The Minister in Honduras (Erwin) to the Secretary of State

No. 2500

Sir: I have the honor to refer to the following communications between this Legation and the Department of State:

[Here follows a list of 16 communications (none printed) of the period May 18 to November 30, 1942, which trace the early development of currency problems in Honduras.]

[Page 373]

Because of the fact that this Legation daily receives complaints from business men, bankers, travelers, and from American and Honduran Government officials against what they regard as the shortsighted policy of the United States in discrediting its own currency, it is deemed important to summarize once more the recent developments regarding the dollar currency situation in Honduras.

After many years of currency difficulty, Honduras adopted the Lempira standard by Legislative Decree No. 102, of 1926, which states in Article I that the national monetary unit is the Lempira, equal to $0.50 United States currency. This stipulation is renewed in Article I of Legislative Decree No. 114 of 1931.

At various times from the early nineteen twenties to the early nineteen thirties, the American dollar was the principal circulating medium in Honduras. Legislative Decree No. 141, of 1934, provided for a commission for the control of exchange and the stabilization of currency in Honduras, and stated in Article 4 that the importation of dollar currency should be limited by the Exchange Control Commission to that amount deemed strictly necessary. In the exercise of powers granted him under Decree No. 141, of March 27, 1934, the President32 issued an acuerdo on April 17, 1934, entitled “Reglamento de la Ley de Control de Cambios Internacionales”.

Article 20 of the “Reglamento” states that: “Only by special permission of the Commission of Control of Exchange, in each case, may bills of the United States be imported, with the exception of tourists and those who, according to the law of immigration are obliged to bring a certain amount of money fixed-by that law when entering the country, but this money may not be put into circulation except through the credit institutions or any of their branches by obtaining in exchange the legal equivalent in the national (Lempira) currency. The deposits made in conformity with the law of immigration must be returned in the same currency in which they are made, or in international exchange at the current rate if the interested party has to leave the country, but if he remains in territory of the Republic, his repayment will be made in national currency also at its legal equivalent.”

Article 21 states: “According as the circulation of bills of the credit institutions established in the country fulfills the necessities of commerce, the Commission of Control of Exchange through the medium of the banks will withdraw the bills of the United States of America from circulation and will proceed to their exportation. Also, the fiduciary currency brought to this country by tourists and immigrants will be exported, and this will be done by the banks of the country, whether it form a part of their assets or should belong to the Exchange Fund”.

[Page 374]

At various times the Exchange Control Commission has indicated that dealing in dollar currency was really equivalent to dealing in Foreign exchange, and therefore subject to its direct supervision. Specific instructions were issued to the Banks prohibiting them from selling dollar currency without special authorization, and implying, at least, that the Banks’ purchases of dollar currency were also subject to Commission’s approval.

The administration of the above regulations gradually worked to the virtual elimination of dollar currency from daily transactions. However, dollars continued to be accepted by merchants to some extent. The usually unfavorable trade balance of Honduras made it very difficult to obtain foreign exchange, and, there is a charge of two percent plus service fee on all sales of foreign exchange. From about 1938 through 1941 there was a premium on dollar currency in the “black market” of 5 to 10 percent. Many merchants made buying trips to the United States every other year, carrying with them the dollar currency bought locally.

Traditional lack of confidence in the stability of Honduran currency, and fear of revolutions, caused many persons to keep a reserve of dollar currency hidden away.

Mention should also be made of the fact that tourists and traveling business men brought American currency into the country. On several occasions, even after the 1934 regulations, the American fruit companies on the North Coast of Honduras were allowed to meet payrolls in U.S. currency.

By 1942 the “black market” operations and the other operations referred to above had virtually taken dollar currency out of visible circulation. In fact, dollar currency was so scarce that the “black market” itself virtually ceased to function in 1941. At the same time the balance of trade had become “favorable”, making dollar exchange readily available.

In response to the Department’s instructions listed above, the Legation requested that the Honduran Government pass more specific legislation regulating dollar currency. These restrictions are discussed fully in the communications listed in paragraph one of this despatch.

Particular mention should be made of the Department’s instruction No. 784, of June 27 [25], 1942,33 which states at one point that: “In view of these regulations, you should ask the government to which you are accredited to notify the Central Bank and other institutions not to purchase dollars but merely accept them for transmittal on a collection basis.”

[Page 375]

The publication of the Honduran Decrees against dollar currency caused panic in all parts of the country, and to alleviate the situation, the Legation recommended that the Banks accept limited amounts, at least for collection purposes, and mildly censured the Banco Atlántida, an American-owned firm, for having refused to take dollars in any form at some of its branches.

The Banco Atlántida followed a policy of accepting only small amounts of U. S. currency, and, as reported in despatch No. 2456, of November 19, 1942,34 it attempted to send $160,000 to the United States after first notifying this Legation, as mentioned in the Legation’s despatch No. 2415 of October 30, 1942.34

When Mr. Jean Charbonnet, General Manager of the Banco Atlántida, arrived in Miami it is reported here that he was virtually arrested and taken to Atlanta, Georgia, along with the funds to be turned over to the Federal Reserve Bank. It is believed that he has now been released, but the ultimate disposition of the funds remains in question.

The Banco de Honduras reports that its attempts to ship currency to the United States have only caused trouble and monetary loss; therefore, it has suspended accepting dollar currency under any circumstances whatsoever.

The Banco Atlántida has not complained about the Charbonnet incident, but merely informed the Honduran Government, and this Legation, that, because of its present involvement with American currency, in future it would accept American dollars for collection only, and that all charges plus one percent would be deducted from the amount due to the person presenting the currency. Both banks are reportedly ignoring the Exchange Control Commission’s authorizations to pay in Lempiras for U.S. currency regardless of whether the source be travelers, officials, etc. This is working a hardship on persons, many of them American citizens, who arrive here with $50 in U. S. currency under the impression that they can exchange them for Lempiras through the Exchange Control Commission.

The President of the Honduran National Congress, Plutarco Muñoz, according to unofficial information, planned to discuss the situation extensively in his speech at the opening session of the National Congress, December 5, 1942. After much discussion, and at the request of President Carías, he modified his opening speech, and has confined himself to newspaper comments. His comments are echoed throughout the Republic; some trying to clarify the policy of the United States by pointing out that despite the billions being expended by the United States, the U. S. currency is really not falling [Page 376] in value, while others are not so hopeful. Some critics point out that the Lempira is tied to the dollar and eventually will decline also.

There is an undercurrent of glee on the part of anti-Americans, and pro-Axis persons, and comments regarding the “bungling policy of the Democracies” and the “prophetic weakness of the dollar” are not infrequent.

There is not, and never has been, as far as the Legation has been able to ascertain by diligent inquiry, any Axis-owned U. S. currency in Honduras.

The Honduran public, along with the Honduran Government, is frankly puzzled by what it considers a policy being urged on the Honduran Government to discredit and question the stability of United States currency. Pointing out that there is a difference between depreciating the currency and depreciating the exchange rates, has had little beneficial effect. Letters from persons in various parts of the interior who believe they have now lost their meager savings, and complaints from disgruntled travelers, continue to beset the Legation and the consulates.

The Legation clearly understands that substantial amounts of American currency were seized when the Germans over-ran Norway, the Netherlands, Belgium, France, et cetera, and that the object of restricting the movement of dollar currency in Latin America is to prevent the enemy from benefiting from the sums seized. According to the “United States Treasury Circulation Statement”, the amount of money in circulation outside the Treasury on June 30, 1940, was $7,847,501,324. It seems improbable that more than 1 percent (or $78,475,013) could have been in the countries over-run by the Germans, and it is even more unlikely that the Germans could have seized all of this; certainly a substantial proportion must have been sent away prior to their arrival. Furthermore, much (perhaps most) of what the Germans seized must have been exchanged by now.

It is extremely difficult to understand (1) how substantial sums of “tainted” dollar currency could be brought into Honduras, (2) how it could be changed into Lempiras on a large scale without attracting attention; in fact, without upsetting the whole national currency system, and (3) since all exchange transactions are rigidly controlled by the Honduran Government, and all such transactions are made through the medium of U. S. banks, what good it would do the Axis to get its funds changed from dollars into Lempiras in the first instance.

While the depreciation of dollar currency and the controls of the movement of dollar currency have undoubtedly handicapped Axis operations in certain areas, the damage to American prestige and the [Page 377] inconvenience to the Latin-American public weigh heavily on the other side of the scales.

Unless corrective measures are taken, the situation is likely to become worse. Any information which the Department may have regarding the modification or clarification of the policy, or regarding the length of time the Honduran and the traveling public must endure these unqualified hardships, will be sincerely appreciated. In any case, the United States Treasury should make adequate arrangements enabling Latin American banking entities to make legitimate shipments of U.S. currency to the United States in an orderly manner.

Respectfully yours,

John D. Erwin
  1. Tiburcio Carías Andino.
  2. Not printed.
  3. Not printed.
  4. Not printed.