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For release 7:30 p.m.
Eastern Standard Time
December 10, 1962




Remarks of J. L. Robertson
Member of the Board of Governors
of the
Federal Reserve System
Before the National and State
Bank Divisions
of the
American Bankers Association
Mayflower Hotel - Washington, D. C.
December 10, 1962

United States Policies and Latin American Progress
Several months ago I suggested the need for a funda­
mental reformation of our crazy-quilt pattern of federal bank
supervision, a pattern which is obsolete and defies logical
justification. I suggested that instead of clinging to a sys­
tem in which three different federal agencies examine and reg­
ulate the commercial banks of this country, we should consoli­
date them into a single independent agency - a Federal Banking
Commission. It would be headed by a board of five men, ap­
pointed by the President, with the advice and consent of the
Senate, on a staggered-term basis. They should be special­
ists who know the business of banking well, men of integrity,
impartiality and competence, constituting an agency that
would be completely nonpartisan, even as the Federal Reserve
Board and the federal courts are today. To this Commission
would be transferred all the powers and functions now vested
in the Comptroller of the Currency and the Federal Deposit
Insurance Corporation, as well as the bank supervisory pow­
ers exercised by the Federal Reserve.
This would have a number of important advantages. It
would raise standards. It would end a race of laxity among
existing agencies, which too often reduces supervisory stand­
ards to the lowest common denominator. It would satisfy the
imperative need for coordination, efficiency and uniformity
of federal bank supervisory policies. It would eliminate the
confusion caused by conflicting and inconsistent decisions
(for example, on mergers). It would reduce costs and increase
efficiency. Last, but not least, it would provide the bank­
ing industry with a single set of "rules of the game", ground
rules that would apply to all banks alike - fairly, equitably,
and impartially - and without which many institutions are
finding it increasingly difficult to plan their own future
activities.
Shortly after my last speech on this subject, before
the convention of the National Association of Supervisors
of State Banks at Bretton Woods, New Hampshire, I removed
myself physically as well as mentally from the field of bat­
tle. I spent most of tl^$8fc%t|^of October in Latin America,
where I engaged in som^^n-s^^^pot research into the bank­
ing and economic probl^s|^l|%i confront our neighbors to the




- 2 -

south. On my return, I fully expected to again take up the
gauntlet, but to my surprise and pleasure, I found that in
my absence, and perhaps because of it, there had developed
an increasingly widespread understanding of the proposal for
a Federal Banking Commission, a growing realization that it
would not in any way weaken the dual banking system, and a
ground swell in favor of it.
I have no illusion that the issue has been decided
and that the battle has been won. However, the case for re­
form has been stated, not only in my earlier speeches on the
subject, but in articles and editorials in widely read maga­
zines and newspapers. There is little that I can add of an
expository nature. Even if I had the power, I would not want
to try to win support for the reform by emotional oratory. I
can only say that the more the question has been debated, the
more convinced I have become that the proposal is sound and
feasible. I hope and trust that after careful, open-minded
study of the pros and cons, bankers, supervisors, government
officials and legislators will reach a similar conclusion.
If this should be the case, the plan could be effectuated
either by the President under the Reorganization Act or by
the Congress through the legislative process.
Believing that I have done about as much as a man in
my position can be expected to do in bringing about the needed
reform, I feel free tonight to turn to a discussion of the
need for reform in our thinking about the problems of Latin
America. I do not pretend to know as much about this as I do
about bank supervision, since - when it comes to Latin America I am, at best, what might be called a "one-month expert". I
make no pretense of being anything else, and perhaps I should
hold my tongue. However, the gravity of the situation has so
impressed me that I feel impelled to share my thoughts with
you, in spite of the fact that they are the product of a too
brief, even though intensive, survey.
I was in Mexico City when the Cuban crisis occurred.
It seemed that the hand of fate itself was adding emphasis to
the feeling that Latin America will influence our destiny much
more in the future than it ever has in the past; a feeling
that had led me to seek firsthand knowledge of the area. In
those final days of October we gained a keener appreciation




- 3 -

of the fact that small, barely noticeable clouds on the south­
ern horizon could be the origin of storms that might threaten
our very existence. Nov) the crisis has subsided, and we are
practically back to normal. However, I think that we are all
a little changed. We are more conscious of the fact that we
are living in the shadow of a volcano that might erupt at any
time. We are also aware of the need to find some means of im­
munizing this hemisphere against the kind of evil that Fidel
Castro represents.
That we are still a very long way from accomplishing
this was impressed upon me strongly in the first country I
visited - Venezuela. Here is a country that is obviously ex­
periencing real difficulties. The first day I was in Caracas
the newspaper headlines blazoned the news of the temporary
seizure of a village just a few miles from Caracas, and the
slaughter of its police force, by a band of communists. The
week after I left, the Tamanaco Hotel where I had stayed was
bombed and badly damaged. More recently, bombings have wreaked
heavy destruction on Venezuela's oil and pipeline facilities.
The government has been forced to declare martial law and sus­
pend civil liberties.
I commend careful study of the Venezuelan situation to
all those who hold that the antidote for communist penetration
in Latin America is simply economic growth or the achievement
of higher levels of per capita income. Latin American growth
statistics are highly suspect, but Venezuela's growth is eas­
ily visible to the naked eye. One does not need statistics
to see that in the last decade there has been an economic ex­
plosion in Caracas. It has been based on a great oil boom,
which has seen production nearly double in the last ten years.
Per capita Gross National Product is now well over $600, which
is not only far above the level in any other Latin American
country, but is higher than in parts of Europe.
This is not just statistical deception. Venezuela has
attracted many immigrants from Europe, and even those working
in humble positions testify that economically they are better
off in Venezuela than they were in countries such as Italy or
Spain. Workers on the assembly line in the Ford Motor Com­
pany's newly established plant earn $10 a day. The beginning




- 4 -

pay for bank employees is $100 a month. Still, it is said
to be hard to get competent skilled workers, whether they be
accountants, cooks, or mechanics, even though the number of
unemployed people there is very high, indeed.
We often hear that land reform is vital in Latin Ameri­
ca, but in Venezuela it would be more accurate to say that the
problem is to find people willing to develop and cultivate the
vast amount of unused land that is available. The country is
larger than Texas and Oklahoma combined, and it has a popula­
tion of only seven and one-half million people. Much of the
arable land is publicly owned and is not used for any produc­
tive purpose. The problem in Venezuela is not that of appeas­
ing the deep hunger of the people for land, but rather to find
men and women willing to pioneer and open up new areas.
The Venezuelan experience rudely shatters the fond
American notion that you can make people more stable politi­
cally by taking them out of the slums and giving them good
housing. To the dismay of the government, it has discovered
that the hotbeds of communism in Caracas are not the miser­
able squatters' hovels that blight the city's hillsides, but
the striking high-rise apartments that the government built
to provide decent, low-cost housing for the squatters.
Venezuela's President is Romulo Betancourt, a man who
is regarded in some quarters as the apotheosis of the noncom­
munist left. He was democratically elected, and he has tried
to undercut the appeal of the communists by introducing vari­
ous social reforms. However, he has been a special target of
the communists, and terrorism and lawlessness have been grow­
ing problems for him. The terrorism, along with some of the
reforms, have worried investors in Venezuela, and in recent
years there has been a slowdown in the rate of economic growth.
I suspect that President Betancourt would be one of the first
to agree that the complex problem of subversion confronting
Venezuela is not one that can be solved merely by political
reform. Observing his problem, I can better understand what
Edmund Burke was driving at when he said, "Kings will be ty­
rants from policy when subjects are rebels from principle."




- 5 -

Venezuela does not typify all of Latin America. Each
country has its unique characteristics and problems. How­
ever, it does provide an interesting and challenging intro­
duction to the area. I say this because Venezuelan experi­
ence points to both the urgency of Latin American problems
and to the need for a fresh, questioning look at some of the
most frequently mentioned remedies for them.
A very important step in the treatment of any ailment
is proper diagnosis, and the gnawing worry that has been
troubling me since my return from Latin America is that per­
haps we have failed to properly diagnose that area's ills.
It appears that we have tended to see the illness largely as
one of capital malnutrition and income maldistribution. The
accepted remedies have been the infusion of large amounts of
capital and some rush operations to reform the distribution
of income through taxation and through a draconian change in
the ownership of agricultural land. It appears to me that
we may be mistaking the symptoms for the disease, which is
really more deep-seated. If this is true, our prescribed
remedies will be ineffective, and they may in some cases be
harmful.
The shortage of capital in Latin America is very real
and very obvious. One sign of this is the high rates of in­
terest that prevail throughout the area. As a general rule,
banks are pressing against the legal ceilings on interest
rates, and they are usually finding ways of circumventing
them. Bank lending rates are generally limited to a maxi­
mum of around 12 per cent a year, but commissions and other
hidden charges often push the actual cost up to as much as
18 per cent. In Brazil, businessmen complain that bank offi­
cials frequently ask for a participation in the enterprise as
a condition for granting credit. Even so, the banks are un­
able to meet the heavy demand for loans because of the inade­
quacy of their resources.
What's more, the banks in most Latin American coun­
tries have found that they can get around the interest rate
limitations on both deposits and loans by setting up "finan­
cieras1 . These are finance companies which may sell shares
1




- 6 -

or accept savings deposits, issue bonds or borrow funds,
and relend at rates of interest much higher than the banks
are permitted to charge. For example, in Brazil where the
legal ceiling for bank loans is 12 per cent, the financieras
lend against good commercial paper at rates up to 40 per cent
a year. In Argentina, the banks are limited to 15 per cent,
but their financieras also charge up to 40 per cent. They
pay 18 per cent on their shares or borrowings. In Mexico,
where inflation and devaluation have been less of a problem,
the financieras charge 15 to 22 per cent a year. Their
bonds, which they redeem at par on sight, yield 8 per cent
a year.
The high cost of money in these countries seems to
have little to do with the policies currently pursued by
the central banking authorities. Some of the central banks
are ostensibly employing very restrictive policies; others
are exercising virtually no control over credit. However,
the only country I visited where money was not extremely
expensive and where banks could fully meet the loan demand
was Panama, where there is no central bank. I do not want
to imply that central banks are useless institutions which
might be better abolished. However, it is significant that
Panama, which uses the United States dollar for its currency
and therefore has the hardest money in the area, is the one
country that has what we would consider to be a relatively
reasonable structure of interest rates.
This provides a most revealing clue to the cause of
the capital shortage elsewhere in Latin America. Inflation,
past and present, is certainly a major factor. Some of the
Latin American countries are taking painful measures to curb
inflation - but once confidence in a currency has been se­
verely shaken, it is not easy to restore it. It takes con­
fidence to encourage savings, and to get capital to flow into
a country and to stay there. Those interest rates of up to
40 per cent in Argentina may appear very attractive to lend­
ers at first glance, but when one finds that the value of
the Argentine peso has been nearly halved since last March,
interest soon wanes. This is one reason why banks and sav­
ings and loan associations in the United States are able to
attract money, with their 4 per cent and 4% per cent rates,




- 7 -

from countries where the local institutions may be offering
rates three or more times as high.
There are other explanations for this phenomenon in
addition to inflation. Fears of the confiscation of property
and of legislation which makes the profitable employment of
capital difficult or impossible are also important in driv­
ing capital out of Latin America. Mexico has recently en­
acted compulsory profit-sharing legislation, which has raised
a lot of eyebrows abroad. Brazil has recently enacted a law
which limits the remittance of profits on foreign investments
to 10 per cent a year, calculated on the basis of the regis­
tered investment. It will not permit retained earnings in
excess of this 10 per cent limitation to be added to the capi­
tal base which will be used to compute future remittances.
Add this to the recent nationalization there of some Americanowned utilities, and you can understand why foreign investors
are not exactly rushing to Brazil today.
Much concern has been vocalized over the fact that
Latin Americans have been sending their money abroad and be­
cause foreign, especially United States, investment in Latin
America has markedly dwindled. (In the first half of 1962,
there was actually a net reflow of United States direct in­
vestment capital from Latin America.) I suggest that the
remedy for this does not lie in the substitution of government-provided capital for private capital. It does not lie
in attempts to locate and forcibly repatriate Latin American
capital deposited in American or Swiss banks. It does not lie
in exhortation or special tax measures designed to persuade
Americans to step up their investments in less-developed coun­
tries.
The primary remedy, and perhaps the only workable one,
lies in an attack on those factors that drive capital out of
Latin America and discourage domestic savings. This means
attacking some fairly prevalent ideas, one of the more im­
portant being the idea that inflation is unavoidable, or even
desirable, in a developing country. This is not a new thought,
but I wish to emphasize it because somehow our Latin American
friends have gotten the impression that the Alliance for Prog­
ress program is keyed much more to such things as land reform




- 8 -

and the writing of long-range development plans than to the
adoption of sound fiscal and monetary policies and the cre­
ation of a favorable climate for both domestic and foreign
investment. This has gone so far that some Latin Americans
accuse us of contributing to the worsening of the investment
climate by pushing for reforms that tend to drive money
abroad. To show you how twisted thinking can become, some
even say that we are doing this deliberately in order to
ease our own balance-of-payments problem'.
This leads to our second questionable diagnosis of
Latin America's ills, namely, maldistribution of income.
Much has been said about the problem created by the great
contrast between wealth and poverty in Latin America. I do
not know why Latin America is singled out in this respect.
The contrast there is perhaps less than in many parts of
Asia. In fact, I understand that a Latin American soccer
team that recently visited Russia was shocked to find that
the gap between the living conditions of the rich and the
poor was far greater there than at home.
I might note that thirty or forty years ago, not to
mention the present, the contrasts between the wealthy and
the poor in this country were not exactly unnoticeable. I
had personal knowledge of conditions on the lower end of the
scale during my boyhood in Broken Bow, Nebraska. We did not
have any firsthand knowledge of how the Astors and the Vander­
bilts lived, but we read about it. We also read the litera­
ture of social protest - the works of writers such as Upton
Sinclair, Frank Norris, and Theodore Dreiser.
Those works had a beneficial influence in so far as
they stimulated corrective action against some of the ugly
sores in our society. However, few would argue today that
we have reached our present degree of affluence because we
eliminated or greatly reduced the unequal distribution of in­
comes. We are better off today chiefly because we concen­
trated our efforts on raising productivity. One way we did
this was by developing mass production, supported by mass
consumption. Men like Henry Ford were lavishly rewarded for
their contribution to this development. However, their great
personal fortunes were picayune in comparison with the tre­
mendous increase in the productive power of American labor,




- 9 -

and the resulting improvement in the standard of living,
that they made possible.
Nothing in Latin America impressed me more than the
need and the scope for improvements in the productivity of
labor, both urban and rural. This, I feel, can make a much
more important contribution to raising living standards
there than can measures to redistribute existing income.
The cake needs to be made bigger - just recutting it will
not do any good. Indeed, there are cases in which the ef­
fects, on productivity, of income redistribution are likely
to be harmful.
Again, this is not an original idea, but it is also
one that seems to have gotten lost in Latin America. Like
correcting attitudes about the desirability of inflation,
this is not something you can accomplish simply by making
government loans or grants. It requires work in the area
of ideas. For example, you have to convince a very large
number of people that they will get real improvements in
their living standards faster if they try to maximize their
productive effort than if they try to maximize their money
income while minimizing their output. Well-organized groups
can use their bargaining power to improve their own posi­
tion at the expense of the unorganized up to a point, but
in Latin America the tendency has been to grant the wage
increases, the fringe benefits, the early retirement privi­
leges, et cetera, to everyone through legislation. This
often means that no group gains at the expense of any other,
but rather that the whole society loses because productivity
suffers.
I came away from Latin America with stories ringing
in my ears of the great problems created by inefficient op­
erations that could not be put in order because of laws and
regulations restricting the dismissal of workers - even the
inefficient ones. In one country, a bank was prevented from
dismissing two employees who had been caught embezzling
funds! In Peru, a country plagued with underemployment,
I found costly machinery being used instead of unskilled
labor only because complex legislation makes it easier for
employers to work with machines than with men.




- 10 -

Elsewhere, I saw large amounts of capital being used
to build plants which can operate profitably only as long as
the government continues to provide them with guaranteed mar­
kets in which they can sell at high prices. The idea of stim­
ulating mass consumption by bending every effort to bring the
cost of manufactured goods within the grasp of the masses is
not only ignored, it is flouted. The governments themselves
must share the blame for this because of tax and tariff poli­
cies that make goods much more expensive than they ought to
be.
This applies not only to luxuries, but even to some
obvious necessities - matches, for example. I was particu­
larly aware of this because 1 am a pipe smoker. Never be­
fore have 1 been in an area where matches were so scarce and
of such poor quality. People joke about this. In one coun­
try they told of the fellow who took a match from a full box,
lit it, and immediately threw the box away. Asked why he was
so wasteful, he replied, "Oh, everyone knows there is only
one in a box that works."
This exaggeration illustrates a point of some signifi­
cance. There is something cockeyed about policies that make
the sale of poor matches at exorbitant prices a means of help­
ing to finance the losses incurred by a government-owned plant
to produce, for instance, poor quality steel which is also
sold at exorbitant prices.
I began this discussion by pointing out that the Vene­
zuelan case suggested that economic growth per se was not the
solution to the problem of political instability in Latin
America, and I then went on to criticize some of the accepted
solutions on the ground that they do not seem to be the meas­
ures best suited to the promotion of economic growth. I must
clarify this seeming inconsistency.
I am in favor of economic growth; very much so. I want
to see misery alleviated; not because it will serve our polit­
ical interests, but because it is in the interest of the people
of Latin America. I am also in favor of social justice, and
for the same reason. However, one of the basic difficulties
there is that popular concepts of social justice are often in




- 11 -

serious conflict with some of the basic principles of eco­
nomics. A country may have very impressive growth, as Vene­
zuela has had, and still suffer from political instability
because a substantial portion of the population believes
that the political and economic organization of society is
unjust. On the other hand, if the government succumbs to
popular conceptions of social justice that are economically
ruinous, as in Argentina under Peron, political stability is
not likely to be attained either. I am afraid that we have
not yet mastered the art of bending basic economic law to
meet our own wishes.
This suggests that the Latin American problem has to
be approached in the direction of modifying popular concep­
tions of what is economically and politically just. Govern­
ments, whether democratic or dictatorial, will have difficul­
ties if they try to pursue economic policies that are sound
but highly unpopular. But they will have no easier road if
they adopt policies that are popular but economically unsound.
I believe that what this adds up to is that the proper
diagnosis for Latin America is not capital malnutrition and
income maldistribution. Rather, it is a combination of en­
demic economic miscomprehension, a widespread acceptance of
certain notions of social justice that do not square with the
economic realities, and a high degree of inertia.
If one accepts this diagnosis, it is obvious that high
on the list of remedies must be one that will stimulate a re­
formation of ideas and of spirit. There is a need to somehow
infuse a spirit of drive into a large part of the population
of the southern hemisphere. There is a great need for some­
thing akin to the spirit that impelled our forebears in this
country to pioneer the wilderness and open up the west, suf­
fering not only personal discomfort but risking death to carve
out a better life for themselves and their families by their
own sweat and sacrifice.
What worries me is that we do not really know how to
go about this. So far as I know, we have not carried out
experiments or research to try to find out whether it can be




- 12 -

done. I suspect that the closest we have come to it is in
the Peace Corps program. I did not have an opportunity to
observe the Peace Corps at work, but I did hear favorable
reports on its activities in Latin America. This approach
may be one way in which some of the necessary changes might
be stimulated.
Actually, the remedial task in Latin America, under
my diagnosis, is so staggering that there is a strong temp­
tation to throw up one's hands and look (as I fear we have
done too frequently in the past) for diagnoses that call
for simpler remedies - remedies, for example, that can be
provided from an open pocketbook. However, in my view, the
danger is so great that there are two things we cannot really
afford: first, failure to comprehend the nature and the
scope of the problem, and second, failure to exercise all
our ingenuity and imagination - as well as our compassion in the endeavor to aid our Latin American neighbors.




During the month of October 1962, Governor J. L.
Robertson of the Federal Reserve Systém, visited eight
Latin American countries— Venezuela, Brazil, Argentina,
Chile, Peru, Colombia, Panama and Mexico. His remarks on
the economic problems of Latin America as he saw them in
the course of this trip were delivered before a meeting of
the National and State Bank Divisions of the American Bank­
ers Association in Washington, D. C., on December 10, 1962.
In view of the favorable reaction they have evoked, we feel
that the regular readers of Latin American Economic Develop­
ments may wish to see the text of Governor Robertson's re­
marks. Except for a portion that did not deal with Latin
America, the text is reproduced in full below.

United States Policies and Latin American Progress
When it comes to Latin America - I am, at best, what
might be called a "one-month expert". I make no pretense of
being anything else, and perhaps I should hold my tongue.
However, the gravity of the situation has so impressed me
that I feel impelled to share my thoughts with you, in spite
of the fact that they are the product of a too brief, even
though intensive, survey.
I was in Mexico City when the Cuban crisis occurred.
It seemed that the hand of fate itself was adding emphasis to
the feeling that Latin America will influence our destiny much
more in the future than it ever has in the past; a feeling
that had led me to seek firsthand knowledge of the area. In
those final days of October we gained a keener appreciation







- 3 -

of the fact that small, barely noticeable clouds on the south­
ern horizon could be the origin of storms that might threaten
our very existence. Now the crisis has subsided, and we are
practically back to normal. However, I think that we are all
a little changed. We are more conscious of the fact that we
are living in the shadow.of a volcano that might erupt at any
time. We are also aware of the need to find some means of im­
munizing this hemisphere against the kind of evil that Fidel
Castro represents.
That we are still a very long way from accomplishing
this was impressed upon me strongly in the first country I
visited - Venezuela. Here is a country that is obviously ex­
periencing real difficulties. The first day 1 was in Caracas
the newspaper headlines blazoned the news of the temporary
seizure of a village just a few miles from Caracas, and the
slaughter of its police force, by a band of communists. The
week after I left, the Tamanaco Hotel where I had stayed was
bombed and badly damaged. More recently, bombings have wreaked
heavy destruction on Venezuela's oil and pipeline facilities.
The government has been forced to declare martial law and sus­
pend civil liberties.
I commend careful study of the Venezuelan situation to
all those who hold that the antidote for communist penetration
in Latin America is simply economic growth or the achievement
of higher levels of per capita income. Latin American growth
statistics are highly suspect, but Venezuela's growth is eas­
ily visible to the naked eye. One does not need statistics
to seer that in the last decade there has been an economic ex­
plosion in Caracas. It has been based on a great oil boom,
which has seen production nearly double in the last ten years.
Per capita Gross National Product is now well over $600, which
is not only far above the level in any other Latin American
country, but is higher than in parts of Europe.
This is not just statistical deception. Venezuela has
attracted many immigrants from Europe, and even those working
in humble positions testify that economically they are better
off in Venezuela than they were in countries such as Italy or
Spain. Workers on th^^^selbbly line in the Ford Motor Com­
pany's newly establffirea%&Qnt earn $10 a day. The beginning




- 4 -

pay for bank employees is $100 a month. Still, it is said
to be hard to get competent skilled workers, whether they be
accountants, cooks, or mechanics, even though the number of
unemployed people there is very high,-indeed.
We often hear that land reform is vital in Latin Ameri­
ca, but in Venezuela it would be more accurate to say that the
problem is to find people willing to develop and cultivate the
vast amount of unused land that is available. The country is
larger than Texas and Oklahoma combined, and it has a popula­
tion of only seven and one-half million people. Much of the
arable land is publicly owned and is not used for any produc­
tive purpose. The problem in Venezuela is not that of appeas­
ing the deep hunger of the people for land, but rather to find
men and women willing to pioneer and open up new areas.
The Venezuelan experience rudely shatters the fond
American notion that you can make people more stable politi­
cally by taking them out of the slums and giving them good
housing. To the dismay of the government, it has discovered
that the hotbeds of communism in Caracas are not the miser­
able squatters' hovels that blight the city's hillsides, but
the striking high-rise apartments that the government built
to provide decent, low-cost housing for the squatters.
Venezuela's President is Romulo Betancourt, a man who
is regarded in some quarters as the apotheosis of the noncom­
munist left. He was democratically elected, and he has tried
to undercut the appeal of the communists by introducing vari­
ous social reforms. However, he has been a special target of
the communists, and terrorism and lawlessness have been grow­
ing problems for him. The terrorism, along with some of the
reforms, have worried investors in Venezuela, and in recent
years there has been a slowdown in the rate of economic growth.
1 suspect that President Betancourt would be one of the first
to agree that the complex problem of subversion confronting
Venezuela is not one that can be solved merely by political
reform. Observing his problem, I can better understand what
Edmund Burke was driving at when he said, "Kings will be ty­
rants from policy when subjects are rebels from principle."




- 5 -

Venezuela does not typify all of Latin America. Each
country has its unique characteristics and problems. How­
ever, it does provide an interesting and challenging intro­
duction to the area. I say this because Venezuelan experi­
ence points to both the urgency of Latin American problems
and to the need for a fresh, questioning look at some of the
most frequently mentioned remedies for them.
A very important step in the treatment of any ailment
is proper diagnosis, and the gnawing worry that has been
troubling me since my return from Latin America is that per­
haps we have failed to properly diagnose that area's ills.
It appears that we have tended to see the illness largely as
one of capital malnutrition and income maldistribution. The
accepted remedies have been the infusion of large amounts of
capital and some rush operations to reform the distribution
of income through taxation and through a draconian change in
the ownership of agricultural land. It appears to me that
we may be mistaking the symptoms for the disease, which is
really more deep-seated. If this is true, our prescribed
remedies will be ineffective, and they may in some cases be
harmful.
The shortage of capital in Latin America is very real
and very obvious. One sign of this is the high rates of in­
terest that prevail throughout the area. As a general rule,
banks are pressing against the legal ceilings on interest
rates, and they are usually finding ways of circumventing
them. Bank lending rates are generally limited to a maxi­
mum of around 12 per cent a year, but commissions and other
hidden charges often push the actual cost up to as much as
18 per cent. In Brazil, businessmen complain that bank offi­
cials frequently ask for a participation in the enterprise as
a condition for granting credit. Even so, the banks are un­
able to meet the heavy demand for loans because of the inade­
quacy of their resources.
What's more, the banks in most Latin American coun­
tries have found that they can get around the interest rate
limitations on both deposits and loans by setting up "finan­
cieras" . These are finance companies which may sell shares




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or accept savings deposits, issue bonds or borrow funds,
and relend at rates of interest much higher than the banks
are permitted to charge. For example, in Brazil where the
legal ceiling for bank loans is 12 per cent, the financieras
lend against good commercial paper at rates up to 40 per cent
a year. In Argentina, the banks are limited to 15 per cent,
but their financieras also charge up to 40 per cent. They
pay 18 per cent on their shares or borrowings. In Mexico,
where inflation and devaluation have been less of a problem,
the financieras charge 15 to 22 per cent a year. Their
bonds, which they redeem at par on sight, yield 8 per cent
a year.
The high cost of money in these countries seems to
have little to do with the policies currently pursued by
the central banking authorities. Some of the central banks
are ostensibly employing very restrictive policies; others
are exercising virtually no control over credit. However,
the only country I visited where money was not extremely
expensive and where banks could fully meet the loan demand
was Panama, where there is no central bank. I do not want
to imply that central banks are useless institutions which
might be better abolished. However, it is significant that
Panama, which uses the United States dollar for its currency
and therefore has the hardest money in the area, is the one
country that has what we would consider to be a relatively
reasonable structure of interest rates.
This provides a most revealing cltie to the cause of
the capital shortage elsewhere in Latin America. Inflation,
past and present, is certainly a major factor. Some of the
Latin American countries are taking painful measures to curb
inflation - but once confidence in a currency has been se­
verely shaken, it is not easy to restore it. It takes con­
fidence to encourage savings, and to get capital to flow into
a country and to stay there. Those interest rates of up to
40 per cent in Argentina may appear very attractive to lend­
ers at first glance, but when one finds that the value of
the Argentine peso has been nearly halved since last March,
interest soon wanes. This is one reason why banks and sav­
ings and loan associations in the United States are able to
attract money, with their 4 per cent and 4% per cent rates,




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from countries where the local institutions may be offering
rates three or more times as high.
There are other explanations for this phenomenon in
addition to inflation. Fears of the confiscation of property
and of legislation which makes the profitable employment of
capital difficult or impossible are also important in driv­
ing capital out of Latin America. Mexico has recently en­
acted compulsory profit-sharing legislation, which has raised
a lot of eyebrows abroad. Brazil has recently enacted a law
which limits the remittance of profits on foreign investments
to 10 per cent a year, calculated on the basis of the regis­
tered investment. It will not permit retained earnings in
excess of this 10 per cent limitation to be added to the capi­
tal base which will be used to compute future remittances.
Add this to the recent nationalization there of some Americanowned utilities, and you can understand why foreign investors
are not exactly rushing to Brazil today.
Much concern has been vocalized over the fact that
Latin Americans have been sending their money abroad and be­
cause foreign, especially United States, investment in Latin
America has markedly dwindled. (In the first half of 1962,
there was actually a net reflow of United States direct in­
vestment capital from Latin America.) I suggest that the
remedy for this does not lie in the substitution of government-provided capital for private capital. It does not lie
in attempts to locate and forcibly repatriate Latin American
capital deposited in American or Swiss banks. It does not lie
in exhortation or special tax measures designed to persuade
Americans to step up their investments in less-developed coun­
tries .
The primary remedy, and perhaps the only workable one,
lies in an attack on those factors that drive capital out of
Latin America and discourage domestic savings. This means
attacking some fairly prevalent ideas, one of the more im­
portant being the idea that inflation is unavoidable, or even
desirable, in a developing country. This is not a new thought,
but I wish to emphasize it because somehow our Latin American
friends have gotten the impression that the Alliance for Prog­
ress program is keyed much more to such things as land reform




- 8 -

and the writing of long-range development plans than to the
adoption of sound fiscal and monetary policies and the cre­
ation of a favorable climate for both domestic and foreign
investment. This has gone so far that- some Latin Americans
accuse us of contributing to the worsening of the investment
climate by pushing for reforms that tend to drive money
abroad. To show you how twisted thinking can become, some
even say that we are doing this deliberately in order to
ease our own balance-of-payments problem!
This leads to our second questionable diagnosis of
Latin America's ills, namely, maldistribution of income.
Much has been said about the problem created by the great
contrast between wealth and poverty in Latin America. I do
not know why Latin America is singled out in this respect.
The contrast there is perhaps less than in many parts of
Asia. In fact, I understand that a Latin American soccer
team that recently visited Russia was shocked to find that
the gap between the living conditions of the rich and the
poor was far greater there than at home.
I might note that thirty or forty years ago, not to
mention the present, the contrasts between the wealthy and
the poor in this country were not exactly unnoticeable. I
had personal knowledge of conditions on the lower end of the
scale during my boyhood in Broken Bow, Nebraska. We did not
have any firsthand knowledge of how the Astors and the Vander­
bilts lived, but we read about it. We also read the litera­
ture of social protest - the works of writers such as Upton
Sinclair, Frank Norris, and Theodore Dreiser.
Those works had a beneficial influence in so far as
they stimulated corrective action against some of the ugly
sores in our society. However, few would argue today that
we have reached our present degree of affluence because we
eliminated or greatly reduced the unequal distribution of in­
comes. We are better off today chiefly because we concen­
trated our efforts on raising productivity. One way we did
this was by developing mass production, supported by mass
consumption. Men like Henry Ford were lavishly rewarded for
their contribution to this development. However, their great
personal fortunes were picayune in comparison with the tre­
mendous increase in the productive power of American labor,




- 9 -

and the resulting improvement in the standard of living,
that they made possible.
Nothing in Latin America impressed me more than the
need and the scope for improvements in the productivity of
labor, both urban and rural. This, I feel, can make a much
more important contribution to raising living standards
there than can measures to redistribute existing income.
The cake needs to be made bigger - just recutting it will
not do any good. Indeed, there are cases in which the ef­
fects, on productivity, of income redistribution are likely
to be hamful.
Again, this is not an original idea, but it is also
one that seems to have gotten lost in Latin America. Like
correcting attitudes about the desirability of inflation,
this is not something you can accomplish simply by making
government loans or grants. It requires work in the area
of ideas. For example, you have to convince a very large
number of people that they will get real improvements in
their living standards faster if they try to maximize their
productive effort than if they try to maximize their money
income while minimizing their output. Well-organized groups
can use their bargaining power to improve their own posi­
tion at the expense of the unorganized up to a point, but
in Latin America the tendency has been to grant the wage
increases, the fringe benefits, the early retirement privi­
leges, et cetera, to everyone through legislation. This
often means that no group gains at the expense of any other,
but rather that the whole society loses because productivity
suffers.
I came away from Latin America with stories ringing
in my ears of the great problems created by inefficient op­
erations that could not be put in order because of laws and
regulations restricting the dismissal of workers - even the
inefficient ones. In one country, a bank was prevented from
dismissing two employees who had been caught embezzling
funds! In Peru, a country plagued with underemployment,
I found costly machinery being used instead of unskilled
labor only because complex legislation makes it easier for
employers to work with machines than with men.




- 10 -

Elsewhere, £ saw large amounts of capital being used
to build plants which can operate profitably only as long as
the government continues to provide them with guaranteed mar­
kets in which they can sell at high prices. The idea of stim­
ulating mass consumption by bending every effort to bring the
cost of manufactured goods within the grasp of the masses is
not only ignored, it is flouted. The governments themselves
must share the blame for this because of tax and tariff poli­
cies that make goods much more expensive than they ought to
be.
This applies not only to luxuries, but even to some
obvious necessities - matches, for example. I was particu­
larly aware of this because I am a pipe smoker. Never be­
fore have I been in an area where matches were so scarce and
of such poor quality. People joke about this. In one coun­
try they told of the fellow who took a match from a full box,
lit it, and immediately threw the box away. Asked why he was
so wasteful, he replied, M0h, everyone knows there is only
one in a box that works,"
This exaggeration illustrates a point of some signifi­
cance. There is something cockeyed about policies that make
the sale of poor matches at exorbitant prices a means of help­
ing to finance the losses incurred by a government-owned plant
to produce, for instance, poor qualit' steel which is also
sold at exorbitant prices,
I began this discussion by pointing out that the Vene­
zuelan case suggested that economic growth per se was not the
solution to the problem of political instability in Latin
America, and I then went on to criticize some of the accepted
solutions on the ground that they do not seem to be the meas­
ures best suited to the promotion of economic growth. I must
clarify this seeming inconsistency.
I am in favor of economic growth; very much so. I want
to see misery alleviated; not because it will serve our polit­
ical interests, but because it is in the interest of the people
of Latin America. I am also in favor of social justice, and
for the same reason. However, one of the basic difficulties
there is that popular concepts of social justice are often in




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serious conflict with some of the basic principles of eco­
nomics. A country may have very impressive growth, as Vene­
zuela has had, and still suffer from political instability
because a substantial portion of the population believes
that the political and economic organization of society is
unjust. On the other hand, if the government succumbs to
popular conceptions of social justice that are economically
ruinous, as in Argentina under Peron, political stability is
not likely to be attained either. I am afraid that we have
not yet mastered the art of bending basic economic law to
meet our own wishes.
This suggests that the Latin American problem has to
be approached in the direction of modifying popular concep­
tions of what is economically and politically just. Govern­
ments, whether democratic or dictatorial, will have difficul­
ties if they try to pursue economic policies that are sound
but highly unpopular. But they «ill have no easier road if
they adopt policies that are popular but economically unsound.
I believe that what this adds up to is that the proper
diagnosis for Latin America is not capital malnutrition and
income maldistribution. Rather, it is a combination of en­
demic economic miscomprehension, a widespread acceptance of
certain notions of social justice that do not square with the
economic realities, and a high degree of inertia.
If one accepts this diagnosis, it is obvious that high
on the list of remedies must be one that will stimulate a re­
formation of ideas and of spirit. There is a need to somehow
infuse a spirit of drive into a large part of the population
of the southern hemisphere. There is a great need for some­
thing akin to the spirit that impelled our forebears in this
country to pioneer the wilderness and open up the west, suf­
fering not only personal discdmfort but risking death to carve
out a better life for themselves and their families by their
own sweat and sacrifice.
What worries me is that we do not really know how to
go about this. So far as I know, we have not carried out
experiments or research to try to find out whether it can be




- 12 -

done. I suspect that the closest we have come to It is in
the Peace Corps program. I did not have an opportunity to
observe the Peace Corps at work, but I did hear favorable
reports on its activities in Latin America. This approach
may be one way in which some of the necessary changes might
be stimulated.
Actually, the remedial task in Latin America, under
my diagnosis, is so staggering that there is a strong temp­
tation to throw up one's hands and look (as I fear we have
done too frequently in the past) for diagnoses that call
for simpler remedies * remedies, for example, that can be
provided from an open pocketbook. However, in my view, the
danger is so great that there are two things we cannot really
afford: first, failure to comprehend the nature and the
scope of the problem, and second, failure to exercise all
our ingenuity and imagination - as well as our compassion in the endeavor to aid our Latin American neighbors.