611.2531/270: Telegram
The Chargé in Chile (Frost) to the Secretary of State
[Received 3:17 p.m.]
31. Department’s No. 22 March 8, 8 p.m. During extensive conversation on the 9th instant with four Chilean and three American officials Garcia stated he has been unable despite earnest efforts to devise plans for according equality on exchange control and asked what the American Government requires or can suggest.
When informed of substance of Standard Provisions, article 11, he stated Chile cannot accept clause A because she never knows in advance when exchange shortages necessitating prompt resort to delays and restrictions may arise, nor clause B because of the special weakness of the peso vis-à-vis the dollar and because of her compensation agreements. He does not regard abandonment of the latter as feasible (although he left the inference it might just possibly be so in a gradual manner over a period of apparently 2 or 3 years).
I suggest that even if the compensation agreements are retained Chile might consent to allow the dollar peso rate to be set by supply and demand, as she does in the case of blocked currencies thus establishing equality of principle. Garcia felt that the peso would always be in danger and that attempts to protect it by import quotas on selected articles drawn largely from the United States but also to some extent from European countries would incur prompt retaliatory quotas in Europe against Chilean goods. The sacrifices by Chile in Europe would outweigh the advantages which a trade agreement with the United States could offer. He estimates that Chile’s exports to us could not possibly be increased by more than $1,000,000 and expressed belief that the United States is unlikely ever to place a duty on nitrate. Moreover in periods of severe and protracted dollar shortage here import quotas on nonessential goods drawn chiefly from the United States would not suffice to save the peso as goods of this class form a quite small proportion of Chile’s total purchases of dollar goods (including Peruvian oil, et cetera). The conversation ended with no solution in view.
This morning I held a personal conversation with Garcia. Urged that normally the exchange shortages are not so severe, that moderate use of quotas could not suffice and that such minor losses as Chile sustained from retaliatory quotas by Germany and other European secondary supply countries would probably be offset by American Customs concessions. If periods of acute or long scarcity should arise the United States would not resent reexamination and a new agreement. Garcia caught up this point and recurred vigorously to a [Page 440] previous idea which I had supposed was a private enthusiasm of Gazitúa, namely, that the agreement should provide for a mixed commission which could from time to time readjust the agreement. When I expressed myself favorably he seemed much relieved and stated that with such an automatic safety device he believes a supply and demand peso with import quotas as a first recourse can at least be given serious consideration.