Foreign Relations of the United States, 1955–1957, American Republics: Central and South America, Volume VII

388. Letter From Joseph A. Silberstein of the Office of South American Affairs to the Chargé in Chile (Corrigan)¹

Washington, February 1, 1956.

Dear Bob: You may be interested to know what we have been doing in response to your letters to Mr. Holland of January 12, 17 and 23 (and to related letters from Mr. Lockett).²

Mr. Holland, as you have probably realized, has expressed great interest (to put it mildly) in taking all the steps to clear the way for such aid to Chile as their progress on their anti-inflationary program merits. He has given us direct orders to get things rolling.

We have had discussions with Jack Corbett of E, who frankly was dubious of the desirability of rushing into the exchange reform and was not very optimistic as to the chances of the Chileans getting anything in the way of stabilization fund assistance. Nevertheless he suggested a call on Southard, U.S. representative on the IMF Directorate. In between we had the benefit of a visit from Mr. Knoke of the Klein–Saks group, to which we invited a representative of Treasury, among others, and at which Knoke outlined the latest developments and explained the proposed exchange reform. Harley,³ the Treasury man, also raised some sharp questions on the need for rushing the exchange reform, and suggested it might be better to concentrate first on internal reforms and see what can be done about slowing down the inflation. He left no doubt that Treasury would take a very dim view of a stabilization loan to Chile.

Our visit to Southard produced somewhat more positive results. He took a very skeptical line, in the light of Chile’s past history, and indicated the Fund would take a hard, close look at the situation if approached by Chile. He explained also that a decision on Chile might be complicated by the possible bearing which action in the case of Chile might have on other applications. Nevertheless, we left with the impression that if a good case can be made he personally would probably support something in the way of IMF stabilization assistance. He did not, of course, commit himself in any way.

In any event, the Fund is definitely the first place for the Chileans to start looking, hence our telegram of January 30.⁴ While we were there Southard verified that the Fund had some people who could get down to Chile in a hurry if the Chileans come up with a request.

At this point I would guess that a stabilization fund loan of the size the Chileans will want might require a joint IMF–U.S. Treasury operation, although it is not inconceivable that the amount the Chileans will actually need could be met by the Fund alone. Treasury will be much the harder of the two nuts to crack, if only because Treasury resources for such operations are by now very limited. Of course if the Fund decides in favor, the case for Treasury participation would be facilitated.

As I have already indicated, there has been some questioning both within and outside the Department as to the need for and desirability of rushing into the exchange reform. Doubt has also been raised about the proposed freely fluctuating rate. That is why it will be important for Chile to show an economic justification for rushing ahead now with the exchange reform, if indeed there is such justification, as well as for the type of program proposed.

We have already seen a few pieces of an economic case such as the importance for budget balancing purposes of the revenue to be derived from the exchange rate reform, and the usefulness of the proposed import deposit requirement in sopping up excess pesos let loose by the Government’s inevitable borrowing at the Central Bank in the next few months.

Incidentally, you may be interested to know that Alex Rosen-son, who is now in ARA, has been very active in all these discussions and of great help in explaining the Chilean situation.

Sincerely,

Joseph A. Silberstein⁵

1. Source: Department of State, Holland Files: Lot 57 D 295, Chile. Confidential.
2. Not found in Department of State files. Thomas H. Lockett was a member of the Klein–Saks mission to Chile.
3. Charles R. Harley, Chief, Latin American Division, Office of International Finance, Treasury Department.
4. In telegram 319, the Department informed the Embassy that preliminary discussions indicated that the IMF would be the logical place for Chile to begin exploring a possible stabilization loan for the proposed exchange reform. (Department of State, Central Files, 825.10/1–3056)
5. Printed from a copy which bears this typed signature.