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

391. Memorandum From the Director of the Office of South American Affairs (Bernbaum) to the Assistant Secretary of State for Inter-American Affairs (Holland)¹

Washington, February 29, 1956.

SUBJECT

• Suggested ARA Position on Chilean Exchange Reform

We understand that Mr. Corbett will contact you in the morning prior to the NAC Staff Committee Meeting which is scheduled for 10:30. Mr. Corbett has been out all week but we believe the position outlined below to be consistent with the thinking in E.

1. We believe that the initiative Chile is now showing in seeking to overcome inflation, and the momentum its anti-inflationary program has achieved is worthy of our support. We therefore favor support of the Chilean Exchange Reform proposal now before the IMF. The IMF Executive Board will consider this proposal on March 2.

2. There are several reasons for earliest possible action on the proposal:

a) The psychological importance of following steps already taken with further effective action.

b) The Chilean Government’s belief that it must take positive action now on the exchange system in order to hold together the small majority in the Congress which has supported its anti-inflationary policies so far. Important elements of this support represent groups which are not only restive due to the effects of credit controls recently imposed, but are those most outspoken in favor of exchange reform.

c) The Chilean Government’s further belief that institution of the exchange reforms is a pre-requisite to Congressional support of proposed tax reforms and other parts of the stabilization program which, to be most effective, must be enacted as soon as possible.

3. Nevertheless, we recognize that approval of the exchange reform proposals will not of itself guarantee effective action on other aspects of the overall stabilization program, the importance of which has been emphasized by the IMF Mission report² as follows: “The success of the exchange reform will depend on the vigor and persistence with which the Government and the Central Bank pursue the overall stabilization program”. We are concerned, therefore, with the need for assuring that the support we extend will have the most effective impact on the overall stabilization program. The points made hereafter in regard to restrictions placed on the use of financial support are made with this objective in mind.

4. Chile desires financial aid in connection with its exchange reform proposal although it has not yet formally requested such aid. Its need for such aid has been supported by the Klein–Saks group and has been mentioned in the IMF Mission report. Therefore, even though the matter formally before the NAC and the IMF at this time is solely that of the proposed exchange reform program, NAC, at least, will in formulating the U.S. position on the rate proposal also have to consider what position the U.S. will take if Chile formally raises the question of IMF and U.S. financial assistance early next week. For reasons cited in No. 1 above we also favor IMF and U.S. financial support (with appropriate safeguards) of the exchange reform proposal. We understand that Chile intends, formally, to request such support from the IMF and probably from the U.S. on March 5, assuming IMF approval of the reform proposals.

5. With regard to IMF financial support, we favor a standby loan or similar arrangement which would permit tight control of drawings and would put the IMF in a position to influence the Chilean Government to adopt and vigorously execute other stabilization measures on which the IMF Mission report says the success of the exchange reform is dependent.

6. If it is agreed that the U.S. should contribute the approximately $20 million in financial support for the exchange reform which Chile has indicated she will ask of us, in addition to the $37.5 million she hopes to get from the IMF and the approximately $17 million she hopes to get from private U.S. banks, the Treasury or the Export-Import Bank would be the available sources for such funds. Since any U.S. financial assistance extended for the purpose under consideration should be designed to induce Chile to enact the further measures necessary to the stabilization program and should be safeguarded against unwise utilization, such as an attempt to hold an unrealistic exchange rate, the adaptability to these conditions of the types of loans generally extended by Treasury or the Export-Import Bank would be an important factor.

7. We favor NAC instruction to the United States representative on the IMF to seek to have the IMF recommend to Chile that it apply the proposed export tax to all exports and not just to certain “exports”, when the new free exchange rate approaches or reaches the rate now enjoyed by the export commodities which are to be exempt from the export tax, according to the proposal submitted by Chile. We do not believe, however, that as it is now projected, according to the IMF mission report, the proposed export tax is unduly discriminatory, or that we should make its elimination or broadening to affect all commodities a condition for our support of the proposed reform.

8. We must recognize that unless financial support follows IMF approval of the exchange reform proposal, Chile will not put the new system into effect. We have been informed, in fact, by the Chilean Embassy that Chile would rather not have the proposal considered, much less approved, unless there is a disposition to support it financially. We recommend, therefore, that the State Department representative on the NAC make these considerations clear to the NAC, so that the NAC will appreciate the effect its attitude could have on the overall Chilean stabilization effort.³

1. Source: Department of State, Central Files, 825.131/2–2956. Confidential. Drafted by Ernest V. Siracusa.
2. Not further identified.
3. On March 1, the Staff Committee of the National Advisory Council on International Monetary and Financial Problems (NAC) met to discuss, among other matters, the proposed Chilean exchange system. According to the minutes of the meeting, Southard outlined the Chilean stabilization effort and the proposed exchange arrangements, including the proposed financial support recommended to the Chilean Government by the Klein-Saks mission. He described the proposal as a major effort which deserved support “even though it might not be completely successful.” After a discussion of the proposal, the NAC Staff Committee agreed that it would be appropriate for Southard to support the proposed Chilean exchange reform in the IMF Executive Board, but not to imply that financial assistance would be forthcoming from the U.S. Government. (Department of State, NAC Files: Lot 60 D 137, Staff Committee Minutes) Corbett, Rosenson, Siracusa, and several others represented the Department of State during this meeting. In a memorandum to Holland, dated March 1, Siracusa summarized the results of the meeting. (Ibid., ARA Files: Lot 59 D 73, Chile 1956, Credits (Economic))