Mexico and its reconstruction/Chapter 7
CHAPTER VII
MEXICAN FINANCE: CURRENCY AND THE BANKS
As has been indicated, the debts of Mexico to its own citizens are not ones that involve the possibility of international complications. If Mexican property is destroyed, the only recourse for the injured is to the Mexican government. To what degree the governments of the reconstruction period will feel themselves bound, or find themselves able, to make restitution to Mexican citizens for property confiscated, or taken over in return for warrants issued by the various generals, can not be indicated. There is little reason to believe that any serious effort will be made for a general restitution. Much of the property was taken or destroyed under such confusing conditions that it would be impossible to determine what justice demands. In addition, the government will not pay because it cannot if it would. Heavy as the foreign obligations of Mexico are, the domestic ones are on their face still greater.
Much of the property loss suffered by the Mexican people occurred in connection with the various issues of paper money authorized by the passing governments and put in circulation under circumstances that made them practically the equivalent of forced loans. In fact far the greater part of the nominal value represented by them already has been finally repudiated and whatever loss occurred will never be repaid. All but a small part of this money, it is true, never circulated at its face value, if indeed any of it ever did, a fact that has disposed those who have come into power to refuse to redeem it at its face. It is beyond doubt, however, that the rates at which the issues that have been "redeemed," were paid for, were lower than those at which they were originally issued and that this loss has fallen on the people of Mexico.
The extravagant character of the paper money régime through which Mexico passed and from which she has recently made successful efforts to free herself can be judged best in the light of the currency system, which had been created previously.
Through a large part of Mexican history the coinage has been intimately connected with the taxing system. Precious metals were so important a part of the exports of the country that the expedient of taxing them was early resorted to. The system that came into use was to require all gold and silver extracted to be taken to the mints where it was made into coin at a charge of about five per cent. In addition, an export duty of five per cent on silver and one half per cent on gold was levied on the metal leaving the country. In 1872 export of silver in bars was allowed, providing it went through the mints and paid taxes almost as heavy as if coined. On November 1, 1882, all export duties on metals were removed. Under these conditions currency in Mexico approached more nearly to the character of merchandise than in most countries.
The Mexican eagle dollar coined in the early years of the Diaz régime weighed .869 of an ounce and was of .901 fineness. It sold abroad by weight usually at a slight discount as compared to bar silver though occasionally it had a premium for export to the Far East where it circulated as coin.[1]
By Presidential decree of March 25, 1905, and the monetary law of December 9, 1914, the Mexican monetary unit was declared to be the silver peso the value of which was fixed by the law at the equivalent of $.4985 in United States gold coin. This legislation placed Mexico among the countries using the gold standard.
Those in control of the government in the first years of the revolution avoided the use of paper money but a more radical policy was adopted to furnish funds to finance the revolution headed by Carranza. On April 26, 1913, to help pay the expenses of his army Carranza, by decree, authorized the issue of $5,000,000 Mexican in paper since known as the Monclova issue. These bills were to pass at face as legal tender. Those who refused to accept them faced jail sentences.
As often has been the case when governmental authorities have yielded to the temptation to issue fiat money, it became in this case impossible for them to summon the resolution not to do so again. It was an easy way to meet expenses. The bills issued were poorly printed and counterfeits soon appeared from all directions, including United States ports. Even the official issue was soon exhausted. Another decree of November 28, 1913, raised the total by $20,000,000 Mexican and was soon followed by others necessitated by the continuing needs of the army and the steady decline in the rate at which the bills were currently accepted. Meanwhile Villa, Zapata, and others were issuing rival currencies forced into circulation in the districts they controlled. Later Carranza was forced to retire to Vera Cruz and from that city he issued quantities of "Vera Cruz bills." The value of Carranza paper continued to fall, and counterfeits continued. It was evident that soon the "bilimbiques," as his paper was nicknamed, would be so low in value that they would not circulate at all.
Under these circumstances a decree was issued July 21, 1919, alleging that counterfeits had destroyed the confidence of the people in the paper issued and authorizing another issue of "infalsificable" notes, which were to retire all Carranza paper previously authorized. The issue was of $500,000,000 Mexican and was to be backed by metallic reserves which never were created. These bills were printed in New York and, unlike their predecessors, were well made. Previous issues of the Carranza government, not counterfeits, were to be redeemed at a set rate until June 30, 1916. All paper currencies, except the new issue, were then declared no longer legal tender.
All told there had been some 200 issues of various origins current in the republic, most of which had rapidly declined in value after their appearance—as the "infalsificables" now proceeded to do.
The total paper currency "legal" and "counterfeit" put out in 1913-16 is estimated to have had a face value of over $2,000,000,000 Mexican. The Carranza issues alone totaled about $1,250,000,000 as follows: [2]
| Monclava | $ | 5,000,000 |
| Ejercito Constitucionalista | 25,000,000 | |
| Gobierno Provisional (Mexico City) | 42,625,000 | |
| Vera Cruz (Provisional Government) | 599,329,321 | |
| Infalsificable | 599,329,321 |
The record of the effects of the paper money issues upon the economic life of the nation reads like pages from the Arabian Nights, As long as the money, issued in large quantities, had any appreciable value, those who could command gold and who were in a position to profit by a rapidly falling exchange were able to build up fortunes in a way little short of fantastic.
Wages remained nominally at their former standard for a time and then adjusted themselves but slowly to the new money values. Large debts could be paid off with money the current value of which in gold was as low as five per cent of its face. When the government took over the banks, it found itself caught between its own decree that its paper must be accepted for payment of all obligations and the fact that the loans and mortgages of which it had taken charge could be paid off in the same money.
Real estate purchases from sympathizers with the old régime or persons despairing of the reëstablishment of order were made on the most remarkable of terms. The property might be heavily mortgaged to a neighboring bank, but the owner might at the same time have an equity representing a considerable capital. Nevertheless, in the face of the revolutionary storm, his first impulse was to save what he could and make his way out of the country to safety. He would sell his property at its former value accepting payment in depreciated paper at its face, pay off his mortgage to the bank in the same paper, and leave the country.
The result of such operations was peculiar, the adventurous buyer got the property for perhaps a twentieth of its real gold value, yet he paid a fair price in the money that the government was forcing the people to accept. The seller was equally well satisfied for he paid off his debt to the mortgagee under terms that the government itself upheld and he saved at least a little from ruin. The government, which had brought on these conditions and which through taking over the banks was under obligation to receive its own depreciated currency as the measure of the non-metallic assets, into possession of which it came by that act, was the only party to the transactions which might be disappointed. In the background, for the moment at least, were the former stockholders of the banks who saw their assets vanishing with only a hope that they might be reimbursed for their loss at some distant time.
The period of wildest financial inflation fell between October, 1914, and October, 1916. On the whole the course of all the paper issues was steadily downward. By the latter part of 1915 Vera Cruz bills, for example. were worth about one per cent of their face. When the "infalsificable" came out in April, 1916, it was accepted at a gold value of about 20 cents Mexican. The government forced its acceptance by decree. For a time the old Vera Cruz issue was exchanged against the new money at ten of the old for one of the new. Then even this sort of "redemption" ceased. The "infalsificables" began to depreciate alarmingly. Eight months after their issue they had fallen to 80 to one as compared to gold and at the end of 1916 they were little better than Vera Cruz bills.
Their subsequent history is brief. They were never formally repudiated by the Carranza government. When it had been decided that the "infalsificables" could no longer be relied upon as the regular currency, it was arranged to demand that all customs dues be paid in gold plus an equal amount in "infalsificables." In this way the issue was to be "redeemed." At first the requirement was little more than formal, for the bills were practically valueless. By July 10, 1919, $397,119,298 Mexican were reported to have been retired and by October 18, 1919, their value had risen to $.0765 in Mexican metallic currency.[3] A summary of the gold debt issued by Minister Cabrera published in 1920 assigns an item of $10,125,000 Mexican for the redemption of Vera Cruz and "infalsificable" bills.[4] The Carranza government had meanwhile decided that the time for reliance on paper currency had passed and a decree issued that all payments should thereafter be made in coin.
This third attempt at regulating the currency system was inaugurated in December, 1916. It had a success far beyond what might have been expected and certainly far beyond that which would have attended it had not conditions outside the republic become abnormal and such as to help the Carranza government in its new experiment. The World War was now in its most critical period. Prices were high and there was an unprecedented export demand for all articles that the much-tried country was able to produce. These conditions brought to Mexico the unusual circumstance of a favorable balance of trade. During previous years a large part of the gold coinage had been exported, and with the coming of the paper money era silver disappeared or fled the country. Even the smaller metallic coins tended to be withdrawn at one time and had to be replaced by little slips of stamped cardboard.
Now, however, with the favorable balance of trade, gold was flowing back into the country, silver was rising in price and silver continued, as it had always been, one of the things produced in large quantities. Between December, 1916, and July, 1918, the coinage of money within the country reached the unprecedented total of $93,900,000, from which coinage, it may be remarked in passing, the government had profited through the stamp tax, assay charges, and other levies to the amount of $6,000,000. This coinage was not only silver. Gold produced in the country which the government could coin, it would not allow to be exported. It had to be sent to the mint. Gold bearing ore could be exported only if an equivalent value in gold was returned to Mexico. Silver could be exported only if an equivalent of 25 per cent was returned in gold. Evidently events had turned in such a way that the creation of a metallic basis for the currency could be accomplished much more easily and quickly than would have been the case in normal times. By June, 1918, there were reported to be 250,000,000 silver pesos in circulation in the republic.
The next development was the monetary decree of November 13, 1918, induced by the continued rise in the value of silver. The old pesos were withdrawn and a new series issued about three-fourths the size of the old ones, weighing 18½ grams of which 14½ were pure silver. New subsidiary coins were also issued. The gold basis for the currency was not disturbed. In the process of the change from one basis to the other large amounts of the coins of the old issue were melted down and sold as silver by those who had hoarded them. The transfer from the old to the new currency does not seem to have involved serious difficulties to local commerce.
A review of the financial problems that confront the republic must include at least a brief mention of the more recent banking developments.[5] Before the revolution the banking system of Mexico was based on the law of 1897, which divided financial institutions into three classes: (1) banks of issue; (2) mortgage banks, which made loans on urban and rural properties and issued bonds secured by a similar guarantee; and (3) banks of promotion to encourage mining, agriculture, and industry. Under this law there were established, between 1897 and 1913, 32 banks of issue of which 20 were in existence in the latter year with assets amounting to $425,500,000. Mortgage banks also flourished. Four had been established by 1913 with assets then totaling $43,762,000. Banks of promotion had been created to the number of six which in 1913 had assets of $83,000,000.
In addition to these institutions, operating under the law of 1897, there were a loan bank for promoting agricultural and irrigation enterprises, six branches of foreign banks, a number of private banks, and a national pawn shop, which had some of the characteristics of a bank.
During the revolution this financial structure was torn down. The assets of $600,000,000 were wiped out, its reserves taken over, and the institutions finally declared insolvent. Since 1914 the country has been practically without banks as that term was used in the law of 1897. By an order of September 15, 1916, the government closed all the regular banks, A few private institutions have since been in operation but their activities have been confined practically to purchase of foreign exchange and minor commercial credit transactions.
What is to take the place of the former Mexican banking system is not yet clear. The Congress granted to the President power to establish a single bank of issue by decree. In September, 1918, he reported a bill to Congress and stated that he had not acted on the authority before because of the uncertainty of the money market. The measure proposed provided for a single bank of issue similar in name to those under the law of 1897 but with more restricted powers. There were also petroleum banks, for the encouragement of the oil industry and banks of deposit. Branches of foreign banks were to be required to come under the law within six months or cease operations. The foreign banks, their capital and their employees were to be considered Mexican for all purposes. Appeal to the home country could not be taken on their behalf. The program was one that reflected the general policy of "nationalization" supported by the government.[6] No important advance in banking legislation has as yet been made by the revolutionary governments.
- ↑ Reports from Her Majesty's Diplomatic and Consular Officers Abroad, Commercial No. 36 (1883), . . . Part VII, . . . Report by Lionel E. G. Cardan on the trade and commerce of Mexico, gives a good description of the conditions in the early eighties of the last century.
- ↑ These figures and the facts cited above concerning paper money issues are taken from W. F. McCaleb, The Public Finances of Mexico, New York, 1921, pp. 223-39.
- ↑ Commerce Reports, November 26, 1919.
- ↑ El Heraldo de México, March 26, 1 920, quoted by W. F. Mc-Caleb, op. cit., p. 252. The Presidential address of C. Adolfo de la Huerta published in the Diario Oficial, September 2, 1920, states that the "infalsificables" then outstanding totaled $106,787,862 Mexican.
- ↑ A detailed discussion of Mexican banking is found in W. F. McCaleb, Present and Past Banking in Mexico, New York, 1921, passim.
- ↑ A review of Mexican banking from which the above facts are chiefly taken and which gives a detailed analysis of the proposed law is found in Commerce Reports, February 1, 1919, "The New Banking Law of the Republic of Mexico," by Edward F. Feely. See also on currency issues and banking Investigation of Mexican Affairs, Hearing Before a Sub-committee of the Committee on Foreign Relations, United States Senate, 66th Congress, 1st Session, pursuant to S. Res. 106, Washington, 1919, part 5.