278. Letter From the Ambassador in Brazil (Cabot) to the Assistant Secretary of State for Inter-American Affairs (Rubottom)1
Dear Dick: Four months have now gone by since I arrived in Brazil and, to my great surprise, the shoe has not dropped, either on my toe or, so far as I can see, anywhere else. I had assumed on coming here that I should be confronted with a harassing campaign to get large loans without any undertaking in return that they would be properly spent. I will not say that broad hints have not been cast out from time to time; for example, you will recall that the President [Page 745] button-holed me the very day I presented my credentials;2 and Schmidtty may have been looking for loans when he had lunch with me, though he said he wasn’t.3 Nevertheless, I cannot say that the pressure so far has been heavy.
Brazil has been able to scrape by for six months primarily because of coffee exports which were much bigger than expected. This is a process which can scarcely continue. Brazil has probably wanted to scrape by, partly in response to Walter Moreira Salles’ idea that there should be a breathing spell and partly because having thumbed its nose very publicly at the IMF, it did not choose to go round again in public asking for money which probably would not be forthcoming except on terms which Brazil had just rejected.
I do not think that we should be deceived by this lull. The situation is gradually deteriorating, and I would say that our relations with Brazil were deteriorating also. In part, this was inevitable. It was a risk which we took with our eyes open when, after Brazil publicly stuck out its tongue at the IMF, we refused to furnish any new money. I have no doubt that we then thought the Brazilians would grab the gold loan which they insistently sought and also would snatch at our offer to reschedule debts. These things have not yet happened.
From our viewpoint, the most discouraging thing is that the internal financial position of the Government is going from bad to worse. There is no evidence that I can see that President Kubitschek has any real intention of economizing. On the contrary, his whole philosophy is one of all-out development and the hell with the economic consequences. He is not alone in this. I would say that the great majority of Brazilians believe almost hysterically in development and that they are not emotionally able to appreciate the very direct relationship between development at too rapid a pace and the price of feijão. Of course, the more literate and conservative elements do understand this relationship, but they are not running the show at the present time.
The deterioration can be shown in various ways. The drop in the cruzeiro from 150 when I arrived to about 200 today is one symptom. The decision of the Government to buy beans and meat abroad and to put $1 million a week extra into the official exchange market is another. A third is the increasing rate of inflation associated with the increasing rate of paper money issuance. Our Treasury Attaché thinks that by one sleight-of-hand measure after another the present administration can probably ride out the storm until a new one comes into office, but in that event the new administration will take over with the [Page 746] ship of state on the point of sinking. I find this a very disturbing thought, particularly when one of these fine days we may be confronted with the problem of synthetic coffee.
We should realize that Brazil’s financial record is not quite as bad as it has often been pictured. For example, in Washington I heard a good deal of talk about the “billion dollars in balance of payments help which Brazil has received since 1953.”4 In point of fact, the net balance of payments help has been barely half of this and a good deal of the gross has actually been paid. Thus, nearly two-thirds of the $300, 000, 000 which Brazil borrowed in 1953 has been repaid. There has as yet been no default on Brazil’s obligations. Herbert May, our Treasury Attaché, prepared some figures for us on total foreign loans and repayments from 1953 to 1958 which showed a heavy deficit only in the last year; until then, income approximately balanced outgo. Brazil has sharply curtailed imports, particularly of luxury items; more drastic curbs would cut into essentials or development. Brazil’s balance of payments problem has been only partly due to extravagance, and it has been in very substantial measure due to heavy short term maturities. (Of course, this is not to deny Brazil’s need to take the measures necessary to expand its exports, particularly in the face of the probable continuation of decline in world coffee prices.)
The cold shoulder we have given the Brazilians in their economic plight has had its inevitable repercussions on the political orientation of the Brazilian Government. One sympton of this is the trade mission which is now in Soviet Russia.5 A second is the meeting at Itamaraty which I described in my telegram No. 770 of November 20.6 A third is the temperament so often displayed at inconvenient moments by Augusto Frederico Schmidt. A fourth is the way in which President Kubitschek impatiently harps on the need for development in practically every major speech he makes. A fifth is the way in which we have been blamed for the meat and feijão crises. (The American bean scandal begins to look like a Communist masterpiece, but if it is I hope we can make it boomerang.) I think we must anticipate a rough going [Page 747] over at the Quito Conference, with the Brazilians, who have so often in inter-American conferences acted as moderators, now taking the leadership in turning the heat on us.
The question is: What, if anything, should we do about it? It would seem to me that there are really two problems. One concerns the long-term development of Brazil, which is obviously a matter of great importance to us. This involves the subsidiary problem of making it clear to the Brazilians that, although we have our temporary differences with them in regard to financial policy, we nevertheless hold firmly to the historic concept of continued cooperation between our two great countries and that we want to see Brazil strong, prosperous, progressive, and respected. In his anxiety to be loved, Schmidtty expresses a national Brazilian yearning which, I am afraid, we have not adequately satisfied in recent years, [remainder of paragraph (6 lines of source text) not declassified]
Our short-term objective is obviously to see that Brazil gets through the present administration without some major over-turn and survives in such shape that a new government taking office can restore Brazil’s economic stability. We have, if I understand correctly, refused to loan Brazil new money for balance of payment purposes, partly because we did not wish to break a pattern we had established with many other nations, but partly also because we did not wish to have the new administration’s financial head pushed under water even before it took office. I think this was a wise decision, since we cannot fill a bottomless pit with gold.
While we must keep long-term objectives in mind, it seems to me there is little reason at present to do any specific planning about them; we do not now know even who the next president will be. Our present concern should be to get through the next fourteen months with as little damage as possible to Brazil’s economy and development, and to the relations between the two countries.
It does not seem to me that our present negative attitude is a very satisfactory way of attaining these aims. It lends itself to such charming interpretations as Hanson’s Letters have been putting on it7—and the Brazilians in their sensitive mood are likely to accept such artful distortions as gospel. It runs counter to the Brazilian yearning to be loved by us—and the more I think of Alzira Peixoto’s phrase the truer I realize it is for Brazilian psychology, however strange we may find it. More important, it does nothing to stop the economic rot here; and it hobbles Brazilian development.[Page 748]
I feel that we do not adequately appreciate that, if there has been graft and waste, Brazil’s progress under Kubitschek has been very rapid. The figures of increases in the production of steel, electric power, alkalis, ships, oil, etc., are very impressive. Roads and railways are being built. In oil, we thought six years ago that Petrobras would be a flop; in that time oil production has gone up twenty times. Though I am still skeptical that they will become self-sufficient in oil in the next few years as they anticipate, it seems to me we would find it difficult to argue now that we were right and they were wrong; on the contrary, I doubt that private initiative would have developed Brazil’s oil resources as fast. In short, they have spent a lot of money, but they have a lot to show for their money.
Even their “extravagances” don’t appear so reckless on examination. The principal reason for their inflation is coffee financing—and this administration inherited this problem, though it has certainly not contributed to its solution. Brasilia is expensive, but it is only a small part of the broad development picture, and by securing for the government a good part of of land values increment (they bought up a block of 5000 square kilometers and are now selling it in lots) they will recover much of their outlay, if not the inflation it engendered. The Brazilians suffer from our defect of talking too much about their defects—and finding that foreigners take their exaggerations seriously.
You naturally wish suggestions as to what we should do. Here are some:
- It would be most helpful if the President could come to the inauguration of Brasilia. By that time the airport there should be able to take the President’s jet, and if he came on to Rio he could presumably do so in a prop plane. The Secretary should also visit Brazil at an early opportunity and not repeat Acheson’s and Dulles’ mistake of waiting too long.
- I am glad to see that the Secretary invited in Moreira Salles. An invitation to Lafer to come to Washington to discuss Quito would be most helpful, also any similar gesture to show how important we consider Brazil. They yearn to be considered a great power, and they feel we have treated them on a par with Honduras. Even 25 years ago we consulted them first on practically all inter-American and on many world problems—are they less important to us now? (Your letter of November 27 has just come in. I am very pleased that we have such very similar views.)
- If the Inter-American Bank gets going soon, could we intimate to them that we would support a loan to Petrobras? For many Brazilians our attitude towards Petrobras is the test of our real purposes regarding Brazil. Our refusal to grant loans to Petrobras, plus the campaign of our oil companies against it (I hear Standard is now burying the hatchet), has convinced a good many Brazilians that our [Page 749] government is dominated by the “oil trust” and that the present squeeze on Brazil is really an effort to get our clutches on Brazil’s oil resources. We have good reason to be chary of direct loans, but if New York private banks will lend to PEMEX, why shouldn’t the Inter-American Bank with our blessing lend to Petrobras, which never expropriated any of our property? On the positive side, this would help to solve a very important balance of payments problem and, depending on how clearly we were willing to show our hand, would be a good refutation of many of the most damaging nationalist arguments against us.
While opposing balance of payments loans under present circumstances, it seems to me that we should be willing to make sound development loans. I understand none are now pending, but I imagine this is because the Brazilian Government thinks it would be rebuffed if it asked for one. Considering the immense needs of this country for development and the many sound projects on which money might be spent, it seems to me inadvisable for us to sulk while the situation in Brazil, and their relations with us, deteriorate. I do not think we should intervene in Brazil’s internal financial affairs as we inevitably would in connection with a balance of payments loan—and get all the blame for anything that went wrong. I do think, however, that it is essential that we should continue to identify ourselves with sound Brazilian development, since practically all Brazilians are nuts on the subject. It seems to me most inadvisable to turn off the spigot for any length of time if only because, with Brazil’s heavy maturities, this would be draining dollars rapidly out of Brazil.
In this connection a particularly suitable project would be the development of the additional units for the Peixoto Power Project. I understand that there is likely to be a power shortage in the area unless this is done, since Furnas will not be ready as soon as these additional Peixoto units might be. In view of the large component of dollar equipment, the inflationary impact of this would be relatively minor. We would presumably insist on formal assurances that no further expropriation of American Foreign Power properties be contemplated.
If the Brazilian concept of OPA is merely a technical plan drawn up with our help for the multilateral development of the Latin American republics, then it seems to me we can scarcely refuse it our positive support—we have warbled too often publicly of the high regard we have for OPA. In fact, if that is all that is involved, surely we should sound as enthusiastic as possible rather than as defensive as possible. If, however, this is just the first step towards getting us sucked in, then we might refer blandly to the Inter-American Bank and the proposed International Development Association as new sources for financing projects. Our gold outflow, of course, puts us in a [Page 750] stronger position to resist pressures, but so long as we continue to foot the budget deficits of Nationalist China, Korea, Vietnam, Jordan, etc., we cannot expect our Latino friends to be happy at getting nothing but loans at a high rate of interest. (I don’t favor grant aid except through PL 480, but I do think we should lower interest rates to the point that Exim operates as an instrument of national policy rather than a lush banking operation.)
The Brazilians assert that OPA is more political than economic, and are resentful of what they consider our negotiation attitude. We must of course resist signing a blank check for financing development and also to my mind anything too reminiscent of the old Mixed Commission, to which the Brazilians look back nostalgically. It seems to me on this account the more important to find out what the Brazilians want and take a friendly position attitude on all of the specific proposals that we endorse. Insofar as I have been able to get any positive information as to what OPA envisages, it would seem to me to be precisely what we have been trying to do for years, with only a reservation re the financing we can make available.
- To refute nationalist allegations re the alleged lush profits, remittances, etc., of American business in Brazil, we need the figures— and I hope they won’t show that the Nationalists are right. Herb May, our Treasury Attaché, has requested data from Washington, and I hope ARA can insist that we be sent the essential facts.8
- We should surely make the local currency derived from PL 480 sales available to Brazil and every other Latin American country for development on a grant rather than a reimbursable basis. This would in an immediate sense cost the American taxpayers nothing; on a long term basis the amount the taxpayer may recover is problematical, particularly now that the maintenance of value clause has been abolished. Why not get credit for what we are in fact doing? Moreover, we are making PL 480 local currency grants to such countries as India; I cannot too strongly emphasize that I think this further evidence of discrimination between the third force, Johnny-come-lately countries and our tried and true friends in Latin America is inexcusable and intolerable. Here is a field in which we can help Latin American development without affecting in the slightest our balance of payments problem.
- While a solution for Brazil’s basic coffee problems must remain her own, we might help them and secure credit for ourselves by offering to cooperate with them in a comprehensive, scientific study of all kinds of possible uses of this product. I feel it would be essential to have this a strictly cooperative project in order that no suspicion might exist in Brazilian minds that this was a cover of the development of [Page 751] synthetic coffee. If properly played, it would presumably be a psychological boost to the Brazilians as an indication of our interest in their problems.
- In connection with the readjustment of sugar quotas, it would seem to me appropriate to act favorably on Brazil’s request for an increase of its quota,9 considering the increase in Brazilian production, its substantial stocks, and the state of our relations with Cuba. I imagine that the Department may be considering alternative sources of sugar supplies in the event that a full-dress show-down with Cuba should occur.
- The possibilities for increased technical assistance and special programs are enormous. Brazil is awakening in the need for accelerating industrial technical development and realizes that her educational system needs revising from top to bottom. We could make a grand gesture by making loans for both technical training and limited amounts of scientific and teaching equipment, including publications. A considerable amount of cruzeiros from PL 480 could be applied to construction of school buildings.
- Dramatic assistance in advanced fields of scientific and/or military technology might well be considered. Assistance might be given in the form of, e.g., a large atomic energy plant, a large astronomic observatory, a cancer research center, fertilizer plants, etc.
- With reference to the proposed world-wide program for improving community water systems, perhaps a special case for this program, as it applies in Brazil, would accelerate its approval and serve a useful purpose in Brazil.
This is a horribly long letter for which I apologize, but I did wish to place before you a rounded picture of the situation as I see it after four months here. I have addressed this letter to you personally to be certain you saw it, but I have no objections to its being circulated as you see fit, and I have had it made up with that thought in mind. I do hope it will be helpful to you.
With warmest good wishes of the Season,
- Source: Department of State, Rubottom–Mann Files: Lot 62 D 418, Brazil 1960. Confidential.↩
- In telegram 135 from Rio de Janeiro, July 22, Cabot reported on his presentation of credentials on that day to President Kubitschek. (ibid., Central Files, 611.32/7–2259)↩
- A memorandum of the conversation between Schimdt and Cabot at a luncheon in Rio de Janeiro is ibid., Rio de Janerio Embassy Files: Lot 68 F 77, 320, Brazil-U.S. 1959.↩
- The quotation has not been further identified.↩
- In despatch 594 from Rio de Janeiro, December 11, the Embassy reported on a Soviet-Brazilian trade agreement signed at Moscow, December 9, which provided for $208 million in trade during 1960–1962. (Department of State, Central Files, 832.00/ 12–1159)↩
- In telegram 770, Cabot reported on a hastily called meeting between diplomatic representatives of all the American Republics and Brazilian officials including Foreign Minister Láfer and Presidential Adviser Schmidt at the Brazilian Foreign Office on that day. During the discussion of Operation Pan America at that meeting, Cabot stated that he thought it would be helpful to know specifically what Operation Pan America envisaged, since he had “seen no concrete plan.” (ibid., 363/11–2059)↩
- In a November 25 letter to Rubottom, Cabot called attention to two issues of Hanson’s Latin American Letter, October 31 and November 21, dealing with U.S.-Brazilian relations. (ibid., Rio de Janeiro Embassy Files: Lot 68 F 77, 320 Brazil-U.S. 1959) Rubottom’s reply of December 10 is ibid.↩
- Neither May’s request nor the reply has been found in Department of State files.↩
- The Brazilian request for a sugar quota increase was not further identified. Brazil ordinarily did not have a quota but after the President cut back the Cuban quota pursuant to Public Law 86–592, approved July 6, 1960 (74 Stat. 330), 100, 347 tons of the Cuban quota for 1960 was reassigned to Brazil. For additional information, see Congressional Quarterly Almanac, 1961 (Washington, 1961), vol. XVII, p. 126.↩