852.75 National Telephone Co./9–3044

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

No. 3158

Sir: I have the honor to inform the Department of the developments concerning the difficulties of the International Telephone and Telegraph Corporation since my despatch No. 3102, September 19, 1944.

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In the Official Bulletin of the State of September 24, 1944, there appeared a decree of the Minister of Labor which limits or prohibits the employment of foreigners in technical and managerial positions. Industries may be permitted, by special authorization of the Council of Ministers, to employ foreign technicians and specialized personnel for a maximum period of seven years but companies rendering public service are prohibited by Article 2 from employing foreign personnel in positions of management, submanagement, as managing directors, superintendents, inspectors, chiefs of personnel, or in positions conveying technical or administrative authority. Although the government may concede authority for the temporary employment of foreign personnel in such companies, this may be only for the time indispensable to substitute Spanish personnel. A transitory article of the decree provides that foreign personnel must be dismissed within a period of three months from the date of its publication. A translation of the decree is being transmitted herewith.63

It will be noticed that foreigners are not barred from policy making or managerial positions in industry; the descriptions applying to the posts affected in public utilities include every post now filled by Americans in the Compañía Telefónica Nacional de España and leads to the strong suspicion that this legislation was designed as a flank attack on that corporation.

The issuance of the decree at this time has added significance as it coincides with the apparent expiration of the contract between the ITT and the CTNE for technical and managerial services. At the meeting of the Board of Directors on August 25th, Mr. F. T. Caldwell in his capacity as Managing Director, called attention to the fact that the service contract with the ITT should be renewed on August 29th. He purposely refrained from mentioning the fact that a law of 1940 authorized the automatic extension of contracts which had been affected by the civil war for the period in which they were not fully operative. According to the ITT’s interpretation of the 1940 law, the service contract therefore continues operative for approximately twenty months more. The Directorate agreed that a new service contract with the ITT should be drawn up and should be discussed and passed upon at a subsequent meeting. Apparently the decree of September 23rd was designed to prevent the employment of Americans by the CTNE under the new service contract.

I am presenting a note to the Foreign Office, a copy of which is enclosed, pointing out that as the concession contract permitted the CTNE to employ foreigners up to 20% of its personnel and as Article 26 specifically provides that the terms of the contract cannot be [Page 436] modified by unilateral action on the part of the State, I assume that the decree of September 23rd does not apply to the CTNE.

On September 26th the Board of Directors held another meeting. After the usual business had been concluded the Government Delegates presented to the Directorate a note received by them from the Undersecretary of the Presidency of the Government notifying the company that it must give strict compliance to the provisions of Article 92 of the regulations and stating that noncompliance with the obligations set forth in that regulation will prevent the legal application of resolutions which may be arrived at in the ordinary and extraordinary stockholders meeting and in meetings of the Board of Directors or other organisms or of persons whose authority emanated therefrom. A copy of the notice and translation thereof are enclosed.64

These new government acts following so shortly after my conversation with General Franco on September 11th impelled me again to discuss this entire matter with the Minister for Foreign Affairs during my interview on September 27th. I informed him that in the course of my conversation with General Franco on September 11th I had understood him to indicate quite clearly (1) that he welcomed American—and indeed foreign—investments in Spain which would be amply protected and justice rendered them by the Spanish Government; (2) that he was minded to appoint a representative or a special commission to treat with the management of the Telephone Company and to reach with them an amicable and just settlement of questions in dispute. I had made a point in my conversation with the Caudillo that the contract between the Government and the Telephone Company should be respected and observed until such time as, through mutual agreement, and in accordance with the present terms of the contract, a new and altered agreement might be made. However, since that conversation with General Franco on September 11th, the most arbitrary action had been taken, quite contrary to the words of the Caudillo as I had understood them. For example, there was a decree of September 23rd, published in the Official Bulletin and signed by General Franco, prescribing that all foreign personnel occupying managerial, technical, or administrative positions in public service companies, that is, in the Telephone Company, must quit those positions within three months, that is, by December 23rd of this year. As a matter of fact, of the total number of employees of the Telephone Company, 99.94 percent were now actually Spanish, despite the fact that the contract prescribed merely that at least 80 percent had to be Spanish. This decree of September 23rd was only one of the highhanded, arbitrary acts of the Government. On September 26th had [Page 437] come a communication from the Presidency of the Government demanding strict, immediate compliance with the demand made in August for transfer of 51 percent of the stock of the Company into Spanish hands, and declaring that until such compliance was forthcoming any and all action of the Company and its Board of Directors would be illegal and unlawful. The Minister had given me to understand at San Sebastian in August that the demand then made by the Presidency of the Government would be suspended pending negotiation of all the difficulties between the Government and the Telephone Company. Not only had there apparently not been a suspension of the demand, but it was now being renewed and attended with the direst penalties.

From these latest acts—the decree of September 23rd and the demand of the Presidency of September 26th—it was abundantly clear that the Spanish Government whatever might be the professions of the Caudillo, was actually doing by indirection what it had no right under the contract to do directly and legally. To all intents and purposes, it was nullifying the contract and thereby it was endangering a large and important foreign and American investment. My Government did not propose to sit idly by at such flouting of justice. It intended to protect American interests unjustly attacked or undermined. I was sure that if and when the real facts in the case became public property there would be a most violent repercussion of American public opinion. American investment had been made with the clear understanding that the Spanish Government would respect and observe the contract it had freely made with the Telephone Company. It was now violating and nullifying that contract. If the Spanish Government wished to abrogate the contract or to modify it, it could do so legally and in accordance with contractual provisions. To achieve its ends, whatever they might be, by high-handed, unilateral action was obviously unfair and unjust, and quite belied the Caudillo’s assertion that he welcomed foreign investment in Spain and wished to have it protected and justly treated.

The Minister said he was gradually familiarizing himself with the whole involved subject of the Telephone Company. Unfortunately he was personally in a difficult position, in as much as he was closely identified in business matters with Urquijo, the President of the Company. He would do his utmost, however, to draw a line between his personal interests, which were really those of the Telephone Company, and his official position as Minister of Foreign Affairs. He was sure the Caudillo meant what he had told me on September 11th but he must confess he thought the Caudillo was considerably misinformed about the history of the Telephone Company. There were too many self-seekers with personal axes to grind in the matter who had access to [Page 438] the Caudillo and prejudiced him against the company. He knew the Caudillo wanted to be perfectly honest and fair and square. However, he needed information of an accurate sort and he, the Minister, was now seeking to collect all such information and get it before the Caudillo. He had a luncheon engagement—I understood for today, though perhaps tomorrow—with Pablo Garnica,65 and he expected to obtain at lunch and in conferences afterwards a great deal of essential information. He did not believe that any immediate action could be taken to reverse the decree of September 23rd or the communication from the Presidency of September 26th, but, after all, these were details. As a businessman, he himself felt that such actions were injurious to Spanish credit abroad. He thought Carceller66 knew a good deal about the whole matter and he expected to talk with him at length as well as with Garnica. He would go into the matter and would discuss it, he hoped more intelligently, with me at a future date.

I said I, too, felt the Caudillo was laboring under considerable misapprehension and misinformation concerning the Telephone Company and its past. In our conversation of September 11th, I had not wished to take time to reply in detail to many of the specific allegations the Caudillo had then made, nor did I have at that time sufficient detailed and technical information to answer his allegations with precision and accuracy. Consequently, after the conversation, I had requested my Commercial Attaché to obtain from the management of the Telephone Company the necessary specific information which might serve to disabuse the Caudillo of any misinformation or misapprehensions. The results had now been embodied in a fairly elaborate memorandum which I would hand to the Minister, in both English and Spanish versions, with the request that, if he saw fit, it should be put into the personal hands of the Caudillo. The Minister said he welcomed very much just such a memorandum and he was sure the Caudillo would welcome it likewise. He would see to it that, after reading it himself, it would be transmitted promptly for the personal attention of General Franco.

In a recent conversation between the Minister of Industry and Commerce and my Commercial Attaché, the former indicated a desire to meet informally with representatives of the ITT to discuss the Telefónica problem more leisurely than would be possible at his office. Mr. Caldwell invited the Minister to lunch with him and the other representatives on Thursday, September 28th. In addition to the Minister and Mr. Caldwell there were present Judge Pitkin, one of the New York legal representatives of the ITT, Mr. Francis White, and the ITT’s Spanish attorney, Sr. Don José Beltrán.

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According to Mr. White, the luncheon lasted from 2 p.m. to 6 p.m. and characteristically Carceller did about fourth-fifths of the talking. At the suggestion of the Embassy the company officials first sought to have the Minister increase the sum of exchange which would be made available for remittance against arrears and to obtain a promise that earnings and charges would be released currently. Carceller insisted that the dollar exchange position does not admit of the release of anything above the token payment of $5,000,000 which he had proposed to the Commercial Attaché some weeks ago nor could he give a definite commitment regarding the remittance of current earnings.

The question of the sale of American shares to Spanish nationals was only touched on obliquely, that is, the Minister deprecated the various notices which had been sent to the company by the Presidency of the Government and the notes sent by the Embassy in connection with the various complaints and claims of the company as having very little practical effect. He reiterated his previous statements to the effect that Franco is opposed to State ownership of the company for the several reasons that public administration would inevitably greatly increase personnel and operating costs, that efficiency would decline and that the detractors of the present regime would immediately allege that such transaction had been consummated for the financial benefit of Franco and his collaborators. The problems of the Telefónica have been the subject of Cabinet discussions, according to Carceller, and within a relatively few days, possibly early next week, representatives of the company would be asked to meet with a commission appointed by the Government to discuss a revision of the contract. Carceller did not refer to the possibility that these discussions might encompass proposals for the acquisition of American-owned shares but the representatives of the ITT concluded that the question of Spanish majority ownership would be one of the changes desired.

I proposed to continue pressing the Minister of Foreign Affairs on behalf of the company until a solution is found for its many problems.

Respectfully yours,

Carlton J. H. Hayes
  1. Not printed.
  2. Not printed.
  3. Pablo de Garnica y Echevarra, Spanish industrialist and banker.
  4. Demetrio Carceller, Spanish Minister of Industry and Commerce.