CHAPTER XIIFINANCE
Conversion Fund.—Currency.—Debts.—Public Revenues.
When the war in Europe broke out Chile was on the point of establishing a Conversion Office upon lines similar to those followed by Argentina and Brazil. The object was fixation of the exchange value of paper currency by the creation of strong gold reserves, and under normal circumstances Chile’s office would have begun its work in 1915. It has not been possible, up to the end of 1922, to open the “Caja de Conversión,” although funds are maintained on deposit with this purpose in view in Chile, England and, upon a much smaller scale, in the United States. Funds amounting to over 30,000,000 pesos of eighteen pence were also lying in Germany when war broke out, but these were, by special arrangements with the Allies, withdrawn during war years.
The total amount in the Conversion Fund in 1914 was over 108,000,000 pesos of eighteen pence. Of this less than 4,000,000 was held in Chile, and more than 74,000,000 in the Bank of England, besides the deposit in Germany. The reserve was increased during the following year, standing at 111,000,000 pesos at the end of 1915, or about £8,300,000, but was reduced to 88,000,000 in the following year when the National Congress authorised the utilisation of £2,000,000. This money was drawn upon to pay off Treasury Billsissued in conformity with the decree of January, 1914, for the purchase of vessels for the Chilean Navy and the construction of port works, but has been gradually replaced until in 1919 the total Fund amounted to over 114,000,000 pesos, of which 67,000,000 were banked in Chile and the remainder in England. At the beginning of 1921 Chile possessed £2,300,000 on deposit in the Bank of England, or nearly 31,000,000 pesos of eighteen pence; and to the credit of the Conversion Fund in the Casa de Moneda in Santiago had bar gold, $400,000 United States gold money, £78,845 of English money, and other specie, amounting in all to nearly 84,000,000 of pesos.
The withdrawal of funds from the Conversion reserves for special purposes was not unprecedented. Three years after the inauguration of the Fund in 1899 (when it was hoped to begin conversion operations in ten years’ time) 20,000,000 pesos were used for military expenditure, this sum being practically replaced in 1904 by proceeds of the sale of certain old cruisers.
Gallant efforts made to bring up the Fund to a point justifying the opening of the Conversion Office have been rendered abortive by the hard times of late 1920 continued throughout 1921, but the intention of Chile’s financial advisers is maintained and appears only to await the accumulation of sufficient gold.
At the same time the fact that credit and not gold is the true basis of economic prosperity has been forcibly impressed upon South America since 1914. Countries possessing big reserves of gold have been observed to suffer from depreciation of their paper currency, and, what is worse than depreciation, from constant fluctuation in every economic breeze, despite all the efforts of experienced financial experts; and on the other handcountries which were able to trade advantageously during the war and thus to pile up immense stocks of the precious metal have been seen to experience a demoralising paralysis of their markets—to be choked with their own gold.
The fact that those countries whose fiduciary issues have sunk to an apparently ruinous level are on that very account able to export their merchandise with profit, taking payments in comparatively valuable currencies and paying their way at home in depreciated paper, is illuminated by the lesson of the territories with currency maintained at a high exchange rate by gold backing, which are unable to find buyers of their products because no outsider can afford to pay the exaggerated rates of exchange. However, exporters are not the only persons to be considered, and the general uncertainty of commerce, together with the natural timidity of foreign capital when invited to lands with persistently variable currencies, will undoubtedly act as an incentive towards establishment of the Conversion Office in Chile.
Exchange values of Chilean currency, as well as several other forms of financial statistics, are officially given in sterling, the use of English monetary terms resulting from the establishment of financial and commercial relations with the United Kingdom in the earliest days of Independence, and from the fact that Chile’s first exterior loan was obtained from London. The “gold peso” is fixed in exchange value at eighteen pence, while the paper peso reflects economic conditions from day to day.
Since 1871 the average value of the Chilean peso incomparison with sterling has fluctuated from just over forty-six pence in 1872 to seven pence in the worst days of 1915 and a drop to nearly sixpence in the slump of 1921–2. For the last fifty years the exchange value has tended to decrease, due chiefly to repeated issues of the paper money which replaced the gold and silver coinage of the Spanish colonial régime, when a peso was worth (1800) the equivalent of four English shillings. The creation of paper money was, however, unavoidable in the circumstances, and so long as a country possesses a sufficient quantity of some recognised form of currency, the material of which it is composed is not a matter of local importance, although exchange values may be grievously affected.
All the gold minted into Chilean money has disappeared from circulation, the finely designed little coins being retained only as curios or mementos since 1875, when severe depreciation of silver values rendered gold higher priced as bullion than as currency. The gold peso is today no more than a financial term. Officially, gold coin has an existence, as the condor, of 20 pesos; the doblón, of 10; and the escudo, of 5, but the currency actually in use is paper, well printed, in denominations from one peso upwards, with silver coins of 1 peso, 20, 10 and 5 centavos, and nickel coins of 20, 10 and 5 centavos. From more than one country of the Americas, silver has disappeared entirely when the depreciation of paper has borne down the purchasing power of the peso or other unit to a point below the market price of the metal, but Chile has so far escaped this denudation in difficult times. At the beginning of the present century the value of the Chilean peso stood at 15 to 16 pence until 1906, when the tragic effects of the earthquake that temporarily destroyed Valparaiso reduced credit.
Between 1907 and 1914 it fluctuated about ten pence, went down to an average of eight pence during 1915, rose to nine pence in 1916 when demands for nitrate increased, to about thirteen pence in 1917 and nearly fifteen pence as the average in 1918; in June of 1918 the peso soared to an exchange value of over seventeen pence, but dropped quickly when the Central Powers signed the Armistice. During 1919 the average remained at about eleven pence, rose to over fifteen pence during the early part of 1920, and subsequently experienced the falls that disturbed the Chilean market in 1921, when the peso touched an exchange value of between six and seven pence.
Despite, or perhaps on account of, the wealth of Chile in copper ores, no coins made of this metal are actually in use, although they make an appearance in official records. The reason for this abstention is found in popular prejudice against a commonly known metal. During the sixteenth century an attempt was made to introduce copper coinage, a large quantity of the metal was minted in Santiago, and the objections of the peasantry were so strong that more than a million piastres’ worth of the coins were buried or thrown into the rivers in contempt.
Employés in most of the nitrate fields receive at least a proportion of their wages in special token-money, distributed by various companies with the chief object of circumventing the underground liquor traffic. These large discs, specially tinted, and stamped with the name of the issuing oficina, pass as currency in camp stores and upon the contiguous railroads, but are without more than curio values outside the nitrate areas. Such tokens help to relieve the need for quantities of small money, for Chile, like every other land with a paper currency making conscientious efforts to reduceinflation, is perennially short of change in industrial regions.
Chile has in circulation about 4,000,000 pesos in silver coinage, and a Government note issue of 150,000,000 pesos, which on the basis of eighteen pence to the gold peso is covered to the extent of 75 per cent by the Conversion Fund; at twelve pence, the issue is fully covered. But there is other paper outstanding—treasury “vales,” to the amount issued to banks and nitrate producers, totalling at the beginning of 1921 about 107,000,000 pesos, as well as 45,000,000 pesos in round numbers, issued against the gold guarantee. The total paper currency of Chile is therefore over 300,000,000 pesos, or 75 pesos to each inhabitant, with one peso of silver and with a quantity of nickel: let us say, about four pounds sterling, or $20 U. S. currency.
No one is more acutely aware of the dangers of inflation than Chileans, a people with a marked aptitude for finance. That fine journalist and courageous editor, Carlos Silva Vildósola of theMercurio, has repeatedly drawn public attention to important aspects of the monetary situation, and has declared that Chile is “desperately ill of the disease of paper money”; a comprehensive study of fiduciary issues has also been made by Dr. Guillermo Subercaseaux, a Chilean economic expert, and one of the planks of the Alessandri platform was a promise to proceed with the fixation of exchange, “so that we can know what we really possess, and how much we can buy tomorrow with the money we earned yesterday.”
Debts
Chile’s public debt was augmented in early 1921 when $24,000,000 United States currency was borrowed in New York, but prior to this loan the exterior obligations of the country had not been heavy in comparison with its vigorous economic growth; later in the year, another $20,000,000 (U. S.) was borrowed in New York, and in the first weeks of 1922 the financial markets of London readily took up a Chilean loan of £1,657,000.
The first Chilean loan was made in 1822, after Independence, by the Supreme Director, Don Bernardo O’Higgins, through his representative in London, Don Antonio de Yrisarri. One million pounds sterling was obtained through the medium of Hullett Bros. & Co., the loan bearing interest at six per cent; a Sinking Fund of £20,000 the first year, and £10,000 in succeeding years was arranged for, any bonds remaining unredeemed in thirty years to be paid off at par. The security agreed upon was a mortgage upon all revenues of the State, estimated at 4,000,000 pesos or £800,000 annually; also specially pledged were the net revenues from the Mint and from the Diezmos or Land Tax, expected to yield 250,000 pesos annually.
Of this premier loan Peru had a share amounting to three-tenths of the total, or 1,500,000 pesos.
Successive borrowings brought Chile’s exterior debt to £1,500,000 in round numbers by 1850, and £5,500,000 by 1870. Between 1876 and 1893, when the war with Peru and Bolivia had been followed by the revolution against Balmaceda, these obligations rose to nearly £12,000,000 sterling. In 1901 the account had mounted to £17,000,000, and to £23,000,000 in 1909.
Two years later external loans stood at £35,000,000,but were reduced to about £34,000,000 in 1913; by the middle of 1921, according to the Official Message of President Alessandri, this debt had been brought down to about £28,000,000. The detailed history of Chile’s financial years since 1884 shows new loans, although as a rule of extremely moderate sums, occurring almost annually with the exception of a gap of eight years between 1896 and 1905, when not a penny was borrowed; nor was any fresh exterior debt incurred between 1912 and 1921. Most of the Chilean loans bore the modest interest of 4½ per cent.
In 1919 Chile began to negotiate for a new loan, to cover the needs of the State railways; there was a deficit of 40,000,000 pesos upon the operation of these lines in 1918, and in addition to another large deficit, expected in 1919, money was wanted for supplies and equipment for new work upon the lines, and especially for construction on the southern part of the “Red Central.” The law passed by the National Congress authorising the loan also permitted the State railroads to raise tariffs by 20 per cent. Eventually, in February, 1921, the first New York loan was made through the agency of the Guaranty Trust for $24,000,000 United States currency; it bears interest at 8 per cent, and was issued at 99, a considerable proportion of the sum raised being spent by arrangement in the United States.
Public revenues in Chile are large in proportion to the population, the great bulk of the national income coming from import and export dues and, since the acquisition of Antofagasta and Tarapacá, especially from the nitrate industry, in the form of exportation taxes, and leases of deposits, as well as less directlyfrom the entry of immense quantities of machinery, stores and personnel. In considering the statistics of Chilean revenues, it must be remembered that taxes are partly paid in “paper” and partly in “gold”; no gold coin, nor, necessarily, gold-backed paper actually passes, but what happens is that a proportion of the dues are paid in paper of a fluctuating exchange value, while the remainder is paid at the fixed exchange rate of eighteen pence to the peso.
Since the Chilean Government’s excellent statistical departments figure out the totals reduced all together in pesos of eighteen pence, however, or in pounds sterling, the student of Chilean economics is considerably aided; but in surveying past years one is confronted with the fact that between 1885 and 1897 the peso was reckoned as being worth thirty-eight pence. For the reason, therefore, that comparisons with external currencies would frequently be misleading, it is preferable to retain the majority of revenue and trade figures in Chilean denominations only.
In 1850 Chile’s national income was still below 5,000,000 pesos yearly: there was almost invariably a small balance over expenditure in these early years, and in 1865 this excess rose to the respectable figure of 6,000,000 pesos. It was not until 1868, when revenues had grown to 13,000,000 pesos, that a deficit so large as a million pesos was recorded, and this was the fourth occasion only, in 65 years, that expenses had exceeded income.
In the stormy period of the ’seventies, when expenditure on public services was heavy, and, also, railroad building was developed, deficits were common; but by 1880 receipts had risen to over 40,000,000 pesos, and a balance of nearly 13,000,000 over expenditures was left in the treasury.
In 1891 the public revenues of Chile for the first time reached—and exceeded by 5,000,000 pesos—the hundred million mark. In 1895 receipts reached 127,000,000 pesos, with 93,000,000 expenditure, in round numbers; next year, with an income of nearly 163,000,000 pesos, there was a surplus of 47,000,000, an agreeable record exceeded in 1901 when, with revenues of nearly 186,000,000, the balance left in public coffers amounted to more than 50,000,000 pesos. Both receipts and surplus rose in the next year, and in 1903 official statistics showed the remarkable figures of 210,000,000 income, with 91,000,000 on the right side of the ledger after expenses were paid. A slight drop was experienced in 1904, but in 1905 receipts went up to nearly 257,000,000 pesos, rising to 373,000,000 in 1907 and 458,000,000 in 1908. In 1911 a tremendous jump in public income was made, to 796,000,000 pesos: in this year the surplus rose to nearly 457,000,000 pesos. In the three following years there was a falling off from this satisfactory record, but the balance remaining in the treasury was always substantial, and until Chile was adversely affected by the international upheavals following the European War her treasury was in a condition that many wealthier nations might envy. But in 1919 the Government was obliged to record a deficit of over 60,000,000 paper, and in 1920 estimated a deficit of 89,000,000 paper pesos. The result of these unprecedented difficulties is to bring about a somewhat hasty series of plans for changing the tax system, with a view to obtaining larger revenues, and while heavy dues were placed upon the importation of luxuries, remodelling of the inheritance and land laws, and of the imposts upon industry and commerce was outlined. The fall of nitrate prices, and paralysation of the market, emphasised the fact that this industry is taxed toa disproportionate degree, while many other forms of activity are exempt. In 1915, for example, out of 134,000,000 paper pesos received in the customs houses, 85,000,000 were paid for nitrate exports and 1,000,000 for its by-product iodine, while of the gold receipts, amounting to 30,000,000 pesos, 29,000,000 were paid for the same output from the salitre fields.