The Ambassador in Mexico ( Thurston ) to the Secretary of State

No. 434

Sir: I have the honor to acknowledge receipt of the Department’s secret telegram No. 188 of February 27, 1948,1 stating that the Government of Mexico through the Mexican Ambassador in Washington had [Page 621] presented a request for an additional ten million dollars under the stabilization agreement.2

Inasmuch as it is the purpose of the agreement to stabilize the value of the Mexican peso with respect to the United States dollar by arranging for the Secretary of the Treasury to purchase Mexican pesos whenever necessary to assist Mexico to meet temporary disequilibria in its balance of international payments, the Embassy has deemed it prudent to obtain from the Bank of Mexico its projected balance of international payments for 1948 and to subject it to detailed analysis. It is hoped that this analysis will assist the Treasury Department in determining whether or not the present disequilibrium is temporary or fundamental in character.

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

The Embassy has long feared that if the general public in Mexico were aware that all reserves available for commercial transactions were nearly exhausted, and that, in fact, there are not now sufficient reserves to meet legal requirements, an exchange panic might ensue which not even the entire immediate support of the United States-Mexican Stabilization Fund could stop. The Acting Director of the Bank of Mexico discounts these fears. He admits that through January and February there was a considerable flight of capital to the United States, and ascribes this to devaluation of the franc and ruble, lower prices in the United States and lastly, to rumors of devaluation or exchange control, or both, originating within the Bank of Mexico itself. The Embassy considers only the last-named to be valid.

The Acting Director confirmed the statement made in the Embassy’s secret despatch No. 229 of February 4, 19483 that branches and subsidiaries of large American companies with large inventories were beginning to hedge against a possible devaluation of the peso by borrowing dollars locally—or alternatively, liquidating inventories as rapidly as possible and sending the proceeds to the United States in dollars. Indeed, the manager of a large American bank in Mexico City is rationing even his best client’s dollar borrowings and does not permit them to exceed inventories. The Acting Director of the Bank of Mexico optimistically believes that the worst is over since, he alleges, the limiting factor is that private individuals do not have enough surplus pesos to convert to dollars, “that peso deposits have now been reduced to working capital”. Sr. Gomez’ optimism is so firm that he feels even without the $10,000,000 USCy application now pending, the Bank of [Page 622] Mexico, principally through Eximbank receipts, will be able to meet its legal reserves and have a little left over.

The Embassy does not share this degree of optimism either with respect to the immediate future or for the remainder of 1948 as forecast in the Bank of Mexico’s projection. Nevertheless, the decision whether or not to grant the application will be a hard one. If devaluation occurs through a failure to grant the application, the United States will be blamed, there will be adverse repercussions on the Bogotá Conference4 and, worst of all, there will probably be grave internal unrest. While it may be advisible to conserve the resources of the United States-Mexico Stabilization Fund to support a rate of exchange more truly enabling Mexico to establish and maintain equilibrium in its balance of international payments, the Embassy believes that the considerations in favor of granting the application may be the more weighty.5

Respectfully yours,

For the Ambassador:
Lew B. Clark

Commercial Attaché
  1. Not printed.
  2. For press statement by the Treasury Department on the United States-Mexican stabilization agreement executed on May 13, 1947, see the Department of State Bulletin, May 25, 1947, p. 1043.
  3. Not printed.
  4. For documentation on the Conference, see pp. 1 ff.
  5. In telegram 251, March 12, 1948, 1 p. m., not printed, the Secretary of State informed the Embassy in Mexico that on March 9 Mexico had obtained the third ten million dollars under the United States Treasury Stabilization Agreement (812.5151/3–1248).