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

No. 816

Sir: Confirming my telegram en clair, I have the honor to report that the new modus vivendi to replace that between Chile and the United States of September 28, 1931,2 was duly signed at noon on January 6, 1938,3 in conformity with the terms of the Department’s telegraphic instructions Nos. 52, 55 and 67 of November 19, December 2 and December 31, 1937.4

There is transmitted herewith a copy of the Spanish text of the Chilean Note incorporating the modus vivendi, in compliance with the Department’s telegraphic instruction No. 25 (which was received here bearing the date of January 3, 1938, 7 PM, but which was apparently despatched from Washington January 4, 7 PM, 1938). The original Note from the Chilean Foreign Office will be retained here pending the Department’s directions as to whether it should be forwarded to Washington.

The English text of the Note incorporating the modus vivendi which I addressed to the Foreign Minister of Chile is identical with that transmitted to the Department under cover of my despatch No. 789, dated December 15, 1937;5 with the correction of the word “national” in Clause 1 and the word “ammunitions” in Clause 5. (The words “confirms its declarations and reiterates” at the beginning of Clause 3a had been previously approved by the Department in the first sentence of its telegram No. 52 dated November 19, 1937.)

There are also transmitted herewith a copy of the Aide-Mémoire which I delivered to the Foreign Office on January 3, 1938 in accordance with the Department’s telegraphic instruction No. 67 of December [Page 422] 31, 1937, 6 PM; and a copy and translation of the Aide-Mémoire in reply delivered to me on January 4, 1938, in pursuance of the procedure approved by the Department’s instruction just cited. These documents have been kept confidential.

. . . . . . . . . . . . . .

Respectfully yours,

Wesley Frost
[Enclosure 1]

The American Embassy to the Chilean Ministry for Foreign Affairs


In connection with the interpretation of item (b) of Paragraph 3 of the proposed modus vivendi between Chile and the United States, the Department of State by telegraph requested the American Embassy at Santiago to furnish certain explanation. In its telegraphic reply, dated November 22, 1937, the Embassy supplied the Department of State at Washington an explanation subsequently modified to meet your views and which now reads as follows:

  • “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 1st forward) so long as exchange availabilities remain adequate. If stringency occurs certain of our imports could later be made financeable 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 value of the free dollar rises further than is deemed safe in Chile recourse can be had to limiting by the system of quotas, in accordance with the terms of Article 2 of the modus vivendi, the importation of specified articles whose payment may have been authorized with free exchange, or recourse can be had with the same purpose to other measures of general application. 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.
  • “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 between non-compensation 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 her use of 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.”

[Page 423]

The Embassy would be very grateful for a statement as to whether the foregoing interpretation accords with the views of the Chilean Foreign Office.

[Enclosure 2—Translation]

The Chilean Ministry for Foreign Affairs to the American Embassy


The Ministry of Foreign Affairs and Commerce has considered with great interest the explanations given by the Embassy of the United States to the Department of State at Washington embodied in the Aide-Mémoire of the Embassy of January 3, 1938, regarding Item b of article 3 of the draft modus vivendi at present in study.

The Ministry of Foreign Affairs and Commerce is in accord in general with the aforesaid explanations, provided the modus vivendi is in force for a short period, within which no fundamental modifications of the present conditions in the exchange market may be foreseen, with the understanding that, as the Embassy can comprehend, the draft modus vivendi does not import in reality a definitive solution of the difficulties regarding exchange which have been presenting themselves in the past.

In this understanding it cherishes the hope that within a brief time, perhaps no greater than that fixed by the terms of the provisional accord with Great Britain, the modus vivendi which is to be concluded with the United States should be replaced by a definitive treaty of commerce to contain provisions from which may be expected the assurance that there shall not recur the situations of scarcity of exchange for the needs of commerce which have caused the difficulties mentioned.

  1. Ibid., 1931, vol. i, p. 926.
  2. Department of State Executive Agreement Series No. 119, or 52 Stat. 1479.
  3. Foreign Relations, 1937, vol. v, pp. 416, 422, and 429.
  4. Not printed.
  5. Not printed.