Senator JOHNSON. Did you tell him that you came from the State Department? Mr. LANCASTER. I told him that I had got his information about President Olaya's attitude from the State Department. Senator JOHNSON. Did you discuss with anybody else in the State Department the subject matter in June? Mr. LANCASTER. I think not; no. Senator JOHNSON. Did you discuss with anybody else than Mr. White and Mr. Matthews the matters relating to the loans after your first conversation in May? Mr. LANCASTER. Only those conversations in June with Mr. White. Senator JOHNSON. Did Mr. White exhibit concern over the situation and anxiety that the loan should be paid? Mr. LANCASTER. Mr. White expressed a desire, if I remember correctly, to have the misunderstanding resolved. Senator JOHNSON. Did he express a reason then? Mr. LANCASTER. I do not recall his repeating the reasons which had previously been expressed to me. Senator JOHNSON. When you went back to New York, you took up with Mr. Schoepperle the matter as you have described? Mr. LANCASTER. That is my recollection; yes. Senator JOHNSON. Do you know what conclusion he then reached? Mr. LANCASTER. Each time that I communicated anything to Mr. Schoepperle in reference to this transaction, I believe he conferred with the associated bankers, and the final result was that they became satisfied that President Olaya was intending to carry out in complete good faith the balancing of the budget and that they could rely upon what he had been doing to balance the budget during 1931 as an evidence of his continuance in the same course, and the moneys were finally advanced. Senator JOHNSON. Did you have any communication with Mr. Caffery during June? Mr. LANCASTER. No. Senator JOHNSON. You met at luncheon President Olaya. Did you see him at any subsequent time? Mr. LANCASTER. I think not. Senator JOHNSON. Did you meet him with any member of the State Department or with Mr. Caffery in New York save at the luncheon? Mr. LANCASTER. No. Senator JOHNSON. That was the only occasion? Mr. LANCASTER. Yes; the only occasion. Senator JOHNSON. Did anybody in the State Department talk to you at all about the obligation of the bank, in relation to this loan, to the Federal reserve system? Mr. LANCASTER. No. Senator JOHNSON. Nothing of that sort? Mr. LANCASTER. No. Senator JOHNSON. Was anything said between you and Mr. Schoepperle in respect to it? Mr. LANCASTER. No. Senator JOHNSON. I think that is all, sir. The CHAIRMAN. You may be excused. 1694 Mr. LANCASTER. Thank you. (Witness excused.) The CHAIRMAN. Professor Kemmerer. Senator JOHNSON. Mr. Lisman is here, Mr. Chairman. The CHAIRMAN. Yes; I was just calling them according to the list. If you want Mr. Lisman we will take him now; but I thought the professor wanted to get through so as to go home to-night. Senator JOHNSON. I will not take more than five minutes with him. I had forgotten that he was here. It is my fault entirely, sir. TESTIMONY OF EDWIN WALTER KEMMERER, RESEARCH PROFESSOR IN INTERNATIONAL FINANCE, PRINCETON UNIVERSITY, PRINCETON, N. J. (The witness was duly sworn by the chairman of the committee.) Senator JOHNSON. Will you please state your name, residence, and occupation? Professor KEMMERER. Edwin Walter Kemmerer, Princeton, N. J... research professor in international finance at Princeton University. Senator JOHNSON. Are you familiar, generally speaking, with the financial situation in Latin America? Professor KEMMERER. Yes; in some parts of Latin America. Senator JOHNSON. Take Bolivia, for instance are you familiar with that? Professor KEMMERER. I was in Bolivia as president of a commission of financial advisers to the Bolivian Government in 1927. Senator JOHNSON. Was that just prior to one of the loans being made there? Professor KEMMERER. There was a loan that had just been consumated when we arrived. Senator JOHNSON. Was there a subsequent loan? Professor KEMMERER. There was one, I believe, that took place in 1928; yes. Senator JOHNSON. Did you make any report concerning the financial situation in Bolivia? Professor KEMMERER. We made reports to the Bolivian Government on a variety of financial subjects upon which they asked reports, and that included the establishment of the gold standard, the central bank, a general banking law, various taxation laws, the subjects of the budget and accounting, fiscal control, customs, administration and customs tariff, and a number of other subjects of that kind. We also made a report to the Government of a general character on credit policy. Senator JOHNSON. Will you state whether you made any recommendation as to further dealings by Bolivia or further loans to be floated from Bolivia? Professor KEMMERER. We made a general report on the subject of credit policy, and in that report we discussed the whole question of loans and the policy in regard to future loans. We recommended that the Government of Bolivia publish all of our reports and projects, and so far as I know, the Government of Bolivia did publish all but the one on credit policy. That report still remains a confidential document and, I believe, has never been released. Senator JOHNSON. Can you state what your conclusions were as to whether or not future loans should be made or future bond issues should be floated? Professor KEMMERER. I feel in a little delicate position there, Senator. I could easily tell you what we recommended as regards public credit policy in other countries that published our reports on this subject. Inasmuch, however, as the Bolivian Government itself was apparently unwilling to release this report, and as it stands as a confidential report of our commission to the Bolivian Government until the Government releases it, it is a rather delicate thing to state what is in that report. Senator JOHNSON. You realize why I am asking you. Bolivia has defaulted, and what I am trying to establish is the fact that an expert like yourself on a complete investigation reached the conclusion that that would be the inevitable result of future loans. Let us see if we can get at it without talking about your confidential report. Professor KEMMERER. There is one way to do it, Senator. The recommendation of our commission of financial advisers to Chile was very similar in character, for we had the same general economic philosophy, although conditions in the two countries were naturally different, and that has been published and I can put it into the record. Senator SHORTRIDGE. That is one way of getting around it. Senator JOHNSON. Professor, I bow to your superior acumen. Did you recommend further loans for Chile or not? Professor KEM MERER. We recommended great care in regard to future loans, and that loans should only be made in the case of Chile-foreign loans-for the productive public works that would be self-supporting in the main; although we recognized that there might be extreme emergencies that would come up that would Occasionally justify other classes of loans. But in the main, we advised that the Government should be very cautious and should borrow only for productive public works; and then only in accordance with a carefully prepared public-works program looking well into the future. Senator JOHNSON. And if that were not done, it was perfectly obvious that there would be ultimate default? Professor KEMMERER. We said that the consequences would be likely to be serious if the Government did not follow some such policy. Senator JOHNSON. Have you a copy of the Chilean report? Senator JOHNSON. If you have, I will put it into the record. (The report of the commission of financial advisers to the Republic of Chile on the public-debt policy of Chile, referred to and submitted by the witness, is here printed in the record, as follows:) REPORT ON THE PUBLIC DEBT POLICY OF CHILE GENERAL OBSERVATIONS For many years in the future Chile will be a borrower of money in foreign markets. A country so rich in natural resources needs large amounts of capital for its economic development and, for some time, it will be wise public policy 92928-32-PT 3—28 to obtain much of this capital by foreign borrowing. Chile is passing through the same stage of economic development that the United States passed through during the last century, and that Canada, Australia, South Africa, and all countries of Latin America are passing through to-day. It is to the advantage of any country with great undeveloped resources to obtain capital in those countries where the rate of interest, due to the great accumulations of capital, is substantially lower than it is in the borrowing country. Large amounts of foreign capital, as in the past, will undoubtedly continue to flow into Chile through the channels of private investment. But for many purposes, particularly public improvements, foreign capital must be obtained to a substantial degree through Government loans. The development of the country will to no small extent depend upon the wisdom with which foreign loans are floated and the purposes for which they are used. The statement that "a public debt is a public blessing" is by no means always true, and the unwisely contracted public debts of many countries are evidences of the fact that a public debt often proves to be a public curse. Whether or not a public debt is to prove a curse or a blessing will depend upon the wisdom with which it is contracted and upon the purposes for which its proceeds are expended. The foreign debt record of Chile has been an excellent one. The Government has scrupulously and promptly met the service charges on this debt and it has avoided the more flagrant mistakes which have characterized the loan policy of many other countries. It is to be expected that the establishment of the Central Bank of Chile, the placing of the Chilean currency on a gold basis, and the introduction of the other financial and administrative reforms recommended by the commission of financial advisers, will stimulate the economic development of Chile. In particular will these reforms stimulate the interest of foreign investors in the possibilities of investments in Chile, both in private enterprises and in Government securities. The probable increase in foreign borrowing renders it desirable that Chile make a survey of her existing public debt and of her probable borrowing needs for the future with the idea of making readjustments in the existing debt and working out a definite and well coordinated loan program. PURPOSES FOR WHICH A PUBLIC DEBT SHOULD BE CONTRACTED The purposes for which a public debt may be wisely contracted are limited. Borrowing to meet deficits in the annual budget is something that can be justified under extraordinary circumstances, such as war, a public calamity, or some unavoidable event which temporarily causes a deficit in the Government's finances. As a general principle, however, the present should pay the expenses of the present and not burden the future with debts contracted to pay for the expenses of to-day. The financial policy of Chile during the last few years is open to the criticism that public borrowing has been too lightly resorted to for meeting deficits that should have been avoided by a policy of more rigid economy or by increased taxation. Government bonds, like corporation bonds, should be floated only for improvements which last over a period of years. Even for those who admit the validity of this principle, there is always a temptation to enlarge unduly the field of loan operations. When additional funds are desired, borrowing is usually a line of less political resistance than increased taxation. For a country in Chile's stage of economic development, a public debt contracted for a purpose that does not directly or indirectly yield a revenue out of which the service of the loan may be met, is, except in the case of a limited number of loans urgently needed for such purposes as sanitation and public health, to be considered as a luxury to be indulged in very sparingly. The purchase of equipment for the army and navy, the widening of city streets, and the construction of public parks may represent highly desirable public expenditures, and yet under ordinary conditions may not warrant the pledging of the nation's credit for many years to come to pay for them. There are a large number of public improvements of a productive nature which the economic situation of Chile makes desirable during the next quarter century. The completion of the port works which the Government has had under construction for some years, the purchase of modern equipment for the state railroad system, the construction, to a reasonable extent, of good roads, and of irrigation projects, the installation of waterworks and of sewage and drainage systems in many of the cities of Chile, are all purposes for which public debts may be legitimately contracted or guaranteed by the National Government. POLICY OF LOANS FOR PUBLIC WORKS A comprehensive program of expenditures for public works should extend over a considerable period of years. If the Government, after making a careful study of what its needs will be, maps out a program for expenditures on such projects, this money can be spent to much better advantage than if a haphazard policy of borrowing is followed. The excellent foreign-loan record of Chile in the past, and the increased interest in Chile as an investment field that will undoubtedly come with the new monetary and banking reforms, are in danger of tempting the Government to the immediate borrowing of excessive amounts. The public-debt record of several Latin American countries is a sad monument to the unfortunate results of hasty and unsystematic construction of public works, and more than one country is burdened with interest payments on loans floated many years ago, the proceeds of which were largely wasted. Your commission suggest that the Government of Chile make a careful study of its probable needs for public works, so that it may have a well-planned construction program, and may apportion its expenditures more or less evenly over a substantial period of years. The appointment of technical commissions, assisted by competent experts, to study the situation would be a wise step before any extended operations are undertaken. Many of the improvements will be made by the municipalities and other political subdivisions, and most of the loans for these purposes obtained abroad will have to be guaranteed by the National Government. It is questionable if any loans of political subdivisions could be floated abroad on satisfactory terms without the guarantee of the National Government. This will make it advisable that the loan program embrace as far as possible any of the political subdivisions that will be borrowers and that these borrowers cooperate with the National Government in the mapping out of a national loan policy and program. ADVANTAGES OF CONNECTION WITH A STRONG BANKING HOUSE For a country intending to do any extensive borrowing abroad it is a great advantage to do all of its financing through a single strong banking house. Viewed as a long-run proposition, the service of a banker to a borrower, be the borrower a business house or a nation, consists of much more than selling bonds to the public. A high-class banking house is more than a salesman of securities. It is a financial friend and representative, and the services that it renders a borrowing country are extremely valuable in building up and maintaining the credit of that country in the financial centers of the world. 1. Acts as a storehouse of information.—A banking house which handles the foreign financing of a country becomes of necessity a center of information in regard to economic conditions in that country. It becomes familiar with financial and business conditions, and is constantly informed of investment opportunities in private business. It is in a position to furnish interested business concerns with full information that will help to promote trade relations. A good banking representative abroad is a strong center of propaganda of the right sort for any country. It is but natural that the banking house feels that its interests are closely connected with those of the borrowing country, and it follows that anything it can do to further the interest of that country is in its own interests. 2. Protection of Chilean securities in the money market.-A banking house which expects to do further financing for a country has a strong interest in maintaining the credit of that country-an interest that a banking house which holds no such close relationship to the Government does not feel. The security market is extremely sensitive. Prices of government bonds, particularly the bonds of Latin American countries, are subject to sudden fluctuations due to causes other than the fundamental credit standing of the issuing country. Not only do events within a country, such as bad crops and political difficulties, have a tendency to depress the price of bonds, but revolutions in near-by countries often have a serious effect on security prices. If there is no strong banking house ready to protect the market, such fluctuations may have a bad influence on the opinion of that country's credit held by the average investor. Connection with a strong banking house which stands ready to support the securi |