852.75 National Telephone Co./9–1944

The Ambassador in Spain ( Hayes ) to the Secretary of State

No. 3102

Subject: Compañía Telefónica Nacional de España

Sir: With further reference to my despatch No. 2999, September 1, 1944,61 on the above subject, I have the honor to enclose herewith a copy of a memorandum of the substance of my conversation with the Chief of the Spanish State on September 11, 1944.

The day following that conversation the Vice President of the International Telephone and Telegraph Corporation received notification from the Subsecretary of the Presidency of the Government to the effect that the Presidency of the Government can not entertain the claims which are presented in the name of a foreign company in view of the fact that the right of representation of the general interests of the Compañía Telefónica Nacional de España before the Spanish State corresponds to that Company.

I immediately sent a personal note to the Minister for Foreign Affairs recalling assurances given to me by General Franco and expressing my belief that this notification must have been sent by inadvertence. I pointed out that the promise of fair treatment to the American interests in the Compañía Telefónica Nacional de España could only be carried out by fair treatment to that company. I requested the Minister to bring this notification to the attention of General Franco. I have received no reply to this note as yet.

In acknowledging receipt of the notification, Mr. Caldwell, Vice President of the International Telephone and Telegraph Corporation is reminding the Presidency that the Compañía Telefónica Nacional de España is the product of the intervention of foreign capital which still holds a controlling interest, and of foreign management, and that the denial of the Presidency to admit that the American interest in the company may address an appeal to the Spanish Government for action to remedy a condition which is injurious to that interest makes it necessary for the International Telephone and Telegraph Corporation to have recourse to the United States Government for protection of its interests.

Respectfully yours,

Carlton J. H. Hayes
[Page 432]

Memorandum of Conversation, by the Ambassador in Spain (Hayes)

In the course of my conversation with General Franco at the Prado on Monday, September 11, which covered a number of matters which are embodied in another Memorandum of Conversation, I stated that I should like to bring up two specific matters which were at issue between our Governments and which, I trusted, might speedily be settled to the satisfaction of both.

. . . . . . .

The other specific matter I wished to bring up, I said, had to do with the Telephone Company in which there was a very large and important American financial interest which my Government intended to protect. Despite the fact that I had called this to the attention of the Foreign Office in a formal Note as long ago as early February, and despite a succession of Notes ever since that time, no reply whatsoever had been forthcoming from the Spanish Government. I thought this not only discourteous but suspiciously indicative of unfair and unjust treatment of American interests. The IT&T had invested a large amount of American capital in providing Spain with a modern and efficient telephone system under a solemn contract concluded between the Company and the Spanish Government of the time of Primo de Rivera.62 This contract had been scrupulously lived up to by the Company, but in the last years had been violated in a number of respects by the Government as set forth in a memorandum of last February. It seemed obvious to me that the terms of the contract should be carried out and that if any modification of the contract was desired it should be arrived at by mutual agreement and not by unilateral action on the part of the Spanish Government.

The Caudillo said he had given much attention to this matter of the Telephone Company and it was not as simple as I implied. The contract was not between the IT&T, a foreign Corporation, and the Spanish Government, but between a Spanish company and the Spanish Government with a provision in the contract to the effect that the laws of the State had precedence over the terms of the contract. It was therefore a matter of domestic policy and not a question at issue between two governments or even between the Spanish Government and a foreign corporation. Besides, the contract had been a particularly iniquitous one. It was, so far as the Spanish Government was concerned, largely a personal act of General Primo de Rivera, who had been a good general and had done much for Spain, but who had been [Page 433] easily duped on economic matters. There had been a terrible outcry from the Spanish public about the terms of the contract, and it was the “scandal of the Telefónica” which was the major factor in bringing about the downfall of Primo de Rivera and eventually of the Monarchy. Indeed the chief hue and cry against the contract had been raised by the Republicans and Leftist elements in general so that, under the Republic, a serious attempt had been made to nationalize the Spanish telephone system. This had been halted through a kind of informal compromise whereby the status quo would continue indefinitely without the State’s recognizing the validity of the contract. I should bear in mind that the contract had never been passed upon, much less accepted, by the Cortes either under the Monarchy or under the Republic. All that the Spanish Government was now doing was to continue the status quo much as it had been under the Republic. He recognized that there was a considerable American investment in the Telefónica. He wanted it treated fairly and justly and had no idea of effecting any confiscation.

I said that the Government had recently expressed a desire to buy the holdings of IT&T in the Spanish Telephone Company but the Government spokesman seemed to wish to buy them at a figure which would entail at least partial confiscation and money losses for American investors. The Company was willing to treat of a sale if the Government would make a firm and formal written offer and then give some individual or committee full powers to carry on the subsequent negotiation. The Caudillo said the Spanish Government had no thought what soever of buying up the holdings of American investors. He himself was extremely glad that American capital had been invested in Spain and he hoped it would remain invested here. The Government had thought of buying up 51% of the stock in the Company but it was not by any means finally committed to that. In any event, he would be insistent that foreign capital invested in Spain was well and justly treated and that a fair return was made to the investors. He and his Government were determined on fair and honest financial dealings. He could assure me that no American investor would suffer.

I said that raised still another point which didn’t have any connection at all that I could see with questions in dispute about the contract or about the possible purchase of holdings of the IT&T. It was the point that there was now a big backlog of credits and blocked balances held by the IT&T in pesetas which had not been transferred into dollars for the American investors. Hence the latter for some years had not been in receipt of any return on their investment. I said there was no dispute regarding the amount of these credits and balances between the Company and the Spanish authorities. Everybody agreed on the amount. Moreover, Spain had resources that enabled it to make the needful transfer from pesetas into dollars and I [Page 434] could not see why such action should not immediately be taken regardless of the debates about other matters connected with the Telephone Company. It was only fair and just to the American capital invested in an important and essential Spanish public utility. The Caudillo said there was a great deal of doubt in his mind whether Spain in the immediate future could transfer the full amount of the credits and blocked balances. Consequently, some further negotiation would be necessary to determine the exact amount which Spain, through its resources, could actually transfer now. He intended, however, that Spain should meet its obligations.

I said there was one great difficulty about this whole telephone complex, and that was the lack of any agency authorized and empowered to deal with the Company. All sorts of delaying and frequently contradictory proposals came from this or that member of the Government; sometimes from the Ministry of Industry and Commerce, sometimes from the Ministry of the Treasury, sometimes from elsewhere. It seemed to me obvious that American capital had been invested in the Company on the understanding that the original contract was a valid one, that consequently, in the interest of the American investors, the contract should be respected and observed until such time as, through appropriate negotiation, a new contract might be made. Moreover, authoritative negotiation seemed necessary for any sale of stock from American to Spanish holders and, according to what he had just said, negotiation might be necessary to determine what amount of the credits and blocked balances would be immediately transferred from pesetas to dollars. Absolutely essential, however, to all such negotiations was the designation by the Caudillo of a person or a committee with authority and full power to negotiate on behalf of the Spanish Government. The Caudillo said this last suggestion was an excellent one and he would take immediate steps to see that such a negotiating commission was set up and that it deals promptly and in a businesslike way with the Company. He would reaffirm his purpose of respecting fully American investments in Spain and the interests of the United States here.

  1. Not printed.
  2. Miguel Primo de Rivera, Marques de Estella, overthrew the Spanish Ministry in 1923 and established a Military Directorate. He resigned his office in 1930.