The Chargé in Chile ( Scotten ) to the Secretary of State

No. 255

Sir: In confirmation of this Embassy’s telegram No. 120 of December 26, 7 P.M.,5 replying to the Department’s telegraphic instruction No. 85, December 20, 5 P.M., concerning the possible sale of American railway equipment to the Chilean state railways, I have the honor to report the following.

Upon receipt of the Department’s telegram, the Embassy had a consultation with the local representatives of the Pullman Company as well as those of the Bethlehem Steel Company which was also interested in furnishing the railway equipment. As a result of our conversations with these agents and of information obtained from other well informed sources, the Embassy became convinced that due to an excess of German exchange available in the Chilean market, the Minister of Finance planned to use these marks by giving the pending order for railway equipment to Germany. It was not possible to determine in just what manner exchange would be used; whether a certain portion of exchange produced through the sale of Chilean products in Germany would be furnished at a preferentially low rate, or whether a large amount of exchange at a low rate would be available merely through the law of supply and demand, or whether the German Government itself planned to create exchange below the ordinary commercial market rate. The conversations with the representatives of the railway equipment companies also developed the fact that the time element was a very important one in permitting the American firms to have a fair chance at the business. The State Railways have heretofore followed the practice of granting two or three months between the time of calling for bids and their opening, [Page 396] this practice being provided for both in the Organic Law relating to the State Railways and in the Railways Administration’s own regulations. Contrary to this usual practice, however, a period of only ten days between the time bids were called for on December 18th and the time they were to be opened on December 28th was allowed. This short period would not permit the necessary plans and specifications for the sleeping cars to be sent to the United States for estimating bids. The Germans were not under this handicap as the railways were calling for a type of sleeping car which had been furnished by the Germans on a previous order and the plans for which were in Berlin. In view of this fact and that there appeared a strong probability that American companies would suffer through exchange discrimination, the Embassy felt that ample grounds existed for an informal and friendly conversation on the question with the Foreign Office. Accordingly, on December 22nd, December 26th and December 28th, respectively, conversations were held with the Undersecretary for Foreign Affairs. Memoranda copies of these conversations are enclosed.6

Summarizing the result of these conversations it may be stated that after looking into the question the Foreign Office made, it is believed, a sincere effort to obtain the prolongation of the time before the opening of the bids. This effort was unsuccessful due to the perfectly evident fact that the Minister of Finance had made up his mind to give the business to German firms and was not willing to change the manner of handling the granting of the business even to the extent of giving the appearance of more fairness to American bidders.

On the second and most important point, namely, the question of whether American business was suffering discrimination through the supplying of exchange at preferential rates to other countries, the Foreign Office gave us the most definite assurances that no special exchange due to the blockage of Chilean products in Germany would be used for the business. Furthermore, the Foreign Office assured us that though the official rate of exchange would be changed after January 1st, the Government did not plan to change its policy of maintaining the equivalency as concerned exchange for current business whether such exchange originated in the free market or from compensation accounts. In other words, assurances that no discrimination on exchange for financing current business would take place.

On a strictly business basis it appears certain that American firms would not have secured the order in any case since as concerns the day coaches the lowest American bid was $24,760 per coach, or about [Page 397] 595,000 pesos at the current rate, as against the lowest German bid of 55,000 Reichsmarks, or 532,000 pesos at 9.665 pesos to the mark, the equivalent of the current export draft rate. A similar spread would be almost certain to exist with regard to the sleeping coaches. The Embassy’s investigations and conversations have made clear, however, a development of a situation in the manner of handling affairs within the Chilean Government which is of much more importance than the loss of this particular order and which may develop into policies really inimical to our trade. As the Department has been informed on many occasions, our diplomacy in Chile suffers the great handicap that the Foreign Office in actual practice can assume no real responsibility even in questions relating entirely to its own sphere. The complete control of government policies is in the hands of the Minister of Finance. Our conversations and investigations on the railway equipment case have made it clear that not only does the Minister of Finance make all decisions even in the realm of foreign affairs, but he does not even inform the Foreign Office either fully or clearly on the financial aspects of questions presented to it for negotiations with other governments. As has been stated, the Foreign Office, it is believed, in perfect good faith, has given the Embassy every assurance that at no time has discrimination taken place against American commerce in the financing of special exchange and that no policy of discrimination was contemplated in the future. However, in spite of these definite assurances, in investigating the exchange situation in the matter at issue, the Embassy somewhat by chance stumbled on to the fact that in the previous order for locomotives given by the Chilean Government in November, 1934, marks to cover a portion of the order to the amount of 16,000,000 pesos were furnished by the nitrate companies under orders from the Minister of Finance at a rate substantially below the export draft rate applicable to compensation accounts. The matter is highly confidential as the Department may well believe, and the Embassy is not in a position to obtain the exact rate but knows that it was a special preferential rate. In the case of the present railway equipment order, proof has not been obtained that a rate specially low on exchange obtained from the sale of nitrate in Germany is being used, but it is almost certain that such is the case.

The time before the closing of the air-mail pouch does not permit an intensive discussion of this important question of possible exchange discrimination but it is planned to cover fully this very important question in a despatch in the very near future.

Respectfully yours,

Robert M. Scotten
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