The Chargé in Mexico (Wheeler) to the Secretary of State
Subject: Immediate Results of Stabilization of Mexican Peso and Prospective Developments
Sir: I have the honor to refer to despatches No. 434 of March 4, 1948,1 No. 484 of March 11, 1948,2 No. 1308 of August 5, 1948,3 and No. 462 of March 31, 1949,2 all expressing pessimism as to the possibility [Page 678] of achieving a fundamental equilibrium in the Mexican balance of international payments and to report herewith concerning the results of the establishment of a new par value on June 18, 1949, so far as the effects and probable consequences are ascertainable at this date. The Embassy believes that the consequences have been beneficial and is now optimistic as to the probability of achieving equilibrium in the Mexican balance of international payments even in the face of a possible further gradual decline in the general United States price level of 10 or even 15 percent. Should there be a rapid and severe business recession in the United States, however, the consequences to the Mexican economy in common with those of all western countries would be exceedingly grave.
The views expressed herein are based principally upon the Embassy’s observations but also upon a conversation between officers of this Embassy with the Sub-director of the Bank of Mexico, Sr. Rodrigo Gómez, on July 13, 1949.
Balance of Trade
It is as yet too early to obtain concrete data as to the effect of the 8.65 rate on exports and imports or on tourism. The full effects will not be apparent for two or three months. A wave of cancellation of orders in the United States occurred immediately after June 18, 1949 as has happened after each previous severe change in the exchange value of the Mexican peso. Business in Mexico is still not completely adjusted to that change. Officers of this Embassy agree with Sr. Gomez that the principal effect will be felt in the reduction of imports into Mexico, in spite of the relative inelasticity of those imports, rather than in the increase of the volume of exports from Mexico. The Mexican Government intends to maintain the 15 percent export surtax, with respect to which substantial and extensive reductions were recently granted, and to continue the policy of considering requests for reduction of the tax on an individual commodity basis.
Sr. Gómez is impressed by the seasonality of Mexican exports and has referred to the loss of 35 million dollars in reserves in July 1947 and of 25 million dollars in July 1948. Since the cotton crop at Mata-moros has not yet begun to be exported in any considerable volume, Sr. Gomez expects some loss of dollar reserves during the balance of this month. This does not accord with the Embassy’s information obtained from private bankers as to the present supply of dollars available in Mexico. The Embassy has not shared Sr. Gómez’ previous perennial optimism nor does it now share his present pessimism. Both parties, however, are in complete agreement that, before the end of the summer, a firm equilibrium will have been reached. Consequently, it is believed that the reserves of the Bank of Mexico will increase even [Page 679] to the point of permitting the repurchase by Mexico, within a year, of a portion of the 37 million dollars in pesos purchased by the United States Stabilization Fund under the previous Stabilization Agreement with Mexico.4
The Bank of Mexico has made no balance of payments projection for 1949. Sr. Gómez expressed distrust with the results of any such study in the face of present uncertainties.
Repatriation of Mexican Capital
Of approximately 100 million dollars held in United States banks by Mexican residents, Sr. Gómez estimates that 70 million dollars consists of balances held there by Mexican enterprises for perfectly normal business uses, and funds held by wealthy Mexican businessmen or politicians against other contingencies. That 70 million dollars, he believes, would not return to Mexico regardless of exchange profits. Thirty million dollars is estimated to represent flight capital, and even in periods of panic, flight capital never exceeded this amount, in the opinion of the Bank of Mexico. Since the normal inflow of foreign exchange into Mexico is of the order of 50 million dollars per month and the outgo the same, the flight capital represents only 5 percent of annual dollar volume.
Sr. Gómez has often been asked how long a period he thinks the 8.65 rate can be maintained. He has refused to answer that question and has also said that the support of the International Monetary Fund and the United States Stabilization Fund is not for a definite term. Sr. Gomez does not think that much of the 30 million dollars “hot money” will return nor does he desire that it return unless the repatriation be very gradual. If it should return, it would increase bank deposits and the banks would certainly expand their loans based on those deposits. Since the possessors of “hot money” would be quick to withdraw those funds on the least apprehension, it creates the possibility of private banks exceeding their proportional reserve, and calling on the Central Bank for assistance. He does not want this to happen and therefore does not want to encourage the return of these funds.
The Embassy, however, has been informed that already some repatriation of Mexican capital is taking place. The slowness may be accounted for by the fact that some of the owners of that capital are [Page 680] looking for good buys in real estate or business enterprises. In addition, there is undoubtedly a feeling in some quarters that the 8.65 rate is none too secure and the owners are awaiting further developments.
In connection with the related question of new American capital investments in Mexico, the Embassy has observed a similar slowness. For example, the Stetson Company of Philadelphia has for nearly two years been considering a $50,000 investment in a hat finishing plant here to be followed by a $200–300,000 investment in a complete plant. They had been waiting for the stabilization of the Mexican peso, but now, in view of the constant import license difficulties and the fear of being cut off from their United States raw materials, the Stetson interests have just reached an agreement with their principal Mexican competitors, Tardan, for the manufacture of Stetson hats in Mexico under license.
As the Armour Research Foundation has pointed out, the problem of increasing American capital investments in Mexico is like opening a safety deposit vault. One of the keys is the stabilization of the peso; but other keys must also be turned before the door will open.
The Mexican Federal Budget
Considering that previous unbalanced Mexican budgets, facilitating over-ambitious capital development programs, have contributed powerfully to the previous fundamental disequilibrium in the Mexican balance of international payments, it was very encouraging to hear from Sr. Gómez that the same relationship between expenditures and receipts has been maintained in the second quarter of 1949 as was maintained in the first quarter when there was a surplus of 88 million pesos. Sr. Gomez stated that he could not yet supply the definitive figures for the first half of 1949, but was confident of the accuracy of his general impression that there was no deficit. He added that the holdings of Government bonds by the Bank of Mexico had declined by 90 million pesos in the first six months of 1949.
Silver Sales and the Prospective Silver Market
The increasingly healthy status of the reserves of the Bank of Mexico, reported each week by the Embassy, is in large measure owing to the sale of Mexican silver to other countries for coinage, thus producing dollars which may be counted in the foreign exchange reserve. The prospects for continuing to sell substantial amounts without affecting the world market price are quite good, despite the fact that the Saudi Arabian Government did not take up its option for the purchase of an additional 7 million ounces.
In addition to the first lot of 10 million ounces sold to the Bank of America for the Chinese Government and minted in Philadelphia, the Bank of Mexico has sold an additional 10 million ounces directly [Page 681] to the Chinese Government, for which payment has been received, and a further 2,150,000 ounces to the Chinese Central Bank, after negotiation with the Bank President now in the United States, for which payment will be made through the Federal Reserve Bank of New York. These sales consist of bar silver and will be delivered at Philadelphia. This raises total sales during 1949 of silver for coinage abroad to 36,150,000 ounces valued at about 25.8 million dollars.
There is now under discussion a third lot of 10,000,000 ounces to be sold to the Chinese Government. The Bank of Mexico is prepared to agree to the arrangement proposed by the Chinese Government, under which a revolving credit of 2.5 to 3 million dollars would be established in New York, payments to be made therefrom as silver is delivered.
The Bank of Mexico is trying to sell silver to Shanghai interests through New York bankers. The Bank of Mexico has also suggested to the Israeli Government the minting of fractional silver currency, for which there might be a demand from coin collectors and Jews throughout the world. The Mexican Government is disposed to mint the coins without charge in order to dispose of the silver. Only small amounts of the new 1-ounce silver pieces have been sold, since technical difficulties have impeded minting of adequate supplies and have prevented acceptance of larger orders.
Sr. Gómez considers that the prospects are good for maintaining the present world market price of 71.5 cents per ounce. First, the seasonal demand by American silversmiths will begin in August. Second, the large stocks on hand elsewhere are not a present threat to the price. The Allied occupation authorities in Japan have 70 million ounces but have not agreed upon the distribution among themselves. The Cuban Central Bank has 60 million ounces in old Cuban silver pesos now no longer needed for reserve against notes but they will not sell below 71¾ cents per ounce and would prefer to use the silver for fractional currency to replace United States silver coins now in circulation. Finally, there is little silver elsewhere available as attested by the fact that five London brokers contracted to sell 10 million ounces to China (for sterling obtained at $2.67 in Hong-kong) but were unable to find more than three million ounces.
To sum up, the prospects for further sales at a good price are excellent, with consequent beneficial effect to the reserves of the Bank of Mexico. To complete a resumé of the silver situation, it is necessary only to refer to the domestic policy of the Mexican Government. The Bank of Mexico is not calling in either 5-peso or 1-peso coins although it does not contemplate further coinage, deeming the present supply adequate; it will continue to buy demonetized 0.720 coins at 1.70 pesos, [Page 682] although it is getting only small amounts at this price; and it does not fear large scale contraband movements of silver out of Mexico.
Foreign Debt Service
The Embassy representatives had in mind the peak load of the foreign debt service next October when 8.7 million dollars is due on account of the British-Dutch petroleum expropriation and 2.5 million dollars on account of American claims. They did not raise the question of what preparations are being made to meet those obligations, but Sr. Gomez did say that under the existing commercial agreement with Spain there is a balance owing to Mexico of some 5 million dollars, of which payment may be requested on September 27, and that Mexico would probably demand payment and was confident that Spain would pay.
Significance to American Exporters
The Embassy believes that an equilibrium will be established in the Mexican balance of international payments and that business may be conducted in fairly complete assurance that the 8.65 rate can be maintained for a considerable period of time, assuming no fundamental change in the United States market or price level. But this is small comfort in view of the virtual certainty that it will be an equilibrium reached at a low level as measured in terms of the dollars paid for United States exports to Mexico. In addition, the share of European suppliers in the Mexican market is likely to increase owing to barter agreements and the increasing availability of supplies from that region. Finally, it is believed that further restrictions will be imposed by Mexico upon private international trade, particularly through the addition to the present import prohibitions of some quantitative regulations, and also through higher tariffs if the trade agreement with the United States should be terminated. Stability will be achieved, but it will probably be in a contracting rather than an expanding economy so far as American interests are concerned.
- Foreign Relations, 1948, vol. ix, p. 620.↩
- Not printed.↩
- Foreign Relations, 1948, vol. ix, p. 624.↩
- Not printed.↩
For the text of a press statement issued by the Treasury Department concerning the United States-Mexican stabilization agreement executed on May 13, 1947, see Department of State Bulletin, May 25, 1947, p. 1043.
Under date of June 27, 1949, Mr. George H. Willis, Director of the Office of International Finance, Treasury Department, transmitted to Secretary of State Acheson copies of a stabilization agreement entered into by the United States and Mexico on June 17, 1949, supplementing and modifying the stabilization agreement of May 13, 1947 (812.5151/6–2749).↩