The Ambassador in Mexico (Thurston) to the Secretary of State
Sir: I have the honor to refer to the Department’s telegram No. 587 of June 9, 19481 and in compliance therewith to submit a report on Mexican financial developments in the four weeks ending June 18th, with particular attention to measures taken by the Bank of Mexico to strengthen the peso. The major points of these developments have already been sketched in the Embassy’s telegrams numbers 633 of June 4 and 656 of June 12, respectively, and in the usual weekly financial telegrams.2
The crisis in the exchange position of the Bank of Mexico predicted in the Embassy’s despatch No. 619 of April 2, 1948,1 to occur during May–June 1948, was reached at the end of May. Net reserves declined [Page 623] from minus $2,876,855 on May 8th to minus $3,213,432 on May 15th to minus $7,850,113 on May 22, 1948. Although export and import statistics are not available for the period under review, it is believed certain that the chronic adverse balance of trade persisted, and was the chief factor responsible for the heavy loss of reserves.
On May 26, 1948 the Chase National Bank made a 60-day loan to Nacional Financiera in the amount of $2,000,000 USCy with an interest rate of two and one-half percent. The note bears the unqualified endorsement of the Mexican Minister of Finance. According to the local representative of the Chase Bank, Sr. Rodrigo Gomez, Sub-Director of the Bank of Mexico, was in New York on May 15 and requested a loan of $4,500,000 USCy from the Chase Bank. He stated that the Export-Import Bank would shortly make a disbursement of that amount to Nacional Financiera.
On May 27, 1948 the Chemical Trust Company made a similar loan of $2,500,000 USCy. It is believed that the terms were identic with the Chase loan, although this has not been verified.
On May 28, 1948, under the Stabilization Agreement between the United States and Mexico signed May 13, 1947, $7,000,000 USCy was credited to the Bank of Mexico and the peso equivalent was transferred to the New York Federal Reserve Bank as Fiscal Agent of the United States.
Following these developments, the net reserves of the Bank of Mexico stood at $1,211,698 on May 29, but declined to minus $1,731,095 on June 5 and amounted to minus $434,687 on June 12, the latest date for which an Estado Concentrado is available.
The remainder of this despatch will refer to the measures taken, or alleged to be taken, by the Bank of Mexico in accordance with the technical recommendations of the Treasury Department attached to the minutes of the meeting in Secretary Snyder’s office at 4:00 p. m. May 28, 1948, on the Mexican request to withdraw the remaining $20,000,000 USCy in the United States-Mexican Stabilization Fund. These recommendations have been studied intensively in the Bank of Mexico and the Ministry of Finance. It is believed that they have been presented to the President, since Sr. Gomez stated that the Minister of Finance had personally made the translation for the President. Sr. Gomez’ observations on the measures were made to First Secretary Harry R. Turkel on June 11, 1948.
The Embassy notes that the principal recommendations are to limit credit in order to reduce imports, and to increase government revenues or curtail government expenditures in order to produce a surplus. The Embassy is thoroughly in accord with these objectives but ventures to point out that the effectiveness of the first measure depends on degree [Page 624] and timing, while the second measure is exceedingly difficult to implement at all. The writer believes that if all of the steps recommended by Sr. Gomez were to be put into effect immediately there may well be such a contraction of credit as to result in a waste of manpower and productive resources, particularly agricultural. On the other hand, it is hardly likely that Sr. Gomez will be able to achieve all of his objectives despite the secrecy with which he is proceeding. These objectives are bound to become known in Mexico and will probably be highly unpopular. Many segments of the Mexican economy are already complaining that the “Gomez policy” is “too tough”. Complaints against the unavailability of bank credit have already been strongly voiced, particularly with respect to agricultural, commercial, industrial and construction credits.
[Here follow comments on limitation of credit, increasing government revenues or curtailing expenditures, detailed recommendations, and additional considerations.]
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It is difficult at this point to evaluate the degree to which the recommendations to strengthen the peso will be put into effect, and still more difficult to evaluate the precise effect of each recommendation if actually put into force. The Embassy is frankly dubious as to the possibility of maintaining the present rate of exchange of the peso for an extended period without further recourse to the Stabilization Fund, or the International Monetary Fund. While the Embassy is thoroughly in accord with nearly all of the recommended measures, it feels that Mexico’s long term difficulties cannot be solved through financial legerdemain but only through the time-proved principle: produce, save and invest.