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107 5 The Global Crisis “Brazil must stand or fall with the United States,” President Getúlio Vargas reportedly told his cabinet at a meeting to discuss the global crisis in January 1942.1 The friendly sentiment was warmly welcomed and reciprocated by leading U.S. officials. For some time they had been disturbed by the fascist sympathies displayed by Vargas ever since the establishment of the Estado Novo in 1937. In fact, Vargas had openly sought to play off Germany against the United States in order to maximize the economic advantages for Brazil. The relationship with the United States, however, was significantly boosted in 1939 by the convergence of national interests arising from the outbreak of war in Europe. The war closed off trade links between Brazil and Germany and greatly enhanced the strategic significance of Brazil’s long coastline bordering the Atlantic Ocean. Just as in World War I, Brazil was again highly valued in the United States as a supplier of strategic minerals and raw materials. After the United States entered the war in 1941, the northeastern region of Brazil effectively became a major U.S. military base and staging post for supplying the allied campaign in North Africa and Italy. Brazil officially declared war on Germany in August 1942. Despite talk of a relationship of equals, Brazil was essentially a satellite of the United States throughout the war. The reward was substantial U.S. financial and material assistance that enabled Brazil to surpass Argentina as the leading military power in South America. In addition, Brazil gained international prestige because it was the only South American country to take on an active combat role in the war. The participation of 25,000 soldiers of the Brazilian Expeditionary Force (feb), who fought in the Italian campaign under U.S. military command , encouraged Brazil once again to aspire to the status of a world power. The achievement of Brazil’s diplomatic ambitions, however, was dependent on the continuation of U.S. diplomatic support, which was effectively ended by President Franklin D. Roosevelt’s death in 1945. 108 chapter five The German Challenge The negotiation of the 1935 reciprocal trade agreement between Brazil and the United States demonstrated the importance that both countries attached to developing trade with each other. But the most notable growth in Brazil’s overseas commerce during the 1930s was not with the United States but with Germany. In marked contrast to customary international trading practice and the principle of most-favored-nation treatment, the Nazi government that came to power in Germany in 1933 preferred to conduct foreign trade in what amounted to a barter system in which goods were paid for in a special German currency known as “aski” or compensation marks. These marks were not freely convertible into foreign exchange or gold and could only be used to buy German goods. The arrangement appeared restrictive but was particularly attractive to Brazil and to other Latin American countries not only because it offered a signal opportunity to increase exports at a time of world economic depression, but also because it obviated the need to allocate scarce foreign exchange and gold reserves to finance foreign trade. Moreover, Germany was keen to buy just what Brazil wanted to sell—coffee and agricultural goods—in exchange for manufactured products and capital goods including arms and munitions, which were eagerly desired by the Brazilian military. The barter system was so successful that Brazil doubled its exports to Germany from 1933 to 1938. Germany purchased large quantities of coffee and rubber and also became the biggest single foreign market for Brazilian cotton and cacao. During the same period Germany’s share of Brazil’s import trade more than doubled from 12 percent to almost 25 percent. In 1938 the value of German exports to Brazil slightly exceeded those of the United States. Only five years earlier Brazil had purchased twice as much from the United States as from Germany. While Brazil welcomed the opportunity to diversify its foreign exports, the United States was alarmed at the rise of German economic competition and what was considered to be the unfair use of compensation marks. Moreover, Germany’s economic drive in Brazil coincided with the start of Cordell Hull’s policy of concluding reciprocal trade treaties. Itamaraty was quick to reassure U.S. ambassador Hugh Gibson, who duly reported to Washington that the Germans were not seeking to negotiate a full commercial treaty and that he had been “told definitely that...

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