Foreign Relations of the United States Diplomatic Papers, 1940, The American Republics, Volume V

832.51/1777

Memorandum of Conversation, by the Adviser on International Economic Affairs (Feis) and the Assistant Adviser on International Economic Affairs (Livesey)

[Washington,] March 5, 1940.

Participants:	Mr. Francis White, President, Foreign Bondholders Protective Council, Inc.
	The Secretary of State
	Assistant Secretary Berle
	Mr. Feis
	Mr. Livesey
	Mr. Briggs
	Mr. Collado19

The circumstances of Mr. White’s seeking an interview with the Secretary are stated in other memoranda.

Mr. White, starting from the circumstances under which the original Niemeyer proposal of about October 1933²⁰ had been discussed by Mr. Reuben Clark at Rio de Janeiro in January 1934²¹ and qualified somewhat to the advantage of various American bond issues before it was issued as the Aranha Plan of 1934, expounded the unsatisfactory allocation of funds as between the sterling and dollar issues, and notably the treatment given the São Paulo Coffee Realization Loan, as the reasons why the Council could not recommend the present Aranha proposal.

Mr. Berle and Mr. Feis reminded Mr. White that it was not at present a question of the Council recommending the proposal. The Brazilian Government had been giving serious study to the possibility of making a four-year offer to the holders of its external bonds; the Council, though the suggestion had been put before it by the Department,²² had no one present in Brazil to represent the bondholders—a fact which Mr. White explained on the score of the limited resources of the Council; the American Ambassador therefore had been endeavoring in discussion with the Brazilian authorities to secure for the American bondholders as favorable terms as it was possible to secure. In these endeavors the Department and the Ambassador had been moved by concern for the interests of the bondholders, who had not received payment for some years, and by the fact that the longer the debt remained in complete default the dimmer the prospect of resumption of payment might become; the Ambassador had reported to the Department three times in the past week that he felt he had achieved everything that was possible at the present time in the way of improving the terms of settlement. He had conveyed to the Department several times the statement of Aranha that he hoped that the Brazilian offer would not be opposed by the Council, and that he would not go forward with any offer if the Council were going to make adverse comment; the situation thus created was that the Council had the choice of refraining from adverse statement or of assuming the responsibility of preventing any offer being made at the present time, in which event, according to the opinion of Ambassador Caffery, the whole matter of resumption of payment might be deferred until after the end of the war. The Department’s own judgment of the best course for the bondholders was that their best interests would be served if the offer could be placed before the bondholders; of course there was no way of being sure that this would in fact prove to be the best course for the bondholders but the Council would obviously be assuming a heavy responsibility if it should veto a proposal to make payments in the amount of about twenty-five million dollars to American bondholders over the next four years.

Mr. White went into a very long and critical analysis of the offer both on the score of the total amounts to be paid and on the distribution of the amounts as between the different grades of bonds. His criticism, however, centered chiefly on the fact that certain preferences, which he deemed unjustified, established in the Aranha Plan of 1934, would be retained in this offer, and in his judgment they represented much more favorable treatment to the holders of sterling bonds than to the holders of dollar bonds. (The Brazilian Government had transmitted through Mr. Caffery its estimates that the percentage of total payments going to the holders of dollar bonds was greater by several percent than the proportion of the total bonds which are dollar bonds; this is probably roughly correct as to proportions based on principal amounts; however, the Council takes as its basis of criticism not percentages of principal but percentages of contractual service, and on this basis the amounts paid on the dollar bonds are several percent less than their proportion of service on the original bond contracts.) Mr. White went on to present the situation as one in which the Council had a trustee relationship to the bondholders and to interpret the Department’s presentation as a request to the Council to refrain from disclosure of pertinent facts. In various forms he gave the impression of a belief that the Council’s duty to the bondholders lay in denouncing the offer, and that requests were being made of him to neglect that duty. This made it necessary repeatedly to make counter-assertions and clarifications to the effect that the question before the Council was simple. The Brazilian Government stated it would make an offer to the bondholders on condition that the Council would not comment adversely upon it. Our Ambassador reported that this was the best offer obtainable at the moment. It would represent a payment to American bondholders of a total amount of about twenty-five million dollars over four years. The question, emanating from Mr. Aranha, therefore, was whether the Council would veto Mr. Aranha’s proposal for such payments by taking the position that it must make an adverse statement if the proposal were made. Mr. White never squarely met that simple question. He tried repeatedly to treat the matter as a request from the Department that the Council refrain from disclosing facts, or to elicit a request from the Department. Thus he suggested that if the Department, which is concerned with national policy, should request the Council, which is concerned solely with bondholders’ interests, to take action or to refrain from action because of considerations of national policy, the Council would cheerfully comply, since it never wishes to oppose the national policies of the Government.

Finally the Secretary of State pointed out to Mr. White that the Government’s interest in our bondholders was as great as that of the Council and similar to that of the Council. Both should be moved by the same desire to work things out to the best interest of the bondholders. Our steady purpose along this line was shown by our activity in a score of situations in which the Department had backed the Council and extended every effort to assist the Council’s endeavor. Therefore it seemed to him that we were all working for the same purpose and what the situation called for was the best cooperative efforts of all in the interests of the bondholders and not for a sharp dispute and long discussion among ourselves as to the respective duties and endeavors of the Council and of the Department. It was not a question as to loyalty to bondholders but as to how to make the Council’s loyalty to bondholders effective.

Mr. White agreed with these general ideas without, however, substantially modifying his position. Finally—it then being after six o’clock and Mr. White having stated that he had to catch a seven o’clock train to New York, the Secretary suggested that the situation might be met if the Council would merely limit itself to a statement that it was putting before the bondholders an offer of the Brazilian Government transmitted through the Department of State. The suggestion was agreed to by Mr. White, who said he would bring it before his Executive Committee in a meeting the following day.

After the meeting had left the Secretary’s office, Mr. White in Mr. Briggs’ office drafted the following statement as embodying Secretary Hull’s suggestion, and as the statement which he would submit to the Executive Committee:

“Without passing in any way on the merits of the Brazilian proposal, which was not negotiated by it, the Council limits its comment on the proposal of the Brazilian Government, received through the Department of State, to the remark that negotiation at present would seem to hold no favorable prospect of obtaining any better offer. The Council must leave it to the bondholders to determine whether or not they will accept what is now offered.”

During the meeting with the Secretary, Mr. White at one time had suggested that the Council might refrain from making a public statement but might circularize bondholders transmitting the Brazilian proposal, commenting thereon in these letters of transmittal and in ensuing correspondence with bondholders. In discussion of this, however, it was brought out that such letters to bondholders would inevitably come to the attention of the press and be reported in the press and that the result would hardly be different from that of a public statement.

19. Emilio G. Collado, of the Division of the American Republics.
20. Apparently plan proposed by the Brazilian Government for adjustment of the national, state, and municipal debts after consultation with Sir Otto Niemeyer of the Bank of England. See telegram No. 82, September 16, 1933, 5 p.m., and despatch No. 58, September 27, 1933, from the Ambassador in Brazil, Foreign Relations, 1933, vol. v, pp. 75 and 76, respectively.
21. See Foreign Relations, 1934, vol. iv, pp. 602 ff.
22. This suggestion was presented to Mr. White by Mr. Feis in a conversation at New York on December 30, 1939. Memorandum of conversation dated January 2, 1940, not printed.