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

No. 211

Sir: I have the honor to refer to my despatch No. 197 of April 29th regarding the exchange situation with special reference to page 7 in which was discussed the effect the recent depreciation of the peso might have upon the policy of the Exchange Control Commission.

On May 8th at the request of the Minister for Foreign Affairs the Counselor of the Embassy and myself called at the Foreign Office and were received by the Minister accompanied by Sr. German Vergara, the Under Secretary for Foreign Affairs. The Minister opened the conversation by stating that the Chilean Government was extremely preoccupied with the alarming depreciation of the peso which had occurred within the last few weeks in relation to sterling and dollars and that it was casting about for every means within its power to stabilize the situation.

He recalled that in compliance with the promises given to me by Sr. Ross and by himself the Exchange Control Commission had on April first removed the restrictions under which prior to that date importers of American merchandise were required to submit shipping documents before receiving the authorization of the Control Commission for export draft exchange. He added that it was a general opinion that the removal of these exchange restrictions was in some degree responsible for the fall of the peso and that the Ministries [Page 340] of Finance and Foreign Affairs had incurred severe criticism for taking this action. He requested me to help Chile out of her difficulties by consenting to the reimposition of these exchange restrictions. At this point Sr. Vergara recalled the conversation which he had had several weeks ago with Mr. Scotten in which he informed the latter that in his opinion if the exchange control restrictions were lifted the peso would be subject to violent fluctuations which would neither be convenient for the Government of Chile nor for American commerce and that now, as we saw, this situation had actually come to pass.

Sr. Vergara and the Minister were informed at once that in the opinion of the Embassy the relaxation of the restrictions which provided for the presentation of documents could in no way be responsible for the recent depreciation of the peso in view of the fact that the amount of export draft exchange authorized by the Control Commission since April first for the importation of American merchandise prior to the presentation of documents was extremely small.

Sr. Vergara replied that he had no doubt that this statement was accurate but that the fact was that the public believed that the removal of the exchange restrictions was responsible for the depreciation of the peso and that the Chilean Government would greatly appreciate my helping it out of this situation by consenting to the reimposition of the restrictions.

I informed the Minister that this was a matter which would require some consideration and study and that I would prefer to defer my answer to his request to another day in the near future.

I inquired as to what the actual factors were which the Minister considered had caused the sudden depreciation in the peso. He replied that probably the depreciation was not due to any one cause but rather to a multiplicity of causes among which he named the increase in imports, the uncertain political situation, lack of confidence in the peso, speculation on the part of the brokers, etc.

He then added that he had a second request to make of me, namely: that I would use my influence informally with the Manager of the National City Bank to cause the latter to restrict the granting of credits to commercial houses who desired to import American merchandise. I gave the Minister no assurances whatsoever that I would take this step and inquired what the attitude of the British Embassy was regarding these matters. I should add parenthetically that the British Ambassador accompanied by the British Commercial Attaché was leaving the office of the Minister for Foreign Affairs just as I entered. The Minister replied that although the British had no objection to his first request they informed him that the Anglo-South American Bank had extended very few credits to commercial houses.

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I inquired whether the Chilean Government contemplated taking action to decrease the importations from countries other than the United States and Great Britain. Sr. Vergara replied very confidentially that the Chilean Government had requested the Banco de Chile to restrict granting credit in sterling to exporters desiring to make shipments of wool to Germany in the hope that a diminution of wool shipments would decrease the amount of exchange available to Germany and consequently restrict to some extent German exports to Chile.

The same evening the British Ambassador, Sir Robert Mitchell, telephoned me and informed me that the Minister for Foreign Affairs had requested his consent to the reimposition of the exchange regulations discussed above, but that in his opinion the relaxation of these restrictions had not had the slightest effect upon the peso and he contemplated informing the Minister that he could not see his way clear to consenting to the reimposition of these restrictions.

After a conference with Mr. Bohan, the Commercial Attaché, and Mr. Scotten, the consensus of our opinion was that I should not accede to the Minister’s request without authorization from the Department. It was felt, however, that this matter should be considered from the realistic rather than the legal point of view and that the Embassy’s attitude should be based upon an attempt to assist importers of American merchandise in the most practicable way possible. It was brought out in the discussion that the inherent difficulty of the exchange situation is the actual scarcity of availabilities, and that if the Minister maintained his request it might be well, if the Department approved, to accept his request, but impose as a definite condition for our acceptance that the Exchange Control Commission should adopt a radical change of administrative tactics and should give promptly and freely export draft exchange to importers of American merchandise as soon as documents were presented and should furthermore impose no restrictions upon the request of importers to open commercial credits obtained through the acquisition of exchange in the free market. Our attitude was based upon the belief that should we show an intransigent attitude the Chilean Government might in theory maintain the fiction that no exchange regulations have existed since April first, but actually through the Exchange Control Commission place quotas upon the importation of certain classes of American merchandise, especially automobiles and radios, and that our commerce as a result would suffer rather than gain by our non-acceptance of the Minister’s request.

I was, therefore, prepared to inform the Minister that in case I received definite assurances that the Control Commission would act as regards the authorization of exchange against documents in the [Page 342] manner outlined above, I would recommend to my Government that the latter give its consent to the first request. I thereupon secured an appointment with the Minister on the morning of May 9th and called upon him accompanied by Messrs. Bohan and Scotten.

I informed him that after careful consideration of this question I was unable to agree that a relaxation of the exchange regulations had had the slightest effect upon the peso rate and that although I had the greatest sympathy with the problems faced by the Government and desired to do everything in my power to assist the Government, I could not acquiesce to his request without authority from my Government. At this point, much to my surprise, the Minister stated that the British Ambassador felt the same way as I did regarding this question, and that the Foreign Office had decided to withdraw its request. Since this somewhat surprising volte face on the part of the Minister made no further discussion necessary nor advisable at the time no further discussion of importance ensued. The Minister, however, informed me that on account of certain measures which the Government had taken the peso rate had improved somewhat during the past twenty-four hours and the Government was much encouraged thereby.

It will be most interesting to observe further developments in this situation and my fear is that unless the peso either improves or remains more or less stable at the present rate, American importers will be subjected to further difficulties on the part of the Exchange Control Commission. Sr. Urrejola, the head of the Exchange Control Commission, has had several talks with the Managers of both of the Anglo-South American and National City Banks and has requested these Banks to assist in the stabilization of Chilean exchange. Mr. Willett, the Manager of the National City Bank, informs me that he told Sr. Urrejola categorically that as long as the local brokers are allowed to deal freely in free market exchange with no control whatsoever on the part of the Government, the National City Bank did not see what action it could possibly take to assist the Government in stabilizing the rate. He informed Sr. Urrejola that if the Government either through administrative action or through a modification of the legislation governing exchange would place the exchange business back where it properly belonged, namely in the Banks, instead of with the brokers and then request the Banks to assist in stabilizing the rate, this would be possible. However, as long as imports of merchandise could be financed through the purchase of exchange at any rate demanded by the brokers and as long as the latter were not controlled by the Government, the Banks were powerless.

I believe it necessary to make this rather long exposé to show the Department how confused and complex the exchange situation in [Page 343] Chile is at the present time. On the one hand the Control Commission is actually faced with the scarcity of export draft exchange required by the needs of the United States and other countries not included in Chile’s compensation agreements. On the other hand, the importers are faced with an extremely difficult personality to deal with in Sr. Urrejola, the Vice President of the Control Commission. Sr. Urrejola, according to the Manager of the National City Bank, actually informed the latter a few days ago that if he found it necessary he was prepared in order to save the peso to impose quotas against the importation of automobiles and radios and would have no hesitation in doing so to conserve Chile’s supply of exchange.

Respectfully yours,

Hoffman Philip