Foreign Relations of the United States, 1958–1960, Volume V, Microfiche Supplement, American Republics

CH–15. Memorandum of a Conversation¹

Santiago, January 20, 1959

SUBJECT

• Economic Program of the Alessandri Administration and Problems Which It Faces

PARTICIPANTS

• Señor Roberto Vergara, Minister of Finance, Economy and Mines
• Señor Eduardo Figueroa, Chief Assistant to the Minister of Finance
• Ambassador Walter Muller, the new Ambassador to the United States
• Ambassador Howe, U.S. Embassy
• Mr. William Krieg, U.S. Embassy
• Mr. Raford Herbert, U.S. Embassy
• Mr. Robert Eakens, U.S. Embassy

At a luncheon meeting today, various aspects of the Alessandri Administration’s economic program and the problems it faces, both with International Monetary Fund and from a domestic political standpoint, were discussed at some length.

Vergara came to the luncheon straight from the Congress where he had been in constant hearings for several days on the Government’s recently submitted wage and economic and financial legislation. He was frankly discouraged at being caught on the one hand between the attitude of the Congress, which already had weakened the Administration’s program with larger wage adjustments than had been proposed, and on the other by the tighter attitude of the Fund, as reported by Figueroa. Vergara nevertheless felt that in spite of the pressures in Congress the program would go through without being weakened too much, either as a result of restoration by the Senate or use by the President of his veto. At the same time the attitude of Congress made it clear that the program proposed by the Administration was the most that could be hoped for.

Figueroa had gone to Buenos Aires on Friday, January 16, for a discussion with representatives of the International Monetary Fund the following day. Costanzo was tied up and was not available but Figueroa has a 9½ hour discussion with Edgar Jones and Eugenio Bertens. [text not declassified]

According to Figueroa, the discussion was very discouraging. Figueroa felt the attitude of the Fund had changed greatly, and had become much harder in what was being demanded of Chile than was the case in the December discussions with Jones in Santiago. Figueroa thought this reflected a greater lack of confidence in the Alessandri Administration and a degree of self-confidence brought on by the Fund’s success in reaching agreement with Argentina.

Figueroa took a draft reply to the Fund’s letter of December 24 with him to Buenos Aires for the discussion. The December 24 letter of the Fund indicated the conditions which Chile would need to meet in the first quarter of this year to draw the quotas provided for under the current Stand-By Arrangement which expires on April 1.

The one suggestion which Chile made with respect to the ceilings was that instead of a monthly quota of 8 1/3 million dollars from Central Bank exchange sales to importers a total figure for the three months be set of 25 million dollars to allow greater flexibility. Jones indicated that he was in complete agreement with the draft reply except for Chile’s position with respect to these exchange sales. Figueroa did not explain why Jones considered a lump sum figure for the first quarter a problem, or how firm Jones seemed to be on this point. Jones indicated that the Fund would like to have the letter signed by someone other than Maschke. Vergara said that legally Maschke was the only one who could sign but he did not say that there was not some other way to meet the Fund’s requirements on this point. Although not mentioned in Figueroa’s memorandum, Jones indicated that the Banco Central should be completely reorganized, apparently with the objective of eliminating the Congressional members from the Board of Directors and possibly others. Vergara said he was already working with Radical Party leaders to see what could be done about changing the complexion of the Bank. He thought there was a possibility that this might be accomplished and he was going to continue to work on it although there also was the possibility that he might be defeated. He also felt that no change in the law would be possible until after Congress had acted on the Administration’s economic proposals. Jones also considered that a change in management was essential, this apparently being aimed at Maschke, especially, but also at Mackenna.

As indicated in the Figueroa memorandum, Jones and Bertens questioned various aspects of the Administration’s stabilization program and also indicated certain requirements that Chile would have to meet in reaching agreement with the Fund. They thought the wage increase should be less and that the idea of general and automatic adjustments should be eliminated as soon as conditions permit. They made an especial point that any housing program should be financed exclusively from private savings. They said that the adjustment made in the exchange rate from 835/837 to 989/991 was not adequate and that the establishment of a single exchange rate responsive to market forces is a sine qua non of a new agreement with the Fund. They considered that a cut of 10 percent should be made in the budgeted government expenses, that priority attention should be given to making State enterprises completely self-financing through economies of administration and increases in tariffs, and that the government’s investment program should be so limited as to provide only for completion of existing projects, the initiation of new projects which would be financed with foreign loans not being justified in the existing circumstances. They recommended a drastic revision downward in the amount of the arrastre to be paid off. Upon completion of the current Stand-By Arrangement on March 31, they did not consider any further credit expansion justified for the next year since prices already had reflected the currently proposed readjustments in wages and any expansion would therefore be inflationary. They recommended that the entire import deposit system be abolished, all goods made freely importable, and several groups of commodities established with tariffs varying according to essentiality and high enough to yield more revenue and to control imports.

Vergara, Figueroa, and Muller made it clear that they were in accord with almost all of the foregoing measures which were advocated by the Fund representatives. They felt, however, that Chile was being likened too much with the case of Argentina, that the situation was quite different in Chile, and that therefore the means of achieving the desired goals would also have to be different. An important difference is the fact that Frondizi’s party has control of the Congress and the army is accustomed over the years to be used in the control of Argentina. These things make it easier for Frondizi to take strong action and back it up with military force where required. Chile, on the other hand, is a democratic country split up into numerous political parties, with an army not accustomed to participating in politics or control of the economy, and with the present government having minority support in Congress.

One point that Figueroa stressed was based on two talks which he has had with President Alessandri since his return from Buenos Aires. This was the President’s feeling that he has to try to do something about the unemployment situation and that he simply cannot take any measures which would increase unemployment. Figueroa and Vergara believe that the policies advocated by Jones and Bertens would have this effect. Vergara emphasized this point at considerable length, pointing out that he could not see how technicians from the International Monetary Fund could be so wrapped up in their figures and so cold-blooded as to advocate policies which would increase unemployment and starvation.

While stressing his agreement with cost of the measures advocated by the Fund officials, Vergara raised the question several times as to what would be the attitude in Washington of the Eximbank and the DLF if Chile would achieve two-thirds or even possibly 75 percent of the program which the Fund representatives outlined. He though it would be possible to go most of the way but left no doubt in his feeling that Chile could not meet all the requirements. Later on, Figueroa indicated that he thought it would be possible to negotiate out the differences with the Fund on all points except two. These relate to housing and to credit. While he and Vergara did not consider the announcement of a flat 10 percent cut in government expenditures practicable, they were sure this objective could be achieved or perhaps even more. Figueroa expressed the view that the desirable way to put part of the people back to work was in a housing program. The Fund representatives apparently left the definite impression that this was one thing to which they could not agree. With respect to credit, Figueroa was not very explicit, except that he felt that holding credit at a fixed level from April 1 onward simply was impossible. According to Figueroa, this was a big change in the position which Jones had taken in his talks with them in December. At that time he agreed that increases in the money supply were justified as physical production expanded and as prices rose for reasons other than the government’s fiscal and monetary policy. In Buenos Aires, however, they took a very rigid attitude that there should be no further increases in credit after April 1, for the reasons indicated above, and it was obvious that Figueroa felt hurt that the Fund representatives should thus raise the ante in view of his sincere efforts to meet their requirements.

Vergara expressed particular interest in knowing what the Embassy group thought of their program. The Ambassador indicated that taking account of the political realities in Chile he considered the program sound and that he thought people in Washington were generally sympathetic with respect to helping Chile. He went into considerable detail in emphasizing the importance which the U.S. Government attaches to Chile first coming to an agreement with the Fund on its economic program. This is not because the U.S. wants to hide behind the skirts of an international agency but rather because the Fund is in a better position to deal objectively with this kind of problem. In addition, numerous countries are seeking help from the United States and these requests can be handled on a more effective basis and better programs developed by the countries collaborating with the Fund. Vergara and Figueroa indicated their recognition of the soundness of this position and the reasoning behind it. While he could not say just how much help would be extended or in what form, the Ambassador said he felt confident help would be available once Chile had reached agreement with the International Monetary Fund. Vergara was particularly interested in knowing what the attitude would be of U.S. lending agencies if Chile succeeded in getting a “light-green” signal from the Fund but not a full “green light” endorsement. In reply the Ambassador said that in view of the importance U.S. agencies attach to a country reaching a prior agreement with the Fund, he could not say what their attitude would be unless there was a full agreement.

As to the Administration’s program generally, Eakens indicated it would be helpful if that part concerned with credit were reduced to concrete terms. Mentioning that all measures thus far taken by the Administration for increasing the availability of local credit had been sound and non-inflationary, he said the President had indicated his disagreement with the credit controls which had been in effect during the last two and a half years and that this had given rise to concern in Washington that the Administration’s actions in this field were going to be inflationary. He said the same concern was felt over the Administration’s housing program. Vergara said that they were taking measures to place the Chilean economy on a dollar basis and to encourage the use of dollars to finance imports and exports and relieve the pressure on existing local credit. While the results had not been as great as he expected, he said this was beginning in a small way to have the desired effects.

1. Source: Department of State, Central Files, 398.13/1–2359. Confidential; Limit Distribution. No drafting information appeared on the source text. The memorandum of conversation was transmitted to the Department of State under cover of despatch 732 from Santiago, January 23, 1959, not printed.