By instruction of Mr. Hughes, I am transmitting to you herewith a copy of
a memorandum which I handed to him on July 28, reporting the substance
of various conversations which I had in New York regarding the Cuban
financial situation and making certain specific recommendations in view
of the information which I had received. You will understand, of course,
as does the Secretary, that these recommendations are made purely in the
light of the facts which I have been able to collect at this end, and
that while they meet with the Secretary’s approval, they are subject to
any amendment or alteration which you believe wise, and to have
substituted for them any other plan or plans which you may consider more
appropriate.
I have been somewhat perplexed by the repeated reports that have come to
me that the Cuban Congress would not sanction the flotation of any loan
other than an internal one, in the apparent belief that the United
States Government would not consider an internal loan to be an increase
in the public debt of Cuba in the light of Article II of the Platt
Amendment. I assume that these reports are incorrect. I do not see how
it can be seriously questioned that an internal loan is as much an
increase in the public debt as an external loan, and our action in Santo
Domingo in 191638 would
necessarily establish a precedent as to the opinion of the Department of
State in the matter.
We are sending to you, as you already know, Mr. W. E. Pulliam as the
expert on tariff requested by you. It had been my desire to procure for
you the services of Dr. W. S. Culbertson of the United States Tariff
Commission, but the President was unwilling to release him in view of
the fact that the new tariff bill will be considered by the Senate here
during the coming months. Mr. Pulliam was therefore the best available
man. He has had long experience in the Philippines and in Santo Domingo
in connection with tariff matters, and speaks Spanish. I presume that
his services will not be required by you for any extended period and Mr.
Pulliam has consented to go to Cuba in the same belief, since it is his
hope that the President will appoint him to the Receivership General of
Customs of Santo Domingo, which position he held prior to 1913.
I trust that you are in accord with our belief here that the Cuban
delegation to negotiate a loan in this country should proceed to the
United States without delay. I understand, of course, that such a
delegation cannot, at the present time, enter into any formal or final
negotiations to that end. I see, however, such a wide divergence between
the views of the bankers in this country and the Cuban Government as to
the terms of the necessary loan that I feel that much time can be saved
by preliminary conversations between the [Page 711] members of the delegation and the bankers, in
which it is my hope that some adjustment can be found. I believe that it
is perhaps preferable to have the delegation come here with that object,
rather than to have the Cuban Government request the bankers to send
representatives to Havana.
[Enclosure]
The Acting Chief of the Division of Latin
American Affairs, Department of State (Welles) to the Secretary of
State
[Washington,] July 28, 1921.
Dear Mr. Secretary: I took the opportunity
of my presence in New York yesterday to have a series of conferences
regarding the present financial situation in Cuba and the
possibility of Cuba’s obtaining financial assistance in New York
under present market conditions with Colonel Tarafa (ex-President
Menocal’s foremost adviser on financial matters); Senator Cosme de
la Torriente, Chairman of the Financial Committee of the Cuban
Senate; Mr. Norman Davis; Mr. Russell Leffingwell, former Assistant
Secretary of the Treasury; and Messrs. Stettinius, Whitney and
Hanson of J. P. Morgan & Co.
The first conference I held was with Colonel Tarafa. The
representative Cuban point of view, as set forth by him, would seem
to be as follows:
- That the Cuban Government unquestionably needs financial
assistance in the shape of an interior or exterior loan, to
an amount sufficient to help the Government extinguish the
existing deficit of $46,000,000 and meet its current
obligations;
- That a loan for any other purpose is unnecessary and
inadvisable on the ground that the only purposes to which
the proceeds of any further loan could be applied would be
either to the purchase by the Cuban Government, itself, of
the existing surplus of sugars amounting to some 1,000,000
tons, which is clearly impractical; or to the application of
the proceeds of any additional loan to the extension by the
Cuban Government of financial credit to plantation or mill
owners and to the banks which have loaned money upon such
properties.
Colonel Tarafa expressed the belief that if a loan
of, say, $25,000,000 were obtained by the Cuban Government to help
relieve the present stagnation in the sugar industry, its effect
would be to stimulate the next year’s sugar crop, which is, of
course, the result least to be desired. He stated that because of
the conditions which were bound to continue for the next two or
three years, only the plantation owners holding properties in the
eastern half of the Island could pull through, and that the
plantation owners in the western [Page 712] half (because of a difference in
transportation rates, quality of the cane, price of labor, etc.),
producing approximately 40% of the total Cuban crop, are bound to go
under, no matter what temporary relief might be extended to them. It
was his opinion that notwithstanding the effect of the failure of
the owners of these properties, it is better to have the crash come
now and to have the Island start once more on a sound basis, than to
postpone the crash for some years, when it is, in his opinion,
inevitable.
Colonel Tarafa likewise stated to me that the country branches of the
large Havana banks which are now in the hands of the Superior
Liquidating Commission acting as receiver, have, notwithstanding the
legal prohibition contained in the legislation creating that
Commission, continued to accept deposits from the small depositor,
and that the volume of such deposits, which he alleges have gone
into the pockets of the stockholders of the banks, is very
considerable. He stated that he had brought certain specific
instances of this nature to General Crowder’s attention, but that
this flagrant violation of the law still continues, and he fears the
effect upon the laboring classes which [when]
the fact becomes known. He urges that the Cuban Government be
advised by this Government that it must insist that the penal code,
which he states is now being ignored, be most rigidly enforced.
To sum up, Colonel Tarafa recommends that this Government insist that
the Cuban Government enforce the penal code; that when the ordinary
revenues of the Republic are sufficient, it authorize the flotation
by the Cuban Government of a loan; external or internal, for the
sole purpose of extinguishing the present national debts and
assisting the Government to meet its current obligations; and that
no action be taken in the way of extending credits to the sugar
industry in Cuba, but that matters be allowed to take their normal
course.
Mr. Norman Davis, who, because of his interests in Cuba, has been
following the financial situation very closely, discussed the
situation with me at great length. As a result of my conference with
him and with the New York bankers above mentioned, I have the
following concrete recommendations to offer as the best method by
which this Government may assist the Cuban Government to solve the
existing financial crisis once this Government is officially advised
that the ordinary revenues of Cuba are sufficient to enable it to
float an additional loan of $50,000,000.
- I.
- The flotation by the Cuban Government of an external loan
(long term, if necessary), to meet the national deficit and
assist the Government to pay its current obligations. In Mr.
Davis’s opinion, while the national deficit is $46,000,000 it
will not be necessary for [Page 713] the Cuban Government to obtain that
amount, but that $30,000,000 would be amply sufficient to tide
the Cuban Government over its present difficulties and enable it
to clean up the deficit in a comparatively few months.
- II.
- The flotation by the Cuban Government of an additional
external loan of $20,000,000 (preferably short term notes) to
help relieve the sugar situation and initiate the liquidation of
the present frozen credits.
That a Cuban Finance Commission be constituted by the Cuban
Government similar in a general way to the War Finance Corporation
of the United States; that this Commission be composed of two
members appointed by the President of Cuba, two members nominated by
the American bankers who float the Cuban loan for appointment by the
President of Cuba, one member nominated by the Federal Reserve Board
of the United States for appointment by the President of Cuba; that
the Commission have the following additional specific powers:
- To supervise the application of the proceeds of the total
external loan of $50,000,000;
- To receive that portion of the revenues of Cuba obtained
from a certain definite percentage of the customs or from
certain stipulated taxes necessary to meet the service of
the additional $50,000,000 loan;
- To have the right to investigate the Cuban bureaus or
offices initially receiving such revenues and to replace (by
act of the Cuban Executive) any Cuban officials in such
bureaus or offices found to have mal-administered funds
passing through their hands, or considered negligent or
inefficient;
- To have submitted to it by the Cuban President any project
of law providing for an increase in the budget or a decrease
in the ordinary revenues of the Republic, the Cuban
President to veto any such measure unless such measure
obtains the approval of the said Commission.
That the Commission be authorized, after passage of the necessary
legislation, to extend from the proceeds of the $20,000,000 loan, a
credit of $2 per bag on the sugars of any sugar producer in Cuba on
a quantity not to exceed 75% of the average annual crop of such
sugar producer for the past three years; such credit of $2 per bag
to be made by law the first claim upon those sugars on which credit
is thus extended.
The present price of sugar is approximately $6.50 to $7. per bag. A
credit of $2 per bag will enable only those sugar producers who can
be saved to pull through and will not prevent sugar producers in
unsound condition from going under. It will thus reduce next year’s
sugar crop without any artificial or arbitrary method of reduction
and will enable such sugar producers as are in comparatively [Page 714] favorable circumstances to
recoup within a comparatively brief period. The $2 a bag extended by
the Government being the prior lien on each bag, the Government
cannot lose. An extension of credit in this manner by the Cuban
Government commends itself to the banking interests who have loaned
money on sugar in Cuba as the one means by which the producers can
continue doing business and eventually repay the banks the moneys
which they have advanced. It will likewise make impossible any
partiality or favoritism in the extension of credits by the
Government, since all sugar producers will be placed on an equal
footing. In the opinion given me yesterday by the bankers with whom
I spoke in New York, probably not more than $10,000,000 or
$15,000,000 of the $20,000,000 suggested will be required. I should
like to emphasize above all, the fact that this plan will prevent
any stimulation of next year’s crop, and consequently make probable
next year a return of Cuban sugars to something approaching their
normal value.
The idea of an internal loan to meet the existing Governmental
deficit, which appears to be favored by President Zayas, seems
entirely impracticable. In the first place, it is exceedingly
doubtful whether any internal loan could be floated by the Cuban
Government. In the second place, the payment by the Cuban Government
of its outstanding obligations by interior bonds, which would
unquestionably depreciate immensely within a brief period, would
have a ruinous effect upon the credit of the Cuban Government.
The major portion of my conversation with the representatives of
Morgan & Company was confined to a discussion of just what
control any American bankers floating the Cuban loan would have over
the revenues of the Cuban Republic. They were at first insistent
that no Cuban Government loan, because of the developments in the
Cuban finances during the last six months, could be floated in this
country unless the average investor could be assured that the
revenues necessary to meet the service of that debt would be
collected and distributed by American officials. In other words the
bankers feared that the only practical way to make the loan go would
be the constitution of a receivership general of Cuban customs
similar to that now obtaining in Santo Domingo or in Nicaragua. I
expressed to them my belief that if such measures were put into
effect, the Cuban Government would resign and intervention by the
United States would consequently become necessary, which the
President desired, at almost any cost, to avoid; also, that the
impression created in Latin-America as a whole would be exceedingly
unfortunate. I explained to them that while the details of the plan
above suggested had not been worked out, the Commission referred to
would have complete control in fact over [Page 715] the collection of that portion of the
Government’s revenues necessary to meet the service of the new loan
and would, at the same time, have the right to prevent any decrease
in the national revenues while leaving the actual physical
collection of customs revenues or taxes in the hands of local Cuban
officials. I may remind you that General Crowder has reported that
President Zayas will probably consent to some scheme of this nature,
which would save the dignity of the Cuban Government. Mr. Stettinius
and his partners finally came around to the opinion that the plan
above outlined would probably be satisfactory from their point of
view and would make it possible to float a loan of $30,000,000 in
this country in the near future.
The question was raised whether it would not be advisable for Morgan
& Company to send one of the partners to Cuba if an intimation
were received from President Zayas that such a visit were desired to
discuss the flotation of the necessary loan with the members of the
Government. I told them that if their representatives were invited
by President Zayas and would abide by any recommendations which
might be made by General Crowder in line with our general policy of
assisting Cuba in its financial rehabilitation, such a visit might
be desirable, although it appeared to me that the approaching visit
to this country of a special Cuban delegation to arrange for the
loan would probably be all that was necessary. The advantage of the
visit of the Cuban delegation would be, in my opinion, that the
delegation could negotiate with any and all bankers in this country
interested and thus obtain the most favorable terms.
The opinion seems to be general that the Cuban sugar commission
should not now be dissolved; that the lack of benefit resulting from
the work of the Commission has not been due to the creation of the
Commission, but to the personnel of the Commission, and it appears
to me highly desirable that the members of the Sugar Commission be
replaced by more competent men at an early date.
