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

PE–12. Memorandum of Conversation, by the Chargé in Peru (Neal)¹

Lima, June 13, 1958

SUBJECT

• Economic Situation

PARTICIPANTS

• Sr. Luis Gallo Porras, Prime Minister and Minister of Finance
• Francis A. Linville, Economic Counselor
• Jack D. Neal, Chargé d’Affaires, a. i.

I handed Gallo Porras a letter containing Ambassador Achilles’ congratulations.² I told him Mr. Linville and I also were happy he had accepted the Prime Ministership and position as Minister of Treasury; that the Embassy was ready to cooperate with him in every possible way.

He said he was concerned about the economic situation and that Pedro Beltran was in the United States at the present time discussing financial matters. He had taken some documents there regarding Peru’s financial needs. Gallo Porras said they were planning to negotiate for a loan in the United States. I asked whether this meant the work was not to be carried on here in Lima. He stated it was their intention to negotiate through Ambassador Berckemeyer. He said they felt it would be much better to carry on the talks in Washington away from interference and opposition of Communist elements and political opponents. When questioned further, Gallo Porras stated the request for a loan had not actually been prepared but was being worked on here presently.

I told him Mr. Samuel Waugh of the Export-Import Bank had possibly informed him (Gallo Porras) as I know he had former Minister of Treasury Thorndike that it was essential for Peru to make a detailed exposé of its financial plan when requesting a loan. I told him that only one week ago in Washington the Department of State had also advised me to so inform Peruvian officials concerned. I stated this was strictly a business matter, that Peru was dealing with precise “Boston Bankers” and, therefore, their case must be well presented. Gallo Porras indicated his understanding.

Gallo Porras said the situation was critical and that an extraordinary session of Congress was being called next week. He said the country was heavily in debt; that it owed Grace & Co. 50,000,000 soles (Gallo Porras was in error on the amount. Peru owes Grace & Co. 25,000,000 soles and 52,000,000 to International Petroleum. The total debt to various local concerns is estimated at 350,000,000 soles.) and Ferreyros and Company a large sum.

I told the Prime Minister I knew he was extremely pressed for time; however, I wished to inform him of the Embassy’s preoccupation with the climate for foreign investment and particularly the treatment of American business. I stated I was leaving with him a Memorandum concerning the main points at issue.³ I said the climate for investment had deteriorated during the past eight months. The treatment of International Petroleum Company—he asked what I meant, “their not being granted an increase for their products?” I said no; that first it was forcing a 15 per cent wage increase on them⁴ and then not allowing them to increase the price on their products. I explained that IPC was partially owned by Standard Oil of New Jersey which was not only influential in the U. S. financial circles but also has holdings throughout the world; therefore, any adverse decisions affecting the company is quickly known throughout the world and carries great influence in financial circles.

Gallo Porras said that I had seen what the local effect of an increase in price granted to the retailers of gasoline had been. He said he didn’t see how an increase could be granted to IPC at this time. I said the company was making no money. Gallo Porras acted rather surprised and said, “No?” I said, “Very little, if any.” As a result I felt certain it would be necessary for IPC to curtail activities (Mr. Ashworth, the manager of IPC, had already informed me that he was closing six of his eleven drilling rigs and laying off 560 workers but that IPC had not yet informed the Government.) and cut personnel. Gallo Porras said, “Well, they have too many workers anyway.” I said I didn’t know, but laying off personnel would cause a problem—which Gallo Porras admitted.

I told the Minister I was leaving him copies of two notes which we had sent to the Foreign Office regarding taxes which affected Americans.⁵

The “foreigners tax” was causing us a great amount of difficulties and was a source of constant complaint by American citizens. I said we felt the tax unjust and discriminatory and that it should be repealed, I showed him the Foreign Office reply⁶ received today saying our Note had been referred to Congress for appropriate committee handling. I stated that was not satisfactory since time was a factor and Americans would have to pay the tax before July 1. I stated what we desired was an immediate suspension of the law until Congress could repeal it. I said we would appreciate a decree by the President or if proper, one by him as Minister of Treasury.

Gallo Porras said he didn’t know anything about this but would look into it.⁷

The other note we wore leaving with him concerned the increase in taxes on American firms - the complementary-tax. I pointed out to him that there was an increase from zero to 19 per cent on “income from service, interest and rent obtained by companies not established in Peru.” Mr. Linville informed him this phase of the bill had been inserted by Congress, reportedly without the knowledge or suggestion and approval of the Ministry of Treasury.

I said we felt these two taxes had added to the unfavorable climate for investment and that he himself had in his letter of acceptance to President Prado stated the need for foreign capital.

At one point early in the conversation when I mentioned Gallo Porras’ letter to the President, he thought I meant a letter which evidently he has written to Vice President Nixon.⁸ He said he told the Vice President that he shouldn’t go to San Marcos—it was a mistake, etc., etc.—that he and the Vice President upon reaching the Hotel Bolivar “there were only cheers; he shouldn’t have gone to Son Marcos.” Since Mr. Linville and I had not called on him to get into a discussion on the Nixon visit, I gave him no reply but turned him back to his acceptance letter to President Prado.⁹

With reference to the economic troubles, I told Gallo Porras there was no need for Peru to import experts to advise them on their needs because he had right, on the same floor with him two financial experts from the International Bank. I stated both Mr. Havlik and Mr. Chaufournier were friends of Peru, and their viewpoint was professional, had nothing to do with their respective governments and therefore their advice could be relied upon implicitly. I said the Embassy had faith in them.

Mr. Linville stated Mr. Havlik and Mr. Chaufournier would know precisely what procedures were required in applying for loans. Mr. Linville added that Mr. Larrabure of the Central Bank and Mr. Romulo Ferrero could also be relied upon for good advice.

1. Source: Department of State, Central Files, 823.10/6–1758. Official Use Only. The source text was transmitted to the Department of State under cover of despatch 993 from Lima, June 17.
2. The referenced letter was not further identified.
3. The referenced memorandum was not found in Department of State files.
4. In despatch 808 from Lima, April 24, the Embassy reported that the Peruvian Government on April 11 decreed a 15 percent wage increase for petroleum workers for the 18-month period beginning February 19 in order to settle a strike. (823.062/4–2458)
5. The two notes under reference were not found in Department of State files.
6. Not found in Department of State files.
7. In airgram G–132 from Lima, December 31, the Embassy stated that President Prado signed on that day the new Foreigners’ Tax Bill, which provided for payment by foreign residents of a nominal fee beginning in 1959 rather than a foreigners’ tax based on income. (823.11/12–3158)
8. The referenced letter was not further identified.
9. In despatch 981 from Lima, June 16, the Embassy reported on Prime Minister Gallo Porras’ letter of June 9 to President Prado. (723.11/6–1658)