The Secretary of State to the Chargé in Brazil (Scotten)
59. Your 113, April 12, 1 p.m. Reference is made to the exchange arrangements mentioned in Section 1 of the letter of Aranha to the [Page 389] Secretary of State, dated March 8, 1939,57 and described in more detail in the documents transmitted to the Embassy with instruction no. 307 of March 9, 1939.58
It is the Department’s position that, while minor modifications were of course expected, it was anticipated that no important changes would be made without prior discussion. The Department is of the opinion that the increase from 10 to 30 percent in the proportion of export drafts which must be sold to the Bank of Brazil at the official rate is of considerable importance. Nevertheless it feels that the present situation is acceptable if the increased yield is devoted primarily to external debt service and transfer of earnings. We feel that the Brazilian government should keep us fully and currently informed as to the disposition of this official exchange.
Regarding transactions in compensation currencies, the Department assumes that the understandings indicated in the memorandum of February 17, 1939,58 will be carried out in substance.
Concerning the penultimate paragraph of the Embassy’s telegram, the Department, although it is not of the opinion that the point must be pressed further, fails to agree with the Embassy’s argument. Since the spread between the official and free buying rates is not fixed, the free rate being a market rate, it would be expected on purely theoretical grounds that if the official buying rate were 17.300 milreis, the free buying rate would be slightly lower than 18.300 to 18.400, and the free selling rate correspondingly decreased.