There is enclosed herewith the text of a note in reply to the Foreign
Office’s note which you are requested to transmit as a formal first person
note.
In addition, you are requested to continue upon all appropriate occasions to
keep before the appropriate officials of the British Government the serious
interest of this Government in the operation of the international rubber
restriction scheme.
In connection with the references in the note to local conditions as a
limiting factor in production, you are requested to point out orally that it
is reported that Sarawak has declared a tapping holiday from April 11 to May
10, 1937. Thus while it is contended in the Foreign Office’s note that it is
no use increasing permissible quotas beyond a reasonable appraisal of actual
production possibilities, there appears to be little or no disposition to
take advantage of the possibilities in those areas which could produce more;
but in fact action is taken for a complete cessation of production in one
area in the face of the existing world stock situation.
The Department is also informed by the Trade Commissioner at Singapore that
the consensus of opinion at the present time is that Malaya can produce the
rubber quota for the remainder of the year notwithstanding labor conditions,
providing the Government insists that producers meet their assessments or
have them reduced. Although this Government would prefer not to become
involved in actual details of administration or of revision of the rubber
scheme, you may make such discreet use of this information as seems
desirable
[Page 903]
to you in connection
with numbered paragraph 14 suggesting closer coordination between the
decisions of the local governments and those of the Committee.
You will note that in numbered paragraph 16 of the note enclosed herewith, it
is urged that the Committee increase the rates of release for the last half
of 1937. For your confidential information the American representatives on
the consumers’ panel will probably present a vigorous request at the meeting
of the Committee on May 25 for a revision of the quota for the last six
months of 1937 from 90 percent to not less than 95 percent. This Government
concurs in this request and if inquiries are addressed to you in connection
with the suggestion in paragraph 16, you may indicate that such a rate of
release is the minimum which would appear adequate to this Government.
[Enclosure]
Text of Note to the British Foreign Office37
On March 15, 1937, upon instruction from my Government, I conveyed to you
some preliminary observations on some of the more salient aspects of
your note of March 11, 1937 (No. W 4455/97/50) in reply to this
Embassy’s note of February 16, 1937, with regard to the situation which
has arisen with respect to stocks and prices of rubber and to the deep
concern of my Government therein. At the same time I indicated that
fuller reply would be made when the text of your note had been received
in Washington and opportunity had been had for its study. I am now
instructed to submit the following comments:
1. The United States Government is led to continue this exchange of views
and opinions regarding the operation of the rubber restriction scheme
not for the purpose of establishing responsibility for the existence of
the present situation in the rubber market, but because the interest of
its citizens in having assurance of adequate supplies of rubber at a
reasonable price is so great. The United States customarily consumes
more than half of the world’s rubber production. The enterprises which
purchase this rubber have found themselves faced since the inauguration
of the scheme with a continuous rise in the price of rubber up to a
point well beyond any calculations of costs of production. They have
witnessed a substantial decline in available stocks. They have been
faced with the uncertain prospect that these developments might continue
further, at great cost to the American consumer
[Page 904]
and at a great potential loss to American
interests. In the face of these circumstances, they have found various
occasions when in their judgment the International Rubber Regulation
Committee did not give adequate consideration to their presentation of
the situation. In consequence there has been, and there remains,
continued apprehension, natural to a situation whose past development
has been as described, and which places the American consumer far more
conclusively at the mercy of producing interests than in the ordinary
market for an uncontrolled commodity.
2. This situation will not change until experience has demonstrated the
complete willingness and ability of those in control of the rubber
regulation scheme to provide such adequate supplies that world stocks
can be built up at prices lower than those now existing and until the
future maintenance of a supply and price situation more stable and
reassuring than the present one is established.
3. Therefore, this Government sincerely hopes that the expectation of his
Majesty’s Government that “in a short time the supplies of rubber will
equal and then exceed the demand” will be found to be justified. It has
noted the subsequent action of the International Rubber Regulation
Committee in the meeting of March 16, 1937, increasing the rate of
permissible exports for the last half of 1937 to 90 percent of the basic
quotas. The fact, however, that after more than five weeks since this
decision was announced rubber prices are still above a reasonably
remunerative level to producers is clear evidence that the situation had
been allowed to get sufficiently out of control that even this action
was not adequate.
4. It is believed that in the note of March 11, 1937, the degree of
concurrence of the consumers’ panel in many of the decisions reached by
the International Rubber Regulation Committee has been unduly stressed.
On the basis of information available to it, the United States
Government finds significant instances in which the consumers’
representatives found themselves unable to concur in the decisions which
the Committee reached. From the beginning the American consumers’
representatives in their attendance at the meetings of the Committee
have felt themselves in a subordinated role in which they were required
to adjust their requests to their anticipations of what the interests
controlling the Committee would be willing to consider, without too
severely straining their relations with the Committee. At various times,
according to the reports received by this Government, they have been
faced with clear intimations that in the event the presentations made
either by them or by this Government went beyond what seemed reasonable
to the controlling interests of the Committee, their future chances of
getting consideration from the Committee would be impaired. This is
recited not for the purpose of criticism, but in
[Page 905]
order that the British Government may appreciate
the atmosphere in which from time to time the Consumers’ Panel has felt
itself acting, and also as a partial explanation of what may have
appeared to the Committee as concurrence.
5. It will be remembered that the consumers’ representatives are entirely
without vote and that they have generally participated in the
discussions only after preliminary agreement has been reached by the
producers on the Committee. In the opinion of this Government, the
present arrangements do not adequately fill the criterion of consumer
protection which was laid down in Section 3 (d)
of the general resolution of the London Monetary and Economic Conference
of 1933.38 It is
natural that the inadequacies of consumer representation should become
clear only at times when developments in the market situation were of
unusual character, such as have occurred subsequent to the middle of
1936.
6. Furthermore, regardless of the concurrence of the advisory panel in
decisions of the Committee, this Embassy, upon instruction, presented
orally to Sir John Campbell on September 24, 1936, the concern of the
United States Government over the prospects that the then concurrent
rate of release of crude rubber was not sufficient to meet the
consumption requirements of the world and that as a result world stocks
had been declining even more rapidly than anticipated and had reached a
point where they created the possibility and danger of inadequate
supplies and unreasonably high prices. These views the United States
Government has continued to press in London and at The Hague, both
formally and informally, with the utmost seriousness. It was foreseen
clearly by this Government and should have been equally evident to the
Committee that unless more prompt action were taken there would be a
progressive depletion of stocks and corresponding increases in prices of
rubber. In view of this record the United States Government cannot
concur in the statement that it was not until towards the end of
November that rising prices and increased rate of consumption were “seen
by all concerned for the first time”. Had the September warning of this
Government been heeded, more prompt action on the part of the Committee
could undoubtedly have resulted in the earlier increase of production
and shipment. Such action could have arrested the decline of world
stocks before they reached a point deemed inadequate by producers and
consumers alike and would have been reflected by now in releases equal
to current consumption.
7. A considerable amount of stress is placed in the note of March 11 upon
the fact that world consumption in 1936 exceeded estimates by
[Page 906]
approximately 50,000 tons. The
fact that a difference of 50,000 tons or less than 3 weeks’ consumption
could deplete stocks sufficiently to cause so marked a rise in price is
of itself sufficient evidence that the plan has not been administered
with adequate provision for stocks against just such a contingency. In
this connection it may be recalled that in paragraph 3 (b) of the Foreign Office’s note of April 26,
1934,39 it was stated:
“There are several factors in the scheme on which the United
States can rely for rapid price protection in the event of
temporary fluctuations occurring. In the first place, both
dealers and producers will be allowed, under the plan, to hold
stocks of very considerable size. In the second place, it would
be open to the Committee if the scheme comes into operation,
(when stocks are approaching normal) to set up a buffer stock
analogous to the proposed tin buffer stock. The members of the
Committee, who it should be noted would be plenipotentiaries,
and therefore able to vary the export quotas at short notice,
would then have ample resources on which to draw in order to
deal with temporary price movements. The existence of
considerable stocks in the hands of producers and dealers, the
power of the Committee to increase the quotas rapidly, the
possible creation later of buffer stocks, the pressure from
producers to be allowed larger export quotas, and the
constitution of the Committee, should, as I am sure Your
Excellency’s Government will agree, provide adequate safeguards
against any artificial scarcity.”
8. In justification of the refusal of the Committee to adopt the advice
of the consumers’ panel at the meeting of January 26, 1937, it is stated
that the governments chiefly concerned, as well as the representatives
of the chief producing areas, concurred that a further increase in the
rates of release would not secure the attainment of the objectives
desired. Your note further recalls that “rubber is not a factory
product. Production cannot, in the nature of things, be very rapidly
increased”. Awareness of this fact emphasizes all the more the
inadequacy of the Committee’s action at the October meeting in deciding
to set the rate of release at 70 percent for the entire first half of
1937 instead of 70 percent for the first quarter and 75 percent for the
second period as suggested by the advisory panel. Had this higher
objective been set at that time and had plans been laid in producing
areas in accordance therewith, it would have been easier at the December
meeting for the Committee to have set (say) rates of 75 percent and 85
percent for the first two periods respectively with some assurance that
these rates of release could be met. This would, over the first six
months, have averaged out to the rate of production which the advisory
panel felt in December to be the minimum to be justified by the
prospects of stocks and consumption
[Page 907]
and with which, according to your note, the
Committee did not disagree. Further, if it is correct that production
cannot be rapidly increased, it must be obvious that consumers will
necessarily come to place less confidence in the usual proviso of the
Committee, when setting its rates of release, that its decisions as
regards permissible exports may be revised from time to time, if for any
reason this should, in its opinion, be desirable.
9. In this connection also it is pertinent to refer to the assurances
given in paragraph 3 (c) of the Foreign Office’s
note of April 26, 1934, that
“a cardinal feature of the scheme now proposed
is its flexibility. There will therefore be no danger of any
situation arising, such as occurred under the Stevenson plan,
the rigidity of which was one of the causes of its breakdown.
Under the Stevenson plan the release of further supplies of
rubber was contingent on prices reaching a certain level and was
attended by considerable delay and consequent inconvenience to
consuming interests. Under the present scheme, on the other
hand, exports will be determined by demand. The Committee will
be able to vary the export quota[s], without delay, in
accordance with the increase or decrease in demand, and the
working of the scheme should be such as to prevent any violent
price movements.”
10. From the assurances in paragraphs 3 (b) and 3
(c) of the note of April 26, 1934, cited
above, it is evident that at that time there was awareness of the
necessity that ample provision be made, through the maintenance of
adequate stocks, for meeting situations which might be occasioned by
increases in demand and by the lag in the responsiveness of production
to such increases. Such provision, however, has not been made.
11. The United States Government further believes that the responsibility
of the governments concerned in the rubber restriction scheme is greater
than that which seems to be indicated by your note with regard to the
British delegates over whom “His Majesty’s Government have some measure
of control”. I may recall that in a note from the Foreign Office, dated
March 23, 1934,40 that is before the present restriction scheme
was adopted, it was stated that:
“It is the governments, and not the producers, who will appoint
the international committee that is to operate the scheme; … The
Control scheme will be worked, not by producers, but by
officials appointed by, and truly responsible to, the
governments mentioned above.”
It is also necessary to recognize that the whole
operation of the rubber regulation scheme rests completely on
legislative action, supported
[Page 908]
by penalties enacted by the authorities of the respective governments
concerned and that without such direct governmental powers no control
scheme could possibly be operated with respect to rubber. This was
recognized in the note of March 23, 1934, which stated:
“… the effective scheme must be one agreed, not
by the private interests, but by the governments concerned. The
governments therefore (which in addition to His Majesty’s
Government include the Governments of the Netherlands,
Indochina, Sarawak, North Borneo and Siam) must first accept the
scheme and agree to put it into effect.”
12. With reference to the question of a “fair and equitable price,
reasonably remunerative to efficient producers”, the United States
Government would appreciate an expression from His Majesty’s Government
as to what it considers such a price to be in present circumstances. It
is noted that the price obtaining in the middle of February, 1937, “is
admittedly higher than the fair and equitable level for the efficient
producer as determined on the Committee’s costing basis”, but that such
a price would be “substantially higher” than 15¢ (7½d.) per pound. It
may be recalled that the United States Government made this same inquiry
when the present restriction scheme was being set up in 1934 and that it
was replied that “such a price has not been determined nor is it
possible to do so”; that such a price depends on the degree of
restriction which in turn depends on the demand and the cost of
production. While the United States Government is not unaware of
increases in the general level of costs, wages and prices over the past
years, it cannot fail to point out that without definite objective
criteria the concept of what is a satisfactory price tends to change
with prices themselves. It also understands that, over a period of time,
the unit cost of production is lessened as the rate of production
increases. Furthermore, it draws attention to the fact that with prices
substantially below existing levels or even below 150 a pound, a large
part of the rubber producing companies were able to pay satisfactory
dividends.
13. The United States Government much appreciates the willingness
expressed by His Majesty’s Government to consider any proposals which
might be made to increase the flexibility of the scheme and to secure at
all times adequate supplies. It does not believe that it would be
appropriate for it to make suggestions as to details of operation and
administration, but it does believe that the experience of recent
months, together with some of the explanation advanced in the Foreign
Office’s note under reply, serves clearly to indicate justification for
the suggestion that the whole basis of the present scheme should be
examined at an early date in order that it may make more adequate
provision for ample stocks and that it may be more adequately adapted to
meeting increased demands for rubber. The Committee and the
[Page 909]
governments concerned have the
responsibility of so determining the course of supply from existing
capacity that adequate supplies may always be forthcoming at reasonable
prices. Furthermore, the continued operation of the scheme is bringing
to the fore the question of whether provision for new planting may not
soon become essential. So far the restriction control scheme has
operated in only one direction: to raise price and reduce stocks. The
interests and governments which control the scheme must prove that the
control is able to operate in the other direction as well: to keep the
price reasonable and supplies adequate. There is small comfort to the
purchasers of rubber in the fact that the failure of the control to work
may be excused by local conditions; those who assume the responsibility
for control must also assume the responsibility for local
conditions.
14. It has come to the attention of the United States Government that the
regulations of the local government control authorities have not always
been adjusted so as to give full and prompt effect to the decisions of
the Committee. Unless the local controls are so administered that each
area is able and permitted promptly to respond to increases in the rates
of permissible exports, action by the Committee cannot alone suffice to
assure supplies and prices of rubber. When all major producing areas are
under control, failure of any one to fill its allotment acquires a
significance for world supplies which does not obtain when alternative
sources of supply may be freely drawn upon. The suggestion is ventured
therefore that the Committee and the governments concerned may wish to
give consideration to the question of better coordinating the
administrative control in the several producing regions with the
decisions of the Committee.
15. The record of the past several months clearly demonstrates that a
basic requisite of a stable price level for rubber is the existence of
sufficiently large stocks to discourage speculative movements. This is
also recognized in your note of March 11, 1937, which states, “No
control scheme, which is unsupported by the possession of large stocks
under the controlling authority, can control such a situation fully,
over a short period; and it is common knowledge that speculative
movements of this kind occur periodically, whether a control scheme is
in existence or not, and often irrespective of the long-term position”.
The fact that, as your note points out, all commodities, controlled or
uncontrolled, have been subject to sudden changes in demand, gives all
the more force to the suggestion that a control scheme which aims not
only at a reasonably remunerative price but also at a stable price
should make ample provision for just such contingencies which may be
expected to occur but whose timing may not be exactly predictable.
Whether the larger stocks, for which the need is clearly indicated,
should be permitted to be carried outside the regulated areas, or by
[Page 910]
dealers or producers in the
regulated areas, or in the form of a buffer stock under the control of
the Committee and at its financial risk, are details which would be more
appropriately decided by the Committee.
16. Meanwhile, the United States Government again urges most strongly
that the British Government instruct its delegates on the Committee to
seek to secure rates of release which will impose no restriction upon
the maximum possible output, consistent with orderly production, until
world stocks are restored to a level substantially higher than those
prevailing at present and, in any event, not less than six months’
anticipated consumption. Although it cannot be denied that the rates of
release provided for the year 1937 are notably in excess of those for
the preceding year, it must be recalled that estimates of consumption
are also greater, that the rates of release in 1936 were adjusted to a
further diminution in world stocks, and that the base from which the
comparison of increased release is made is thus an artificially low
rate. Even if world production of rubber reaches the rates of
permissible exports now envisaged and if world consumption does not
exceed present estimates, there will be added to world stocks in 1937
only some 60,000 to 80,000 tons over the stocks at the end of 1936. A
restoration of world stocks to around 500,000–525,000 tons would, in the
opinion of the United States Government, still be insufficient to give
firm assurance that the experience of recent months could not be
repeated, and it is for this reason that it urges that the Committee
increase the rates of release for the last half of 1937.
17. With reference to the strengthening of provisions for safeguarding
consumers’ interests, it is not believed that any useful purpose would
be served by the addition of a representative of the United States
Government if he were to act merely as an adviser and observer as do
other members of the consumers’ panel. Neither is it believed that any
substantial improvement could be achieved by increasing the powers of
the consumers’ representatives by, for example, extending full voting
privileges to them, so long as the representation remained numerically
unequal between producers’ and consumers’ representatives, as it is at
present. It is suggested, however, that every effort be made to assure
that members of the advisory panel are consulted before the definite
crystallization of opinion and judgment in the Committee and that they
be permitted to join in all discussions of the Committee rather than
only those portions of the meeting to which they are now admitted.
18. The United States Government is by no means certain that the worst
phases of the threatened shortage of rubber have passed and that
arrivals of rubber in the principal consuming countries will soon
[Page 911]
equal the current rates of
consumption and will, in addition, permit a beginning in the recovery of
world stocks toward an adequate level. It hopes, however, that it will
be made abundantly clear by the Rubber Committee that it is the firm
intention of the Committee to maintain production and stocks at such
levels that the present situation cannot again arise. The simplest test
will be the course of the price of rubber. As your note suggests, the
principle of regulation of an important raw material in the interest of
orderly supplies and reasonable prices fair alike to producers and
consumers is not of itself objectionable to the United States
Government. It feels that the administration of the rubber regulation
scheme at least temporarily failed to meet these criteria and it is
still apprehensive that the scheme, unless further revised, does not
contain adequate assurances that it may not fail again. It feels that
its repeated expression of concern when the plan was first under
consideration has been amply justified and it is for these reasons that
it has again continued to press its point of view upon His Majesty’s
Government.
19. Finally, the United States Government wishes again to refer most
earnestly to the importance, particularly at the present juncture in
world affairs, of avoiding by all practicable means any appearance of
unreasonable restriction upon the supplies of basic raw materials. If it
appears that a commodity as important as rubber is being regulated with
a view to inordinate gains, even though the supply is restricted
impartially to all consumers alike, the discontent of those areas which
find themselves largely dependent upon other countries for their raw
materials cannot fail to be enhanced, and the confidence of peoples of
all consuming countries that the materials essential to satisfactory
conditions of life can be obtained on reasonable terms through the
peaceful methods of trade will be weakened.
