Foreign Relations of the United States, 1946, The American Republics, Volume XI

818.5151/10–946

Memorandum by Mr. Joseph R. Solana, of the Division of Central America and Panama Affairs

confidential

[Washington,] October 9, 1946.

Proposal to purchase colones in order to stabilize the exchange value of Costa Rica’s currency was brought to Department’s attention by Treasury on Thursday afternoon, October 3, with request for immediate expression of our views. We were given little time to study proposition. Department stated that politically there would appear to be no reasons to support or oppose the fund but that economically it appeared somewhat unsound. Views Embassy San José were requested and reply of October 6¹² expresses desire to assist Costa Rica and present Administration, provided Department favors maintaining colones at present value and helping Picado, but advises that a “quid pro quo” stipulating tighter fiscal policy and sounder economic practice be obtained from Costa Rica.

The working and staff committees of the National Advisory Council have already (prior to receipt of the Embassy’s telegram No. 337) approved the fund in principle and proposal is to be submitted for final approval to the governing Board of NAC on Thursday afternoon, October 10, at which time Mr. Clayton¹³ could present the Department’s views.

Although the Picado Government’s opposition would probably object to the fund, we might incur the enmity of an extremely friendly Government if we turned it down. FN believes that disapproval of the fund could result in a chaotic exchange and financial situation, might lead to default on payments on the Exim Bank loans, and would place great pressure on the exchange value of the colon.

The gold and exchange reserve of U.S. $3,200,000 available to the Government is equivalent to slightly more than seven weeks requirements at present rate of expenditure of foreign exchange. The inflow of exchange during the present period is low comparatively. Costa Rica depends on import duties for 40 percent of its income. Any tightening of exchange control, in addition to being politically difficult, would result in decreased imports consequently reducing revenue from import duties and throwing the budget out of balance even more than at present.

President Picado since his inauguration has advocated financial and fiscal reforms and he and his Minister of Finance instituted some measure of fiscal reform in September 1945. However, they have been consistently blocked by the wealthy landowners and coffee growers, politicians, and by Congress in their efforts to institute a more scientific and productive tax system. On the other hand, they have not made great efforts to reduce Government expenditures for political reasons and because the Picado Government is inherently weak politically, the President having few personal followers.¹⁴

12. Telegram 337, not printed.
13. William L. Clayton, Under Secretary of State for Economic Affairs.
14. Department’s telegram 375, December 24, 1946, to San José, transmitted the following message from the Treasury Department to the National Bank of Costa Rica: “Your message that Costa Rica’s foreign exchange position has improved to such an extent that you no longer need stabilization credits is indeed gratifying. Please accept the Treasury’s best wishes for your increasing prosperity.” (818.51/12-2446)