The Ambassador in Chile ( Sevier ) to the Acting Secretary of State

No. 25

Sir: I have the honor to refer to my despatch No. 18 of December 15, 1933, and to report the progress of our negotiations with the Chilean Government for a provisional agreement concerning the allocation of exchange for the needs of Americar commerce.

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With a view to keeping in touch with the Foreign Office on certain technical and statistical details in connection with the studies which the Foreign Office and the Embassy have been making on exchange matters, Mr. Scott and Mr. Bohan have had several interviews during the last few days with Mr. Vergara, the Under Secretary. A definite counterproposal has not yet been worked out although it is gratifying that the Government is actually working on a definite plan and is not merely marking time as it has so often done in the past.

As stated in my previous despatch, the British are also pressing for an understanding somewhat along the general lines that we are seeking and for this reason the Chilean Government is examining with unusual care any proposal which it may make to us since it will have to offer satisfaction in a more or less similar form to the British Government. Yesterday an interview took place with Mr. Vergara which is reported herewith as Enclosure No. 1,40 in which the Under Secretary tentatively made the rather interesting suggestion that perhaps we might feel that Chile could afford us satisfaction by removing all exchange restrictions to our commerce. Mr. Vergara made it plain that this was merely a suggestion for study and should not be taken as a definite commitment. To our objection that the plan would not do away with the discrimination to which our commerce is subjected because of the special exchange rates obtained by other countries under compensation agreements, Mr. Vergara replied that if England and the United States were placed on an entirely free basis as far as exchange control were concerned, the exchange rates governing the “A” or current business accounts in the compensation agreements would not be set at fictitiously low rates but would be set each day by the Central Bank at rates equivalent to the free market quotations. Mr. Vergara argued that our commerce would not be subject to discrimination under this arrangement but he did not, however, go into the question of the preferential rates at which frozen assets are being liquidated under compensation accounts. While it is obvious that the suggestion advanced by Mr. Vergara would not solve the question of discrimination which is caused by the preferential exchange created in compensation agreements, the plan would have certain distinct advantages. In the first place, it would give us an assurance that our current trade would be able to finance itself by purchases of exchange in the open market. The artificial barriers would be reduced and the limitations to our trade with Chile would correspond more nearly to the normal commercial factors entering into international commerce. This advantage may not appear so important at the present time when there is a surplus of [Page 153] export drafts in the market and when it is the policy of the Chilean Government to encourage the purchase of these instruments. However, if the economic situation becomes more strained and there is a tightening of exchange control, it would be a very distinct advantage to us to be free of the restraints of exchange control and the stultifying effects of licensing and other legal restrictions. In addition, the plan would presumably solve the vexatious problem which we have had in connection with the re-export of consignment merchandise. Furthermore, while not supplying exchange at an artificially low rate it would nevertheless facilitate the transfer of frozen credits. At the present time a fair amount of these credits is being repatriated through arrangements worked out with the Minister of Finance on the basis of an exchange rate five or six points above the free market rate. The plan proposed, therefore, would save the payment of this premium to the Chilean Government for the transfer of funds.

Looking at the proposal also from a broader viewpoint, it might well prove an entering wedge toward breaking down the entire compensation system. While it cannot be clearly seen at this moment just how Chile’s commerce would react under the double system which would be created it may be foreseen that with the United States and England, Chile’s two most important customers, on a basis of trade free of exchange restrictions, a strong precedent would be created for the breaking down of exchange control. If trade flourished with the Anglo-Saxon countries a powerful incentive for abolishing exchange control entirely would be created.

It is not seen how according us exchange free of control would entirely solve the problem of discrimination involved in Chile’s compensation system but the principle seems a large step in the right direction and combined with other provisions to give us adequate protection from discrimination it may provide the basis for a satisfactory arrangement.

As of use to the Department in its consideration of the somewhat complicated ramifications of the Chilean exchange problem, there is enclosed a memorandum prepared by Mr. Bohan, Commercial Attaché, on this subject.41 This memorandum represents an exhaustive research and has been checked as much as possible by the members of the staff of the Embassy. As the Department will appreciate, it is almost impossible to obtain accurate figures on some of the items entering into the total of exchange availabilities but it is believed that the estimates are reasonably accurate.

Respectfully yours,

Hal Sevier
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