THE DOUBLE CURRENCY
The persistence of the double currency——The history of paper money——
The origins of the premium on gold, and its almost continual
increase——The year 1890 and the depreciation of the currency——
The causes of this depreciation; abuses in the issue of paper,
caused by a bad financial and administrative policy.
Remedies suggested——Rosa’s law fixing the value of paper money and
establishing a _Caisse de Conversion_——Opposition to this law——
Its beneficent effect upon agriculture and stock-raising, which
had especial need of a stable medium of exchange——Reserve fund
created with a view to converting paper money; its vicissitudes
in the past and its present constitution——The present monetary
situation.
In the financial history of the nations there are few examples of
countries in which the phenomenon of two standards of currency has
manifested itself so persistently and for so long a period as in the
Argentine Republic. This is one of the gloomiest pages of its past,
on which are recorded all the errors of its rulers, all the abuses of
speculation, and all the faults of administration whose cost the present
generation has been paying since the opening of the twentieth century.
Since the 27th of May 1820, the date on which the Junta of
Representatives authorised a gradual issue of paper money, and another
issue of redeemable and endorsable notes, the latter to be applied to the
payment of debts contracted in the name of all the Provinces during the
previous Administrations; since 1820, we were saying, until the present
time, there have been few years indeed during which the Republic has not
been under the empire of a double currency.[107]
[Footnote 107: In 1820 the issue of paper money was 40,000 piastres per
month, and that of the notes was the same.]
Our paper money, says an Argentine publicist, originated in an issue
of 290,000 piastres by the _Banque d’Escompte_, created in virtue of a
law of the Province of Buenos Ayres, dated the 22nd of June 1822. Four
years later, when on the 20th of January 1826 the Discount Bank was
transformed into the National Bank, the issue amounted to $2,694,856.
When the National Bank was in turn converted into the Mint, eleven
years later——that is, on the 1st of January 1837——the issue had already
amounted to $15,283,540. Seventeen years later, when the Mint was
transformed into the Provincial Bank (1st January 1854), the issue
amounted to $203,915,206. During the twenty-seven years which elapsed
between the creation of this bank and the passing of the monetary law of
1881, the successive issues of National and Provincial Governments had
increased the mass of inconvertible paper to the sum of $882,071,156.
It was then, with gold at 2500 per cent., that the Government began to
recall all this mass of paper, replacing it by another issue, of which
the one piastre notes exchanged against 25, or a piastre’s worth of the
issue which was destined to disappear.
This operation, which at a blow reduced the paper currency to a
twenty-fifth part of its original amount, also brought gold to par.[108]
[Footnote 108: See _Las vicisitudes de nuestra moneda jiduciaria en los
ultimos 65 años_ (1826-1890), by F. Latzina.]
In 1861 the depreciation of paper touched its lowest point: 2483 piastre
notes were given for $100 in gold. The premium was thus 2383 per cent.
But the reader must not take this to be the only surprise that the
history of the double standard has in store; others, still greater,
remain to be told. In 1862 the depreciation was even lower, the premium
reaching 2456 per cent., and 2556 piastre notes being given for $100 in
gold.
The premium continued to rule high until 1867, being 2569 per cent. in
1863; 2784 per cent. in 1864, 2597 per cent. in 1865, and 2406 per cent.
in 1866.
We stated just now that the Republic, during a long period of history,
never escaped from the inconveniences of depreciated paper save
practically on two occasions, which were unhappily of only too short
a duration. The first occasion was when Adolfo Alsina was Governor
of the Province of Buenos Ayres. The “Bureau of Bank Exchanges” was
established, its mission being to exchange one piastre in gold against 25
in paper, and _vice versa_. This Bureau was in operation from February
1867 to May 1876, the date of the suspension of metallic conversion.
After this period the value of paper money declined anew. In May 1876
the golden coin was worth 28 piastre notes; in June, 30; in July, 33; in
December, 29.
In 1877 the average value of a golden piastre was 29 piastre notes; that
is, 100 piastres in gold represented 2900 notes; in 1878 the ratio was
3187; in 1879, 3220; in 1880, 3055; in 1881, 2706.
It was at this time that the second exception occurred, marking another
check to the constant depreciation of paper.
In November 1881, under the Presidency of General Roca, Señor Romero
being Minister of Finance, a law was promulgated establishing a
bimetallic standard in the Argentine. The monetary unit was to be the
piastre of gold or of silver; the first weighing 24.9 grains Troy, and
the second 383.8 grains, both being alloys containing nine-tenths of
the pure metal. This law also established the metallic conversion of
depreciated notes.
This operation was a beneficent advance in the economic and financial
system of the country; for by establishing metallic conversion it gave
stability to the legal instrument of monetary transactions, and also
contributed to establish an enviable state of affairs during the years
1883 and 1884, which gave rise to the rosiest hopes for the future. But
by an irony of fate the very Government which had suppressed the double
standard found itself forced to re-establish it in January 1885. It
should be remarked that at this time Señor Romero was no longer Minister
of Finance.
The country being once more abandoned to the miserable system of
inconvertibility, the depreciation of paper began its downward progress,
recalling the too celebrated case of the _assignats_, a case one would
have thought impossible of recurrence in time of peace and among a people
that had suffered no catastrophe for many years.
In June 1885 the premium rose to 50 per cent.; in 1886, it was 39 per
cent.; in 1887, 35 per cent.; in July 1888 53 per cent., finally, in
1889, it proceeded by leaps and bounds; 50 per cent. in January, it was
53 per cent. a month later; in March it was 55 per cent., rising to 120
per cent. in September and October, and 130 per cent. in November and
December, despite the empirical measures of alleviation adopted, amid
violent disputes, by the Minister of Finance.
Thus the Republic entered on the year 1890; a year of grave political
and financial disaster. On the one hand was the revolutionary movement,
prepared by the connivance of part of the army and the navy; on the
other hand, the crushing depreciation of paper, ending in an absolute
catastrophe which affected both public and private fortunes.
In the month of April of that year the premium increased to 215 per
cent.; that is, 100 piastres in gold were equivalent to 315 in paper.
In July, when the revolution broke out, it stood at 217 per cent. In
November the Government which replaced that which had been attacked
by the insurgents prohibited the quotation of gold. Nevertheless, the
premium rose to 225 per cent, and remained at that figure until December.
We must remember that, in spite of the downfall of paper, the economic
vitality of the Republic had suffered no serious blow; no war had broken
out, no international complication had occurred; there was, in short,
no organic cause to which the premium could be attributed. Certainly,
the commercial balance was unfavourable; but that phenomenon has not the
significance generally attributed to it. The true causes of this crushing
state of affairs were exclusively of a financial and administrative
nature. It was the inevitable result of the manner in which paper money
had been issued to serve the needs of the Government, and to feed the
furnace of speculation. One cannot forget that at the end of 1886 the
total issue of paper amounted to $80,251,380; that in less than two years
it was nearly doubled, amounting to $147,503,911; while in 1890 the paper
currency reached the figure of $196,882,500. But this situation, painful
as it was, could not be suddenly changed for the better; other causes of
a like nature were about to intensify it. The new President, who came
into power after the revolutionary outbreak found himself forced, by
various circumstances, to increase the existing circulation of paper.
The new issues amounted to $150,000,000.
As was only to be expected, such an issue on the back of the existing
paper currency, which exceeded $196,000,000, could only produce a
disastrous fall in paper. Its depreciation touched the lowest point in
the history of the Argentine, or of any other country during the second
half of the nineteenth century; the blackboard of the Stock Exchange
showed an exchange value of 464 per cent. or a premium of 364 per cent.,
in the third week of October 1891. This was the record of monetary
depreciation.
After 1892 the monthly quotation of gold, in relation to paper,
oscillated between 359 and 290 in 1893; 433 and 307 in 1894; 377 and 311
in 1895; 352 and 266 in 1896; 317 and 274 in 1897.
We see from these figures that these conditions are abnormal,
extraordinary; and yet, owing to their long duration, they are almost
part of the normal life of the Republic. It is therefore a matter of
interest to study the causes of such phenomena, in order to decide
whether they are inherent in the period of transformation through which
the country is passing, in which case it would be idle to attempt any
reform at present, or whether they can be controlled or checked by the
employment of means counselled by science and confirmed by experience.
According to the judgment of certain persons who have devoted themselves
to the study of economic questions, the causes which, in the Republic,
produce the double standard, are of a permanent character, proper to the
period of formation through which the country is passing. It is even
said that so long as Argentina has not a capital of her own with which
to float herself in the full tide of affairs——such a capital as is the
result of years or centuries of prosperity——so long will she be a debtor
among the nations, and the system of the double currency must continue.
We ourselves are of opinion that the causes which have produced, and
now maintain the inconversion of the fiduciary currency, are of a very
different character to those implied by the above judgment; and that if
we consider the economic state of the country at the moment when the
double standard was established, we shall find that it was in no way
responsible for the phenomenon of depreciated currency. The true cause is
the necessities of the Government; determined either by factors beyond
the range of debate, such, for example, as the eventuality of a foreign
war, or by less justifiable reasons, such as deficits in the budget and
reckless issues of paper. In both cases the printing-presses of the
official banks have been set to work, in order to tide the Government
over a difficult passage, at the risk of vitiating the instrument of
national credit by the efflux of inconvertible paper.
Those interested should read the history of the first issues, exposed in
a masterly manner by Señor Augustin de Vedia, in his work on the National
Bank; they will see that the excessive issue of notes cannot be explained
or justified by the period of economic formation which the country has
passed through. We must search for other causes in order to explain this
long and unfortunate period of inconversion, which lasted, with a few
years’ respite; from 1820 down to 1905.
What, for example, were the reasons which determined the premium on
gold in 1885, under the first Presidency of General Roca? Was it, by
any chance, that any economic calamity fell upon the country? Were
the harvests lost? or was there a foreign war, or even one of those
revolutionary risings so common among the South American nations? Did the
germs of some epidemic invade the country, decimating the population by
disease and poverty? Was there any violent and ruinous fall in the market
prices of Argentine products?
Nothing of the kind befell. The Government itself, in the message in
which it solicited the ratification of the double standard, that “the
national production, the valuation and the degree of culture of the
soil, had consolidated the national credit.” The crops were abundant;
and their prices, in foreign markets, were more than fair. The Republic
was at peace, at home and abroad; thus realising one of the dreams of
the paternal administration which directed its destinies. As for the
public health, it suffered no perceptible eclipse in all the Argentine
Territory.
It has also been said that the commercial balances were unfavourable to
the Argentine: a country at once a debtor and a centre of immigration.
And it has been asserted, too, that the Republic suffered from a sudden
increase of growth, without having behind it any reserves of accumulated
capital.
The affirmation that the depreciation of the currency, and in consequence
the establishment of a double standard, arose from unfavourable
commercial balances, has no scientific basis and is not supported by
precise demonstration.
“None of the countries which have suffered the misfortune of a
depreciated currency have reached that condition purely on account
of adverse balances,” as a Spanish economist, Señor Edouardo Sans y
Escartin, has said with justice. All countries have suffered from this
evil, on account of monetary changes, and the Argentine is only the
latest example. France towards the end of the eighteenth century, England
from 1797 to 1821, Austria and Russia since the beginning of the last
century, the United States from 1862 to 1878, Italy since 1875, Paraguay
since 1870, and the Hispano-American Republics for the last twenty-five
years: all these countries have suffered from monetary perturbations,
some through the abuse of paper money or the excess of the fiduciary
circulation, others through the variations of the relation of gold to
silver. In none of these countries did the crisis take the form of the
consequence of unfavourable commercial balances.
We find, in fact, that it is not the case that economic causes, resulting
either from the formative period the country has traversed, or from its
lack of accumulated capital, have contributed and are still contributing
in the Argentine Republic to prolong the system of inconversion; the
causes are exclusively financial and administrative, as we have already
maintained.[109]
[Footnote 109: The famous Italian economist, Eteocle Lorini, maintained
in a book which he published in 1902 (_La Republica Argentina e i suoi
maggiori problemi di Economia e di Finanza_). that the Republic has
never possessed money, but only a simple legal tender or instrument of
exchange.]
Having glanced at the circumstances which have determined the state of
monetary inconversion which has afflicted the country ever since it
became a nation, we must now examine the remedies which the public
powers have suggested in the hope of emerging from this detestable state
of affairs.
Every presidency has declared its firm intention of redeeming or reducing
the paper currency in circulation; but none of them has obtained results
that we can really regard as final.
Of all the attempts to terminate the condition of inconvertibility,
to give stability to the currency, and to prepare, in a more or less
proximate future, for the establishment of a sane monetary system, the
most earnest and scientific, and that which had the happiest results, was
that which emanated from the proposal presented to Congress in August
1899 by the ex-Minister of Finance, Señor José-Maria Rosa, which has
since then become law: the present law of the conversion of the fiduciary
currency.
The scheme of reform of this eminent statesman was worked out on the
following basis:——
1. Immediately to fix the rate at which the future conversion would
be effected, in conformity with the actual and contemporary value
of the currency. The fixing of a definite rate was necessary
in order to consolidate the then existing state of affairs, to
suppress the premium, and to give transactions a positive basis,
without indefinitely retarding the possibility of conversion; and
also to prepare for the liquidation of old issues, and to deliver
the country to some extent from the gigantic burden of its issues.
2. To form a large metallic fund to guarantee this conversion and to
make it possible for money to become stable during this period.
3. To maintain a fixed standard by these two means:——
(_a_) The creation, in the _Caisse de Conversion_, of a
bureau operating as an automatic regulator, in conformity
with the tightness or slackness of money, and according
to the necessities of the market; thus making elastic the
paper currency, the circulation of which might increase
or decrease, on account of the quantity of gold given out
in exchange.
(_b_) The intervention of the Bank of the Nation in matters
of international exchanges.
It was on these lines that the Minister drew up, and Congress adopted, a
law which enacted that the nation should convert, during a fixed period,
at a convenient time, the whole fiduciary circulation into Argentine
gold coinage, at the rate of one paper piastre for 44 centavos of a gold
piastre. This same law ordered the formation of a Conversion Fund, with
resources which it enumerated; and finally it established in the _Caisse
de Conversion_ a bureau for the exchange of paper into gold and _vice
versa_ to all who might apply, at the rate of one paper piastre for .44
of a gold piastre.
Few laws have been so beneficial as this law of monetary conversion was
to the Argentine Republic. The present prosperous economic conditions of
the country are the work of this law; it constitutes the glory of Roca’s
Government, which gave it birth and enjoyed its first fruits.
Yet we must emphasise the fact that this law, so beneficial to the
public, was at the outset repudiated not only by the President, who, to
avoid subscribing to it, forced his Minister to send in his resignation,
but also by the principal organs of the press, at the head of which was
that important journal _La Nacion_, and again by the Professor of Finance
at the University——M. Terry——who was all for conversion on a sliding
scale; that is, for the worst method conceivable, as by maintaining the
condition of instability he would have adjourned the question instead of
solving it. But thanks to the rare energy and the intelligent propaganda
of Señor Rosa, the sole author of the law, effectually supported
by Senator Pellegrini and Señor Tornquist, this important step was
accomplished, despite all the obstacles which barred the way.
In a very short time this law, so strongly opposed before its birth,
produced marvellously beneficial effects upon the economic life of the
Republic. It gave stability to the currency; that is, it endowed the
Argentine with one of the greatest blessings a commercial and productive
nation can enjoy.
To be convinced of this fact it is enough to run the eye over the column
of metallic quotations on the Exchange, published in the “Statistical
Annual of the City of Buenos Ayres.”[110]
[Footnote 110: _Annuaire statistique de la Villa de Buenos Ayres._——The
transactions in metallic values effected on the Buenos Ayres Exchange in
1899 (before the passing of the law), amounted in value to £109,817,116,
or $1,234,579,370 paper, while in 1908 there were none. Any one wishing
to exchange gold for paper or paper for gold to-day, goes to the _Caisse
de Conversion_, where the exchange is effected without any charge.]
This law has killed speculation on exchange values, which before it was
passed had assumed scandalous proportions, and went far to developing
throughout the country that passion for gambling which is even now a
corroding cancer at the heart of the young Republic.[111]
[Footnote 111: As the _Annuaire statistique_ declares, in the course of
the year 1908 no less than £8,160,000 changed hands over the sale and
purchase of lottery tickets and betting on racehorses. This is an evil
that may grow into a national calamity if nothing is done to arrest it;
and we see with pleasure that the Government has stated its intention of
presenting to Congress the draft of a law prohibiting lotteries.]
This law also provided for the formation of a Conversion Fund, which
was a powerful factor——_si vis pacem para bellum_——in the pacific
solution of the old frontier dispute with Chili. This fund amounts
to-day to £5,100,000 deposited in the Bank of the Nation, and would,
without this far-sighted law, have been swallowed up in the whirlpool of
administrative expenses.
Lastly, the law of monetary conversion has been the salvation of
agriculture and stock-raising, the two chief sources of national wealth,
by preventing the too rapid change in the value of paper, which is
a result that deserves to be considered with attention. The law was
promulgated at a time when a large harvest was expected, and when, from
that very cause, the depreciation of paper violently increased, the value
falling from 278 in August 1898 to 206 in December of the same year. It
is certain that at this rate the depreciation would finally have touched
150, to the greater profit of the speculators.
What would have happened had the monetary situation altered so
rapidly? The Argentine agriculturalist or stock-raiser, having paid
all the expenses of production with gold at about 300 per cent., would
have been forced, by reason of the rapid depreciation of paper, to
sell his products at a price which would no longer compensate him
for his increased expenditure. This would inevitably have ruined the
producer——that is, the principal artisan of the national fortune. Far
from opening up new lands with his ploughshare, as hitherto had always
been the case, he would have abandoned the land already under cultivation.
We need not describe the disaster which would have overcome the country
under such conditions as these: the loss of credit both at home and
abroad. The stream of immigration would have been suspended; emigration,
on the contrary, would have increased, taking the form of a veritable
exodus, even of a flight; and each impoverished and disillusioned
emigrant, as he left the Argentine, would have proclaimed that the
country was ruined. As a result the Argentine would have been for years
partially depopulated, or at least deprived of the new recruits which
immigration brings in, and of whom it has such need in order to realise
the value of more virgin territory.
Worse still: once the harvest was sold, at prices which could no longer
be calculated on the basis of the cost, gold, now freed from all
restraint, like a balloon whose mooring is broken, would have resumed
its upward journey. The melancholy spectacle of 1890 and 1891 would
have been repeated; gold would have risen by leaps and bounds, in
contradictory and incalculable rushes, finally to reach the limits that
mean bankruptcy.[112]
[Footnote 112: We remember that gold, which on the 9th of August 1890
stood at 35 per cent. when a new Government came into power, had risen
to 425 per cent. by May 1891, and in October of the same year touched
464 per cent.; the highest premium ever known in the long history of the
double standard during the last half of the nineteenth century. In the
United States during the war of secession, the premium on gold rose to
286 per cent. only (on July the 4th 1864).]
Such are the disastrous results which would have ensued had not the
law of monetary conversion come just in time to restrain the rapid
depreciation of paper, and to give money the stability it must possess
if it is to be the faithful and precise instrument of commercial
transactions, the common measure of all exchanges. Such were the
beneficent results which followed shortly upon the operation of the
law; and we can only regret that it has not always been understood and
applied with sufficient force by those who were responsible for putting
it into practice. The Governments which have followed since then have not
always followed the ideal of economy and scrupulous administration which
should ensure the success of this important reform. None the less, the
Conversion Fund amounts to-day to £5,100,000.
According to the figures for October 1909 the monetary situation of the
country may be summed up as follows:——
The total of notes in circulation amounts to $686,291,704 paper,
equivalent to £60,393,670. The Conversion Fund of £5,100,000 in gold,
added to £34,752,058 on deposit in the _Caisse de Conversion_ and to the
£14,073,515 deposited in the various banks of the capital, forms a total
of £53,925,573. It follows from these eloquent figures that the fiduciary
circulation, notes, nickel, and copper, is guaranteed in Argentina by
an actual value of 65.9 per cent. of its total; the notes alone are
guaranteed by 89 per cent. of gold.
Unquiet spirits from time to time, including the enemies of monetary
reform, announce their opinion in the press that this law should be
modified. Quite lately the well-known journal _La Nacion_, which is
distinguished by the constancy and fervour with which it attacks this
beneficent measure, has opened its columns to an enquiry, in order to
obtain the opinion of the public, or at least of persons competent in
such matters. Happily common-sense triumphed; the law remains intact,
continuing to benefit the whole national economy.