Foreign Relations of the United States Diplomatic Papers, 1937, The American Republics, Volume V

611.2531/224: Telegram

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

Santiago , November 22, 1937—7 p.m.
[Received 9:15 p.m.]

80. Department’s 52, November 19, 6 p.m.

1. Item (b) of suggested exchange provision creates a condition such that only one rate, the export draft rate, now 25 pesos to the dollar, will be applied to all American imports (from January 1 forward) so long as exchange availabilities remain adequate. If strife [stringency?] occurs certain of our imports could later be made financable by free or black market dollars at supply and demand rate. None could be obliged to be financed by dollars at higher rates. If the free rate goes higher than Chile feels safe she can only recur to import quotas, subject to paragraph 2 of modus vivendi. The rate or rates on American imports will be the same as on imports from other non-compensation countries. Chile cannot denounce her compensation agreements offhand, and is not undertaking in the present relatively simple modus vivendi to negotiate comprehensively on this aspect of the thorny exchange question. Her present offer, however, affords much more protection than hitherto secured, and further present discussions with her might become prohibitory without leading to better results.

2. Commercial Attaché supplies following explanation: while present system exchange control in effect at least two dollar sterling markets inevitable, namely export draft and free markets; and until compensation trade eliminated arbitrage impossible except the present noncompensation currencies. Therefore rate inequalities between currencies will continue to feature local exchange market. When dollar sterling export draft exchange plentiful only one rate contemplated. Item (b) is designed to outlaw another arbitrary gold rate situation but to allow use of exchange other than that created by Chilean exports when export draft exchange insufficient to cover demands for American products. Free exchange can be obtained only at free rates while export draft exchange has been kept within range of 24 to 26 pesos per dollar.

3. García accepts the Department’s substitute paragraph with regard to negotiations for a definite [definitive?] treaty of friendship, commerce and navigation. His acceptance is based partly upon the Department’s statement that after the modus vivendi is signed the Department is prepared to explore the possibilities of entering into negotiations for a reciprocal trade agreement. The latter negotiations will presumably be coordinated with those for the general treaty, and will probably be regarded as of primary importance by the Chileans unless the general treaty undertakes to cover the exchange situation.

4. In the preamble and also eighth paragraph the word friendship will of course be inserted before the word commerce in describing the treaty to be negotiated.

5. In the eighth paragraph Foreign Office requests omission of words “come into force as of this day” since definitive entry into force can come only after submission to Congress. In practical fact Foreign Office will issue a decree rendering agreement operative as of date of signature. The Department will recall that previous modus vivendi omitted the words in question.

6. Accordingly if the Department accepts item (b) of the modus vivendi exchange provision the way is apparently clear for signing the modus vivendi. García gave his approval prior to departure for Buenos Aires and the Foreign Office states that it is ready to conclude the modus vivendi, with the approval of the Comisión de Tratados, if now satisfactory to the Department, on the 24th or 26th instant. The Foreign Office feels the French have been very forbearing with regard to exchange of ratifications and that they cannot be held off more than a few days longer.

Frost