Foreign Relations of the United States, Diplomatic Papers, 1933, The American Republics, Volume V

837.51/1612½

Preliminary Report on Cuban Finances Prepared by American Financial Experts, September 5, 1933

September 5, 1933

The following embodies our estimate of the financial possibilities now easily expected in the Republic of Cuba, together with our recommended action.

1. The present (current) revenues of the Republic are estimated at the rate of $48,000,000 for the current fiscal year, divided into $40,000,000 of regular or ordinary revenue and $8,000,000 of revenue from the special public works tax.

This represents a decrease of roughly two-fifths of the ten-year average of regular or ordinary revenues as shown in the following table:

Budget Year	Regular or Ordinary Revenues	Public Works Revenues	Total
1923–24	$91,460,720		$91,460,720
1924–25	93,559,300		93,559,300
1925–26	89,109,979	$13,627,906	102,737,885
1926–27	82,111,688	16,366,552	98,478,240
1927–28	83,732,858	17,147,925	100,880,783
1928–29	80,959,941	18,501,817	99,461,758
1929–30	77,157,087	18,121,289	95,278,376
1930–31	59,580,764	15,307,008	74,887,772
1931–32	46,976,552	10,756,485	57,733,037
1932–33	43,652,881	9,470,431*	53,123,312
Ten-Year Average	74,830,177		86,760,118

It may be pointed out that the charges hereinafter discussed in this memorandum could be handled did the national revenue approximate the ten-year average of the figures given above, or even the lowest year thereof, prior to 1932–33. They can not, however, be handled so long as the revenue remains as it now is.

It is our estimate that tax rates can not be profitably increased nor are other sources immediately practicable. Tax rates have reached if not passed the point of diminishing returns. It is believed that the yield of the taxes could be increased depending on popular support of the government, upon orderly handling and imposition of these taxes, upon general confidence in the system, and most of all in case of any increase of economic activity within the Island. We can not, however, count upon substantial increases within any presently measurable period.

2. It is our belief that the objective of any program must be the following (Arrangement in order of apparent necessity):

a) To release revenues sufficient for the orderly functioning of the government.

We do not believe that the ordinary budget now in force can be decreased; on the contrary, government salaries should be partially restored. They have been cut below the danger point now.

b) To pay off accrued back salaries of government employees as soon as possible.

This is necessary for the stability of the government. It would have the advantage of giving some slight impetus to economic activity within the Island. Politically it appears essential in any event.

c) To pay, so far as possible, the public debt

(1) As to interest

(2) As to principal.

d) To pay, if and when audited, and so far as possible, in reasonable installments if need be, the floating debt (other than accrued back salaries).

The floating debt must be audited before it can be paid, and in any event such audit must necessarily take some months at best. The problem of this part of the floating debt is, therefore, not immediate.

3. The following plan is worked out on certain assumptions based upon the information now available to us:

If regular and Public Works revenues at the current rate be allocated in order of apparent necessity, it will appear that:

a) These revenues will provide for government functioning, estimated to cost approximately $34,000,000, plus a reasonable amount, say $3,000,000, for necessary increases in salary, or $37,000,000 in all.^†

b) These revenues will further permit application of approximately $7,000,000 a year toward liquidating accrued back salaries.

The Cuban Treasury estimates $14,000,000 in unpaid back salaries accrued during the twelve-month period ended June 30, 1933. Salaries for July 1933 and August 1933 have been paid. Salaries for September 1933 have not yet accrued.

Note: The plan suggests also a method by which by the use of silver and seigniorage the liability for accrued back salaries may be paid within six months through a special use of $5,600,000 of this $7,000,000 and liquidated within two years.

c) These revenues will not suffice, after taking care of the foregoing, to pay in full amortization and interest on the funded debt.

Note: A schedule of the funded debt is attached hereto, marked Schedule A.¹⁹

d) Nor do these revenues permit any payment towards the floating debt (other than accrued back salaries mentioned above).

We are very clear that no money can be reasonably expected from outside sources, except that the Reconstruction Finance Corporation might through various channels make available an amount not exceeding $15,000,000 to the Republic. This, however, is not a solution. At best it could merely replace other debts with a debt directly or indirectly due to the Reconstruction Finance Corporation, entailing an additional service charge, and still further tying up the already insufficient revenues of the country. The major problems would still remain, that is, a debt structure whose service can not be handled on present revenues; and within a relatively short time a similar fiscal problem would again face the Island, with an added liability.

The Suggested Plan

Part I

We suggest that the United States Government interpose no objection if the following plan be adopted; it being understood that all the provisions form essential and integral parts of the plan:

1. The Republic of Cuba might by appropriate decree declare the principle that the regular budgetary and Special Public Works Fund revenues must be allocated to the following objectives in order, the order being arrived at by determining the relative importance of the several functions to the public welfare:

a) To defray expense, stated to be $37,000,000 annually, necessary for orderly functioning of the government.

b) To payments on account of accrued back salaries of government employes, sufficient to liquidate these salaries within two years at the rate of not more than $7,000,000 per year.

c) To pay first, the interest and second, the amortization on the public debt.

d) To make payments on account of the floating debt other than salaries, after audit of this debt and in such installments as may be found reasonable.

e) To apply the remainder, if any, towards additional governmental activities of the Republic.

To the extent that the public revenues in any year shall be insufficient to take care of the public debt service, there is declared, pro tanto, the conditional suspension of such service, and allocation of revenues thereto as hereinafter provided.

2. The Government would accordingly undertake in such decree

a) That all regular and public works revenues up to $37,000,000 a year be devoted to current government functions.

b) That all of the balance of such revenues up to $14,000,000 be devoted to payment of back salaries at the rate of not more than $7,000,000 a year.

c) That all of the balance of such revenues be devoted pro rata to the matured interest of the public debt and thereafter to the accrued sinking fund charges of such debt.

In all such allocation, interest shall take priority over any payment of amortization so that no payments shall be made for amortization until all matured interest payments shall have been made; and all payments of interest shall be credited to the earliest maturing unpaid installments of interest. All payments by way of amortization shall be credited generally to the principal of the respective loan.

Interest will not be allowed on past-due installments of interest irrespective of the terms of any loan agreement.

d) That all of the balance of such revenues be devoted to the payment pro rata of the floating debt certified by the commission hereinafter referred to.

e) That the balance be devoted to additional governmental activities.

3. As guarantee of the faithful performance of the foregoing conditions and terms of suspension and allocation, the decree would constitute a fiscal commission composed of:

a) A chairman who shall be the Secretary of Hacienda or an official of the Secretaría of Hacienda designated by him

b) A member who shall be designated by the trustees (or fiscal agents in cases where there are no trustees) of the respective Cuban loans. If, within thirty days after the publication of the decree, the trustees (or fiscal agents) shall not have named such a member, then the Cuban Government shall designate a member.

c) A member who shall be an outstanding banking official of Cuban nationality, designated by the Government, and not holding government office.

It would be the duty of this commission each month to audit and to determine the amount of revenue received by the Republic of Cuba, and the amount thereof allocable to back salaries and to each loan.

A separate study would have to be made to determine whether the decree should provide for priorities of the various loans as amongst themselves, and if so what the priorities should be, and to certify the same to the government and to the trustees (or fiscal agents) of the respective loans.

4. The Cuban Government in such decree would undertake monthly to make allocations in accordance with the certificate of the Fiscal Commission.

Part II

In order further to expedite the payment of back salaries we suggest that the following plan also be adopted:

We estimate that on the basis of current revenues $5,800,000 will be available during the remainder of the fiscal year 1933–34 toward payment of back salaries. With this there could be purchased in monthly installments sufficient silver to coin the $14,000,000 necessary to pay the salary arrears for the twelve months ending June 30, 1933. The decree would provide that the silver, when coined, would be used only for payment of back salaries. The decree should provide that such amount of the $7,000,000 a year as was not required to purchase silver sufficient to coin $14,000,000, should be deposited with an agent designated by the fiscal commission, and employed for the purchase of the coined silver in circulation, which should be melted under the direction of such agent and the proceeds of the sale employed in further purchases of silver coins in circulation. No change would be made in the legal tender value of silver coin.

It will be noted that Part II of this plan dealing with the purchase and coinage of silver is separable from the Part I of the plan contemplating a suspension and allocation of the debt service. In our judgment it would be possible to adopt the second part of the plan without the first, thereby creating enough silver money for a brief period of time to handle demands for back salaries, and to maintain the service of the foreign debts, and the functioning of the government at present levels. But to purchase enough silver to pay five months of back salaries it would be necessary to secure a loan of about $4,000,000 presumably running from the Reconstruction Finance Corporation to the seller, or more likely the exporter of the silver. This assumes that the service on the $20,000,000 loans in the hands of the banks, and on the $20,000,000 Contractors’ Credit, could be extended for one year, thus releasing $2,200,000.

As a weak piliative [palliative?] this plan might be adopted without the plan for a general default (Part I), but it should be adopted with the recognition that it can not do more than secure at the most six months time within which to develop other measures. These measures would have as an added difficulty the servicing of the $4,000,000 loan. Further, the second part of the plan, while valuable as an adjunct to a more drastic plan, would not, by itself, command any particular popular support in Cuba, nor contribute decisively towards the stabilization of an incoming government. It is conceded that this conclusion as to the second part of the plan is largely a matter of opinion, but this would be our best judgment on the facts now in hand.

Recommendation

We should recommend the adoption of the first part of the plan and suggest the second part of the plan as furnishing the best method of clearing the Republic of its present difficulties. The adoption of the second part without the first might well incur criticism by Cubans to the effect that we had added to the debt of Cuba solely to protect obligations held by Americans.

We are not unmindful of the dangers of default, or of inflation.

We make these recommendations to meet an obvious emergency, and we make them only on the condition that in each case the suggested safeguards are established. To summarize, these are, in the case of silver coinage, its repurchase within two years, together with a definite limitation on its amount; and as to default, the allocation of surplus income sufficient to permit resumption of the debt service in case the revenue of the Island returns to what was previously considered normal levels.

• Adolf A. Berle, Jr.
• John G. Laylin
• J. H. Edwards
• A. F. Nufer²⁰

1. Includes $1,350,000 advance made in June, 1933, by these oil companies against taxes and duties on future imports of petroleum products. [Footnote in the original.]
2. The August 1933 salary roll was $1,818,789 including $459,920 salaries of the Army and Navy but not including the legislative branch. [Footnote in the original.]
19. Not printed.
20. Albert F. Nufer, Commercial Attaché in Cuba.