216. Memorandum From Robert M. Sayre of the National Security Council Staff to the President’s Special Assistant for National Security Affairs (Bundy)1

I am reluctant to burden you with the rather lengthy memorandum and telegrams attached2 but there is a “great debate” going on about our policy toward Brazil. I think you need to know about it. The success (or failure) of our Brazilian policy will determine the course of events in Brazil for years to come.

Essentially, Rostow is suggesting the shock treatment. Gordon is pressing for strong support of what might be called a moderate course, although bringing inflation down from 140% to 10% in less than two years may not be regarded as moderate by those people who get hit.

I believe everyone agrees with Rostow on the seriousness of the issue and the objective. The argument is over means. On that, I side with Gordon. But I think both make a mistake in trying to apply U.S. and Western European economic theories to Brazil. In homogenous commodities, price may respond fairly well to supply and demand theory. Even here, however, poor marketing makes this debatable. But on manufactured products, Latins are real monopolists. Any program that is based on the premise that increasing supply will result in an [Page 480]automatic cut in prices in Latin America, fails to recognize this social attitude. Social and political rigidities in Latin America are strong. I think this is why Tom Mann views with some skepticism that even the “moderate” program pushed by Gordon will be carried out and he, therefore, wants to keep on maximum pressure by putting out our money generally after Brazil delivers the goods.3

RMS
  1. Source: Johnson Library, National Security File, Country File, Brazil, Vol. VII–a, 8/64–11/68. Confidential.
  2. Attached but not printed are a September 14 memorandum from Rostow to Mann; telegram 700 from Rio de Janeiro, September 24; and telegram 42 from Brasilia, September 28. In a September 7 memorandum to Mann, Rostow proposed a “broad strategy” for attacking inflation in Brazil: “The Situation in Brazil—now reinforced by the election of Frei in Chile—gives us a rare and perhaps transient interval of opportunity. We could not conceive of a government in Brazil more mature, more level-headed about relations with the U.S., and in its attitudes towards private enterprise.” (National Archives and Records Administration, RG 59, Central Files 1964–66, POL 15–1 BRAZ)
  3. Bundy wrote his response on the memorandum: “I’m with Gordon. Rostow is very strong but not strong enough to remake Brazil one-handed.” On November 2 AID Administrator Bell approved a proposal to provide Brazil with $100 million for project loans and $150 million for a program loan “on the most concessionary terms legally available.” (Memorandum from Mann to Bell, October 29; ibid., ARA/LA Files: Lot 66 D 65, Brazil 1964) The United States and Brazil signed the agreement on December 14.