MY TASK is to outline the financial and economic situation in Chile, going back for that purpose to the threatened collapse of our national structure in the maelstrom of world depression, and the forces which the Chilean Government employed to combat that threat. A nation's problems often fail to awaken much sympathetic attention abroad; an earthquake in Asia involving a loss of thousands of human lives commands less interest, as expressed in the columns of the daily press, than a train wreck or a local fire. However, the toll taken by the world depression may have brought us all somewhat closer together in the sympathy of a common tragedy. Specifically, the course taken by the crisis in Chile has so closely paralleled developments in the United States that each people may be ready to take a sincere and friendly interest in the other's misfortunes and in the steps which it has taken to recover the ground lost in the economic landslide of 1929-32.

By any reasonable measure Chile has suffered more bitterly from the world crisis than almost any other important nation. Our exports dropped from $278,000,000 in 1929 to the insignificant total of $42,000,000 in 1932, and this 85 percent slump could not but entail acute suffering for the entire Chilean people. It must be remembered that with us the export trade is the very foundation of the national economic structure and not, as in some more self-sufficient countries, merely a desirable adjunct to domestic trade. The effects of the drop in internal purchasing power following the shrinkage in exports were immediately and everywhere apparent. Farmers found it impossible to dispose of their crops even at ruinous prices, and, consequently, they had no way of meeting their obligations. The position of those dependent upon industry was scarcely less acute. Add to this the fact that government revenues fell from nearly $150,000,000 in 1929 to $43,000,000 in 1932, when the Chilean people were most in need of assistance, and some idea will be had of the magnitude and scope of the problems confronting the government.

Obviously, it was impossible to await a general world trade recovery. Chile was compelled to meet its problems at once, and unaided. What was to be done?


The commercial crisis was solved primarily through the forced reduction of interest rates. In that way the burden of debtors was lightened, and in the end the banks, which had at first bitterly opposed these measures, were aided in replenishing their resources and in liquidating a substantial portion of their frozen assets. The position of the debtor classes was further relieved by the depreciation of the currency which followed the decline in exports. At the same time, the government was able to supplement these measures and give a natural impetus to business recovery through the creation of an Industrial Credit Fund to finance new industries and expand those already in existence.

The crisis proved to be most acute in the agricultural regions, and it may be remarked that some 41 percent of the Chilean population is dependent upon the soil. The market for farm products was completely demoralized by the collapse in purchasing power and by the frantic efforts of farmers to dispose of their crops at any price in order that they might continue to meet their obligations. The widening disparity between the farmer's pitifully small income and his fixed debt charges forced drastic action. Debtors were allowed to fund their arrears at the uniform rate of 6 percent into new long-term obligations, while current interest and dividends were reduced by 50 percent, and for the two following years by 25 percent. Creation of a Farm Credit Fund helped to solve the problem of debts, without shifting the burden onto the banks. The Mortgage Bank, which had been on the verge of bankruptcy, found its position improved as a result of the relief afforded its debtors, and was able to avoid the threatened suspension of payments on its own internal obligations.

In Chile, as elsewhere, it became apparent that an attempt to solve the problem of indebtedness by forcing debtors into bankruptcy is merely to aggravate the evils of depression. The changed position of debtors had to be frankly recognized, and all possible assistance, compatible with the just claims of creditors, had to be accorded them. This was the guiding policy to which the Chilean Government adhered in dealing with the problem. It proved to be the only means of restoring equilibrium in the national economy when the aggregate debt burden had been artificially raised by a precipitous drop in the means of payment, in other words, in the prices of basic commodities.

The reasonable words of President Roosevelt with reference to the European war debts may appropriately be quoted in this connection: "I firmly believe in the principle that an individual debtor should at all times have access to the creditor; that he should have opportunity to lay facts and representations before the creditor and that the creditor always should give courteous, sympathetic and thoughtful consideration to such facts and representations." This was the policy followed by Chile in the treatment of its oppressed debtors.


While the steps which I have outlined above relieved the immediate pressure on the Chilean people and prepared the way for slow recovery, the country still faced a serious unemployment problem. To alleviate unemployment, the government had to choose between three programs: (1) public works, either constructed by the government or let out to private contractors; (2) a direct dole; or (3) work relief, such as the Citizens Conservation Corps furnishes in the United States.

Prior to the middle of 1932, the first method was followed in Chile, supplemented by direct relief. But it was found (as has been discovered elsewhere) that a public works program is inevitably the most costly and least efficient form of relief, while, on the other hand, the dole tends to undermine the morale and self-respect of the unemployed.

It was decided, therefore, to adopt the third alternative -- that of work relief -- as the principal means of dealing with the unemployment problem. Thus, the government initiated a series of concerted measures to promote gold production, both through mining and placer operations. The chief emphasis was placed on private rather than government operation, and state gold-bearing properties were in many instances turned over to private contractors. Individual initiative was encouraged, and thousands of persons who started out panning for gold have since become contractors or owners of their own properties. The government coöperated by fixing a minimum price for gold, which made prospecting decidedly attractive, owing to depreciation of the currency. In addition, the government sent agents direct to the fields to purchase the gold so as to avoid placing the miners at the mercy of speculators and to eliminate the waste of their time in traveling to and from the mint.

It may be stated that this program has proved a complete success within its obvious limits. Within five months the glamour of gold mining as such, and the intrinsic reward for long hours with a shallow pan or pick and shovel, brought 40,000 workers back into the ranks of the gainfully employed. By November 1932 the value of new gold production was equal to 50 percent of Chilean imports for the month, and gold mining was well on the way to becoming a profitable and growing industry rather than merely a form of unemployment relief. The government now is giving greater attention to technical improvements in the methods of extraction, which may be expected to bring about a further increase in output. In 1934, Chile produced 7,420 kilograms -- nearly 8 tons -- of gold, which represented a gain of 62 percent over 1933. It is significant, moreover, that 26 percent of the total production came from placer operations, which are predominantly carried on by independent laborers and small contractors.

Government aid to the mining industry was not confined to the encouragement of gold production, although expansion of the latter has doubtless been most spectacular and of the most direct benefit to victims of the depression. In the same way that credit funds were created to finance industry and ease the burden of farm debts, a Mining Credit Fund was formed to finance the production of sulphur, potash, salt, lead, nickel and aluminum as well as gold.

Thus, by means of a well planned and coördinated recovery program the Chilean Government has not only alleviated unemployment through work relief, but has fostered the development of new and permanent sources of national wealth.


What has been described thus far is in effect a "New Deal" for the Chilean people. In so far as possible, the system operates without competition with private industry. Its purpose is merely to fill up the gaps left by private capital and mark out the road which later on is to be followed by individual initiative. The goal has by no means been reached, but the immediate worries of the producer have been lifted by the efforts of the government to assure him a market for his product.

Some people have characterized this new concept of the duty of the state as "socialism," and have endeavored to arouse vague fears of political and social experimentation. But does not the fundamental concept of socialism today consist of the appropriation by the state of the means of production? When these means of production remain in the control of private capital, and the state confines itself to encouraging their use and to providing those services which have not attracted private capital, this is not socialism; it is merely the recognition by the state of its primary social function, its paramount duty to preserve to the people the possibility to work and live.


Such are the broad social and economic measures and purposes which lie behind the present recovery movement in Chile. There are other aspects of the program, of course, and among them we lay particular stress on the steps taken to reëstablish the national credit through balancing the budget and initiating discussions relating to the external debt.

Confronted by a national emergency, the government's first step was to reduce the level of its expenditures. It was realized that if confidence in the financial stability of the government were not maintained the country would be confronted not merely with crisis but with chaos. How effectively this was done is seen from the fact that government expenditures were slashed from 1,596,000,000 pesos in 1929 to 948,000,000 pesos in 1934. The comparison would be even more striking if the depreciation of the currency were taken into account. What these savings meant in terms of dollars and cents to the individual government official or employee may be understood from the fact that the Secretary of State, the Finance Minister and other members of the Cabinet today receive salaries of only $33.60 a week, while the average government employee gets less than $5.80 a week.

But retrenchment alone was not sufficient to balance the budget. The government was forced to impose new and higher levies of every kind: taxes on bachelors, on the volume of business, on excess profits; taxes on the transfer of property; increased income and inheritance taxes; and so forth. In spite of the depression, therefore, and by dint of severe sacrifice on the part of the people, the Treasury managed to collect total taxes of 871,000,000 pesos in 1934, as against 356,000,000 pesos in 1932.

Under present conditions, taxes cannot be raised further, and expenditures can be cut only at the risk of endangering the efficiency of the government organization and the living standards of its employees, who have patiently submitted to drastic salary reductions. The President of the Republic in his message to Congress stated: "We have raised taxes to the limit. The combined taxes represent an average assessment of 27 percent on the income of each citizen." Computations have been made showing that industry and commerce pay taxes equal to 62 percent of their earnings. Yet these burdensome taxes have been necessary to preserve the government's fiscal structure. It is hoped that in time the gradual recovery fostered by the measures already described will both increase the revenues of the government and lighten the burden on the taxpayers.


It must be pointed out that all this recovery, all these increased taxes and the balancing of the budget have added little to the present capacity of Chile to meet interest payments upon her foreign debt. These debts can be met solely in foreign exchange arising from the excess of the balance of international payments. In other words, foreign debt service must depend, not merely upon Chilean recovery, which has made gratifying progress, but upon world recovery, and particularly upon increased world demand and higher world prices for the two products which have always accounted for close to 90 percent of Chile's total exports, namely, copper and nitrates.

Thus the problem of foreign debts is seen to lie in the fact that world prices for copper have dropped over 80 percent and for sodium nitrate nearly 72 percent in terms of gold, while at the same time the slackening in the demand of world industry and agriculture for these two vital products compelled a slash in production from 316,813 tons of copper in 1929 to 163,312 tons in 1933, and from 3,280,000 tons of sodium nitrate to 450,400 tons.

As a consequence, total Chilean exports dropped from $278,000,000 in 1929 to $44,800,000 in 1933 (only 16 percent of the 1929 figure). When it is remembered that Chile can find foreign exchange solely from exports, the effect of this terrific cut in our resources becomes apparent. In the United States in 1932, the worst year of the crisis, national production was reduced only about 50 percent from the level of the 1929 boom. Prices had dropped only 32 percent in the same period, and exports 69 percent. Picture, then, the significance of the crisis in Chile, with national mineral production, which had accounted for over 90 percent of foreign trade, cut 74 percent; prices for the principal products off 72 percent to 80 percent; and exports, which are the sole means of meeting external obligations, slashed 84 percent.

These figures of foreign trade and exchange do not exaggerate the acuteness of Chile's distress. There has been, it is true, a gratifying measure of recovery during the past year. It is this turn in the tide, in fact, which gives us confidence that the worst of our troubles are over and allows the Chilean Government to make any offer whatsoever for the settlement of its external indebtedness.

Chile has not lagged in trying to reëstablish a basis for the service of its external indebtedness. The government did not wait until the country had attained a full or normal measure of economic recovery, nor until its creditors came to it with their demands for payment. Its action has been entirely spontaneous. At the very worst period of the crisis, in September 1932, the government passed the organic law establishing the Autonomous Institute for the Amortization of the Public Debt (Caja Autonoma de Amortizacion de la Dueda Publica), and it is under the provisions of that Statute, and of subsequent enabling legislation, that the Chilean Special Financial Commission of which I am a member was sent to the United States and England to take up this problem with representatives of the creditors.

The law of January 31, 1935, which formed the basis of our discussions has been published and its details are already familiar to American and other bondholders. In explanation of the terms of that law, I may state that if a definite and flat cut in interest rates were to be proposed as a permanent arrangement, it would have to be a considerable reduction from the contractual rate. This would be unfair to Chile's creditors and would not reflect the nation's continuing desire to meet its obligations to the full extent of its ability. Any such arrangement entered into today, when Chile is (we believe and hope) just beginning to emerge from the economic depths, would fall far short of its capacity to pay once recovery had been fully established.

Hence, in deference to the legitimate rights of creditors and from respect for national obligations on the one hand, and taking due account of the vicissitudes of economic fortune on the other, the law provides a graduated schedule of payments varying in accordance with Chile's capacity to pay. It is believed that this arrangement will be more acceptable to creditors than any outright and permanent slash in interest payments.

The law therefore allots to foreign creditors not merely a part of the government receipts from two major sources, but all those receipts -- namely, the entire fiscal revenues from the nitrate and copper industries. The income from these exports has been and is today practically the only one providing a constant and certain source of foreign exchange, and hence the only resource that can be relied upon from year to year as a basis for meeting service upon external obligations.

While these two sources of revenue will suffice to provide only a small proportion of the service at the present time, it may be pointed out that there is reason to believe that a revival in world trade may restore them, probably not to 1929 levels, but at least to the average level of the ten-year period from 1921 to 1930. If the present plan had been in effect during this ten-year period, there would have been available thereunder an average of approximately $24,000,000 per annum for the service of the foreign debt.

As a further feature of the plan, provision is to be made for the gradual retirement of the debt. The Government of Chile did not consider it proper to follow the policy pursued by many other governments at this time, namely to reduce interest rates to minimum percentages and then, covertly and without public announcement, to buy back as many of their obligations on the open market as it could at depreciated prices. Instead, the Chilean Government has openly announced its intention to devote half of the total fiscal revenues from the copper and nitrate industries to meet interest payments upon the foreign debt, and to employ the remaining half of this income for the retirement of the bonds by purchase in the open market.

The year-by-year purchase of bonds by the Amortization Institute is of real advantage to the bondholders. Although many of them are in a position to retain their bonds over a period of time and thus secure even greater returns, there are some who are forced by circumstances to liquidate, regardless of the market price. In the past it has been impossible to dispose of such bonds except at a ruinous sacrifice. Not only were prices low, but there was so small a market for these obligations that an offer of 10 or 20 bonds was sufficient to cause prices to fall to even more disastrous levels. The employment of substantial funds for the purchase of Chilean bonds in the market would be more beneficial to the bondholders than a slight increase in the current interest rate. Further, the purchase of bonds will have the automatic effect of increasing the rate of interest payable with respect to the smaller amount of bonds thereafter outstanding.

Moreover, if world demand and world prices for copper and sodium nitrate improve -- and it is sincerely believed in Chile that this will be the case -- these repurchases and interest payments will increase at a rapidly accelerating rate. This is not a vague expression of hope based merely upon a desire to render the program attractive to creditors. On the contrary, it must be stressed that the economic well-being of the Chilean nation, and even the very existence of its population, depends in a large measure upon the prosperity of those industries. In other words, Chile's own prosperity is as much wrapped up in the expansion of the nitrate and the copper industries as is the welfare of its creditors under the proposed plan of debt service. If world prices and demand for copper and nitrate increase to normal levels, it is not too much to forecast that ultimately those holders who have relied upon the continuing good faith and ability of the Chilean Government and who have retained their bonds to maturity will be rewarded by payment of the principal in full.

In no other way than by the allotment of the two great national sources of revenue and foreign exchange, as described above, and by the segregation of these revenues into interest and retirement funds, could the desired results be attained. When the program is studied in the light of all the present circumstances, our creditors and the public at large will, I hope and believe, realize that the Republic of Chile is not shrinking from very real national sacrifices in order to conclude the most equitable and just arrangements possible.

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