AIR MAU Habana, Cuba. Moveiaber 8, 1941. Mr. V* *T Clayton, Deputy Federal loan Administrator, Washington, D. C. Dear Mr, Clayton; In view of the mention which you lied made to me briefly while 2 had the pleasure of seeing you in Washington during ay holiday about the possibility of our approaching the Cubans for the purchase of the 1942 sugar crop, I of course had this matter in mind oa ray return here. When the Department's instruction came to me to approach the Cuban Government with regard to the purchase and for the sending of a mission from Washington te> talk about It, the Cubans already had ted some time to think about it as the sugar letters fro the Hew York houses were constantly mentioning this possibility. The reaction of the Cuban Government when Z was authorized to take up this matter with them was Immediately that it was a natter they must go into vita us without delay on the basis that undoubtedly our proposition was made as a defense measure and that Cuba, which is 100$ desirous of cooperating in defense, must cooperate in this Batter alas. The disposition in Government and in sugar oircles immediately was to cooperate fully wits us and there was so question from the outset but when the Cuban Government would send the mission. I do not think they were overly enthusiastic about it for s number of reasons which I will go Into briefly ia this letter, but X have wanted to emphasize that their attitude wes cooperative from the beginning. The Cuban mission is leaving this morning by plans* It is made up, as you know, of Dr. Ldpos Castro, the Minister of the Presidency, who is the Government's leading agriculture and economic expert* The two oolonos MS) Godoy and Saatiestebaa and the haoendados are Mafias and Casanova. It- ia a good delegation and I do not think wo oould haws a better* They all know the sugar problem thoroughly and some of them know the economic problems generally very thoroughly. One unfortunate factor
2 factor is that Mafia* is the only one who hat a thorough knowledge of English and he of course too has a Tory thorough knowledge of our mentality and of our sugar problems* Guerra, who is going as an adviser to the mission X am sure you know about ant he will be most helpful as he is bi-lingual and knows our problems particularly. Casanova and L4$pez Castro are going straight through to New York as their respective wives are there on a holiday. Mrs. Ldpens Castro has keen there for soma time with the wife of Preaidant letlata. When they learned that the first meeting was postponed until Wednesday, the twelfth, L6pez Castro and Casanova arranged to go through to Uew York and go to Washington Monday or Tuesday evening to be there for the Wednesday meeting wltk you. Sinoe then we have had further word that you might tee them briefly am Monday, the tenth, at eleven o'clock, but aa L<5pez Castro and Casanova have made these plans. 1 doubt whether it would to now advisable %t have this meeting on Monday aa I gathered it is planned to have it a short one and a purely preliminary one any way. Tha decree setting up the mission states that they are going there to study sugar problems and this seemed more desirable than to state the specific purpose of the mission and something of course, as you realise as well* had to be aaid with regard to their leaving here. The mission, as I understand from the decree, does not have full powers but it has tha power to discuss theae matters on behalf of the Government and Of the industry. The way it was set up was specifically for this purpose, sa both tha cane producers and mills are represented equally and Lopes Castro represents the Government* Z was particularly anxious that L6pez Castro should go sa he is perhaps ssarer to President Batista in the Cuban Government than anyone else, and X think is a matter of this kind L6pez Castro's recommendations will go further with President Batista than those of anyone also* He understands too sugar problem here and X have not always felt that he had aa adequate understanding of our own problems at home. On the other hand, his attitude has recently changed quite a good deal and X am inclined
- 3 aa inclined to think that he will be reasonable, but he la a man of strong opinions and en soma faotors it wiu be necessary to go into them very thoroughly so that he is fully understanding. L6pez Castro told me that the mission wis going with the definite purpose of trying to reach an agreement on the amis of the crop and X believe that whatever may bo agreed between you and the Cubans will bo ratified hero* Z believe that the prospects for reaching aa agreement are good and I am confident on neither aide will there bo a tendency to make a hard bargain or to try to use the operation for securing any undue advantage or price. In other words, 1 think both sides will approach the sugar purchase with the idea of reaching an equitable arrangement, keeping in mind the factors which both parties have to consider. I aa sure that we are not approaching it with the idea of making a bargain which would result in any special advantage or profit for our own producers at homo or which would result in our Government's making a profit on the transaction* On this particular point the Cubans will be particularly alert I believe for you will recall there was a sugar purchase during the last war on which our Government made a substantial profit and this has left s bad tasts hers* Just as late as last year 1 had to stop, and was able to do so, SS effort whisk it was planned to make to have our Government reemburse Cubs for one half the profits which we made on that transaction* This is past history which the Cubans, X am sure, are willing to forgot, but they have It in mind of course in connection with any further purchases. While I do sot know what detailed instructions the Cubans have, Z think it say be helpful to you if 1 give you some of the things, as briefly as possible, which they will X believe have in mind* The Cuban economy is still from 80 to 85$ dependent on sugar* There has been really great progress in diversification in the last fifteen years and to s degree whloh is surprisingly and not generally understood. On the other sand this dependence oa sugar continues and no matter what progress is mads in diversification will continue for the future as far as you and X can definitely foresee it.
- 4 - foresee it* fhis means that anywhere from 80 to $5$ g for Internal and external purposes is sugar. She buys frost us at present from 90 to 94$ ofher Imports and sugar from 80 to 85$ is the money with whieh she has to pay for these* Even before the present disturbed conditions Cuba was buying at least 74$ of her imports from us. The prinoipal concern, therefore, of the Cubans with regard to a crop sale is one of price for they see the difficulties for the Cuban economy in selling their crop which is 30 to 85$ their money for ft fixed flat prioe when this sugar money is that which they. ~Ahavs to use so largely in their internalftsonomyand m****** entirely for from 90 to 94> of their imports in uncertain and unstabile pries market in the United States. In other words I believe thsy will not be disposed for any sals atft ]fcxed price unless it be on a sliding scale, as long as we do not have any greater pries control in the United States. This attitudeoof the Cubans X believe me must recognize as well founded and we must see the basis soundness of their attitude. 1 do not see how they could sail the crop at ft fixed pries when they have BO idem what thsy have to pay for their imports, AS 1 ses it, mm are not in ft position yet to fix prices for their articles at home mm ft general basis and it may be some time still before mm will or can do it* Under theso cire urnstanoes I do not see how we can ask the Cubans to sell their orop at s flat pries in ths face of mm uncertain a price market for their artieles at home. On ths other hand so far mm price is concerned I do not believe that ths Cubans have ftny unreasonable ideas. So far ms 2 can learn it is their intention to be very reasonable on this* They realize that too high ft pries would bring about only an artificial situation here which eould in ths end do them more harm than good* Thsy have learned that the high prices of the last war in the snd did them more harm than good* On the other hand they will undoubtedly ask for ft price that is reasonable for they have increased costs of production Already and are faced by further increases which I believe are inevitable. The repairs at ths mills are mow going mm and the mill owners have had to pay mere for the repair materials they got from the United States and ia some eases, considerably more than in the past* Practically everything that the eolono has to buy is increased
K m increased* It Is useless and it would be inequitable not to taice tills into aocount. Further than this, the wages paid in the industry have been for some time inadequate and whatever the increase la the cost of living aay be it is real. 2 will not enter into this problem hare at length as the Cubans will sot it forth I am sure. 2 merely wish to say that the increase in costs of materials, wages, ot cetera, already exists and will be greater. The Cuban Government yesterday issued a decree providing for increases la wages from 10 to 204. This for the present does not apply I understand to the sugar industry except for the dead season as they have to know what the prloe of the *42 crop is before they can determine what they can do for the sugar workers. The opinion of myself and my associates hero is that increases to the workers in the sugar industry aro indispensable to moot already increased costs of living of workers who have been Inadequately paid and whose condition ill aaay respects It miserable. I eannot go into detail without burdening this letter, but I merely wish to Mint out that this question of wage increases is one the Cubans have to consider or there will be serious disturbances which would interfere with the production and Marketing of the 1942 crop. It has also besldss this the direst interest to us of the maintenance of stability hers* Just what the erop hers next year will be I caa aot tell and there are those who knovj batter, but X think the general concensus of informed opinion is that it will at minimum bs 3t500,000^tons of sugar if the cane available is out and turned into sugar. There haa been a lack of rain la some of the provinces and this will cut down the yield. The rains which may coma from now on unfortunately will not materially affect the size of the orop. One of the most conservative sugar men here, in whoa we have very great eonfidsnee, told mo for my private information the other day that he had told his people at noma that wader the best conditions which saw exist between now and the grinding season the maximum crop that can bs expected if all the available sane is made into sugar is 3,675,000 tons* His Idea as to the minimum is alas 3,500,000. I glvs you these figures with sll reserve, but I believe the Cuban crop for $942, if all the available sens is cut and made into sugar, will be between 3,500,000 tons sad 3,675,000 tons or perhaps 3,750,000 tons. AS Z believe one of our
- 6 one of our main interest* is this Batter Is molasses I think we shall have ts consider a fail* prise) so that if we ask the mills to produce molasses in large quantities and out down on sugar they will not have any loss through this. This 1 think will be Tory much in the minds sf the Cubans* Perhaps one of the things which bothers the Cubans the most about the sals of the orop is the fast that there will be sn inevitable increase in production. Some of the eolonos and mills have already increased their planting. This planting, however, will not sffeot the 1942 crop and the increased planting whieh has been made or will be made will only be effective in the 1941 crop. The people hers have been very sonserrstlve stout new planting beoause it costs them mossy and they are too uncertain about the future. Perhaps even more than price the Cubans are interested in the post war situation and thsy know what soasequences this Increased production can have on suoh s temporary basis. We stimulated increased production during the last war and then out down our demand to SB absolute minimum abruptly with all the consequent results of s demoralizing sharector hers which I need not go into. The attitude of the Cubans in this respect Is that they fear sorae>dncreased production is inevitable, SBt beoause It is^contribution which they wish to make is the defense program, they do it, Thsy fear it, however, and are not enthusiastic about it and I Bust tell you that X have a very definite understanding of their point of view. Their attitude is this particular respect has really been very understanding and cooperative. We have been talking ts them of diversification and ss X have already said active progress has seen made in that direction. Many sf the eolonos have other interests besides sugar. The attitude sf the Cuban Government also is one definitely in the direction of diversification and lessening of d ependenoe on sugar sad this X believe is the fixed policy sf the Cuban Government. This is, X believe, the major reason any they are interested in the 125,000,000 loan for public works and agriculture diversification. This proposed crop purchase, therefore, brings very definitely into the fore and the light the most definite need of Cuba and her economy and that is some fixed minimum participation in our market. They have felt that if they have this, it will give mors stability to the Cuban economy than anything else, and now with the orop purchase
7 - purchase they feel more than evar the necessity for this cushion for the immediate poet war period. The Cubans therefore are more insistent than ever oa some provision which will protect then against too great shocks. I hare always felt that their attitude is reasonable and that it is as much to our interest as the Cubans that the sugar industry have at least something definite that they can look forward to in oar market* This letter Is already too long but I have oovared what I wish to say, and that too briefly, and have not discussed some factors which X would have liked to bring to your attention* There is just one further matter whioh I feel I must mention. In a memorandum of a conversation which someone in the Department had with X believe Dr. Bernhardt Of Agriculture, Dr. Bernhardt stated that he thought ths price of 2.15 would be the starting point In the present negotiations with the Cubans. 2 have great regard for Dr. Bernhardt and he has a very broad and deep knowledge of sugar problems* X believe, however, that in setting of a prion of 2.15 to begin with he has not kept in mind fundamental factors which the Cubans have to consider and that St is altogether too low* I am only mentioning this at this time as I believe that it is most important that oar preliminary approaches to the Cubans and throughout our whole conversations, wa should approach this matter on a sound, equitable oasis* Z think the initial conversations with the Cubans particularly important and will affeot negotiations very much* The Cubans are going in a reasonable and X believe on the whole, a sound frame of mind* They have factors to present which they must oonslder and they would not bo good Cubans or sound negotiators if they did not present them and eefend them vigorously* They would not be acting in their interests if they did not is so* This group is a sound group and not overly sentimental, bat wo must remember that they are Cubans end psyoological factors affect them somewhat more than they do as* X believe, therefore, in the approaches to the Cuban mission from the very outset, we shall have to be extremely careful to make them understand that ws do not wish to make any money oat of this negotlotion* that wo is not wish to get any advantage for the American producer, that wo understand ths importance of the problem from ths Cuban internal viewpoint and that of her economy Is general, that we wish to oonslder this matter as a cooperative one in the
- 8 - in the program of defense and that the Arrangements whieh we desire to arrive at are ones of aa equitable and sound character in the present and long-range interests of both countries. 1 think If we approaoh the Cubans in this manner it will influence their attitude* On the ether hand if we approach them too bluntly we will find thea shying off and they will be erediting us with motives which we do not have the least in mind* 1 know you will not mind my going into this factor but X have had some) experience la dealing with thea and I know that these initial approaches to the problem sre extremely important sad that the psycologioal factors may have as much bearing on the solution aa the moro practical and matter-of-fact ones* I know that it is unnecessary for me to mention this latter as 2 am confident that you have it already in mind. X wish else to revert to one other point that X eelieve we must be prepared to recognize that as cannot buy the Cuban sugar crop at a fixed flat price ss long as there are not adequate ceilings en the things la the United states which Cuba must buy. It is all very well to spsak of s reasonable prise for sugar but the price is only reasonable Ss long as all the factors are adequately considered as it will be some time before there are celling prices aa the great varisty of Imports from ths United states* X do net see hear any equitable basin fir ths purchase of the 1942 srop at a fixed flat price is possible* X say it only to emphasize it a gala for X aa sure that all of as who are laterested in this purchase at home neve this in mind, sat certainly our own approach to this problem if ths srop purchase must be on ths basis of our recognition that sugar is practically Cuba's only money with which sh buys from ths United States, which is practically her sole supply, ell of her imports. He have always been for the maintenance end stability of the Cuban economy for economical sad polltioal reasons and we cannot conserve that stability without malntaning the purchasing value of her so overwhelmingly priacipal commodity with which to pay. X save no suggestions to offer as to how this pries matter can be arranged, but under the situation whloh ws have to face, X think the only arrangement would be to arrive at some present baslo price for specific deliveries of the crop in certain
- 9 certain periods with provision forftmixed eeramlttee which would from tine to tirae consider revisions of the pries for deliveries during following periods* X have taken the liberty of writing you this personal note With the hops that these personal observations may be of some Interest to yd* You hart so mush mors experience ill these matters that 1 have hesitated somewhat to writs you even, personally at such length, but the considerations which I have brought to your attention represent the considered lews which my study and observation now iapell me to give you* With every good wish, Cordially and faithfully yours, George 3. Messersmith