Bolivia's Central Bank Independence: when U.S. Expertise was welcome in Latin America
A few weeks ago, quite a large number of Latin American banknotes were donated to the American Numismatic Society, largely early 20th-century issues from Bolivia. Many of these banknotes, One-Boliviano bills dated 1911 and issued by El Banco de la Nacion Boliviana, bear an imprinted overstamp that reads “Banco Central de Bolivia.” Three signatures appear at the bottom, which seem almost as if they had been processed manually because of their range of colors, irregular locations on the banknotes, and various combinations of signatories.
It would be futile to understand the context that had led to their issuance without some understanding of Bolivia’s currency history. Partially ruled by the Incas before the Spanish conquest, the territory of what would become Bolivia became part of the Viceroyalty of Peru until 1776, when it was transferred to the newly established Viceroyalty of the Rio de la Plata. Incorporating the Potosi Mines, the area became Spain’s main silver supplier from 1545 until its independence on August 6, 1825. The young Republic, founded by Simon Bolivar, naturally turned toward silver to create the backbone of its currency system in 1827, with the new Sol exchanged on par against the Spanish colonial Real. However, wars, internal conflicts, excessive reliance on imports, and economic growth led to a permanent lack of monetary supply. Limited use of gold, minting of debased silver coinage and of bronze small change were not sufficient to alleviate this issue, leading to the introduction of paper money in 1867. At the same time, the world was moving away from the bimetallic gold and silver standard, adopting gold as its monetary anchor. As a result, the value of silver fell and Bolivia adopted the gold standard in 1895. Minting of silver coins decreased, coming to a halt by 1909, while Peruvian and British silver coins gained legal tender status. By the early 20th century, banknotes, issued by four private banks, had grown to represent more than half of the country’s overall monetary supply. At that time, a new currency unit, the Boliviano (worth 8-Soles) had been in circulation since 1864.
On January 7, 1911, Banco de Bolivia y Londres was turned into a mixed bank with a 78.4% state participation called Banco de la Nacion Boliviana, which enjoyed exclusive privilege of printing banknotes from 1914 onward. Its first banknotes were overstamped on existing pre-1911 bills, before the regular Mercury-type new banknotes were printed shortly after a May 11, 1911 law covering a 1–100 Bolivianos range:
However, like most other countries all around the world, Bolivia’s cycles of economic boom and bursts worsened with the Great War. Currency convertibility into gold had to be suspended between 1914 and 1928. However, high demand for raw materials from the US stimulated tin production, originally only a by-product of the country’s mining sector, which brought back prosperity. After a provisional fall in 1918, tin exports surged to become 24% of world production by 1929. This amounted to 70% of Bolivia’s total exports. Logically, excessive credit expansion and unregulated speculation reached their peak.
Enter Princeton Professor Edwin Walter Kemmerer. Holding PhDs in Philosophy, Economics, and Finance from Wesleyan and Cornell, he witnessed the suspension of the Gold Standard in most of the world (but not the US) following 1914, followed by a period of strong monetary expansion that degenerated into high inflation and currency disorders in several countries. The breakdown of paper-money convertibility into gold, even if restored provisionally in some countries in the 1920s, had opened the doors for unlimited abuse of monetary expansion at the hands of political authorities and economic agents. A strong advocate of more independent central banks, return to gold standard, and control of monetary supply, Kemmerer was called by Guatemala in 1919, where he oversaw the creation of a central bank. This started a cycle of economic and financial reforms sweeping the continent, Kemmerer and ad-hoc teams of advisors steering a range of financial, monetary and legal reforms in Colombia (1923), Chile (1925), Ecuador (1926), Bolivia (1928), and Peru (1930). At the same time, he was involved with other countries as diverse as China, Turkey, and the Philippines.
In Bolivia, Kemmerer intended to suggest reforms of the taxation, custom, and financial systems altogether, while creating a true central bank with capacity to offer rediscount facilities to other banks. Kemmerer concluded his mission in July of 1927. A law dated July 11, 1928 and promulgated on July 20, 1928 led to the transformation of the existing Banco de la Nacion Boliviana into a central bank, initially named Banco Central de la Nacion Boliviana, operating alongside a banking regulatory and supervisory body, la Superintendencia de Bancos y Seguros, as well as a controlling authority. Regulations protecting private savings were set up as well as reserve ratios between banks’ capital and their balance sheet and limits on the banks’ ability to expand credit. The new central bank’s mandatory reserves of metal were fixed at 50%, and the Boliviano defined as a currency unit equivalent to 0.54917 g of gold. British and Peruvian Pounds were reestablished as legal tenders alongside the national currency. On April 20, 1929, the bank adopted its final name, Banco Central de Bolivia, and initiated its activity on July 1. Although the state owned 62.5% of the bank, it could appoint only 2 board members out of 9.
The central bank started to issue new banknotes bearing “Banco Central de Bolivia” and the July 20, 1928 date, displaying a portrait of Simon Bolivar, which replaced the former Mercury of the 1911 series. The law of 1928 had provided for coinage of silver for fractional denominations up to the 1-Boliviano unit. However, through amendments on February 5 and December 3, 1929, it was agreed to retain the 1-Boliviano notes. As a result, the denomination range produced by the new central bank was no different than in 1911, with banknotes of 1, 5, 10, 20, 50, and 100 Bolivianos to which higher denominations of 500 and 1,000 Bolivianos were added. The date of the law that had established the new central bank replaced the previous 1911 date.
Since no real currency reform had taken place, the monetary structure that had operated since 1911 could be maintained. The law had simply provided for the replacement of the old banknotes with the new ones issued by the central bank, which paid royalties to the central treasury in exchange of this privilege. Pending the printing of the new series, it was then decided to use the older types, incorporating a “Banco Central de Bolivia” overstamp.
Interestingly, a range of overstamps were used, with four different colors—black, blue, pale blue, magenta—and four different sizes for the letters: very large, large, medium, and small. This created potentially 16 combinations for each denomination. Actually, not all these combinations were used for each denomination. As far as the 1-Boliviano banknote is concerned, neither the red overprint nor the largest letter size are to be found. The delay in getting the new series printed may be explained by the fact Bolivia, like most Latin American and many other developing countries at that time, subcontracted the printing job to corporations located in the US or in Europe. In this case, the American Banknote Company, which was responsible for printing the majority of the paper money used by the Latin American countries between ca. 1870 and 1970, was entrusted with that task.
One of the difficult parts was the fact banknotes had to carry the signatures of no less than 3 different officials. In 1911 they were the Contador (Accountant), the Delegate of the Government, and the “Gerante” Director of the issuing bank. The 1928 law had substituted them with the Accountant, the Superintendent of the Banking Authority and the “Gerente General,” the Central Bank Governor. As a result of bureaucratic and political instability, these names changed frequently. No less than 16 possible combinations of officials are encountered on the un-stamped 1-Boliviano 1911 banknotes, to which the three additional combinations displayed on the overstamped series need to be added. The plates and inks that were used for printing the signatures vary as a result, with exact location on the banknote, color, letter thickness, and shape displaying much instability. The range of colors and sizes used for the letters on the stamp added to this variety, ensuring that each banknote featured almost unique characteristics.
The banking reform did not allow Bolivia to escape the consequence of the 1929 market crash and subsequent economic depression. Mining exports collapsed, and private consumption dropped 25% between 1929 and 1932. With high unemployment, capital imbalances and falling salaries, Bolivia left the gold standard for the second time in 1932 after it had defaulted on its public debt in late 1930. A military junta had taken over in July 1930, and the country went into a disastrous war with Paraguay between 1932 and 1935. In 1939, the central bank was nationalized, after its independence had been gradually reduced as a result of the economic and financial crisis.
Kemmerer’s faith into the gold standard had not helped the country: its overvalued currency exchange rate, fixed at the height of Bolivia’s mining activity, had effectively hindered its capacity to export goods in a competitive fashion, while allowing cheap imports. To some extent, Bolivia suffered the fate of those countries that did not leave the gold standard and devalue their currencies soon enough, like France, even though Bolivia left the gold standard before the US did.
Obviously, one cannot only blame Kemmerer’s inspired reforms for what was happening: the crisis was global, and it is likely that reining in excessive credit before 1929 had allowed the country to mitigate some of the economic depression’s impact. In the long run, the most striking tribute to the 1928 financial overhaul lies probably with the survival to these days of some of the institutional framework it had created: Bolivia is still enjoying a Central Bank that helped extract the country from further inflation and hyperinflation in the 1950s and early 1980s.
In any case, most economic crises find their roots outside of the realm of monetary policy, and even the most efficient central bankers have to deal with their governments’ generally sub-optimal economic policy choices.