Foreign Relations of the United States Diplomatic Papers, 1934, The American Republics, Volume IV
810.5151 Williams Mission/46
The Ambassador in Argentina ( Weddell ) to the Secretary of State
[Received August 13.]
Sir: I have the honor again to refer to the Department’s instruction No. 107 of June 30, 1934, relative to the pending visit to this city of Dr. John H. Williams to study the exchange control situation, and in this connection to enclose copies of a confidential memorandum prepared by Dr. Williams, dated August 3, relating to this subject.
During the course of his visit every effort was made to put Dr. Williams and his assistants in touch with Argentine officials, members of the American Chamber of Commerce, local business men, banking interests and others who were best qualified to assist him in his task.
The Department will be especially interested to note the main conclusions of Dr. Williams as set forth on page 8 of the memorandum.12 Dr. Williams and his associates are leaving for Santiago, Chile, tomorrow morning by aeroplane.
Respectfully yours,
First Secretary of Embassy
The Special Representative of the Department of State ( Williams ) to the Ambassador in Argentina ( Weddell )
Dear Mr. Ambassador: During our stay in Buenos Aires we have interviewed various Argentine officials, including especially Dr. Pinedo, Finance Minister, Dr. Duhau, Minister of Agriculture, Dr. Prebisch, the economic and financial advisor of the government, and Dr. Gagneux, the Exchange Controller. We have had two meetings with the American Chamber of Commerce and individual meetings [Page 529] with American importers and bankers; and have discussed our problem with the American Government representatives.
Under the Exchange Control system now in force, Argentina allocates to us more than twice as much exchange as is created by our imports. But since the greater part is required for debt service, we receive only about half enough official exchange to cover our exports to Argentina. To put it another way, Argentina allocates to us as cover for our exports about as much official exchange as is created by her exports to us, and in addition supplies official exchange for dollar debt service; but this means that for about half of our exports to Argentina we must have recourse to the “free market” at a premium over the official rate, which has recently been around 15 per cent. In allocating the exchange Argentina discriminates as between imports from us which she regards as more essential and imports which she regards as less essential. It seems clear also, though on this we have had no definite admission, that as between similar imports from different countries, she discriminates in favor of countries, notably England, with which she has concluded special exchange agreements. But it was stated at the meeting with the Exchange Committee of the American Chamber of Commerce that the range of such products is not great. The method of discrimination as between different imports from us is the requirement of a prior exchange permit, imports receiving such a permit being entitled to official exchange and those not receiving such a permit being forced for cover into the free market. Action on the application for permit can and should be had before the import leaves the country of origin, unless the importer is prepared to provide the exchange cover through the free market.
Our current exchange position could be improved by inducing Argentina to provide more official exchange or by the removal, or narrowing, of the spread between the official and the free market rates. We have, in addition, the problem of how to release unpaid balances.
Means of inducing Argentina to allocate to us more official exchange seem unpromising. We have not the trade position to press for, or to benefit by, a compensation arrangement, like the Roca Agreement, and have not favored such a policy even in countries in which our trade position is strong. We could create more dollar exchange by a bilateral trade agreement, but will probably not wish to do so in the near future. An advance of capital or credit would create more dollar exchange, but we have seen no evidence that Argentina wishes to borrow or the United States to lend; and except possibly in connection with freeing blocked funds (discussed below), which would provide no additional current exchange, there does not appear to be any sound reason, on either side, for recommending this type of solution at present.
[Page 530]Termination of the special exchange agreements with other countries would also help our position, though the Roca Agreement probably impairs our position less than one might in principle assume; but the Argentine officials state frankly that they have responded unavoidably to pressure in making these agreements, and emphasize the fact that the agreements are terminable upon the termination of exchange control. We have received the impression that they have little enthusiasm for the Roca Agreement but see no way out of it at present. They also appear to feel, somewhat resentfully, that these agreements have not given them the assurance of their foreign market for beef which they expected. It would appear, however, to be both impolitic and futile to raise any questions respecting these agreements with Argentina, though it does appear that the United States has good ground, in logic at least, for pointing out to Great Britain the inconsistencies of her policy as between countries like Chile and Brazil in which her trade position is weak and countries like Argentina and Uruguay in which her trade position is strong, the policy being, as it now seems to us, to plead in the former countries for avoidance of compensation agreements, on broad economic grounds, and to press for such agreements in the latter, on narrower grounds of special advantage.
The remaining method of solution of our exchange problem lies in the achievement of equilibrium in the Argentine balance of payments, such as would permit the removal of exchange control and the emergence of a single exchange rate, equally applicable to all exporting countries, in a free market. The members of the Exchange Committee of the American Chamber of Commerce expressed themselves in favor of this solution, as both the most feasible and the most desirable. Whether, and when, this solution can be achieved depends upon a number of factors. The chief is world prices of Argentine exports, which have in recent months advanced substantially, materially improving the trade balance and giving rise to a distinctly optimistic atmosphere. This improvement has been accompanied by a narrowing of the spread in the exchange rates in the past two months, which appears to mean that more exchange is becoming available in the free market. By reason of her internal policy, which has resulted in a substantial fall in farm costs, Argentina is in a very strong position to take advantage of any improvement in world prices for her products, and does not require a return of prices to the pre-depression level. This matter of internal prices and costs in relation to external we have investigated in some detail, and have discussed with the Minister of Agriculture and with Dr. Prebisch.
The Argentine Government is also endeavoring to improve its balance of payments position by applying a priority list on imports and by effecting conversions of its foreign debt at a lower rate of interest. [Page 531] It is in a strong position to achieve the latter, as security markets strengthen, owing to its record of maintaining the full debt service during the depression. Two British loans have already been converted, and discussions are now proceeding with respect to others. The Argentine officials have not omitted pointing out to us that a conversion of their six per cent dollar bonds into five per cents would help their position considerably, but it will probably be some time before such an operation in our market could be successful.
The Argentines have also stated that under a system of free exchange they might not think it prudent to relax at once their system of import permits since there appears to be a strong tendency for imports to increase when control is relaxed or exchange conditions improve; they would have to be guided by actual experience.
One possible obstacle to a nearby removal of exchange control may be the fact that at present the Government makes a substantial profit in the official market by buying the exchange created by the exporters at a considerably lower rate than that at which it is auctioned off to importers having prior exchange permits. This profit has been used in part to buy grains from the farmers at an official minimum price. The Minister of Agriculture has informed me that the Government has now sold all its grain holdings and realized a substantial profit, but he took obvious pride in explaining how the spread in the exchange rates provided funds to finance such operations, and outlined a policy of building up reserves of this character to aid in supporting any agricultural production which might experience temporary market weakness. So long as these operations persist, they may provide a strong motive for retaining the present system of exchange control; but this possibility must be weighed against the counter-possibility that the producers, once they feel their foreign market is assured, may demand that the full price of the exchange, as in a free market, should come to them. This is the development which in Uruguay has resulted (last week) in a new exchange policy substantially enlarging the free market.
On the whole, I have received the impression that the Argentine situation is substantially improving, and that if the improvement continues it will result in a narrowing of the spread of exchange rates, the expansion of the free market, and eventually the removal of exchange control. How quickly this will occur cannot be estimated. One recent piece of evidence was the removal (August 1) of exchange control on small private (mainly immigrant) remittances, estimated at about 40,000,000 pesos a year, and the transfer of these operations to the free market. Another may be Dr. Gagneux’s statement to us that the present exchange control mechanism, established last November, was designed to permit an easy and rapid transition to a free [Page 532] market when and as conditions permit. Apart from such straws as these, the Argentine officials have carefully avoided making any definite statements or commitments respecting their future policy.
Two remaining questions are the attitude of the American business community in Buenos Aires, and the problem of blocked funds. We have the impression that American export interests and bankers in this market feel that the treatment being accorded them is as satisfactory under the circumstances as can reasonably be expected. In their view the system of prior exchange permits combined with freedom of access to the free market after notice is served that permits will not be granted is acceptable until such time as conditions permit the removal of exchange control. Thus far, the Chamber of Commerce Exchange Committee has supplied us with no complaints of discrimination or citations of cases of unfair treatment, and on the other hand several of its members have stated expressly that we were being accorded fair and reasonable treatment, all things considered. On the other hand, they point out that the exchange control has undoubtedly been injurious to many of our small exporters, and that the present comparative absence of complaint is in part due to the fact that only the fittest now survive.
In the Chamber’s view, the most serious problem at present is that of liquidating the unpaid balances. We understand that the Chamber intends to supply us with an estimate of the amount of these funds. Dr. Gagneux, the Exchange Controller, gave us an estimate of 25,000,000 pesos (the American part only), and points out that creditors have now the option of liquidating through the free market. The Chamber of Commerce Exchange Committee stated that to some extent liquidation was occurring in this way, though this method involves a substantial loss in the exchange difference. The Government has offered to pay off blocked funds with five-year notes (similar to the arrangement offered Italy) but these are not acceptable, according to the Chamber, unless they can be discounted for cash (dollars) in the United States. The Exchange Controller is anxious to clear up the unpaid balances, and points out that the removal from the market of this potential pressure would be of great assistance. Both he and the Chamber’s Exchange Committee have raised the question whether the Export-Import Bank could be interested in a transaction of this character.
Our two main conclusions are:
- 1)
- The United States appears to have little or no means of inducing Argentina to offer us more favorable exchange treatment except as her general position improves; and this improvement appears now to be under way.
- 2)
- Both Argentina and our exporters wish to clear up unpaid balances. This may now be done through the free market and to some [Page 533] extent is being done, but this method involves an exchange loss. The alternative method of payment in five year notes depends upon the discounting of such notes by the Export-Import Bank or some other American institution. Anything we can do to facilitate the liquidation of these balances will undoubtedly assist Argentina in her general solution of the exchange problem, and will thereby improve our own treatment on current trade account.
Sincerely yours,