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

392. Minutes of the 242d Meeting of the National Advisory Council on International Monetary and Financial Problems, Washington, March 6, 1956¹

Washington, March 6, 1956

[PARTICIPANTS]

• Mr. W. Randolph Burgess (Acting Chairman), Treasury Department
• Mr. Andrew N. Overby
• Mr. George H. Willis
• Mr. Elting Arnold
• Mr. Henry J. Bittermann
• Mr. Charles R. Harley
• Mr. Herbert V. Prochnow, Department of State
• Mr. Henry F. Holland
• Mr. Jack C. Corbett
• Mr. Clarence I. Blau, Commerce Department
• Mr. Arthur W. Marget, Board of Governors, Federal Reserve System
• Mr. Walter Schaefer, International Cooperation Administration
• Mr. Hale T. Shenefield
• Mr. Frank A. Southard, Jr., International Monetary Fund
• Mr. John S. Hooker, International Bank
• Mr. Samuel C. Waugh, Export-Import Bank
• Mr. Vance Brand
• Mr. Charles Shohan
• Mr. Oscar Zaglits, Department of Agriculture, Visitor
• Mr. Ralph W.E. Reid, Bureau of the Budget, Visitor
• Mr. Edmond C. Hutchinson, Bureau of the Budget, Visitor
• Col. George F. Parker, Department of Defense, Visitor
• Mr. C.D. Glendinning, Secretary
• Mr. C.L. Callander, NAC Secretariat

1. Chilean Stabilization Program

The Council considered the stabilization program contemplated by Chile (see NAC Document No. 1908).² The Chairman³ asked Mr. Southard to comment on the situation in the International Monetary Fund with respect to the Chilean program. Mr. Southard said that on March 2 the Fund Board of Executive Directors had considered the proposed Chilean stabilization program, covering both internal stabilization measures and exchange reform measures. The program had appealed to the Fund Board as the best Chilean stabilization effort ever undertaken, and the Board had unanimously approved it.⁴ The exchange reform measures were understood to have been put into effect prior to March 5. These involved the consolidation of existing export and import exchange rates at a single fluctuating rate applicable to authorized trade transactions and to specified invisible transactions, in a banking market, and the carrying out of other transactions in a brokers’ market. On March 5, the Fund had received a formal Chilean request for a stand-by arrangement to permit drawings up to $37.5 million as part of the $75 million stabilization fund that had been recommended to Chile by the Klein–Saks technical mission, which had been engaged in a study of Chile’s economic and financial problems. Chile proposed that the stabilization fund would be used for operations only in the banking market and would not be operated counter to basic economic trends but merely to smooth out changes in the market.

Mr. Southard continued that the Fund Board was scheduled to meet on March 9 to consider the draft stand-by arrangement which had been made available to the Council. He explained that the purpose of the detailed provisions in the draft Chilean agreement was to require drawings to be spaced in time and to give the Fund the right at appropriate intervals to call for reexamination and possibly to suspend drawings.

Mr. Southard expressed the view that Chile would accept the draft agreement and hoped that the Council would authorize him to support it in the Fund Board.

The Chairman reported that a group of United States commercial banks was prepared to make available $25 to $30 million, which would be a second line of reserve after the Fund stand-by arrangement and would require repayment of drawings at shorter term. These banking arrangements would constitute an unsecured line of credit to the Chilean Central Bank. He noted that if Chile obtained $35 million from the Fund and $25 to $30 million from United States banks, there would remain some $10 to $15 million to make up the $75 million desired by the Chileans. He indicated that the Treasury Department would be willing to negotiate a stabilization agreement, using the Exchange Stabilization Fund under appropriate conditions as a third line of reserve, to provide this balance of $10 to $15 million. The Treasury was impressed by this Chilean stabilization effort, especially since the Chilean Government had employed a mission of United States experts and was now endeavoring to follow the mission’s recommendations. The Treasury also favored the step-by-step arrangements contemplated for the International Monetary Fund stand-by arrangement, and was also favorably impressed by the agreements recently reached between the Chilean Government and United States enterprises operating in Chile.

Mr. Prochnow stated that the Department of State supported the proposed Fund arrangements and the proposed United States-Chilean stabilization agreement. Mr. Holland commented that the present situation appeared to offer the best opportunity for stabilization in Chile in the foreseeable future.

Mr. Overby commented that the Chilean Government was to be commended for this effort, but cautioned that a large part of the stabilization program remained to be carried out by Chile and that substantial and difficult negotiations (with the International Monetary Fund, the United States banks, and the Treasury Department) would have to be completed before the desired stabilization fund could be created. He felt, therefore, that it was important that the Chilean representatives not receive premature assurances that the financial support would be forthcoming. He noted that these financial arrangements represented essentially an expression of faith in the intentions and performance of the Chilean Government.

Mr. Marget stated that the Federal Reserve Board of Governors supported the proposed arrangements. Mr. Blau⁵ stated that the Department of Commerce also favored the arrangements.

Mr. Waugh expressed approval of the proposed action, and expressed satisfaction that the Export-Import Bank was not to be called on to participate directly in the support of the Chilean stabilization effort, since the Bank preferred to reserve its funds for loan projects expected to be proposed by Chile. He noted that the Bank had loans of about $75 million outstanding in Chile, and that Chile had a good record with respect to Export-Import Bank loans.

Mr. Schaefer⁶ indicated that he favored the proposed action. Mr. Zaglits informed the Council that an agreement with Chile under Public Law 480 was about to be signed in the amount of $38 million, pursuant to which the peso equivalent of $28 million would be loaned to the Chilean Government.

The possible implications for the U.S. budget of the stabilization agreement and IMF operations were discussed in response to an inquiry by Mr. Reid.

The Chairman commented that the proposed stabilization agreement would be unusual in that it would not specify an exchange rate to be supported.

The following action was taken: (NAC Action No. 860)

• “1. The National Advisory Council advises the U.S. Executive Director of the International Monetary Fund that it approves his favorable consideration in the Executive Board of the Fund of the Chilean Government’s request for a 12 months stand-by arrangement permitting drawings up to $35 million.
• 2. The National Advisory Council approves favorable consideration by the U.S. Treasury Department of the Chilean Government’s request for a United States-Chilean Stabilization Agreement in an amount of not more than $15 million, with a term of twelve months. It is understood that under the agreement a carrying charge of ¼ of 1 percent per annum would be applied against the undisbursed amount and that the interest rate would be either (a) 3½ percent during the first year that any drawing remained outstanding and 4½ percent thereafter or (b) 1 percent in excess of the discount rate of the Federal Reserve Bank of New York during the first year that any drawing remained outstanding and 2 percent in excess of such rate thereafter.”⁷

[Here follows discussion of matters unrelated to Chile.]

1. Source: Department of State, NAC Files: Lot 60 D 137, Minutes. For National Advisory Council Use Only.
2. Not printed. (Ibid., Documents)
3. Burgess, the Acting Chairman, was Under Secretary of the Treasury for Monetary Affairs.
4. The Department reported the action of the IMF Executive Board to the Embassy in Santiago in telegram 378, March 2. (Department of State, Central Files, 825.131/3–256)
5. Assistant to the Director, Bureau of Foreign Commerce.
6. Special Assistant to the Director of ICA for Finance.
7. On March 9, the IMF Executive Board approved a $35 million standby arrangement for Chile. The Department reported this development to the Embassy in Santiago in telegram 392, March 9. (Department of State, Central Files, 825.10/3–956)