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

GT–29. Memorandum from the Director of the Office of Central American and Panamanian Affairs (Stewart) to the Assistant Secretary of State for Inter-American Affairs (Rubottom)¹

Washington, July 26, 1960

SUBJECT

• Guatemalan Situation

The tense situation that has developed in Guatemala, culminating in declaration of a “state of siege”,² requires, we believe, a new look at our approach to President Ydígoras’ repeated calls for financial assistance.

Ydígoras has handled his politics with exceptional astuteness and it can be argued that his “soft” policy toward the left, for which he has been censured by some sectors, has done much to reduce class tensions in that country, and has served to sort the sheep from the goats in the left-of-center political area which, under Castillo Armas tended to be lumped together as “communist”. For this, he has received some recognition. On the other hand, his “soft” policy toward the country’s economic and financial problems has caused considerable concern to the Department and other agencies. In essence, the attitude has been that Ydígoras has not acted adequately on the excellent advice he has received for placing Guatemala’s economy and finances on a sound basis. He has not, for example, pressed with the forcefulness the adoption of such measures as broader income-tax coverage and a reevaluation of properties for tax purposes. On the assumption that Ydígoras could assure his government adequate revenues by adopting such measures, and that Guatemala’s budgetary problem could be resolved with relative ease (as by recourse to private bank credit), a Departmental-ICA team recommended in June the grant of a $3.5 million loan to Guatemala from MSP funds, which would enable Guatemala to make its counterpart contribution to ICA projects and thus get these under way, and that facilities be given the GOG for utilization of wheat agreement revenues. These, it was recommended, should suffice to keep the Guatemalan situation under control. The $3.5 million loan was signed through Eximbank on June 29. We were at the time quite firm, in answering Congressional inquiries, in saying we believed these measures were sufficient to satisfy Guatemala’s reasonable needs, and opposed grant aid. Meanwhile, we encouraged the GOG to present promptly to DLF and Eximbank requests for loans to finance projects intended to stimulate the country’s economy and develop a feeling of optimism.

These arrangements were received with marked lack of enthusiasm by Guatemalan authorities. Ambassador Alejos remarked that it was cash his government needed, in 1960,³ and not in the year or years to come. President Ydígoras made the same point very strongly in an informal message to Mr. Mallory,⁴ warning that access to adequate funds might determine the success of his efforts to control leftist agitation. Ambassador Alejos has been extremely active in presenting, documenting, and pressing for approval of two road-building loan applications now before DLF, but has repeatedly expressed dismay at the apparent unlikelihood that early action on them could be hoped for, much less anticipated.

The Country Team in Guatemala, in evaluating the present tensions there, recommended on July 25 that, in order to encourage conservative and non-Castro, non-communist elements toward unity, approval of the DLF Rio Hondo Loan application submitted to DLF should be announced immediately as a catalytic act to encourage and bolster conservative elements.⁵

In reviewing the Guatemalan situation, we feel that, should current agitation result in Ydígoras’ overthrow and in a take-over by pro-Castro elements, the Department will be subjected to intense and plausible criticism, along the lines that it has been penny wise and pound foolish. It is superfluous under the circumstances to argue in favor of the positions we have taken thus far. Attacks on this position would probably center on the theme that we have been warned persistently that, unless large sums of cash could be furnished Guatemala to enable it to bring itself up to date in the payment of its obligations—most notably of wages to Government employees and school teachers—extremist agitators would stimulate resulting unrest to resuscitate nostalgia for “the good old days” of Arbenz. We have been warned that, as long as the GOG is held to an austerity program in the interests of financial stability, and can not undertake public works either to absorb unemployment or to satisfy expanding popular demand for greater living amenities, the pro-Castro and communist agitators will have an almost obstacle-free field for operation. The charge would be leveled at us that we have underestimated the political dangers of the social-economic problems surrounding Guatemala’s cash shortage, and insisted on adopting an orthodox, business-like approach to an abnormal situation, with resulting disastrous consequences.

The political realities are that the extreme left has received not only moral but financial and, reportedly, tangible encouragement in the form of weapons, from Cuba; that the adoption by Ydígoras, in recent months, of a somewhat harder posture toward the left has united extreme leftist elements, and that the recent Khrushchev statements on United States interference in Cuba, while alarming and rallying to our cause some significant formerly critical left-of-center elements, has also undoubtedly given increased confidence and power of conviction to agitators. These took advantage of a minor strike of Social Security workers in January to stir up demonstrations, whereas that effort was short-lived, the same agitators have had for more spectacular success in building up a minor student grievance into a teachers’ strike that has lasted well more than a month and, in conjunction with terrorist activities (i.e. bomb throwing), has whipped Guatemala into a state of extreme tension, alarm and pessimism, Although it seems possible that the extreme left has now overplayed its hand, and although Ydígoras appears to have played his cards with his characteristic astuteness, (using a much lighter touch than most persons to the right of center would like) reports indicate that the left, now well organized and directed (with the plans mayor of the Arbenz regime now congregated in Habana), will continue to exploit even the most insignificant incidents to create an impossible situation. We cannot therefore afford to go on the assumption that Ydígoras will successfully outmaneuver all future agitators and plotters. We should, we believe, take positive steps to help him reduce the susceptibility of the mass of the population to leftist blandishments.

Accordingly, we urge that DLF and/or Eximbank be asked to act favorably and expeditiously (in a matter of days, not of weeks or months) on the two applications for loans now pending before them. The one given top priority by the GOG is for $9 million (with a foreign exchange component of $3.6 million) for the completion of a highway from Rio Hondo through Esquipulas to the Honduran Border. The chief qualms harbored by our people in Guatemala and by Eximbank revolve around the possibility that such a loan would increase competition for the IRCA railway and possibly finish it off. Eximbank particularly is concerned by the fact it refused a loan to IRCA not long ago, and considers itself exposed to criticism if, on the other hand, it were to facilitate competition for this American concern. However, the directness of the competition in arguable. From a purely political standpoint it may be regarded as unwise to bolster an American investment that has long been the source of infinite anti-American sentiment in Guatemala while disregarding the desirability of opening up a large area to economic exploitation and improvement, and of fostering the aim of Central American unification pursued by Ydígoras.

The second loan application now pending before DLF and Eximbank is for road construction to the El Salvador border from El Molino through Jalpatagua. This is for $4.5 million, and reportedly is considered the more viable application in Eximbank.

Eximbank, which is now studying both applications, asked Ambassador Alejos for more complete data on them about two weeks ago. On the personal orders of President Ydígoras, the Dirección de Caminos in Guatemala dropped virtually all other work to concentrate on furnishing the desired information, and Ambassador Alejos submitted it yesterday, July 25. The President obviously wants no responsibility for delays in action on these requests. The direct implication is that, if action is not taken promptly, the fault will be ours.

A third application, which our Embassy considers to have great merit, will reportedly be submitted to DLF next week, and will involve roadbuilding to the Cobán area, aimed at opening up what is potentially one of Guatemala’s richest provinces, one capable of absorbing much of the teeming population of the Indian areas.

We recommend that, if at all possible, the two applications now being processed be handled expeditiously, and an announcement of their approval be made on the earliest possible date. Time is definitely of the essence, as events are moving very fast and we must not be caught in the position of having supplied too little too late.

With the aim of reversing the trend of nostalgia for Arbenz’ day, we suggest also investigation of the rumored intention of the United Fruit Company to dispose of its large holdings in the Tiquisate area. Reports speak of the possibility of selling these, under a United States Government guaranty for UFCO, to workers’ cooperatives. If it should be found that there is, in fact, disposition in UFCO to do this, it would be highly desirable that the Company be urged to announce its plans quickly, and to develop the impression that it is not only under extremist regimes that agricultural workers can aspire to acquiring ownership of these valuable lands.

OAP, in making the recommendations below, feels it necessary to point out that, while the loan applications described above are not considered top priority projects by Eximbank or REA, the Rio Hondo project is given No. 1 priority by President Ydígoras. It would seem logical to give considerable weight to this fact, in view of the President’s now acknowledged political acumen. Our relations with him have not been made easier by our apparent unwillingness to accept his own programs, which are normally predicated on political and sociological as well as economic considerations. It should be remembered that Ydígoras has received only two $5 million bank loans since he has been in office,⁶ both on the basis of programs favored by United States experts. The $5 million rubber loan was assigned a rate of interest that has made its utilization virtually impossible. The $3.5 million subsequently lent out of MSP funds, you will remember, was intended to get IGA projects underway and did not increase Ydígoras’ flexibility of movement.

Recommendations:⁷

1. That you sign a letter to be addressed to Mr. Waugh of Eximbank, requesting urgent favorable consideration of both the Rio Hondo and El Molino loan applications, and that, if necessary, you follow up this latter with personal representations.

2. That you authorize an approach to the United Fruit Company concerning its plans for the Tiquisate area in Guatemala.

1. Source: Department of State, Rubottom-Mann Files, Lot 62 D 418, “Guatemala, 1960.” Confidential. Drafted by Gorrell. The source text is an unsigned carbon copy.
2. The declaration, approved by the Guatemalan Congress and issued on July 19, suspended certain civil rights and put defense forces in control for 30 days. It blamed the agitation on “political elements, principally Communists,” aiming to subvert constitutional order. (Telegram 32 from Guatemala City, July 19, 1960; 714.00/7–1960). A teacher’s strike and chronic disturbances, climaxed by an aborted garrison takeover in Cobón on July 16 and a hand grenade exploded in a theater in Guatemala City on July 18, preceded the issuance of the decree. A description of the incidents leading to declaration of the state of siege is contained in despatch 31 from Guatemala City, July 22. (714.00(W)/7–2260)
3. In a memorandum of July 5 to Acting Secretary Dillon, Rubottom stated that the International Cooperation Administration made available to the Government of Guatemala $3.5 million in unobligated special assistance funds on a short-term loan in February, and $800,000 in June to relieve an acute cash shortage. (ARA/OAP Files, Lot 63 D 146, “Alejos, Carlos (Ambassador); Guatemala, 1960”). In addition, the International Monetary Fund agreed to a Standby Arrangement with Guatemala which made available $15 million during the period June 6, 1960-June 5, 1961. For further information, see International Monetary Fund, Annual Report of the Executive Directors for the Fiscal Year Ended April 30, 1961 (Washington, 1961), pp. 27–30.
4. Not found in Department of State files.
5. Telegram 46 from Guatemala City, July 23, contains the country team recommendation; 714.00/7–2360.
6. Reference is to the DLF agreement of August 17, 1959, for a loan of $5 million to Banco de Guatemala for rubber production and to Export-Import Bank authorization for a $4,840,000 credit to Banco de Guatemala on December 4, 1959, for industrialization.
7. A copy of the letter from Rubottom to Waugh, July 28, suggested in the first recommendation, is in decimal file 814.2612/7–2860. A notation on the source text regarding the second recommendation states that it is “O.K. to inquire, subject to proper clearances re U.S. Government guarantees.” “Thomas G. Corcoran, a lawyer in private practice with the firm Corcoran, Youngman and Rowe, brought the proposal to the attention of Under Secretary Dillon on October 10, and Dillon referred the matter to Assistant Secretary Mann. (Secretary’s Memoranda of Conversation, Lot 64 D 199). No record of further action was found in Department of State files.