The Minister in Paraguay ( Howard ) to the Secretary of State

No. 1377

Sir: I have the honor to acknowledge receipt of instruction No. 187, December 12, 1940,4 referring to my despatch No. 1271 of September 2, 1940 on the desire of the Paraguayan Government for financial assistance in connection with a number of projects, and enclosing copies of two Departmental memoranda dated October 4th and 14th5 in which recommendations are made with regard to certain of these projects.

The Legation is directed to report its recommendations and observations on the various questions raised regarding these problems, and particularly on the relation of the extension of further economic assistance of this nature to the present political situation in Paraguay.

In telegram No. 39 of October 30, 1940, the Department advised that the Paraguayan Government had been requested through its mission in Washington to have Mr. Eric Lamb prepare a report on the economic desirability and the probable cost of the specific projects mentioned in despatch No. 1271 under reference. On November 12th the Paraguayan Minister of Finance called upon Mr. Lamb as Financial Adviser for such a report which has now been completed and delivered. The Legation has been able to borrow Mr. Lamb’s personal copy of this report, copies of which are enclosed4 for the Department’s confidential information.

It is found that this report presents a carefully studied picture of the feasibility of the various projects other than the refinancing of the Port of Asunción, the situation of which has subsequently changed, for additional financial assistance under present economic [Page 1132] conditions which, it will be noted, are taken to be somewhat different at this time than as set forth in the Departmental memorandum of October 4th. Whereas the memorandum recommends an increase in the banking line of credit* to the Banco de la República by $500,000 “to prevent a complete collapse of the Paraguayan exchange in the first half of 1941”, the Financial Adviser’s report concludes that such an increase is undesirable. On the other hand, the Financial Adviser indicates that a scheme to finance exportable surpluses—particularly cotton—might serve to offset the economic misery of the country and at the same time permit the Government to maintain its exchange position. Mr. Lamb estimates that a credit of $1,200,000 or more might be required for this purpose.

If the actual economic depression of the country is relieved by sufficient financial assistance for the Government to carry over until more normal export revenues can be expected and to bolster up farm production, on which a large part of the population depends exclusively, by providing an internal outlet for crops through Government purchases, then the progressive development of transportation facilities, especially roads, and ports, takes on the form of a cohesive long-term program for the opening up of the country so that the natural forces of agricultural expansion may come into play. It will be noted in this connection that the Financial Adviser’s report rejects any idea of direct financial assistance to the Banco Agrícola until such time as that somewhat anomolous institution has been thoroughly overhauled.

The building of feeder roads to widen the influence of the trunk route under construction between Asunción and Villarrica seems advisable in so far as those proposed in the Financial Adviser’s reports do not further parallel the existing Paraguay Central Railway and, if of low cost construction, would apparently be justified in the relatively productive regions selected. Additional credits of, say, the $900,000 estimated at this time should admit of their construction simultaneously with the trunk route, leaving any large projects, such as a network joining Asunción, Pilar and Encarnación, until the Hebard equipment becomes available sometime after 1942. However, the construction of a low cost road inland from the port of Pilar to the Misiones region might be justifiable in direct relation to the proposed improvement of the port there, so as to open up a large stretch of country at present practically without transportation facilities save the railroad which runs at cross purposes to an economical export trade.

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The Department’s stand with regard to refinancing the Port of Asunción is not clear from the memoranda under consideration. It will be seen that the Financial Adviser advances some considerations in his report on this subject which in his view would appear to make feasible a certain type of financial aid in this matter. However, his report was submitted as of December 17, 1940, before the port was actually taken over by the Government—see recent Legation despatches on this topic. The outcome of the Government studies of the port question has not yet become known to this office, but it is of interest to note that the Interventor (Captain Bozzano) named to take over the port works resigned directly thereafter. It is the view of the Legation that no action should be taken in this matter until the present administration has definitely shown its intention to respect the just rights of the company as they may be determined by arbitration or an amicable agreement. Otherwise it is in substantial accord with the Financial Adviser regarding the port question.

The projects for sanitary works in the Capital, and for a merchant marine are readily deferable it is believed, the latter at least Until the ship-building industry is released from war-time pressure (unless, of course, old river boats adapted to local conditions could be cheaply acquired).

Interesting additional projects covered by Mr. Lamb’s report are the construction of crop storage warehouses and the vitally necessary outfit for dredging the river. It is thought that these items deserve consideration.

It is believed that the foregoing observations taken in conjunction with Mr. Lamb’s detailed survey of these projects present as nearly accurate a view of the economic feasibility of further financial assistance to Paraguay as can be had at this time. Naturally the extent to which such assistance may be effective, the surety of its application to the purposes designated, and its ultimate repayment, will depend on the ability and good faith of those comprising the Paraguayan Government.

This brings up the whole question of policy with regard to financial assistance to Paraguay. Thoughtful Paraguayans point out that if the Estigarribia program for development of the country through United States aid had only not been so slow to start and so little advanced at the moment of his untimely death, the confused political and administrative situation since prevailing would never have arisen. Paraguay would have been thoroughly bound to its course of cooperation with the United States and disruptive forces could not have come to power. However that may be, it is seriously alleged today that if the road credit were now stopped the present administration would not last many weeks in face of the resulting public outcry.

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On the other hand, since General Morínigo took over the constitutional presidency and cast out all but one of Estigarribia’s cabinet as well as most of his appointees in the Army and the public service, the outward attitude of the administration to United States aid can hardly be classified as one of great concern but rather as one which, particularly in Army circles, takes it for granted that such aid will be forthcoming in any event. A program of “nationalism” and army direction of public works is held forth as the ultimate goal, returning for inspiration to the whitewashed dictatorships of Francia and the Lopez when a “strong state” led the people to alleged prosperity. This attitude is further tinged by a naive expectancy that Paraguay can obtain assistance whichever way she may wish to turn—from the United States, Argentine, Brazil, Uruguay—it being reliably reported that the present Foreign Minister, Dr. Luis Argaña, is confident of receiving full economic cooperation for the country as an outcome of the much-postponed River Plate Regional Conference now scheduled for January 15th in Montevideo.

The problem thus presents itself of whether it is more expedient to await a change or consolidation of regime and some sure evidence of willingness and ability to go along with the United States in the program of continental solidarity, a period of waiting that would be fraught with danger of both economic and political upheaval, or to go on granting credits, without too much consideration as to the present economic possibilities of the country to repay, in the hope that the reaction to such largesse will be what is desired and that Paraguay will become a sure friend of the United States in South America.

In connection with this last point, it may be noted that there is a local train of thought which wonders at the enormous credits granted by the United States to Argentina which it is said will never be more than a lip-service friend, while Paraguay, forming by her geographic position a wedge for American influence, is given little, although a strong Paraguay developed as she could be by American financing and technical aid would constitute a primary influence in South American politics.

The above political commentary has been drawn out to some length since from the instruction and accompanying memoranda under reference it is not possible for this Legation to know to what extent the United States may see fit to go in the matter of financial assistance to Paraguay over and above strictly a businesslike credit program. Whatever action is taken, the local interpretation will be tortuous. If further credits are withheld or those granted withdrawn, the present administration would look upon such action as directed against them; while should additional assistance be forthcoming now it would no doubt act as a further obstacle to the return of civil elements to the government.

Respectfully yours,

Findley Howard
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  4. Certain commercial aspects of the handling of the original banking credit line granted to the Banco de la República are discussed in memorandum prepared in the consular section of the Legation annexed hereto. [Footnote in the original. Memorandum not printed.]