CHAPTER XVIII.

BANKING IN LATIN AMERICA.

The History of Brazilian Paper Money and the Restoration of a Fixed Gold Exchange-The Similar Experience of the Argentine Republic-Failure to Maintain Gold Payments in Chile-Banking Development in Paraguay, Uruguay, and the Northern StatesThe Exchange Standard in Peru-Monetary Systems of Cuba and Panama-Colonial Banks of European Countries.

TH

'HE banking systems of the American States and dependencies of the South offer a great variety of methods of note issue and a great variation in the safeguards thrown around such issues. Some of the banking systems of Latin America have been the development of time and experience; others have been framed as an entirety upon the model of some European system, sometimes with the approval of eminent foreign economists; and others are simply concessions by the governments to English capitalists who conduct the affairs of the banks from London. The domestic systems of banking and of currency have illustrated in many cases the fact that the best regulations do not always constitute a safeguard against unsound banking in countries where internal development is rapid, speculation is intense, and the conservatism of fixed conditions does not prevail. Bad as have been the results of some of the banking systems, their evils hardly kept pace for a time with the evils of government paper currency, which proved a serious fetter upon the prosperity of many South American States. With growth in population and in the extraction of national resources, however, there was a great improvement from about the close of the nineteenth century in monetary

conditions. In Brazil and the Argentine the paper money was gradually reduced and a system was established based upon the issue of paper at a fixed rate in gold, which restored to these countries most of the benefits of a gold standard.

Banking relations between Latin America and other continents have been chiefly in the hands of European bankers and trade with North America has been carried on through them. The first International American Conference, held in Washington in 1889, recommended the creation of an international American bank and several bills to this end were introduced in Congress, but up to 1908 the project had not reached a more tangible stage. At the third of these conferences, held in Rio de Janeiro in 1906, a step was taken towards closer co-operation in bringing about stable monetary conditions by the adoption of resolutions recommending to each government a study of the subject, and that these studies be effected through the International Bureau of American Republics at Washington, in order that a resumé might be distributed among the several governments at least six months before the meeting of the next conference.'

The Banking and Paper Issues of Brazil.

The monetary and banking history of Brazil fully set forth would contain much of interest bearing upon the effect of changes in the quantity of money upon its value and upon the possibility of maintaining comparative parity of foreign exchange without direct redemption of paper in coin. The issue of paper money dates back to soon after the coming to Brazil of the royal family, expelled from Portugal by Napoleon in 1808. As early as 1819, the paper became redundant and the exchange value of the milreis, which at par was five shillings seven and a half pence, fell to four shillings. An effort was made in 1833 to restore fixity of exchange upon the new basis of three shillings seven and

1 Terceira Conferencia Internacional Americana, Acta da Decima Segunda Sessas em 23 de Agosto, de 1906, 4.

a half pence (about 87 cents) to the milreis. The existing bank of issue was liquidated and its note issue was taken over by the Treasury. Another readjustment became necessary in 1846, by which the par of the milreis was fixed at twenty-seven pence. This remained the nominal gold par during the remainder of the century, although the actual value of the milreis went through a great variety of ups and downs.

Several circumstances of the Brazilian paper circulation between 1846 and 1889 gave some color to the theory that it is possible to maintain an irredeemable currency at par by regulation of the quantity.' Much was made of the fact that the government was able in 1860 to add 40,000,000 milreis to the circulation without causing a permanent decline of exchange below par. There was a depreciation of 4.161 per cent. in 1860 and 2.619 per cent. in 1861, but no depreciation in 1863 and 1864. The comparative stability of these years was due to the fact that the new paper took the place of a corresponding amount of gold which was expelled from circulation, while the balance of payments was influenced in favor of Brazil by foreign loans in 1858, 1859, and 1860. Fifteen years later, in 1875, a like phenomenon occurred, on the occasion of a foreign loan of £5,000,000 and unusually high prices for coffee. The effect of these loans was to offer a means of adjusting commercial and financial balances abroad without drawing upon the gold supply or compelling a readjustment of export prices.' While the steadiness of exchange in certain years verified the law that the value of money is influenced by the demand for it, the fluctuations in other years indicated that

' Vide Report of the Indian Currency Committee, 1893, Sec. 92, where the relative stability of the Brazilian exchange seems to be rather overstated. See table in Wileman, facing page 161.

'As Wileman points out: "When the currency is wholly inconvertible and there is little or no gold for export, it is clear that the fall of exchange is not the result of an increase in the demand for bullion alone, but of that for exports of all descriptions, of which bullion is merely the most important and representative item."— Brazilian Exchange, 9.

this law cannot be relied upon to give adequate stability to an irredeemable currency.

Whatever support might have been drawn from the earlier experiences of Brazil as to the stability of paper, the deluge of new paper poured into circulation after the fall of the Empire in 1889 left no room for delusions. The exchange of that year was favorable. The milreis, which had been at a discount of 6.48 per cent. in 1888, was at par in 1889, and exchange on London was at 27 pence. An important factor tending to stability was the fact that the combined circulation of paper and bank-notes was less in 1889 than in any year since 1877 and there had been no excessive issues since 1869.1 But this favorable situation was radically changed by the new government. At the close of 1890 the circulation had been advanced to 336,730,462 milreis, an increase of more than sixty per cent.; the next year 513,827,357 milreis was reached; in 1892, 555,825,964; in 1893, 646,917,750; in 1894, 703,825,960; and in 1895, 789,464,096 milreis. Exchange on London, which measured the gold value of the paper milreis, promptly fell to 22 pence on average for 1890; 16 pence for 1891; 10 pence for 1894; and finally to the low level of 5 pence for 1898. As in most paper money debauches, supply seemed never to equal demand, and the more the channels of circulation were flooded with depreciated paper the louder was the clamor that the supply of currency was insufficient for the needs of the country. The banks, many of which had the privilege of note issue, vied with the government in the issue of paper and in the profitable speculation in exchange, and, as depreciation more than kept pace with increase in quantity, it was a curious fact that the 297,800,000 milreis in circulation at the close of 1890 was worth more in gold than the 788,364,000 milreis remaining in circulation in 1898.

1 According to Wileman the average circulation in 1869 was 183,224,767 milreis; 1875, 181,868,699 milreis; 1880, 215,677,818 milreis; 1885, 207,861,450 milreis; 1888, 205,271,302 milreis; and in 1889, 198,815,562 milreis.

* Cf. Lyon, in Questions Monétaires Contemporaines, 795. With

It was recognized almost from the first that the debauch of paper must come to an end, but the government had entered upon a vicious circle which was difficult to break, and its attitude towards the banks and towards its own obligations was not such as to restore confidence. Two banks were founded at about the time of the creation of the republic, with the support of French capitalists,-the National Bank of Brazil and the Bank of the United States of Brazil. They had been in operation but a short time when a decree of President Fonseca in December, 1890, based upon a report by Ruy Barbosa, the Minister of Finance, authorized the union of the two institutions under the name of the Bank of the Republic of the United States of Brazil, with a capital of 200,000,000 milreis. The new bank was authorized to issue notes to three times the amount of its gold reserve, and the charter provided that the government should grant the right of note issue in future to no new banks and that the circulation of existing banks should be remitted to the new establishment as the old ones surrendered their privileges. The existing banks of issue numbered six, with a limit of circulation of 166,000,000 milreis. The new bank undertook the retirement of the government paper money, which had been in circulation for some fifteen years and still amounted in June, 1891, to 168,000,000 milreis.

A new organization was given to the Bank of the United States of Brazil by an Act of December 17, 1892, under the title of the Bank of the Republic of Brazil. The capital was reduced from 190,000,000 milreis to 150,000,000 milreis, the notes were made legal tender, and the bank was pledged to retire 100,000,000 milreis in bills within the year 1893.' The circulation of the bank, including interest-bearing bonds, which were made legal tender and receivable at public depositaries, and including the circulation of other bank bills assumed by the consolidated bank, reached 379,390,720 mil

exchange at 23% in 1890, the gold value of the currency worked out at £28,073,000; at 54 in 1898, it worked out at £23,537,000. 1 Revue des Banques, January, 1893, XII., 293.