CHAPTER IV
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.