From Autonomy to Cooperation: The Transformation of Policy Objectives at the Central Bank of Chile in the 1930s

• External factors: Following the easing of the global crisis, commodity and food prices rose naturally—hitting countries with depreciating currencies especially hard. Research shows that commodity prices increased by 5–7% between 1935 and 1936, and by 9–15% between 1936 and 1937; key Chilean imports—petroleum (up 9%, then 17%) and wheat (up 10%, then flat)—rose sharply, while copper—the country’s main export—rose only 8% in 1936 and actually fell 6% in real terms the following year. • Internal factors: The central bank’s primary obstacle to achieving its inflation target was its statutory obligation to finance development institutions. Laws enacted during the era of fiscal dominance—designed to support such institutions—remained unrepealed; President Arturo Alessandri repurposed them as tools for his recovery program. Law No. 5185 of 1933 expanded credit quotas for these institutions, and between March 1936 and early 1937, their net credit balances doubled. The central bank attempted to manage both sets of factors, but in 1936 introduced measures only to control the money supply. Its Board persistently warned the government about rising prices and prudently reviewed discount and loan applications from development institutions under the ‘real bills’ principle. In its December 1936 monthly bulletin, the Board publicly called for higher interest rates and tighter credit for development institutions. Yet these steps proved insufficient—particularly in curbing commercial banks’ expansion of rediscounting. Between January and August 1937, M2 grew modestly by 3.9%, contrasting sharply with the stability of M2 around 850 million pesos during periods of price stability. Moreover, although inflation may have been exchange-rate-driven—due to strengthening export exchange rates and the free-market U.S. dollar—the central bank took no action to halt the peso’s depreciation. This passive stance stemmed from authorities’ view that international price increases represented an ‘equilibrating’ process, and that the peso inevitably faced pressure due to ‘the legacy of hyperinflation in 1931–1932’. By year-end 1936, annual inflation reached 12.3%. In 1937, policy shifted—a sign of significant monetary learning. With inflation still exceeding 10% and compounded by the external shock of the U.S. recession in 1937–1938, the central bank sought alternative approaches. The Board concluded that other monetary policy instruments were needed to achieve its inflation target. According to the 1937 semiannual report and the 1938 annual report, policy focus shifted toward the exchange rate—to prevent international price increases from feeding into domestic costs (i.e., cost-push inflation)—and declared that ‘maintaining a fixed parity was no longer an unconditionally accepted ideal’. In August 1937, the Chilean peso appreciated nominally by 4% against the U.S. dollar; the unofficial exchange rate followed suit. Evidence indicates this appreciation successfully halted a new round of price hikes—without requiring contraction of the money supply. Annual inflation improved from mid-1937 onward, returning to the favorable levels seen between 1933 and 1935. This outcome held even though Chile’s real export value fell 21% in 1938 relative to 1937, and real import prices rose 28%. Notably, the appreciation targeted the broader export-dollar exchange rate, whose pricing authority resided with the International Exchange Commission under the Ministry of Finance. Yet internal central bank documents reveal that the argument for peso appreciation originated with the Board itself—and that directors actively urged the government to adjust the export-dollar price. Supporting evidence includes the Board’s determination of the specific appreciation magnitude—from 26 to 25 pesos per dollar—based on the central bank’s reserve capacity to defend the new parity. Finance Minister Gustavo Ross began attending Board meetings as the government’s representative starting in late March; central bank archives record that several months before the appreciation, President Alessandri met with Central Bank Governor Subercaseaux, who warned the president of the necessity of peso appreciation.

Liu Yu: Why Has Chile’s Economy Stood Out in Latin America?

Take Argentina as an example: since its democratic transition in 1983, its economy has essentially ridden a roller coaster—plunging into major crises in 1989, 2001, 2014, and 2019. As a result, Argentina’s per capita GDP—which had already reached over $8,200 in 1998—stood at only about $10,000 in 2019, representing barely any growth over two decades. Meanwhile, Chile’s per capita GDP nearly tripled over the same period. Brazil started from roughly the same level as Chile and also experienced notable economic growth in the early 21st century—but after 2011, its economy entered a sustained downturn, with per capita GDP falling from over $13,000 to $8,800 by 2019. Venezuela’s economic nightmare needs no elaboration—and we will analyze it in greater depth in our next class. What distinguishes Chile from these countries? In short: although Chile abandoned Pinochet’s political authoritarianism, it inherited and upheld his economic liberalist legacy—whereas other countries, to varying degrees, became embroiled in what is termed the ‘Pink Tide’ revolution. What is the ‘Pink Tide’? As the name suggests, it refers to a moderate form of left-wing populism. In 1999, radical leftist Hugo Chávez came to power in Venezuela, launching Latin America’s ‘Pink Tide’. Thereafter, in the early 21st century, ‘pink politicians’ were elected across Argentina, Brazil, Bolivia, Ecuador, Nicaragua, and elsewhere. For a time, these countries enjoyed robust economic growth—fueled by the stimulative ‘adrenaline’ of fiscal expansion and rising global commodity prices. But as international markets cooled and national treasuries ran dry, economic crises emerged one after another. In Venezuela, the collapse of oil prices reduced the economy to ruins. In Brazil, the ‘Lula boom’ gave way to the worst economic crisis since democratization—marked by severe negative growth in 2015–2016. In Argentina, chronic fiscal deficits led to repeated sovereign debt defaults… Chile, however, avoided large-scale economic disaster. From 1990 to 2018, Chile maintained an average annual growth rate of approximately 4.7%—a strong performance for a country already at middle-income status. Even more impressively, Chile achieved substantial economic growth while simultaneously reducing inequality: its Gini coefficient fell from 0.57 in 1990 to 0.44 in 2017. Though still high, this decline compares favorably with the sharp rises in inequality observed in neighboring ‘pink’ countries that pursued bold left-wing economic policies. Chile’s economic success stems from its moderate liberal economic policies. After 1990—whether under Christian Democratic or Socialist Party governments—Chile consistently adhered to liberal economic thinking. This consistency is remarkable because both parties are nominally left- or center-left; not until after 2010 did a center-right party win the presidential election in Chile. Yet regardless of which party held office, Chile quietly maintained its economic continuity. In 2020, according to the Economic Freedom Index database, Chile ranked 14th globally—far ahead of all other Latin American countries.

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