410. Letter From the Ambassador in Chile (Lyon) to the Acting Assistant Secretary of State for Inter-American Affairs (Rubottom)1
Dear Dick: In addition to the telegrams and despatches we have sent about the local situation, I think it may be useful if I give you a little of my own thinking, less formal as it were.
As you know, I am perennially optimistic. I think one has to be in our work and it is lucky I am for at present I view the situation in Chile through rather pessimistic eyes.
Things were going very well until about last August. Although business people, bankers and the like were opposed to certain aspects of the anti-inflation fight, largely because it was hurting their pockets, it was really succeeding. Then when President Ibañez impetuously got rid of the Minister of Finance, Herrera, who had become the symbol of the anti-inflation fight, confidence was generally shaken. Despite this the economy was kept under control and progress continued through January when the Congress approved a budget for 1957 that was generally in balance for the first time in years.
Since then our troubles have been increasing, but with all, I think we could have been almost certain of victory if a series of unexpected misfortunes had not overtaken us. First, the sharp drop in the price of copper which, as you know, now averages for Chile about 30-31 cents a pound. The Chilean budget for this year was balanced on a 35-cent copper. This drop represents a loss in revenue of about 30 million dollars. Added to this the nitrate business is in an appalling condition and will have to be carried by the banks until the effects of the recent Eximbank loans begin to be felt—about two years hence. Also there has been a terrific drought this year resulting in extremely poor harvests and the need for large advances by the banks to carry the farmers.
We thus face a fiscal deficit carried over from last year now increased by a further large deficit in prospect for this year. We have prices continuing to rise, particularly on those goods which up until now have been subsidized by the Government.
The result is obviously general discontent which is not diminished but increased among the political parties supporting the President [Page 834] by the President’s unpredictable actions. Business has declined during the past year and unemployment has increased to a greater extent. All of which in the face of coming elections is not a pretty picture.
On the positive side of the ledger there has been a definite slowing down in the increase in the cost of living and although as I said above, while last August bankers and businessmen were still opposed to the fight against inflation, it is nowadays pretty broadly accepted as a good thing which must be continued.
Chile now enjoys a free exchange and many of the subsidies have been stopped and others are to follow. Eximbank loans are slowly trickling this way, and the President demonstrates a determination to go through with the anti-inflation policy.
The one fly in the ointment is that President Ibañez has let down the Conservative and Liberal parties who have been supporting his policies so many times that they are pretty well fed up, particularly as both are politically “opposition” parties.
For the first time in months the Klein–Saks Mission seems defeatist in outlook and insists the only way the situation can be saved is by a large (about $40 million) loan from U.S. banks.
I do not think we should look at the situation quite so gloomily, though I admit it is precarious. If, by any chance, the price of copper should again rise the situation could quickly change. Things change very quickly in Chile. They can go from good to bad or vice versa with extraordinary rapidity.
Another hopeful possibility is that the political parties which have been supporting the President will again get behind him. At present conversations with this end in view are being carried on between the ex-Minister of Interior2 and the leaders of these parties. (I sent a memorandum of conversation covering this about ten days ago.)3 Should some arrangement be reached and the President, at their behest, install a cabinet which would renew confidence in the country, the whole situation might change over night, as it were.
In any event people will become so interested in the next presidential election very shortly that they will forget about their present woes in anticipation of future possibilities and thus a period of comparative tranquility might ensue. However, one cannot be so foolish as to count on miracles and the odds are very definitely against us at the present time. I think you ought to know that, so you and the lads in the Department will be sympathetic to any proposals which are made with a view to holding the line here. I do not for a moment mean to imply you have not been so, but I want [Page 835] you to know that the sky is heavily laden with clouds and whether it really pours or they pass on largely depends on how the wind blows. We may have an opportunity of helping that wind.
Elsie joins me in best wishes to you and Billie.
As ever,