Papers Relating to the Foreign Relations of the United States, 1920, Volume II
837.51/398
The Minister in Cuba ( Long ) to the Acting Secretary of State
[Received December 28.]
Sir: I have the honor to report that on Monday December 20th, before Mr. Rathbone’s third interview with President Menocal he received from the President of Cuba a letter of which the enclosed is a copy.60
A few hours thereafter, upon taking leave of the Chief Executive he was informed that he would be advised at a later date should there be further need for his services. President Menocal stated that he did not expect to make public Mr. Rathbone’s report but would be glad to have a copy placed at the disposal of the American Government.
I assume from what I have learned of the interview that the relations between President Menocal and Mr. Rathbone were cordial.
Realizing the unfortunate impression which might be produced in the minds of American bankers should Mr. Rathbone’s connections with the solution of Cuba’s present perplexing financial problem be severed, before a settlement had been reached, I feel inclined discreetly to indicate the advisability of his retention at least until the loan shall have been negotiated in New York.
Enclosed please find a clipping from the Havana Post of Saturday60 relating to Mr. Rathbone’s report, a copy of which is herewith enclosed.
I have [etc.]
The Special Adviser to the Cuban Government ( Rathbone ) to President Menocal
Sir: Since my arrival in Cuba, I have availed myself of the facilities you have placed at my disposal to discuss the existing banking and economical situation with Cuban bankers, with representatives of associations of business men and with others. The information I have thus obtained and the views that have been expressed to me have been of great assistance. I have verbally explained to you the various considerations which have led me to make the recommendations hereinafter set forth. In an endeavor to submit this document to you at the earliest possible moment, I omit any extended discussion of the causes of the present conditions or the reasons for my [Page 53] recommendations. I should also add that while I assume full responsibility for these recommendations, they have largely grown out of my discussions with you and do not greatly differ from the views of many of those with whom I have discussed the situation.
I
Cuba is fundamentally sound. There is no reason why under wise administration its prosperity should not continue. The inflation of prices and of credits from which Cuba is suffering is a condition existing throughout the world. Natural laws must and will force a healthy deflation—the process is bound to prove unpleasant but any artificial interference with the operation of these laws will but aggravate and prolong the disease. The inevitable consequences of inflation cannot be escaped. The process of deflation in Cuba has been aggravated by the speculation in sugar here and elsewhere, by the inability of the banking institutions, or some of them, to immediately meet demands for cash made upon them by their depositors and other creditors, and by the congestion in the harbor of Havana grievously interfering with the rapid delivery of merchandise and the use or sale thereof in the ordinary course of business thus uselessly tying up large sums of money. The moratorium, while necessary to enable banks and merchants to put themselves in a position to meet demands that might be made upon them, has naturally had the effect of impairing confidence. Confidence must be restored, to accomplish this and to enable deflation to proceed in an orderly manner Government aid can properly be given. Private business losses must be borne by those who have incurred them, they cannot be assumed by the State. Those who are insolvent must suffer the consequences, there is no fairy wand which can change insolvency into riches. Prosperity is based upon working and saving, it is so in Cuba as well as in other countries.
II
Already steps have been taken to relieve the harbor congestion. When this work has been accomplished important progress will have been made toward the restoration of normal conditions.
III
The rumors that Cuba would issue or authorize the use of an emergency circulating medium have quite naturally given rise to feelings of apprehension throughout the community. The United States dollar in use is today the best of paper money—any other medium put into circulation must inevitably and immediately go to a discount [Page 54] as compared with the United States dollar with a resultant increase in commodity prices. Those who have deposited American dollars with banks and bankers and those who have sold goods for American dollars should receive back their deposits or receive payment for their goods sold in the American dollar. An immediately [sic] declaration of the Cuban Government that it will not countenance any emergency currency measure would do much to relieve apprehension and to restore confidence.
IV
The President of Cuba should be authorized by proper legislation, for the purpose of relieving the banking and commercial situation, to contract a loan or loans not exceeding $100,000,000 to issue bonds, (free of all Cuban taxes) in a principal amount not exceeding said sum, in one or more series with such rights and priorities, if any, as between different series as may be provided in said bonds, to sell and dispose of said bonds at such price and upon such terms and conditions as he may determine, to pledge all or any of said bonds as security for money borrowed or otherwise to use and dispose of said bonds or any of them for the aforesaid purposes with authority to pledge Government revenues as security for such bonds.
V
A sale of not less than $50,000,000 of such bonds of the Cuban Government should be negotiated in the United States. Any part of said issue not so sold should remain available for use if ultimately found necessary, but only for the purposes mentioned.
VI
The arrangements made for such loan should include the constitution of a Commission of not more than four members and for its perpetuation during the life of the loan. The proceeds derived from such loan should be under the control of the Commission. The Commission should have authority
- (a)
- Under such conditions as it should impose to loan moneys to solvent banks and bankers against good collateral and repayable at such times and carrying such rates of interest as the Commission should determine.
- (b)
- To examine or to cause examination to be made into the financial condition of domestic operations, branches of foreign corporations or individuals carrying on the business of banking in Cuba.
- (c)
- To take possession of and exclusively to close and to liquidate in such manner and by such instrumentality as it should deem proper, any domestic corporation, the branch [Page 55] of any foreign corporation and any individual carrying on the banking business in Cuba if, in the judgement of the Commission, insolvent or [if] the future conduct of its business in Cuba would be detrimental to the interests of the public.
The proceeds resulting from the sale of the Cuban Government Bonds in the United States should be administered as a revolving fund from which payments could be made for the amortization of said bonds and their payment of [on] maturity. The proceeds of such loan and the evidence of indebtedness received from advances to solvent banks with the security therefor and their proceeds should always be held as security for the loan. The use of any bonds not sold in America or the proceeds of any sale thereof, for the purpose of making advances to banks, should be in the exclusive control of said Commission.
VII
When the proceeds of the loan are available for use and when the examinations of banks has been concluded, a date should be set for the lifting of the moratorium. Any [in] solvent bank will then be in the charge of the Commission as liquidators and solvent banks, whose assets are in part not quickly convertible into cash will, through the aid of advances to be made as aforesaid by the Commission, be prepared to pay their deposits and obligations as an[d] when called upon to do so. The moratorium should be entirely lifted on a specified date and not gradually. To pass the necessary legislation to negotiate the sale of Cuban Government Bonds, to bring the proceeds to Cuba, and to examine the Banks will take some time. To enable the Plan to be put into operation, the moratorium should be extended thirty days with authority to the President to terminate it at any time in ten days previous notice.
VIII
It is important to the interests of Cuba that the remnant of the past sugar crop should be properly sold and the undue influence it is having in fixing prices on sugar markets through small transactions, be removed. The rights of anyone to carry sugar for any length of time by the use of his own money must be recognized but the resources of the banks available for the making and marketing of the coming crop, should not be used to continue to carry this remnant of unsold sugar. I understand that steps are now being taken by banks to obtain authority from their respective customers to sell this sugar. It can best be sold in one block to the only considerable purchaser now in the market. The Cuban Government should give every possible aid and encouragement to the efforts of the banks to place themselves [Page 56] in a position where they can, by concurrent action, dispose en block of the unsold sugar of last years crop which they are now carrying. Concretely steps should be taken by the Cuban Government at once so that the moratorium shall no longer apply to loans made by banks, bankers or others secured in whole or in part by sugar of the past crop, unless full authority has been given to the lender to sell, in such manner at such price and at such time or times as he shall determine, the sugar of the past crop as pledged as security.
IX
The embargo on the export of American currency should be lifted. Money cannot be expected to come into a country when it cannot go out again. Every effort should be made to restore normal conditions at once. However it would prove impossible to float a Cuban Government loan in America unless this embargo was lifted.
X
If a loan is to be obtained in the United States, the sanction of the American Government must be had and there must be compliance with the provisions of the Cuban Constitution regarding revenues.
XI
An American loan could not be obtained unless it was understood that no embargo would be imposed on the export of sugar and no attempt to valorize it. Apart from this consideration, I should strongly advise against the Cuban Government in any way taking any control over the coming sugar crop. The war time controls are being done away with by the various nations of the world in their effort to return to normal conditions. The Cuban Government would be taking a distinct step backward by any resumption of control. It is only through private enterprise and initiative and private business that the natural correctives will be found for abnormal conditions. Government can only delay the application of such correctives as may be found necessary. Any control of sugar by the Cuban Government, whatever its purpose, will be regarded by the world at large as an attempt to fix artificially the price of sugar. During the war, the people have learned how to decrease their consumption with the minimum of discomfort. In these days of curtailed purchasing power,—if it is thought that the Cuban Government is taking steps to move up sugar prices—the consumer is most apt, in his own interest, to do what he did before for patriotic reasons, namely to reduce his consumption of sugar. Because a consumer has failed to eat sugar one month his normal consumption in subsequent months is not increased. Indeed, if habits are formed [Page 57] for the purpose of decreasing consumption the normal demand may never return.
XII
I do not recommend that legislation be enacted for the formation of a clearing house. I recognize the many advantages that would accrue to the banks and to the public if a clearing house in Havana was voluntarily formed and wisely administrated. In my judgement, the advantages of such a voluntary clearing house would far exceed those of a clearing house imposed by legislation. I understand that steps are now in contemplation by the banks for the formation of a clearing house and I feel confident that the lesson taught by present conditions can be relied upon to bring about such a voluntary association at an early date.
XIII
If, as the result of the operation of the Plan suggested, any bank which had received savings deposits should be closed and liquidated by or under the direction of the Commission, it has been suggested that the Cuban Government should guarantee the ultimate payment in whole or in part of such savings accounts. Those with whom I have discussed this suggestion have expressed diametrically opposed views. As its determination depends largely upon considerations other than economic or financial, I make no recommendations in this respect. The amount of liability incurred by the State by reason of any such assumption cannot be even approximately determined in advance of an examination into the condition of the banks. It might run into a considerable sum. If it should be determined to assume any such responsibility then, as a part of the legislation assuming such liability, there should be enacted statutes adequately protecting this class of depositor so that in any future crisis the State will not be called upon to give a similar guaranty.
XIV
My recommendations are addressed to meet the present emergency situation which requires prompt action. I recommend, however, that the Cuban Government should enter into negotiations with the United States Government in regard to the framing of an adequate banking and currency system sufficiently elastic to meet the rapid advance in industry and business in Cuba and the increase in the volume of Cuban trade and business which can be expected in the near future.
Respectfully submitted,