Memorandum by Mr. Richard F. O’Toole of the Division of Brazilian Affairs to the Assistant Chief of the Division ( Braddock )1


The recent experience of Mr. Green2 (of our Rio Embassy) in trying to find out the quantity and quality of the coffee pledged for repayment [Page 488] of this loan, strengthens certain beliefs which I have long held about this transaction,—namely:

that in the absence of a satisfactory, independent verification any information from Brazilian Government sources regarding either the quantity or quality of this coffee should be received with reservations.
that the Brazilian Government has no intention of recognizing its obligation to the bondholders of this loan.
that unless this Government exerts pressure upon the Brazilian Government the bondholders will never be paid off and the collateral will sooner or later be wrongfully converted.

Last October I prepared a memorandum in which I set forth the history of this transaction and, apart from the moral considerations involved, mentioned a number of reasons why it would be in the Department’s interest to ask the Brazilian Government to call these bonds for redemption. I am now of the opinion that it is both urgent and advantageous to take such a step in the immediate future, because:—

Official announcement has been made by the Brazilian Government that the National Coffee Department will be liquidated on June 30 next. As that organization is the custodian of this pledged coffee its prospective liquidation affords ample reason for maknig pointed inquiries of the Brazilian Government as to its intention with regard to this collateral.
On the same date the present coffee subsidy arrangement will expire, so that subsequent policy with regard to price ceilings must be determined by that time.
The Brazilian Government will shortly send a representative to this country to take up the question of future coffee price policy.
The Brazilian Government intends to seek substantial capital assistance in this country in the near future.

If we are to take action in this matter our first consideration is that of determining procedure. Is it to be looked upon as a matter related to coffee or as a transaction related to public finance? Should action be joined to discussions about coffee price policy or should it be related to Brazilian negotiations for new capital?

If the matter is brought up in connection with coffee price policy discussions then we ought to round out our effort by also including the subjects of coffee export taxes and sales and consignment taxes. Recently Brazilian coffee planters memorialized the Minister of Finance3 and included requests that the export tax on coffee be eliminated and that the sales and consignment tax law be revised. We, accordingly, ought not to lose the opportunity to forcefully press these tax matters in addition to that of the liquidation of the bonds, for it [Page 489] is about time that we got some return in exchange for the forty or fifty million dollars of taxpayers’ money which we are handing out to these planters under the coffee subsidy.

On the other hand it might prove better strategy to join this question of bond redemption to the coming discussions of Brazil’s credit requirements for the following reasons:

Any announcement of Brazil’s intention to seek capital assistance in this country would almost certainly stimulate strong objection on the part of Coffee Realization Loan bondholders. With a congressional election in the offing, the possibilities of such a situation are too apparent to ignore.
The success or failure of any Brazilian Government effort to obtain such new capital would, in light of the foregoing, probably depend entirely upon the redemption or nonredemption of these bonds.

  1. Marginal notation by Mr. Braddock reads: “RFO, Good! Why not approach problem from both angles, coffee and finance, in turn as each offers opportunity? I suggest you begin to prepare the ground with Sellon and with Corliss. D.B.”
  2. David S. Green, Senior Economic Analyst.
  3. Gastão Vidigal.