Monetary Policies and Gold Standard: A View from The Periphery (Chile, 1878–1931)

By 1887, Chile, one of the poorest colonies of the old Spanish empire, with no more than 5.4% of the Latin American population, accounted 13% of the total trade of the region. The foreign trade had become the most important economic activity and, thanks to the incomes from custom duties, the government could finance social and public services, while the private sector could obtain low interest rates. However, the success of the foreign trade also caused several problems for the Chilean economy. Like the most of the Latin American countries, Chile also had to confront price volatility, the outflow of gold and silver, insufficient capitals and inflation. Besides, when the international prices of the main exported goods decreased, the fiscal deficit was imminent. The most traditional solution to these difficulties was obtain loans from abroad. The gold standard was implemented in Chile, like in other countries like Russia, Japan or Argentina, in order to stabilize the economy and promote the inflow of capital from abroad. It was a demand of the industrial unions and the protectionist economists. After the failure of the first gold standard, between 1895 and 1898, Chile returned to the gold standard in 1925. The results were immediate. The growth of the inflation rate in the 1920s (30%) was significantly lower than in the previous decade (74%), while foreign investments rose from US$723 to US$1.103 millions. Nonetheless, problems remained. The external debt also increased and, due the amortization and the interests, the most of the gold went into foreign hands. The economy, in despite of the stability and the growth, became extremely dependent on international trade. Consequently, when the Great Depression began, Chile suffered the most dramatic recession of its history.