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

No. 77

Sir: I have the honor to refer to my despatch No. 71 of March 17, 1934,9 reporting the status of our negotiations concerning the agreement to accord exchange facilities to American commerce. On its face the Memorandum of the Chilean Government setting forth its interpretation and modification of the proposal on exchange, seemed so unsatisfactory and appeared to depart so greatly from the spirit of the original offer that it was felt desirable to arrange for a long conference in an attempt to clear up the points at variance. On Saturday, March 24th, therefore, Mr. Scott, Mr. Sparks and Mr. Bohan had a long conversation with the Under Secretary for Foreign Affairs, Mr. Vergara, a record of which is enclosed.10

This conversation brought out the fact that the unsatisfactory nature of the Chilean Government’s reply was due in part to a misunderstanding of the significance of the English text of our Memorandum and partly to certain practical and reasonable considerations which became apparent when a closer study of actually putting the [Page 19] plan into operation was undertaken. As a result of the conversation referred to above, and a further discussion which took place with Mr. Vergara yesterday, it is felt that the points which presented difficulties have been largely cleared up and that the Chilean Government is in virtual agreement with us as to the substance of our proposal.

Following the discussion on March 24th, in order to advance our negotiations a memorandum dated March 27th (Enclosure No. 2)11 was prepared at the Embassy embodying the revised ideas which had developed as a result of this discussion. This memorandum was submitted to Mr. Vergara yesterday, who stated that it represented substantially the basis of an exchange agreement satisfactory to Chile. He added that obviously the wording of portions of the memorandum were too discursive and explanatory in nature to be used as the final text of an agreement but that he felt that in substance the two governments were virtually in agreement if the memorandum represented also a basis for an agreement acceptable to the United States Government.

In explanation of the departures in the draft of the Memorandum dated March 27th from the Embassy’s Memorandum of March [February?] 20th, originally submitted, the following may be stated concerning each point.

1. It will be noticed that the first sentence of point No. 1 has been changed to read that the Chilean Government agrees to lift “as soon as possible” all exchange control, etc. The insertion of this phrase was felt necessary because the Foreign Office feels that enabling legislation will be necessary to put on a strictly legal basis the lifting of the exchange control provided for in the agreement. While at first glance there may appear to be some objection to this, actually it is not believed that the point is of great importance since the Minister of Finance can and will give full effect to the agreement pending the time when the new exchange situation can be regularized through appropriate legislation.

The next change which was made was in the deletion of the second sentence of point No. 1. Our discussions with Mr. Vergara brought out the fact that he entertained surprisingly strong objections to making any reference to sources of exchange other than the export draft market. He insisted that the only source of exchange controlled by the Government is the export draft market and to include reference to other sources would lead to great difficulties both because of internal legal considerations as well as in connection with Chile’s relations with other countries on exchange questions. He maintained that from our point of view it is not a practical consideration since if the commerce [Page 20] of the United States and Great Britain are placed on a free exchange basis, the unofficial sources of exchange are thus virtually done away with. The reasons for the strong objections entertained by the Under Secretary are not completely apparent, but it is felt that a satisfactory solution to this point can be reached by omitting the sentence embodying this reference. Such an omission leaves the commitment made by the Chilean Government to give us exchange free of restriction or control, fully as strong and unqualified and there would not appear to be any great loss from our point of view in meeting the Chilean Government’s wishes on this point.

Paragraph 2 of point No. 1 of the modified Memorandum is largely explanatory in character and presumably would not appear in this form in the final agreement. It was set forth in this Memorandum following the language employed in the Memorandum from the Chilean Foreign Office in order that there should be no misunderstanding as to the manner in which the rates would be determined. In our discussion of the rates of exchange the Under Secretary pointed out that as the amounts retained in compensation offices for imports into Chile are in effect the property of private individuals, the situation might arise in which these individuals would agree privately to an exchange rate lower than the rate fixed by the Government and that therefore in any agreement which might be reached the Government would have to note this exception, limiting its commitment to this extent. This point, in the Embassy’s opinion, is not of great practical importance. It is obvious that a situation, though unlikely, might arise where private transactions would be made at rates different than the official rate. The bulk of exchange, however, arising through compensation agreements, is obtained from the sale of nitrates. As the Chilean Government can fully control the rate of exchange obtained through this source, it is felt that American commerce would be fully protected from discriminatory exchange rates if the Chilean Government would guarantee that any exchange created through the sale of nitrate would not be sold at rates lower than the equivalent of the export draft rate. For this reason a proviso to this effect was inserted as the last sentence of the last paragraph under point No. 1.

2. In discussing point No. 2, Mr. Vergara insisted that it would be unwise to make a reference to the exclusion of purchasers of goods from compensation countries from other sources of exchange. The question involved here is the same point which was discussed under point No. 1, namely the opposition of the Chilean Government to a reference to other sources of exchange. Mr. Vergara again pointed out that the Government can control the export draft market but cannot control these other extra-legal markets. Furthermore, from his knowledge of the attitude of other countries who have negotiated compensation agreements, he stated that he felt sure that a reference of [Page 21] this sort would provoke retaliatory measures on the part of other countries who would then begin to raise their blockage quotas, perhaps even up to 100%, on Chilean nitrate. In our discussion on this point, it was pointed out that such an attitude on the part of compensation countries would be entirely unreasonable since whatever advantages we might be obtaining under the proposed agreement for free exchange were at the cost of the United States’ foregoing the advantages obtained under compensation arrangements, advantages which these nations were now enjoying to our detriment. The Under Secretary did not deny the force of this argument but pointed out that it might be unwise to invite retaliatory measures on the part of compensation countries, which would be very harmful to American commerce as well as Chilean, when the point was of no real practical importance. It was of no practical importance for the reason that even though an attempt were made in an international agreement to dry up extralegal sources of exchange for countries within the compensation system, such attempts would not be effective since experience had proved that legal obstacles notwithstanding, there will always exist a bootleg market when the need for exchange is sufficiently strong. He confirmed our previous understanding that Chile would, however, exclude compensation countries from access to the export draft market.

It is obvious that Chile is very anxious to avoid taking any step which might invite further bullying tactics on the part of European countries. While recognizing the very fair treatment which it is obtaining from the United States in regard to the sale of its nitrate, Chile is fearful of losing any of its European nitrate markets. It is of course perfectly true that no international engagement will serve to eradicate the bootleg market or exchange if a real need exists for such a market and in view of the doubtful practical value of attempting to make reference to markets for exchange which are not controllable by the Chilean Government, it is felt that the reference to other sources of exchange at the end of point No. 2 might be omitted without prejudice to the agreement from the American point of view.

3. Point No. 3 occasioned more discussion than any other point. The Chilean Government apparently read more into the point than had been intended and insisted on drawing the Embassy into discussions of the details of possible arrangements which might be entered into between American holders of frozen credits and the Chilean Government. It was pointed out to the Under Secretary that the primary desire was that an agreement on exchange facilities should not be later on invoked by the Chilean Government as closing the door to advantageous private arrangements on the part of American firms or individuals to liquidate their frozen credits; that it might be possible, for example, for these creditors or groups of them [Page 22] to work out arrangements on exchange matters over a period of time at rates more advantageous than the prevailing free market rates and that we would wish the Chilean Government to give sympathetic consideration to any such proposals. The Under Secretary appeared to feel that somehow this statement involved a definite commitment as to the point of view of the Chilean Government which might prove embarrassing or untenable later on. After much discussion, however, he finally agreed to accept point No. 3 without change of wording as originally embodied in the Embassy’s Memorandum.

4. The Under Secretary had apparently been impressed with the seriousness with which the American Government viewed the question of relief for Americans having deposits in the retirement fund and appeared to view favorably a provision following the lines of point No. 4 in the modified Memorandum. It will be noted that following this provision the Chilean Government would agree to repay Americans having dollar deposits when such payments are due. The reason this language was inserted was because the law governing the repayment of these deposits contains certain conditions governing the time at which they are to be repaid; for example, one provision provides for the repayment of depositors after they have been outside of Chile for a period of one year. It is felt that if the Chilean Government is willing to agree to point No. 4 as now worded, we will obtain a more satisfactory arrangement in regard to these payments than has heretofore seemed possible. It will be noted that the language of the new point No. 4 shifts the burden of payment to a definite obligation on the part of the Government rather than on the part of the Caja which does not have funds available to meet these payments.

There have been indicated above the changes in phraseology of the proposal drafted by the Embassy which the Chilean Government feels are essential to make it acceptable. In my opinion, these changes do not represent an attempt to offer us less than contemplated in the original proposal. Rather they are due to the development of certain practical or legal difficulties in putting the proposal into operation which were not entirely foreseen at the time when the general principle of the granting of exchange free from all control was suggested. It is not believed that in meeting the wishes of the Chilean Government the substance of the agreement, from the American point of view, will be lost. Indeed, in some respects the amended proposal represents a more concrete and satisfactory draft than that of the Embassy Memorandum of February 20th. Therefore, unless the Department perceives objections which are not apparent to the Embassy, it is recommended that the Memorandum of March 27th be accepted as embodying the general terms of a satisfactory proposal following closely the lines of the Department’s telegraphic instruction [Page 23] No. 21 of February 17, 2 p.m., 1934. It should be understood of course, that in tentatively accepting the Memorandum referred to above, the Under Secretary made it clear that for the sake of conciseness, if for no other reason, there would be certain changes in the text and that his Government was not to be considered as accepting absolutely textually the Memorandum as it stands. He added, however, that if the Memorandum were acceptable to the Department, there appeared to be practically no divergence in any essential points between the two governments. On our side it was made clear that no definite assurance could be given as to the Department’s viewpoint thereon.

In view of the foregoing I have the honor to request that the Embassy be informed by telegram whether the Department desires it to proceed on the above basis to work out a draft of an exchange of notes, subject to the Department’s approval, such an exchange of notes to constitute a modus vivendi in regard to exchange matters between the two governments pending the time when a definitive commercial treaty can be concluded.

In recommending the acceptance of the above proposal the Embassy desires to make it clear that it feels the proposal is about the best we can obtain, all conditions being considered. It is believed that it satisfactorily takes care of the requirements for our current trade, certainly within the limited external purchasing power which we may anticipate in Chile for the next few years. We must frankly face the fact, however, that such an agreement does not very satisfactorily solve the problem of American frozen credits which at the best we can anticipate will be transferred at approximately the prevailing export draft rate. Obviously liquidations of frozen accounts at this rate represent an acceptance of a loss on the part of American business firms involved ranging up to 66⅔%. Local American firms realize that they cannot hope to obtain rates comparable to the official rate of exchange obtaining through compensation agreements. They do feel, however, that in all fairness, they should be able to liquidate their back accounts at rates substantially more favorable than the prevailing export draft rate.

Our discussions with the Foreign Office have made it apparent that the Chilean Government will not be disposed to enter into arrangements with private firms for the transfer of their frozen assets at preferential rates. While the Embassy will of course lend its good offices in any proper way toward assisting American firms in reaching a favorable arrangement, it is not believed that the Chilean Government will grant favorable rates of exchange unless the American Government is disposed to assert very strong pressure.

Respectfully yours,

Hal Sevier
[Page 24]

Memorandum Submitted by the American Embassy to the Chilean Foreign Office

1. The Chilean Government agrees to lift as soon as possible all exchange control and trade restrictions as concerns American commerce and interests. This means that individuals or firms desiring to make remittances or to effect other transactions with the United States would be able to do so freely without restriction or control. The requests of persons seeking foreign exchange to pay for current purchases of American goods would be honored at the most-favored-nation rate of exchange to the extent that such foreign exchange might be available. In this connection the Chilean Government, in conformity with the oral assurances already given, would guarantee that as regards current and future purchases abroad there would be no discrimination in exchange rates as between the United States and other countries, including those having compensation agreements.

In order to prevent the discrimination which would result from the existence of different exchange rates with other countries, arising from the control of commerce which originates the establishment of compensation offices, the Government fixed the rate of exchange at which there must be sold the amounts withheld by the compensation offices and set aside for the import of merchandise into Chile, at 250% of the official rate of exchange; this surcharge will be modified if the present exchange conditions vary. In this matter it equalized all rates of exchange for the amounts subject to compensation, and fixed a surcharge which establishes equivalency between those rates and that which obtains at the present time for the United States in the export draft market.

The Chilean Government points out that the amounts retained in the compensation offices to be used for imports into Chile are the property of private individuals and that it could happen that these individuals might agree privately to exchange transactions at rates lower than those fixed by the Government. However, notwithstanding, the Chilean Government will make every effort to endeavor to maintain equivalency in the rates and it agrees to guarantee that any exchange created through the sale of nitrate or other products by the Nitrate Sales Corporation will not be sold at rates lower than the equivalent of the export draft rate.

2. The Government agrees that purchasers of merchandise from countries having compensation agreements with Chile, shall not be accorded legal access to the export draft market.

3. The Government agrees to give sympathetic consideration, within the spirit of the foregoing and bearing in mind that the United States does not discriminate against the commerce of Chile, to any [Page 25] private proposals which subsequently may be made by American commercial interests with a view to concluding an equitable agreement for the liquidation of frozen credits.

4. With regard to Americans having dollar deposits in the Caja de Previsión de Empleados Particulares, the Chilean Government agrees to repay such depositors in dollars when payments to them become due. Furthermore, the Government agrees to repay in dollars at the official rate of exchange the American holders of peso accounts residing outside of Chile.

  1. Not printed; but see telegram No. 33, March 17, 1934, 3 p.m., supra.
  2. Not printed.
  3. Printed on p. 24.