How Chile Has Met the Depression

Author(s): Ernesto Barros Jarpa

Source: Foreign Affairs, Vol. 13, No. 4 (Jul., 1935), pp. 638-646
Published by: Council on Foreign Relations
Stable URL: http://www.jstor.org/stable/20020222
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HOW CHILE

HAS MET THE DEPRESSION

By Ernesto Barros Jarpa

Y TASK
is to outline the financial and economic situa
to the
tion in Chile, going back for that purpose
our
structure
threatened collapse of
national
in the
of world depression, and the forces which the Chilean
maelstrom
to combat that threat. A nation's
Government
employed
prob
lems 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
a train wreck or a local fire. However,
the toll
daily press, than
taken by the world depression may have brought us all somewhat
closer together in the sympathy of a common tragedy. Specifi
cally, the course taken by the crisis in Chile has so closely paral
in the United States that each people may be
leled developments
a
to
take
sincere and friendly interest in the other's mis
ready
it has taken to recover the
fortunes and in the steps which
in
economic
of 1929-32.
lost
landslide
the
ground
measure
Chile
reasonable
has
suffered more bitterly
By any
from the world crisis than almost any other important nation.
Our exports dropped from $278,000,000
in 1929 to the insignifi
cant 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
structure
of the national
economic
foundation
and not, as in some
a
more
to
desirable
self-sufficient
countries,
adjunct
merely

trade. The effects of the drop in internal purchasing

and
power following the shrinkage in exports were immediately
to
Farmers
it
found
everywhere apparent.
impossible
dispose of
domestic

their

crops

even

at

ruinous

prices,

and,

consequently,

they

had

no way of meeting
their obligations. The position of those de
was
scarcely less acute. Add to this the
pendent upon industry
revenues fell from
in
fact that government
nearly $150,000,000
were
to
most
in
when
Chilean
the
1929
1932,
$43,000,000
people
in need of assistance, and some idea will be had of the magnitude
and scope of the problems confronting the government.
it was impossible to await a general world trade
Obviously,
was
at once, and
to meet its
Chile
recovery.
problems
compelled
was
to
unaided. What
be done?

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HOW CHILE HAS MET THE DEPRESSION

II.

THE

PARAMOUNT

PROBLEM

OF

639

INDEBTEDNESS

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
were aided in
resources
opposed these measures,
replenishing their
and in liquidating a substantial portion of their frozen assets.
The position of the debtor classes was further relieved by the
of the currency which followed the decline in ex
depreciation
same time, the government was able to
At
the
ports.
supplement
these

measures

and

give

a natural

impetus

to business

recovery

an Industrial Credit Fund to finance new

through the creation of
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
for farm
is dependent
upon the soil. The market
population
was
demoralized
the
products
by
completely
collapse in pur
to
of
efforts
and
the
frantic
farmers
chasing power
by
dispose of
at
their crops
any price in order that they might continue tomeet
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
a Farm Credit
two following years
by 25 percent. Creation of
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 threat
ened 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 bank
ruptcy ismerely 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
in
of
basic
the
commodities.
words,
prices

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FOREIGN AFFAIRS

640

The reasonable words of President Roosevelt with reference to

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

of

its

THE

debtors.

oppressed

ON UNEMPLOYMENT

ATTACK

THREEFOLD

I have
While
the steps which
immediate pressure on the Chilean
for slow

the

recovery,

people
faced

still

country

outlined

above relieved the

and prepared the way

a serious

unemployment

the government
had to
problem. To alleviate unemployment,
con
either
three programs:
choose between
(1) public works,
structed

the

by

or

government

let

out

to

contractors;

private

(2) a direct dole; or (3) work relief, such as the Citizens Conserva
tion Corps furnishes in the United States.
Prior to the middle of 1932, the first method was followed in
was found (as has
Chile, supplemented
by direct relief. But it
a
that
is
been discovered
elsewhere)
public works program
most
of
form
efficient
least
and
the
relief, while,
costly
inevitably
on the other hand, the dole tends to undermine
the morale
and self-respect of the unemployed.
It was

therefore,

decided,

to

adopt

the

third

alternative

that

means of dealing with the un

as the
principal
initiated a series of
the
government
employment problem. Thus,
to promote gold production,
both through
concerted measures
on
was
mining and placer operations. The chief emphasis
placed
of work

private
properties

tractors.

persons
contractors

relief

rather

than

were

government
operation,
turned
in many
instances

initiative was
Individual
who started out panning
or owners

cooperated
by fixing
decidedly
prospecting
currency. In addition,
fields to purchase the
mercy of speculators
traveling

to and

from

of

their

own

a minimum

and
over

state
to

gold-bearing
private

con

encouraged, and thousands of

for gold have since become
properties.

The

government

price for gold, which made

of the
attractive,
owing to depreciation
sent agents direct to the
the government
so as to avoid placing the miners at the
gold
and to eliminate the waste of their time in
the mint.

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HOW CHILE HAS MET THE DEPRESSION

641

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
a form of
now is
relief. The government
merely
unemployment
to
attention
technical
in
the
meth
giving greater
improvements
ods of extraction, which may be expected to bring about a further
?
increase in output. In 1934, Chile produced 7,420 kilograms
?
of gold, which represented a gain of 62 percent
nearly 8 tons
over 1933. It is significant, moreover,
that 26 percent of the
total

came

production

carried

dominantly

from

on

placer

by

independent

are

which

operations,

laborers

and

pre

small

contractors.

aid to the mining industry was not confined to the

of gold production,
encouragement
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
of
production
sulphur, potash, salt, lead, nickel and aluminum
as well as gold.
Thus, by means of a well planned and coordinated
recovery
not
unem
the
Chilean
Government
has
alleviated
program
only
work
but
the
has
fostered
relief,
ployment through
development
Government

of new

and

permanent

IV. THE

NEW

sources

SOCIAL

of national
AIMS

wealth.

OF GOVERNMENT

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 ismerely
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
to
producer have been lifted by the efforts of the government
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

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vague

FOREIGN AFFAIRS

642

But does not the

fears of political and social experimentation.
of
socialism today consist of the appropria
fundamental
concept
tion 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
its
social
function,
paramount duty to preserve to the
primary
to work and live.
the
people
possibility
REFORM

FINANCIAL

V.

AND

RETRENCHMENT

Such are the broad social and economic measures and purposes
in Chile. There
which lie behind the present recovery movement
are

other

aspects

of

the

program,

of

course,

and

among

we

them

stress on the steps taken to reestablish the national

lay particular
credit through balancing the budget and initiating discussions
relating to the external debt.
the government's
first
?Confronted by a national emergency,
was
was
to
It
reduce
the
of
level
its
realized
step
expenditures.
in the financial stability of the government
that if confidence
were not maintained
the country would be confronted not merely
this was done is seen
with crisis but with chaos. How effectively
were slashed from
from the fact that government
expenditures
to
948,000,000
1,596,000,000 pesos in 1929
pesos in 1934. The
even more striking if the
of
be
would
comparison
depreciation
the

currency

were

taken

into

account.

What

these

meant

savings

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
a week, while the average
of
receive
salaries
today
only $33.60
government
employee
But
retrenchment

a week.
less than $5.80
gets
was
not
sufficient
alone

to

balance

the

was forced to
new and higher
budget. The government
impose
levies of every kind: taxes on bachelors, on the volume of busi
ness, on excess profits; taxes on the transfer of property; increased
income and inheritance taxes; and so forth. In spite of the de
of severe sacrifice on the part of
pression, therefore, and by dint
to collect total taxes of
the people,
the Treasury managed
871,000,000
pesos
Under
present

expenditures

in 1934,
conditions,

as

in 1932.
356,000,000
pesos
against
cannot
taxes
be raised
and
further,

can be cut
at the risk of endangering
only

the effi

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HOW CHILE HAS MET THE DEPRESSION

643

and the living standards

organization
ciency of the government
of its employees, who have patiently submitted to drastic salary
to
of the Republic
in his message
reductions. The President
com
taxes
to
the
limit.
The
have
"We
stated:
raised
Congress
bined taxes represent an average assessment of 27 percent on the
have been made showing
income of each citizen." Computations
that industry and commerce pay taxes equal to 62 percent of
taxes have been necessary
their earnings. Yet these burdensome
to preserve the government's
structure.
It is hoped that in
fiscal
time the gradual recovery fostered by the measures
already de
and
scribed will both increase the revenues of the government
on the taxpayers.
the
burden
lighten
VI.

THE

PROBLEM

OF FOREIGN

DEBTS

It must be pointed out that all this recovery, all these in

creased taxes and the balancing of the budget have added little
to meet interest payments upon
to the present
capacity of Chile
her foreign debt. These debts can be met solely in foreign ex
excess of the balance of international
change arising from the
In
other words, foreign debt service must depend, not
payments.
merely upon Chilean recovery, which has made gratifying prog
ress, 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
a slash in pro
agriculture for these two vital products compelled
duction from 316,813 tons of copper in 1929 to 163,312 tons in
I933> and from 3,280,000 tons of sodium nitrate to 450,400 tons.
As a consequence,
total Chilean exports dropped from $278,
to
in 1933 (only 16 percent of the
in
1929
000,000
$44,800,000
it
that Chile can find foreign
When
is
remembered
1929 figure).
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
in the same period, and exports 69
dropped only 32 percent
percent. Picture, tnen, the significance of the crisis in Chile, with

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FOREIGN AFFAIRS

644

national mineral production, which had accounted

for over 90
cut
of
for
the
74 percent; prices
percent
foreign trade,
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
to
of our troubles are over and allows the Chilean Government
make

any
indebtedness.

for

whatsoever

offer

the

settlement

of

its

external

Chile has not lagged in trying to reestablish 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
demands

recovery,
for
payment.

nor

until
Its

its

action

creditors
has

came

been

entirely

to

it with

their

spontaneous.

the very worst period of the crisis, in September

1932, the
law
the
the
Autonomous
government
establishing
passed
organic
of the Public Debt {CajaAut?noma
Institute for the Amortization
de Amortizaci?n
de la Dueda Publica),
and it is under the provi
sions of that Statute, and of subsequent enabling legislation, that
of which I am a mem
the Chilean Special Financial Commission
to take up this
ber was sent to the United States and England

At

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
and other bondholders.
In explanation
familiar to American
of
the terms of that law, Imay state that if a definite and flat cut in
interest
it would

rates
have

were
to be

to be
proposed
a considerable

as a

arrangement,
permanent
from
reduction
the contrac

tual 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,
to emerge
when Chile is (we believe and hope) just beginning
from the economic depths, would fall far short of its capacity to
pay once recovery had been fully established.
in deference to the legitimate rights of creditors and
Hence,
from respect for national obligations on the one hand, and taking
due account of the vicissitudes of economic fortune on the other,
in
the law provides a graduated schedule of payments
varying
to pay. It is believed
that
accordance with Chile's capacity

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HOW CHILE HAS MET THE DEPRESSION

will be more

this arrangement
and

outright

in interest

slash

permanent

to creditors

acceptable

645

than any

payments.

The law therefore allots to foreign creditors not merely a part

two major sources, but all those
of the government
receipts from
?
the

namely,

receipts

entire

revenues

fiscal

from

the

nitrate

and copper industries. The income from these exports has been
the only one providing a constant and
and is today practically
certain

source

of

foreign

and

exchange,

hence

the

resource

only

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
at the present time, it may be
proportion of the service
reason to believe that a revival in
pointed out that there is
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

have

would

been

available

an

thereunder

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
to follow the
policy pursued by many other
proper
at

governments

this

time,

to

namely

reduce

rates

interest

to

minimum
and then, covertly and without public
percentages
as many of their
on the
to
back
announcement,
buy
obligations
as
at
market
could
it
Chilean
open
depreciated prices. Instead, the
Government
its intention to devote half
has openly announced
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
to the bondholders.
is of real advantage
Institute
Although

of them are in a
many
position
even
of time and thus secure

to retain
greater

their

returns,

are forced
to liquidate,
by circumstances
In
it
has
been
the
past
price.
impossible
except

at a ruinous

sacrifice.

Not

only

bonds

over

there

are

a
period
some who

regardless of the market

to
dispose of such bonds

were

prices

low,

but

there

was so small a market for these

10 or
obligations that an offer of
20 bonds was sufficient to cause
even more disas
prices to fall to
trous levels. The
of
for the pur
substantial
funds
employment

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6^6

FOREIGN AFFAIRS

chase 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.
if world demand and world prices for copper and
Moreover,
?
in Chile
and it is sincerely believed
sodium nitrate improve
?
these repurchases and interest pay
that this will be the case
rate. This is not a
ments will increase at a rapidly accelerating
a desire to render
vague expression of hope based merely upon
the program attractive to creditors. On the contrary, it must be
stressed that the economic well-being of the Chilean nation, and
a large
even the very existence of its population,
depends in
In
measure upon the prosperity of those industries.
other words,
is as much wrapped up in the expansion
Chile's own prosperity
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
those holders who
is not too much to forecast that ultimately
have relied upon the continuing good faith and ability of the
their bonds to
and who have retained
Chilean Government
of the principal in full.
maturity will be rewarded by payment
In no other way than by the allotment of the two great na
as described
tional sources of revenue and foreign exchange,
revenues
into interest and
above^ and by the segregation of these
retirement
funds, could the desired results be attained. When
the program is studied in the light of all the present circum
stances, our creditors and the public at large will, I hope and
of Chile is not shrinking from
believe, realize that the Republic
very real national sacrifices in order to conclude the most equi
table and just arrangements possible.

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