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

No. 432

Sir: I have the honor to refer to the Department’s telegram No. 41, June 21, 7 P.M., 1935, on the subject of possible discrimination against American trade (to which this Embassy made a preliminary reply in its telegram No. 68 of June 24, 4 P.M., 1935, and its despatch No. 395 of July 9, 1935. Reference is made to page 3 of this despatch in which the Department was informed that the question of discrimination through making available exchange from nitrate accounts at less than the current commercial rate of exchange would be made the subject of a special report.) There is enclosed herewith a memorandum10 on the subject prepared by Mr. Arthur Pack, the Commercial Secretary of the British Embassy. Up to now the Embassy has hesitated to burden the Department with a report on this matter since it is virtually impossible to prove this type of discrimination. Furthermore, it is not admitted by the Chilean Government, and the whole question has been complicated by the difficulty of establishing a criterion for the current rate of exchange. Also the special types of marks established by the German Government have not simplified the matter, nor the fact that a special exchange market exists in Chile as against world markets such as New York and London. However, as the matter was made the subject of a complaint by an American firm and as it is apt to arise again to plague Chilean-American commercial [Page 414]relations, it is believed the following information may be of interest.

The Embassy has been aware that on several occasions the Minister of Finance has departed from the assurances given by the Chilean Government with regard to the supplying of preferential exchange. The most definite example whose ramification the Embassy was able to follow with reasonable completeness concerned the purchase in the fall of 1934 of certain German railway equipment. In August, 1934, a transaction was entered into between German wool importers and certain wool producers in Magallanes, by which the Germans agreed to pay a premium of 25% above the prevailing market price for wool for the privilege of having the sale based on marks rather than on pounds as heretofore. As the Department is aware, London is the general clearing house for wool in Europe and it was customary for Chilean wool to be cleared through London. Apparently the Germans felt that they could afford to pay this premium partly because of the fact that they were saved certain handling charges incidental to the financing through London, and partly because of the general financial situation which created great pressure towards the use of German marks due to exchange conditions in Germany. The Chilean wool producers were delighted to obtain this high premium, figuring that although the mark might go down in value, the 25% would much more than cover any depreciation of this sort. In effect, shortly after the transaction was completed, the mark did go down and there developed a bearish point of view in Chile with regard to German exchange which had a tendency to send the mark to a still lower value. This being the situation, the Chilean wool producers hastened to discount their transactions with the Banco Aleman, which immediately proceeded to unload the marks which had been received, thus accentuating the prevailing tendency in Chile for the mark to decline. The wool transaction amounted to approximately 3,000,000 reichsmarks. About the time that the deal with regard to wool was started, there were blocked in Chilean nitrate accounts in Germany between 6 and 7 million marks. The nominal export draft rate for the mark at that time stood at around 9.60 pesos to the mark.

With the rapid decline of the mark in the Chilean market, the Nitrate Sales Corporation stood to lose a substantial amount on its funds held in reichsmarks. The Minister of Finance therefore decided to cover mark depreciation by using the marks, or a large portion of them, for the purchase of German goods. As the Chilean state railways were in the market for some new equipment, the Finance Minister decided to use the blocked marks for the purchase of this equipment and, in spite of the fact that purchases of the state railway company are supposed to be made by competitive bids, he secretly [Page 415]arranged to give the order to the German firm “Ferrostaal G. m. b. H.”. Bids were received as usual from other foreign firms, including American and British, but the bidding was purely a dummy transaction. The exact rate of exchange which was used for this transaction is not known. The important point from the American angle, however, is the fact that the rate, whatever it may have been, was fixed low enough to render the American bid too high to obtain the order. On the other hand, it is understood that the rate was not as low as the average at which the marks were liquidated as the result of the wool transaction and which were quoted as low as 7.80 pesos to the mark. The question of whether a rate discriminatory to American commerce was actually used involves a rather fine distinction. On the one hand, according to Chilean law the rate of exchange for current business accounts obtained from the blockage of nitrate for the year 1934 was taken at 250% of the official rate of exchange. During the year 1934 the official rate of exchange was based on 3d gold and multiplying the official rate by 250% was supposed to give more or less the current export rate. As stated previously, in the case of German marks under discussion, this rate amounted to around 9.60 pesos to the mark. On the other hand, due to the special circumstances which have been described, the mark in the Chilean market declined very rapidly so that actual transactions occurred, as we have seen, at rates substantially below 9.60 pesos to the mark. This low quotation in Chile, however, represented a special market not necessarily in normal relation with the quotation of marks in London or New York. The question then present[s] itself in this form: Was the Minister of Finance violating the spirit of the assurances made by the Chilean Government as to special exchange when he made exchange available at a rate between the so-called export draft rate, according to Chilean law 250% of the official rate, and the low point of the German mark in Chile at this period. It is not a simple question to decide, but in any case, the rate fixed by the Minister was low enough to divert the business from American to German firms.

From a practical point of view, it is the Embassy’s opinion that our interest in passed practices of the Finance Minister is secondary to that which should be directed toward our commercial policy with Chile. Our present weakness lies in our complete dependence upon the convenience of the Minister. As long as exchange control continues in force and our commercial situation is not regularized and definitely established, he will naturally continue his policy of managing exchange to suit his needs. Up to now, after all the various factors have been taken into account, our commerce has averaged as well as that of other countries; but this situation may change over [Page 416]night if at any time it should suit Mr. Ross’ plan to supply exchange from blocked nitrate funds to other countries at preferential rates for their commerce.

Respectfully yours,

Winthrop R. Scott
  1. Not printed.