The Ambassador in Cuba (Braden) to the Secretary of State

No. 513

Sir: I have the honor to enclose herewith a message63 directed by President Batista to the Special Session of Congress which convened today. This document discusses and presents a draft-law to create:

A central bank of issue and rediscount, to be called “Banco de la República de Cuba”;
A stabilization fund;
A bank examiner’s office.

Also it proposes to reform Cuban monetary and banking laws with a view to eliminating the dollar as legal tender in this country within 180 days or less if the Government so elects.

It is my understanding that the enactment of legislation along these lines has been under consideration for some time and that finally the creation of a central bank was definitely provided for in Article 142 (d) of the 1940 Constitution. During these protracted discussions, [Page 297] it has come to be accepted as well nigh axiomatic that reforms such as are contemplated in this draft legislation were required for the proper functioning of banking in Cuba. Irrespective of whether or not this be so, I understand and sympathize with Cuban ambitions to improve credit facilities and to have their own currency as the sole legal tender. On the other hand, in accomplishing these ends, the utmost care should be taken to insure against mistakes—either in the planning or carrying out of the desired measures—which might prove disastrous to this country and indirectly to our interests here and to our commercial and other relations with Cuba. Hence, it is of the utmost importance that the proposed legislation should only be enacted into law after the most exhaustive investigation possible of all the pertinent facts and influences and that, in particular, certain conditions and psychologies, peculiar to Cuba, be so thoroughly understood and such protection thereon be incorporated in the law as to insure the successful operation of the new system to be created.

The bill now presented, and which closely coincides with the recommendation made by the American Technical Mission to Cuba, headed by Mr. H. B. [D.] White of the United States Treasury Department, will probably become law unless:

The present Congress becomes so involved in political bickering as to prevent any legislation;
The Department deems it advisable to suggest discreetly that a deferment of this legislation appears desirable;
Opposition thereto in public hearings be far stronger and more effective than presently seems likely.

Self-evidently, the American Technical Mission could not properly enter into those unfortunate features of Cuban character and malfeasance in public office, which, nevertheless, of necessity, must be entirely excluded from the new banking and monetary system if it is to function honestly and effectively. It is for this reason that, quite apart from the purely technical aspects of the pending legislation, I feel that the following observations merit the Department’s careful consideration:

(1) There should be accurately determined just how much truth there is in the widespread allegations that the lack of commercial credit and rediscount facilities and the existing monetary system are responsible for the financial and economic difficulties which have arisen in this country during the last two decades. If these generalizations are not entirely factual, it would appear unwise to rush through the basic changes now under contemplation. But even if they are accurate, it does not necessarily follow that the only solutions are those outlined in the draft of law presented to Congress by President Batista. So far as I have been able to ascertain, a careful [Page 298] analysis and report on this underlying situation has not been made. Therefore, it would seem logical for a meticulous study of all the facts to be concluded first so that, based thereon, the best possible solutions could be explored and then adopted.

(2) President Batista’s statement that the present is the most propitious time for the enactment of this legislation is perhaps exact from the viewpoint that the financial and economic problems which will arise during the next few years will be so difficult as to require the best of talent and the most solid banking, credit and monetary structures for their proper solution. I am not convinced, however, that the present period, when the entire world is in a state of flux and uncertainty and so many unknown factors are appearing daily, is propitious for the inauguration of a new banking and monetary system. On the contrary, it might be preferable during the next few years to continue with the existing media rather than to attempt to change systems in midstream.

(3) Unless consummated with “superior skill”, the elimination of the dollar as legal tender and the creation of the stabilization fund might complicate the Cuban financial structure and prejudice trade with the United States. Simplification in these matters would seem preferable rather than the enactment of measures which will probably involve the establishment of an exchange control, thus adding this country to the long list of those which now have the freedom of their international trade hampered by such measures. Finally, this would appear to be another step away from the ideal of, if not a common currency for the entire Hemisphere, at least complete stability of currencies between the American republics.

While the Prime Minister, in a conversation with me, stated that it was intended to tie the peso irrevocably to the dollar, it would not appear from the draft law that this has been accomplished. Pending the development of more definite plans to reach this very desirable end, it might be preferable to carry on under the existing media which at least in this particular have worked reasonably well until now. In fact, the outstanding weakness which appears to exist in Cuban currency is the extraction therefrom of large seigniorage profits during the last several years. In any case, to force such a momentous change within a 180–day period or less does seem precipitous.

(4) President Batista’s message to Congress points out that the draft legislation is largely based on the report of the White Mission. Therefore, if, in the future, difficulties are encountered, irrespective of what may be their cause, the United States Government will in all probability be blamed.

(5) That Government should control banking and currency is a sound postulate providing it can furnish competent and honest management. [Page 299] If this cannot be done, then some other control should be created. As the report of the White Mission states: “A poorly administered central bank or stabilization fund would add greatly to the difficulties that already exist.” When I informally mentioned to the Prime Minister, Dr. Saladrigas, that honest and competent management was a sine qua non for the successful operation of the proposed bank, the only assurance he could give me, that there would be such management, was that Dr. Oscar García Montes, until recently Minister of the Treasury, and Sr. Eduardo Durruthy, of that Ministry, would be the top executives of the new institution for at least five years. …

As the Department is aware, honest and competent administration in Government-controlled organizations has been and is a rarity in Cuba. The new system by law will be politically controlled throughout. Therefore, on this country’s record, it would seem overly optimistic to hope for a “superior administration”. Without such an administration there is at least an even chance that there will be costly mistakes, difficulties and possibly illicit practices which may be disastrous in many directions. To launch a fundamentally important new system under these conditions is, to say the least, hazardous.

(6) As the report of the White Mission states, “care should be taken to protect the (member) banks against loss of principal on their subscriptions to the central bank”. Aside from the very serious problem involved in obtaining a competent and honest administration for the bank, the capital investment—and for that matter all other assets—might be imperiled by:

Over borrowing by the Government in times of duress. Under strain, political influences have played havoc with central banks in such places as Chile, and the history of Cuba gives no encouragement that conditions would be any better here. For instance, here there are no really important national banks which could exercise a beneficial restraint on the central bank.
The volume and potency of corruption in Cuba induces the fear that illicit influences will endeavor to milk the institution for selfish ends. So frequently do attempts of this nature arise here that the Embassy has to be eternally vigilant to protect our interests against the effects of these evil practices. A most recent example is the maneuver to alter the promedio price of sugar. (See my despatch No. 311 of July 3, 1942.64)
The draft law limits the total amount of loans which the bank may have outstanding to the Government at any given time to 10 percent of the average of the current and the last preceding year’s budgets. However, it is pertinent to observe that, based on the present budget of 89,000,000 pesos, the Government could borrow up to 8,900,000 or 78 per cent in excess of the paid-in capital of 5,000,000 pesos for the new institution. Moreover, the temptation would be [Page 300] great for the Government, if hard pressed for cash, to force an expansion of the 10 per cent limitation.
The central bank’s liquidity may be adversely effected by the narrow market which exists for Cuban investments of the kind which would be appropriate for the bank’s portfolio. Stabilization Fund operations also might be hampered by this condition.
The authorization for the bank under emergency conditions to make loans to the general public offers another source of danger, particularly in a one major crop—one export and import market country, such as Cuba, where, for instance, the sugar interests from time to time can and do bring unusual pressure to bear.
If the new institution takes over the present outstanding issues of Cuban silver backed currency, it would absorb at the outset a deficiency of some 50,000,000 pesos resulting from the seigniorage profits which have been extracted by previous administrations from the present 80,000,000 pesos of so-called silver circulation.

(7) This new legislation involves the enactment of additional taxation which seems especially unfortunate at a period such as the present, when the country’s income may be reduced and other heavy taxation be imposed by reason of this country’s participation in the war.

I heartily approve of inspiring people to accept responsibility, by giving them responsibility, but I question the wisdom of this policy being pursued in Cuba at this time on so vital a matter as this, on which depend the economy of the country and the happiness and well-being of its citizens. If there had been in recent years a reasonably long period of competent and honest administration by Governmental organizations in Cuba, then the experiment might be justified, but under existing circumstances, it seems perilous and, unfortunately, if it does not work out successfully, the Department of State, the White Mission and, therefore, the United States Government will probably be made the whipping boy.

It is to be hoped, therefore, that very careful consideration of the project will be given by the Cuban Congress and, in particular, that the public hearings thereon will lead to a thorough analysis of all factors, including the aforementioned. …

The Department will observe that in my opinion the recommendations of the White Mission would prove most valuable under other conditions and with the guidance of experienced technicians. But since this talent is, unfortunately, unavailable here, I can only view with misgivings the inauguration of a new banking and monetary system at this difficult and uncertain period, in a country where practically all governmentally-dominated enterprises are saturated with self-seeking political influences which all too frequently lead to inefficiency and even corruption.

Respectfully yours,

Spruille Braden
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