CENTRAL AMERICAN PUBLIC FINANCE
Sources of Revenue--Defects of the Fiscal Systems--Floating
Debts--Brief History of the Bonded Debt in Each Republic--Depreciation
of the Currency Systems--The Monetary Situation in Each Country--Need
for Financial Assistance from the United States.
Few factors have done more to retard the economic progress of the
Central American republics than the defects of their fiscal systems.
The inability of the governments to meet the current expenses of
efficient administration or to discharge their obligations to
foreigners, and the demoralization of the monetary systems which has
resulted from attempts to make the depreciation of the currency a
source of revenue, have been a serious drawback to the investment
of capital and the development of commerce in the Isthmus, and have
involved some of the five countries in rather serious diplomatic
complications. This financial weakness has been due partly to
the nature of the governments’ incomes, partly to defects in
administration, arising from ignorance or dishonesty, and partly to
general economic and political conditions.
Each of the five republics obtains its revenues principally from
customs duties, on exports and imports, and from the rum monopoly.
Other sources of income, of which the most important are tobacco and
powder monopolies and stamp taxes, amount to very little as compared
with these two great items. Direct property taxes, the introduction of
which has at times been attempted in Guatemala, Nicaragua, and Costa
Rica, have met with very little success, and have been very unpopular.
This fiscal system has many bad features. The duties upon imports,
upon which the chief reliance is placed, are so high that they seem
in many cases to discourage commerce. This is especially true in
regard to the cheap textiles and other articles used by the working
classes, for the imposition of the duty according to the gross weight
of the package, and the failure to make adequate distinction between
different qualities of the same category of articles, raises the prices
of some goods to a point where consumption is materially lessened.
There are still stronger objections to the second great source of
revenue, the manufacture and sale of _aguardiente_, or rum, for as in
other countries where similar monopolies have existed the temptation
to stimulate the consumption of the liquor has in some cases proved
stronger than consideration for the welfare of the community. In view
of the relation between drink and vice and crime, which is nowhere more
directly evident than among the working classes of the Isthmus, it is
hard to understand how the public authorities can not only permit but
encourage the unrestricted sale of what is little more than a low grade
of alcohol. Some of the governments, indeed, have endeavored by raising
the price of the _aguardiente_ to check its consumption, and have
done so without materially decreasing their own income, but with the
majority the object has seemed to be to sell a large amount at a low
price rather than the opposite.
The following table shows the revenues of each of the five republics in
1913, the last year before the general financing disorganization caused
by the European war:
Revenues in 1913. (Approximate equivalent in American gold.)
Source of revenue Guatemala Honduras Salvador Nicaragua Costa Rica
Import duties 1,930,000 1,130,000 2,900,000 1,680,000[78] 2,500,000
Export duties 1,275,000 88,000 600,000 112,000
Liquor and other
monopolies 450,000 775,000 1,200,000 1,368,000 1,150,000
State owned
railways,
telegraphs,
postal service,
etc. (Gross
income) 200,000 140,000 285,000 500,000
Miscellaneous 325,000 377,000 615,000 317,000 208,000
--------- --------- --------- --------- ---------
Total revenues 4,180,000 2,500,000 5,600,000 3,355,000 4,470,000
The way in which the Central American governments spend their income
has already been described. The heaviest outlays are those for military
purposes and for the service of the foreign debt. The following table
shows roughly the division of the expenditures between the different
departments of the administration:
Expenditures in 1913. (Approximate equivalent in U. S. gold.)
Department Guatemala Honduras Nicaragua Salvador Costa Rica
_Gobernación_ 220,000 320,000 208,000 860,000 380,000
Public works 130,000 287,000 902,000 600,000 695,000
Public instruction 180,000 152,000 159,000 354,000 635,000
War and marine 520,000 720,000 410,000 1,600,000 627,000
Finance and public
credit 475,000 185,000 385,000 2,150,000 1,320,000
Charities * * 9,600 500,000 80,000
Judiciary * 70,000 127,000 280,000 325,000
Miscellaneous 695,000 26,000 2,800,000 126,000 211,000
--------- --------- --------- --------- ---------
Total expenditures 2,320,000 1,750,000 4,809,000 6,470,000 4,273,000
* Not specified.
Note. The miscellaneous expenditures include items of nearly $500,000
for “exchange,” i. e. for buying drafts on foreign places, in
Guatemala, and of $1,680,000 for paying claims arising from recent
revolutions in Nicaragua.
The revenues are decreased, and the expenditures are increased, in
some countries to an alarming degree, by inefficiency and corruption
in their administration. The control of the public funds is almost
entirely in the hands of the President and his subordinates, for the
voting of taxes and of the budget by Congress is a very perfunctory
matter even in those countries which have most nearly attained
constitutional government in other respects. The income is derived
from sources which remain much the same from year to year, and its
disposition is subject to little control by the Congress, because the
annual financial legislation does not always appropriate specific sums
for specific purposes, but simply divides the estimated expenditure
between the various departments. The administration, moreover, does
not seem to regard itself as bound to keep within the general limits
laid down if it can obtain funds for additional outlays. The Congress,
which is rarely in a position to oppose itself to the wishes of
the executive in this or in other matters, usually ratifies excess
expenditures or proposed changes in the budget with little question.
In some of the countries, there is undoubtedly a large amount of
corruption in the management of financial affairs. The traditions
of the public service encourage rather lax conduct on the part of
the officials, for custom and public opinion tolerate many practices
which are now considered improper in countries which have had a longer
experience in self-government, and those who are unscrupulous are
aided in defrauding the government by the inadequate provision which
is made for the supervision of accounts. The commonest forms of graft
are those which imply a rather loose standard of official morality
rather than actual theft or dishonesty, but it cannot be denied that
there are many officials, some of whom occupy the highest positions in
their respective countries, who have enriched themselves during their
tenure of office by means which nothing could excuse. Few such men,
fortunately, occupy positions of power in the five republics at the
present time.
The chief fault of Central American public finance is the indifference
shown in regard to the balancing of revenues and expenditures. The
governments frequently pay salaries and other obligations with receipts
rather than with money. This practice gives rise to many abuses, for
often the receipts can be cashed only by persons having influence
with the authorities of the treasury department, and thus become a
source of graft. Certain governments, indeed, make it a practice to
buy their own promises to pay at a discount, after depreciating them
by refusing to redeem them at their face value. The floating debt,
which ordinarily bears a very high rate of interest, is always an
indefinite but steadily increasing quantity, comprising a great variety
of obligations. It includes claims for salaries and for supplies
furnished to the government, for damage to property during revolutions,
for violated concessions and contracts, and other demands of every
degree of validity. Some of these are paid off from time to time as the
condition of the treasury permits, but no provision is made for the
service or amortization of the internal debt as a whole.[79]
Each of the five republics has also a bonded debt, held for the most
part in England. In most cases this dates back to the loan of £163,000
contracted in London by the officials of the first Central American
Federation. Costa Rica and Salvador paid off their share of this after
they became independent, but the other states, after defaulting for
several years, eventually made arrangements for refunding the bonds
with new loans. At the same time, further issues were made, chiefly
for the construction of railways, during the period of prosperity
and inflation which accompanied the first development of the coffee
plantations in the seventies and eighties. These were often accompanied
by fraud, in which both the officials of the Central American
governments and the companies which floated the bonds participated,
and which in some cases reached immense proportions. The service of
the foreign debts became very difficult when the coffee prices fell,
and when the decline in the price of silver, upon which the monetary
systems of the Isthmus were based, greatly increased the amount of
the debt in terms of the national currency without proportionately
increasing the national revenues. During the decade 1890-1900, nearly
all of the republics found it impossible to maintain regular payments
of interest. New arrangements were therefore made with the creditors,
who were forced to accept successive reductions of their claims,
amounting in some cases to a large proportion of the total, in order
to obtain any payment at all. These readjustments, with the partial
repudiation which they involved, naturally injured severely the credit
of the five countries.
Guatemala has until very recently been involved in almost continuous
difficulties with her creditors. Her share of the debt of the Central
American Federation remained in default until 1856, when it was
refunded with the accrued interest into a new five per cent loan of
£100,000. In 1869 another loan of £500,000, issued at 70¹⁄₂ and bearing
interest at six per cent, was issued through a London banking house.
Both loans went into default in 1876. They were refunded in 1888 by a
bond issue of £922,700, bearing four per cent interest, and another
issue was made at the same time to consolidate the internal debt. The
Republic again failed to meet its obligations to its creditors in 1894,
and the latter were forced to accept a further reduction of their
claims. By an arrangement made in 1895, both the external and internal
bonds were refunded by a new issue of £1,600,000, at four per cent,
secured by a special tax of $1.50 gold on each bag of coffee exported.
These bonds now constitute the principal foreign debt of the Republic.
The government soon violated the terms of the agreement under which
they were issued, for the coffee export tax was reduced in 1898 and
1899, and its proceeds were used for other purposes than the service
of the loan. Payments of interest were suspended from 1898 to 1913.
After several fruitless attempts to reach an agreement, the bondholders
finally secured the resumption of payments through the energetic
diplomatic intervention of the British government, and the interest has
been met regularly since 1913. The principal, on December 31, 1915,
amounted to £2,357,063.[80]
Salvador had paid off her share of the federal debt in 1860, by a
compromise with the holders of the bonds. In 1899, a loan of £300,000
at six per cent and in 1892 another of £500,000 at six per cent were
obtained from bankers in London for the purpose of extending the
railway line from Acajutla to Santa Ana and San Salvador. These were
secured by mortgages on the railway. In 1894 the service of the loans
was assumed by the Central American Public Works Company, which took
over the railway for eighty years in return for a promise of an annual
subsidy from the government and a guarantee of a minimum annual profit.
In 1899 this company entered into another contract with the Republic,
by which it agreed to retire on its own account all of the 1889 and
1892 bonds, converting them into five per cent mortgage debentures of
the Salvador Railway Company, which had been formed to take over the
concessions held by the Public Works Company. The Railway Company was
to receive a fixed annual subsidy of £24,000 for eighteen years. In
this way the bonds ceased to be obligations of the Republic. The only
foreign bonded debt of Salvador at the present time is the issue of
six per cent sterling bonds secured through two London banks in 1908.
On January 1, 1916, £756,900 out of the original £1,000,000 were still
outstanding. The service of these was suspended after the outbreak of
the European war, but an arrangement was made with the bondholders by
which the coupons from August, 1915, to August, 1919, were to be funded
into new bonds bearing seven per cent interest.
Costa Rica, which had paid off her share of the Central American
debt in full immediately after the dissolution of the Federation,
contracted two loans in London,--one of £1,000,000 at six per cent in
1871, and the other of £2,400,000 at seven per cent in 1872,--during
the first years of General Guardia’s administration. From the two,
it is said that the Republic received a total sum of £1,158,611, 18
s, 5 d,[81] the rest being kept by the speculators who arranged the
transaction. The service of the debt was suspended in 1874. In 1885 a
new arrangement was made through Mr. Minor C. Keith, by which the old
bonds were refunded at one half their face value by a new issue of
£2,000,000 at five per cent. The interest was to be paid by Mr. Keith
until 1888, in return for concessions in regard to the railroad which
he was building, and after that date by the government. The service
of the debt was suspended from 1895 to 1897, when a new agreement
was made by which the rate of interest was reduced and the unpaid
coupons were exchanged for certificates at forty per cent of their
face value. Payments were resumed and were maintained until October,
1901, when a financial crisis caused by high rates of exchange and
falling coffee prices again forced the government to suspend them. For
nearly ten years the bondholders were put off, usually on the ground
that the Republic was unable to pay as much as its creditors asked.
Each administration made an effort to settle the matter by securing
a reduction of the debt, but refunding contracts made with Speyer
and Company in 1905 and with the National City Bank of New York in
1909 were rejected by the Congress. Finally, however, the pressing
need for refunding the internal debt, which bore ruinous rates of
interest and was increasing alarmingly every year, led the government
to make a new contract with Mr. Minor Keith in 1911. This provided for
a bond issue of £1,617,200, bearing four per cent interest for the
first ten years and five per cent thereafter, to refund entirely the
principal and the unpaid interest of the old debt, which, even with
the numerous previous reductions, amounted to £2,710,293 by the end of
1910. The creditors accepted the arrangement, and the bonds were taken
by an international syndicate, formed by bankers in New York, London,
Hamburg, and Paris. The interest was secured by the customs revenues,
the administration of which was to be taken over by the syndicate in
case of default. As soon as the Congress had ratified this agreement,
another loan of 35,000,000 francs at five per cent, issued at eighty,
and secured by a mortgage on the _aguardiente_ monopoly, was arranged
in Paris for the payment of the internal debt. Since 1911, the service
of these obligations has been maintained with scrupulous regularity.
The total foreign debt of the Republic on December 31, 1915, was
31,478,392.27 colones, or $14,641,112.68 American gold.[82]
In Nicaragua, £285,000 in six per cent bonds secured by a mortgage on
the National Railway had been issued in 1886. Payments were suspended
on these in 1894, and an arrangement was made in 1895 by which the
interest was reduced to four per cent. In 1904, another six per cent
loan, to the amount of $1,000,000 gold, was negotiated with Mr.
Weinberger of New Orleans. Both of these debts were paid in 1909 by
means of an issue of £1,250,000 at six per cent contracted for by the
Ethelburga Syndicate of London. The interest on the Ethelburga loan
was reduced to five per cent in 1912, through the good offices of the
two New York banking firms which had undertaken the reorganization of
the currency, on condition that these firms continue to administer the
customs revenues of the Republic, by which the bonds were secured.
The total foreign debt of Nicaragua on December 31, 1915, was as
follows:[83]
Ethelburga bonds (£1,179,620) $5,740,131
Debt to Brown Brothers and Seligman 1,060,000
----------
Total $6,800,131
Honduras is now the only one of the Central American republics which
has not effected some adjustment of its foreign debt. This country,
on January 1, 1916, owed to foreign creditors the immense sum of
£25,407,858,[84] arising from loans contracted in London and Paris
in the years 1867-70. Bonds to a nominal value of £5,398,570, and
bearing from five to ten per cent interest, were issued at that time
for the construction of an interoceanic railroad from Puerto Cortez
to the Gulf of Fonseca. The greater part of the money received from
the investors in these securities seems to have been divided between
the officials of the Republic and the promoters, with the result
that the sum which finally found its way into the national treasury
was sufficient only to build ninety kilometers of the railroad. The
payments of interest, which until that time had been made out of the
principal of the loan, were suspended in 1872, and the quotation of
the bonds on the European exchanges dropped rapidly from 85¹⁄₂% to
1¹⁄₄% of their face value.[85] A few half-hearted efforts to enter into
negotiations with the bondholders have been made during the years which
have since intervened, but the Republic has shown little inclination
to make good its obligations, and there have even been occasional
propositions to repudiate the debt altogether, because of the fraud
which accompanied its flotation. Meanwhile the government has been
unable to make arrangements for the extension of the National Railway
into the interior, because of the lien held by the bondholders upon the
line, and it has also been unable to obtain new loans for carrying out
other internal improvements. The foreign debt has thus been one of the
principal factors which have retarded the Republic’s economic advance.
Early in 1909, a plan for the settlement of the debt was arranged by
the British minister in Central America, but its consummation was
prevented by the protest of the United States, which insisted that
provision must at the same time be made for the adjustment of certain
American claims. An arrangement suggested by J. P. Morgan and Company
was therefore substituted for the British scheme. The New York bankers
agreed to purchase the old bonds at the rate of £15 in cash for each
£100 of the old bonds with their accrued interest, on condition that
the United States government be a party to the agreement under which
this was done. After some delay, a treaty was signed on January 10,
1911, by Secretary of State Knox and the Minister of Honduras at
Washington, in accordance with which the United States was to assist
Honduras in obtaining a loan secured by her customs duties, which
were to be administered, until the bonds were paid, by a collector
general nominated by the State Department. The treaty was rejected by
the Honduranean Congress on January 31, 1911.[86] After the Bonilla
revolution, another attempt was made to arrange for the loan, but there
was such strong opposition to the treaty in the American Senate that
nothing could be accomplished. In February, 1912, J. P. Morgan and
Company withdrew from the negotiations, and a syndicate of New Orleans
bankers took their place. The treaty, however, was never ratified, and
the plan for a new loan was finally abandoned.
At the Pan American Financial Conference in May, 1915, the delegates
from Honduras announced that their government was ready to increase
the customs duties and the banana export tax to a point where they
would yield an additional sum of $410,000 gold each year, which might
be set aside for the service of the foreign debt. As the holders of the
bonds have indicated their willingness to negotiate upon this basis,
there seems to be reason to hope that an adjustment will eventually be
brought about which will place the credit of the Republic on a sound
basis.[87] Until this is done, it will be impossible to build railroads
or to carry out the other internal improvements which are indispensable
for the development of the country.
The failure of the Central American governments to fulfill their
obligations to foreign creditors is not due entirely to a listless
sense of national honor, for in many cases there has been serious
doubt whether these obligations should be regarded as entirely valid.
The circumstances under which the majority of the public debts were
contracted were such that the governments have felt a strong reluctance
to recognize their duty to repay them in full. The bonds, bearing heavy
rates of interest, were usually purchased in the first place at a
considerable reduction from their face value, and the speculators who
floated them took advantage of the ignorance or the cupidity of the
agents with whom they negotiated to defraud the borrowing governments
of large sums. A large part of the product of the issue, in fact, seems
in many cases to have been retained by the underwriters or divided by
them with the Central American officials. Subsequent administrations
were naturally unwilling to repay sums from which the country as a
whole had never received the benefit, especially as the service of the
loan involved a heavy and in some cases intolerable burden upon the
impoverished treasury and deprived the government of resources which
were sorely needed for the maintenance of order and the promotion of
internal improvements.
One of the influences which have most disastrously affected the
government finances and the credit of the Central American republics
during the last generation has been the depreciation of their
currencies. Until the last decade of the nineteenth century, the money
of the Isthmus had been based upon the silver dollar, subdivided into
eight _reales_ or one hundred cents. Each of the five countries had its
own coinage, but foreign money, especially from other Latin American
states, was ordinarily accepted at its face value. When the market
price of silver declined, as it did with great rapidity after 1890,
there was a serious disturbance both of the foreign commerce and of the
finances and credit of the five governments, and this disturbance was
intensified by a further depreciation of the currency, in Guatemala,
Costa Rica, and Nicaragua, by the issue of irredeemable paper money.
For a number of years, rates of exchange fluctuated widely, with
a general upward tendency, and it became increasingly difficult
for merchants to pay their bills in foreign countries and for the
governments to meet the service of their loans. Costa Rica, and later
Nicaragua, succeeded in establishing a currency on a gold basis, but in
the other republics the situation grew more and more difficult until
the outbreak of the European war in 1915. This catastrophe caused the
rate of exchange upon New York to rise from 25 to 100 per cent in each
of the five countries, and made necessary a suspension of payments upon
the foreign debt in two of them.
Several causes have contributed to the disorganization of the Central
American currencies. The fallacies which have at times caused
unfortunate experiments with the monetary systems of other countries
have been as attractive in Central America as elsewhere, and every
financial or commercial depression has seen demands, which have
usually been acceded to, for an increase in the circulating medium.
The banks, whose notes form the larger part of the currency in each
state, have been subject to little effective regulation, and have in
some cases been abetted by the governments in flooding the country
with worthless paper money. By unscrupulous speculation in foreign
exchange, moreover, they have often done much to cause unnecessarily
violent fluctuations in the premium on gold. At the present time, laws
relieving the banks of their obligation to exchange their notes for
gold or silver are in force in Guatemala, Salvador, Nicaragua, and
Costa Rica. The factor which has done most to disorganize the monetary
systems of the five republics, however, has been the inability of the
authorities to resist the temptation to use the depreciation of the
currency as a source of revenue. There is no easier method of raising
money for pressing needs than the issue of government paper or the
granting of special privileges to the banks in return for loans; and
few of the countries have as yet learned that such a policy in the long
run does far more harm than good.
The worst currency system of the Isthmus is that of Guatemala, where
silver coin has entirely disappeared from the circulation within the
last twenty years. On assuming office in 1898, President Estrada
Cabrera found himself confronted by serious financial difficulties
arising from the extravagance of his predecessor and the business
depression from which all of the Central American countries were at
the time suffering. In order to provide funds, the new administration
resorted to what was practically an issue of unsecured paper money.
In return for a large loan, drawn in part from the reserves which
guaranteed their circulation, the banks were relieved of their
obligation to redeem their notes in silver, and a large issue of
new notes, guaranteed solely by the claims of the banks against the
government, was made at the same time through the so-called _Comité
Bancario_. Subsequent decrees made all debts payable in paper even
though the contracts expressly provided for payment in silver.
The redemption of the bank-notes has never been attempted, and
further issues have been made from time to time until the amount in
circulation, on January 1, 1916, was more than $160,000,000.[88] The
money depreciated rapidly. Just before the outbreak of the European
war, the paper _peso_ was worth about five cents in gold, but in August
and September, 1914, the difficulty of obtaining drafts on foreign
countries forced the rate of exchange from 20 to 1 to 40 to 1. It has
remained approximately at this point since that time, although it has
fluctuated considerably, sometimes rising or falling as much as thirty
per cent within a few weeks.
The circulating medium is now in a very bad condition. The notes of the
smaller denominations are dirty and torn almost beyond recognition,
and in quantity they fall far short of supplying the necessities of
commerce. The subsidiary coinage, which consists of nickel and copper
pieces of 12¹⁄₂ and 25 cents, is also insufficient in quantity, and it
is supplemented in ordinary transactions by tokens issued by business
houses and municipalities, tram-car tickets, and postage stamps. This
state of affairs naturally causes great inconvenience to persons
engaged in commerce on a small scale.
The fluctuations in the rate of exchange make business transactions
very difficult, for merchants who handle imported goods must change
their prices from day to day if they are to avoid loss, and must at
the same time face the greatly decreased purchasing power of the
masses of the people when the money in which wages and salaries are
paid depreciates. There is a growing tendency to quote prices and make
transactions in United States currency, of which there is a large
amount in circulation.
Proposals for reforming the currency have been made from time to
time, but none of them have been taken up by the government. The
reintroduction of a metal standard, in fact, has been opposed by one of
the most influential classes in the community. The coffee planters and
other employers of labor have benefited greatly by the rising rate of
exchange. Despite the depreciation of the currency, they have raised
the wages of their employees comparatively little, and the latter,
bound by contracts from which the decline in their earning power made
it more difficult than ever for them to escape, have been unable to
protest. The result has been an enormous increase in profits, for wage
costs have been reduced, while the coffee has continued to be sold for
gold in the European and North American markets. The government also
benefits by the present situation, for the revenues from the customs
houses are received in gold, and the employees are paid in paper, with
the result that there is a yearly increasing surplus in favor of the
treasury. The effect of this condition on the morality of the underpaid
officials has already been mentioned.
In Nicaragua, monetary conditions were much similar to those in
Guatemala before the reform carried out by the New York bankers in
1912. President Zelaya had driven the silver out of circulation early
in his administration by the issue of legal tender treasury notes, and
the value of the _peso_, after his fall, had sunk to about five cents
gold. The establishment of a new currency, under the 1911 treasury
bills agreement, has been described in Chapter XI. At the beginning
of the European war, the new money was exchangeable at par for sight
drafts on New York. The inability of the government to replenish the
exchange fund against which these drafts were drawn forced the National
Bank to suspend their sale for a time, with the result that the premium
on American exchange rose to thirty per cent early in 1915. More
recently, however, the National Bank has resumed the sale of drafts at
par with its own funds.
Honduras is still upon a silver basis. Silver coin circulates at its
intrinsic value, and bank-notes, which are generally used in commerce,
are accepted at par in the cities and towns, although the country
people as a rule prefer to use specie. The Republic has coined little
money of its own, but a considerable part of the silver of Guatemala
and Nicaragua found its way over the border when those republics fell
under a paper regime, and _pesos_, or dollars, from Salvador, Chile,
and Peru are in general use. The monetary system of the Republic is
thus better than that of the majority of its neighbors, but it can
nevertheless hardly be said to be sound. The rise and fall of the price
of silver in the world’s markets involves fluctuations in the rate of
exchange which are only less violent than in the case of an unsecured
paper circulation, and cause much inconvenience and danger to merchants
dealing with foreign countries. A part of the Republic’s imports, which
for several years past have exceeded the exports, are undoubtedly paid
for in silver coin, despite the restrictions on the export of specie.
This tends to leave only subsidiary coins, of a lower standard of
fineness than that of the _pesos_, in circulation, and to make it more
difficult also for the banks to maintain their metallic reserves. Since
the beginning of 1916, especially, the scarcity of exchange on New
York, combined with the high price of silver in the foreign markets,
has threatened to drain the country of its circulating medium, and has
forced the government to forbid entirely the exportation of coin.
The currency of Salvador was until very recently on a silver basis,
but in August, 1914, the banks, whose notes formed a large part of the
circulating medium, were allowed to suspend silver payments in order to
safeguard their metallic reserves, and the exportation of specie was
forbidden. Silver coin has now almost disappeared from circulation,
and bank-notes and small nickel coins have taken its place in all
transactions. The fact that the banks still maintain a large reserve
for the resumption of specie payments after the war, however, has
prevented a serious depreciation, although the rate of exchange has
fluctuated considerably.
In Costa Rica, the depreciation of the currency had begun as early as
1882 with the issue of government paper and bank-notes which gradually
drove silver coin out of circulation. Rates of exchange rose slowly
until 1896, when President Rafael Yglesias procured the passage of a
law which provided for the establishment of a gold standard. A unit
called the _colón_, worth about 46¹⁄₂ cents in United States currency,
was adopted, and certificates were gradually exchanged for the old
money at the rate of one _colón_ for one _peso_. On July 15, 1900, the
government was able to begin the redemption of these certificates in
gold coin. A new law, meanwhile, had required the banks to guarantee
their notes by adequate reserves of specie, so that the currency of
the Republic was placed upon a sound basis. At the outbreak of the
European war, however, the government relieved the banks of their
obligation to redeem their notes in gold. A little later, finding that
its revenues were falling off, and being unable to arrange for a loan
with the existing banks, it granted to a new institution, the Banco
Internacional, the privilege of issuing inconvertible notes secured by
government bonds. The result was a rapid depreciation of the currency.
The rate of exchange on New York rose from 218 on August 1, 1914, to
260 in January, 1915, and to nearly 300 a few months later. It has been
reduced somewhat since that time, and a metallic reserve has gradually
been accumulated by the Banco Internacional, so that there seems to be
ground for hoping that the paper will be redeemed at par when normal
conditions are restored.
The Central American republics will have to depend upon the assistance
of foreign capital both for the readjustment of their foreign debts and
the reorganization of their monetary systems,--reforms for which the
need will become pressing soon after the conclusion of the war. The
problem of placing their credit on a sound basis is one of the most
important which confronts them today. If their economic development
is to continue, they will require new loans from abroad, not only
for refunding old obligations and stabilizing their depreciated and
fluctuating currencies, but also for building railways and roads,
improving ports, and making other internal improvements. These new
loans, probably, can be obtained to best advantage only in the United
States, with the aid of the American government, for no other country
has the interest which we have in the solvency and the economic welfare
of the Central American nations, and no other, while the Monroe
Doctrine is maintained in its present form, is really in a position
to guarantee to its bankers the full measure of protection which
is necessary to make loans to the republics of the Isthmus a safe
investment.
FOOTNOTES:
[78] Includes export duties.
[79] The internal debt of each of the republics, according to
statistics compiled from their Treasury Reports and from the 1915
Report of the Council of the Corporation of Foreign Bondholders, was as
follows on December 31, 1914.
(Figures in American gold.)
Guatemala 3,880,986
Salvador 4,563,676
Nicaragua 6,676,662
Honduras (July 31, 1914.) 1,844,585
Costa Rica 2,692,215
[80] These and other details in regard to the bonded debts of the
Central American Republics are for the most part based on information
in the 1915 Report of the Council of the Corporation of Foreign
Bondholders in London.
[81] Message of President Jiménez to Congress, 1911.
[82] Costa Rica, _Memoria de Hacienda_, 1915. This sum includes certain
minor obligations to correspondents in New York, London, and Paris.
[83] This does not include the accrued interest, which now amounts to a
considerable sum, as the service of the loans has been suspended since
1914.
[84] Report of the Council of the Corporation of Foreign Bondholders,
1915, p. 207.
[85] Honduras, Boletín Legislativo, April 19, 1911. (Quoting from the
Moniteur des Rentiers of Paris.)
[86] The treaty was exactly similar to that signed in the same year by
the United States and Nicaragua. For the text, see the American Journal
of International Law, Vol. 5, supplement, p. 274.
[87] See the 1915 Report of the Council of the Corporation of Foreign
Bondholders.
[88] U. S. Commerce Reports, Supplement 29a, September 2, 1916.