314. Memorandum From Rudolf E. Cahn of the Office of South American Affairs to the Assistant Secretary of State for Inter-American Affairs (Holland)1


  • Brazil: Program of Economic Reforms (Your memorandum of July 30 to Messrs. Lyon, Cale, and Dearborn)2


There is attached a Program of Economic Reforms for Brazil for discussion with the new Brazilian administration. This program was prepared and agreed upon by OSA, AR, and E. Copies of this program have been sent to Mr. Corbett, who will clear it with Treasury and Eximbank.

The basic conclusion reached was that any special U.S. assistance should be contingent upon real progress by the Brazilian Government in achieving economic stabilization through such corrective measures as are wholly within its own capacity.


That you approve the conclusions and program of action.3



I—Objectives of Economic Reform

In our talks with the Brazilians we should impress on them that prompt and firm measures are required to achieve the following objectives of economic policy:

The containment of inflation;
The correction of the deficit in the balance of international payments;
The correction of the imbalance among the various sectors of the development program.

II—Measures to Achieve Objectives

While we have definite views as to the concrete measures necessary to achieve these three objectives, we are confident that the Brazilians have sufficient competence in these fields to formulate the necessary measures if the new Government is firmly determined to undertake and carry out those measures. A list, including both short or long-term measures, is attached hereto. Action must be undertaken vigorously across the broad front if success is to be achieved. Three areas, however, are of supreme importance if Brazil is to escape from chronic financial instability and repeated crises; these are:

The control of the quantity and destination of bank credit;
The achievement of balanced Government accounts;
The reform of the exchange system.

III—What the Brazilians Will Probably Ask For

In discussing with Brazil the problem of her economic instability, it seems probable that she would request us to assist her along any or all of the following: (1) refunding of her short-term indebtedness, (2) a substantial loan to be used for balance of payments purposes and to provide an adequate reserve in connection with exchange reforms and (3) development loans primarily as recommended by the Joint Commission.

It may be recalled that we have come to the assistance of Brazil in connection with previous crises and at each time the Brazilians indicated that they would take remedial actions to overcome their economic and financial difficulties. In each case we expected that our assistance would induce more energetic action on the part of Brazil in instituting and carrying out the necessary corrective measures. This was the case in connection with our granting of the $300 million Export-Import Bank loan in 1953, the $160 million gold loans by the Federal Reserve Bank in 1954, and again (but to a lesser extent) the $75 million Export-Import Bank credit in February 1955.

IV—U.S. Attitude

We should emphasize that any requests from the Brazilian Government would receive careful consideration but that special U.S. assistance is necessarily contingent upon real progress by the Brazilian Government in achieving economic stabilization through such corrective measures as are wholly within its own capacity. Also, if real progress is made the IBRD would be more respective for development loans.
In the light of prospective export earnings and import requirements, we feel that Brazil has very little capacity to service additional short-term indebtedness.
The only short-term indebtedness which currently imposes an appreciable burden is the $300 million Export-Import Bank loan of 1953. (Payment on the $200 million gold collateral loan of 1952 from private banks will start in 1959;5 the 1955 Eximbank credit of $75 million, of which only $45 million was utilized, will begin only after the $300 million is paid off.)

The current annual payments on the $300 million loan amount to $50.4. If reduced say by one-half, the Brazilian foreign exchange budget would be helped, but not to any important degree unless other assistance is extended at the same time.

If all we can do is to alleviate the current repayment burden say by $25 million for one year, it is hardly likely that we can induce the new Government to take the vigorous and unpopular measures which will be necessary to achieve economic stabilization and the other economic objectives.

List of Short or Long-Term Measures6

A—Monetary, Banking and Fiscal Measures

Private Credit Control. Strengthening present policies for qualitative and quantitative control of credit to the private sector of the economy.
Government Deficits. Careful examination of federal government expenditures with a view to economies and a reduction of the deficit; extra-budgetary credits should be avoided, unless revenue to cover them is provided simultaneously.
Government Enterprises. Measures to place government enterprises, notably transportation and other utilities, on a self-supporting and efficiently operating basis; a raising of rates and improvements in management are needed. Some enterprises might be sold to private investors.
State and Local Deficits. Measures to reduce state and local deficits, or to provide for their financing from non-inflationary sources.
Monetary and Banking System. A review of the monetary and banking system designed to facilitate the implementation of monetary [Page 677] policies; plans should include the establishment of a central bank.
Taxation. A review of the tax and revenue system with a view to improved administration and the adoption of desirable reforms.
Foreign Exchange System. Simplification of the exchange system and the adoption of improved procedures, looking to the encouragement of both a near and a long-term expansion of exports, and to the eventual establishment of reasonable freedom in the purchase and sale of exchange at a unitary rate.

B—Other Measures

Coffee. A coffee policy which permits coffee exports to move in large volume. (Coffee is a delicate subject and the U.S. should speak only in general terms, preferably after Brazilian initiative.)
Transportation Facilities. Measures to improve and extend transportation facilities of all types; better organization and management is needed.

Solution of the Petroleum Problem. Importance of easing the pressure this commodity exerts on the foreign exchange budget by developing domestic sources of supply.7

  1. Source: Department of State, OSA Files: Lot 58 D 42, Brazil 1955—Economic (General). Confidential. Also addressed to Lyon. Dearborn and Cale concurred with the analysis presented in the enclosure.
  2. Not found in Department of State files.
  3. Holland initialed his approval on the source text.
  4. Confidential. Drafted by Cahn, Turkel, and Joseph Rosa, Adviser, Economic Development Division.
  5. For documentation on these loans, see Foreign Relations, 1952–1954, vol. iv, pp. 570 ff.
  6. A nearly identical copy of this list was drafted by Rowell and forwarded to Holland on September 15. (Department of State, OSA Files: Lot 58 D 42, Brazil 1955—Economic (General))
  7. In a memorandum to Lyon and Holland of October 17, attached to the source text, Cale made the following comments:

    “I concur in the attached memorandum. I also believe that prior to any discussions with Brazilian officials on the subject we should have a rather clear idea as to the magnitude, and possibly the nature, of the Brazilian economic program which we would help finance, provided the Brazilian Government takes the type of action we believe necessary to maintain economic and financial stability. It is my understanding that some consideration has already been given to this matter. I believe that we should attempt to reach the maximum measure of agreement possible with the E area and with the Treasury Department, at least, prior to any discussions with Brazilian officials.”