837.51/366a: Telegram

The Acting Secretary of State to the Minister in Cuba (Long)

[Extract]

246. … In the present situation as it appears to this Department, there are two points that are the cause of the present confusion and unsettlement. First, the demoralization of the sugar market; second, the moratorium, which was brought about by the insolvency of some banks and consequent runs on the other banks. Unless these two underlying causes are effectively dealt with we can see no satisfactory outcome to the situation. It is imperative, if the sound banks are to avoid large losses, that the moratorium should be promptly ended. Under the moratorium, banks are not, we understand, able to obtain additional margin nor enforce security for existing debts. If long continued this is likely to lead to acts by unscrupulous debtors which will result in their ridding themselves of assets to which the banks are entitled to look for repayment on their loans. The suggestion that Congress authorize the issue of emergency currency certificates to be secured by real estate mortgages, sugar warehouse certificates, etc., will not in any way meet the situation but will make it worse. If such emergency certificates are made legal tender it will result in their going at once to a very substantial discount and they would be discriminated against and accepted only in cases where the recipient could not help himself. If they are not made legal tender, no one would accept them, except, perhaps, occasionally to meet a payroll or pay customs duties or other debts to the Government. Banks certainly would not accept them on deposit except on special deposit to be repayable in the same kind of currency. Such an issue, if receivable for customs duties and government debts, would at once cut off the Government’s revenue and the extent to which they are paid out by the Government for wages or for amounts due by the Government would result in placing in the hands of government creditors a currency which they could not in turn pass on to their creditors. We fear greatly that such a condition, through the complaint of government employees and parties to whom the Government owes money, would lead to an immediate demand for other legislation making such currency legal tender and compelling its acceptance for all debts. This would be practical repudiation. What the banks need is something that their depositors will accept in payment of deposits because undoubtedly when the moratorium is lifted there will be at first at least a withdrawal of deposits. The proposed currency, far from meeting that requirement would, in our judgment, further [Page 48] seriously undermine confidence and aggravate the situation. The proposal that such a currency should have a definite percentage of 25 or 30 percent in gold or deposits in New York would not in any way make the currency more acceptable, as it is not proposed that such currency shall be exchangeable at the government offices for gold or for drafts on New York. The whole plan seems to the Department not well thought out. It assumes the form but not the substance of currencies that have been made to work successfully under different conditions than those which now obtain in Cuba. Such a plan might work with a country whose foreign account was fairly well balanced and which proposed to redeem its currency in gold or in drafts on New York. Cuba’s balance of payments is, the Department understands, now heavily against it, and it is not proposed that the currency shall be redeemable in gold or in drafts on New York.

So far as concerns the sugar market, the demand at present is very small at constantly lower prices, and the danger is that if this condition be permitted to continue the new crop sugars will be sold by needy planters at any price they can get. The strong planters who could finance their requirements would withhold their sugars from the market until the selling wave had passed and might then put sugar to unreasonably high prices with the result, as heretofore, of drawing Oriental sugars into the market. An embargo on the export of sugar, controlled through a government sales committee, although it might prevent the sale of sugar at low prices, would have no effect in stimulating the demand, as buyers would regard the situation as artificial; besides which, the holders of sugars and the banks which have loaned them money would get no relief such as would be afforded by an actual sale. Foreign buyers, the Department understands, have been unwilling to make purchases except through those channels which they know to be actually reliable, fearing if they dealt with others that the sugar would be delivered if the price declined, but that they could not enforce their contracts if the price rose. Reliable dealers, on the other hand, are unwilling to buy small lots of sugar on the chance of their being able afterward to re-sell them abroad. The present situation, therefore, is one where it has been impossible for buyers and sellers to meet, and this would not be corrected through a government sales committee which would not actually control the sugar in the sense of having it in its own hands ready to sell when a demand developed, or to make firm offers thereof, and which very probably would not have the confidence of foreign buyers. In short, what the Department fears is that the present plans, without helping the market for sugar, which is the great staple of Cuban industry and prosperity, would simply result in putting all Cuba on a paper money basis and undermining [Page 49] foreign confidence in Cuban business stability. This Government, it must be understood, is not endeavoring to maintain the price of sugar. It is for political and financial reasons important, however, for Cuba to reestablish some kind of market and avoid a situation which would prevent getting out the next crop of sugar, which the world needs.

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You are instructed to call at once upon President Menocal and read to him the foregoing. You may, in your discretion, leave with him a paraphrase. Report results of your interview by cable.56

Davis
  1. Not printed.