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

No. 86

Sir: I have the honor to refer to this Embassy’s despatch No. 77 of March 28, 1934, reporting the progress of our negotiations concerning an agreement on exchange and to report the situation of the British in regard to their exchange problems.

For the time being the British negotiations have reached somewhat of an impasse due to the fact that, while the British are insisting upon a full acceptance of the general principle of freedom from exchange control, on its side the Chilean Government is unwilling to sign a formal agreement on the principle until it shall have received a detailed statement of the amount of funds which the British desire to transfer and the names of the companies and individuals involved. It appears that the British Embassy, some weeks ago, submitted a global amount representing an estimate of British frozen credits, but the Minister of Finance refused to accept this figure, stating that it was far too large. The real difficulty is due to the fact that the British problem is somewhat different than ours. In our case the frozen credits are represented by actual cash in pesos, by very liquid assets which can be converted quickly into pesos, or by accounts which are owed in dollars but where both the debtor and the creditor are Americans, for example, the dollars owed by American concerns such as the electric light company or the telephone company to pay service charges on their bonded indebtedness or for supplies and other dollar obligations. In addition to these there are dollar accounts which are owed by Chileans, but these are a relatively small percentage of the total. The British, on the other hand, are faced with the problem of repatriating a relatively large amount of sterling obligations which are owed by Chilean debtors. These debtors, shielding themselves behind the text of the monetary [Page 26] law, refuse to settle their sterling accounts except on the basis of supplying pesos to cover at the official rate of exchange, namely, about 50 pesos to the pound, instead of purchasing exchange in the open market at around 120 pesos to the pound. Specifically, the British Embassy estimates British frozen assets as follows:

(a) Sterling obligations owed by Chilean debtors 1,000,000 Pounds
(b) Bank loans 1,000,000
(c) Peso accounts such as bills of exchange, current accounts due British merchants, bank credits, etc., in liquid form 62,000,000 Pesos

The Minister of Finance has endeavored to secure from British banks and the British Embassy a list of the funds whose transfer is desired, but it is understood that comparatively few of these transfers have been made, chiefly due to the fact that, unlike American creditors, the British are unwilling to accept a liquidation of their accounts at the current export draft rate.

Although the Foreign Office has been prodding the British Embassy to secure a formal acceptance of the principle of free exchange by the Chilean Government, the Embassy is inclined to be complacent about the present situation. The logic of events here has brought it to virtually the same conclusion which we have also reached, namely that the de facto situation is not an unfavorable one, since: (a) current commerce can obtain ample exchange to cover its needs and to take care of any reasonable expansion due to better world conditions; in this respect exchange availabilities being better for us than for countries limited by compensation treaties; (b) frozen assets can be freely repatriated at the current export draft rate, thus providing for a quicker liquidation, though at a much less favorable rate than in the case of compensation countries. Although British creditors appear to be more hopeful of obtaining a better rate than the current market rate for the liquidation of frozen assets, the British Embassy shares this Embassy’s view that preferential rates for this purpose could only be obtained should Great Britain decide to enter into compensation or blockage arrangements, a policy which that Government does not care to pursue. As stated above, the most serious problem which the British have is to find a fair solution for the settlement of the million pounds sterling accounts.

This Embassy will of course continue to report any matters of interest developing in the exchange situation, but is not anticipating taking the question up again with the Foreign Office, pending the receipt of the Department’s instructions after it has had time to give consideration to the Embassy’s despatch No. 77.

Respectfully yours,

Hal Sevier