Foreign Relations of the United States, 1955–1957, American Republics: Central and South America, Volume VII

379. Special Report by the Operations Coordinating Board¹

Washington, April 13, 1955.

SPECIAL REPORT ON CHILE

I. Analysis

1. The Working Group concluded that the present situation in Chile was serious but that the country was not likely to fall under Communist control in the near future. The political scene is marked by weakness and ineptitude in the Executive and a high degree of Congressional irresponsibility, and the two branches are frequently in conflict. The Communists, strongly entrenched in Chile since the days of the Popular Front in the ‘30’s wield great influence among the students and in the labor movement, where efforts of the free trade union movement to displace them have not to date been successful. The armed forces and carabineros, however, are believed relatively free from Communist influence.

2. Chile’s economy is in a lamentable condition, but economic difficulties have been present for many years and the current developments have not produced an atmosphere of crisis. The country is in the grip of galloping inflation: prices rose 71 during 1954 and the Government’s budget is and for years has been seriously unbalanced. The exchange system has operated to distort trade patterns, misdirect investment, subsidize favored groups and contribute to the depression of agriculture. Efforts at applying direct economic controls have been uncoordinated, ineffective and have distorted domestic productive patterns. Agricultural production has been falling off, forcing Chile, which was at one time an agricultural exporting country, to devote roughly 25 of its foreign exchange income to food imports. Industrial productivity is low and there have been a series of labor disputes and strikes, usually motivated by the need for higher wages to keep pace with spiralling prices, which lend themselves to exploitation by the Communists for political ends.

3. In the latter part of 1954, the then Finance Minister Jorge Prat attempted a modest program of economic reform designed to stabilize the economy within a period of two to three years, but his policies aroused considerable domestic opposition. The Cabinet of which Prat was the most prominent member resigned at the end of 1954, and Prat’s successor withdrew most of his program for consideration before Congress and there has been no visible effort to replace it with any worthwhile alternative.

4. The Communists in Chile, as in other countries of the world, endeavor to prevent economic development and improvement in living standards except under their own aegis. In doing so they direct their efforts at limiting or preventing U.S. cooperation in Chile’s development. They attack the U.S. and U.S. interests with reference to matters in which the Chilean masses are directly interested, such as prices of raw materials, prices of imported products and profits of American companies. By appealing to Chilean nationalism and by repeating false and misleading statements on these matters, they have succeeded in Chile in building up a climate in which it has been politically profitable, though economically harmful, for the Chilean Government to discriminate against American interests in Chile, particularly the copper interests.

II. Basic Approach

5. Achievement of economic stability is primarily a Chilean problem toward the solution of which the United States can, however, make an important² contribution. Our basic approach to this problem is as follows:

a. It is in the interest of the U.S. to help Chile achieve a stable and healthy economy.

b. Such an economy cannot be achieved unless Chile, herself, does certain basic things in her own interest.

c. U.S. assistance to Chile will not be effective unless it is related to and coordinated with effective Chilean action.

d. U.S. assistance which is not so related and coordinated will probably not only be ineffective but may actually be harmful to Chile by encouraging and making possible the continuance of uneconomic practices and by lessening the chance that Chile will take the steps she should take in her own interest.

e. Grant economic aid is not required because Chile has the potential with which to repay assistance. It also is undesirable, because it is not in consonance with the need to strengthen Chilean backbone and self-respect so that she will tackle her own problems.

f. The risks in a continuing deterioration of the Chilean economic situation while we await Chilean action are not such as to require immediate extraordinary measures by the U.S.

g. If Chilean action should not be forthcoming and the danger should appear of a serious deterioration of the social fabric, the U.S. should promptly re-examine the situation. The steps which might be appropriate as a result of this re-examination cannot be satisfactorily determined at present, but the situation in Chile and the effectiveness of the measures taken by the United States and Chile should be the subject of continuing scrutiny, study and planning.

h. In devising measures to deal with Chile’s problems we must always keep in mind the extreme sensitivity of the Chileans to anything they could interpret as foreign intervention in Chile’s domestic affairs. Any reasonably substantiated charge of U.S. intervention in internal matters would not only alienate large segments of the populace for a considerable period but would seriously damage our general position in Chile.

6. The steps Chile should take to enable U.S. assistance to be effective are:

a. Initiate an effective program designed to halt inflation.

b. Improve further the competitive basis of Chilean copper and nitrate. This includes giving fair treatment to the industries involved.

c. Improve the system of exchange control with a view to arriving eventually at a system of free exchange.

d. Achieve more efficient utilization of Chilean petroleum resources.

e. Stimulate agricultural production.

f. Encourage new private investment, including foreign investment.

Annex A

April 13, 1955.

SUPPLEMENTARY REPORT ON CHILE³

1. Our basic approach to the problem of Chile remains as stated in the foregoing Special Report [discussed by the Board on April 6].⁴ In order to achieve a stable economy, Chile herself must initiate an effective program to halt inflation; U.S. economic assistance to Chile not accompanied by effective Chilean action would not only be ineffective but actually harmful since it would make it possible for Chile to continue her present uneconomic practices.

2. It has been and remains our policy to take advantage of every feasible opportunity to encourage the Chileans to take remedial action. It is possible that such an opportunity may be presented if the Chilean Council of Ministers carries out a proposal adopted on April 5 to employ a commission of technicians in economic and financial matters. Dr. Julius Klein stated on April 8 that he had been approached by the Chileans regarding the possibility of his firm’s advising them on various administrative matters and that he planned to send his partner, Mr. Saks, to see what could be done. It is not sure that this approach is related to the Cabinet’s decision though it may be. Although further information must be obtained before our exact position can be determined, it is suggested that our tentative policy be as follows:

a. Through Embassy Santiago discreetly encourage the Chilean authorities to follow through on their announced intention of contracting for a commission.

b. Also through the Embassy, endeavor tactfully to insure that the Chileans select for a commission persons of ability, integrity and reputation, so that the commission’s findings will carry weight.

c. In carrying out the foregoing actions, refrain from sponsoring or appearing to sponsor a commission, so that the United States will not be regarded as responsible for its recommendations.

d. Through State and Treasury, with the collaboration as appropriate of the International Bank (IBRD), the Export-Import Bank and the International Monetary Fund, aid Chile if requested to obtain the best available persons to serve on a commission.

e. If the commission’s recommendations are sound and the Chileans demonstrate their willingness to carry them out, the United States should then consider action found to be feasible at that time.

f. During commission’s study we will continue to urge the Chileans to take steps which are generally agreed upon as desirable to combat inflation, such as those already suggested by the IMF Mission.

1. Source: Department of State, OCB Files: Lot 62 D 430, Chile. Secret. Transmitted to the OCB on April 15 under cover of a note from Staats. In the note, he stated that the special report had been amended to include the revised Department of State supplementary report which was concurred in by the Board on April 13.
2. The Treasury maintains that it is “only a limited” contribution. [Footnote in the source text.]
3. Secret. The source text indicates this report was drafted in the Department of State.
4. Brackets in the source text.