419. Memorandum of a Conversation, Department of State, Washington, November 6, 19571
SUBJECT
- Economic and Financial Developments in Chile
PARTICIPANTS
- Mr. Charles Knox—Klein–Saks Firm of Economic Consultants
- Mr. Thomas Lockett—Klein–Saks Firm of Economic Consultants
- Mr. Turkel—REA
- Mr. Rosenson—REA
- Mr. Devine—OSA/W
Messrs. Knox and Lockett handed Mr. Turkel a “Strictly Confidential” memorandum summarizing the current exchange situation in Chile and the corrective measures recommended by Klein–Saks.2
Mr. Turkel observed that Mr. Carter had recently estimated next year’s exchange deficit at $60–70 million but that now the estimate had apparently risen to $100 million. He noted that the GOC was planning for the coming year on the basis of a “conservative” 26¢ price for copper, even though the average price being received by Chile for its copper was already below that. Mr. Knox said that what was “conservative” when the budget drafting commenced was no longer so.
Mr. Turkel suggested that the exchange shortfall might be eliminated by the simple expedient of freeing the exchange rate. Mr. Knox replied that it would be up to 715 by the end of this year. Mr. Turkel insisted that there was no reason to hold it artificially below the free-market level, now about 735. He said that a higher rate combined with tighter credit control would choke off the demand for dollars. Mr. Knox objected that the higher rate would push the cost of living upward. Mr. Rosenson said that it had been his experience that people generally attributed too much cost-of-living impact to the exchange rate. Mr. Knox admitted that the incidence of imported goods in the over-all cost of living was only something like 2, but he professed to believe that a disproportionate increase would result from any rate increase. Mr. Rosenson suggested that an increase in some prices might serve to bring a healthful cut in over-consumption. He asked if petroleum-product prices in Chile were not still somewhat below their realistic levels. Mr. Knox noted that the public transport system in Santiago was one of the principal [Page 853] consumers and that a price increase here would immediately be translated into a particularly widely felt cost-of-living increase.
Mr. Knox said that the major question at hand was how to meet the imminent exchange deficit. He said that additional amounts could be drawn from the standby credit and imports could be cut, but that even so, exchange controls might have to be reinstated. Mr. Turkel maintained that the exchange rate should be set free. Mr. Lockett pointed out that President Ibañez had at last agreed to cut down on exchange drain through Arica by instituting an import list and system of guarantee deposits there.
Mr. Turkel commented that Chile could go on drawing $6.25 million monthly until next April, up to a maximum of $22.5 million, but at that time he said it was very doubtful whether the stabilization arrangement would be renewed. He suggested that the single greatest thing President Ibañez could do on his forthcoming trip to Washington3 would be to secure such a renewal, but he predicted that this would not be easy. Mr. Turkel observed that under the “fine print” in the stabilization arrangements, the New York banks could probably protect their resources if they wished and that the U.S. Treasury certainly could. He termed any hope of additional credits from the Eximbank as very, very dim. This left, he said, only the major American copper companies, and if desperate, the GOC would almost certainly turn to them. Mr. Knox said that this was what he feared. Mr. Turkel then admitted that the copper companies did indeed represent a major American investment in Chile. At the same time he said, their stockholders had gone in with their eyes open and he could not see the justification of forcing the American taxpayer to bail them out through unwise economic assistance to the GOC. In any event, said Mr. Turkel, even another $50 million would not do the trick in Chile so long as wrong attitudes and policies persisted. He said that the fundamental policies must change. Mr. Knox maintained that they had changed. Mr. Turkel denied this. He said the Central Bank and its personnel were not yet ready to face up to the basic problem confronting Chile, which was how to live within its resources.
Mr. Knox said philosophically that some people felt the whole system and way of life in Chile were wrong and that eventually the inequalities, latifundismo, dependence on minerals, and all the rest would have to be drastically revised. He speculated that perhaps the excessive dependence on copper would always subject the national economy to swings of too great magnitude. Perhaps, he said, this made a free economy impracticable and implied a necessity for [Page 854] exchange controls. Mr. Rosenson said that a reversion to exchange control would mean throwing away all the progress that had been made under the stabilization program. He said that the important thing was to hold on to the gains already made. Mr. Knox asked him if he really felt that a free economy could be viable in the face of a $100 million or even a $50 million exchange deficit. Mr. Rosenson replied that it could certainly be viable but that at some level a balance must be struck. Mr. Lockett asked if this meant sizable reduction of imports. Mr. Turkel replied that it certainly did. He suggested that if things continued to go on as they are, eventually perhaps a currency reform should be considered by the new Government at the end of next year, one that would do away with pesos and establish a new monetary unit.
Mr. Knox said that an analysis of Chile’s imports would show that about $110 million of the $300 million total went for basic essentials. Mr. Turkel said the answer then was to cut down to the $110 million.
Mr. Knox noted that southern Chile was badly off and some workers were emigrating to Argentina. Cessation of coal exports to Argentina had semiparalyzed the industry, and the drastic decline in Chile’s construction industry had similarly affected lumber producers in the southern provinces. Mr. Turkel asked why the $5 million drawn from the Federal Reserve for that specific purpose had not gone into the construction industry. Mr. Knox said that the money had never yet become available due to a delaying technicality at the Contraloria. Mr. Lockett added that from July to August, retail sales had fallen by 18, industrial production by 6.5, and industrial sales by 8. He termed it paradoxical that in the face of such declines, prices continued to mount. Mr. Turkel asked about the total cost-of-living increase. Mr. Lockett said that it had gone as high as 36 since the beginning of the year but had dropped back in October to below 30. Mr. Knox said that the balance of this year should show no further net increase.
In summary, Mr. Turkel said that the basic problem facing Chile was that of living within its income. A freely-fluctuating exchange rate would automatically contribute to this. Mr. Rosenson added that sufficiently tight credit controls would keep domestic money supply so low as to discourage and even preclude excessive imports and inventories. Mr. Knox commented that severe pressure had already developed for relaxation of the existing controls on credit. Mr. Rosenson observed that the absence of such pressures would be prima facie evidence that credit control was not doing the job it should.