THE _CAISSE DE CONVERSION_
The principles on which the establishment of this institution is
based——The necessity of a rapid redemption of fiduciary money——
The imperfect success of this programme——New issues of notes——
New attributes of the _Caisse_ dating from 1899——The exchange
of paper for gold and _vice versa_——The development of this
system of exchange——The authority attaching to the _Caisse_.
Among the official institutions which are closely connected with the
issue and redemption of paper money, the _Caisse de Conversion_ demands
a special place, on account of the important part which it plays in
the financial life of the Republic. This establishment was created in
1890, at a moment particularly critical for the credit of the country,
when the terrible crisis occurred which ruined several banks and
resulted in a depreciation of the fiduciary currency which exceeded all
expectation. The Government which presided over the destinies of the
country understood that it was necessary, in order to ameliorate such a
situation, to put some means into practice which should ensure a more
gradual movement of paper, its reduction in no matter what form, and its
future convertibility within a short and definite period, as the message
declared which accompanied the draft of the law submitted to Congress.
In obedience to these excellent principles of financial and banking
policy, it proposed the creation of a Junta or a special Directorate,
“independent in its action, and uniting the necessary faculties for the
recovery, administration, and application of the elements that must be
confided to it for the effectual accomplishment of its important mission.”
An “important mission” it was indeed that was confided to the Junta by
law; for this body was to see the gradual conversion and redemption of
paper money, supervise the strict execution of all the laws relating to
paper money, and oversee all issues of the same.
With the object of effecting, sooner or later, the actual and effective
conversion of paper money, the law created a “Conversion Fund,”
composed of the metallic reserves of the guaranteed banks, the sums for
which these same banks would be debitors on account of the value of
stock bought as guarantees, the public funds issued to guarantee the
bank issues, and all the sums which, in virtue of other legislative
enactments, might be destined to the conversion of bank paper, and
especially those proceeding from economies made out of the general
budgets.
The Executive attached a special significance to this fund, proposing to
use it to great advantage in the future; if the succeeding Governments
had the wisdom to maintain the elements indispensable to the regular
circulation of the national currency.
These details prove that the fundamental idea at the bottom of the
creation of the _Caisse de Conversion_ was that of effecting, by its
help, and by utilising the resources with which it was endowed, a rapid
redemption of paper money. This intention, moreover, was solemnly
affirmed at home and abroad when the contract was signed with the
English bankers for the issue in 1891 of the loan known as the “Funding
Loan,” amounting to £15,000,000; in virtue of which loan the Government
undertook to withdraw from circulation, during each of the years 1891,
1892, and 1893, $15,000,000 in notes, or $45,000,000 in the three years.
Unhappily the Government’s good intentions had no practical issue; the
_Caisse de Conversion_, from the first moments of its existence, found it
impossible to fulfil its object.
So the proposal to withdraw $15,000,000 a year went no further than a
beautiful ideal; it never took definite shape as a reality. In 1891
$1,696,676 in paper were burned; they came from an additional customs
duty on certain imports. In 1892 $1,463,424, having the same origin, were
disposed of in the same way. Besides this a sum of $3,511,600, provided
by the payments made by the National Bank and the Bank of the Province
of Buenos Ayres on account of $35,116,000 lent them by the Government
in order to help them out of a greatly embarrassed condition, was also
burned. The balance-sheet of receipts and expenditures drawn up every
year by the _Comptabilité Générale_ records only $1,248,032 as burned
in 1891, and $3,586,255 in 1892, or $4,834,287 in two years; a very
different sum to the 30 millions which the Government had promised to
withdraw.
Thus the _Caisse de Conversion_, from which the Minister of Finance
had hoped so much, failed at its birth, and as an institution gave no
positive results. So it was not necessary, as the Minister of Finance,
Señor V. F. Lopez, pleasantly remarked, to await the appreciation of
future Governments.
But this is not all; instead of redeeming the promised quantities of
fiduciary money, the Government which was then directing the destinies
of the country——we must believe that it was compelled by circumstances,
which are so often more potent than the human will——the Government
actually found itself forced to increase the total of paper in
circulation by emitting, for various reasons, further issues of notes.
Dominated by circumstances, it issued in 1890 $35,116,000, in order to
legalise the excess of an issue delivered to the National Bank and the
Bank of the Province of Buenos Ayres. In the course of the same year it
created an issue of 60 millions more, in order to furnish the National
Bank with 25 millions, the National Mortgage Bank with 25 millions,
and the City of Buenos Ayres with 10 millions. In 1891 it issued 50
millions in order to found the Bank of the Argentine Nation, and finally
5 millions more for the Mortgage Bank. In short, urged by necessity, the
Government created $150,000,000 of paper in two years, which on the top
of a previous issue of $161,766,590 in paper was naturally followed by
disastrous results.
The Government which took charge of the administration in 1892 also
manifested, in its programme, its firm intention of increasing the value
of paper money by its gradual redemption; an operation which would,
of course, be the duty of the _Caisse de Conversion_. To this end it
included the necessary sums in the budget, and $865,426 were burned in
1893 and $8,000,394 in 1894. But the results obtained by this measure
were far from responding to the hopes which were founded upon it;
although the Government religiously and with much solemnity, burned on
the 15th of each month a determined sum of paper money——usually half a
million——the value of paper, far from rising, fell further and further
below that of gold.
The Government finally saw that its plan was useless; and hastened to
explain itself by the mouth of its Minister of Finance, who declared that
“the executive power recognises that the withdrawal of eight millions of
piastres per annum cannot fundamentally alter the price of our paper; but
what it does affirm is that this quantity will be sufficient, provided
the production of the country increases, provided that the exports exceed
the imports; that is to say, provided that the international balances are
in favour of the Republic.”
We may say in passing that these two desired factors were realised; but
not the expected advantage, for the Government again made the mistake of
issuing 15 millions of internal stock, bearing interest (£1,320,000),
while at the same time it extinguished another debt, also domestic, which
did not bear interest.
All these details prove in a conclusive fashion that the original and
organic functions of the _Caisse de Conversion_ were inverted from the
time of its creation; converting that institution into a factor of
depression in all that concerned the paper currency, instead of being the
instrument of increasing its value.
After this date the _Caisse_ operated as a secondary and harmless
department of the public Administration; leading an almost forgotten
existence, until the year 1899, when the law of monetary conversion was
passed, which entrusted it with two missions of great importance, which
were destined to exercise a beneficent influence upon the fiduciary
circulation, and therefore upon the economic life of the Republic.
One of these two missions had as its object the establishment of an
office for the exchange of paper into gold and _vice versa_, at the rate
of 2.2727 piastres in paper for 1 piastre in gold. The other consisted
in forming a Conversion Fund, to which more or less important resources
were assigned. This fund amounted in 1902 to £2,400,000 in gold, but at
a moment when an international complication was believed to be imminent
this sum was placed at the disposal of the Government by authorisation of
Congress.
The Government eventually returned £2,000,000 of this sum, and since
then the fund has constantly increased, amounting in 1907 to £5,100,000,
as we stated when speaking, in the passages relating to the issues of
paper money affected by the _Caisse de Conversion_, of the results of the
application of this new law.
The law to which we are referring was put into execution on the 9th
of December 1899. On that day the first transaction under the new law
was effected; the _Caisse_ received 100 piastres in gold, in exchange
for which it returned the equivalent in notes, in the proportion of 44
centavos of gold to a piastre note. The balance drawn on the 31st of
December showed the existence of £292.6 in gold. At this same date the
fiduciary currency in circulation amounted in all to $295,149,735.
Let us now look into the operations of the _Caisse de Conversion_ after
this date.
During the year 1900 $18,398,449 (£3,679,690) in gold was received; but
as this sum was eventually withdrawn the fiduciary circulation soon
reached its former figure.
In 1901 there was nothing done; that is, the _Caisse_ received no gold.
In 1902 scarcely anything was done; £4209 was received, and £3636 was
paid out, leaving a balance of £573. The operations for 1902 began in
October, during which month the _Caisse_ received £68, 12s.; it paid
out £67, 12s., so that £1 remained. In November the takings increased
to £1497, and the outgoings were £1466, leaving a balance of £31. In
December £2639 were taken and £2102 issued, leaving a balance of £537.
Only in 1903 did the operations of the _Caisse de Conversion_ amount to
anything. The two principal causes of this state of affairs were, firstly
the settlement of the frontier dispute with Chili, a question which had
caused serious alarm, and had resulted in enormous official expenses
during the few previous years; and secondly the size of the commercial
balances. Bearing this in mind, it is not surprising that the amount of
gold in the _Caisse de Conversion_, and, consequently the issues of
paper money, should have commenced to increase and have continued to do
so until they reached the proportions which they have since attained.
In 1903 £9,208,284 in gold was taken, and £1,576,625 paid out; leaving
£7,648,229. The busiest months were April, when £2,519,048 was taken, and
March, when the takings were £1,738,395. The largest outgoings were in
March and July, amounting respectively to £239,133 and £222,104.
In succeeding years the metallic reserve of the _Caisse de Conversion_
has continually increased, thanks to the favourable sense of the economic
balances of the nation’s trade, and the capital which has entered the
Republic, to be employed in the establishment of new industries, or the
creation of railways, tramways, etc.
At the time of writing the metallic reserve of the _Caisse de Conversion_
has lately increased to £34,752,058, which, added to the £5,100,000 of
the Conversion Fund, gives a total of £39,852,058. The proportion of
these reserves to the paper currency in circulation is to-day 65.9 per
cent.
According to the law the increase of the metallic balance in the _Caisse
de Conversion_ has inevitably caused, as a natural consequence, the
parallel increase of the issues of notes, nickel, and silver, of which
the amount in circulation increased to $688,177,998 on 31st October 1909,
or $393,028,267 more than on 31st December 1899, the year in which the
law of monetary conversion was voted, and in which the same circulation
amounted to $295,149,731.
The rapidity with which the emission of paper has increased has caused
certain journals, and especially those which have been prominent in
attacking the law of monetary conversion (whose beneficial effects they
were yet powerless to deny) to raise cries of alarm, thinking to see
in this increase a future economic peril, or the seeds of a dangerous
crisis, due to the inflation which, in their judgment, is produced by
such issues. But it is easy to prove that these alarms are not justified
from the moment when such issues are guaranteed by a corresponding
deposit of metallic currency in the _Caisse de Conversion_. Moreover,
a very little reflection will show that one cannot help admitting that
this gold, being the product of the ever-increasing economic balances
of the country, will affect the monetary situation equally if instead of
being in reserve in the _Caisse de Conversion_ it is to be found in the
strong-rooms of private banks.
As we may see from these data, the _Caisse de Conversion_ has completely
changed its _rôle_. It has abandoned its original function, which was
confided to it by the law; namely, the redemption of the fiduciary
currency and the re-establishment of the monetary equilibrium when
destroyed by excessive issues of paper. To-day this institution is merely
a purely mechanical department of the Administration, and its functions
might be fulfilled, at any rate theoretically, by other administrative
departments which are closely connected with it.