Monetary Disorder in Buenos Aires Province, 1822-1881.

• Author: Ravier, Adrian O.

A stable monetary system continues to elude Argentina two centuries after its independence in 1816. Not surprisingly, some scholars have devoted considerable attention to the reasons behind Argentina's monetary instability (Agote 1887; de Vedia 1890; Hansen 1916; Pinero 1921; Casarino 1922; Pinedo 1942; Curcoresse 1967; Prebisch [1921] 1988; Cortes Conde 1989; Alemann 1990; della Paolera and Taylor 2001; Cachanosky 2012; Quesada [1901] 2012; Ortiz Batalla 2014). It may be argued that contemporary issues on Argentine monetary instability are like those issues present after its independence in the nineteenth century.

Unlike previous studies, rather than focusing on monetary problems at the national level, this paper focuses on the Buenos Aires Province between 1822 and 1881. This period runs from the founding of the first bank in 1822 to the adoption of a national currency in 1881. Buenos Aires Province is the largest and most politically significant province of Argentina. We build on the free-banking literature and argue that the root cause of monetary instability in Buenos Aires Province in the nineteenth century was the banks' monopoly powers (Selgin 1988; Dowd 1992; White [1984] 1995). Fiscal imbalances and banking regulations got in the way of the evolution of a genuine free-banking regime in the province. The reason for these monopoly powers is well known: the state granted monopoly rents to banks to finance province Treasury deficits and war expenditures (Smith [1936] 1990; Kindleberger [1984] 2006). Consistent with these studies, we conclude that the series of banking failures in Buenos Aires Province was due not to a shortage of precious metals but to inefficient regulation and burdensome Treasury deficits. This case study is consistent with the prevalence of fiscal needs over a sound monetary policy (Glasner 1989, 1997; Selgin and White 1999). The case of Buenos Aires Province is yet another historical example of how wars result in the degradation of monetary and banking institutions. It is important to note, however, that the province's banking history is not representative of what happened in the rest of the country (Gomez 1994; cf. Prebisch [1921] 1988).

We divide this paper into sections that historically match the presence of major banking institutions in Buenos Aires Province: (1) the Discount Bank (1822-26), (2) the National Bank (1826-36), (3) the Mint (1836-53), (4) the Bank and Mint of the Province of Buenos Aires (1853-72), and (5) the National Bank (1872-81).

The Discount Bank, 1822-1826

In 1822, the minister of finance of Buenos Aires Province, Manuel Jose Garcia, convened a meeting to present a proposal to create a bank. Governor Martin Rodriguez and Minister of Government Bernardino Rivadavia exerted considerable influence. They decided to create the Discount Bank (also referred to as the Bank of Buenos Aires). This institution, organized as a private company with limited liability, was the first incorporated company in Argentina.

The bank shareholders were a diverse group--landowners, military personnel, clergy, and professionals, among others. Shareholders were also varied in terms of nationalities, including English, Spanish, French, and German persons. English shareholders, familiar with the banking practices of their country, were well represented. It is plausible that they, influenced by the Bank of England's (BoE) experience, pressured the Buenos Aires Province government to grant a twenty-year monopoly to the Discount Bank. (1)

Nicolas Casarino (1922) notes that the first interim chairman of the board and three out of nine directors were British. Data from shareholders' meetings in 1825 (January 18) and 1826 (January 9) also show that British shareholders represented 54 percent of total votes. Right from the outset, British capital played a dominant role in Argentine banking.

Agustin de Vedia claims there were two formal arguments for creating the Discount Bank (1890, chap. 59). One was to finance the production of precious metals (needed to mint coins) and channel the influx of foreign capital attracted by trade expansion. However, Raul Prebisch argues that the real motivation was more political than as presented by de Vedia: the bank was established to assist the provincial Treasury in its "fiscal emergency" by facilitating low-cost loans ([1921] 1988, 125). (2)

The experience of the Discount Bank resembles that of the BoE. The initial capital of the BoE was composed solely of English sovereign debt. The BoE gave bullion to the English government in exchange for debt that the BoE could lend again. Also, the BoE was granted exclusive rights to issue banknotes. The provision of the initial capital in the case of the Discount Bank was somewhat different; the bank was founded with private contributions from English investors living in Argentina. The initial contribution to the bank's capital was supposed to be 1 million pesos fuertes (the symbol for pesos fuertes is $, which we subsequently use), divided into shares of $100 each, which were publicly subscribed. However, the shares were subscribed partially in specie and partly in banknotes from the bank. Also, the Discount Bank was granted a twenty-year monopoly right on the issuance of banknotes. The shortfall of initial capital soon translated into a shortage of working capital, however. The bank needed funds to maintain its day-to-day operations, so the board decided to issue 500 more shares at $100 e.ach. However, the new shares were paid with indefinitely renewed loans (Agote 1887, 90). The nominal capital of the Discount Bank went from $445,000 in 1823 to $1 million in 1824. Yet the bank's bullion reserves did not increase; the outstanding loans did (table 1).

For Prebisch, the first Argentine bank began its operations with too meager a capital base ([1921] 1988,126). The bank's financial situation was known but considered to be unimportant by its investors. Advocates of the bank strategy argued that the idea that such an institution needed to have reserves entirely composed of bullion was exquisitely beautiful but impractical (de Vedia 1890, 73). Credit expansion by the Discount Bank resulted in a significant interest gap: the bank would issue loans at a rate of 9 percent, whereas the nonbank rates ranged between 18 and 24 percent (Alemann 1990, 63). Also, recall that, according to Prebisch, the bank was founded with the political intention of offering low-rate loans to the provincial Treasury.

The bank's financial situation started to break down with the Brazilian War (also known as the Cisplatine War), which began in 1825 and ended in 1828. The conflict between the United Provinces of the River Plate (Argentina) and the Empire of Brazil was about taking control of today's Republic of Uruguay and the Brazilian state Rio Grande do Sul. In a similar fashion to what occurred in England under...