From Autonomy to Cooperation. The Chilean Central Bank’s new targeting in the 1930s

Abstract

This article aims at analysing the development of the Central Bank of Chile during the Great Depression and the economic recovery process in the 1930s. It primarily examines the Bank’s relationship with the governments and the evolution of its policies. We have identified two main phenomena: The Bank’s autonomy reduction
and a change in its monetary policy strategy from the exchange rate to inflation. Throughout these years, the Bank went through different relationship schemes with the government. Due to the intensity of the Great Depression and the internal institutional disorder, the government subordinated the Bank during the most
dramatic years of the crisis (1931-1932), in what is known as a fiscal dominance scenario. Once the constitutional order returned, a cooperative relationship scheme established between the Bank and the Ministry of Finance under the Alessandri’s administration (1932-1938). Such cooperation was made possible mainly by the personalities who led both institutions, Guillermo Subercaseaux, President of the Central Bank, and Gustavo Ross Santa María, Minister of Finance. We propose and show that the understanding between both authorities allowed an economic recovery in a relatively short period taking into account the impact of the crisis.
This collaboration also gave the Bank an additional room for manoeuvre to recommend and implement a new monetary policy strategy focused on inflation and not on the exchange rate as was the norm under the gold standard system. From a methodological point of view, we have consulted the Bank’s Annual Reports, Monthly Bulletins and Board of Directors’ Minutes - the latter scarcely used by historiography. These primary sources
allowed us to analyse the policies adopted at a level of detail not previously covered by other research, especially concerning the views of the Board members. Similarly, the documentary corpus has allowed us to elaborate monthly time-series to reconstruct the most relevant banking and monetary variables in real values.