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

409. Memorandum of a Conversation, Department of State, Washington, April 16, 1957¹

Washington, April 16, 1957

SUBJECT

• Chile’s Interest in Dollar Credits

PARTICIPANTS

• His Excellency Sr. Mariano Puga—Ambassador of Chile
• Mr. Rubottom—ARA
• Mr. Bernbaum—OSA
• Mr. Devine—OSA/W

Ambassador Puga thanked Mr. Rubottom for the very helpful statement issued by the Department last Friday.² He said that its words of support and encouragement to Chile were well-chosen and had been very well-received in his country.”El Mercurio“, in particular, had commented very favorably upon it.

Ambassador Puga then spoke at some length upon another matter. As the conversation closed and the Ambassador prepared to leave, Mr. Rubottom said that he would like to take the opportunity to discuss an economic matter. He referred to Chile’s expressions of interest in obtaining a $40 million loan. Mr. Rubottom said that as Ambassador Puga had probably recognized, the State Department was merely one part of a family in Washington whose members were concerned with matters of finance and international credits. He mentioned the Treasury, Export-Import Bank, IBRD, and IMF as other members of this general community. He commented that representatives of all these agencies have been following developments in Chile and had evolved certain long-range plans involving rather important dollar credits. These people were properly concerned over the recent disorders and have since been studying Chile’s case almost continuously. Mr. Rubottom said, however, that there seems to be some feeling among members of the group that Chile itself may not be pursuing the course suited to its own best interests. Preoccupation with the budget-balancing or balance-of-payments loan may even be somewhat prejudicial to Chile’s long-term developmental program.

Ambassador Puga asked how this could be. He stressed the very real emergency facing his Government and said that this might be greater than the State Department realized. He emphasized the current need for emergency credits and said that these were—and should be considered—separate and distinct from contemplated credits of a developmental character. Mr. Rubottom said that they could not be separated completely. He pointed to the inevitable effect of any loans—emergency or otherwise—upon Chile’s credit capacity and future ability to repay. Ambassador Puga replied that no matter how good risks Huachipato, ENDESA, Chile’s nitrate industry, and other loan recipients might appear, there could be no better guarantor of credit repayment than a healthy balance of payment. The emergency loan now sought would directly benefit and strengthen Chile’s balance of payments.

The Ambassador went on to point out that there existed a precedent for such a balance-of-payments loan. He said that in 1949 the United States had loaned Chile US$ 25 million for this purpose.³ Only US$ 23 million of this amount had actually been drawn upon, and in the eight years since then some US$ 13 million had been repaid. He said that a loan now of US$ 40 million repayable over ten years would not be an undue burden upon Chile’s capacity to repay. Ambassador Puga said that the dollars would benefit Chile’s balance of payments and the pesos arising therefrom would go into a large-scale housing project. The latter would have enormous social, political, and economic benefit. It would win the support of the working classes and more than pay for itself in greatly increased productivity. Mr. Bernbaum suggested that it might be inflationary by creating increased purchasing power and increased demand for goods. The Ambassador said that this could be controlled.

Ambassador Puga said that the same Klein–Saks now operating in Chile had faced the problem of subsidies in Peru. There it had eliminated subsidies and at the same time recommended a 25 increase in wages. In Chile, when eliminating subsidies, Klein–Saks tried to maintain or even cut wages. He said that this generated very strong popular resistance. Some way had to be found to continue the subsidies, and the US$ 40 million would make this possible. Mr. Bernbaum asked what would happen after the US$ 40 millions were used up. The Ambassador said that something had to be done so that the Government would find it possible to continue with the stabilization program. Mr. Rubottom said that while some mistakes might have been made in the past, the progress achieved under the program certainly warranted going ahead with it. He said that speaking frankly and as a friend of Chile he merely wished to call to the Ambassador’s attention a feeling in some quarters that a large emergency loan might not be the best solution under present circumstances. The Ambassador said that he appreciated Mr. Rubottom’s frank and well-intentioned statements. He reiterated his conviction that the situation in Chile was more serious than was realized. In closing, he pointed out that developmental loans were all to the good but that they brought Chile capital goods rather than the cash in hand which was needed at the moment.

After leaving Mr. Rubottom’s office, Ambassador Puga invited Mr. Bernbaum’s comments upon the conversation just completed. Mr. Bernbaum suggested that Chile might not be making the best case for itself. By emphasizing immediate emergency loans in many quarters it might be prejudicing its own case. He said that the State Department tended to be in the position of Chile’s advocate. Eventually it might have to argue for or defend certain credits to Chile, therefore it was interested in having the best possible base from which to work. As an advocate, it felt in a position to suggest to its potential client the way in which best to prepare its case. He said that some representatives of financial institutions in Washington were inclined to feel that slack remained to be taken up in Chile’s credit structure. They adduced the fact that 58 of all credit was utilized by the private sector of the economy and 42 by the public and felt that if subsidy continuation proved politically unavoidable, the inflationary tendency of the resulting deficit might logically be compensated for by further contraction of credit in the private sector. This, combined with other admittedly unpleasant but nevertheless indicated steps like additional taxation and governmental economies might permit the resolution of Chile’s anticipated deficit condition without the necessity of foreign loans. Mr. Bernbaum emphasized that he was not speaking of final judgments but only of attitudes which he and Mr. Rubottom had noted developing in various quarters.⁴

1. Source: Department of State, Central Files, 825.10/4–1657. Confidential. Drafted by Frank J. Devine of the Office of South American Affairs.
2. On April 12, Lincoln White, Acting Chief of the News Division, read a statement to the press expressing the deep interest of the United States in the success of Chile’s stabilization effort. The text of the statement is printed in Department of State Bulletin, May 13, 1957, p. 773.
3. For documentation on this subject, see Foreign Relations, 1949, vol. II, pp. 588 ff.
4. Puga returned to Chile on April 21. The following day, Lyon spoke with him regarding Chile’s financial situation. According to a memorandum of that conversation, drafted by Lyon, Puga viewed the situation “as extremely black.” “The sum and substance of his arguments,” the memorandum noted, “are that Chile desperately needs help at this time in the way of a political loan and is unable to get it, it appears, from the International Bank or the Export-Import Bank. He hopes, therefore, that the State Department will be able to encourage one of these institutions to make a political loan.” (Department of State, Santiago Embassy Files: Lot 64 F 87, Economic Matters—General)