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

No. 2619

Sir: I have the honor to refer to the Department’s airgram No. 164, 4:30 pm, January 14, 1943; this Legation’s telegram No. 20, of January 20, 11 am, 1943; and the Department’s telegram No. 27, of January 26, 7 pm, 1943.39

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The Legation suggested in its telegram No. 20 the substitution of United States two dollar bills for the present currency of the United States now in Honduras with the following points in mind: (1) that Honduras would change its laws regulating the circulation of U.S. currency in Honduras, (2) that the U. S. Treasury Department believed that there was a probability that some Axis tainted currency existed in Honduras, and (3) that by allowing dollar currency to circulate in Honduras, and not forcing the dollar currency into the banks to be exchanged for Lempiras, the pressure on the limited amount of Lempiras now available might be relieved to the extent of the amount of U. S. currency remaining in Honduras.

In Paragraph Three of the Department’s telegram No. 27, it is stated: “If the existing Honduran controls are modified, it would appear that the dollar currency presently in Honduras would circulate freely, that the shortage of Lempiras would be relieved and that the substitution of two dollar bills would not be necessary.” It is entirely true that if Honduras declared U.S. currency legal tender again, as it did in the 1920’s, that U.S. currency would circulate freely; however, this would seem to indicate that the Treasury Department now has no fear of Axis tainted currency already in Honduras, which is also this Legation’s belief. “That the shortage of Lempiras would be relieved”, of course, merely means to the extent that dollar currency would not be forced into the banks to be exchanged for Lempiras.

In Paragraph Five of the Department’s telegram No. 27 it is stated: “The Department does not understand the relevancy to the question of currency controls of the last paragraph of your telegram concerning the impossibility of selling dollar drafts to the banks in Honduras”.…40 “It would seem that this situation may arise irrespective of whether dollar currency circulates freely in Honduras.”

When a Honduran bank buys dollar drafts, it may pay for these drafts in one of two ways: (1) in local currency, (2) in foreign currency obtained by selling some of its stocks, bonds, etc., already held abroad. Payment in foreign currency is limited to the extent that the owners of the exchange are willing to take the foreign currency. However, the bulk of the foreign exchange purchased by Honduran banks is purchased from persons who want Lempiras. For example: the United Fruit Company, the Standard Fruit Company, the New York and Honduras Rosario Mining Company, the Compañía Minera Agua Fría, the United States contractors working on the Inter-American Highway, the various projects of the Coordinator’s Office and the Board of Economic Warfare, etc., all want Lempiras to meet local payrolls and make local purchases. They can obtain Lempiras only by selling dollar drafts. They sell the dollar drafts to the banks. In [Page 382] normal times, the banks could resell the dollar drafts to importers. With the present shipping difficulties, the importers cannot get normal amounts of merchandise from the United States and other countries, therefore, they do not need as much foreign exchange. The foreign exchange balances of the banks increase while their supplies of Lempiras decrease. The supply of Lempiras is limited. If the United States requests the Honduran Government to have all U.S. currency forwarded to the United States, the banks must purchase such dollar currency with Lempiras. During the last seven months the banks have purchased over $250,000 in U.S. currency, which means that the amount of available Lempiras in the banks which might have been used for the purchase of foreign exchange or for ordinary banking operations has been decreased by more than 500,000 Lempiras. This is roughly 4% of the entire monetary medium of the country, including legal reserves of the banks which must be held in silver Lempiras. It is quite evident from this explanation that currency controls have considerable relevance to the difficulties of the banks in purchases of dollar drafts.*

Of course, the Legation and the various banking and Government officials with whom the question was originally discussed did not think that such a relatively large amount of U.S. currency existed in the country. This was due to the fact that most of it was being hoarded, since many people considered the U. S. dollar as the equivalent of, or even better than, gold. At the same time it was not thought necessary to apply any further internal restrictions on the U. S. dollar, because of the complete lack of any evidence that there were any counterfeit dollars or Axis tainted dollars in Honduras.

The effect of forcing down the value of dollar currency and discrediting dollar currency in Honduras, where there has been no evidence that there was in existence any currency of Axis taint, has been most unfortunate.

In view of the foregoing, the Legation respectfully requests that the Department forward to the Legation the text of whatever modifications of present controls the Department considers should be suggested to the Honduran Government.

Respectfully yours,

John D. Erwin
  1. Telegrams Nos. 20 and 27 not printed.
  2. Omission indicated in the original despatch.
  3. A more complete discussion is contained in the Legation’s report No. 152, of January 18, 1943, entitled “Balance of International Payments, Exchange Control and Monetary Control.” [Footnote in the original; report not printed.]