CH–16. Letter from President Alessandri to President Eisenhower.1
[4 pages not declassified]
[Facsimile Page 2] [Facsimile Page 3] [Facsimile Page 4] [Facsimile Page 5] [Facsimile Page 6] [Facsimile Page 7]The Government has already embarked on a program to reorganize the public administration and state agencies, for the purpose of reducing national expenditures to limits consistent with the country’s economic capacity. To the [illegible in the original] and studies will be completed during 1959 that will permit the introduction of sweeping changes in the systems of social security, customs tariffs, and taxation.
The first steps have already been taken to rationalize foreign trade, by adopting a policy governing rates of exchange that will effectively encourage export activities and reduce the demand for imported products to safe limits. With this purpose in mind, the areas of exchange have been unified in a single rate of exchange, the value of which will be effectively determined by supply and demand on the market.
[Typeset Page 252]As a consequence of the mistaken exchange policy adopted in the past, under which the value of the dollar was arbitrarily kept low in relation to the level of domestic prices, the national economy was deprived of the flow of foreign capital and, what is more serious, the flight of Chilean capital was encouraged as it sought more stable investments abroad. Naturally this was reflected in a stagnation of capital investment in productive activities. Furthermore, the long process of inflation which has affected the national economy has largely destroyed the working capital of various enterprises.
In those circumstances production and trade have sought to use domestic credit, this being their only possible source [Facsimile Page 8] of financing, and this has brought about heavy and constant pressure on the Central Bank to increase the rediscount rate of the commercial banks. This erroneous credit policy has resulted in currency issues that have helped to aggrevate the inflationary process.
The exchange measures already adopted will help to solve those problems and, furthermore, will make it possible for the National economy to develop its activities through the use of foreign credit, thus leaving margins of domestic credit available for these activities which by their nature cannot reach out to sources of foreign credit. Along with this, the demand for bank credit will be heavily reduced and it will then be possible to keep the issuance of currency under strict control.
The development of this financial policy requires a climate of public confidence and social tranquility. The Government will achieve its purposes only to the extent that it create new sources of employment that will permit the incorporation into productive activity of a large number of workers who at present do not have even the most elementary resources for their subsistence. To attain this objective without creating inflationary pressures, it is imperative to be able to count, for one time only, upon substantial financial assistance from abroad, which will supplement the country’s own resources and which is needed to strengthen the country’s economic activities.