The Ambassador in Peru (Pawley) to the Secretary of State

No. 425

Sir: Replying to the Department’s confidential instruction No. 80 of September 25, 1945, 1 have the honor to forward the following observations regarding the proposed negotiation of a new trade agreement between the United States and Peru.

The data regarding port taxes and charges requested in the Department’s instruction No. 22 of August 7, 1945,1 are nearing completion and will be forwarded during the coming week. [P.S.: This report now completed is No. 256 (Restricted), dated October 19, 1945, entitled, “Port Charges in Peru not Previously Reported (Except as Otherwise Noted)”.]1

Nothing new has developed with reference to the internal taxes mentioned in the Department’s instruction No. 4140 of July 2, 1945. The subject was taken up with the Minister of Foreign Affairs in the Embassy’s note No. 44, dated August 20, 1945, but no reply has been received.

In order to avoid further delay, the Embassy reviewed and submitted the available data on the internal tobacco taxes in Despatch No. 286 of September 17, 1945, which enclosed a copy of note No. 442 referred to above. The latter solicited the Peruvian Government’s assistance in analyzing the internal as well as the port taxes and charges, since the Peruvian technicians no doubt are in possession of factual details not available to the Embassy. In its conversations with the Peruvian [Page 1356] delegates in Washington the Department may wish to suggest the value of full and prompt cooperation if it is desired to conclude a mutually satisfactory agreement within a reasonable period of time.

The instruction invited the Embassy to make any comments and to furnish any information it considers would be helpful to the Department. Those occupied with the pre-negotiation studies may find it useful again to review Secret Despatch No. 123 of August 17, 1945,3 entitled “Business and Economic Angles on Peru’s New Government and Congress”, and to the various despatches referred to therein, in order to refresh their memories of Peru’s rather persistent irregularities of the past.

Although it is probable that certain of our pending problems in this country cannot be solved or even considered directly in the treaty negotiations, it is believed that the Department and the negotiating officers will welcome reference again at this time to some of the more prominent background information. The oldest and most difficult of the unsolved problems are, of course, the dollar loans, originally totaling 95 million dollars. These are composed of the 7 per cent Tobacco Loan, 1927–1959, for 15 million dollars; the 6 per cent First Series National Loan, 1927–1960, for 50 million dollars; and the 6 per cent Second Series National Loan, 1928–1961, for 25 million dollars. The service was suspended in 1931 after the principal had been reduced to $81,547,500. Detailed information regarding the efforts of the bond holders’ representatives to adjust this debt problem, and a considerable amount of miscellaneous information pertaining to Peru’s general economic and financial conditions may be found in the series of despatches of which the last was No. 489 dated June 2, 1944,3 entitled “Seventh Session Dollar Debt Discussions, May 31.”

The main point to be brought out here is that the Peruvians have made no serious effort to renew service on these bonds in recent years when the economic situation has been reasonably favorable, and notwithstanding the fact that the Tobacco Loan was guaranteed by the gross revenue of the tobacco monopoly, which ranged from S/12,030,218 in 1927 up to approximately S/34,000,000 in 1934.

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The Peruvian trade control system may become, or may even now be, one of the most obnoxious, for the obvious reason that a few men may restrict or kill business by their own individual decision, without laws or regulations to govern them or to protect the business men. The complaints by Peruvian, American, Chilean, Canadian, Chinese and British merchants and officials are now so numerous and coherent as to point directly to such a conclusion. (There is also an accumulating volume of testimony that Ricardo Madueño, Manager of the [Page 1357] Peruvian Government’s Banco Industrial is the principal hatchet man; that he is anti-American, nationalistic, and stubborn.) It was the Bank’s sales of silver, under Madueño’s management, to the Casa Welsch (Proclaimed List) which caused the Banco Industrial to be placed on the Confidential List.

Mr. Wilfredo Pflucker, Superintendent of Importations, whose resignation of July 31, 1945, was finally accepted on October 13, stated that his views had been entirely disregarded and that he had not been attending committee meetings for several weeks.

According to Mr. Pflucker, the committeemen have the support of the large importing companies, which for the most part deal in machinery, building materials, foodstuffs, chemicals, and other commodities which have been classified as essentials. By virtue of that situation they are able to obtain practically all the dollar exchange they need, find their business prospering, and in fact look upon the system as a convenient method of eliminating a certain amount of competition.

In like manner, the local producers of medicinals, pharmaceutical products, hats, shoes, textiles, etc., defend the import controls because they are thus able to dispose of their manufactures, which, because of inferior quality in many cases, do not move well in competition with the finer imports (usually of United States origin.) As a general rule, the local manufacturers are now enjoying unwonted profits by charging import prices for their products.

Minor employees all along the line are in agreement also because they make money on the margin by accepting fees or presents for rendering special favors, according to the testimony of numerous importers.

Mr. Pflucker reported that all of this had been discussed in the meetings of the general steering committee, among whose members, he said, are Messrs. Clemente de Althaus and Alcides Velarde of the Central Reserve Bank, Superintendent of Banks Figari, Mr. David Dasso, Price Control Officer Diaz Dulanto, Mr. Ricardo Madueño, Mr. Jorge Chamot, and (until October 12) Mr. Pflucker. According to this experienced informant, the committee, as well as the President himself, defends the system as the only practical method during this period of political uncertainty which encourages the continued flight and hiding of dollar exchange.

It is now evident that we are not going to obtain a clear solution of this problem by the simple process of persuasion, although we shall no doubt be able to effect adjustments here and there in individual cases, as have been reported in previous communications.

We have engaged in repeated conversations with the leading representatives of American exporters, encouraging them to take united action. One of their most concerted acts was a protest published in [Page 1358] the newspapers of September 5, 1945, a translation of which is attached hereto as enclosure No. 1.4 The document is excellent and self-explanatory. Nevertheless, it produced no useful results, as may be observed by reading ex-Finance Minister Ferrero’s reply, which is translated in enclosure No. 2.4

My Note No. 44 of August 20, 1945, to the Minister of Foreign Affairs, a copy of which was enclosed with Despatch No. 286 of September 17, 1945, entitled “Discriminatory Taxes on American Tobacco and Other Products”, has remained unanswered, as has Mr. Greenup’s letter of September 4, 1945, to ex-Finance Minister Ferrero (enclosure No. 34).

Our latest official communication on the subject, Mr. Greenup’s Memorandum of October 11, 1945, (Enclosure No. 4)4 to the new Finance Minister Carlos Montero Bernales, has not yet been answered, although the Minister stated that he would look into the matter, and published a notice in the newspapers the following day (October 12) to the effect that he “contemplated the revision of the system of control on foreign trade, the ‘traffic’ in foreign exchange, prices, and other controls exercised by this Ministry in order to put them in line with the economic exigencies of the moment and coordinate them with the other controls exercised by other Ministries”. It is beginning to appear as if statements and promises of this character are appeasers, similar to those to the effect that Peru is going to exert every effort “within the economic possibilities of the country,” to meet the defaulted debt obligations.

The Peruvians no doubt will endeavor to use the trade and exchange controls as a bargaining instrument. Such procedure would be most unfair in view of the exceptionally great favors we have accorded to this country. To obstruct any movement of that nature, one of the higher officers might intimate to Ambassador Beltran that the United States expects an immediate improvement in the application of the controls to the United States before serious consideration can be given to granting concessions to Peru.

The hour for straight-forward, unsentimental, business methods with Peru is overdue. It is bad enough to injure ourselves, but deliberately to go on providing a friendly nation and people with the facilities for perpetuating “political and economic gangsterism” is dangerous to both countries. This may well represent my own conclusion and that of our compatriots of long experience in Peru, but what is really important is that the conspicuous Peruvian leaders have the same opinion. The foregoing descriptive terms (in quotations) are their own, and in using them they have declared in sincerity [Page 1359] that it would be a godsend to this nation if the United States would place emphasis on fairness in our governmental economic relations rather than upon cooperative or unconditional contributions. I believe that such a practice, added to our overall good neighbor policy, would contribute much toward making the relations between Peru and the United States exemplary in the family of nations.

Despatch No. 423, of October 17, 1945,5 regarding a proposed law to increase the export duty on silver, produced largely by the American Cerro de Pasco Copper Corporation, contributes additional suggestions and recommendations of value.

Respectfully yours,

William D. Pawley
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