Front Cover
 Half Title
 Map of Central America
 Title Page
 Table of Contents
 Central America, general surve...
 Part I. Guatemala
 Part II. Salvador
 Part III. Honduras
 Part IV. Nicaragua
 Part V. Costa Rica
 Appendix A. Monetary units of Central...
 Appendix B. Foreign commerce
 Appendix C. Revenues and expen...
 Appendix D. National indebtedness,...
 Appendix E. Monetary law of Nicaragua,...
 Appendix F. Honduras, translation...
 Appendix G. Value of the silver...

Title: Central American currency and finance
Full Citation
Permanent Link: http://ufdc.ufl.edu/UF00078290/00001
 Material Information
Title: Central American currency and finance
Physical Description: xviii, 258 p. : fold. front. (map) diagrs. ; 22 cm.
Language: English
Creator: Young, John Parke, 1895-
Publisher: Princeton university press
Place of Publication: Princeton
Publication Date: 1925
Subject: Finance -- Central America   ( lcsh )
Currency question -- Central America   ( lcsh )
Economic conditions -- Central America   ( lcsh )
Genre: non-fiction   ( marcgt )
Bibliography: Bibliography: p. 249-254.
Statement of Responsibility: with an introduction by E. W. Kemmerer by John Parke Young.
 Record Information
Bibliographic ID: UF00078290
Volume ID: VID00001
Source Institution: University of Florida
Rights Management: All rights reserved by the source institution and holding location.
Resource Identifier: aleph - 000619112
oclc - 22487292
notis - ADE8424

Table of Contents
    Front Cover
        Front Cover 1
        Front Cover 2
    Half Title
        Half Title 1
        Half Title 2
    Map of Central America
        Page i
    Title Page
        Page ii
        Page iii
        Page iv
        Page v
        Page vi
        Page vii
        Page viii
    Table of Contents
        Page ix
        Page x
        Page xi
        Page xii
        Page xiii
        Page xiv
        Page xv
        Page xvi
        Page xvii
        Page xviii
    Central America, general survey
        Page 1
        Page 2
        Page 3
        Page 4
        Page 5
        Page 6
        Page 7
        Page 8
        Page 9
        Page 10
    Part I. Guatemala
        Page 11
        Early monetary history
            Page 11
            Page 12
            Page 13
            Page 14
            Page 15
            Page 16
            Page 17
            Page 18
            Page 19
            Page 20
            Page 21
            Page 22
            Page 23
            Page 24
        Paper money
            Page 25
            Page 26
            Page 27
            Page 28
            Page 29
            Page 30
            Page 31
            Page 32
            Page 33
            Page 34
        Period of depreciation
            Page 35
            Page 36
            Page 37
            Page 38
            Page 39
            Page 40
            Page 41
            Page 42
            Page 43
            Page 44
            Page 45
            Page 46
            Page 47
            Page 48
            Page 49
            Page 50
        Currency reform
            Page 51
            Page 52
            Page 53
            Page 54
            Page 55
            Page 56
            Page 57
            Page 58
            Page 59
            Page 60
            Page 61
            Page 62
    Part II. Salvador
        Page 63
        Monetary history prior to 1914
            Page 63
            Page 64
            Page 65
            Page 66
            Page 67
            Page 68
            Page 69
        Gold standard established
            Page 70
            Page 71
            Page 72
            Page 73
            Page 74
            Page 75
            Page 76
            Page 77
            Page 78
            Page 79
            Page 80
        Salvador on the gold standard
            Page 81
            Page 82
            Page 83
            Page 84
            Page 85
            Page 86
            Page 87
            Page 88
            Page 89
            Page 90
    Part III. Honduras
        Page 91
        Honduras on the silver standard
            Page 91
            Page 92
            Page 93
            Page 94
            Page 95
            Page 96
            Page 97
            Page 98
            Page 99
            Page 100
            Page 101
            Page 102
        Honduras on the gold standard
            Page 103
            Page 104
            Page 105
            Page 106
            Page 107
            Page 108
            Page 109
            Page 110
        Return to circulation of silver money
            Page 111
            Page 112
            Page 113
            Page 114
            Page 115
            Page 116
            Page 117
            Page 118
    Part IV. Nicaragua
        Page 119
        Monetary history prior to 1911
            Page 119
            Page 120
            Page 121
            Page 122
            Page 123
            Page 124
            Page 125
            Page 126
            Page 127
            Page 128
            Page 129
            Page 130
        Fall of Zelaya; American intervention and financial assistance
            Page 131
            Page 132
            Page 133
            Page 134
            Page 135
            Page 136
            Page 137
            Page 138
            Page 139
            Page 140
            Page 141
            Page 142
            Page 143
            Page 144
        Currency reform
            Page 145
            Page 146
            Page 147
            Page 148
            Page 149
            Page 150
            Page 151
            Page 152
            Page 153
            Page 154
            Page 155
            Page 156
            Page 157
            Page 158
            Page 159
            Page 160
            Page 161
            Page 162
            Page 163
            Page 164
            Page 165
            Page 166
            Page 167
            Page 168
        Nicaragua under the new regime
            Page 169
            Page 170
            Page 171
            Page 172
            Page 173
            Page 174
            Page 175
            Page 176
            Page 177
            Page 178
            Page 179
            Page 180
            Page 181
            Page 182
            Page 183
            Page 184
            Page 185
            Page 186
            Page 187
            Page 188
    Part V. Costa Rica
        Page 189
        Monetary history prior to 1914
            Page 189
            Page 190
            Page 191
            Page 192
            Page 193
            Page 194
            Page 195
            Page 196
            Page 197
            Page 198
            Page 199
        Currency system and the war
            Page 200
            Page 201
            Page 202
            Page 203
            Page 204
            Page 205
            Page 206
            Page 207
            Page 208
            Page 209
            Page 210
            Page 211
            Page 212
            Page 213
            Page 214
            Page 215
            Page 216
            Page 217
        Foreign trade and exchange rates
            Page 218
            Page 219
            Page 220
            Page 221
            Page 222
            Page 223
            Page 224
            Page 225
            Page 226
            Page 227
            Page 228
        Problem of reform
            Page 229
            Page 230
            Page 231
            Page 232
            Page 233
            Page 234
    Appendix A. Monetary units of Central America
        Page 235
    Appendix B. Foreign commerce
        Page 236
    Appendix C. Revenues and expenditures
        Page 237
    Appendix D. National indebtedness, January1, 1923
        Page 238
    Appendix E. Monetary law of Nicaragua, March 20, 1912
        Page 239
        Page 240
        Page 241
        Page 242
    Appendix F. Honduras, translation of project for monetary reform
        Page 243
        Page 244
        Page 245
        Page 246
    Appendix G. Value of the silver in the peso 25 grams .900 fine at different prices for silver
        Page 247
        Page 248
        Page 249
        Page 250
        Page 251
        Page 252
        Page 253
        Page 254
        Page 255
        Page 256
        Page 257
        Page 258
Full Text

Central American


and Finance



London: Humphrey Milford
Oxford University Press


0 hi Iw !l 301
Submarine Cables .
Size of type iadicates relative
importance of places


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" Bank"


Central American Currency

and Finance

With an Introduction by
E. W. Kemmerer


Parts III and V constitute a dissertation presented to the Faculty of Prince-
ton University in partial fulfilment of the requirements for the degree of
Doctor of Philosophy, October 19zz.


Central American Currency

and Finance

With an Introduction by
E. W. Kemmerer


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332. 49 72 ?



Copyright, 1925, By Princeton University Press

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T HIS book contains an account of the currency sys-
tems and recent financial developments in Central
America. It does not pretend to cover the entire realm of
finance, including such things as taxation and other phases
of public finance, but deals especially with currency mat-
ters, foreign trade, exchange rates, and the financial rela-
tions between the United States and these countries.
T'he material for the book was gathered during several
months' stay in Central America, during which time the
capitals and important towns of all the countries were
visited, and also from various sources in the United States.
Obstacles in the way of obtaining reliable information
were many. Records kept are meager and the material is
often not in systematic or readily available form. Official
publications can not be relied upon and statistics are fre-
quently given with insufficient explanation at to what they
represent. Mucyiy.f *tke infarmgtiq'n nyas secured through
personal ihteriews, but different versiMs, of an event or
situation are often very inconsistent.
C oItms and fina:;, il rac!ti- s Central America dif-
fer'Yo greatly from those of the United States-that it is
difficult for Americans to appreciate the problems before
these countries. Corrupt administrations and numerous
revolutions have characterized Central America during the
last hundred years so that the progress and development
of the countries have been checked. T'he credit of Central

American Governments has all but been destroyed through
default in the payment of debts, debts legally valid but
which in some cases were contracted as a result of conniv-
ance between officials and foreign promoters so that the
funds were dissipated before the people of Central Amer-
ica received much benefit.
Nevertheless, Central American countries are rich in
resources, and in natural features and in other ways are
attractive. If stability of Government can be established
these countries will assume a position of greater import-
ance than that which they now have. Also, if suspicions in
Central America as to imperialistic intentions on the part
of the United States can be allayed, cooperation and the
rapid development of the countries may be expected to
follow. It is hoped that this book will contribute to a bet-
ter understanding of the financial problems before Cen-
tral America.
Sincere thanks are due the many officials, business men,
bankers and other friends jj the United States and in Cen-
tral America who had'"ss dlfe zi tie:,~Ipration of this
book. The aut i spj eciially indebted td Lfit Frank-
lin, Amerifa2. cbnsul in San Salvador and td'F'do S.
Fonseca,.EL4ctor Ge'h'aZ .iflJVa cN iin Salvad ;.to
Julio Santayoa, Sdenz Federico de I'ejada, and Juan Ma-
ria de Ledn, of Guatemala; to Fernando Sempg, Manager
of the Banco Atldntida in legucigalpa; and to Luis Suazo,
Director General de Rentas in Honduras; to Clifford D.
Ham, Collector of Customs in Nicaragua, and to Roscoe
R. Hill, American High Commissioner in Nicaragua; to

John M. Keith, and Juan Francisco Echeverria of Costa
In the United States special thanks are due Earle Bailie
of J. and W. Seligman and Company, New York, R. F.
Loree, President of the Bank of Central and South Amer-
ica, and Judge Otto Schoenrich of Curtis, Mallet Prevost
and Colt. Grateful acknowledgement is made to Dr. Dana
G. Munro, Assistant Chief of the Latin American Divi-
sion in the Department of State, for many helpful sug-
gestions and criticisms, and to the author's former col-
leagues at Princeton, especially to Professor E. W. Kem-
merer, the author's former teacher, who has read care-
fully the entire manuscript and has rendered assistance in
many ways during the course of the work. Finally, the
author is greatly indebted to his brother Dr. Arthur N.
Toung, Economic Advisor of the Department of State
and formerly Financial Advisor to the Government of
Honduras, who has been of continual assistance in numer-
ous ways since the book was first undertaken. I'he author,
of course, accepts entire responsibility for all statements
contained in this book.
Washington, D.C.
September, 1924



Chapter I


Chapter II

Chapter III

Chapter IV

Chapter V


Chapter VI

Chapter VII

Chapter VIII


Chapter IX

Chapter X


Chapter XI


Chapter XII

Chapter XIII

Chapter XIV


Chapter XV
3. SUMMARY 182


Chapter XVI

Chapter XVII
1. CRISIS OF 1914 200

Chapter XVIII
3. DEPRESSION OF 1920-1921 227

Chapter XIX

Appendix A

Appendix B

Appendix C

Appendix D

Appendix E

Appendix F

Appendix G
Bibliography 249
Index 255


ESPITE the frequent claims to the contrary that have been
made by popular writers as a result of the world's monetary
experiences since 1914, monetary science, like any other true science,
is a body of fundamental natural laws. These laws being psycho-
logical and social and finding their expression in the activities of
man-nature's most complex product-are more complicated in
their inter-relationship than are the laws of the so-called natural
sciences, and therefore more difficult to disentangle and understand.
None the less, in fundamental character the laws of monetary
science are no less natural and no less immutable than are the
laws of physics or biology. Furthermore, they are fundamentally
the same in their applications to all races of people and for all
stages of civilization.
Because of their great complexities and of their intimate rela-
tionship to human welfare, monetary phenomena do not subject
themselves to study by the laboratory method, according to which
phenomena under investigation can be more or less isolated, and
can be manipulated to suit the purposes of the investigator. If
the student of monetary problems could only follow the practice of
the chemist and isolate his phenomena, reduce them to simple
terms, and then manipulate them to suit the purposes of his in-
vestigation, we could make much more rapid progress in our un-
derstanding of the laws of money and credit.
One of the nearest approaches that can be made by students of
monetary science to the advantages of the laboratory method of
study is to be found in the study of currency reforms in small
countries whose economic life is simple. For the purpose of the in-
vestigator, it is particularly helpful if the currency reforms being

studied in such countries are being pushed through rapidly, so that
the forces at work and their results stand out plainly. Herein lies
one of the principal services rendered by the present book. Central
American republics are all small. Their combined area is only
about two thirds that of the State of Texas, and their total popula-
tion is only about five million persons. Their economic life is
simple. Each of the five Central American republics underwent a
number of monetary reforms during the time covered by Dr.
Young's study; but the period stressed by the book is the war and
post-war period, when the monetary system of each of the repub-
lics was greatly disturbed by powerful outside economic forces
and when, as a consequence, the movements that took place were
writ large. The ten year period, 1914-1923, in Central America was
therefore particularly favorable for the study of the operations of
fundamental monetary laws under simple conditions.
Furthermore, the monetary experience of the different countries
studied were widely different. In Guatemala, for example, we see
a silver standard country degenerating into a paper money
standard, in which the paper is issued almost entirely by a group of
commercial banks, and in which the monetary unit depreciates con-
tinually over a period of years until it reaches a value equal to
only about two per cent of its original gold value. In Salvador we
find since the outbreak of the World War a movement from the
silver standard to a paper money standard and thence to a gold
standard, accompanied by a skillful exchange of the country's old
silver in the world's market at the time when high war-time prices
for silver prevailed. In Honduras we see an interesting and illum-
inating experience with a dual currency-a silver standard and a
gold standard-in operation at one and the same time within the
limits of a country having an area of only about that of the State
of Pennsylvania. Nicaragua exhibits some useful lessons in the

operation of Gresham's Law. Here, for example, we find one kind
of inconvertible paper money driving out of circulation not only
metallic money but other kinds of inconvertible money in certain
parts of the country, while in other parts silver coins continue to
circulate, and successfully resist the onslaughts of the cheaper
paper money. We find in recent years a gold exchange standard
built up under American influences and successfully functioning,
then suspended under war pressure, and now with difficulty work-
ing its way back towards normal. Here also we find an example
of a deliberate reduction of the monetary supply with the purpose
and result of greatly increasing the gold value of the monetary
unit until a predetermined value is attained. Costa Rica adopted
the gold standard between 1896 and 19oo by a unique method of
issuing gold certificates in return for deposits of gold, but making
these certificates redeemable at first only in silver and later, after
sufficient gold had been accumulated, of making them redeemable
in gold. Here likewise are found some useful lessons in the working
of Gresham's Law.
Dr. Young's book is not only valuable because of the light it
throws upon some of the natural laws of money. It is also valuable
because it provides for the foreign business man, investor and
traveller who may be interested in Central America, useful descrip-
tions-heretofore unavailable-of the present currency and bank-
ing systems of these countries. Central America is rich in resources
of kinds that the world is demanding in increasing quantities-
coffee, tropical fruits, cattle and timber. Her five republics are
located very near to the United States. Her trade is predominantly
with North America and that trade is increasing. To most Amer-
icans the Central American republics are practically unknown
countries, and this is particularly true of Central American fi-
nances. Dr. Young's book offers an interestingly written and

thoroughly scientific account of the monetary experiences of these
countries during recent times.
Princeton New Jersey
May 29, 1924

Chapter I


T HE five countries of Central America, Guatemala, Salvador,
Honduras, Nicaragua and Costa Rica, secured their inde-
pendence from Spain in 1821, and for a short time after this date
were united as a single state. Almost from the first, however, the
new state was disturbed by political unrest, so that several revolu-
tions resulted, and the federation lasted only a few years. The
local governments came to disregard the central government and
the union gradually fell to pieces after a few years of turbulent
From that time to the present the countries have existed as in-
dependent republics, although repeated efforts have been made to
reestablish the federal union. The political groups in power in the
different republics have been unwilling to relinquish their authori-
ty, and the five republics have had separate, although not entirely
dissimilar histories. The Republic of Panama is geographically
a part of Central America, but until recently it has belonged to
Colombia and its history is more closely related to that of South
America than to that of Central America.
Although the governments of Central America are nominally re-
publican in form, in actuality they have usually been little more
than military dictatorships. Elections are held but they are usually
only a formality and controlled by the administration. Genuinely
free elections have been very rare. Changes in administration ordi-
narily are accomplished by revolution, consequently the govern-
ment in power must continually be on its guard against conspiring
opponents. The promise of a lucrative job at home or abroad at-

tracts individuals to a revolutionary movement that appears to
have a chance of success. The government in office must be generous
to its friends and be careful not to create too many enemies if it
desires to remain in power. This fact is often a handicap to a well-
meaning and honest president, and prevents the adoption of needed
reforms or the bolstering up of a bankrupt treasury.
The political history of Central America is chiefly an account
of one revolution after another; and of the efforts of the different
groups to place themselves in power, or of the ruling party to put
its friends in power in a neighboring republic. While revolutions
are frequent, the majority of the people take little active part in
the disturbances. Contrary to the general opinion in the United
States the bulk of the Central American people are of a peaceful
disposition and desire only to be left alone to follow their pursuits
without interference from marauding revolutionary armies, which
take whatever provisions and live stock the peasants may have in
their possession.
The majority of the people are unable to read or write and take
little interest in governmental affairs. Thus the restraining in-
fluence of public opinion has little force, so that official corruption
has become a commonplace and is carried on more or less openly.
Conditions are worse in this respect in some of the countries than
in other countries. Similarly as regards such matters as sanitation,
education, or revolutionary disturbances the countries are not all
alike. Costa Rica has had a more tranquil existence and in many
ways is more advanced than some of the other countries. Much of
that which is said above does not apply in the case of Costa Rica.
Geographically and climatically Central America offers a va-
riety of conditions. On the Pacific side of the country is a range of
mountains which slope off gradually toward the lowlands along
the Caribbean Sea. In the low territory the tropical heat is oppres-

sive but at the higher altitudes the heat is moderated and the cli-
mate is favorable to health and to agriculture. Most of the people
live at the higher altitudes in the Pacific half of the country. In
the low land along the Caribbean Sea bananas thrive, while on the
higher plateaus coffee is the chief crop of commerce. The popula-
tion of the five countries in 1923 was approximately as follows:
Costa Rica 500,000 Nicaragua 650,000
Guatemala 2,180,ooo Salvador 1,5oo,ooo
Honduras 640,000
The people of Central America are largely of Indian descent;
they are either pure blooded Indians or have an admixture of Span-
ish blood. There is also a certain amount of negro blood in Central
America, especially along the Caribbean coast. In Costa Rica Span-
ish blood predominates and the people are of a white complexion.
Due partly to this Costa Rica has had a somewhat different de-
velopment than the other Central American countries; she has en-
joyed a more stable government and has made greater progress.
In Guatemala the Indian continues as a distinct type. There the
bulk of the population consists of pure blooded Indians many of
whom do not even speak the Spanish language. They live a simple
life and have retained many of their original customs which ante-
date the Spanish Conquistadores. However, in Guatemala as in the
other countries the small ruling class is composed chiefly of people
of Spanish ancestry. In Honduras, Nicaragua and Salvador the
people are mostly a mixture of Indian and Spanish, Spanish blood
predominating in the ruling class.
When the Spaniards came to Central America the Indians were
subjugated and made to do the hard work. Blended with Spanish
stock they now live a primitive life cultivating the land or working
as laborers in the towns. They are free laborers except in Guatemala
where the peonage system on the large plantations is similar in

practice to a system of slavery. The life of the Central American
is simple; his food is chiefly corn in the form of tortillas, beans
and rice. Water must usually be carried from a distance and is
borne on the heads of women.
A large percentage of the people of Central America are unedu-
cated and know very little of what happens beyond their immediate
horizon. Educational facilities are extremely meager and lacking
entirely to a large proportion of the population. The people have
little opportunity to better their condition, and also little ambition
to do so. Sanitary and moral conditions are bad, although the
Rockefeller Foundation has recently accomplished much in the mat-
ter of hygiene, and has practically eradicated yellow fever. To
what extent the backwardness of Central America is due to the trop-
ical environment, or to inherent physical qualities of the people, or
to political and social factors admits of considerable speculation.
The continual turmoil which has existed in Central America for
the past one hundred years has not been conducive to the develop-
ment of sound principles of government finance. The motive of
governing officials has too often been to secure as large personal
profits as possible while in power. Foreign borrowing, at exorbitant
terms, and the debasement of the currency have been undertaken
as means of increasing the revenue. Reform measures and strict
control of moneys coming into and going out of the treasury have
often not been desired since a loose administration better served the
purpose of the party in power.
Budgets are regularly adopted by the various Governments but
are rarely adhered to strictly. The revenues if properly administered
would be ample to provide for the ordinary needs of government
and leave a surplus for public improvements. Yet government
salaries are usually in arrears and the treasuries usually empty.
Numerous leakages occur and pay-rolls, especially in the army, are

often padded. Illegitimate claims are often met promptly while
legitimate claims and salaries go unpaid; salaries of school teach-
ers are commonly the last to be paid.
The expense of revolutions, and the costs of maintaining armies,
have been no small burden upon the treasuries, and have prevented
the accumulation of funds for public improvements and other de-
sirable purposes. The armies are a great source of expense and re-
form here is urgently needed. The armies are used chiefly for in-
ternal purposes, to put down uprisings against the Government,
and for the distribution of patronage and graft, and in most cases
are poorly disciplined and inefficient. The Washington Conventions
of February 1923 endeavored among other things to secure reform
in the matter of reduction of armaments and the avoidance of
revolutions; however it does not appear that the results will be as
far-reaching as was originally hoped.
Each of the five countries has a foreign debt on which the in-
terest is either now in arrears or has been in recent years. The
largest debt is owed by Honduras. It was contracted in London and
Paris in 1867-1870 for the purpose of constructing a transconti-
nental railway. The bulk of the money received from those who
bought the bonds was divided between the promoters and officials
so that Honduras only built between fifty and sixty miles of rail-
road, but is burdened with a debt the face value of which, including
unpaid interest, in 1923 amounted to about one hundred and forty
million dollars. Honduras at the present time is the only Central
American country which has not made some adjustment of its for-
eign debt. Various attempts at settlement have been made but none
have been successful. An arrangement favorable to Honduras was
nearly consummated in 1923, but was not approved by the Hon-
duran Assembly of that year.
Nicaragua has had a sound financial administration since 1911,

when the country was in such a state of turmoil that the United
States intervened. Funds were advanced to Nicaragua by New
York bankers, and a complete reorganization of the country's cur-
rency and finance has been accomplished. Nicaragua had no credit
in the money markets of the world and in order to insure payment
of the bonds which were issued, a collectorship of the customs was
established. An American collects the custom revenues and before
turning over the money to the Government of Nicaragua takes out
the amount necessary for the service of the country's foreign obli-
The relations between Nicaragua and the United States have
been the subject of much discussion and criticism, and many in-
dividuals look upon the policy of the United States towards Ni-
caragua as part of a program of general expansion and absorp-
tion of countries to the south. A legation guard of American
marines has been stationed in the capital of Nicaragua since the
latter part of 1912 when a revolution threatened a return to the
chaotic conditions of a short time previously, and would have
brought an end to the reforms which were just being instituted.
About 100 marines are maintained in Nicaragua, which is a suf-
ficient number to inspire order.
The charges made against the United States of interfering in
an independent country, aggression south of the Rio Grande, or
"Yankee Imperialism" as it is called, are heard throughout all
Latin America, and a certain amount of evidence is adduced which
appears to support them. Instances cited of American expansion
at the expense of Spanish peoples are Texas, California, Cuba and
Panama; and now it is charged that the independence of Nicaragua
has disappeared. Other countries have felt pressure from the
United States in their affairs so that the Monroe Doctrine has often
been looked upon as a doctrine of aggression. This view was

strengthened when at the recent Pan-American conference the
United States elected not to permit South American countries to
participate in the interpretation of the doctrine, but retained it as
a national policy to be interpreted by the United States.
The Monroe Doctrine for some time has been unpopular with
Latin American countries, as menacing or restraining their inde-
pendent existence. The doctrine was originally adopted by the
United States in the interests of the security of the country against
conspiring governments of,Europe. It was a policy of self interest,
yet at the same time was in the interests of the other American re-
publics'; and had it not been for the Monroe Doctrine and the firm
stand taken by the United States, the South American countries
would doubtless today have been provinces of European nations,
as the continent of Africa and other parts of the world have been
divided up.
In his speech before the American Bar Association in Min-
neapolis in 1923 Secretary Hughes said that the declaration by
the United States to oppose what was inimical to its safety did not
imply an attempt to establish a protectorate. He disclaimed em-
phatically implications that the United States claimed to superin-
tend affairs in Latin American republics, saying that such implica-
tions found no sanction in the Monroe Doctrine. He also declared
that the actions of the United States in this hemisphere were not
limited by the Monroe Doctrine, but may be determined on grounds
of international right and national security. In a later speech in
SPhiladelphia he said that the United States is not seeking economic
advantages in Latin America denied to other countries.
When the United States intervened in Nicaragua in 1910 and
1911 conditions were intolerably bad. The tyranny and misrule of
President Zelaya had become increasingly oppressive, and practices
of civilized nations were ignored in spite of protests from outside

countries. Foreign creditors were pressing Nicaragua for a settle-
ment, and if the United States did not intervene to restore respect-
able government European nations were ready to assume this re-
sponsibility. Intervention by European powers in foreign territory
has usually meant permanent acquisition of the territory; therefore
if the United States desired to maintain the Monroe Doctrine the
duty of restoring order in Nicaragua and placing the country in a
healthy condition devolved upon the United States.
Since 1912 Nicaragua has been free from serious uprisings and
has enjoyed security of property and person together with a stable
government, which are essential to the development of the country
and to the prosperity and welfare of the people. The Government
in Nicaragua is not representative of the people generally, and re-
mains in office chiefly because the United States has been un-
willing to countenance a revolution. However, a Government that
is really representative of the people in Central America is seldom
found. Hostility towards the United States in Nicaragua is kept
alive to a large extent by disgruntled politicians, revolutionists and
others who find that the elimination of fraud and extortion is not
as lucrative to their pocket-books, nor does it yield the power and
influence enjoyed under the old system of government by success-
ful revolution.
Economically the system of financial control exercised by the
United States over Nicaragua has been successful in that the busi-
ness and financial conditions within the country are fundamentally
sound; although socially there is still much to be desired. The ab-
sence of continual revolutions has been a fortunate event for the
country. Revolutions discourage the accumulation of property since
there is no assurance that property saved will not be plundered or
confiscated without restitution.
Any faults that may be charged against the American adminis-
tration in Nicaragua appear of small consequence in contrast to

the grave abuses that occurred during the previous years of Zela-
ya's tyrannical rule. There is undoubtedly more real freedom and
happiness at the present time than formerly. A majority of the
Nicaraguans are probably satisfied with American control and
would resent a return to the old order. They are now enabled to
follow their different pursuits without interference from the un-
certainties and destruction of revolutions, and the arbitrary meas-
ures of government officials. Also most Nicaraguans have little
interest as to what goes on within the Government, and are content
if left alone and if the Government provides music in the plaza
two or three nights a week.
On the other hand, to a certain number of Central Americans
interference by the United States is genuinely offensive and seems
to menace nationalistic aspirations and the realization of the
Central American Union. The Latin American is temperamentally
different from the North American and dislikes the seeming brusk-
ness and blunt ways of the latter. People from the United States
often appear to be blustering money seekers, and the Latin Amer-
ican resents intrusion in his home country by Americans or any one
else. In the relations between the United States and Latin America
unfortunate events have occurred and needless irritation has been
produced, much of which might have been avoided by a more in-
telligent appreciation of the Latin American viewpoint.
A strong anti-American sentiment throughout nearly all Latin
America must now be overcome, and to an encouraging extent is
being overcome. In the Caribbean countries, where the influence of
the United States has been especially pronounced, suspicions as to
the designs of the United States have been a hindrance to full co-
operation between the United States and these countries. Un-
founded rumors and misinterpreted facts have done much to im-
pugn the motives of the United States. That the United States has
territorial aspirations southward does not need much refutation in

the United States, yet in Latin America it is considered an estab-
lished fact.
The recent policy of the American Government, in requesting
that contemplated flotations of foreign loans in the United States
be first taken up with the State Department, gives countries such
as those of Central America a certain amount of protection against
excessively onerous or unsound arrangements, and against possibly
undesirable political features that might be embodied. The policy
of the State Department according to Secretary Hughes is "to
throw its influence against unfairness and imposition."
The economic penetration by the United States of the countries
to the south can not be denied. Economic relations between the
United States and these countries are continually becoming more
intimate, and a large amount of American capital is invested in
Latin America. The United States, however, has not sought special
or exclusive privileges in trade or investment, and the intimate
relations are the result of propinquity and natural forces.
The interests of Americans and other foreigners in those coun-
tries have become extensive, and in the long run if intervention by
European powers on plausible grounds is to be avoided, the United
States must contemplate the possibility of having to assume the
obligation of maintaining reasonable order and protecting the in-
terests of all foreign nationals. Until these countries are able to
provide against the excesses which have occurred at various times
in the past, the United States, which occupies a peculiar position in
relation to Latin America, may have occasion to intervene. In re-
ferring to Santo Domingo Secretary Hughes said: "The United
States intervened in the interest of peace and order and when these
are assured it is not only willing but glad to withdraw."'
1 Hughes, Charles E., Observations on the Monroe Doctrine, Government
Printing Office, Washington, D.C. 1923.


Chapter II


i. Spanish period in Central America
W HEN Central America was a dependency of Spain the coun-
try was divided into several separate states which together
made up the Viceroyalty of Guatemala, ruled over by the Governor-
General residing in the city of Guatemala. The history of the
province dates back to the year 1523 when Cortez, after inviting
submission from the inhabitants of the country, sent Pedro de Al-
varado to enforce submission. Alvarado founded the city of Guate-
mala in 1524 and three years later received a commission from
Charles V, appointing him Governor and Captain-General of the
new kingdom.
About this same time Francisco Fernandez de C6rdoba penetrated
into Nicaragua and established settlements there. In 1542 the vari-
ous scattered settlements throughout the peninsula were united by
royal decree under one government, and all came to be ruled from
the city of Guatemala. The site of the city was twice moved due to
earthquakes and volcanic eruptions, and the present city dates from
the year 1777. It has a long history as capital of the province of
Guatemala, the province during the Spanish period including the
country now covered more or less by the five Central American
Guatemala was a dependency of the Spanish crown, and like the
other Spanish possessions in the New World, soon came to have the
Spanish system of currency. However, Spanish currency was not
used exclusively, and except in the more important towns, trade
during the early period was carried on by means of barter and by
means of the native forms of money. The native money consisted


Chapter II


i. Spanish period in Central America
W HEN Central America was a dependency of Spain the coun-
try was divided into several separate states which together
made up the Viceroyalty of Guatemala, ruled over by the Governor-
General residing in the city of Guatemala. The history of the
province dates back to the year 1523 when Cortez, after inviting
submission from the inhabitants of the country, sent Pedro de Al-
varado to enforce submission. Alvarado founded the city of Guate-
mala in 1524 and three years later received a commission from
Charles V, appointing him Governor and Captain-General of the
new kingdom.
About this same time Francisco Fernandez de C6rdoba penetrated
into Nicaragua and established settlements there. In 1542 the vari-
ous scattered settlements throughout the peninsula were united by
royal decree under one government, and all came to be ruled from
the city of Guatemala. The site of the city was twice moved due to
earthquakes and volcanic eruptions, and the present city dates from
the year 1777. It has a long history as capital of the province of
Guatemala, the province during the Spanish period including the
country now covered more or less by the five Central American
Guatemala was a dependency of the Spanish crown, and like the
other Spanish possessions in the New World, soon came to have the
Spanish system of currency. However, Spanish currency was not
used exclusively, and except in the more important towns, trade
during the early period was carried on by means of barter and by
means of the native forms of money. The native money consisted

of articles of trade which had come to pass commonly as money.
These articles were chiefly maize, which was one of the main items
of food, and cacao beans, from which cocoa is made. In some sec-
tions cocoanuts passed currently. Cacao beans were a generally
recognized form of money and date back for several centuries prior
to the coming of the Spaniards. They were probably used as money
during the period of the Maya civilization, the ancient ruins of
which are still in evidence.1 Accounts of travellers differ as to the
monetary value of the cacao beans during the Spanish period, but
the beans appear to have been used chiefly as fractional money and
circulated at rates which varied from time to time.
The Spanish system of currency which was transplanted to the
American continents was based upon the real as a unit. The real
dates from 1369 and was a mixture of silver and copper.2 It was
divided into thirty-four maravedf, which were small coins for minor
transactions. Under the Spanish laws of 1497 silver pieces of eight
reales were coined, which later came to be known variously as pesos,
duros, duros fuertes, or pieces of eight. These silver pieces original-
ly contained 423.716 grains troy, 930.55 fine, which would give
them a pure silver content of about 394.829 grains. However, the
amount of silver in the peso was reduced at different times, and a
mint test in 1626 indicated that it contained only about 386 grains
of pure silver. Later tests showed still smaller amounts, and by
18oo they contained only about 371 grains on the average. The
reales were also often debased so that the pieces of eight were not
always rated as the equivalent of eight reales. The Spanish mone-
1 The Maya civilization was divided into two main periods and dates back
originally to several centuries before Christ. The Maya were perhaps the
most highly civilized people of the American continents.
2 The real was originally 1/70 of a mixture of one marc of silver (355o.16
grains troy) and three mares of copper.

tary legislation of the seventeenth century was very much confused,
indicating a similar condition in the currency. Many of the coins
contained was considerably less than that which they were supposed
such coins were known as vell6n. The coins were clipped, plugged,
or impaired in other ways so that the silver which they actually
contained a large percentage of copper mixed with the silver, and
to contain.
In addition to the silver coins, Spanish gold coins were brought
over to America. The common gold coin was the onza. The onza,
as its name implies, was supposed to contain about an ounce of
gold, but in practice this was not the case. The onzas with which
the American colonies were familiar appear to have contained
about twenty-seven grams of gold gross,s and circulated as the
equivalent of about sixteen silver pesos. According to Spanish rec-
ords they were coined first in 1615 by Phillip III. Another familiar
gold coin was the dobl6n, or doubloon, as it is often called. It was
of various denominations and was coined in multiples of the es-
cudo, especially in the denominations of two, four, and eight escu-
dos. These were known respectively as "doblones de i dos," "do-
blones de a cuatro," and "doblones de a ocho." In America the onza
was frequently known as a dobl6n.
Due to the lack of facilities for coining money in America, in
the early part of the Spanish period, nearly all the silver and gold
taken from the mines was sent to Spain, and a portion returned in
the form of coin. However, as the amount of the metals taken from
the mines increased, there were not sufficient coins locally for the
purpose of trade, due doubtless to the cheapening of the metals in
the neighborhood of the mines as their quantity became greatly
increased. The metals themselves came to be used in crude form
as money.
SAn ounce troy is the equivalent of about 31.1 grams.

The result of this situation was the appearance about 16oo of
pieces of silver of irregular shapes and bearing the official stamp.
These peculiar coins circulated as money and were known as
"macacas," "moneda cortada," or sometimes "macuquina." They
contained good metal and were made in almost all the cus-
tomary denominations, usually of silver but sometimes of gold.
Although mints existed in America, they were not sufficiently
equipped to supply the needs for currency with round money and
consequently turned out macacas. The coins were made with Span-
ish dies and thus had the Spanish insignia. The dies were intended
for striking round currency, but the macacas were allowed to take
whatever shape resulted when the die was pressed down. The coins
frequently had large cracks received in the minting, and the Span-
ish insignia was often illegible. Macacas were put out by the mints
of Peru, Mexico, Guatemala and Spain, but the majority came
from Mexico and Peru. The mints in America also turned out a
considerable amount of coins of more regular shape, which cir-
culated along side of the macacas.
Macacas were minted in large amounts and circulated widely
during a long period of years. It was not until 1873 that their
circulation was prohibited in Guatemala, and it was still more
recently that they disappeared from circulation in some of the out-
lying sections of Central America. At the present time they can fre-
quently be found strung as a necklace around the neck of some
Indian, and very much cherished. The unsatisfactory nature of
macacas as money is apparent since their crude and irregular shape
made clipping, and the removing of part of the metal in other
ways, comparatively simple. It is not surprising to find that they
were the source of much confusion, and when taken in large quanti-
ties were accepted by weight, rather than according to their nominal
Mints were established early in Mexico and Peru, and in 1733

the Royal Mint in Guatemala was founded. The founding of the
mint was an event of great importance and was the occasion for
much celebration and ceremony. The dies and special machinery
for coinage were brought down from Mexico, and when news
arrived that the equipment was in the neighborhood of Guatemala
City, the officials and notables of the town went out to meet it.
They found it already escorted by men from the neighboring
towns, so a procession was formed and the whole entered the city
with pomp and ceremony, escorted by a detachment of cavalry.
The bells of the city rang and guns fired salutes. It was found that
the equipment was coming in two consignments, so when the sec-
ond consignment arrived a similar welcome was necessary. Then
when the first coins were struck there was occasion for another
celebration. The chief officials, both civil and clerical, were present
at the coining, and after five coins had been struck the party pro-
ceeded to the cathedral where a Te Deum was sung. This was fol-
lowed by a general celebration and fiesta in which all the popula-
tion participated.
The coinigs by the mints in America were not always uniform
as regards metallic contents, and coins of inferior weights were
frequently struck. Many of the gold onzas were light weight, and
consequently did not pass as the equivalent of sixteen silver pesos.
The pesos were also often underweight, as were many of the other
coins, which fact contributed to the complexities of the currency
situation. Coins of American mints even circulated in Europe, both
the debased coins and the full weight ones. In 1650 Spain ordered
that all the Peruvian coins in the country be taken to the mint
and reminted; they were denied currency in Spain. Three years
later, in 1653, new coins of Peru were approved and allowed to
circulate in Spain.
It can be seen that the currency situation in Spanish-America
during the Spanish period was not satisfactory; it was disordered

and full of confusion. The coins in circulation in Central America
were a mixed lot of coins from various Spanish-American countries,
as well as coins from Spain and other European countries. Com-
bined with these were the rudely minted macacas, which formed
an important part of the circulating medium. The coins of similar
denominations were often not uniform as regards metallic content,
due both to their original debasement and to their later physical
impairment. New and full weight coins, if put into circulation
tended to disappear, in accord with Gresham's law. Although some
of the coins of similar denominations varied widely in contents,
most of them were not so far apart but that they passed more or
less at a parity in spite of the differences. A person would not
hesitate to accept a light weight coin if he knew he could pass it
on at the same value for which he received it.

2. National period
WHEN Guatemala was under the Spanish crown, domestic affairs
ran along without much disturbance. One Governor succeeded an-
other in tranquil succession, a contrast to the events of the past
one hundred years. However, about the beginning of the nineteenth
century a change took place, when nearly all of the Latin-American
states became involved in wars of separation from Spain.
The Royalist Governor of Guatemala, Don Gaviano Gainza,
saw the trend of events and adapted himself to the situation, so
that Central America came into independence with almost no
disturbance. The Governor and other important men of Guate-
mala City, including both the civil and ecclesiastical, met in con-
ference to decide what course Guatemala should pursue. After
lengthy and spirited debate independence was decided upon, and
on September 15, 1821, the declaration was signed and indepen-

dence proclaimed. Recognition was accorded by the United States
in 1824. Spain at the time was engaged in a more important
struggle with the provinces in South America, and was not able
to offer any armed resistance to the action of the Central American
This marks the beginnings of Central American federation,
when all the countries were united under one government. At this
time it was assumed as a matter of course that the states would
remain together as a single republic. In fact under the new status
there was little change in the Government from what it had been
before. The Royalist Governor Gainza was retained as head of the
independent state, and similarly the local Governors of Salvador,
Honduras, Nicaragua, and Costa Rica were retained in office.
However, there was little cohesion in the new state since means
of transportation and communication were poor. With the new
spirit which had grown up of freedom from restraining authority,
hostility between the federal officials and state officials developed
almost from the first. The different states respected instructions
from the Government in Guatemala only when they chose to
do so. Rivalry and dissension soon set in among the states them-
selves, and among aspiring leaders, so that the union gradually
fell apart. A series of revolutions followed by counter-revolutions
disturbed the country as different groups tried to assume the
power. Moraz;n of Honduras was the last President of the Federa-
tion, and exercised considerable authority for a time. The support
given him by the various states soon fell away, and as they turned
against him he was overthrown and forced to leave the country.
The central government had less and less real authority, and the
last federal congress before it adjourned in 1838 declared that the
states might govern themselves as they saw fit.
The question of a federal union was complicated-and still is

for that matter-by questions of personal animosity and ambition,
so that many who contributed to the overthrow of the central
government were in fact loyal adherents to the idea of federation.
Unsuccessful efforts at federation have been made at various times
since the dissolution of the first union, but the results have all been
short-lived, and the states have existed as independent republics.
During the period of Central American federation the currency
was little different from what it had been when the states recognized
the authority of Spain. The largest silver coin was the peso. The
pesos in circulation varied as regards silver contents, but contained
in general between 25 and 26 grams of silver .900 fine. A large
number of Mexican pesos circulated throughout Central America,
which contained about 27.07 grams of silver with a fineness of
about .903. The peso was divided into eight reales, and the small
coins were reales or multiples or subdivisions of the real. The gold
coins were the onzas and medias onzas. The onza was supposed to
be the equivalent of sixteen silver pesos, but did not always cir-
culate as such. The coins which were in circulation were a miscel-
laneous lot from various countries of the world, principally the
Spanish countries of North and South America; along with these
were a certain amount of European coins. The mints in Central
America struck some coins with the insignia of the new Republic,
but with the break-up of the federal government such coinings
The circulating medium after the dissolution of the union con-
tinued the same as it had been previously, in fact remained almost
the same down to the end of the nineteenth century. The different
countries retained the Spanish system of currency, and with it the
coins which were in customary circulation. An acuerdo in Guate-

mala' in June 1838 declared that there should be published in all
the towns a statement that all legitimate money of the different
nations should circulate freely and be accepted by everyone; the
old macacas were to be received without discrimination on an equal
basis with the other money. Anyone departing from the order was
to be punished.
The currency was in a badly confused condition, and frequent
laws and decrees were issued dealing with the problem. In 1840
the Government of Guatemala said that it would not receive cer-
tain coins of Peru and Bolivia which were badly debased. In 1845
it declared against certain Spanish coins, stating at what rate it
would accept them. Tables of official ratings were quite common,
listing the various coins and the rate at which they were to be
received. In July 1851 money of the United States was officially
recognized and declared to be receivable for public dues as well as
for private transactions, at the rate of one dollar for one peso,
both for United States silver coins and United States gold coins.
Numerous laws dealing with monetary matters are found on the
statute books of Guatemala, indicating that the condition of the
currency was not satisfactory.
The Government of Guatemala, as well as of the other states,
frequently issued paper notes, which often circulated as money.
The notes were usually issued in connection with forced loans, and
were acceptable in satisfaction of custom dues and other government
payments. They were commonly bought at a large discount. One
of the first of these issues was provided for by a decree of 1834
4 The word Guatemala now ceased to be applied to all the provinces com-
bined, as it had been when they were united under one administration in
Guatemala city. After independence from Spain and the dissolution of
the federal union, the term was applied specifically to the local territory
of Guatemala, exclusive of the four other states, the territory now com-
prising approximately the present Republic of Guatemala.

when a little over three thousand pesos was offered in the form of
prizes to stimulate agriculture within the country.
The condition of the currency in the different Central American
countries was very much alike. A traveller through these sections
about 1845 wrote the following description of currency condi-
tions :
The current money of Central America, with the exception of
Honduras, is nearly the same as the Spaniards left it, and as all
the southern republics in pretending to improve it have only
robbed the public by issuing a debased currency, it is fortunate
that they left it alone. It consists principally of pieces of silver
rudely cut and stamped, of the value of from one half to four
reales; it is rather finer than the current hard dollars, but
from long use the coins, especially the smaller pieces, have lost.
a great part of their weight; and I find from examination
that one with another they may be said to have lost twenty
per cent, eight reales of the current money being one fifth
lighter than a new hard dollar, which passes for the same
value. All the coins of Mexico pass currently in Central
America, and next to the cut silver, form the bulk of the cir-
culating medium; but only the gold ounces and hard dollars
of the southern republics are received. The gold ounce-im-
properly called doubloon in English-weighs 317 grains, and
should be exactly twenty-one carats fine. Those of Mexico and
Central America, and the old republic of Colombia, are said to
be pretty exactly of that fineness, but many of those lately
coined by the southern republics have been depreciated; the
ounce passes for sixteen dollars in Guatemala and San Sal-
vador, and for seventeen in Nicaragua and Costa Rica, but
current silver and hard dollars are generally worth six per
cent premium in the latter states, which makes it of actually
the same value in them all.
The cheapening of gold due to the increased amount thrown on
the market following the California and Australian gold discov-
eries of 1848 to 1850, caused a change in the market ratio of gold
5 Dunlop, Robert Glasgow, Travels in Central America; Longman, Brown,
Green, and Longmans; London, 1847.

to silver, with the result that silver money in Guatemala tended to
be withdrawn from circulation. The United States dealt with a
similar problem by a law (1853) reducing the amount of silver
in the subsidiary coins (coined only on government account there-
after) so that they would remain in circulation. Guatemala en-
deavored to meet the situation by issuing a decree in 1858 prohibit-
ing the exportation of any silver money or silver bullion. A person
leaving the country could take with him only twenty-five pesos in
silver money. The situation soon remedied itself since about 1860
the value of gold began to rise, or in other words the gold price of
silver began to fall, and the market ratio of the two metals was
more nearly what it had been previously.
In June 1869 Guatemala adopted the decimal system as the
basis for her currency. This disposition was revised somewhat by
a decree in September 1870, which declared that the unit was the
peso of 25 grams of silver .900 fine. The peso was considered as
divided into one hundred centavos, instead of into eight reales as
formerly. The four-real piece would now be the equivalent of the
fifty-centavo piece.6 Instead of the former gold onza equivalent
to sixteen pesos, the gold coins were to be in the denominations of
five, ten, twenty, etc., pesos. The gold peso was given a weight
of 1.612 grams of gold .9oo fine. This involved a ratio with silver
of about 15.51 to 1, which was close to the market ratio of about
15.57 to 1 at that time. The gold peso thus was given a value close
to that of the United States gold dollar which contains approxi-
mately 1.672 grams of gold .900 fine. Although gold coins were
provided for in the law, the silver peso was made the unit.
The decimal system was not well received by the people general-
ly who were accustomed to the old system of reales, medio reales
6 The subsidiary silver currency provided in the law was of proportional
weight to the peso but was only .835 fine.

and cuartillos, and a decree was issued in December 1871 which
rearranged the denominations of some of the smaller coins. This
law also increased the weight of the peso from 25 grams gross to
2540 grams gross. The Guatemalan peso now contained forty
centigrams of silver more than the generally accepted pesos of
other countries. The result was that Guatemalan pesos began to be
exported and replaced by lighter weight ones of Peru and Chile.
The coinings at the mint in Guatemala soon began to decline since
more pesos could be obtained at other mints for a given amount of
silver. From 1859 to 1870 the mint in Guatemala coined about
2455,000 pesos in silver and about 1,2o7,ooo in gold. After 1870
the coinings were not maintained at this rate. The exportation of
the heavier Guatemalan silver and the importation of foreign silver
continued, and in 1878 about 321,000 pesos left the country; in
1879 and 1880 combined about 543,ooo pesos were shipped out.
During these same two years about 1,172,000 pesos in foreign silver
were imported.
Coinings of the heavier weight "pesos fuertes" were discontinued
in 1878, and in April 1881 a law was approved which provided
for the return to the pesos of 25 grams .900 fine, as in the original
law. The legal tender quality was also given to foreign silver
equivalent or superior in weight to the national money. The foreign
coins recognized by the law were as follows: the five-franc pieces
of France, Italy, Belgium and Switzerland; the Spanish "peso fuer-
te"; the pesos of Mexico, Chile, Peru, and Venezuela; and the
United States coins of fifty, twenty-five, and ten cents.
The influx of foreign silver money, noted above, appears to have
been due to a variety of causes, and not solely to the greater weight
of Guatemalan pesos, which were being exported. The reduction
in the circulation tended to lower prices, and cause the importation
of lighter weight foreign coins, but in addition to this, political

and financial conditions in South America were disturbed at this
time. The War of the Pacific between Chile, Bolivia and Peru began
in 1879. Peru was experiencing the difficulties of irredeemable
paper money. The "billete" circulation increased many fold and
in 1879 amounted to about eighty-six million soles. Exchange rates
on foreign countries rose and the silver soles began to be driven
out of circulation, a large part of them going to Guatemala, and
to the other Central American countries where silver still passed
currently. A situation existed in Chile similar to that in Peru, and
in 1877 the Chamber of Deputies decreed the inconvertibility of
the bank notes. Thus Chile went onto the paper basis, which ac-
counted in large part for the exportation of the silver money.
About 1873 the gold price of silver began falling throughout
the world. The result was that as the price of silver fell, the mint
ratio of the two metals in Guatemala was not in harmony with the
market ratio. The gold and silver coins in Guatemala were cir-
culating side by side at their nominal value, which involved the
mint ratio of about fifteen and one-half to one, whereas according
to the market value of the two metals seventeen or more ounces of
silver were needed to be the equivalent of one ounce of gold. The
result of this situation was that the gold coins, being undervalued
in terms of silver, began to disappear from circulation. Further-
more, the influx of silver coin from South America, and the effect
of several of the important countries of the world going onto the
gold standard, tended to cheapen further the silver peso in terms
of gold. The gold onzas began disappearing about 1875, and by
1878 or 1879 were practically all gone. By this time the smaller
gold goins had begun to disappear, so that by 1880 there was
practically no gold coin in circulation.
For the next two decades the chief metallic currency in Guate-
mala was silver money. The coins were a miscellaneous mixture

from various Spanish countries as already noted. The old rudely
minted silver macacas or moneda cortada, were demonetized in
August 1873, and ordered to be brought to the mint for recoining
into Guatemalan currency. They continued to circulate for a short
time after this decree, but soon began to disappear and were no
longer seen in circulation. The year 1873 thus marks the end of the
macacas, a peculiar form of currency which had an existence of
about three hundred years, dating back to the early days of the
Spanish Conquistadores. Guatemala was the last country formally
to declare against these coins, and one of the last countries of the
world to have such a primitive form of currency.
After the fall in the gold price of silver and the disappearance
of gold coin, the fluctuations in exchange rates in Guatemala upon
gold standard countries were more or less in harmony with the
fluctuations in the gold price of silver. As the gold price of silver
continually fell, exchange rates upon gold standard countries con-
tinually rose, as can be seen from the table on page 39. In view of
the more recent depreciation of the peso, it is interesting to note
that in 1874 and the years immediately preceding, the Guatemalan
peso was at a parity with the American dollar.

Chapter III


1. Silver and paper money on a parity
THE first bank notes in Guatemala were those of the Banco
National de Guatemala, which was founded in March 1874.
Funds for the establishment of this bank were provided out of the
property confiscated by the Government from the Catholic Church
in 1873 following the revolution of 1871.1 The clergy were strong
in Guatemala and were a factor in the political situation. They had
accumulated wealth over a period of years and had valuable hold-
ings when their property was confiscated in 1873. They loaned out
money, at about six per cent interest, usually on mortgages against
farms. The decree of August 1873 which confiscated their property,
included all their holdings and property of whatever description.
The Banco Nacional which was founded out of the proceeds of
this property was given a capital of two million pesos, whicl- was
the estimated value of the confiscated property. The Bank was
authorized to do a regular. balning'1ibsiness, including that of
issuing and circulating .liakinates agahnstica h or paper of not
more than three aleniis maturity. The notes were',lo.tender and
were guaranteed y the Government. Prior to the establisinent of
the Baneo'leional in 1874 ~i~ e.w i piwte bankers' and.mer-
chants in Guatemala who did somewhat of a banking business.
The new government bank had a short existence. In March 1876
1 The convents of the Church were suppressed a few years after indepen-
dence was declared in 1821, and the Church never exercised much influence
throughout Central America thereafter, except in Guatemala where the
orders were restored after the revolution in 1839 when the Conservative
party came into power. In Guatemala the Church enjoyed considerable in-
fluence for many years and had valuable holdings.

a decree was issued suspending specie payments on the bank's notes,
and in November of the same year the bank was ordered liquidated.
Its notes passed at a discount for a time, but soon were withdrawn
from circulation, and the bank passed out of existence. The follow-
ing year, 1877, the Banco Internacional was founded. This bank is
still in existence and is thus the oldest of the present banks in
Guatemala. The Banco Colombiano was founded the following
year, 1878, and thus has a history nearly as long. Both these banks
were allowed to issue circulating notes. A third bank, the Banco Oc-
cidente, was founded a short time later, 1881, at Quezaltenango.
The banks had a little difficulty in 1885 when an army officer
approached the Banco Internacional with troops one night, and
forced the bank to part with its silver. Thus robbed of its silver
reserve, the bank was forced to suspend specie payments. The public
was fearful as to the notes of the other banks, the Banco Colombiano
and the Banco Occidente, and to alleviate the situation the Govern-
ment issued a decree, April 6, 1885, declaring that the three banks
were not obliged to redeem their notes in gold or silver, and that
they might make all payments in their own notes. A decree the fol-
lowing day said that the-notes pvew. legal tender for transactions
both public andapoivae, the .ame a; co,*'?fo.eda metlica efec-
tiva." TJi4 'orattbrium on the redemptiloof.': ank notes lasted
only fd'." six months, and the notes were thin''aiin redeemed
in ce~t4.With the e' eij"i f liis'ir rtiperiod the i'bk notes in
Guatknala were continuously redeemable down until'.1897 when
they became inconvertible and the period of depreciated paper
money began.
The metallic circulation from about 188o onwards consisted
chiefly of silver coin; gold had left circulation as already noted,
due to the increased value of gold in terms of silver throughout
the world. Much of the silver money in Guatemala was in a bad

condition. Many of the coins brought in from other Latin-American
states were of inferior weight; and in addition to this Barrios, who
was President of Guatemala from 1892 to 1898, coined light weight
money, especially in the smaller denominations. A full weight peso,
or sol, was melted down, and three or four pesos in light weight
coins were made from it.
Issues of paper money by the Government were made at various
times, billetes del Tesoro as they were usually called. Several
issues were made in 1887 and the years following during the ad-
ministration of President Barrillas. The notes were redeemable
on demand and do not appear to have been the source of much
difficulty, although they were not well received by the people. In
addition to these were the notes of the different banks, also redeem-
able on demand.
In 1890 the gold price of silver which had been falling almost
continuously for about twenty years, ceased to fall and experienced
a marked rise. The result of this was the exportation from Guate-
mala of a portion of her silver money. The circulation in Guate-
mala had been increasing for the past decade from importations
of foreign silver and from inwtases.ln.th amount of paper money.
When the price of ,it ri'tpie in foreigni mm ikts.i4 drew from
Guatemala a portiift d~ l er better silver coins. Th, i 'crease in
paper monejyalso'-tended to e4ourage, the, exportation dbt silver.
To check tli :e odus of dihe:silecmone a'law was passe in
October 18io9 taxing the exportation of silver coin or bullion.
The situation changed very quickly and in 1891 silver was again
falling in terms of gold. It fell at an accelerated rate, and instead
of silver currency leaving Guatemala it began to flow into the
country. It came especially from Chile and Peru, pesos and soles,
respectively. The currency came to be made up largely of foreign
coins, and in July 1894 the importation of foreign silver was

prohibited. The foreign money in the country was ordered brought
to the mint and exchanged for national money.

2. Inconvertibility of paper money and disappearance of silver
THE situation after 1894 again changed its appearance very rapid-
ly, and silver once more began to leave the country. However this
time it was not due to a rise in the price of silver abroad. Silver on
the contrary continued to fall in terms of gold, and in 1895
averaged about sixty-five cents an ounce as against $1.o4 an ounce
in 1890, and about $1.32 an ounce in 1872. The exodus of the
silver money, beginning in about 1894, was caused by an excessive
amount of paper money.
Six banks of issue were operating in GuateLlala at this time.
These six banks, which are still the only banks of issue, with the
years of their founding, are as follows: Banco Internacional, 1877;
Banco Colombiano, 1878; Banco Occidente, 1881; Banco Agricola-
Hipotecario, 1894; Banco de Guatemala, 1895; and Banco Ameri-
cano, 1895. The banks were authorized in their concessions to issue
"billetes," redeemabe .oa demvnai,.but which were not legal tender.
Billetes were.dsisd'froMi tine b t ny' y-tese banks, beginning in
1877 wit.'th"fdfunding of the Banco in'i ra'clonal, and with a
1877 Banco hlndanco, and with
few ecbXptions were continuously redeemable'db~'to 1897.
nt"a* Barrios, alo'J isAe'je rin}nt in 1892, 'bj'.tl only rela-
tively free election ever held m Guatemala, was extravagant in
his expenditure of public monies. Although active and industrious,
he played havoc with the Government's finances. He borrowed ex-
tensively from the banks, which tended to increase the circulation
outstanding. As the circulation increased the banks found difficulty
in meeting their obligation to redeem the notes in coin.
In May 1897 Barrios borrowed one million and a half pesos

from the banks which was to be used in paying government em-
ployees' salaries delinquent for about five months. The loan bore
interest at the rate of one per cent a month, and was to be amortized
in about one year's time. Coincident with this loan contract a de-
cree was issued, May 21, 1897, relieving the banks of their obliga-
tion to maintain payments in current money of gold or silver,
"moneda corriente de plata u oro." This moratorium was to last
until January 1, 1898, when specie payments were to be resumed.
During this period the billetes were declared to be full legal tender
in all transactions public and private, and were to be considered
the same as metallic money. The Government itself assumed a
secondary responsibility for the redemption of these bank notes.
This decree marks the beginning of irredeemable paper money with
the full legal tender quality, although for a short time prior to
this date the notes were in fact irredeemable.
By the end of 1897 the Government had not repaid the money
loaned by the banks. Nevertheless a decree was issued, on Decem-
ber 7, which arranged for the gradual redemption of the bank notes.
On January 1, 1898, the billetes of one and five pesos denomina-
tions were to be redeemable. In March and April other denomina-
tions were to be added, and by May i full redemption in silver was
to be resumed.
When the first of the year came, redemption was attempted but
was not long maintained. In February 1898, President Barrios met
death by assassination, and Manuel Estrada Cabrera, the first "de-
signado," became President. Cabrera ruled Guatemala with despotic
severity for over twenty years, being finally overthrown by the
revolution of April 1920.
When Cabrera came into power the treasury was in severe finan-
cial straights, and the political situation was disturbed. A new plan
of dealing with the paper notes and the Government's debt to the

banks was evolved by Cabrera and became law in 1898. This plan
involved the establishment of a Banking Committee, or "Comiti
Bancario," as it was known. The Comiti was to be composed of a
representative of each of the banks which entered into the agree-
ment, and of two representatives of the Government. The purpose
of the Comiti was to issue billetes to the amount of six million
pesos, which were to be used in paying the Government's debt to
the banks, and for other Government expenses. The billetes were
guaranteed by the Government, and were to be considered the same
as coin, "metilico," for the banks as regards redemption of their
own notes. Certain governmental revenues were to go to the Comite
Bancario to be used in amortizing the billetes it issued and in
accumulating a reserve either in gold or silver. When the reserve
should amount to thirty per cent the Comiti was to begin redeem-
ing the billetes.
Thus a small reserve behind these billetes was expected to sup-
port the entire paper circulation, because the banks had the option
of redeeming their notes in the billetes of the Comite Bancario
instead of in coin. The banks were unable to redeem their notes in
coin. The billetes were legal tender, and their payment for all
Government and Municipal dues was compulsory, with the proviso,
however, that the banks which came into the plan should have their
billetes also acceptable for public dues. The banks all came into
the arrangement, and agreed to accept the billetes of the Comiti as
coin in all payments due them. As long as the billetes of the Comiti
were in existence the banks were not required to redeem their notes
in silver. Deposits in metal, however, were payable in metal.
The Comiti Bancario was composed of eight members, one from
each of the six banks, and two from the Government. However, in
practice the Comite was a government body dominated by Cabrera.

It functioned merely as a government institution to issue paper
money, and was not in fact representative of the different banks.
The billetes were purely fiduciary and were never redeemable in
-coin. A decree in June 1899 reiterated the fact that the billetes both
of the banks and of the Comite were legal tender, and were payable
for all obligations even though the contract expressly stipulated
that payment was to be made in silver coin.
The banks continued to advance money to the Government, and
on August 28, 1899, Cabrera entered into a loan contract with the
banks which arranged for the funding of various loans, and pro-
vided that the Government should pay interest at the rate of five
per cent per annum in "moneda corriente," current money. The
contract also arranged for the issuance by the banks of additional
amounts of billetes. The certificates of indebtedness which the
banks held against the Government were to be considered as valid
security to guarantee the notes already in existence and those
which might be issued in the future. One of the noteworthy pro-
visions of the contract was contained in article VIII, which de-
clared that the banks were not obliged to redeem their notes in
cash, "moneda efectiva," until the Government should have paid
in metal, "metilica," the total amount of its debts to the banks,
and the billetes of the Comit6 Bancario.2 The Government has not
yet paid its debts to the banks, and therefore the notes are still in-
The Banco Colombiano was not a party to this contract. The
SThis article reads as follows:
"No podrin ser obligados los referidos Bancos al cambio de sus billetes
por moneda efectiva, salvo el caso que el Gobierno hubiese pagado en
metilico la cantidad total de los criditos de los mismos Bancos contra el
Estado y los billetes del Comiti Bancario." Recopilacidn de las Leyes de
Guatemala; Tomo XVIII, 1889-1900. Articulo. VIII. p. 175.

thirty days allowed by the contract for signing and accepting its
terms, were permitted to expire, and the Banco Colombiano ne-
gotiated a separate contract under date of November 12, 19oo.
This contract was similar in its provisions to that negotiated with
the other banks, with the exception that whereas in the first contract
the Government agreed to pay interest in moneda corriente, current
money, in the contract with the Banco Colombiano these words do
not appear. The Government at the present time has not paid the
interest on its various loans from the banks, and the Banco Colom-
biano holds itself to be in a different position from the other banks
due to the omission of the above words in the contract; it believes
that both the interest and the principal due it are payable in silver
money and not in moneda corriente, which for a long time has been
paper money.
As the billete circulation increased the silver money began
leaving the country. In 1894 the Government looked with disfavor
at the large influx of foreign silver and prohibited its importa-
tion. However, as the paper circulation expanded the tide quickly
turned, and silver began to flow out. The Government now was
concerned with keeping the silver in circulation, and took various
measures in this endeavor. President Barrios ordered light weight
coins struck; a silver sol or peso would be melted down, and four
times its amount in inferior coins minted. Some of the smaller coins
were only .250 fine, containing three-fourths copper. These coin-
ings were not according to law and were a falsification of the
currency. Some of the foreign coins were re-sealed with the Guate-
malan stamp on top of the foreign stamp with the hope that this
would keep them in the country.8
These measures were unavailing, and the silver continued to go
3 The foreign money recoined in 1898 amounted to 1,o8o,0oo pesos.

out. In the latter part of January 1898, a few days before his
assassination, President Barrios prohibited altogether the exporta-
tion of silver coin. Nevertheless the silver continued disappearing
and in November 1898 Cabrera granted a premium of ten per cent
on silver which might be imported.4 Further coinings of inferior
money were made, with a silver fineness of about .500. Finally
nickel money was minted.
All these efforts were insufficient to keep the full weight silver
in circulation, and by about 1897 or 1898 all except the small
silver money and the inferior coins had disappeared, part being
exported and part going into hoards. Increased paper money and
increased depreciation continued, so that by about 1905 the small
and inferior silver coins had also disappeared. Inflation and de-
preciation continued to such an extent that eventually the copper
and nickel coins were driven from circulation. These coins remained
in circulation until about 1920. A large number of the copper coins,
which were the last to go, were exported to Mexico and Salvador,
where in some instances, they were used as tokens by employers to
represent a day's work, a meal or whatever was desired.
The following figures on the exportation of silver coins are

1896 ................ P 552,203
1897 ................ 473,0oo
1898 ................ 22,563
The small amount shown for 1898 is due to the fact that in January
of this year the exportation of silver coin was forbidden, and all
exportations after this date were clandestine and are not shown in
SIt was only in 1894 that the importation of foreign silver had been

the official figures. Most of the money is listed as going either to
the United States or to other Central American States.

1892 .............. P 40,850
1893 .............. 339,864
1894 .............. 2,061,989
1895 .............. 2,245,667
1896 .............. 1,252,141
1897 .............. 413,267
1898 .............. 1,310,000
1900 .............. 240,663
(Data taken from Report of the Director of the Mint of Guatemala.)

Chapter IV


1. Course of depreciation
THE Guatemalan peso has been depreciating in terms of gold
almost continuously for the past fifty years as a result, first,
of the fall in the price of silver beginning about 1873 as we have
already noted, and second, of the emission of large amounts of
paper money. The regime of inconvertible paper money was started
by Barrios in 1897, more or less as a temporary measure with plans
for the ultimate restoration of specie payments. Cabrera, who suc-
ceeded Barrios in 1898, continued the issuance of paper money as a
lucrative source of revenue, and used it in such a way as to preclude
any immediate return to specie payments. The paper billetes were
not issued directly by Cabrera, but were put out through the Co-
mite Bancario discussed above, to the extent of about six million
pesos, and by the banks to a much greater extent in connection with
loans to the Government.
Loans by the banks to the Government continued to increase,
accompanied by increases in the bank note circulation, and in-
creased depreciation of the peso. The Government would grant
authority for a new emission of billetes, usually receiving in return
additional credits at the bank. The arrangement was thus profit-
able for both the Government and the banks. The system, in effect,
was not unlike that of pure government fiduciary money, although
the notes were issued by the banks and are thus obligations of
the banks.
The bank note circulation at the end of 1896 amounted to about
ten million pesos. By 1910 this had increased to about seventy-five
million pesos, and in 1923 amounted to about three hundred and

seventy million pesos. The banks have participated in this increase
in different amounts, the Banco Colombiano having refrained,
however, almost entirely from paper issues. The details of this
increase in circulation can be seen from the following table.
1897 P 10,711,000 P 10,711,000
1898 11,935,000 11,935,000
1899 11,675,000 11,675,000
1900 15,385,000 P 6,000,000 21,385,000
1901 22481,000 6,ooo,o00 28481,000
1902 26,033,000 6,ooo,o00 32,033,000
1903 32,651,000 6,ooo,ooo 38,651,000
1904 41,782,000 6,000,000 47,782,00o
1905 43,914,ooo 6,000,ooo 49,914,o00
1906 45,649,000 6,000,000 51,649,ooo
1907 46,849,ooo 6,000,000 52,849,ooo
1908 P 57,924,oo00 P 51434,000 P6,ooo,00o 57434,000
1909 63,588,000 57,140,000 6,000,000 63,140,000
1910 74,7o8,o00 68,271,000 6,000,o00 74,271,000
1911 81,189,00o 74,543,0ooo 6,00oo,000 80,543,000
1912 99,981,ooo 89,092,000 6,000o,ooo 95,092,ooo
1913 109,647,000 95,739,000 6,ooo,000 101,739,000
1914 112,074,000 106425,000 5,782,000 112,207,000
1915 143,o79,00o 133,776,00o 5,782,00o 139,558,000
1916 164,91,00ooo 156,819,00o 5,682,000 162,501,000
1917 182,300,000 174,935,000 5,604,000 180,539,00o
1918 210,238,000 193,072,000 2,879,000 195,951,000
1919 246,058,000 219,718,000 2,126,000 221,844,000
1920 326,436,00o 274,847,000 274.847,00ooo1
1921 349,076,000 336,1o9,00o 336,1o9,oo00
1922 386,054,000 377,230,000 377,230,ooo00
1923 406,741,000 401,306,00o 1,047,ooo00 402,353,000
1 Exclusive of notes of Comiti Bancario.
2 September 1, 1923.
Data taken from Juan Maria de Le6n, Contribucidn y Bases Estadisti-
cas; from Kemmerer, E. W, Proposals for Currency Reform in Guate-
mala, and from other sources. The figures from 1897 to 1907 represent the
total emission of January I of each year; those from 19o8 to 1923 are
as of June 30; those for 1921 and 1922, however, are as of January 1.

It will be noted that the increase in circulation did not cease with
the overthrow of Cabrera in April, 1920, but has continued down
to the present time.
The billetes of the Comiti Bancario have been largely withdrawn
from circulation. They were counterfeited to a large extent and
like the other billetes, became extremely worn and dirty. In De-
cember 1913 about 58,000 pesos of them were incinerated. Inciner-
ations continued so that by the end of 1916 about 395,000 had been
destroyed. After this time their destruction ceased, although a large
number were withdrawn from circulation, until after Cabrera was
deposed. On May 1, 1920, nearly four million of them were incin-
erated. Others have been destroyed since then so that at the present
time only about one million are still in existence.
Behind their paper notes the banks on June 30, 1898, held in
their vaults metallic currency to the extent of about 2,800,000
pesos. By June 30, 1899, this had declined to about 1,750,000 pesos,
and on January 1, 1921, amounted to only about 324,000 pesos.
The circulation on the latter date was about 356,000,000 pesos,
and the metallic reserve thus less than one tenth of one per cent, a
negligible amount.8 The asset behind the billetes is chiefly the debt
of the government to the banks.
The gold value of the Guatemalan peso continued to fall during
the long period of increasing paper money, as it fell during the pre-
vious period of the declining price of silver. In 1870 the gold value
of the peso was approximately equivalent to that of the dollar.
By 1895 the price of silver had fallen to such an extent that the

S This is estimating the paper peso as the equivalent of the silver peso.
If the paper peso has a value of two cents gold, and the silver in the silver
peso is worth forty-seven cents in gold (silver at sixty-five cents per ounce
troy), the reserve would amount to a fraction over two per cent.

value of the peso was about fifty cents, just half its former value.
By 1900, after inconvertible money had come into being, its value
was reduced to fifteen or sixteen cents, and by 1905 to five or six
cents. In 1921 it was worth between one and a half and two cents,
and at the present time, 1924, has about this value. Accompanying
this fall in the gold value of the peso has gone a rise in domestic
prices and wages, necessitating constant readjustments.
The continued depreciation of the currency has wrought hard-
ships to various classes of individuals. Those who loaned money
one year with the peso at a certain value, and received back the
money a few years later, when the peso had perhaps one third its
former purchasing power, experienced a very real loss. What the
creditors lost, of course the debtors gained. Prices of commodities
have risen as the paper circulation increased. Since wages, as a rule,
move more tardily than general prices, the wage earners in Guate-
mala during most of the last half century have been continually in
the position of trying to catch up with the advancing cost of living,
always receiving a little less than their due. This accounts in part
for the favor of the present system with the agricultural or em-
ploying class.

2. Foreign trade and exchange rates
THE depreciation in the gold value of the peso is expressed in ex-
change rates on gold standard countries, and can be seen from the
following table and charts.


P 1.00





P 2.30


Data from 1871-1895 furnished by Julio Samayoa of Guatemala City; from
1896-1922 by Juan Maria de Le6n, Commission Merchant of Guatemala

P 2.07





70 I- I 70

0 5-0

- -0 -30

0- 20

i160! 6

IrO 1873 1880 1885 1880 1093 1900 1905 1010 1915

IsW l095

In order to show the relative importance of the early depreciation
of the peso, the same data have been plotted on logarithmic scale.
The fall in the value of the peso from one peso to the dollar in
1870 to two pesos to the dollar in 1895 is of the same relative im-
portance as the later fall from thirty pesos to the dollar in 1919
to sixty pesos to the dollar in 1921. These two changes are given
equal weight on logarithmic scale. A comparison of the two charts
shows how on chart I, drawn to arithmetic scale, the gradual
halving of the value of the peso from 1870 to 1895 appears as of
minor importance, while a similar degree of depreciation from
1913 to 1915 stands out boldly. On chart II (p. 42) these same rela-
tive degrees of depreciation are represented as of equal importance.
Since the currency of Guatemala can not be shipped out of the
country in payment of international balances, exchange rates
fluctuate erratically with the demand and supply of drafts. The
extreme nature of the fluctuations within a single year can be seen
from the following rates on New York, pesos for one dollar:
1919 .......... 21 35
1920 .......... 22 46
1921 .......... 41 69
1922 .......... 48 59
The continual fluctuations cause obvious evils. Importing mer-
chants selling goods in pesos never know what they will have
to pay when purchasing dollars to cover importations of these
goods. This element of risk is reflected in higher prices to the
consumers. In order to avoid the difficulties consequent upon the
fluctuating value of the peso, a large amount of business is being
transacted in terms of dollars. Speculation is prevalent and to
the extent that it anticipates the fluctuations, its tendency is to
equalize the rates.



1870 1880 1890 1900 1910 1920 1930

The demand for foreign drafts comes largely from merchants
who import various kinds of merchandise and manufactured arti-
cles. These articles are principally as follows: cloth of various
kinds, miscellaneous food products, iron and steel manufactures,
drugs and chemical goods. The larger houses usually buy on open
account, while the smaller ones have drafts drawn against them
which are either taken up by themselves or by the banks for them.
The supply of bills in Guatemala on foreign countries comes
almost entirely from coffee shipments. Thus the fluctuations in
the price of bills tend to be influenced by the size of the coffee crop
and the price it will bring in foreign markets. Other export products
of importance are as follows: bananas, hides, sugar, hard woods,
and chicle.
The importations into Guatemala before the war came from the
following countries in the order of importance: United States, Ger-
many, England, France, and oriental countries. Since the war Ger-
many has yielded second place to England as shown by the fol-
lowing figures.
1922 1923
United States ...... 62 per cent 60 per cent
England ........... 15 15
Germany .......... 11 12 "
Other countries ..... 12 13 "

100 100 "
The principal countries to which exports went before the war
were as follows in the order of importance: Germany, United
States, England, Austria-Hungary, and Holland. Most of the coffee
went to Germany. The effect of the war upon the direction of
Guatemala's export trade was to place the United States in the

lead as the chief country for exports, and to increase the importance
of Holland, which remained neutral during the war.
1922 1923
United States ...... 67 per cent 77 per cent
Germany .......... 16 14 "
Holland .......... 9 2 "
England .......... 2 2 "
Other countries ..... 6 5 "

100 100 "
German interests in Guatemala before the war were very great.
The bulk of the coffee crop was shipped to Germany, and marks
were an important currency dealt in on the exchanges. A large
amount of German capital was invested in Guatemala, and German
mercantile houses there were very strong. When the war started
importations from Germany were practically cut off, and the
Germans in Guatemala soon found themselves in a very difficult
situation. In April 1917 Guatemala broke off relations with Ger-
many, and co-operated with the United States in measures directed
against the Central Powers. Property of the Germans in Guatemala
was taken over, and the Germans there found their lot a hard one.
Many of them turned their property into American money as far
as possible and stored it away. Since the war the Germans have
regained a portion of the ground lost, and are again playing a
prominent part in Guatemalan trade and commerce.
When the European source of supply to the merchants in Guate-
mala was cut off, they turned to the United States by force of cir-
cumstances. As a result, trade with the United States increased
greatly, and has remained large. Although European countries
have taken back a part of their former trade, the United States has
a larger share than formerly. The above percentages show the

present relative importance of the United States in Guatemala's
trade, and the following table shows the importance as contrasted
with the year 1913.
(In terms of United States gold)
1913 1921 1923
United States ....... $4,042,000 $6,529,ooo $6,520,000
Germany .......... 1,635,000 1,110,000 1,302,000
England ........... 1,291,ooo 1,898,ooo 1,666,000
France ............ 322,000 437,000 307,000
Japan and China .... 244,000 182,000
Italy .............. 100oo,ooo 89,000
Spain ............. 89,000 117,000
Other countries ..... 236,000 328,000 1,046,000

Total........ $7,959,000 $1o,690,000 $10,841,000
(In terms of United States gold)
1913 1921 1923
Germany .......... $7,654,000 $1,760,000 $2,048,000
United States ....... 3,923,000 8,110,000 11,331,000
England ........... 1,600,000 136,000 355,000
Austria-Hungary .... 514,000
Mexico ............ 78,000 157,000
Holland ........... 48,000 1,546,000
Other countries ..... 623,ooo 422,000 992,000

Total........ $14,440,000 $12,131,000 $14,726,oo000
Thus from the standpoints of exports and imports the United
States is the leading country in Guatemala's foreign trade. Com-
plaints are frequently heard of inferior methods of doing business
by Americans, especially as regards terms of credit, filling of or-
ders, and packing of goods. These are common complaints against

Americans, and have been heard in various parts of the world.
Although in the past there may have been a basis for complaints,
most of the charges are probably now outworn and exaggerated
as applied distinctly to American firms. However, the terms of
credit extended by the Germans were very liberal in comparison to
those of many American houses. Most American drafts have been
sight drafts. Interest rates in Guatemala are extremely high, and
if an American sight or thirty day bill comes with a shipment of
goods, the local merchant must be financed by his home bank, pay-
ing high interest charges-twelve to eighteen per cent frequently-
until he has disposed of his goods. He much prefers to pay a
slightly higher price for his goods, and have sixty or ninety days
in which to pay for them.
The importance of the United States as a market, and as a source
of purchases for all the Central American countries appears to be
permanent, and based upon economic grounds. The proximity of
the United States reduces freight charges, and frequent steamship
service facilitates intercourse. The demand in the United States
for the tropical products of Central America is growing, and on
the other hand the products of American factories are finding in-
creasing popularity throughout Central America. The recent in-
crease in the foreign trade of the United States has caused Amer-
icans to learn more of foreign trade methods, so that their goods
are coming into greater favor.

3. Coffee industry
THE coffee industry is the most important industry in Guatemala.
Guatemala produces more coffee than any of the other Central
American states, and ranks third in the countries of the world,
Brazil being first and Colombia second. The Dutch East Indies
also produce a large amount of coffee. Coffee in Guatemala is

grown chiefly on the Pacific side of the country, somewhat elevated
above the sea level, and is of an especially fine flavor, thus always
bringing a good price in the foreign markets. The fruit ripens in
the summer months and by November or December has been dried
and shipments begun, which continue until about May or June.
Prior to the war Germany received most of Guatemala's coffee.
War conditions altered trade routes and markets so that San Fran-
cisco now has come to be an important market for Central American
coffee. With the other markets of New York and New Orleans, the
United States takes the great bulk of Central America's coffee.
The coffee plantations in Guatemala are nearer the Pacific side
of the country than the Atlantic side. However, in order to aid the
United Fruit Company, which operates a line of vessels out of the
Atlantic port of Barrios, freight rates have discriminated against
the Pacific ports of San Jose and Champerico in favor of the At-
lantic side. This has affected the amount of coffee shipped to San
Francisco. Recent readjustments in rates have tended to reduce this
inequality, and with more frequent steamship service on the Pacific
side the importance of San Francisco as a coffee market is in-
The coffee industry, unlike the banana industry, is to a large
extent in the hands of Central Americans. The coffee plantations
are usually large, and in Guatemala are owned by a relatively
small number of the population, mostly individuals of Spanish
descent. However, coffee "fincas" owned by Germans and by Amer-
.icans are quite common. A large number were originally set out
by Germans, or later were acquired from native owners. The plan-
tations are increasingly passing into the hands of foreigners, either
SOn account of the depreciating value of the paper peso the Government
has declared coffee duties payable in gold or the equivalent. Practically
all other Government payments are on the paper basis.

through outright purchase or through acquisition under a mort-
The work on the plantations is performed chiefly by Indians.
They work under the peonage system which in effect is not un-
similar to a system of slavery, and is subject to grave abuses. The
Indians contract themselves out to work, receiving a customary
advance in money at the time. Once in debt they are under the
control of the employer, and since wages are extremely low, find
it almost impossible to free themselves from debt. The entire
family works, and together get no more than enough to provide
the bare necessities of life under an extremely low standard of
living. The improvident Indians accept advances in money un-
mindful of the burdensome terms under which repayment is to
be made. The contract labor system is frequently imposed upon
laborers by duress, or when the laborer is incompetent to contract
freely. The growers provide maintenance for the workers, the food
consisting chiefly of corn and beans. Thus the crops of these arti-
cles are of importance to the coffee growers.
The number of free laborers who come in to help out at the
time of harvest is decreasing, since these have largely been forced
into the service through corruption of local officials or ensnared
in other ways. The lot of the Indian is a hard one; his living condi-
tions are of the crudest, he is underfed, ill-treated, and as would
be expected, inefficient. The Government at various times has
taken measures to destroy the abuses, but the pressure in favor of
the system has been so great that little has been accomplished in a
practical way. The Indian element is very pronounced in Guate-
mala. A large number of the Indians have not yet assimilated the
Spanish language and customs. They live under extremely primi-
tive conditions,'and being held in subjection on the plantations
have little opportunity to improve their position.

The moving of the coffee crop is generally financed through the
local banks or commission houses. These houses, many of which are
very strong, conduct both an importing and exporting business.
They import a large amount of flour and other food products, also
general merchandise; their business is chiefly wholesale. They ex-
port coffee, sugar and other products. In addition they deal in
foreign exchange, and do somewhat of a general banking business.
These houses, together with the banks and the houses which confine
their business more exclusively to coffee, advance credits to the
coffee growers.
The grower ordinarily borrows in the spring or summer. He may
give a mortgage on his finca, or if he is a man of good credit he is
merely allowed to draw, up to a certain amount, $10,ooo for ex-
ample. When his crop has been harvested he must sell to the house
which financed him. However, if the two can not agree on a price
and the grower chooses to sell to another purchaser, he must pay
to the house which financed him what is known as a "falsa comi-
si6n." This "falsa comisi6n" is usually about fifty cents a quintal,
and thus puts the grower at somewhat of a disadvantage in dispos-
ing of his coffee. Very few of the growers finance their own crops.
The growers who ship their own coffee usually borrow against it
from the banks,
The following table shows the exportations of coffee since 1875.
1876 207,000 1883 404,000
1877 210,000 1884 371,000
1878 209,000 1885 520,000
1879 252,000 1886 530,000
188o 290,000 1887. 479,000
1881 260,000 1888 366,000
1882 312,0oo00 1889 552,ooo



1890 509,000 1907 956,000
1891 524,000 1908 608,000
1892 492,00ooo 1909 1,163,000
1893 598,ooo 1910 704,000
1894 614,000 1911 817,000
1895 692,000 1912 751,000
1896 687,000 1913 917,000
1897 755,000 1914 861,000
1898 826,000 1915 795,000
1899 841,000 1916 881,ooo
1900 730,000 1917 907,000
1901 754,00o 1918 783,00ooo
1902 857,000 1919 898,o00
1903 631,000 1920 942,000
1904 992,000 1921 939,000
1905 886,ooo 1922 938,ooo
1906 936,000 1923 957,ooo
The cultivation of bananas along the hot Caribbean sea-coast
has developed rapidly in Guatemala as in Honduras, Nicaragua,
and Costa Rica. The fruit is now cultivated systematically and
shipped by fast steamships to New Orleans, New York, and other
ports. The industry has thus given the east coast of Central America
frequent steamship service to the United States. The banana in-
dustry is chiefly in the hands of the United Fruit Company, and
since this company represents foreign capital the industry is not
of as great importance to the native Guatemaltecans as the value
of the exports might indicate. However, a large number of the
plantations are in the hands of native owners, who sell the fruit
to the Fruit Company at a certain amount per bunch. Railway lines,
built especially for the transportation of bananas, have been ex-
tended to the capital, so that Guatemala, like Costa Rica, has a
trans-continental railway system.

Chapter V


1. Government debt to the banks
THE question of currency reform in Guatemala is closely
bound up with the question of the debt of the Government
to the banks. The contract of August 1899 between the banks and
the Government provides, among other things, that the banks are
not required to redeem their notes in coin, "moneda efectiva," until
the Government pays to the banks the total amount of its debts in
metal, "metilico."1 The debt of the Government to the banks has
been increasing since the above date by various contracts, and in
September 1923 amounted in round numbers to one hundred and
thirty-seven million pesos. The Government has not even paid the
accruing interest upon this debt. Thus the banks are not obliged
to redeem their notes, and not until some settlement of the Govern-
ment debt is made will the billetes be legally redeemable. Further-
more, the banks at present are unable to redeem the notes since they
have almost no specie. The metallic reserve behind the billetes is
less than one tenth of one per cent.2 Most of the banks' assets which
are security for the notes are represented by the government debt.
The debt of the Government has been a source of dispute be-
tween the banks and the Government for a long time. The dispute
has centered around the question of the kind of currency in which
the debt is to be paid. The original portion of the debt, contracted
before the depreciation had run its course, is commonly accepted
as being payable in silver money, since the contract uses the word
"metilico." The remainder of the debt is payable in "national
Scf. above, p. 31.
2 See foot-note above, p. 37.

money." The various contracts under which the debt has increased
do not specify metal, but merely declare for current money, or
national money-moneda corriente, or moneda national. The silver
debt amounts to a little over five and one half million pesos, and
the accrued interest at five per cent now amounts to about eight
million pesos. The interest, however, appears to be payable not in
silver, but in current money and thus is in the same category with
the rest of the Government debt.8
The other portion of the debt of the Government to the banks,
payable in national money, amounted in the latter part of 1923
with compound interest to about one hundred and twenty-five mil-
lion pesos.' The bulk of this was owing to two banks, about seventy-
five millions pesos to the Banco de Guatemala, and about forty-
five million pesos to the Banco Occidente. The principal point in
controversy is upon what basis this debt should be paid. Payment
in silver is not practical, nor just from the standpoint of the Gov-
ernment. It would entail an almost insuperable burden upon the
Government, and further than this, the loans from the banks were
made at times when the peso was depreciated, and had only a frac-
tion of its original silver value. Thus the Government should not
be asked to pay back a peso more valuable than the one it received
from the banks in the first instance. Current money during this
period has been paper billetes, and the question resolves itself into
one of what value to give the peso when computing the total to be
paid back by the Government.
A basis which has been recommended as fair, is that the Govern-
s The claim that the original debt is payable in silver is based on the use
of the word "metilico" in the contract. Some of the opponents of the
banks have contended that in view of this the Government could fulfill
its legal obligation by paying the banks in copper pesos.
* In addition to this, internal loans outstanding in 1923 amounted to about
fourteen million pesos; there is also a small floating debt.

ment should pay each debt according to the gold value of the debt
at the time it was contracted, as indicated by exchange rates. Ac-
cording to this plan a debt contracted when the exchange rate was
twenty pesos to the dollar would be paid back on an equivalent
basis, and at a greater value for the peso than a debt contracted
when the peso was at a rate of forty to the dollar. This plan would
have the early debts paid in silver or the equivalent. A somewhat
different plan is to have all the debts liquidated upon the same basis
at a chosen rate, such as thirty pesos to the dollar. This has the
advantage of simplicity.
Another question in controversy is that of the delinquent in-
terest, whether it should be compounded, and if so whether this
should be annually or semi-annually. The contracts do not specify
that the interest shall be compounded, but Cabrera recognized such
interest. The banks naturally hold that the interest should be com-
pounded, and that this should be semi-annually.
The Banco Colombiano considers itself on a different basis than
the other banks. It negotiated a separate contract with the Govern-
ment in which it left out the words "moneda corriente." This
omission is interpreted as meaning that both the interest and prin-
cipal of the debt are payable in silver, whereas the interest to the
other banks is held to be payable in "moneda corriente," which was
paper money. The debt owing to the Banco Colombiano is relatively
small, and the bank has only a small amount of billetes in circula-
tion. The original issue of this bank was a little over one million
pesos. This amount was never increased, but has been gradually re-
duced so that the amount outstanding at the first of 1923 was only
about two hundred and fifty thousand pesos. The total circulation
of the country at this time amounted to about three hundred and
sixty million pesos. The Banco Colombiano has thus held aloof
from the billete system, and is withdrawing its' circulation outstand-

ing as much as possible. It desires to have only a small amount of
notes in circulation, since it will thus be able to redeem them easily
in silver. It declares that the Government debt to it is payable in
silver, and that the bank then will stand ready to redeem its notes
in silver.
The banks in Guatemala are in a difficult position being weighted
down with Government obligations, and other paper which is of
doubtful value. They frequently were forced to accommodate cus-
tomers against their own judgment on the recommendation of Ca-
brera-the practice of "recomendaciones" as it was known. Cabrera
would give letters to his friends addressed to one of the banks,
asking that the bank accommodate the individual. Most of the
banks did not dare refuse these "recomendaciones." Thus the banks
have been injured, and are not entirely responsible for their pres-
ent position. Furthermore, the depression of 1920 and 1921 imposed
a heavy burden upon most of the banks.
In 1919 the Commercial Bank of Spanish America, affiliated
with the Anglo-South American Bank, Ltd., established a branch
in Guatemala City and has been doing a general banking business,
also carrying on operations in coffee. This bank is not a bank of
issue and is distinct from the six native banks, which are closely
related with the Government's finance. No American bank has yet
established a branch in Guatemala, although the matter has come
up for consideration at various times.

2. Efforts toward reform
IN May 1903 Cabrera endeavored to arrange for a metallic reserve
behind the billetes, and issued a decree (number 634) which de-
clared that the amount of billetes without metallic guarantee
should be limited to the amount then outstanding, and that all
future issues should be secured by specie to the extent of ten per

cent the first year, twenty per cent the second year, and thirty per
cent the third year. At the time of this decree there were only about
thirty million pesos in circulation, as against four hundred million
early in 1924. This regulation, however, has not been observed by
the banks. Thus the bulk of the present issue has been made with-
out full observance of legal regulations. The decree of May 1903,
also, retained the previous provisions that in order to emit new
billetes the banks should first obtain the approval of the Govern-
Another phase of irregularity in the present issues is that the
charters of all the banks, except the Banco Occidente have ex-
pired, so that these banks have at present no legal existence. The
concessions of the Internacional, Colombiano, and Americano ex-
pired together several years ago; then in April 1923 the concessions
of the Banco de Guatemala and the Banco Agricola-Hipotecario
expired.5 Thus the only bank which has the legal right under its
charter to issue notes is the Banco de Occidente which was given
a concession to last for fifty years, and which fifty years will not
expire until 1931. Efforts on the part of the banks at various times
to re-charter were not successful, since the Government desired to
leave matters indeterminate and more or less flexible until a gener-
al banking law could be worked out, and reform instituted.
Agitation for reform has been prevalent in Guatemala for a
number of years. Cabrera did not evince much enthusiasm for
reform since the billete system was lucrative to himself and to a
5 The concession to the Banco de Guatemala was to expire at the same
time as that granted to the Banco Agricola-Hipotecario. The concession
to the latter bank was granted in April 1893 by decree number 208, and
was to last for thirty years. Article to declared that if the bank was not
founded within one year the concession would expire. Decree 232 in April
1894 extended this period for another year. The bank was finally founded
in 1894, but the concession apparently dates from 1893.

large number of his friends. However, he gave serious attention
to the problem under pressure from the United States and others,
and in the summer of 1919 plans began to take definite shape.
Upon invitation of the Guatemalan Government, Professor E. W.
Kemmerer of Princeton University visited Guatemala in 1919 to
study monetary conditions and make recommendations for reform.
Professor Kemmerer recommended that a gold unit be adopted equal
in value to one-third of the United States dollar. The unit was to
be divided into 10 pesos, or loo centimos, thus making the peso the
equivalent of o1 centimos, and stabilizing it at a value of 31/, cents
in United States gold, which was its approximate value at that time.
The bulk of the currency was to be fiduciary silver maintained at a
parity with gold by a gold reserve of at least thirty per cent. Part
of this reserve was to be kept abroad, and redemption of the coins
to be made in drafts on the fund in accordance with the principles
of the gold-exchange standard. Recommendations for the establish-
ment of a National Bank were also made. The bank was to be the
fiscal agent of the Government, and was ultimately to have the
exclusive right of note issue as the concessions of the other banks
expired. The bank was to be a central bank where the other banks
might keep a portion of their legal reserves on deposit. Unfortu-
nately, these plans were not adopted.
Had the plans for the introduction of the gold standard and the
foundation of a National Bank as formulated by Professor Kem-
merer been put into operation, Guatemala would undoubtedly have
been spared to a large extent the acute monetary and exchange
difficulties which accompanied the period of depression in 1920
and 1921. Program for reform was interrupted in the first part
of 1920 by a revolution in which Estrada Cabrera was overthrown.
He had ruled Guatemala continuously since the first of 1898 when
President Barrios was assassinated.

The administration of Carlos Herrera which came into power
in 192o was favorable to reform and appointed a local finance
commission to determine what measures should be undertaken. The
commission, of which Julio Samayoa was chairman, worked out a
plan somewhat along the lines of the American Federal Reserve
System. There was to be a central government institution which
would issue notes to the banks in return for certain securities and
gold. The notes were to have behind them a gold reserve to the
extent of forty per cent so that they might always be redeemable
on demand. The old billetes were to be presented in exchange for
new notes at a fixed conversion rate.
The question of the rate of conversion was obviously a matter
of great importance since it would fix the value of the old billetes.
A rate of forty billetes to the dollar was first considered, but as
exchange rates rose rapidly and depreciation continued apace a
rate of 50 to 1 was contemplated. The higher the rate selected the
lower the value that would pertain to the peso and the cheaper
would be the reform to the Government. The banks preferred as
low a rate as possible since the debt of the Government to the
banks would then have a greater value. The relation between the
debtor and creditor classes would be affected very materially by the
value given the peso. A high value would be to the advantage of
the debtor class while a low value would be in the interest of the
creditor class.
During the period of rapidly rising exchange rates at the end of
1920 and the first part of 1921 popular agitation for some kind
of reform became pronounced, and in April a public demonstration
before the National Assembly was organized to obtain relief from
the falling value of the peso. A rather hurriedly drawn up project
was adopted which authorized the Executive to establish a bank
with a minimum capitalization of ten million dollars. The bank

was to enjoy the right of note issue up to three times its paid up
capital and surplus, the notes to be guaranteed by a forty per cent
reserve in gold and to be redeemed on demand either in sight drafts
or American gold.
Nothing came of the above attempts at reform, and in the fall
of 1921 President Herrera again took up the question. He decided
to bring in foreign experts who would formulate a plan for general
reform and supervise its installation. Negotiations for this were
nearing completion in the United States and reform might soon
have been under way had it not been for a sudden revolution in
December 1921, whereby Herrera was removed from office and a
new group came into power. The disturbed conditions postponed
any immediate prospects of reform.
General Orellana, who became the new President, realized the
necessity of a thorough-going reform. He soon took up the
question of reform, and commenced negotiations with American
bankers for the flotation of a foreign loan, to provide funds to
settle the debt with the banks and to institute a comprehensive
banking and currency reform. Negotiations were carried on with
Blair & Company of New York, and a plan was worked out whereby
money would be advanced to Guatemala for the establishment of
a National Bank whose currency would replace the present irre-
deemable billetes, the new notes to be guaranteed by gold and
Liberty Bonds or other governmental bonds in the United States.
This loan plan was not approved by the Guatemalan national
assembly. Professor Kemmerer visited Guatemala again in the
summer of 1924 and at the present writing (September 1924)
plans for reform are being worked out.
A decree was issued in September 1923 establishing a "Caja
Reguladora" to stabilize exchange rates. The Caja was given a
directorate of nine members including the Minister of Finance, and

was to buy and sell in paper currency foreign gold drafts. The
Caja was to receive the income from an additional coffee export
tax of fifty cents a quintal, and if this money were insufficient the
Government would provide further funds. An issue of bonds was
authorized. Accordingly bonds were issued and are receivable in
payment of the additional coffee duty. The rate at which drafts
were to be bought and sold was to be determined by the Caja. A
rate of about sixty-three pesos to the dollar was selected when oper-
ations were first begun. As coffee bills came on the market the Caja
was enabled to reduce the rates several pesos to the dollar. In
August 1924 the rates were about sixty pesos to the dollar.
The difficulties which complicate the problem of reform are the
way in which the currency system is closely tied up with the six
banks and with the debt of the Government to these banks; the
banks, the currency, and the Government debt are all inter-related.
Any reform must involve all these factors. The security behind the
bank notes is the Government debt, and not until the Government
pays the banks can the banks redeem their billetes. The Govern-
ment has not sufficient funds to pay the banks, and therefore a
foreign loan is almost essential before a satisfactory reform can
be accomplished and the currency placed upon a sound basis.
When the question of a foreign loan is broached, investigation
shows that Guatemala's record in maintaining payments on her
foreign obligations is not especially favorable. From 1825 until
1856 payments on her share of the debt of the Central American
Federation were in default. A refunding operation was consummated
in 1856 in London, and in 1869 another loan was contracted. Both
these loans went into default in 1876 and remained so until 1888
when a consolidation and refunding operation was again accom-
plished, the creditors accepting a reduction of the interest in arrears.
Default again took place in 1894. In the following year a new ar-

rangement was made whereby internal and external obligations
were consolidated into a new four per cent bond issue to the extent
of 1,6oo,ooo. These bonds were guaranteed by an export duty on
coffee of $1.5o per quintal, which was not to be altered for a
period of ten years. A loan was negotiated the same year with
German bankers also based on coffee duties. Contrary to the agree-
ment, the coffee duties were reduced in 1898 and again in 1899.
Interest payments were not maintained after 1898 until 1913,
when resumption in accord with the arrangements of 1895 was
accomplished. Interest payments are now regularly maintained
and have not been in default since 1913. The total foreign debt
of Guatemala at the close of 1923 amounted to 1,876,000.
In the light of the past record of default, and the scaling down
of the debt through conversion operations, involving a loss to
creditors, any new loan would have to be secured by adequate
guarantees if it wished to find favor with reputable American
The debt of the Government to the banks in September 1923
amounted to about one hundred and thirty-seven million pesos.
This debt would have a gold value of about $2,74,oo000 computing
the peso at the rate of fifty to the dollar. The sterling debt above
amounts to about $9,115,000 ($4.86 to the pound), with annual
interest charges at the rate of four per cent exclusive of amortiza-
tion. These two debts plus internal debts to the extent of about
fifteen million pesos--$3,oo,o-give Guatemala a total debt of
about $12,15o,ooo. The total revenue in 1922 amounted to about
three hundred and seven million pesos, or $6,14o,ooo. Thus, with
economy in expenditure--more than has been shown in the last
two or three years-and stricter financial control, Guatemala

would have a basis for additional borrowing in order to finance a
general currency and banking reform. Following are the total
revenues and expenditures for recent years.
1910 P51,571,0oo P45,959,ooo P5,612,ooo
1911 62,047,000 69,162,000 P7,115,000
1912 71,015,ooo 76,683,000oo 5,668,ooo
1913 83,644,000 46464,000 37,180,ooo
1914 82400,000 48,736,000 33,664,000
1915 85,oo8,ooo 67,841,000 17,167,000
1916 134,935,000 91,753,ooo 43,82,000
1917 135472,000 131413,000 4,o59,ooo
1918 110,937,000 77,666,000 33,271,00o
1919 127,249,000 101,028,000 26,221,000
1920 168482,000 195,715,000 27,233,0oo
1921 256,262,000 387,365,000 131,103,000
1922 306,810,000 348,490,000 41,680,000
1923 385,874,000 396,122,000 10,248,000


Chapter VI


1. Silver standard
E L SALVADOR, prior to 1914, like Honduras was one of the
few countries of the world which retained the silver standard.
The silver standard had a long history in Salvador. During the
period when the country recognized the authority of Spain the chief
coin was the Spanish silver peso, divided into eight reales. Along
with the Spanish money, coins of various other countries, especially
those of Latin-America, were in circulation. In addition to the
silver money a certain number of gold coins were also seen, such
as the "onza," equivalent to about sixteen silver pesos. Gold coins,
however, never circulated very widely and the chief money was
silver money.
The currency of Salvador during the Spanish period was similar
to that of the other Central American states and was equally con-
fused. The money being a mixed lot from various countries and
struck by different mints was not always uniform, and many of
the coins were under-weight or debased. The result of such a
heterogeneous condition of the currency was that a table of ratings
was frequently necessary to determine at what value the coins were
to be received. The rudely minted macacas, pieces of silver of odd
shapes, were current in Salvador as in the other Central American
countries and were an additional source of confusion. They con-
tinued in circulation down to a recent date.1
When Salvador became independent from Spain in 1821 there
was no great change in the currency situation. The Spanish system
1 A fuller discussion of the currency in Central America during this early
period will be found in the section dealing with Guatemala.


Chapter VI


1. Silver standard
E L SALVADOR, prior to 1914, like Honduras was one of the
few countries of the world which retained the silver standard.
The silver standard had a long history in Salvador. During the
period when the country recognized the authority of Spain the chief
coin was the Spanish silver peso, divided into eight reales. Along
with the Spanish money, coins of various other countries, especially
those of Latin-America, were in circulation. In addition to the
silver money a certain number of gold coins were also seen, such
as the "onza," equivalent to about sixteen silver pesos. Gold coins,
however, never circulated very widely and the chief money was
silver money.
The currency of Salvador during the Spanish period was similar
to that of the other Central American states and was equally con-
fused. The money being a mixed lot from various countries and
struck by different mints was not always uniform, and many of
the coins were under-weight or debased. The result of such a
heterogeneous condition of the currency was that a table of ratings
was frequently necessary to determine at what value the coins were
to be received. The rudely minted macacas, pieces of silver of odd
shapes, were current in Salvador as in the other Central American
countries and were an additional source of confusion. They con-
tinued in circulation down to a recent date.1
When Salvador became independent from Spain in 1821 there
was no great change in the currency situation. The Spanish system
1 A fuller discussion of the currency in Central America during this early
period will be found in the section dealing with Guatemala.

remained, and with it the miscellaneous coins which were in circula-
tion. The money was chiefly from Spain, Mexico, Peru and Bolivia.
A shortage of small change soon developed in Salvador, and "mone-
da provisional" was ordered coined at the mint in Guatemala about
1828 and the years following. In 1851 gold money of the United
States was declared officially to be legal tender in Salvador.
El Salvador, so far as can be ascertained, had no general moneta-
ry law until February 1883, when a detailed law was enacted. This
law adopted as the monetary unit the silver peso of 25 grams .900
fine, which was the customary weight for pesos of other countries
at this time. Following the lead of other countries Salvador by this
same law of 1883 discarded the Spanish system of eight reales to
the peso, and adopted the decimal system whereby the peso was
divided into one hundred centavos. Instead of eight reales to the
peso Salvador now recognized ten reales to the peso, the five-real
piece or fifty-centavo piece containing exactly half the silver in the
peso. The smaller coins were of proportional weight but only .835
fine, and were therefore coined only on government account.
The law provided for gold coins, the gold peso to weigh 1.6129
grams .9oo fine which is a little less than the gold contained in
the United States dollar. This gives a ratio with silver of 15Y2
to 1 although the market ratio at the time was about 18Y2 to i. The
law thus undervalued gold, and as was to be expected gold coins
were not minted.2
As regards foreign money, the law declared that the foreign
money circulating in the country, which was the chief currency,
should continue to be legal money; similarly with regard to foreign
money brought in in the future. A table of equivalents was adopted
which listed the various foreign coins and the values at which they
2 A few gold coins were struck in 1892 but did not remain long in circula-

were to be received as legal money. Coins not mentioned in the
table were to enjoy conventional circulation.
Salvador endeavored at various times to establish a mint for
the coining of her own money. In 1849 a mint was authorized and
a contract arranging for it was signed. However, the plans were
not carried out and operations were never undertaken. In 1891 a
concession was granted to certain individuals to establish "The
Central American Mint Limited" to coin money in accord with the
law of 1883 under the supervision of the Government. This com-
pany was organized, and operations in the mint were finally begun
in the latter part of 1892 when some national money of both gold
and silver was struck.
When the price of silver experienced its prolonged fall, begin-
ning about 1873, Salvador followed the lead of other countries,
and attempted the introduction of the gold standard. A law to
this effect was passed in September 1892. The law declared the
monetary unit to be the peso containing 1.612903 grams of gold,
similar to the gold coin which had been provided for in the law of
1883. This weight is slightly less than that of the American gold
dollar.8 The silver money was to remain unchanged, the silver
peso weighing 25 grams .900 fine. The banks were authorized to
issue notes redeemable in gold, either national gold or foreign gold,
on demand. The value attaching to foreign gold coins was specified
by law, the American dollar having a premium of four per cent.
Coincident with this gold standard law, a law was passed, October
1892, which changed the name of the silver peso to that of "Col6n"
in honor of Christopher Columbus; the four-hundreth anniversary
of his discovery of America was being celebrated at this time.
The weights of the coins according to the new gold standard law
were similar to those in the law of 1883. This earlier law had

undervalued gold at the time, and since 1883 the market price of
silver had been falling continually, so that by 1892 a similar ratio
undervalued gold more than ever. Under these circumstances it
was not to have been expected that the plan would have been a
success, and that gold would have remained long in circulation.
Nevertheless, some of the new gold coins were minted, but they
were promptly withdrawn from circulation, most of them being
exported, since their value as bullion was greater than their value
as money. The Government took various measures to sustain the
gold standard, and offered a premium of fifteen per cent on all
customs payments made in gold, hoping thereby to encourage the
circulation of gold.
These efforts to establish the gold standard were unavailing, and
silver money continued to be the chief money of the country. If
gold was to remain in circulation and constitute the standard
metal, the silver money should have been considered fiduciary
and, reduced in quantity, made redeemable in gold. A generous gold
reserve was needed to redeem freely the silver money, and thus
maintain its value at a fixed ratio with that of gold. The large
supply of silver money and the small supply of gold money could
not be made to circulate together at the mint ratio when the market
ratio was so greatly divergent.
Finally, in 1894, all the laws dealing with the gold standard
were repealed, and the silver peso was left the unit as before. The
silver standard continued until 1914 when inconvertible paper
money came into existence and prevailed until the present gold
standard was inaugurated early in 1920.

2. Fall in price of silver, and foreign exchange rates
THE gold standard law of 1892 was adopted by Salvador, after
considerable debate, as a result of the fall in the price of silver in
' The American gold dollar contains 1.671812 grams .90goo fine.

gold standard countries and the concurrent rise in exchange rates
on these countries. The gold standard was expected to relieve Sal-
vador of the instability in the foreign exchanges, and of the diffi-
culties in the currency situation.
The fall in the gold price of silver throughout the world began
about 1873 and continued with some reactions until about 1902.
The leading countries of the world, together with many smaller
ones, were turning to the gold standard, and Salvador in endeavor-
ing to go onto the gold standard was following the general trend of
events. The increased demand for gold throughout the world, and
the decreased demand for silver, cheapened silver in terms of gold
so that silver standard countries such as Salvador experienced
difficulties in their foreign exchange rates. Their monetary units
depreciated in foreign markets, and exchange rates in Salvador on
gold standard countries rose very greatly. Importing merchants
found the cost of foreign goods relatively high when they went to
purchase foreign currencies with local pesos to pay for the goods.
The fall in the price of silver can be seen from the following
table which shows the average price of silver each year since 1870.
Average price per fine ounce in New York; 1870-1873 in London re-
duced to dollars at par of exchange, ounce .1ooo fine. Data taken from
Annual Reports of the Director of the Mint of the United States.
1871 $1.33 1882 $1.14 1893 $ .78
1872 1.32 1883 1.09 1894 .64
1873 1.30 1884 1.11 1895 .66
1874 1.27 1885 1.o6 1896 .68
1875 1.24 1886 1.oo 1897 .61
1876 1.15 1887 .98 1898 -59
1877 1.19 1888 .94 1899 .61
1878 1.15 1889 .94 1900 .62
1879 1.12 1890 1.05 1901 .60
1880 1.14 1891 .99 1902 .53
1881 1.13 1892 .88 1903 .54

1904 $ .r8 1911 $ -54 1918 $ .98
1905 t 1912 .62 1919 1.12
1906 .U7 1913 .61 1920 1.o2
1907 .66 1914 .56 1921 .63
1908 .53 1915 .51 1922 .68
1909 .52 1916 .67 1923 .67
1910 .54 1917 *84

Since Salvador was on the silver standard exchange rates during
this period followed, in general, movements of the price of silver,
until 1914 when the war in Europe brought in complicating
factors. During the few years following 1890 exchange rates rose
especially fast. The table given in Appendix G shows the value in
gold of the silver contained in the peso at various prices for an
ounce of silver.
The most rapid fall in the price of silver occurred between the
years 1890 and 1895. After 1895 the price showed more stability,
gradually tending downward however. A recovery took place
during 1905, 1906, and 1907, after which the price again fell to
its previous low levels. When the war in Europe commenced in
1914 the price of silver at first continued low. However, after
1915 it started to rise rapidly and under pressure of the demand
from India and elsewhere mounted until it reached the old prices
of fifty years previously. This rise in price, however, was to a
large extent merely the depreciation of gold, in terms of which
metal the price of silver was quoted.
The exportation of silver money was interfered with by the
Government of Salvador at various times. In February 1896 a
decree was issued which prohibited the exportation of national and
foreign silver for fear that a "lack of change will produce a
monetary crisis."' This law continued in operation for one year.
Salvador, Repertorio de Legislacidn, 1896.

In March 1899 a tax of thirty per cent was placed upon the ex-
portation of silver money. In order to prevent evasion of this
law silver bullion was not allowed to be exported unless it came
from the mines. However, enforcement of the law was difficult
and evasion apparently took place. To the extent that the law was
effectively enforced exchange rates on foreign countries were raised,
or were prevented from falling, since the law hindered or made
more costly the establishment of balances abroad.
Exchange rates in Salvador, as in Guatemala, are influenced
profoundly by the size of the coffee crop and the price it brings
abroad. Coffee growing is the chief industry of the country, and
shipments of coffee provide the source of most of the foreign drafts.
Thus coffee is a dominant factor in the foreign exchanges. When
the combination of a good coffee crop and good coffee prices pre-
vails, balances accumulate abroad and exchange rates tend to fall.
The country is then fairly prosperous. Buying of foreign goods,
which are more or less articles of luxury, takes place, and imports
tend to increase.
The following table shows the high and low rate on New York
since 1905.
(Pesos per 100 dollars)
1906 237 224 1911 258 244 1916 293 289
1907 262 224 1912 255 229 1917 275 252
1908 269 240 1913 255 231 1918 264 210
1909 285 254 1914 350 228 1919 215 183
1910 303 260 1915 311 229 1920 226 185
1921 225 199
1922 210198.5
1923 207 199
Rates from 1905-1917 taken from Government reports; 1918-1923 sup-
plied by Banco Occidental.
s Also see table on p. 79.

Chapter VII


1. Banks and bank note circulation
THE first bank notes in Salvador were those of the Banco
International which was founded in 1880, being the first
bank in the country. This bank was given the exclusive right to
issue notes which were receivable in the public offices. A second
bank was founded in 1885, the Banco Particular, and was also
given the right to issue notes which were to be receivable in the
public offices provided permission were obtained from the Banco
International. The Banco Particular was changed in 1892 into the
Banco Salvadorefo, which institution exists at the present time
under this name. In 1898 the Banco Internacional was merged
with the Banco Salvadorefio. Permission was given to the Banco de
Nicaragua in 1893 to establish a branch in Salvador. The name
of the Nicaraguan bank was later changed to that of London Bank
of Central America, Ltd., and in 1902 the branch in Salvador was
taken over by the Banco Salvadorelio. Thus the present Banco
Salvadorefio is the outgrowth of several banks.
Two other banks of issue exist in Salvador at the present time,
the Banco Occidental founded in 1890, and the Banco Agricola
Commercial1 founded in 1895. There are thus three banks of issue
in Salvador. Each of these banks is required to keep a metallic
reserve against its notes of at least forty per cent, and a reserve
of twenty per cent against sight deposits. The law declares the
legal reserve against notes to be fifty per cent, but the concessions
of the banks, which antedate the law, specify forty per cent.
1 The Banco Agricola Comerclal is owned to a large extent by the Anglo
South American Bank Ltd.

In addition to these native banks the Commercial Bank of
Spanish-America, Ltd., has opened a branch in Salvador. This bank
is an English institution affiliated with the Anglo-South American
Bank, Ltd. It is not a bank of issue, and confines its operations
almost entirely to foreign business. It buys and sells coffee, deals in
foreign exchange and does a large collection business. Private
bankers, merchants and commission houses also do a considerable
banking business in Salvador.
A fourth bank of issue, the Banco Nacional, founded more re-
recently than the other banks, became involved in difficulties and
failed in November 1913. Its notes immediately went to a discount.
The failure of this bank brought the other banks under general
suspicion and a run on the various banks for silver money took
place. The combined reserves of the banks which amounted to over
four and one-half million pesos on June 30, 1913 fell to consider-
ably less than two million pesos by December 31, 1913. The
emergency was considered sufficiently serious by the Government
so that a six months moratorium, beginning in November 1913,
was granted upon the redemption of all bank notes. The banks
then proceeded to buy up silver money and replenish their silver
reserves so that before the six months expired they were able to
resume specie payments.
When the war in Europe commenced in the summer of 1914,
Salvador, like most other countries of the world, experienced a
financial crisis. The merchants in Salvador were asked by their
SEuropean creditors to remit funds immediately. The demand for
foreign drafts in Salvador was so great that their price rose sharp-
ly. The following are the monthly average rates for sight drafts
on New York during 1914, pesos for loo dollars:

1914 January

233 March
230 April

May 239 September 335
June 242 October 300
July 246 November 300
August 292 December 279
High was 350 September 9.
With exchange rates high the exportation of silver money com-
menced. A strong demand for silver money was also evidenced on
the part of the people generally for the purpose of hoarding. In
Central America a large percentage of the people are suspicious of
banks (often from sad experience), and prefer to put their savings
away in the form of hard money locked up in strong boxes. Thus
at the first sign of difficulty the banks are subjected to a drain on
their metallic reserves.
During the excitement of the first few days of August 1914 the
banks were called upon to pay out large amounts of silver coin.
In order to relieve the situation the Government on August 11
issued a decree extending to the three banks of issue a moratorium
on the redemption of their notes and the payment of all their other
obligations in specie. The moratorium was to last until one year
after peace was signed in Europe. Thus the banks were relieved of
the obligation of paying out silver money. The banks were ordered
to retain in their vaults all the silver money which they then had
with the exception of the fractional money which was to be paid
out and which would go into general circulation. The decree also
established what was known as the Junta de Vigilancia, a joint
commission representative of the Government and the banks, which
was to see that the dispositions just adopted were properly en-
The banks at this time held in their vaults the legal reserve of
forty per cent as a guarantee for their circulation. However, it was
2 A decree of July 1920 arranged for the Junta de Vigilancia to become
a permanent body to exercise general supervision over the banks of the

sealed under government seal and was not available for use. Un-
der these circumstances the silver money very promptly began to
disappear from circulation and soon was at a premium in terms
of the paper bank notes. The premium on silver varied from four
or five per cent to a maximum of about thirty per cent. The fol-
lowing table shows the paper circulation of Salvador and the
metallic reserve behind it.
(December 31 of each year)

1908 P 3,869,000
1909 4,380,ooo
1910 4,847,000
1911 5,530,000oo
1912 5,652,000
1913 June 30 P 6,766,500 P 4,690,000
Dec. 31 4469,100 1,714,900
1914 June 30 3498,300 4,514,800
Dec. 31 6,o62,600 3,664,900
1915 June 30 7,041,000 3,893,600
Dec. 31 7,903,000 4444,900
1916 June 30 9,246,800 5,1io,6oo
Dec. 31 9,612,000 5,520,900
1917 June 30 10,984,700 6,05o5500
Dec. 31 11,195,200 6,o64,200
1918 June 30 12,164,700 6,121,100
Dec. 31 14,183,600 6,622,900
1919 June 30 12,802,600 6,463,300
Dec. 31' C 14,635,800 C 10,690,900
1920 June 30 13,849,000 10,265,700
Dec. 31 8,219400 4,729400
1921 June 30 6,003,100 3,379,600
Dec. 31 7,017,800 4,057,100
1922 June 30 7,989,900 4,582,500
Dec. 31 9,381400 6,290,300
1923 Dec. 31 10,166,5oo 6,674,200
a After currency reform had been adopted.


The effect of the failure of the Banco Nacional in November
1913 can be seen from the figures for December of that year. The
paper circulation at the end of December fell off by over two
million pesos as compared with the June figures. The metallic
reserve at the same time declined by nearly three million pesos,
reducing the reserve to thirty-eight per cent.
During the first six months of 1914 the banks built up their
reserves and at the same time contracted their circulation. Thus
the war in the middle of 1914 found the banks in an unusually
strong position as regards reserve percentages. However the sudden
demand for silver, and the expansion of note circulation changed
the situation abruptly so that by the end of 1914 the reserve per-
centage was cut in half. Although the reserve was still ample it
remained unused in the vaults of the banks on account of the
moratorium which was in effect.
It will be noted that the note circulation showed a steady growth
from the middle of 1914 until the first of 192o. The banks were
not required to redeem their notes during this period, but they
maintained behind the inconvertible paper notes the full legal re-
serves. The increase in circulation was from three and one half
million pesos at the middle of 1914, an unusually small amount,
to over fourteen and one half million at the first of 1920, an ex-
ceptionally large amount.

2. Gold standard installed
THE gold price of silver began to rise about 1915 and continued up-
ward until 1920 when it reached peaks it had not touched before
for fifty years. In 1915 the silver in the peso was worth about forty
cents in American gold. By 1917 it was worth about seventy-five
cents and for a while in 192o was worth a dollar.' A large amount
SThe pesos contained 25 grams of silver .900 fine. (See chart on p. 97.)

of the silver money in Salvador found its way out of the country,
attracted by high prices for silver abroad. The rise in the price of
silver which was taking place was to a large extent merely the de-
preciation of gold. Due to the inflation in Europe and the United
States gold had become relatively cheap, and its purchasing power
When the price of silver was high in 1919 and 192o, or when
gold was cheap, was an opportune time for Salvador to sell out
her silver currency and replace it with gold. Salvador shrewdly
took advantage of this, and by disposing of her silver at a good
profit was enabled to establish the gold standard. The actual cir-
culating medium at this time was irredeemable paper bank notes,
but a large amount of silver currency was locked up in the vaults
of the banks and was lying idle. This silver money was sealed
under government seal and the banks were not allowed to divert
it to any purpose.
Salvador attempted the introduction of the gold standard, it will
be remembered, in 1892, but the plans were not successful and
silver money continued to be the currency of the country until
after the outbreak of the war in 1914 when the period of incon-
vertible paper commenced. Special interest in currency reform be-
came evident early in 1919, and in June 1919 the National Assem-
bly passed a law authorizing the President to appoint a Monetary
Commission to study the situation and make recommendations for
reform. The Commission was instructed to present a project in
the form of a law by the first of January 1920. The President was
also empowered to invite foreign currency experts to come to Sal-
vador and assist the Monetary Commission, but no such experts
were engaged.
The Commission was promptly organized and in two months,
August 1919, made a report. Various plans were discussed' by the

Commission, and two projects were finally presented for considera-
tion, both involving the adoption of the gold standard. The high
prices then prevailing for silver caused events to move rapidly
and on September 11, 1919, the National Assembly adopted a law
embodying the gold standard.
The gold standard law declared the monetary unit to be the
col6n weighing .836 grams of gold .9oo fine, which makes the
col6n almost exactly the equivalent of fifty cents in American
money." The law demonetized all the old silver money both na-
tional and foreign, with the exception of the small coins, twenty
centavos and under. All obligations payable in silver pesos were
now payable in gold colones at the rate of one peso to the col6n.
This provision applied also to the bank notes, although they were
inconvertible since the moratorium was still in force, and would
remain so for several months yet. The banks were ordered within
three months time to substitute American gold for the silver re-
serve which they held. American gold should be first imported be-
fore the silver could be released.
The profit derived from the sale of the silver abroad was the sub-
ject of some dispute. The question was whether this profit, due to
the increased value of the silver, should go to the banks which held
the silver, or whether it belonged to the people generally who were
not able to draw the silver from the banks since the notes were
irredeemable. The Government decided the question by declaring
in the law that, after providing for the gold reserve at the rate
of one gold col6n-fifty cents American gold-for each silver peso
held by the banks, half of the net profit derived from the sale of
the silver should go to the Government and half to the banks.
A second law, passed the same day as that above, September tl,
5 Fifty cents in American money is the equivalent of 3590o6 grams of
gold .9oo fine.

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