Rio de Janeiro, June 10, 1964, noon.

/1/ Source: National Archives and Records Administration, RG 59, Central Files 1964-66, POL 17 US-BRAZ. Confidential; Priority; Limdis.

/2/ June 9.

/3/ Gordon was scheduled to arrive in Washington on June 13 to review the status of economic assistance to Brazil. (Telegram 2695 from Rio de Janeiro, May 29; National Archives and Records Administration, RG 59, Central Files 1964-66, AID(US) 9 BRAZ) He was one of six Ambassadors in Latin America to meet President Johnson on June 18; see Document 18. According to Rusk’s Appointment Book Gordon also met Rusk on June 18; no substantive record of the meeting has been found. (Johnson Library) The next day the Department reported that AID had approved a $50 million loan to Brazil for balance of payments assistance. Although the agreement was to be signed immediately, the actual disbursement of funds was made contingent on settlement of the AMFORP dispute. (Telegrams 1776 and 1778 to Rio de Janeiro, June 19; National Archives and Records Administration, RG 59, Central Files 1964-66, AID(US) 9 BRAZ) The United States and Brazil signed the loan agreement on June 23.

3. President then said he had great interest in Alliance for Progress and its effective application in Brazil. Said he felt threefold program entirely in line with charter of Punta del Este, also actively interested in having social as well as economic side maintained, noting special importance of social side in northeast. He said investments in human beings essential even for effective economic development there, and he rejected argument that social benefits would come automatically from promotion of industrialization. President talked warmly of recent Recife meeting with Kubish.

/4/ On June 5 the Department suggested that Gordon convey to Castello Branco the "seriousness" of international reaction to the suspension of Kubitschek’s political rights. (Telegram 1697 to Rio de Janeiro; ibid., POL 29 BRAZ) In telegram 1716 to Rio de Janeiro, June 9, Mann also recommended that Gordon express to Castello Branco "the mounting concern which we feel here" regarding actions taken under the Institutional Act: "The failure on the part of the Brazilian Government to follow due processes of law and to proceed in a democratic manner will increase our difficulties in responding to Brazilian requests for economic assistance." (Ibid.) The Embassy reported that telegram 2790 had arrived after "Ambassador’s call on Castello Branco in Brasilia and on eve his departure for U.S." (Telegram 2818 from Rio de Janeiro, June 11; ibid.) Mann reported on the "Kubitschek thing" in a telephone conversation with the President, June 11; see Document 16.

5. I then asked whether he planned to issue any sort of official declaration or justification of action on Kubitschek. President replied that something of sort was being projected, on basis partial rather than full dossier, since full revelation would be embarrassing to nation. I urged strongly desirability of issuance some form official justification, emphasizing importance of this to public opinion abroad. President appeared to be impressed by my emphasis on this point.

6. I then speculated on political effects, including likelihood that PSD might now turn to Kruel as candidate, and danger militarization of whole political process, noting concern in foreign press and public opinion of possible slide into military dictatorship. (This whole political discussion was conducted with caution, since I am still developing personal relationship with Castello Branco of type permitting candid treatment such matters.) President replied he well aware concern of excessive militarization but absolutely confident that action his government would dispel this concern. Pointed out that military candidates in Brazil had never gotten much enthusiasm, even from the armed forces noting such cases as those Monteiro, Lott, etc. Also said he would require any officers desiring to be candidates to take leave from jobs, said they could not use their offices as campaign headquarters in the way Lott had done. He said, incidentally, that Kruel had telephoned a few days ago to indicate his personal endorsement of cancellation Kubitschek political rights.

7. I then raised question of possible prolongation Castello’s own man-date. On this, he was reticent, although indirectly indicating reluctance consider anything which appeared to be of personal benefit to him. We discussed in this connection length of necessarily unpopular austerity phase of anti-inflation effort, which he said might be much longer than six months but he hoped would be over by first anniversary of revolution next April. Also said that essence of his government would be noninvolvement in campaign. Remarked with smile that Lacerda had had anti-Goulart issue as major campaign weapon, and might in future become anti-Castello, although he hoped that Lacerda’s future political posture would become more positive than negative.

8. As conversation concluding we covered smaller points. President said had discussed C-130 project with Air Minister earlier same day, with negotiations to proceed. Details will go through JBUSMC.

9. In response to question on embarked aviation, President said he would settle this within few weeks. Issue could be settled only by President, and he intended to resolve it once for all. Then remarked that Kubitschek had bequeathed country two aircraft carriers, the Minas Gerais and Brasilia, one anchored uselessly in Guanabara Bay and the other anchored uselessly in the central plateau.

/5/ Magalhaes evidently delivered the letter when he presented his credentials to President Johnson on July 9. (Johnson Library, President’s Daily Diary)

11. President then asked me about US political party convention prospects, Presidential elections, and other aspects current US scene. We also talked of common acquaintances, President speaking of Colonel Walters in terms of affection and respect. Conversation ended on most cordial note, leaving me impression real progress in melting reserve which is one of Castello’s personal characteristics.

/6/ In a June 15 memorandum to Bundy, Sayre offered the following comment: "All reporting indicates Brazil is seriously proceeding on reform measures. Unfortunately there is an undercurrent that the U.S. owes Brazil assistance because it threw out the Communists." (Ibid., National Security File, Country File, Brazil, Vol. IV, 4/64-8/64)

Gordon

Rio de Janeiro, August 10, 1964.

/1/ Source: National Archives and Records Administration, RG 59, ARA/LA Files: Lot 66 D 65, Brazil, 1964. Confidential; Official-Informal.

Dear Tom:

/2/ Attached but not printed. In his letter to Gordon, Mann reported that the Johnson administration had recently given "a considerable amount of thought to the problem of helping Brazil to get its house in order." According to Mann immediate action was necessary. "If Brazil fails to act responsibly in the months immediately ahead," he argued, "we will then be in a crisis situation again, perhaps of even larger proportions." Mann also reported, however, that IMF officials had expressed "great skepticism about the ‘gradualist’ approach to the problem of inflation," a concern shared by "those of us who are working on this problem in the Department."

/3/ See footnote 3, Document 214.

Your letter of July 31 is concentrated mainly on the stabilization effort. The Castello Branco government, for its part, has constantly emphasized the three-fold goals of stabilization, development, and reform. I believe that this rather broader emphasis is correct, for both economic and political reasons. It is true that rampant inflation is the most acute of the economic problems facing the government. Yet it would be an error to concentrate policy-making entirely on anti-inflation measures, or to give stabilization an exclusive priority, even for a limited period of time.

In economic terms this is because Brazil is still a fairly poor country with a very rapidly growing population, which was suffering in the last year from stagnation along with accelerating inflation. It must continue the building of essential economic and social infrastructure and the stimulation of private investment in both industry and agriculture at the same time that it is fighting hard to reverse the inflationary forces. Even in the interests of stabilization itself, moreover, the acceleration of certain types of investments, such as those designed to finish up projects already begun, so as to get some goods and services out of investment already made, or those designed to improve agricultural output and a better flow to market, will contribute directly to supply and demand equilibrium. The problem cannot be tackled simply on the demand side. And in political terms, there must be a reasonably widespread conviction that burdens of austerity are being spread with equity and that beyond the tunnel of austerity there is the light of development and of progressive reform.

The alleged dichotomy between the "once for all" or "gradualist" attack on inflation, mentioned in your luncheon with the IMF people, seems to me an essentially false option. Inflation at the rate of 120 percent per year, which had been reached in Brazil in the first quarter of this year, is the economic counterpart of a heavy locomotive on a down slope or a heavy merry-go-round, with a tremendous amount of momentum built into it in the form of habits and expectations in all sectors of the community-businessmen, bankers and borrowers, workers and consumers. There is no way of stopping such a machine abruptly without producing an explosion or converting the energy of momentum into such intense heat that it will consume the whole institutional structure.

The realistic questions are: (a) Is the goal really stabilization or is it simply continuing inflation at a substantial even if lower rate, and (b) is the time period by which stabilization is to be achieved politically and economically a realistic one? Even the most orthodox monetarist would not expect to achieve stabilization in Brazil’s present circumstances in less than six to twelve months. Whether it should be six to twelve, twelve to eighteen, or eighteen to twenty-four months does not seem to me a matter of fundamental doctrinal difference. The essential objective is that the goal be the right one, the direction of policy the right one, and the time be what is realistically feasible. An effort to bring about an excessively abrupt halt to inflation would either mean massive deflation, with wholesale bankruptcies and very heavy unemployment, or would require the kind of price-wage freeze and direct intervention in every phase of the economy which could only be enforced in a rigid dictatorship. Given Brazilian habits and attitudes, I doubt whether even a rigid dictatorship could enforce it.

With respect to the restoration of confidence and the change of expectations, I cannot agree that it makes little difference whether the rate of inflation is fifty percent or a hundred percent. In my mind, the direction of change is as important as the actual rate of inflation at any given moment. The change of expectations involved in shifting from a constant or accelerating rate of inflation to a decelerating rate of inflation is as significant as the change involved in shifting from some inflation to no inflation. I see two critical points of inflection in the inflationary curve: the change from concave upward to concave downward (which is the move from acceleration to deceleration), and the later change from concave downward to actual stability.

That much having been said, the problem before us is to judge whether the Brazilian government’s policies are really bringing about this first point of inflection, whether the deceleration will be maintained, and whether its pace is sufficiently rapid. The cases cited by the IMF of "all-out campaigns for a limited period of time"-Greece, Formosa, and Bolivia-seem to me only partially relevant. They involved either beginning situations which were much less severe than the present one in Brazil or volumes of outside aid which constituted a far larger proportion of domestic gross product than can conceivably be envisaged in the Brazilian case. The world is not prepared to finance an import surplus in Brazil of one or two billion dollars a year. Such a surplus could not be absorbed here, even if financing were available, because industrialization has already proceeded to the point where such staggering competition from the outside world would be unacceptable.

/4/ Financial Attaché in Rio de Janeiro.

Castello Branco’s willingness to have his term extended was essentially a result of his conviction that there would be another year of unpopular measures, and that the active campaign period should wait until after the eventual up-turn rather than getting started in the midst of this unpopular phase. I even have doubts as to whether the government program may not be excessively austere on some points, notably the postponement of any further military or civilian civil service wage increases until after December 1965. I should like to leave a quantitative discussion of these matters, however, for analysis in the coming days and weeks when we have had a better chance to study the details of the program.

Although I was not personally involved in the mid-1950’s, as you were, I know the history of the broken promises in connection with past aid package negotiations with Brazil. Since 1961 I have been painfully and intimately involved with them. Looking back at the 1953 and subsequent cases with some historical perspective, however, I am not persuaded that our Export-Import Bank loans were all to the bad. It is a misfortune that Kubitschek was not restrained from various inflationary follies, including the building of Brasilia. On the other hand, the positive things that were done as a result of the project-formulating work of the Joint Brazil-US Economic Commission in the early fifties, and the later help from some World Bank and much Export-Import Bank financing, did make possible the São Paulo development which in turn created the middle class which won the April revolution here in Brazil. And Brazil did enjoy a six to seven percent annual growth rate all through the 1950’s, even though there were imbalances in some of this growth. So neither in economic nor in political terms was that money simply thrown down the drain. Quite the contrary. This is not an argument for aid now regardless of performance, but merely a caveat to the over-gloomy view of our actions a decade ago. Obviously we do want effective performance now, and there is good reason to believe that the Castello Branco government will provide it.

In arriving at judgments on the relation between the performance of the new Brazilian government and our own (and IMF’s and others’) support, we must bear in mind that these are not mutually independent phenomena. These questions always involve the will of the government concerned and the political capacity to make that will effective. On the former point, my judgment is that this government has a stronger will for the right policies than any other in Brazil’s postwar history. On the latter point, our own support in adequate quantity and at the right time may itself make a decisive contribution. If we wait too long to observe performance we may by that very delay make the performance impossible. The only satisfactory arrangement is to have the performance and the outside support run in parallel, and with both related to realizable targets.

The government is already under heavy political fire from an unhealthy and unholy alliance. That alliance naturally includes the Communist, fellow travelling, and extreme negative nationalist forces who were in the Goulart camp. It includes conservative land owners who hate the thought of even the most minimal land reform. It includes the backward monopolistic nationalist business group which fears competition from foreign private investment and opposes any domestic democratization of capital or internal competition as well. And in recent weeks it has threatened to include the powerful voice of Carlos Lacerda for purely personalistic reasons; I hope that his basic intelligence will soon put these in their proper perspective, but I cannot yet be confident of this.

So far, Castello Branco has maintained a resolute tranquillity in pushing ahead with what he believes is right, but some positive economic and social gains along with the wage austerity and other negative aspects of the stabilization program may be crucial to the survival of the government’s program-and conceivably in certain circumstances, to the survival of the government itself. It is especially important that sacrifices not all appear to be concentrated on wage-earners, or in any event that progress is in sight on housing and education as an offset to temporary wage level sacrifices.

We should also be careful to define performance requirements in terms which are within reasonable judgments of what is politically manageable by a relatively strong and good willed government, but one which does not possess dictatorial powers. As I see the postwar record, a chronic source of disillusionment with IMF stand-by agreements in Latin America has been the extraction of commitments from hard pressed finance ministers who did not themselves believe they were capable of being carried out when those commitments were signed. It is a sobering experience to review the history of these agreements and the brief periods within which many of their provisions were disregarded. These would not be good precedents for us to follow in present Brazilian circumstances.

/5/ August 6.

/6/ President and Chairman, Export-Import Bank.

It would also be very desirable to give at least some preliminary indications in October of what might be done during the calendar year 1966. Exactly what and in what form, I would prefer to defer for recommendation after seeing how much of a basis the Brazilian program affords. Even with respect to 1965, there is the critical question of what portion of our commitments, if any, may be contingent upon Congressional action in the form of supplemental authorization and appropriation for the present fiscal year.

So far as broad magnitudes of development assistance are concerned, assuming that the stabilization effort is going in the right direction and that IMF resources are concentrated on short-term strengthening of the balance-of-payments position, I believe that Brazilian needs for total annual long-term capital inflow during the next few years are in the general range of six hundred to seven hundred million dollars per year. This is consistent with the "Gordon formula" of thirty percent for Brazil applied to the Punta del Este overall figure of more than two billion per year in annual outside resources. More important, it is consistent with a rough macro-economic analysis of the Brazilian situation, and with rough estimates on sectoral requirements and sectoral lending opportunities and absorptive capacities.

As to the sources from which such a total might be made up, the following indicates reasonable orders of magnitude:

This total is about three and one half percent of GNP. Since it is additional investment and takes the form of high return imports, it could make the critical difference between an unsatisfactory and a satisfactory growth rate.

/7/Director, Office of Agriculture and Rural Development (AID) in Rio de Janeiro.

Let me conclude on a somewhat personal note. I have the impression-I hope erroneously-that some elements in Washington may look on me as a mere advocate for anything the Brazilian government may request, or a proponent of unlimited and unconditional aid to Brazil simply because I am Ambassador here. This is not a stance that I want to occupy or feel justly described as occupying. Many GOB proposals or requests are turned down here without Washington ever hearing of them. Like Castello Branco, the AID Mission and I are interested in successful policies and good results, not in ephemeral popularity.

/8/ Director, Bureau of the Budget. The "recent letter" from Lincoln Gordon to Kermit Gordon has not been found.

I have sometimes been reminded of the magnificent little book by F.M. Cornford, entitled Microcosmographia Academica-only fifty pages long and a valiant precursor of Parkinson-which is a masterpiece of exposition of bureaucratic obstructionism. Among other principles, Cornford points out that there is "generally only one reason for doing something, but many reasons for doing nothing". The present is not the time to apply this principle in Brazil!

/9/ See Documents 19-23.

/10/ Reference is evidently to the Brazilian response to President Johnson’s personal message on the Gulf of Tonkin incident; see Foreign Relations, 1964-1968, vol. I, Document 281.

Please forgive the length and rambling character of this letter. I hope it may be helpful in clarifying our frame of mind here in Rio on these fundamental issues.

With warm personal regards,

Sincerely,

Lincoln

Washington, September 30, 1964.

/1/ Source: Johnson Library, National Security File, Country File, Brazil, Vol. VII-a, 8/64-11/68. Confidential.

/2/ Attached but not printed are a September 14 memorandum from Rostow to Mann; telegram 700 from Rio de Janeiro, September 24; and telegram 42 from Brasilia, September 28. In a September 7 memorandum to Mann, Rostow proposed a "broad strategy" for attacking inflation in Brazil: "The Situation in Brazil-now reinforced by the election of Frei in Chile-gives us a rare and perhaps transient interval of opportunity. We could not conceive of a government in Brazil more mature, more level-headed about relations with the U.S., and in its attitudes towards private enterprise." (National Archives and Records Administration, RG 59, Central Files 1964-66, POL 15-1 BRAZ)

Essentially, Rostow is suggesting the shock treatment. Gordon is pressing for strong support of what might be called a moderate course, although bringing inflation down from 140% to 10% in less than two years may not be regarded as moderate by those people who get hit.

/3/ Bundy wrote his response on the memorandum: "I’m with Gordon. Rostow is very strong but not strong enough to remake Brazil one-handed." On November 2 AID Administrator Bell approved a proposal to provide Brazil with $100 million for project loans and $150 million for a program loan "on the most concessionary terms legally available." (Memorandum from Mann to Bell, October 29; ibid., ARA/LA Files: Lot 66 D 65, Brazil 1964) The United States and Brazil signed the agreement on December 14.

RMS

Brasilia, May 4, 1965, 2130Z.

/1/ Source: National Archives and Records Administration, RG 59, Central Files 1964-66, POL 7 US/HARRIMAN. Secret; Immediate. Repeated Immediate to Rio de Janeiro and Priority to Buenos Aires, Santiago, Lima, Quito, Bogota, Caracas, Mexico City, Panama, Guatemala, USCINCSO, and USUN. Passed to the White House, DOD, and CIA.

153. For President and Secretary of State from Harriman.

1. Immediately upon arrival in Brasilia 1330 Tuesday, I was received by President Castello Branco for one and one-half hour working luncheon, together with FonMin Vasco Leitao da Cunha and Ambassador Gordon. Conversation was cordial, frank, and very much to the point.

/2/ On Tuesday, April 27, the President sent U.S. Marines to the Dominican Republic to protect American lives in the midst of civil war; he later claimed that action was necessary to prevent the establishment of a Communist dictatorship. In response to criticism that he had acted unilaterally, the President dispatched Ambassador at Large Harriman and a team of high-level officials to Latin America for consultation, i.e., to explain the decision and to seek support from other countries. Before Harriman arrived in Brasilia, Walters met Castello Branco to "prepare a favorable atmosphere." When Harriman landed at the airport, Walters gave him a note: "Don’t push too hard. The door is open." (Vernon A. Walters, Silent Missions, pp. 399-401)

3. Castello Branco replied that problem had two aspects. Substantive one was to avoid Communist seizure of another country, as well as saving innocent lives. Formal one was to legitimate actions through effective OAS measures. GOB subject to two constraints in sending troops: (a) must have OAS request and (b) must have congressional approval. It is vitally important secure two-thirds MFM vote on I-A force. To get this, most effective step is to galvanize OAS five-man commission on spot and get them to take three steps soonest: (a) secure effective cease-fire, (b) make clear to LA governments and publics the nature and extent of Communist threat, and (c) to insist on constitution of I-A force under its political guidance. He said commission so far acting too much like Red Cross body and not taking enough political leadership. He instructed FonMin to communicate forthwith to Penna Marinho in this sense.

4. We also discussed Brazilian approaches through Ambassadors here and in Washington to press Peru and Ecuador to favorable vote. They will also work on Chile, Uruguay and Mexico, although not expecting much from latter two.

5. Castello Branco stated failure secure two-thirds vote would create major rupture in OAS and also be signal for political violence in much of hemisphere. He felt sure that US would not withdraw any forces and made clear he would not want us to. On this point, I assured him President Johnson would stand firm until it was clear that Dominican people would have opportunity establish government of own choice. If MFM vote not secured, Castello Branco doubted possibility going through with May 20 Rio conference.

6. Castello Branco stated categorically that after favorable MFM vote he would request congressional authority to send force. We did not discuss size of force or command arrangements, but ARMA’s contacts indicate Brazilian military thinking of one infantry battalion, one MP company, and possibly a tank company totalling up to one thousand men. Castello Branco had discussed Monday evening with congressional leaders and was seeing them again at 1500 when we adjourned. Their reaction was that OAS request was key, and that with such request favorable vote would be given although with some difficulties in chamber. Castello Branco also thought MFM might want to decide specifically on which countries to invite to send forces, and they should if possible include one of the "shy maidens."

7. In discussing hostile attitude Chile and Venezuela, I mentioned personal friendship with Bosch as one element and reluctance believe that he had lost effective leadership of rebellion to Communist and allied elements. Castello Branco said he had received two telegrams from Bosch protesting US intervention, but shows no disposition to credit Bosch line.

8. After presidential meeting, we continued briefly with FonMin, who sending instructions to Penna Marinho through OAS. GOB has been without direct communications with Santo Domingo Embassy for three days. We offered ours if they have any trouble, but agree OAS politically preferable channel if working.

9. FonMin also gave us copy their Monday morning instructions to MFM representative, strongly opposing Mexico, supporting US actions and resolutions. Translation follows separately.

10. FonMin also gave preliminary views on how Dominican Republic crisis will require being taken into account at May 20 Rio Conference if held, specifically possibility acting on establishment permanent arrangements for emergency I-A peacekeeping force.

/3/ On May 6 the OAS voted to form an Inter-American Peace Force, a unit that augmented U.S. forces with contingents from several member states led by Brazil. Six days later, the OAS voted to postpone the Second Special Inter-American Conference scheduled to start in Rio de Janeiro on May 20. For documentation on the Dominican crisis, see Foreign Relations, 1964-1968, volume XXXII.

Gordon

NIE 93-65 Washington, May 12, 1965.

/1/ Source: Central Intelligence Agency, Job 79-R01012A, O/DDI Registry. Secret; Controlled Dissem. According to a note on the cover sheet this estimate was prepared in the Central Intelligence Agency with the participation of the intelligence organizations of the Departments of State and Defense and the National Security Agency. The United States Intelligence Board concurred in this estimate on May 12. The estimate superseded SNIE 93-64 (Document 213).

PROSPECTS FOR BRAZIL

The Problem

To assess the character of the Castello Branco regime, and to estimate Brazil’s political and economic prospects over the next year or two.

Conclusions

A. The Castello Branco government has provided responsible and effective leadership, reversing the movement toward chaos of the Goulart period and making an impressive start toward reasonable solutions of Brazil’s many problems. President Castello Branco commands, largely on his own terms, the strong support of the military establishment and the cooperation of Congress. This has enabled him both to preserve the qualified constitutional system imposed by the military after Goulart’s removal and to press ahead with his program of major reforms. (Paras. 1-11)

B. So serious and basic are the economic problems inherited by the Castello Branco government, however, that despite its determined efforts improvements can come only slowly. While attempting to bring Brazil’s hyperinflation gradually under control, the administration is also trying to prepare the way for rapid economic growth and meaningful social reform. Its accomplishments so far have fallen short of its aims: it could not prevent a small decline in the economy in 1964, and its goals of relative price stability and vigorous economic expansion by 1966 are probably already beyond reach. Nevertheless, it has achieved much in correcting the worst imbalances and has set the stage for a significant reduction of inflation and a respectable rate of economic growth. (Paras. 17-27)

C. Popular discontent is likely to increase over the next year, primarily because all elements of the population are feeling the pinch of the regime’s austerity program. Because the regime’s integrity and authority are widely respected, however, this discontent is not likely to precipitate a major challenge to political stability. Over the next year, leftist extremists will probably try to carry out sporadic sabotage and terrorism, but their capabilities are limited and Brazil’s security forces will almost certainly be able to handle any threat they may pose. The so-called hardline groups in the military are likely to attempt to coerce the President occasionally, as in the past, but such pressures will almost certainly not threaten his overthrow or even force him to reverse his essentially moderate political policies. (Paras. 12-16, 28-34)

D. There is, of course, a potential conflict between the regime’s determination to ensure the continuation of its program and its desire to hold presidential elections as scheduled in November 1966. To ensure continuation of its policies through an electoral victory, the regime will probably seek to form a combination of political machines at the state level that can "deliver" the vote. Castello Branco would be the strongest pro-regime candidate. Although he has so far flatly refused to run, there will be considerable pressure on him to change his mind. In any case, we consider it likely that the election will be held. (Paras. 36-39)

[Omitted here is the Discussion section of the estimate.]

Washington, October 26, 1965.

/1/ Source: Johnson Library, National Security File, Country File, Brazil, Vol. V, 9/64-11/65. Secret.

SUBJECT
Storm Clouds in Brazil

/2/ Magalhães was appointed Minister of Justice and the Interior on October 7.

The "hard line" supporters of the April 1964 Revolution interpreted the recent elections as a defeat for the Revolution. They fear a return to power of pre-revolutionary elements associated with subversion and corruption. Governor Carlos Lacerda is in the forefront of the "hard line" movement.

On October 13 President Castello Branco sent to the Congress special measures to forestall the anti-revolutionary implications of the election results and of Kubitschek’s return. These measures were designed in large part to mollify the "hard-liners." The measures have run into trouble in the Congress. The Castello Branco Government, lacking the necessary votes to put them through, has been placing the heaviest possible pressure on the Congress and has indicated that the Congress must either vote with the Government or risk losing its right to participate in the nation’s political decisions.

/3/ The principal cable is telegram 885 from Rio de Janeiro, October 25. (National Archives and Records Administration, RG 59, Central Files 1964-66, POL 23-5 BRAZ)

/4/ In telegram 891 from Rio de Janeiro, October 26; ibid.

/5/ Gordon was in Washington, October 11-26, for consultations on economic assistance to Brazil.

/6/ The Department instructed the Embassy as follows: "During current crisis in Brazil, Department believes that best posture for US is one of complete neutrality both in word and deed. Given extreme sensitivity of issues involved, U.S. officials should refrain from making any public statements at this time." (Telegram 655 to Rio de Janeiro, October 26; National Archives and Records Administration, RG 59, Central Files 1964-66, POL 23-BRAZ)

WGB

Rio de Janeiro, October 27, 1965, 1851Z.

/1/ Source: National Archives and Records Administration, RG 59, Central Files 1964-66, POL 23-5 BRAZ. Confidential; Immediate; Limdis. Repeated to Brasilia and passed to White House, DOD, and CIA.

/2/ Castello Branco announced the second Institutional Act on the morning of October 27. The act revived several elements of its predecessor, including the authority to suspend the political rights of citizens and elected officials for 10 years. It also expanded membership on the Supreme Court, dissolved the existing political parties, and increased the government’s power to intervene in the individual states, declare a state of siege, and recess the Congress. Presidential elections were scheduled for October 1966 with Castello Branco declared ineligible to succeed himself. On October 27 Bundy prepared a memorandum to the President on the crisis leading to the second Institutional Act. A handwritten notation on the memorandum indicates it was not sent. (Johnson Library, National Security File, Country File, Brazil, Vol. V, 9/64-11/65)

/3/ Document 211.

/4/ October 26.

3. As in previous case, act falls well short of outright dictatorship. Congress remains, although obviously subject even greater executive pressures, press remains free, and opposition political organizations will be recreated under terms July 1965 party statute. Governors elected October 3 are expected to be empowered. Nevertheless, reassertion at this late date of unqualified revolutionary constituent authority is very arbitrary law-making, with no bow either to Congress, plebiscite, or other device for popular legitimation, and we must expect US and foreign press and other reactions accordingly.

3. [sic] In face this fait accompli we confront several difficult problems. Some OARS may be tempted to react vigorously, even to point of cutting relations, or to refuse attendance November 17 LA conference. Domestically, today’s action reflects a polarization of forces which in long run can only serve interests of extreme left or right and which it is in US interest to seek depolarize in any way we can.

4. I believe we neither can nor should avoid a formal public reaction to Institutional Act no. two. Suggested text in para 6 below, choice of spokesman obviously best determined by Department. Purpose is to express concern, strengthen President’s hand in resisting hard line pressures for harsh application new powers, and at same time to indicate continuing broad support of economic policies and program.

5. In event Department spokesman queried re continuation aid to GOB, suggest reply on lines GOB program fits Punta del Este criteria, has just been reviewed and warmly endorsed by CIAP, and withdrawal support would not only undermine further economic and social progress but also reduce prospects early achievement full constitutional normalcy.

6. Begin text: The USG regrets that the Brazilian executive authorities have felt that, in order to safeguard the country from a recurrence of the chaotic political and economic conditions which made necessary the revolution of March 1964, it was necessary to adopt a new series of extra-ordinary measures. It feels confident, however, in view of the record of the Castello Branco government during the past 18 months, that these measures will be applied with moderation and restraint. It [also] hopes that the very substantial progress already made in the efforts toward economic stabilization, renewed development, and the reform and modernization of economic and social institutions will be carried forward to full realization, and that Brazil’s precious heritage of constitutional government based on representative democracy will be consolidated as the institutional foundation for the further progress of this greater sister nation. End text.

/5/ Bowdler forwarded the telegram to Bundy as an attachment to an October 27 memorandum in which he argued: "I think that Gordon might be able to make his point with Castello Branco, Juracy Magalhaes, and others, in private talks and avoid running the serious adverse risks." Bundy concurred. (Johnson Library, National Security File, Country File, Brazil, Vol. V, 9/64-11/65) In telegram 670 to Rio de Janeiro, October 28, the Department informed Gordon that the Embassy was free to express concern to "selected Brazilians" in private, but the Department would continue to give "no comment." (National Archives and Records Administration, RG 59, Central Files 1964-66, POL 23-5 BRAZ) On October 29 Gordon reported raising the issue with Magalhães, who "naturally preferred silence to condemnation, but saw no harm and some real merit" in an official U.S. statement of "regret." Gordon recommended making a high-level statement as soon as possible, which he believed could be done "without undue inconsistency and to overall benefit." (Telegram 949 from Rio de Janeiro; ibid.) The Department, however, refused to change its position. (Telegram 688 to Rio de Janeiro, October 30; ibid.)

Gordon

Rio de Janeiro, November 3, 1965, 1817Z.

/1/ Source: National Archives and Records Administration, RG 59, Central Files 1964-66, POL 23-5 BRAZ. Confidential; Priority; Limdis.

993. Subject: Talk with President Castello Branco on Second Institutional Act.

/2/ November 2.

2. Turning to second Institutional Act, President said he had spent some time Monday afternoon reviewing foreign press comments. He mentioned Washington Post sympathetic attitude but also harsh condemnation by New York Times and Herald Tribune, several Paris papers, and comments elsewhere in Latin America. He said he was not surprised at sharpness of some foreign reaction, recognizing that close acquaintance with Brazilian history and contemporary reality was essential to understanding of what had happened.

/3/ Telegram 988 from Rio de Janeiro, November 2, reported on a discussion the previous evening between Castello Branco and Vernon Walters. (National Archives and Records Administration, RG 59, Central Files 1964-66, POL 23-5 BRAZ)

4. Prefacing with request permission to speak personally and with complete candor, I replied at length. I said that he knew our official public position to be that these were internal political matters, but had some reason to suppose that my own reactions were widely shared by Washington authorities. I said the initial impact on me had been both shock and sorrow. I had been shocked at extent of arbitrary powers assumed through the act and sorrowful at fact that it symbolized a major setback in his own effort, which American authorities had followed with great sympathy, to bring about full constitutional normalization without jeopardizing basic purposes of revolution. I appreciated that in the immediate circumstances the alternative might have been even worse, and I understood the adventitious factors of Kubitschek’s return and Lacerda’s agitation, but I could not help regret that the situation had gotten to the point where such a choice was necessary. I referred to missed opportunities during the last twelve months to begin building a serious political base for revolution and to develop adequate domestic propaganda and internal public relations designed to give a broad sense of public participation and enlist the support of various influential groups. Where governors or candidates had done so, I remarked, they had generally been successful in recent state elections, as in cases Parana, Para, Maranahao, and Goias, but federal government had failed to take such measures on nation-wide basis.

5. Then quoting National Archives motto that "What is past is prologue," I said I could summarize present view by saying this was a lost battle but not necessarily a lost war. For future, I saw both constructive possibilities and also very serious dangers. I then specified a number of critical issues.

/4/ In telegram 696 to Rio de Janeiro, November 1, the Department suggested that Gordon "make Juracy and others see heavy cost GOB would pay abroad for restricting press freedom in Brazil." (Ibid., PPB 9 BRAZ)

7. Second important issue for future, I continued, was that of his own tenure in office, referring to press reports his possible resignation on January 31. Mildness of some of foreign reaction to Institutional Act, I said, must be attributed to his own demonstrated record of moderation and personal confidence which he had inspired abroad.

8. Third critical issue concerned positive side of revolution, including success of Juracy’s effort to build political base and development of effective internal public relations emphasizing positive goals of modernization and constructive reform as well as opposition to corruption and subversion. Here too Castello interrupted to express concurrence, saying this required team effort and he was now reconstructing ministerial team with this as well as other points in mind.

/5/ Braga and Passarinho were the outgoing governors of Paraná and Pará, respectively.

/6/ Henrique Batista Duffles Teixeira Lott, Minister of War under President Kubitschek, had been nominated for Governor of Guanabara as the candidate of the Brazilian Labor Party (PTB). His candidacy was subsequently voided by the Superior Electoral Tribunal.

10. President listened attentively to this long exposition, interrupting at several points but not dissenting. He remarked that few people outside Brazil had understood depth of corruption and subversion which had been tolerated under Kubitschek and then actively stimulated under Goulart. He cited a statement of Luis Carlos Prestes, Secretary of Brazilian Communist Party, in late 1963 to affect that "We already have the government but do not yet have the power." Thence effort to neutralize armed forces by subversive organization of NCO’s. This led to digression in which we compared Goulart regime to recent Indonesian experience under Sukarno, perhaps only two historic examples of deliberate "superversion" of national institutions in mistaken view that Communists could always be controlled.

11. I then asked President his general impression of my reactions to institutional act. He replied that they were reactions of a good and close observer, but he thought too pessimistic. I said that this was good news and asked why. He replied for two reasons: (a) My combination of American and university backgrounds may have made me too perfectionist on some points of juridical principle, and (b) he was convinced that a military dictatorship could be and would be avoided. He then proceeded to describe two types of military dictatorships, the classical Latin American type of simply ruling by force and enjoying fruits of power and more recent Nasserist type, with socialist overtones and drumming up of popular support through intense nationalism. He thought Brazil would resist implantation of either type. I raised question whether certain of Lacerda’s writings and some thinking among younger officers might not be signs of incipient Nasserism in Brazil. President thought this was possible but unlikely, especially if effective work now done to build political base for revolution. He expressed confidence in success of Juracy’s efforts in this regard. Although saying it would be work of months and not merely days or weeks. He thought November would be critical month in laying out basic guidelines of this effort and its success should be readily visible by about next March.

in addition to adverse foreign reaction to mishandling an admittedly extremely difficult problem of faculty and student subversion at Brasilia.

/7/ October 30.

13. In conclusion, President raised subject of forthcoming Rio Conference and visit of Secretary Rusk. He expressed keen desire for long private talk with Secretary, apart from protocol visits and any social affairs such as projected Roberto Campos dinner. He thought that perhaps Saturday afternoon or Sunday November 20 or 21 would be best indicated time.

/8/ In telegram 1046 from Rio de Janeiro, November 7, Gordon reported having an "extremely encouraging" talk about the situation in Brazil with Juracy Magalhães on November 6. Since Castello Branco had described Gordon as "deeply worried but excessively pessimistic," Magalhães offered reassurance: the purpose of the Second Institutional Act was "to save Brazilian democracy, not to destroy it." Magalhães was confident that world opinion would recognize this once certain events transpired, including: "the installation of the recently elected state governors; the rebuilding of a political party structure; the direct election next year of other governors and congress; and the moderation with which the arbitrary powers of the IA-2 (Institutional Act No. 2) will be used." (National Archives and Records Administration, RG 59, Central Files 1964-66, POL 15-1 BRAZ)

Gordon

Washington, November 7, 1965, 2:09 p.m.

/1/ Source: National Archives and Records Administration, RG 59, Central Files 1964-66, POL 23-5 BRAZ. Confidential; Exdis. Drafted by Kubish and Sayre on November 6, cleared by Vaughn and U. Alexis Johnson, and approved by Rusk. In a November 6 memorandum to Rusk, Vaughn recommended approval of the telegram: "I am convinced that other crises may develop in which the Brazilian military will be tempted to become even more dominant and repressive, and I am concerned that perhaps some of our own U.S. officials, particularly in the military services, may not fully appreciate the serious damage to our interests which could result from such a development. This cable should make our basic policy view quite clear and strengthen Ambassador Gordon’s hand, and ours in ARA, in executing that policy." (Ibid., POL 23-9 BRAZ)

744. For Ambassador from Secretary. Subject: Recent Developments in Brazil.

/2/ Document 221.

You have struck precisely correct note. Although we have been maintaining silence publicly on Second Institutional Act, Castello Branco and other Brazilian leaders should be made acutely aware our serious concern and deep disappointment over recent developments in Brazil. We had strongest hope that Brazil was moving toward effective exercise political democracy and was achieving substantial success in its economic reform and development programs. We sincerely regret backwards steps on the political side and earnestly hope that the arbitrary powers assumed in the Institutional Act will be employed with the greatest moderation and restraint.

/3/ The following sentence was removed from the beginning of the last paragraph: "I have discussed Brazilian developments with the President who is apprehensive over this recent turn of events in Brazil."

/4/ In his reply Gordon urged that the Department reconsider its decision against issuing a public statement: "By holding to line that Second Institutional Act is purely domestic political affair, we tend to give impression inside Brazil, in rest of LA, and in US itself that we condone or even applaud what has been done." (Telegram 1083 from Rio de Janeiro, November 9; National Archives and Records Administration, RG 59, Central Files 1964-66, POL 23-5 BRAZ) The Department declined Gordon’s request, maintaining that the press saw nothing inconsistent or paradoxical in a public stance of "no comment." The Department was concerned, however, about press reports that the Embassy disagreed with official policy: "This is extremely unfortunate and we assume you are dealing with this matter in the manner you think best." (Telegram 802 to Rio de Janeiro, November 12; ibid.)

Rusk

Rio de Janeiro, November 14, 1965, 2129Z.

/1/ Source: National Archives and Records Administration, RG 59, Central Files 1964-66, POL 23-5 BRAZ. Secret; Priority; Limdis. Repeated to Brasilia.

/2/ In telegram 967 from Rio de Janeiro, October 31, the Embassy described conditions leading to the Second Institutional Act, analyzed public reaction to its promulgation, and assessed political consequences for the "foreseeable future." According to this assessment, Costa e Silva had emerged from the crisis in a "greatly strengthened position," while Lacerda’s ability to influence events had been "diminished considerably." (Ibid.)

1. Depressing and dangerous situation described in recent messages has brightened notably over past several days as result well-conceived and executed GOB campaign to expound positive aspects and purposes of revolution. This campaign has also given important psychological boost to President’s prestige and image as being in command of situation, sorely lacking in weeks following October 3. Nevertheless it is not yet possible to have full confidence in continuation this prospect. In longer view, developments during past three months have obviously represented substantial retrogression in terms political objectives Castello Branco government (CBG). Institutional Act No. 2 (IA-2), however its powers may be used, stands not only as symbol of authoritarianism to outside world but also could tempt extremist political and military leaders to seize control of this ready-made dictatorial mechanism. Problem for United States policy is to assess to what extent and in what ways USG can use its resources and influence so that powers of government remain in moderate hands while danger of move toward extremism is reduced and constitutional legitimacy and the rule of law restored, in order to contribute to building of permanent political bases for stability plus progress.

2. At outset we should have no illusions regarding our ability greatly to influence course of political developments in Brazil, given its size and complexity and ease with which attempts to intervene in domestic politics could backfire.

/3/ See Document 221 and footnote 8 thereto.

/4/ Dated November 5. (National Archives and Records Administration, RG 59, Central Files 1964-66, POL 15 BRAZ)

/5/ Military Police Investigation.

6. We may be able exercise some salutary influence in this situation. We are making clear that USG watching it closely as one test of GOB intentions, although this is clearly internal affair, we are reminding selected contacts that US Congress, which controls purse strings on foreign assistance, is responsive to negative US public opinion attitudes on issues such as this.

7. Additionally Embassy and USG should treat Negrao as any of other governors-elect, although without making contrived public issue of it. For instance, I intend to have program officer of AID mission seek appointment with Negrao for purpose of briefing him on Guanabara projects completed, under way and under discussion, and eliciting any ideas he may have on future areas of cooperative effort. Moreover, if Negrao should again express interest in going to US, as he did immediately following elections, we should respond by offering facilitative assistance, plus financial assistance if indicated.

8. Similar treatment should be provided to Governor-elect Pinheiro in Minas Gerais, although problem is less serious and immediate since President has already received Pinheiro and inauguration not due until January 31, 1966.

9. On longer-range problem of building permanent political base, CBG now seems to be headed in right direction of organizing new party to support revolution, getting political as well as technical talent in cabinet, and mounting sustained public relations campaign. Although abolition existing parties should theoretically facilitate task of building revolutionary party, other factors complicate task. Abrupt extinction of parties has left residue of confusion and ill feeling, parochial and personal differences and ambitions at state and municipal levels, which was one of reasons for proliferation of parties, will require time and patient effort to overcome. It is, however, noteworthy and encouraging sign of deep-seated Brazilian democratic orientation that while Mexican example of single-party institutionalized revolution is well known to Brazilians, no serious movement to follow this example has surfaced.

/6/ At the meeting in Rio de Janeiro on November 20, Rusk assured Castello Branco that the concern previously expressed by Gordon was "by no means limited to the Ambassador. A cold reading of the terms of the Institutional Act could not but leave a shocking effect, especially to Americans trained to regard the constitution and its limitations on all branches of the government as the fundamental basis of organized national life. The reader not familiar with Brazil and with the President’s character and attitudes could easily be misled, since he had no way of knowing what the Institutional Act was not intended to be in practice." (Telegram Secto 51 from Rio de Janeiro, November 23; National Archives and Records Administration, RG 59, Central Files 1964-66, POL BRAZ-US)

11. Where local and personal bitterness appear to be holding up progress toward establishment of an effective party structure, and opportunities are afforded in conversations with the political figures involved, we intend discreetly make clear the importance USG attaches to this element of CBG program.

12. To give technical support to development of party and popular support base, we should through covert channels renew our offer to provide assistance to CBG in scientific opinion sampling. In this same area, continued encouragement should also be given to the government’s program, launched since his return by Juracy, to explain government’s programs and objectives to people. Radio-TV appearances by cabinet officials, state governors, and congressional spokesmen for administration have already begun to have positive effect.

/7/ A copy of the revised draft, November 4, is in the Johnson Library, National Security File, Country File, Brazil, Vol. V, 9/64-11/65.

/8/ Telegram 1053 from Rio de Janeiro, November 8, forwarded several revisions to the text of the Brazil annex paper. (National Archives and Records Administration, RG 59, Central Files 1964-66, AID(US) BRAZ)

/9/ Not found.

Gordon

Washington, December 3, 1965.

/1/ Source: National Archives and Records Administration, RG 59, Central Files 1964-66, AID(US) 9 BRAZ. Confidential. No drafting information appears on the memorandum. According to the President’s Daily Diary, Johnson was at his Ranch in Texas, November 19-December 12 and December 21-January 2, 1966. (Johnson Library)

Your authorization is requested to proceed in early December with negotiations with the Government of Brazil for a program loan to cover Calendar Year 1966, and to conclude the loan if negotiations produce a Brazilian commitment to a satisfactory program. Concurrent negotiations are expected to be in process between the IMF and the Government of Brazil for an extension of Brazil’s IMF standby agreement, and the United States and IMF expectations of Brazilian commitments have been coordinated.

Since coming to power in April 1964, the Castello Branco Administration has conducted an admirably tough economic program of stabilization, development, and reform. These self-help measures have been on the whole very effective in reducing the rate of inflation and commencing a broad-based and very promising process of economic development and social progress. We consider that Brazil has made excellent use of the support we have been providing and is today conducting the strongest program of economic self-help in the hemisphere.

AID provided a $50 million contingency loan to the new government in June 1964, and on the basis of formal self-help commitments made by Brazil to CIAP, a $150 million program loan was authorized last December. Other international assistance for 1965 included a $53.6 million U.S. Treasury exchange agreement and a $125 million IMF standby agreement, as well as project assistance from AID, the Inter-American Bank, and the World Bank, and a modest amount under PL-480.

The Brazilian performance this year has on most points exceeded the commitments for self-help undertaken a year ago. This record was warmly endorsed in a formal CIAP review last month.

Additional funds are required for 1966 to support an expanded level of import necessary to achieve Brazil’s investment and growth objectives. Ambassador Gordon and his country team have strongly recommended an AID program loan of $150 million, plus a number of project loans (estimated to total around $75-$100 million) and a new PL-480 agreement (preliminary estimate: $35 million). The program loan decision needs to be taken now, in order to relate the timing and the content of our negotiations properly to those of IMF.

The country team’s estimates are that Brazil’s needs for net capital imports to support an adequate rate of economic and social development, supplementing intensive self-help measures to mobilize internal resources, are on the order of $600-$1000 million a year for the next several years. The country team considers that, allowing for imports from private investment, international institutions, PL-480, and AID project loans, the "resource gap" justifies a program loan of at least $200 million in 1966. The structure of Brazil’s trade and balance-of-payments, however, makes it unlikely that more than $150 million of resources in the form of additional developmental imports from the U.S. can be effectively transferred and used. Even this figure implies a substantial increase in Brazilian imports from 1965 levels.

Administrator Bell and his staff in Washington, recognizing the uncertainty of any balance-of-payments projections and the greater familiarity of the country team with conditions in Brazil, nevertheless consider that the very substantial improvement in Brazil’s balance-of-payments position over the last year, the doubts about the amount of increase in Brazilian imports in 1966, and the availability for emergency needs of additional sources of funding from the IMF, combine to suggest that $100 million might turn out to be enough to support the Brazilian self-help program.

The question has been raised whether a portion of the development import needs should be financed by drawings on the IMF over and above the amounts needed to repay IMF loans coming due in 1966. Such IMF resources, however, should be reserved for unforeseen short-term balance-of-payments difficulties arising from commodity price fluctuations or other factors beyond the country’s control. (Note that a one cent per pound drop in coffee prices loses Brazil $25 million over a year.) What Brazil currently needs is long-term development capital rather than short or medium-term balance-of-payments support. Like many other less developed countries, Brazil’s foreign indebtedness structure is already overweighted with short and medium-term debt, and we have been pressing them to avoid further such accumulations.

Both Ambassador Gordon and Administrator Bell agree that if Brazil continues its present strongly favorable economic progress it should be possible to reduce the level of the program loan for 1967 and to reduce AID assistance to Brazil progressively thereafter.

Ambassador Gordon and his country team believe that their recommendation for a $150 million program loan on economic grounds is strongly reinforced by political considerations. Their views are summarized in the following paragraphs.

From a situation of galloping inflation, growing stagnation, and imminent leftist, anti-American dictatorship less than two years ago, the Castello Branco government has brought Brazil halfway along the road to price stability. It has restarted development on a sound long-term basis. It has reversed the nationalist and statist trends to favor private enterprise and foreign investment. It has undertaken major modernizing reforms. It has adopted a strongly pro-Western foreign policy. It is fighting a life-and-death struggle against both right and left-wing extremists to preserve these policy lines, ensure a like-minded successor regime, and restore constitutional normality. It has enjoyed our vigorous political and economic support.

In October 1966, elections are scheduled for Congress, eleven State Governors and all State legislatures; as well as an indirect election of the successor President by the Congress. Castello Branco has only recently and belatedly begun the task of building a strong political base and popularizing the positive goals of the revolution. The local currency counterpart of our program loan, to be applied largely to private enterprise expansion, education, health, and agricultural development can make a major contribution to the success of this effort.

To reduce our program loan for 1966 from the $150 million level being provided in 1965 would appear to be a withdrawal of U.S. support at the most decisive moment in the Castello Branco effort.

Nor can we neglect the effect of reduced support for Brazil on our whole stance toward Latin America and the Alliance for Progress. The proposed loan, while large in dollars, is relatively small in relation to Brazil’s size. It amounts to $1.77 per capita, compared with proposed program loans for 1966 of almost $10 per capita for Chile and $4 for Colombia. A reduction now would look like a penalty for effective self-help. It would be taken as a deliberate blow to the largest nation in Latin America, in face of the Castello Branco regime’s wholehearted cooperation with us in hemispheric and world affairs, including the provision of a sizable military contingent in the Dominican Republic. Since Brazil by itself is 35 percent of Latin America, and the Alliance stands or falls by success or failure there more than anywhere else, reduced support for Brazil now would look like a retreat from our renewed commitments to sustain the Alliance, including your warmly welcomed pledge reported by me to the Inter-American Conference in Rio.

The risks to U.S. political and security interests if our policy should fail in Brazil are enormous and the costs of failure would be very large in relation to the sums under discussion. Such failure might take the form of an anti-American nationalist military dictatorship or of a Communist-controlled regime. Both are plausible hypotheses. Continued full support for Castello Branco and his policies is the best insurance available against these contingencies.

Use of U.S. Funds. The program loan will be used to finance basic imports from the United States. A major share of the counterpart funds will be used for loans to finance private sector development in agriculture, industry, and housing. Other amounts will be used to finance special programs in education, labor, and public health.

Effect on U.S. Balance of Payments will be minimal in view of the restriction on the use of the loan funds for imports from the United States. Disbursements will not occur until well into 1966. Measures introduced by the Central Bank will increase the attractiveness of United States exports and thereby result in additional follow-on exports from the United States. The expectations for 1966 are that there will be a net capital inflow into Brazil from Western Europe, Japan, and the international financial institutions.

Weighing these factors together, it seems to me we have two alternative courses of action:

1. To authorize a program loan of $150 million, stating during the negotiations that we are not sure that the requirements of Brazil’s recovery will in fact call for the full amount during 1966, that we expect to review requirements quarterly during the year, and if less than the full amount is needed, the remainder will be held back for disbursement in the following year and taken into account in negotiations for AID loans at that time.

2. To authorize a $100 million program loan, stating during the negotiations that requirements may in fact call for larger amounts if the actual pace of Brazilian recovery and growth so indicates, and we would be prepared to add to the loan up to a maximum of $150 million if it is needed during the year.

I consider that the minimal economic needs of the situation might be met by the second alternative, especially if there is some lag in the implementation of the Brazilian investment program. On the other hand, political considerations so strongly favor the first alternative that I believe it to be the clearly indicated course of action.

/2/ A note on the memorandum indicates that the President approved the loan on December 11. In telegram 1014 to Rio de Janeiro, December 11, Harriman informed Gordon that, although the loan was not tied to Vietnam, the Department urgently sought his advice on how to approach Castello Branco for a suitable military contribution. (Ibid., National Security File, Country File, Brazil, Vol. VI, 12/65-3/67) In response Gordon suggested an informal approach without reference to the program loan. Any linkage between Vietnam and the program loan, he explained, "would be disastrous, and even private hint would arouse resentment from Castello Branco, who although good friend is also very dignified and proud Brazilian." (Telegram 1432 from Rio de Janeiro, December 12; ibid.) The Department agreed to treat Vietnam separately, but instructed Gordon to approach Castello Branco in an official capacity, i.e. on behalf of President Johnson. (Telegram 1018 to Rio de Janeiro, December 15; ibid.) The United States and Brazil signed the program loan on February 10, 1966.

Dean Rusk

Washington, December 31, 1965, noon.

/1/ Source: Johnson Library, National Security File, Country File, Vietnam, Vol. XLIII, Memos (B), 12/13/65-12/31/65. Secret. The memorandum indicates that the President saw it. Bundy also attached a December 23 memorandum from Harriman to the President; see Foreign Relations, 1964-1968, vol. III, Document 240. Both were sent to the Ranch on December 31.

/2/ An account of the meeting is in telegram 1456 from Rio de Janeiro, December 17. (Johnson Library, National Security File, Country File, Brazil, Vol. VI, 12/65-3/67)

/3/ Although providing coffee and medical supplies, Brazil never sent troops or military supplies to Vietnam. (Department of the Army, Allied Participation in the Vietnam, p. 169)

McG.B.

NIE 93-66 Washington, August 18, 1966.

/1/ Source: Central Intelligence Agency, Job 79R-01012A, O/DDI Registry. Secret; Controlled Dissem. According to a note on the cover sheet this estimate was prepared in the Central Intelligence Agency with the participation of the intelligence organizations of the Departments of State and Defense and the National Security Agency. The United States Intelligence Board concurred in this estimate on August 18. The estimate superseded SNIE 93-65 (Document 218).

THE OUTLOOK FOR BRAZIL

The Problem

To estimate the situation in Brazil and the prospects for the next year or two.

Conclusions

A. Castello Branco has managed for the most part to preserve constitutional forms without endangering the objectives of the revolution and has retained solid military backing. His economic corrective measures are showing favorable results, but the results have come slowly and the measures have provoked widespread dissatisfaction.

B. The administration is determined to see that acceptable candidates are chosen in the series of elections scheduled for this fall. It is taking steps to ensure that no opponents will become governors in the indirect elections on 3 September in 12 states. But the touchiest election will be the direct popular one to be held on 15 November for federal congressmen and state legislators; Castello Branco may deem it necessary to interfere directly and obviously so as to retain a working majority in Congress.

C. Costa e Silva, who has been War Minister, is almost certain to be elected president by the present Congress on 3 October. He will probably not exert much influence in the "lame duck" period before his four-year term begins on 15 March. Castello Branco’s policies will not change much in those months, though there will be some loss of momentum.

D. General dissatisfactions will persist, but the new government will probably succeed in keeping the opposition off balance and fragmented. At least to begin with, Costa e Silva’s control over the military establishment will be firm, and we do not believe that a military coup against him is likely during the period of this estimate.

E. Costa e Silva’s administration is likely to be a marked departure from Castello Branco’s, not in its broad goals, but in style of governing, in choice of key advisors, and in certain lines of policy. In some ways he will probably perform better; for example, he will give higher priority to public relations and may reduce popular opposition to some extent. He is likely to try for better relations with students and labor organizations, but will take whatever measures seem necessary to prevent a resurgence of the extreme left.

F. In other matters, however, Costa e Silva will probably not do as well. In his efforts to "humanize" the economic program, he may weaken present checks on inflation. Because he is less judicious and more a man of action than Castello Branco, we see more chance that he might resort to harsh, authoritarian methods. Finally, we think that he will put more emphasis on Brazilian nationalism and that in time this could cause friction in US-Brazilian relations.

[Omitted here is the Discussion section of the estimate.]

Washington, December 6, 1966.

/1/ Source: Johnson Library, National Security File, Country File, Brazil, Vol. VI, 12/65-3/67. Confidential.

SUBJECT
Program Loan for Brazil

/2/ Tab A was a memorandum from Gaud to the President, November 22; attached but not printed.

-a $100 million program loan

-up to $90 million for project loans (fertilizer plant, power generating facilities, highway maintenance equipment, seed capital for a national savings and loan system, and agricultural diversification) without submitting each project for your approval.

AID also asks your approval to start discussions with the Brazilians on "sector" loans in agriculture, education and health for 1968 without making any specific dollar commitments. This lead time is necessary in order to influence the Brazilian 1968 budget preparations which begin in early 1967.

The $190 million loan level is $40 million less than you authorized for 1966.

/3/ Tab B was a memorandum from Schultze to the President, November 29; attached but not printed.

/4/ Tab C was a note from Fowler; attached but not printed.

Joe Fowler consistently opposes the use of dollar loans for local cost financing because of their alleged adverse impact on our balance of payments position. To get at the facts, an inter-agency group under the direction of Charlie Schultze recently made a thorough study of this issue. State, CEA, AID and BOB-with only Treasury objecting-found that there was no inherent reason why project dollar loans for local costs should have any different effect on the balance of payments than other forms of aid.

Other reasons why I do not go along with Joe Fowler’s objection are:

-In Latin America in particular we find that our dollar assistance does not leak to any significant degree to other areas.

-The project loan in question is designed to stimulate institutional development in one area where Brazil is most deficient-home financing.

-The Brazilians agreed to our terms for the loan on the basis of dollar support and will probably scrap the project unle