Foreign Relations of the United States, 1964–1968, Volume XXXI, South and Central America; Mexico

281. Memorandum From William G. Bowdler of the National Security Council Staff to the President’s Special Assistant for National Security Affairs (Bundy)¹

Washington, November 10, 1965.

SUBJECT

• Chilean Program Loan

BOB will have back to you sometime today the Chilean loan paper with Schultze’s recommendation.² I understand that BOB will recommend a reduction of $10 million in the $80 million recommended.

Our negotiating team has not left for Santiago and will not do so until the President’s authorization is in hand. Dungan has been informed of the delay.³

At staff meeting on Monday⁴ you asked why the program loan had to be as high as $80 million. The AID memo to the President does not really address itself to this question. The Chileans wanted $100–$130 million for 1966. State, AID, and the Country Team scaled this down to $80 million, based on these considerations:

a) This amount is what they think Chile needs to cover its balance of payments deficit and to produce the local proceeds necessary for Frei to continue an adequate level of public investment to maintain the momentum of his “Revolution in Liberty”.

b) An amount higher than $80 million would reduce the pressure on Chile to make needed self-help efforts.

c) An amount appreciably lower (say $60 million) would confront the Chilean Government with the need to cut its 1966 investment program even more drastically than we are proposing, or resort to inflationary financing. Frei would undoubtedly opt for the latter and thereby aggravate the problem which is Chile’s most serious obstacle to a viable economy.⁵

BOB is recommending a reduction of $10 million. The BOB argument is that increased copper prices and better tax collections make a reduction of this magnitude possible without materially affecting either Chilean balance of payments or the public investment budget. As I mentioned in staff meeting this morning, BOB also has in mind demonstrating to Chile and other aid recipient countries that we follow a flexible approach in setting the limits of our assistance.

The state of play as I write this memo is that BOB is waiting to hear from Dave Bell whether he goes along with the BOB cut and will modify his memo accordingly.

I think that the cut can probably be justified. But we need to weigh the political impact from these standpoints:

1. If the project loan assistance for Chile (which was $16 million in FY 1965) is not continued in FY 1966 (as ARA says is the case, and they have agreed to that), the net reduction of our assistance will be $26 million.

2. The assistance to Brazil should also reflect a corresponding reduction if we are to avoid invidious comparisons.

I suggest that in your memo to the President recommending approval of the loan, you make these points:

1. On the anniversary of his first year in office (November 3) President Frei addressed the nation. Regarding U.S. aid, he said:

“Without abandoning any of our fundamental positions, we have maintained loyal and frank friendship with the United States and have found in them understanding for our task and fundamental economic cooperation for the life of the country, which is a debt that we recognize”.

2. Chile has told us that it will participate in the Rio Conference.⁶

3. We can hardly do less for a strong democracy like Chile than we do for shaky constitutional government in Colombia and a de facto government in Brazil.

4. In terms of the contest between democracy and communism to bring reform and prosperity to the people of Chile, and of the other Latin American countries, we have a big stake in the success of the Frei experiment.⁷

WGB

1. Source: Johnson Library, National Security File, Country File, Chile, Vol. IV, 10/65–7/67. Confidential.
2. Attached but not printed are memoranda to the President from Bell (November 6) and Schultze (November 10).
3. In telegram 431 to Santiago, November 9. (National Archives and Records Administration, RG 59, Central Files 1964–66, AID(US) 9 Chile)
4. November 8.
5. In a November 10 memorandum to Bundy, Mann reported taking another consideration into account: “the fact that the Chilean Government was most uncooperative in the Dominican crisis.” Although he concurred in providing the $80 million program loan, Mann suggested a confidential mission to tell Frei “that we expect cooperation to be a two way street and that we are very disturbed about the Chilean Government’s attitude towards the Dominican crisis.” (Johnson Library, National Security File, Country File, Chile, Vol. IV, 10/65–7/67)
6. Reference is to the Second Special Inter-American Conference which was held in Rio de Janeiro November 17–30.
7. The memorandum to the President was apparently never sent. On November 15 the Department informed the Embassy that action on the program loan had been deferred pending the outcome of the Harriman–Solomon mission. (Telegram 454 to Santiago, November 15; National Archives and Records Administration, RG 59, Central Files 1964–66, FN 10 IMF)