Sabotage from Abroad? The Economic Impact of US Interference in Chile, 1970-73
How much was Salvador Allende to blame for the socioeconomic collapse that precipitated his downfall?
Editor’s note: During my final semester of undergraduate studies in the spring of 2019, I wrote this article for a class on Chilean political economy taught by Professor Andrew Farrant. This version of the article has been edited lightly for style, clarity, and online formatting. The final PDF version can be found here.
Introduction
The staunchest defenders of Augusto Pinochet paint him as a benevolent dictator, who saved Chile from totalitarianism and launched it on a path of unprecedented economic growth. His regime’s egregious human rights record is ignored, downplayed, or brushed aside as a regrettable detail that can be overlooked given the spectacular results of the 'Chilean Miracle’. For the United States and the Chilean right, Dr. Salvador Allende’s democratically elected government was unacceptable and had to go at all costs. Never mind that right up to the bombing of La Moneda, Allende was deeply committed to liberal-democratic ideals and resisted pressure from some of the more radical members of his coalition to clamp down on dissent and act outside the constitution. This is in contrast to Pinochet’s junta, which began a politicidal campaign to exterminate the Chilean left immediately upon assuming power. Even Milton Friedman is guilty of conflating the undesirability of Pinochet with that of Allende, declaring that Chile had no good options at the time.
Regardless of his economic record, there is no doubt Pinochet was a tyrant who killed, tortured, and disappeared tens of thousands of Chilean citizens. But what about Allende? We know his political record is relatively spotless, but was his economic management really so bad that a coup d’état was the only option left to save the country? Indicators make clear that by the time of the coup, the country was in a catastrophic financial crisis. Allende left office with massive budget deficits, a currency on the verge of hyperinflation, and plummeting real wages. But how much of that was his fault? Could the spectacular growth of Allende’s first year have been made sustainable if the Unidad Popular (the coalition of left-wing parties backing Allende) hadn’t haphazardly rammed through its changes in a hyperpolarized society? Could Allende’s economic team have effectively dealt with the deficit and inflation issues? Could they have at least held the economy (and country) together long enough for the president to finish his term? We will never know for sure, but reviewing the historical record can provide an idea of what might have happened.
Allende, the UP, and the Chilean Path to Socialism
Before tackling the subject of U.S. interference in the Chilean economy, I will provide a brief overview of Allende’s economic strategy in order to form a conjecture about the plausibility of its success absent this interference. When Allende took office in 1970, his government was not one of delusional demagogues seeking to cement their power through extravagant public expenditure that would bring short-term gains while bankrupting the country in the long run. Inadvertently though, that is essentially what happened.
The UP correctly identified several structural problems in Chile’s economy1, such as the fact that a cabal of elite interests maintained their economic dominance and wealth through a system of entrenched corruption, with the state granting them monopoly status through special tariffs, subsidies, and other privileges. Extreme wealth inequality and dependence on foreign capital also limited investment in domestic industries that would produce sustainable, economy-wide development and growth. By concentrating on the interests and consumption concerns of the elite, the UP argued that previous governments committed not only great distributional injustices, but severely limited overall output by failing to fully engage peasants and workers in the economy.
Upon taking office, Allende and his administration launched a revolutionary campaign to transform the Chilean economy and society, in the hope that by addressing these long-neglected structural issues, they would succeed where previous reform-minded governments had failed. The core of the UP’s economic program included full state ownership of the copper industry (in contrast to the partial nationalization that occurred under the previous administration of Eduardo Frei), an ambitious acceleration of the agrarian reforms started by the previous two governments, and nationalization of the country’s banking system and major industrial sectors.2 For Allende and the Unidad Popular, the real question wasn’t so much one of efficiency as it was the source of economic and political power. The Marxist-inspired goal was to transform the means of production so that firms operated to prioritize labor interests, either directly through decentralized decision-making with greater worker involvement, or indirectly through various schema of public ownership.
This entailed an upheaval of the social structure in its entirety, and the UP would need overwhelming popular backing for such an effort to succeed. To shore up its base of support, as well as stimulate economic growth and fulfill its promise to tackle inequality, the government immediately began a massive public expenditure campaign. It dramatically increased both the size and wages of the public workforce, launched programs to provide citizens with staple goods, expanded pensions, and subsidized or implemented price ceilings on utilities and basic services.3 This was carried out in conjunction with a concerted strategy to cut inflation and hold down prices.
By most measures, Allende’s first year was a success. Spectacular GDP and real wage growth was coupled with impressive declines in both unemployment and inflation. But while the government’s initiatives spurred a consumer spending boom, they eviscerated investment, leaving no room for further growth. Deficits surged, The reaching 30.5 percent of GDP by 1973,4 as tax revenue did not increase in line with spending. With an explosion of state stimulus financed through the printing press, inflationary pressures not only returned but went into overdrive.
The UP may have hoped increased productivity stemming from its structural reforms could offset the fiscal imbalance, but these gains were never fully realized. Inadequate compensation for the copper mining industry prompted an exodus of specialized experts, and production declined.5 A precipitous drop in global copper prices combined with an excessive desire to appease trade unions exacerbated the issue, and what could have been the lifeblood of public finance turned into yet another drag on the economy. Agrarian reform was based more on the principle of transferring ownership than raising productivity, and the government effectively rescinded its role as a guarantor of property rights.6 Lacking a majority in the legislature and facing severe financial constraints, Allende’s administration resorted to dubious nationalization practices involving obscure laws and other legal schema that enabled it to take over firms while paying as little as possible, further contributing to capital flight and discouraging investment.
This combination of factors produced an economic and social collapse that culminated with Pinochet’s coup in September 1973. Unlike some, my opinion is not that Allende and his advisors were necessarily incompetent, but that they started down what was at the time an impossible path and refused to back out. Unlike other democratically elected populist governments in Latin America both before and since, Allende’s “UP was talking of nothing less than substituting a capitalist system with a socialist model, and they really meant it.”7 Following James Buchanan and Gordon Tullock’s economic model of constitutions,8 the type of changes the UP strove for had incredibly high expected external costs (in terms of potential losses to individual property owners) and thus would require a broad degree of consensus to implement. But reaching that level of general agreement entailed insurmountably high decision-making costs, something that was particularly true in hyperpolarized early-1970s Chile.
In fact, the UP itself often couldn’t agree on what policies to impose as a party that controlled the executive branch but held only a legislative minority. As the economy deteriorated, “the UP government’s inability to take decisions in response to the obstacles that arose” only worsened, as “multifarious interpretations and solutions put forward by different groups, together with the demands of the different parties within the coalition, paralyzed decision-taking. Paradoxically, this inaction on the part of the UP government led to laissez-faire.”9 This calls to mind Friedrich Hayek’s argument about the inevitability of gridlock when too many economic decisions are placed under state control – at a certain point, there may be widespread consensus that the government ought to take a general course of action, but no one can agree on the details. In the Chilean context, this disparity between broadly stated goals and specific action proved debilitating within the governing coalition, let alone society as a whole, particularly with the country in a state of crisis.
The UP had neither the political capital to successfully realize its structural transformations, nor the economic capital necessary for its redistributive efforts. Yet it plowed ahead anyway, perhaps hoping that through sheer determination and willpower it could confront obstacles as they came up. It isn’t that the UP was incapable of effective governance, but that within the political and economic environment of the time, its stated agenda was nearly impossible to carry out in an efficient, effective manner. Under ideal conditions, navigating this level of socioeconomic upheaval would require delicate policies and cautious execution. But even before Allende took office, it was obvious that conditions were far from ideal, and the government’s only alternative to complete inaction was to haphazardly ram through flawed components of its plan – which led to catastrophic socioeconomic breakdown. In the end, achieving the UP’s revolutionary vision would have been monumentally difficult regardless of external factors or the level of expertise surrounding its implementation.
However, even advocates of the position that Allende or his party’s personal incompetence was at fault concede that “if the redistribution of income had been half of what it was, and had it been coupled with other measures, it might have been sustained.”10 It is unclear if these “other measures” would have left open room for the socialist transformation that was the Unidad Popular’s raison d’être. Still, though Allende’s chances of success were painfully slim from the outset, it is worth considering whether this likelihood was substantially reduced by foreign action.
The United States and Economic Interference in Chile
The overwhelming majority of deliberate external interference originated from the United States. As one of two global superpowers, the US had the resources, expertise, and willpower to dramatically alter political and economic outcomes in a peripheral country if it chose to do so. This is exemplified by Richard Nixon’s famous comment to Henry Kissinger, his National Security Advisor (and later Secretary of State), about wanting to ‘make the economy scream’ in Chile. For the Nixon administration, stopping Allende was a top-tier priority. Consumed with Cold War hysteria, Nixon, Kissinger, and the rest of the American foreign policy and national security team genuinely believed that an Allende presidency in Chile, combined with the Cuban revolution, would create a ‘socialist sandwich’ in Latin America, irreversibly cementing a Soviet foothold in the region and threatening allegiance to the US in the rest of what they saw as America’s back yard. Leaving aside the wisdom of this line of reasoning from a foreign policy standpoint, its impact on Chile was devastating, as the Nixon administration made use of nearly every tool at its disposal to undermine Allende, including a variety of economic measures. However, even decades after the coup, there is still widespread disagreement as to how much and what type of a role the United States actually played.
Before proceeding, it is important to distinguish between US political, military, and economic interference, as all three were carried out simultaneously, often by the same agencies, and with the same goals – to prevent Allende from winning, to stop him from taking power, and then to remove him from office. The CIA’s military initiatives revolved entirely around fomenting or facilitating a coup and were thus irrelevant to Allende’s economic success. Political efforts involved the spread of propaganda and financial support for parties and candidates on the center and right, with the objective being to weaken Allende and the left rather than promote a particular cause. While spreading disinformation and funding right-wing newspapers and political parties undoubtedly contributed to further instability and polarization within the Chilean polity, this would only have indirectly effected the economy by limiting Allende’s ability to govern effectively (by raising decision-making costs in the Buchanan-Tullock economic constitutional model), which as illustrated above, was already severely constrained. Therefore, the focus here will be on the explicit economic measures implemented from the time Allende took office until the coup.
I will begin with the official US government narrative. The account on the CIA’s website mentions nothing about economic action other than that “After Allende’s election and before his inauguration, the CIA, under 40 Committee direction, made an effort—in coordination with the Embassy in Santiago—to encourage Chilean businesses to carry out a program of economic disruption.”11 There is nothing we can glean from this about what this “economic disruption” entailed, other than that it definitely occurred on some level seeing as even the agency itself is admitting to it. Jack Devine, a CIA officer stationed in Chile at the time, is even more tight-lipped in a 2014 piece published in Foreign Affairs. He downplays CIA participation in any coup-plotting, and flatly denies involvement in the devastating truck drivers’ strike of October 1972, claiming that the truckers requested agency backing but were rebuffed. 12Chile was heavily reliant on trucking for the transportation and distribution of goods, and the strike effectively froze the economy, so any foreign effort that provided a critical mass of support could have ultimately tipped the scales against Allende. I return to this issue later.
Within the declassified CIA and State Department files I was able to review, the vast majority of documented activity designed to undermine Allende consisted of political and military measures to prevent him from taking office (known as Track I and Track II, respectively) and the successors to these initiatives once he was in power. Substantial resources were poured into center and right-wing movements to either weaken Allende politically or generate broader support for military action among his opponents.13 The few details concerning economic measures were rather underwhelming; for example, there was much discussion about ways to sanction Chile under existing law. One option, discussed in a comprehensive memo to Kissinger, was for the executive branch to impose sanctions if they found that Chile began trading certain military commodities or other “strategic materials”14 to countries such as Cuba, North Vietnam, or North Korea. But even in what seems like an incredibly cautious approach on a worst-case national security issue, some clearly thought it might not be worth the effort, as a “pertinent element in the consideration of the fundamental decision is the fact that the sanctions in question are relatively mild.”15 It is difficult to imagine how this sort of excessively legalistic haranguing could have translated into ‘making the economy scream.’
However, another memo to Kissinger from a year later outlines a much more concerted, systematic strategy to damage the Chilean economy. A major goal was to choke off Santiago’s access to external financing by seeking “to obstruct and delay Chilean loan applications before the IBRD [International Bank for Reconstruction and Development] and IDB [Inter-American Development Bank] using technical and procedural reasons to the maximum feasible extent.”,16 and “as necessary vote against them in both institutions”17 This preference for indirect measures and use of open confrontation only as a secondary option reflects a strong degree of concern for the United States' public image, as part of a “strategy designed to maintain pressures while minimizing Allende’s opportunities to exploit those pressures.”18 There was also substantial worry that more aggressive sanctions than those mentioned above could be interpreted as “economic warfare”,19 and that
If strong sanctions were applied in the absence of demonstrable Chilean interventionism or threatening military ties with the USSR, Chile would find some public and more private sympathy from Latin American governments for the "economic aggression" charge. An at least equally sympathetic response could be anticipated from some sectors of public opinion in Latin America.20
The fact that the State Department was fully aware of this, along with its choice of terminology, is telling. If the policy architects knew that sanctions and financial isolation could credibly be labeled economic warfare, then their ability to devastate the country’s economy would seem fairly plausible. But at the time, those responsible for inflicting the damage felt that, “the present downward course of the Chilean economy is so well defined that the economic pressures available to us will add only marginally to its deterioration. The element in doubt here is not what will happen but who will be blamed.”21 As early as December 1971, US intelligence grasped that Chile was entering a downward spiral from which Allende would not be able to pull out of. Moreover, this appears to be before any of the most severe methods of economic interference had taken effect.
By 1973, the economic collapse was fully underway, as were US efforts to exacerbate it. Throughout Allende’s time in office, there were near-constant rumors of a coup and simmering discontent within elements of the armed forces, but US policymakers seemed to have dramatically underestimated the durability of Chilean democratic institutions and the degree of aversion to violent intervention within both the military and political opposition. Priorities within the CIA shifted toward facilitating the conditions necessary for coup support to reach a critical mass. One of the major tools for this was economic disruption, which appeared to involve direct support for labor strikes and freezes in private sector operations. The actual nature of what happened must be inferred, however, because despite frequent, vague allusions to “covert support for the private sector”, the documents outlining these actions are heavily redacted. In a four-page memo dated March 31st, 1973, it was “recommended that we [the CIA] provide some support to assist the private sector to organize … [redacted]… but this support must be carefully monitored.”22 Additionally, “Cost requirements should also be as flexible as possible, so that relatively modest maintenance subsidies and action programs could be expanded rapidly if circumstances require.”23 Only three paragraphs of the memo were declassified, and key lines and words within those paragraphs were also redacted, so we are left to decipher the meanings through context. One could infer that the CIA was encouraging (probably with financial support) management within firms to freeze production, and the word “organize” seems to imply inducing workers to strike.
These conjectures are reinforced by a pair of memoranda sent from the CIA to the National Security Council to Kissinger just weeks before the coup. The documents outline how the “CIA suggests a new program that would expand our support to certain elements of the private sector--…[three lines redacted]”24 The only clarification of what this expanded support would involve was that “the CIA Chief of Station in Santiago on 24 August recommended that covert financial support be given to the opposition, beginning with a [redacted] to the private sector, in order to keep the pressure on Allende and sustain some of the present strikes.”25 At the time, Allende’s authority was crumbling along with the foundations of Chilean society, but the CIA evidently thought the crisis needed to be aggravated further for a coup to be successful. It is important to note that substantial internal dissent existed regarding such brutal tactics (they were firmly rejected by the US Ambassador in Santiago), and earlier communications revealed a desire to conceal certain CIA activities from the State Department. But as this was an expansion of support to the private sector, the same type of initiatives must have already been underway, possibly an implementation of the plans discussed in March.
The extensive redactions reflect the fact that even today, the United States government does not wish to be seen as hitting below the belt in Latin America, which is what these attempts to induce or exacerbate economic paralysis could legitimately be interpreted as. Curiously, this is in stark contrast to the relatively open discussions about political interference, which frequently included specific recipients and dollar amounts paid to parties, campaigns, and media outlets. Perhaps this type of involvement was thought more benign because it didn’t directly impact the wellbeing or livelihood of the populace in the way economic attacks did.
A New York Times article published in September 1974 corroborates the above inferences regarding strike financing. According to intelligence sources, “the majority of more than $8-million authorized for clandestine C.I.A. activities in Chile was used in 1972 and 1973 to provide strike benefits and other means of support for anti-Allende strikers and workers.”26 Officials at the CIA and State Department publicly declined to comment on their alleged support for the strikes, which may have begun through the unintentional dispersal of funds and was later quietly tolerated and even encouraged. These include the aforementioned truckers’ strike during the fall of 1972 as well as one in summer 1973. But as was described in the declassified government communications, “most, if not all, of the C.I.A.'s direct strike subsidies for unions and trade groups were initiated in 1972.”27 But by then, the country’s economic disintegration had already begun, and in this context, internal observations that US efforts would amount to exacerbation rather than causation of the collapse make sense.
Conclusions
Returning to the central question of culpability, it seems that through economic mismanagement, Allende and the UP did in fact dig their own graves. While sustained, almost institutionalized political and media interference by the United States was underway years before Allende took office, the campaign to target the Chilean economy didn’t begin in earnest until the seeds for its eventual collapse had already been sown. When the strikes and ‘assistance to the private sector’ began, euphoria surrounding the UP’s initial economic boom was rapidly dissipating, and internal disequilibria were becoming painfully apparent. Furthermore, the process of shutting off international finance would have had a delayed impact due to the need to fulfill obligations under existing agreements. Allende and his team had enough time in what was a relatively neutral international economic environment to begin pursuing their socialist transformation in a free, liberal-democratic society. But their vision was rendered inoperable by a lack of domestic consensus, forcing the action that was taken to be inadequately coordinated and poorly implemented. Its success would have necessitated far greater control over a range of societal factors, which realistically could not have happened in early 1970s Chile while retaining the commitment to civil liberties and political pluralism that distinguished Allende from other Marxist leaders of the time.
I would argue, however, that even this is not the end of the story. The details recounted here reflect only a portion of the publicly available government documentation, and more still remains classified. The probable existence of more US involvement than admitted is demonstrated even in the single New York Times report from 1974. Additionally, a much broader debate over the US role in Allende’s downfall continues today, and far more can be said about what was termed the ‘invisible blockade’.28 Blockages of crucial industrial equipment and parts amounted to what some call an effective embargo, and the level of financial isolation imposed on Chile, when viewed in a historical and global rather than bilateral context, could have been far more determinative than generally thought. This investigation began with the acknowledgement that many questions surrounding Allende’s Chile could never be answered. What followed was a preliminary attempt to separate not only the UP’s economic policy from foreign interference, but to isolate the US government’s political, economic, and to a lesser extent military policy towards Chile from the time of the 1970 election until the coup. I conclude by suggesting that the interplay of these factors is sufficiently extensive that far more research needs to be done before any definitive arguments about culpability can be established.
References
Meller, Patricio. "The Road to Socialism of the Unidad Popular." In The Unidad Popular and the Pinochet Dictatorship: A Political Economy Analysis, 1-60. Houndmills: Macmillan Press, 2000.
Rosenstein-Rodan, Paul N. "Why Allende Failed." Challenge 17, no. 2 (1974): 7-13.
Larraín, Felipe, and Patricio Meller. "The Socialist-Populist Chilean Experience." In The Macroeconomics of Populism in Latin America, 175-221. University of Chicago Press, 1991.
Buchanan, James M., and Gordon Tullock. The Calculus of Consent: Logical Foundations of Constitutional Democracy. Indianapolis: Liberty Fund, 1962.
"CIA Activities in Chile." Central Intelligence Agency. June 19, 2013. https://www.cia.gov/library/reports/general-reports-1/chile/#13. [Update 4/11/21: This link is now broken, but the source of the quote, a congressionally mandated response from the intelligence community, can be found here, here, and here.]
Devine, Jack. "What Really Happened in Chile: The CIA, the Coup Against Allende, and the Rise of Pinochet." Foreign Affairs 93, no. 4 (2014): 26-35.
Central Intelligence Agency. The Agency's Covert Action Program in Chile. 1973. 1-12. July 2000. (foia.state.gov)
Ad Hoc Interagency Working Group on Chile. Acting Chairman. Memorandum for Mr. Henry Kissinger, The White House. By John Hugh Crimmins. Department of State, December 4, 1970. 1-57. (foia.state.gov)
Department of State. The Under Secretary of State. Memorandum for Mr. Henry A. Kissinger, The White House: Considerations Affecting Next Steps Options for Chile. By John N. Irwin, II. Washington, 1971. 1-5. (foia.state.gov)
Central Intelligence Agency. Memorandum: Covert Action Options for Chile - FY 1974. March 31, 1973. 1-4. (foia.state.gov)
National Security Council. Covert Support for the Chilean Private Sector. By William J. Jorden. August 29, 1973. 1-2. (foia.state.gov)
Central Intelligence Agency. Proposed Covert Financial Support of Chilean Private Sector. By W. E. Colby. August 25, 1973. 1-2. (foia.state.gov)
Hersh, Seymour M. "C.I.A. Is Linked to Strikes In Chile That Beset Allende." The New York Times, September 20, 1974. https://www.nytimes.com/1974/09/20/archives/cia-is-linked-to-strikes-in-chile-that-beset-allende-intelligence.html.
Sigmund, Paul E. "The "Invisible Blockade" and the Overthrow of Allende." Foreign Affairs 52, no. 2 (1974): 322-40.
Image credits: Clarin, Alternatywa, MercoPress
Meller, Patricio. "The Road to Socialism of the Unidad Popular." In The Unidad Popular and the Pinochet Dictatorship: A Political Economy Analysis. Houndmills: Macmillan Press, 2000: 27-28.
Meller, “The Road to Socialism of the Unidad Popular”, 47-60.
Ibid., 39-42.
Ibid., 40.
Rosenstein-Rodan, Paul N. "Why Allende Failed." Challenge 17, no. 2 (1974): 10-11.
Rosenstein-Rodan, “Why Allende Failed”, 11.
Larraín, Felipe, and Patricio Meller. "The Socialist-Populist Chilean Experience." In The Macroeconomics of Populism in Latin America. University of Chicago Press, 1991: 212.
Buchanan, James M., and Gordon Tullock. The Calculus of Consent: Logical Foundations of Constitutional Democracy. Indianapolis: Liberty Fund, 1962.
Meller, “The Road to Socialism of the Unidad Popular”, 37.
Rosenstein-Rodan, “Why Allende Failed”, 10.
"CIA Activities in Chile." Central Intelligence Agency. June 19, 2013. https://www.cia.gov/library/reports/general-reports-1/chile/#13. [Update 4/11/21: This link is now broken, but the source of the quote, a congressionally mandated response from the intelligence community, can be found here, here, and here.]
Devine, Jack. "What Really Happened in Chile: The CIA, the Coup Against Allende, and the Rise of Pinochet." Foreign Affairs 93, no. 4 (2014): 31.
Central Intelligence Agency. The Agency's Covert Action Program in Chile. 1973. 1-12. July 2000.
Ad Hoc Interagency Working Group on Chile. Acting Chairman. Memorandum for Mr. Henry Kissinger, The White House. By John Hugh Crimmins. Department of State, December 4, 1970. 35.
Ad Hoc Interagency Working Group on Chile, Memorandum for Mr. Henry Kissinger, The White House. 36.
Department of State. The Under Secretary of State. Memorandum for Mr. Henry A. Kissinger, The White House:: Considerations Affecting Next Steps Options for Chile. By John N. Irwin, II. Washington, 1971. 3.
Department of State, Memorandum for Mr. Henry A. Kissinger, The White House: Considerations Affecting Next Steps Options for Chile, 5.
Ibid., 2.
Ad Hoc Interagency Working Group on Chile, Memorandum for Mr. Henry Kissinger, The White House. 40.
Ibid., 41.
Department of State, Memorandum for Mr. Henry A. Kissinger, The White House: Considerations Affecting Next Steps Options for Chile, 3.
Central Intelligence Agency. Memorandum: Covert Action Options for Chile - FY 1974. March 31, 1973: 4.
Central Intelligence Agency, Memorandum: Covert Action Options for Chile - FY 1974, 1.
National Security Council. Covert Support for the Chilean Private Sector. By William J. Jorden. August 29, 1973: 1.
Central Intelligence Agency. Proposed Covert Financial Support of Chilean Private Sector. By W. E. Colby. August 25, 1973. 2.
Hersh, Seymour M. "C.I.A. Is Linked to Strikes In Chile That Beset Allende." The New York Times, September 20, 1974.
Hersh, Seymour M. "C.I.A. Is Linked to Strikes In Chile That Beset Allende."
Sigmund, Paul E. "The "Invisible Blockade" and the Overthrow of Allende." Foreign Affairs 52, no. 2 (1974): 322-40.