Memorandum by the Assistant Chief of the Financial Division (Luthringer) Concerning the Fourth Report of the American Technical Mission in Cuba
The following comments are numbered to correspond with the numbered paragraphs in the Embassy’s despatch No. 513 of July 20, 1942:
(1) The implication of this paragraph is that the American Technical Mission did not devote sufficient study to whatever defects may exist in the Cuban monetary and banking system and did not sufficiently explore alternative solutions to these defects other than those recommended by the Mission in its report. I have heard Mr. Harry White state categorically that the mission was undertaken only on the specific understanding that the Mission would be free to report on Cuban monetary and banking needs as actual study disclosed them to the Mission and further that the Mission would not recommend a central bank for Cuba unless such an institution seemed to be required. I see little or no reason to believe that the personnel of the Mission, which is of unquestioned competence, did not make a thorough and conscientious study and did not recommend the specific institutions and reforms which represented the best judgment of the Mission as a whole. It seems a little unreal to assume that a more thorough investigation of Cuba’s needs in these matters would ever be undertaken by equally qualified personnel if the Department undertook to torpedo the Mission’s report and recommendations on a theory that a better report would be submitted if more thorough or realistic study went into its preparation.
(2) In spite of the flux and uncertainty existing throughout the world because of the war it would nevertheless appear that the present [Page 302] is a propitious time for the institution of monetary and banking reforms. The Mission in its report specifically took cognizance of the probability that there would be a heavy net influx of dollar payments into Cuba and recommended measures to limit the inflationary repercussions of this on the Cuban economy. (See pages 62–63 of the Second Report to the Cuban Government) The Mission estimates that the favorable trade balance of Cuba during the coming year might exceed $100 million and mentions the $25 million Export-Import Bank credit and the $20 million Reconstruction Finance Corporation advance for the development of nickel deposits. In addition, as I understand it, Cuba may derive a large amount of dollars from various military projects which are getting under way in that area. From the point of view of anticipated dollar influx into Cuba it would be hard to envisage a more propitious time than the present for the institution of these reforms.
(3) In view of the considerations set forth in (2) there seems to be no reason to assume that the establishment of a stabilization fund and elimination of the dollar as legal tender will straightway plunge Cuba into an exchange control regime unless the Cuban Government blandly disregards the advice of the Technical Mission and attempts a rapid elimination of dollar deposits. The Mission has expressed its views on the latter in both its Second and Fourth reports and if its recommendations are followed apprehensions as to immediate adoption of exchange control simply do not seem to be justified by the facts. It is true that the Mission foresees certain contingencies under which an exchange control might be necessary or desirable. The chief of these contingencies would be an economic crisis which arose from a collapse of Cuban exports and acute disequilibrium in the Cuban balance of payments. I believe that many monetary authorities would agree that in such conditions an exchange control is a lesser evil than the extreme and uncontrolled deflation of the type experienced by Cuba during the depression. One of the principal reasons for suggesting a Cuban central bank and stabilization fund for Cuba is to provide Cuba with a mechanism for coping with such a situation by its own monetary credit and controls. Measures of this character obviously are doomed to failure so long as Cuba has a dual monetary system and must remain blindly tied to the dollar.
The Mission report clearly indicates an assumption that the peso will remain closely tied to the dollar for some time to come. The Mission, however, quite properly suggested mechanisms for dealing with emergency situations and envisaged certain circumstances in which the change in basic economic relations might make it inadvisable to continue to maintain the peso at its existing parity with the dollar. Whether or not the economic disadvantages and risks to Cuba of continuing [Page 303] a dual monetary system exceed the risks of the establishment in Cuba of mechanisms of currency and credit control to deal with crisis situations is perhaps a matter of opinion. It would not appear, however, that this Government could properly attempt to deny to Cuba the sovereignty over these matters which is enjoyed by all independent countries.
I do not believe that it can be sustained that an establishment of its own currency by Cuba conflicts in any way with our hemispheric monetary policies nor do I think it reasonable to criticize a monetary system because the government derives seigniorage profits from the issues of currency. Practically all other governments derive seigniorage profits directly or indirectly from the issue of money and it is little hard to see why Cuba should be deprived of this normal adjunct of sovereignty.
(4) The point that this Government may be blamed for future Cuban monetary difficulties because of the report of the Technical Mission cannot, I believe, be given much weight. If it were, this Government would refrain from offering advice to Cuba and this would appear definitely to be a greater evil than undertaking to advise Cuba through mechanisms such as the Technical Mission. Moreover, it should be readily discernible what difficulties arise from following the advice of the Mission and what difficulties follow from flat disregard of the Mission’s recommendations.
(5) This is perhaps the essence of the Embassy’s objection to the proposed central bank; namely that the new system will be politically controlled and that the Cuban Government is incapable of providing competent and honest management for the new system.
The trend of experience and developments during the past decade or so, both in this country and abroad, has been such that it is unlikely that any group not composed solely of private bankers or central bankers of the more conservative type would recommend the establishment of a central bank which would not be subject in major policy questions to considerable if not predominant governmental influence. The view that central banks should be above the government (i. e. “free from political influence”) though dominant in the 1920’s has been pretty well discredited during the 1930’s both by monetary theorists and the march of political and economic events. Few countries will now tolerate any large degree of central bank independence from basic policy determinations by treasuries. Central banks have almost everywhere become the tools or handmaidens of governments in the determination of monetary policy rather than independent policy makers or even co-equals in the making of policies. How governments can assume such a role without subjecting central banks to “undue political influence” is not easy to see. In any event [Page 304] in view of the present minor role occupied by purely Cuban financial institutions the establishment of a central bank which would be controlled by private banking interests rather than the Government would appear to perpetuate in Cuba a degree of control over the banking system by foreign bankers which the Cubans can hardly be expected to accept.
In the circumstances and bearing in mind this Government’s general policies with respect to the American republics it would appear difficult if not impossible for the Department to sustain against the recommendations of the Technical Mission and the desires of the Cuban Government the view that Cuba should continue indefinitely on a dual monetary basis or accept a central bank which would be conspicuous among its sister institutions by lack of government means to influence its basic policies. It may well be that Cuba may be forced to learn from bitter experience the consequences of illadvised monetary and central banking policies or political interference with proper conduct of the bank. As against this, however, there is at least the possibility that the proposed reforms may remedy some of the outstanding defects of the present system which flow from the complete lack of any mechanism for centralized control of money and credit in Cuba. Moreover, I do not know that one can wholly dismiss the possibility that the creation of these new Cuban institutions may stimulate a greater sense of responsibility on the part of the Cuban Government and informed public than has existed under conditions of the past.
Regardless of this, however, from the fundamental policy point of view, fears of the possible incapacity of the Cuban Government in these matters would not, in my opinion, justify an attempt on the part of the Department to prevent Cuba joining the vast majority of her sister republics which have an independent currency and a central bank. In the light of Cuban desires in this regard it seems to me that this Government has followed the most proper policy; it has made available to Cuba competent experts to advise that Government as to the type of central bank and monetary system which it regards as most suited to Cuba’s needs and will doubtless freely offer Cuba such technical advice and assistance as the Government of that country may request. This Government will also doubtless stand ready to assist the Cuban central bank and stabilization fund in more material ways should the need arise and the possibility of being able to justify requests for such material assistance should operate as a restraining factor of no mean proportions on Cuban management of these institutions.
There have doubtless been many errors and mistakes in the management and operations of many of the central banks of the American [Page 305] Republics. However, I believe it would be very difficult to sustain the thesis that these countries would have been better off economically if they had been content to accept a dual monetary system or to use the dollar exclusively rather than make some attempt to control money and credit from the point of view of the particular social and economic needs of each. Although inflation and exchange control can be serious evils and bring serious abuses, it is not clear that these have exceeded the evils which would have followed abandonment of national efforts at control in favor of a blind linking of the local currency to the dollar and maintenance at all costs of freedom of exchange.
Finally, it is difficult to see why an exception should be made with respect to monetary and banking matters in the exercise of sovereignty by an American republic. The establishment of its own monetary system by Cuba is as much a prerogative of Cuban sovereignty as the establishment of its own army, police forces and courts. Perhaps Cuba would be better off if it used American armed forces and police and paid us therefor just as economically it pays us when it uses United States currency. I do not see how we could possibly object to the establishment by Cuba of its own independent monetary system without doing violence to our basic political policies toward Cuba. This is not to say that we should remain silent if Cuba goes about it in a way which will not only unreasonably damage American interests but will seriously injure Cuba as well. It is to say, however, that the Department should not attempt to dissuade Cuba from following the advice and recommendations of the Technical Mission merely because of the possibility of Cuban political incapacity.
(6) (a) The mere fact that the government may over-borrow from the bank in times of duress hardly seems sufficient reason for not having any central bank at all. In citing the experience of Chile in this regard or in citing experience of other Latin American countries one must always give consideration to the disastrous results that might have occurred in many instances had the central banks not taken action to counter extremely deflationary pressures. In many cases depreciation of the currency has doubtless provided a safety valve and means of adjustment for relieving intolerable social and economic pressure.
(b) This point appears to be a facet of the general discussion of political interference discussed at greater length in point (5) of the Embassy’s despatch.
(c) It is admittedly difficult to frame legal provisions which will prevent governments from using central bank credit as a convenient substitute for revenues from taxation and which will at the same time permit legitimate ordinary and crisis borrowing by the government [Page 306] from the central bank. The Cuban legislation seems hardly as radical as our own emergency legislation which gave the President power to order the Federal Reserve banks to buy $5 billion of Government bonds. In any event too rigorous legal limitation on the ability of a central bank to extend credit to a government merely results in a change in the law when the need arises or the development of some convenient subterfuge which permits the government to walk right through such restraints. The Technical Mission very distinctly and forcefully points out the dangers of over-borrowing by the government. The various restraints and limitations suggested by the Mission are about all that can be reasonably expected in the circumstances, keeping in mind the predominantly agricultural character of Cuba and the lack of Cuban-owned financial institutions.
(d) In all probability the Cuban central bank for sometime will not be able to engage in important open market operations. Even without a broad open market, however, the bank and the stabilization fund should be able to function effectively and perform many useful functions.
(e) The mere fact that it may be abused would not seem adequate reason for depriving the central bank of this necessary emergency power.
(f) There is no compelling reason for maintaining a 100 per cent reserve behind money. The fiduciary issue of the Bank of England is a case in point. The legal maximum of notes regarded as the fiduciary issue has been raised again and again as Great Britain has become more or less permanently adjusted to a larger monetary circulation. The Mission’s report is, as I understand it, based on the theory that Cuba should in all probability in no event permit a deflation which would reduce the monetary circulation below the quantity of peso currency now outstanding. Based on this assumption it suggests that no reserves be required for such currency but that reserves be required only against increases in circulation above this amount. An approach of this type is perhaps more widely acceptable to students of monetary matters than the more archaic and conservative banking idea that all currency should be backed 100 per cent by reserves.
(7) The fact that the new central bank may occasion some increase in Cuban taxation would appear to be a valid objection to the establishment of the central bank only if it is assumed that the central bank would not benefit Cuba sufficiently to justify its cost. It is clearly the assumption of the Technical Mission that this is not the case, and I believe that the Department would agree with the Technical Mission on this point.