Foreign Relations of the United States, 1950, The United Nations; The Western Hemisphere, Volume II

825.131/4–1250

Memorandum by the Director¹ of the Office of Financial and Development Policy (Stinebower) to the Secretary of State

confidential

[Washington,] April 12, 1950.

Subject: Chilean Exchange Rate Proposal Disapproved by International Monetary Fund on April 11.

Discussion:

On April 11 the International Monetary Fund disapproved the most important feature of an exchange rate adjustment proposal put forward by Chile—the establishment of a new official rate of 54 pesos per dollar. This action, which was unanimously recommended to the Board by the Fund Staff, and which was supported by the U.S. Executive Director,² was taken on the grounds that such a rate would be inadequate to meet the necessities of Chile’s present financial and economic situation.

Chile must now choose whether to accept the Fund’s decision or to ignore it and put into effect the new exchange system advocated by the present Finance Minister.³ In the latter event, and until its position vis-à-vis the Fund were regularized, Chile would automatically lose its right to apply to the Fund for dollar drawings, and would also probably be unable to obtain new loans from the International Bank.

On the basis of the still incomplete information which is available, it appears that the Chilean proposal to the Fund was the product of a complex internal political situation, rather than being based on sound economic reasoning. Background is given in Attachment No. 1, and the text of the Fund action in Attachment No. 2.⁴

Recommendation:

If the concurrence of the U.S. Executive Director in the Fund action should be questioned by President Gonzalez Videla, it is recommended that he be informed that the proposal was considered on its economic and financial merits and was judged to be contrary to Chile’s own interest in the present circumstances.⁵

Concurrence:

ARA

Attachment 1

Background on Chilean Exchange Rate Proposal of April 11, 1950

After protracted discussions with the Fund in 1949 and the reaching of an agreement by the leading political parties, Chile accepted a recommendation by the Fund that it replace its complex multiple exchange rate system as soon as possible with a fixed unitary exchange rate in the neighborhood of 60 pesos per dollar. An interim exchange system, to be used until the legislation required to implement the unitary rate proposal could be passed by the Chilean Congress, was approved by the Fund in January, 1950. The implementing legislation, in particular a bill to stabilize wages and prices proved unacceptable to organized Chilean labor. The Cabinet fell and the stabilization bill was withdrawn from the Congress. The coalition cabinet which was subsequently formed with labor support, and which is still in office, included the present Finance Minister, Carlos Vial, who had long been a political enemy of President Gonzalez Videla and of the previous Finance Minister, Sr. Alessandri. Vial, soon after taking office, attacked Alessandri on the exchange rate issue, claiming that by agreeing to an exchange rate of about 60 peso per dollar the latter had “over-depreciated” the peso to the serious detriment of the Chilean worker.

Such incomplete information as is available indicates:

1. That the crisis which quickly developed over the exchange rate issue during the first few days of the present month, and the pressure which was brought to bear on the Fund early this month to approve a new exchange rate proposal drafted by Sr. Vial were fundamentally due to domestic political rivalries rather than to economic or financial considerations;

2. That the President and his supporters are probably personally in favor of continuing to observe the understanding reached with the Fund in January but have been handicapped by labor opposition to substantial devaluation of the peso.

The several Chilean exchange rate proposals discussed informally with the Fund just prior to the meeting of the Board on April 11, and the plan discussed at that session (which called for a fixed official rate of 54 pesos per dollar) all suffered from several defects:

1. They were all thought to be primarily inspired by political rather than financial considerations.

2. They all substantially over-valued the peso.

3. Although speciously attractive in that they were put to the Fund in terms of a unitary rate, they made no specific provision for the collateral domestic financial and stabilization measures which would be essential to support such a rate structure.

4. Such collateral measures could clearly not be put into effect in the near future in view of the complexity of the internal political situation, for which the new Finance Minister appears to be largely responsible.

5. In the circumstances it was to be expected that, even though a unitary rate were to be established, a new multiple exchange rate system would quickly develop, as the Government could not politically sponsor an outright devaluation of the peso sufficient to meet the economic necessities of Chile’s situation.

1. As of April 16, 1950.
2. Frank A. Southard, Jr. In telegram 96 to Santiago, April 12, 1950, the Department stated in part that it had approved in advance the position taken by Mr. Southard. (825.131/4–1250)
3. The Chilean Government did not adopt a unitary exchange rate of 54 pesos to the dollar. In despatch No. 28 from Santiago, July 10, 1950, the Embassy reported in part that the position of the Chilean Cabinet which had taken office in March 1950 had never been clarified on the subject of exchange policy and that there remained little reason for anticipating a revival of the unitary exchange rate proposal. (825.131/7–1050)
4. Attachment No. 2, not printed.
5. No record of mention of foreign exchange problems by President Gonzalez Videla during his visit (described in the editorial note, infra) has been found in Department of State files.