307. Action Memorandum From the President’s Special Assistant (Rostow) to President Johnson 1

SUBJECT

  • $20 Million Program Loan for Chile

Herewith a recommendation from Bill Gaud, Covey Oliver and Ed Korry, endorsed by BOB and Treasury, that you authorize a $20 million program loan to Chile for the remainder of 1968 (Tab B).2

Charlie Zwick’s lucid memorandum summarizing the loan proposal (Tab A)3 has all the essential elements and I will not repeat them. You should understand, as Charlie points out in his recommendation, that the loan is primarily a political bailing out operation to help President Frei and the moderate Christian Democrats make the best possible [Page 671]showing in the Congressional elections in March 1969. These elections set the stage for the Presidential elections in September 1970.

After a record of steady progress in reducing inflation and stimulating development and reform during 1964, 1965 and 1966, President Frei fell on hard times in 1967 and 1968 when the opposition on the left and right ganged up on his anti-inflation program. If we do not help him to the extent recommended, he will either have to slash his investment budget for Alliance programs or engage in highly inflationary Central Bank borrowing, either of which will have serious adverse political implications for him in the March 1969 elections.

I join Ed Korry and Covey Oliver in the political judgment that our interests in Chile are best served by helping Frei through this particularly hard period. Hopefully, our aid, combined with his own self-help measures, will enable him to reverse the economic trends and make a good showing in the Congressional elections. If it does not turn out that way, we will still be free to decide how we will gear future aid.

In recommending that you authorize negotiation of the loan, I suggest you do so on an ad referendum basis.

Walt

Approve4

Disapprove

Call me

  1. Source: Johnson Library, National Security File, Country File, Chile, Vol. V, 8/67–11/68. Confidential.
  2. Tab B was a memorandum from Gaud to the President, July 15; attached but not printed.
  3. Tab A was a memorandum from Zwick to the President, July 20; attached but not printed.
  4. This option is checked, and a July 25 handwritten notation by Bowdler indicates that Rostow informed Bowdler and Dottie Fredley. On August 27 Rostow reported that the negotiations had been concluded, that Chile had agreed to the fiscal and monetary conditions, and that a severe drought in Chile “makes the program loan more important than ever in President Frei’s economic planning.” The President authorized the loan. (Telegram CAP 82188 from Rostow to the President, August 27; Johnson Library, National Security File, Country File, Chile, Vol. V, 8/67–11/68)