1. Transmitted on December 10 to the Acting Secretary of State by Wayne C. Taylor, Assistant Secretary of the Treasury.↩
  2. Mr. Penteado conferred with the Secretary of the Treasury in November. For the substance of the Secretary’s message, see telegram No. 135, November 25, 5 p.m., to the Chargé in Brazil, p. 362.↩