The Chargé in Nicaragua (Bernbaum) to the Secretary of State

No. 1736

Sir: I have the honor to refer to my telegram no. 307 of August 1568 and previous correspondence with the Department regarding the local financial flurry aroused by refusal of the Bank of America to continue advances under its loan agreement with the Nicaraguan National Bank.

As previously reported, the unexpected action of the Bank of America left the Nicaraguan National Bank with only about $60,000 in liquid dollar balances as of August 12. With refusal of the Federal Reserve Bank of New York to make an otherwise normal 90–day advance of $500,000 against earmarked gold owing to the de facto character of the Government (see Embassy’s A–291 of August 12, 194768), it was then considered that the National Bank’s gold assets in the United States had been frozen. Such assets comprised:

Collateral with Bank of America $2,750,000
Earmarked with Federal Reserve Bank of New York 1,594,385
International Monetary Fund 500,000
Collateral with Bank of America 904,159
Total $5,748,544

As against this, the National Bank has already received from the Bank of America and expended net advances of $2,155,000 on loan account.

The crisis broke on August 13 when, as a result of the foregoing situation, the National Bank discontinued dollar operations: all new and pending import applications as of that day were rejected and importers attempting to meet sight drafts covering merchandise already at Corinto were told that the National Bank was not in a position to furnish the dollars.

[Page 869]

The immediate result was a sharp rise in the black market rate for dollars and a state of panic and confusion in commercial circles. With replacement costs uncertain, some merchants discontinued sales and others raised prices markedly. Rumors of economic sanctions were prevalent, and anxiety was, if anything, accentuated by the following statement to the press on August 13 by Rafael Huezo, Manager of the National Bank:

“Commerce has been abusing the law of October 15, 1945 which authorizes applications for foreign exchange through the deposit of 60 percent of the total value of the imports involved. The National Bank has been forced to issue an order temporarily restricting the entry of imported goods, since there are in warehouses and in the customs stocks of goods which could not be consumed in a year. Commerce has violated its obligations by absorbing more than its share of foreign exchange. The Bank is now disposed to maintain an equilibrium between imports and exports.”

The situation remained tense until August 15 when the admittedly* unexpected purchase by the Federal Reserve Bank of New York of 15,000 ounces of earmarked gold valued at $525,000 permitted the limited resumption of dollar operations. Although not yet restored to normal, economic conditions have as a result receded from the panic stage. Black market dollar quotations have declined from a momentarily frenzied high of C$9.00 to about C$5.50–5.75. The quotation on April 12 was C$5.35. Shops have been reopened and general business activity has returned to the limited levels consonant with the currently acute political situation.

An examination of the National Bank’s foreign exchange position reveals that the action of the Bank of America has merely served to precipitate the initiation of severe import and exchange restrictions which were in any case inevitable. As itemized above, current gold and exchange assets prior to the recent sale of gold amounted to $5,748,544. Taking into consideration outstanding gold-secured loans from the Bank of America of $2,155,000 and the non-liquid character of the $500,000 deposit with the International Monetary Fund, liquid foreign exchange assets totalled only $3,093,500. (This represents a decline of $2,170,250 from the comparable balance on December 31, 1946 of $5,263,800). As against this, collection accounts payable aggregated $1,200,000 and pending import orders to approximately $5,000,000§. [Page 870] With estimated foreign exchange receipts during August–December estimated by the National Bank at only $1,500,000, the end of the year will, even assuming the discontinuance of all import licenses and non-import dollar transactions, find the National Bank with an exchange deficit for the year well in excess of $6,000,000, and dollar-bankrupt. Resumption by the Bank of America of its loan obligations would, in view of the stringent repayment terms provided by the loan contract, only reduce the pending deficit by about $1,000,000 for the current year (see despatch no. 1346 of January 22, 1947).70

. . . . . . .

As stated to me yesterday by Rafael Huezo, the anticipated foreign exchange shortage has led to the decision to restrict all future import applications to only scarce and essential items. Pending the elaboration of a new schedule by the National Bank, no new import applications are being accepted. He assured me, however, that existing dollar obligations are being fulfilled, and in illustration stated that only $200,000 is left of the $525,000 sale of gold last week to the Federal Reserve Bank of New York. Further gold sales are contemplated. It is also planned to liquidate the loan account with the Bank of America in the event the latter does not see its way clear to comply with the loan contract.71

From the political viewpoint, the incident is generally interpreted as having been related to economic sanctions by the United States, and has reportedly reinforced the belief of opposition leaders, including General Chamorro, that “further” sanctions will soon eventuate. I shall, of course, do my utmost to discreetly disabuse them of this idea as running counter to our repeatedly-declared policy of nonintervention.

The foregoing belief is, so far as can be ascertained, based on: a widely publicized prediction from Washington by Dr. Fernando Sacasa during the first days of August that economic sanctions were in the offing; the wording of the Federal Reserve Bank’s refusal to grant the requested 90–day loan; and the apparently evasive policy of the Bank of America. …

Although under the circumstances virtually swamped by appeals for information from the press, businessmen, and “politicos”, the Embassy refrained from any comment pending news from the Department. Following an earlier statement to General Chamorro that there was no [Page 871] reason to believe sanctions were contemplated, comment was restricted to conversations with General Somoza (see Embassy’s A–287 of August 7, 1947), Rafael Huezo and the Panamanian Minister (see Embassy’s A–293 of August 1372) in which I expressed the opinion that the matter was of a legal rather than political nature. This was confirmed to Rafael Huezo upon receipt of the Department’s telegrams no. 187 and 190 of August 14 and 16,73 and made public following a concurrent telephone call from José Sandino in Washington to the then de facto President, Benjamin Lacayo Sacasa (see Department’s telegram no. 191 of August 16, 194772). A reporter’s request for confirmation of United States sanctions was on August 15 answered with substantially the following statement: “the Department of State has not and is not exercising sanctions in accordance with its already well known international policy.” It is still, however, apparently considered in both official and opposition circles that sanctions are either in effect through coercion on the Bank of America or were discontinued in the face of an unexpectedly strong reaction. Characteristic press clippings are enclosed.74

It appears that the net result of the incident has been to further weaken Somoza’s political position and encourage opposition hopes that international action will force him out.

Respectfully yours,

Maurice M. Bernbaum
  1. Not printed.
  2. Not printed.
  3. By Rafael Huezo, Manager of the National Bank. [Footnote in the original.]
  4. See Report No. 15 of February 11, 1947 (Nicaraguan Foreign Exchange Position). [Footnote in the original.]
  5. According to Rafael Huezo (see telegram no. 304 of August 14, 1947). [Footnote in the original.]
  6. Deposits (60%) with the National Bank against imports amounted on July 31 to C$14,900,517. [Footnote in the original.]
  7. According to Rafael Huezo (see telegram no. 304 of August 14, 1947). [Footnote in the original.]
  8. Not printed.
  9. In airgram A–298, August 22, the Chargé reported that Rafael Huezo, Manager of the Nicaraguan National Bank, had informed him that morning that the Bank of America had on that date telephoned to advise him that advances under the loan contract would be resumed (817.51/8–2247).
  10. Not printed.
  11. Telegram 190 not printed; for extract from telegram 187, see footnote 61, p. 866.
  12. Not printed.
  13. Not reprinted.