276. Telegram From the Embassy in Chile to the Department of State1

126. For Mann and Bell from Solomon. I met with Frei for over two hours this morning, accompanied by Chargé, Dentzer and Robinson. Molina and Ahumada also present.

Frei opened meeting by expressing his great appreciation for substantially increased U.S. assistance and good will toward Chile shown in all levels of U.S.

He then took up the subject of U.S. assistance in CY 1965, explaining his approach to the first year of his government’s life, that previous Chilean Governments had always asked the people to sacrifice for stabilization programs but that the programs never worked, that past governments had not cared about all the people, and that his people were mindful of this. For this reason, he wanted to achieve both a reduction in price inflation this year and show concrete benefits to the people, distinguishing his government thereby from its predecessors. He said that reaching the goal of only a 25 per cent price inflation in 1965 was his number one aim and that if he fell short of this, he would consider his first year a failure. If he attained this goal, he could go to the people with the political strength and moral right to demand greater sacrifice. He stated that he hoped, therefore, to sustain a heavy public investment program during this year, but he said that the information given him concerning proposed U.S. assistance for 1965 indicated it fell short by $40 million of his needs. I explained this was not so, and reviewed with him two budgets showing that 1965 U.S. assistance to the balance of payments including debt relief would be $135 million or 35 per cent greater than in 1964 and that 1965 assistance to the budget would be $102 million or 50 per cent greater than the actual 1964 level.

He was surprised and I believe impressed by these figures, which put U.S. aid in 1965 into the best—but fair and defensible—light, contrary to the figures presented on a different basis by his Minister of Finance. I further explained the changes we hoped to see in their investment program, exchange rate policy, etc. and believe was able to disabuse him somewhat of his belief U.S. conservative tradition underlay our position and rather that we were only concerned with workable achievement of targets.

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Frei then turned conversation to the need for $20 million assistance for remainder of 1964. He said he had understood from reports to him prior to the Tomic mission to Washington and from subsequent conversations in Santiago with our Embassy that the U.S. would be willing to be of assistance for the final portion of 1964, that it was imperative in terms of investor confidence that his government not be forced to break the IMF agreement, and that his government could not afford to begin its tenure by holding off unpaid creditors to an unprecedented extent. It then became clear that GOC would have 100 million escudos in unpaid bills as of December 31 in contrast to usual float of 50 million. Frei inquired whether it would be possible for the U.S. to give $20 million now, subtracting this sum from our announced program loan for 1965 for the time being, but with a “gentleman’s agreement” that the same advance against 1966 assistance would be given toward end of 1965. After explaining impossibility of this, I offered to expedite as much as possible the processing of the aid program loan with the possibility if negotiations went quickly enough of signing the program loan agreement in mid December accompanied by initial tranche. However, this would still have to stretch over the full extent of CY 1965, and thus require adjustment in 1965 expenditures or revenues. Molina not enthusiastic about this and mentioned he might try New York banks and hoped we would give him support. I didn’t answer and turned conversation to specific alternatives on finding local resources which we believe possible and preferable.

While this subject was left unresolved, it emphasized GOC need for wide access to escudos from the program loan to finance the investment budget. I therefore agreed on Frei’s request and as a gesture of cooperation to reduce the project component of our 1965 aid loan $10 million, increasing program loan to $80 million, as authorized by Washington.

Frei also asked that we jointly work out some kind of announcement concerning the nature of this week’s talks. I told him we could not make any loan announcements or specify amounts of assistance but would be glad to work out some language of a generalized nature reporting on the work of the past week.

At conclusion of this general discussion, Frei asked me to stay on alone. Tenor of discussion was that he expected to come under attack in the coming months from certain sectors of the Chilean business community—not the industrial sector but the banking and commercial sectors—and he hoped to have U.S. understanding that these attacks would be based on reasonable curtailment by legitimate governmental means of their power in society, as we would be able to judge for ourselves. I suggested as a friend that his best defense against such attacks was carrying out the financial discipline and other policies essential to both the private sector and overall Chilean development. He [Page 606] asked once again for our assistance in helping to resolve his financial problems of 1964, which he characterized as an infortunate inheritance from the previous government. In mentioning this, he acknowledged his confusion over previous reports that the U.S. would be willing to render such assistance, and he asked that U.S. officials never shrink from giving him any bad news about the future, whether it concerned aid or any other subject. In the course of agreeing I made clear what he had not realized before our discussions that any post election assistance would have had to come out of the same total Fiscal Year 1965 Chilean pot and really it boiled down to timing. He accepted this simplistic approach and conversation ended on warm note. We invited to tea today.2

  1. Source: National Archives and Records Administration, RG 59, Central Files 1964–66, AID(US) 8 Chile. Confidential; Immediate. Passed to the White House.
  2. An account of the “tea” meeting between Frei and Solomon is in airgram A–385 from Santiago, November 16. (Ibid., AID(US) 9 Chile) The agreement to provide $80 million of program loan assistance in CY 1965 was signed on January 5. For an account of how the funds were utilized, see United States Senate, Committee on Government Operations, Subcommittee on Foreign Aid Expenditures, United States Foreign Aid in Action: A Case Study (Washington, 1966), p. 32.