632.6231/284: Telegram

The Secretary of State to the Ambassador in Brazil (Caffery)

19. Your telegrams no. 17, January 27, noon, and No. 24, February 1, 4 p.m., and the Department’s 14, January 29, 1 p.m. The Department has studied those provisions of the draft note transmitted in your No. 17, which relate to compensation trade and on which it indicated it might comment later. It has now decided that it does not desire to comment on the specific details of these provisions as long as there are no changes in the draft of these provisions.

On the general question of compensation, as apart from this particular set of details, the Department relies upon the assurances referred to in your No. 18, January 27, 4 p.m.,74 that the exchange rate for the compensation mark will be subjected to control by the Bank of Brazil. It is its understanding that the objective of such control of the compensation mark rate will be to prevent significant fluctuations and to prevent its being cheapened as compared to the dollar. The fluctuation of the compensation mark independently of the fluctuation of free currencies cannot fail to create disturbances and uncertainties for traders whose transactions are based upon the free currencies and the depreciation of the compensation mark would of course widen the advantages from and the inducements to import from Germany in preference to other countries.

Although not commenting upon the specific compensation arrangements contemplated in the agreement between Germany and Brazil, the Department repeats that it must be clear to the Brazilian Government that if compensation trading is allowed to expand unduly it will seriously impair the advantages of the trade agreement between the United States and Brazil, the safeguarding of which was sought in the agreements reached in the conversations with the financial mission in Washington last July.

With reference to the last sentence of your No. 24, the Department would be agreeable to the language suggested in its No. 87, November [Page 389] 24, 2 p.m.,75 as modified in its No. 3, January 12, 4 p.m.76 In this or in any other formula it would be this Department’s clear understanding that the undertaking against subsidization of exports from Germany to Brazil would apply to subsidies extended to German products by the German export subsidy organization organized by German business under the direction and the order of the German Government. This was our clear understanding at the time of the conversations last July, it has been the Department’s consistent position since that time in the exchange of views with the Brazilian Government, and the Department is not able to see how the assurance of the Brazilian Government given in the Ambassador’s note of July 14, 1937,77 could have significant meaning if it were to be circumscribed so as to prevent its extension to the chief method of subsidizing German exports.