825.2542/6–1553

Memorandum by the Director of the Office of South American Affairs (Atwood) to the Assistant Secretary of State for Inter-American Affairs (Cabot)1

confidential

Subject:

  • The Copper Situation in Chile and the Need for United States Loans

When Chile denounced its Bilateral Copper Agreement with the United States in May, 1952, Mr. Miller predicted to the late Ambassador Nieto that Chile’s action was against its own interests and would make her a residual supplier of copper at a time when production was increasing in other countries and substitutes for copper were being developed. Mr. Miller’s prediction has now been borne out. Chile is the highest-price supplier in the world and a back-log of unsold copper has already been built up in the Kennecott mine. In July, similar stocks will accumulate in the Anaconda mines because of Chile’s inflexible, non-competitive price.

On May 30, 1953, representatives of the Kennecott Company met with Finance Minister Rosetti,2 to inform him that they were unable to place their production at the present price and that unless Chile’s price [Page 698]were made competitive, Kennecott would have to curtail production. (This curtailment took place June 12). The Finance Minister replied, that it was the obligation of the United States Government to maintain the 35½ cents price in order to save the Chilean economy from bankruptcy. When the Kennecott representatives pointed out that the United States Government had nothing to do with the price of copper and that his proposal, in effect, asked United States private industry to subsidize the Chilean Government, the Minister criticized United States loan policies in Latin America. He indicated that, in the absence of United States loans, there would be increasingly strong demands in Chile for nationalization of the mines and for sales behind the Iron Curtain. Unfortunately, the Minister did not mention another possible solution, i.e., the possibility that solvency might be approached by curtailing government expenditures, eliminating subsidies, and attacking the fundamental problems of the Chilean economy; nor did he recognize that any blame attached to the Government of Chile for its nationalization of copper sales and its arbitrary establishment of a very high minimum price.

Chile’s excuse for the denunciation of the copper agreement was its financial and economic problem and its deficit in 1952. We informed Chile at that time, that if it expanded its foreign exchange budget because of anticipated higher copper receipts, it was likely to create another economic and financial crisis such as it was trying to solve. Despite the fact that Chile made an extra $80 million on the copper overprice, Chile’s current crisis bears out our prediction. The Minister apparently considers the drop in the price of copper a temporary dip and that United States loans would provide a satisfactory stop-gap solution. If the United States provides, without conditions, the loans which Chile seeks, we merely postpone and make more difficult the eventual day of reckoning. The only logical solution lies in fundamental economic reforms by Chile which will result in increased production, the establishment of competitive prices, diversification of the economy, and less government intervention in and control of business, industry and agriculture. If United States assistance is to be made available to Chile, it must be provided on a basis which will bring about the long-range constructive program required in Chile if it is to attain economic stability.

The Minister said he had been informed by our Embassy that sales behind the Iron Curtain would mean cancellation of the military pact and technical assistance and make it impossible for Chile to obtain further loans. If we are unable to consider Chilean requests for loans, Chile would not risk much loss by resorting to nationalization and/or sales to Communist countries. Military and technical assistance [Page 699]combined amount to only a few million dollars per year, whereas Chile would lose about $8 million per year for each cent of decline in the price of copper. With the world price now below 30 cents and Chile’s budget based on the 35½ cent price, Chile faces an immediate loss of at least $45,000,000. Although it is very unlikely that Communist countries could or would absorb Chile’s surplus production at 35½ cents, irreparable damage would be done to United States-Chilean relations if any such sale were openly made and we would risk strengthening the war potential of the Soviet bloc.

United States loans, provided in a cooperative program based on Chilean self-help, would probably be the most effective means to preserve democratic institutions in that country, help bring about economic stability and ward off the possibility of nationalization or sales of strategic materials to Communist countries.3

  1. Drafted by Mr. Barall.
  2. Juan B. Rosetti; on June 25, 1953 Señor Rosetti was succeeded as Minister of Finance by Felipe Herrera.
  3. The source text bears the following handwritten notation initialed by Mr. Atwood: “This type of program seems necessary to prepare the ground for ‘private’ investment of both local & foreign capital later.”