832.51/3–548
Memorandum by the Chief, Division of Brazilian Affairs (Dawson) to the Embassy in Brazil
Mr. Corliss2 of FN, who was present, informs me that Mr. Otavio Bulhões3 at a meeting at the Treasury yesterday formally requested, on behalf of the Brazilian Government, an extension from July 15, 1948 to July 15, 1949, of the due date for the repayment of the $80,000,000 which has been advanced to Brazil by the Treasury from the Stabilization Fund. Mr. Frank Southard of the Treasury presided over the meeting and the Federal Reserve Board as well as the Department was represented.
Three alternative suggestions were made to Mr. Bulhões as possible solutions. The first was that Brazil sell the earmarked gold which guarantees the advance and thus repay it. Mr. Bulhões said his Government would be loath to do this because of the psychological effect in Brazil and pointed out that the gold was desired as reserves in connection with the proposed establishment of a central bank in Brazil.
The second suggestion was that the Brazilian Government approach the Federal Reserve Bank of New York to take over the $80,000,000 credit. To this Mr. Bulhões replied that he understood that Federal Reserve practice was to advance credits only for short periods limited to three months. It was then further suggested to him that he might endeavor to get special treatment in this particular case on the basis of the circumstances. Mr. Bulhões had stated that the Brazilian Government was making definite plans for repayment by the expiration of the year covered by his request.
The third suggestion was that a credit might be arranged with private banking sources in view of the fact that the amount was fully covered by earmarked gold. Mr. Bulhões’ rejoinder to this was that it [Page 376] would cost his Government more than an extension of the credit by the Treasury since interest rates would be higher. Mr. Southard pointed out that, while this was doubtless true, the Treasury could hardly place itself in the position of competing with private banking when the latter was in a position to handle specific business.
Mr. Bulhões was told that the Stabilization Fund was at such a low level that compliance with his request would be most difficult. However, the Treasury would consider the matter further and let him know its decision at a later date. It was mentioned that Secretary Snyder4 was out of town and that he would be consulted.
In the conversations between the Treasury, Federal Reserve and Department representatives before and after the meeting with Mr. Bulhões it was pointed out that the Stabilization Fund was in fact almost exhausted and that the Treasury had made firm commitments to various European countries which would more than absorb the present balance. Thus, if the Brazilian request were to be met, sale of gold by the Treasury would be necessary.
Strong opposition to meeting the Brazilian desires was expressed by both the Treasury and Federal Reserve representatives. In addition to the other reasons, touched on above, this rested largely on Brazil’s record in regard to the International Monetary Fund and Bank. If Brazil were to declare its par rate and make its contributions, it could properly call on this source for aid. In effect, it was using the Treasury to play off against the Bank and Fund. In this connection, Mr. Bulhões had remarked that the Brazilian Government had at last entered into conversations with the Fund but these do not appear to have reached any conclusion as yet.
It was made clear by the Treasury representatives that there was little chance of approval by the Treasury of the Brazilian request unless the Department were prepared to support it strongly on political grounds. It occurs to me that a path out of the dilemma might be found by in some way, although probably not formally, tying full Brazilian participation in the International Fund and Bank in with extension of the credit and letting them have the latter if they complete the former. There are four months available to work out something along these lines.
After all, the Treasury would run no risk in extending the credit and failure to help the Brazilians in this matter would be taken by them as the culmination of what they think is undue harshness on our part in dealing with their financial needs. The Brazilians are completely aware of the fact that the Treasury has made stabilization advances to others without collateral and can be counted on to be most unhappy [Page 377] over our unwillingness to give them a helping hand when we have full security.
Another possibility which might be explored would be getting a group of banks doing business in Brazil, such as the National City Bank, the First National of Boston, Chase and the Guaranty Trust, to take over the loan at a low interest rate. The present interest on the stabilization credit is 1¾%. I do not imagine the Brazilians care much where they get their dollars as long as they do not have to pay too much for the privilege of using them. The loan would be without risk for the private banks with the maintenance of the present gold collateral and they could certainly get kudos in Brazil which would redound to their and private American business’ benefit if they could be generous on the interest rate.
Still another possibility might be for the Brazilians to arrange with the Federal Reserve Bank of New York for a three-month credit starting July 15, 1948, even if they cannot get it for the full year they desire. This would at least give them seven months from now to decide on what they are going to do about the International Fund and the chances are that the Federal Reserve would extend the credit for at least one additional ninety-day period. Bulhões should, it seems to me, be encouraged to approach the Federal Reserve and private bankers as possible alternative strings to his bow instead of just counting on the Treasury.
Could I have your reactions on this? The Treasury will probably want to reach a decision on the Brazilian request some time next week. In view of your scheduled departure for Rio de Janeiro on March 10, I think any action should be taken prior to that time so as to get the benefit of your personal approach.