MONEY AND INCOME IN COLOMBIA, 1950-1960
DAVID TRESCOTT GEITHMAN
A DISSERTATION PRESENTED TO THE GRADUATE COUNQL OP
THE UNIVERSITY OF FLORIDA
IN PARTLUI. FULFILLMENT OF THE REQUIREMENTS fOR THE
DEGREE OF DOCTOR OF PHILOSOPHY
UNIVERSITY OF FLORIDA
This treatise reflects the growing recognition that there
is far too little theoretical analysis in contemporary studies of
underdeveloped areas, -hile at the same time according some credence
to the view that there is too little reality in current analytical
theory. Hopefully, the following represents one small step towards
the desired balance.
The platform for this attempt is the Colombian economy during
the 1350's. Yet any historical study that attempts to be both manage-
able and unified must be organized around some focus. The focus of
this study is on the growth of national income and the supply of
money in Colombia. The unifying agent is the theoretical model
developed in the latter chapters of the study. Thus, the entire
treatise is baaed on reasoning from the particular to the general.
The author's obligations in this undertaking are manifold.
The names of all of those who lent material assistance are too
numerous to list. However, the following must be singled out for
their patient reading of the manuscript and constructive criticism:
Professors R. W. Bradbury, E L. Jackson, H Kantor and A Ramlrez,
all of the University of Florida, In addition, the author is greatly
in debt to Professors C. C. Curtis 2nd R. L. A. Sterba who have read
and criticized all or part of the theoretical aspects of the study.
As is customary, however, the author accepts complete responsibility
for the errors which remain.
The author wishes to express special acknowledgement to the
many Colombians who lent much of their time and gave freely of their
hospitality to the author and his family during their stay in Colombia.
In particular, four fine friends must be mentioned by name:
Professors Anacleto Apodaca, Jose Miguel Bernal, Albert H. Flores and
Reynaldo Escarpeta, all of the Universidad del Valle, Call. The
author expresses appreciation to Douglas Pijak for his drafting of
A National Defense Education Act fello,'tdp enabled the
author to devote his full attention to this project; and a grant from
the Caribbean Area Research Program at the University of Florida was
of substantial assistance.
The author's obligation to his wife is immeasurable. She
not only typed every draft of the manuscript but did so patiently
and in good humor. Equally amazing was her ability to tolerate,
sustain and encourage her husband through the many months spent in
the preparation of this study. Without her complete cooperation the
task of writing this study would have been impossible.
TABLE OF CONTENTS
PREFACE . . . . . .. .. ..... . . . . ill
LIST OF TABLES . .. . . . . . . . . . vii
LIST OF FIGURES . . . .
INTRODUCTION . . . . . . . . . .
II. NATIONAL INCOME . . . . . . . .
2-1 Introduction . .
2-2 Structural Change:
and Investment .
2-3 Structural Change.
The Composition of Oitput
. . . . 1
The Pattern of Employment and
the Foreign Trade Sector . . . .
Economic Policies to Mid-194 . . . . .
Economic Policies after Mid-1954 . .
Economic Policies and the Balance of Payments .
Conclusion . . . . . . . . .
III. THE SUPPLY OP MONEY . . . . . . . . .
3-1 Types of Banking Institutions and Bank Deposits .
3-2 Alternative Money b.ipply Concepts . ...
3-3 The Money Supply . . . . . .
3-4 The Determinants of the Money Supply . .
IV. THE BANKING SYSTEM AND MONETARY AND CREDIT POLICIES .
The Structure oi the Banking System . . .
The Gold Exchange Standard . . .
Discretionary Powers and the Policies of
the Centr l B.nk . . . . . . .
The Commercial Loan Doctrine . ..
The Specialized Credit Institutions ...
Summary and Conclusion . . . .
V. MONEY AND INCOME: A THEORETICAL APPROACH ...... 93
5-1 Introduction .. . . .. . .. )3
5-2 The Keynesi.n Analysis and the Underdeveloped
Economies: A Word of Caution . . . .93
5-3 The Invectmrnt function . .. ... . 100
5-4 The Savings Supply Function .. . . . .. .105
5-5 The I' Curv . . .. .. . .. 107
5-6 Liquidity Preference Analysis ... . .. .. 112
5-7 The Transactions, Precautionjry and Speculatlve
Motives and the Velocity of Money .. . . .115
5-8 The Consoliddred Dneand Schedule for Money . . 121
5-: The LM Curve. . . . ... . .. .. .. . 124
VI. MONEY AND INCOME IN COLOMBIA: A DESCRIPTIVE AND
THEORETICAL INTEGRATION ... . . . . . 130
6-1 Intruduction .. ... . . .. 130
6-2 The IS and LM Equilibrium . .... . . 130
6-3 The Slope of the IS Curve in Colombia . . 130
0-4 The Savings and Investment Punctions and the
1S Carves Under Dynamic .C.ndtt ons .. . . 133
6-5 The Supply and Demand for b.-ney Under Dynamic
Conditions . . .. . . .. .. .. . 136
o-b The IS and LM Equilibrium Under Dynamic
Conditions and the I4ickseliarn Inflationary Gap 143
6-7 The LM Curves Under Dynamic Conditions and the
Olicl:ellian Tnflationary Gap . . .. . 149
6-8 The Demand for Money and the Velocity of Money .153
VII. SUMMARY AND CONCLUSION ... . . . . . . .158
APPENDLX A . . . . . . . . .. ..... 160
APPENDIX B ..... . . . . . 183
APPENDIX C .. . . . . . . . 194
BIBLIOGRAPHY . . . . . . . . . . . . . 200
BIOGRAPHY . . . . . . . . . . . . 07
LIST OF TABLES
1-1 Indexes of Colombian National Income, Huney Supply,
Wholesale Prices, and Real Cash Balances and Income
Velocity, 1950-1960. . . . . . . . . . 3
2-1 Selected National Income Accounts in Current Pesos
and in Constant Pesos of 1158, 1950-1960 . ... . . 8
2-2 Growth of National Income at Factor Cost Measured
in Constant Pesos, 1950-1900 .. .. . . 10
2-3 Percentage Composition of the Value of Production of
Gouds and Services, Micasured in Cun.tant Pesos of 1)50,
by Economic Activities, 1925, 1945, 1953 . . . 12
2-4 Percentage Composition of the Value of Gross Domestic
Product at PFctor Cost, Measured in Constdnc Pesos of
1958, by Economic Activities, 1950-1960 . . . .. 13
2-5 Percentage Composition of the Value of Fixed Cross
Investment, Mt-asured in Conatant Peso. .f 11"50, Lb,
Type of Investment, 1925-1953 ....... . 16
2-6 Percentage Composition of the Value of Fixed Gross
Investment, Measured in Constant Pejos of 1j58, by
Type of Investment, 1950-1o.0 . . . . . . 17
2-7 Percentage DLstribution of Active Population, by
Economic Activities, 1925, 1945, 1953 . . . . 1
2-8 Percentage of Active Population in Industry, 1950-1960 20
2- Value of LEports of Goods and Services as a Percentage
of Gross National Product at Market Prices, L950-1.iO 21
2-10 Percentage Composition of Gross Natlonal Product at
Market Prices, Measured in Constant Pesos of 1958,
by Economic Sector, 1950-1.'60. .... .. .... ...... 29
2-11 Factors Influencing the Peso Value of Coffee Exports
and the Internal Income of the Coffee Sector, 1952-1)58. 33
3-1 Four Alternative Stocks of Honey, 1950-L9b0 .... ... 46
3-2 Composition of the Honey Stock at End of Year,
1943-1960 . . . . . . . . . . 50
3-3 The Determinants of the Money Supply on December 31,
1949-1960 . . . .. . . . . . . . . 54
3-4 The Determinants of the Money Supply on December 31,
1949-1960 . . . . . . . . . . 56
3-5 Percentage Distribution of Banco de la Republica
Loans and Discounts, According to Type of Borrower,
on December 31, 1949-19b0 . . . . . .... O
4-1 Estimated Yields of Selected Colombian Bond Issues,
1950-19o0 . .. . . .. . . . . . . 75
4-2 DivLdend Yields of Selected Securities Traded at Stock
Exchange of Bogota, 1955-1960 . .. .. . ... 76
4-3 Percentage Distribution of Commercial Bank Loans dnd
Discounts, by Economic Activity, on December 31,
1452-1960 . .. . . . . . . 86
A-I Official Wholesale Price Index by Major
Classification, 1950-L960 ...... . . . . . 161
A-2 General or Home and Import Goods Wholesale Price
Index, lr50-1960 . . . . . . . . 164
A-3 Production Value by Category of Good and for all
Goods, 1953, 1955-19o0 . . .. . . . 167
A-4 Production Volume by Category of Good and for all
Goods, 1953, 1955-1960 . . . . . . . ... 174
A-5 Weights Applicable to the Implicit Price Index . .. 177
A-b Weighted Production Value by Category of Good and
for all Goods, 1953, 1955-1960 ... . . . . 178
A-7 Weighted Production Volume by Category of Good and
for all Goods, 1953, 1955-1960 . . . . . . 180
A-9 Consumer Price Index for Non-Salaried Workers in
Three Major Cities, 1950-1-bO . . . . . ... 18o
A-10 National Consumer Price Index for Salaried and
Non-Salaried Workers, and Official Wholesale Price
Index, 1954-1060 . . ... . . . . . .187
C-l The Determinants of the Money Supply, on December 31,
1949-1960 . . . . . . . . . .194
LIST OF FIGURES
5-1 The Investment-Demand Schedule . . . . . 102
5-2 A Family of Investment-Demand Schedules . . . ... 105
5-3 A Family of Savings Supply Schedules . . . ... 107
5-4 The Four Possible Relationships Between the Investment-
Demand and SAvlngs Supply Schedules . . . .. 10
5-5 The Four Possible Hicksian IS Curves . . . ... 11l
5-6 The LT Function . . ... . ...... ..... .115
5-7 The LL Function ... ... ... . . . ... 120
5-8 The Consolidated L Schedule . . . ..... . 122
5-9 The Four Possible Relationships Between the Consolidated
Demand Schedule for Honey and the Total Money Supply . 125
5-10 The Four Possible LM Curves .. . . . . . ... 128
6-1 The IS-LM Equilibrium . . ... . . ... . 132
This study is an attempt to blend two things: the first is
as examination of some of the mala aggregative facts of the Colombian
economy during the decade of the fifties; the second is the comstruc-
tion of a model that gives insight to these facts.
The plan of the work is fairly st lghtforward. In Chapters
II, III and IV we shall center our attention on the growth of national
income, with special recognition of the role played by investment
demoad; on the rapid expansion of the money supply; and on some of
the moat ignif leant economic aspects of the Colombian banking system
and monetary and credit policies pursued during the decade.
Chapters V and VI construct and apply to the Colombian economy
a theoretical model in the Keynesian tradition in order to demonstrate
the interrelated aspects of investment demand, savings supply, the
demand for mosey, and the supply of money. The intention will be
to construct a framework of some value for explaining, and possibly
predicting. experiences in other undderveloped countrir similar
to those of Colombia while, at the same tie, relating the. theoretical
constacruct to the Colombian situation between 1950 and 1960.
Of the three appendixes that follow the main body of the study,
the first concerns some technical aspects of the computation of the
official Colombian wholesale price index and presents a method designed
.: aii[iiiiiiii ;;:;; ii[
to verify its reliability. The second appendix describes and examines
the Colombian system of national income accounting, and the third
contains the method employed In order to approximate the supply of
money by isolating four primary determinants of the money supply.
At the very outset, it will not be amiss to indicate the
relative magnitude of the variables under study. Thus, Columns 1,
2 and 4 of Table 1-1 indicate that between 1950 and 1960 the level
of national income rose by 219 per cent, the supply of money by 230
per cent, and the general level of wholesale prices by only 119
per cent.1 With t.o exceptions, there were no years during the decade
when all of these three variables did not increase.
The ratio of national income to the supply of money, commonly
called the income velocity of money, exhibited a marked tendency to
decline during the decade of the fifties, as shown in Column 3 of
Table 1-1. Thus, during the period the quantity of money whlch the
public wished to hold increased far more rapidly than income. The
generally increasing liquidity of the Colombian economy, as reflected
in the declining velocity of money, served to prevent an even more
rapid increase in the price level and the level of national income.2
1See APPENDIX A.
2Since an increasing price level is an index of inflation,
it is generally thought to be undersirable. However, a rapidly rising
level of national income may also be an indication of inflation. This
is because national income is conceptually the quantity of output
of goods and services times the price level at 4hich these goods and
services are sold. Consequently, national income may conceivably
rise only in response to rising prices, and, therefore, merely in-
dicate inflation and not a growth of output. This is a particular
danger under conditions of relative supply inelasticity such as existed
INDEXES OF COLOMBIAN NATIONAL INCOME, HONEY SUPPLY,
WHOLESALE PRICES, AND REAL CASH BALANCES
AND INCOME VELOCITY, 1950-1960a
Income Real Cash
in Official Balances
Current Money Income Wholesale e [Col. (2)-
Year Pesos Sapplj Velocity Price Index Col. (4)]
(1) (2) (3) (4) (5)
1950 100.0 100.0 7.0 100.0 100.0
1951 112.0 98.8 8.0 107. l1.b
1952 121.0 122.1 7.0 lOo.i 114.5
1353 134.7 140.5 0.8 112.8 124.6
1954 15 1. 171.5 6.S 120.7 142.1
1955 14.5 18o.3 6.2 121.0 133.2
195o 185.1 219.6 5.9 131.9 u10 .5
1357 216.4 207.2 5 7 163.') 163.0
1958 240.7 311.u 5.4 1)2.2 162.1
1959 27).1 3b4.3 5.4 210.7 172.s
1960 319.2 330.0 5.8 21).5 177.7
"For sources of information, see references cited in Columns
(1), (2), and (4).
bSee Chapter II, Table 2-1.
CSee ChJpter III, Table 3-1, Column 2
dNMtional income in current pesos divided by the average money
eSee APPENDIX A, Table A-I.
..... ii.i. ii.ii.i i i ii niii.iii.i.i.i.iii
As with the declining velocity of money, the increasing level
of real cash balances, or the ratio of the money supply to the level
of wholesale prices, shown in Column 5 of Table 1-1, also reflected
the generally increasing liquidity of the Colombian economy during
the period under study.
Ic is clear from these brief statements that the Colombian
economy which emerged from the disruptions of the Second World War
and the immediate post-iar period produced a variety of distinguishing
features -- moderate inflation, a rapid increase in the supply of
money, a significant growth in the level of national income -- admired
with the rise of Large government budgets.3
Yet the end of the decade of the fifties appears to form a
discernable line of demarcaLion between the years 1)50 to 1760 and
the first third of the 1i60's.
While the eleven years since the mid-century point witnessed
the rise of large government budgets in Colombia, government expendi-
tures did not show a tendency to consistently exceed revenues. Indeed,
a majority of the eleven years were years of budgetary surplus. The
opposite has been true since 1960. Not only has there been a govern-
ment deficit in eery year since 1960, but the size of each annual
deficit has been a multiple of the largest deficit incurred during
che decade of the fifties.
3See Chapter II.
Similarly, the rate of increase of the money supply, quite
rapid during the 1950's, has tended to rise slightly since 1960.
Perhaps of more importance, however, has been the significant
rise in the rate of inflation since l9JO. While the level of whole-
sale prices rose only 119 per cent during the eleven years 1950 to
1360, from 1960 to April of 1964 this index rose by a further 116
per cent. Similarly, the cost of living index rose by 161.3 per cent
from 1960 to April, 1964 while during the entire period 1950 to 190o
this index rose by only 34 per cent.
These factors in general and the increasing tempo of inflation
in particular tend to suggest that our analysis be confined to the
period 1950 to 1)60, a period of moderate inflation.
Whether measured in ieal or money terms, conceived of as in-
come or prodJct, net or gross, or expressed on a total or a per capital
basis, the performance of the Colombian economy between 1950 and l)rO
must be viewed as the result of competing and, in some cases, con-
On the negative side there vere posed a series of obstacles
to economic development. In Colombia, as in most of Latin America,
these factors exerted strong restrictive pressures throughout the
period under study. Six of the most serious obstacles to growth may
be mentioned, while e some Pill require further comment at a later point.
These six impediments were, first, an inadequate knowledge and use
of natural resources, second, a deficiency of investment in the infra-
structure and for productive purposes, third, a lack of diversification
of production, fourth, the vulnerability of the internal economy due
to excessive dependence upon the export sector, fifth, the lack of a
large entrepreneurial class and of the corporate form of enterprise;
and sixth, certain prevailing institutions which tended to create
economic bottlenecks, sich as the land-tenure system, an inadequate
credit structure, the absence of a stable and competent public ad-
ministration, political instability, and, in some areas, the lack of
a homogeneous culture.'
In spite of these impediments, however, the decade of the
fifties was an encouraging one for the Colombian economy, involving
a mitigation of many of the obstacles to its growth, progressive
industrialization, and far-reaching, radical changes in the basic
economic structure. The structural changes themselves may prove to
be of far greater importance to the future development of the economy
than the growth of real income which occurred during the same period.
The most significant national income concepts and their cor-
responding values for the years 1.150 to 1960 are summarized in Table
2-1.2 From this cable it can be seen that the most comprehensive
measure of national income, Gross National Product at market prices,
brew by over 236 per cent if measured in current pesos and by almost
50 per cent if measured in pesos of a constant value. On the other
hand, National Income measured in current pesos rose by almost 220
per cent, and by slightly over 53 per cent if measured in constant
1U.S., Congress, Joint Economic Committee, Subcommittee on
Inter-American Economic Relationships, Hearings, Economic Developments
in South America, Appendix C, 87th Congress, 2nd Session, 160, pp.
See APPENDIX B for a brief discussion of the structure of
the National accounts as they now exist la Colombia. The concepts
contained in Table 2-1 conform to this method.
SELECTED NATIONAL INCOME ACCOUNTS IN CURRENT PESOS AND IN
CONSTANT PESOS OF 1)58, 1950-L[9O'
(in millions of pesos)
Year 1)50 1951 1952 1953
1)50 = 100
1450 = 100
7,777.5 8,843.1 9,570.1 10,647.7
15,037.7 15,127.1 16,097.0 17,562.0
7,0.0.5 6,940.9 ',650.? 10,734.7
14,688.8 15,146.6 1 ,102.0 17,081.0
7,400.5 8,345.2 3,003.4 10,006.0
13,754.2 14,177.3 15,070.3 15,940.8
o,919.) 7,755.u 8,356.4 ),299.0
12,561.5 12,812.7 13,631.2 14,351.0
7,657.8 8,275.b 9,212.0
112.0 121.0 134.7
"anirrep: "Cuentas Nacionales, 1950-1461" (Departamento
de InvestigacLones Economicas, Banco de la Republica), pp. 1-3, 12-17.
(MimeoEraphed.) For method of calculation, see APPENDIX B.
1954 1955 135b 1957 1958 135) 1960
GROWTH OF NATIONAL INCOME AT FACTOR
COST MEASURED IN CONSTANT PESOS, 1)50-1960
National Income Per Capita Income
Income in National in
in Constant Income Constant
Constant Pesos in Pesos
Pesos of 1?58: Constant of i958:
of 158 Annual Pesos Annual
(in Millions Percentage of 1l588 Percentage
Year of Pesos) Increase (in pesos) Increase
(1) (2) (3) (4)
1150 12,260.8 1,0I 5.9
1951 12,539.8 2.3 1,070.4 -2.4
I 52 13,3 d5.d 0.8 L,118.. 4.5
1953 14,088.3 5.2 1,150.7 2.4
1954 15,055.1 t.'9 ,202.i 4.5
1455 15,57).7 3.5 1,217.6 1.2
1956 16,1)3.2 3.) 1,238.0 1.7
1)57 16,272.1 .5 1,217.0 -1.7
1i58 16,454.3 1.2 1,204.1 -1.0
1959 17,95o.) .1 1,285.0 6.7
19b0 18,bol.8 5.0 1,320.4 2.8
Increase 4.4 1.1
aComputed by dividing estimated population into Column (1).
The annual growth of real National Income, or National Income
measured in constant pesos, is shown in Table 2-2, both by total and
as a per capital measurement. The annual average rate of growth of
re.l National Income between 1950 and 1.i60 without consideration of
the growing population was 4.4 per cent, while on a per capital basis
the rate of growth averaged 1.9 per cent.
The latter measurement of real growth may, at first glance,
seem disappointly low. Growth of real per capital National Income
probably does most accurately gauge the state of economic welfare and
the rising standard of living which the population is able to maintain.
Yet as a measure of the strength and output of the economy
as a -hole such a concept may contain a serious shortcoming. Real
per capital income may rise only very slowly due to an abnormal popu-
lation expansion. This appears to have been the case in Colombia
here, during the decade of the 1950's, population expanded by a
fantastic 33 per cent. As a result, the per capital measurement seems
to contain an untoward blas against the performance of the Colombian
2-2 Structural Change: The Composition of Output and Investment
The trend of industrialization and structural change in the
domestic economy began many years prior to the beginning of the period
under examination in this study and was maintained during this period.
The most obvious evidence of this factor was indicated by the changing
composition of the output of the economy, shown in Tables 2-3 and 2-4.
-hile these tables are not directly comparable because of slightly
differing bases of total value, they clearly argue that the structure
of the economy has been undergoing significant and widespread change.
PERCENTAGE COMPOSITION OF THE VALUE OF PRODUCTION
OF GOODS AND SERVICES, MEASURED IN CONSTANT PESOS
OF li50, BY ECONOMIC ACTIVITIES,
1925, 1945, 1953'
(In per cent)
Year 1925 1945 1953
Agriculture and Livestock 58.8 47.0 36.9
Mining 1.5 3.7 3.7
ManufacturIng 7.6 13.4 17.2
Artisan Industry 2.) 3.1 3.8
Constriction 2.6 o.1 4.8
Transport 2.3 4.2 7.4
Public Utilities 0.4 0.7 1.2
Government 5.7 5.5 o.9
Trade, Finance, Services 8.7 10.2 12.9
Personal Income from RentJls 'S.5 6.1 5.2
Total Value of Production 100.0 100.0 100.0
aSource: United Nations, Department of Economic and Social
Affairs, Economjic Commission for Latin America, Analyses and Proiec-
tions of Economic Development, III. The Economic Development of
Colombia (E/CH.12/3o5/Rev. 1, November, li56) (Geneva, 1957), p. 16.
The traditional rural economic activities -- agriculture and
livestock -- had been diminishing in importance from 1925 to the
beginning of the decade under study. From 1S50 to 19u0 the same trend
continued, reducing the contribution of these activities from 40.1
per cent to 34.7 per cent of the total money value of current output.
PERCENTAGE COMPOSITION OP THE VALUE OF
GROSS DOMESTIC PRODUCT AT FACTOR COST,
MEASURED IN CONSTANT PESOS OF 1958,
BY ECONOMIC ACTIVITIES, 1950-1960a
(In per cent)
Year 1950 1951 1952 1953 1954
Agriculture and Livestock 40.0 39.3 39.5 37.5 36.0
Fish and Wildlife 0.1 0.1 0.1 0.1 0.1
Forestry 0.3 0.3 0.3 0.3 0.3
Mining 3.8 4.1 3.8 3.8 3.7
Manufacturing 13.9 13.9 14.0 14.4 14.8
Construction 2.8 2.6 2.6 3.1 3.8
Commerce 12.8 12.9 12.7 13.6 14.2
Transport 5.3 5.7 6.1 6.2 6.4
Communications 0 5 0.5 0.5 0.5 0.6
Energy and Public
Utilities 0.5 0.5 0.6 0.6 0.6
Banking and Finance 1.8 1.8 2.0 2.0 2.2
Net Housing Rental
Income 5.2 5.0 4.9 4.8 4.7
Government 5.0 5.3 5.2 5.6 5.2
Personal Services 8.0 8.0 7.7 7.5 7.4
Total Value of Gross
Domestic Product 100.0 100.0 100.0 100.0 100.0
aSource: "Cuentas Nacionales, 1950-1961" (Departamento de
Investigaciones Econmlicas, Banco de la Reppblica), p. 15. (Mimeogra-
TABLE 2-4 -- Extension
1)55 1956 1957 1958 1959 19b0
35.5 35.2 3o.5 36.7 3o.1 34.7
0.1 0.1 0.2 0.2 0.2 0.2
0.3 0.4 0.4 0.4 0.4 0.4
3.6 3.8 3.8 3.8 4.1 4.1
15.1 15.b 15.9 lo.2 11.4 1o.7
3.o 3.9 3.6 3.4 3.5 3.2
13.b 12.9 12.4 12.1 12.5 12.8
6.9 (.7 0.3 5.7 5.8 0.2
0.o 0.o 0.b 0.7 0.7 0.7
0.0 0.7 0.7 0.7 0.8 0.)
2.4 2.0 2.2 2 1 2.0 2.2
4.7 4.8 4.9 5.1 5.1 5.3
5.2 5.1 4.i 5.2 4.9 5.0
7.5 7.6 7.6 7.7 7.5 7.6
100.0 100.0 100.0 100.0 100.0 100.0
The opposite trend existed in several economic activities
associated with economic development, the growth of more highly
productive economic activity, and a decreasing reliance on export
activities and raw material production. The importance of manufac-
turing industry is, in this connection, most relevant. This type
of activity gre< to represent nearly 17 per cent of the value of
all output by 190O, with a significant increase in the period 1950
Other similar types of activity related to development and
structural change also grew in relative importance. Mo~t significant
in the period before I'150 was the growth of the transport, trade,
finance and service sectors, while after 1950 the growth of construc-
tion activity 3as highly important.
Concoimmitant .ith the changing relative importance of rural
traditional economic activities and the newer more productive activities
was a similar pattern of change in the composition of fixed investment
and in the distribution of the economically-active population. These
changes are reflected in Tables 2-3 through 2-8.
The composition of fixed investment is of strategic importance.
While the total amount of fixed investment (measured in constant pesos
of 1950) Increased by 81.8 per cent from the period 1925-29 to the
1945-53 period and by 51.9 per cent (measured in constant pesos of
1958) from 1950 to 1960, the distribution of these gains *as not evenly
allocated by economic activity. For example, between 1925 and 1953
investment in agricultural machinery and equipment grew by only 4.o
per cent while investment in industrial machinery and equipment rose
PERCENTAGE COMPOSITION OF THE VALUE OF
FIXED GROSS INVESTMENT, MEASURED IN
CONSTANT PESOS OF 1)50,
BY TYPE OF INVESTMENT, 1)25-1953a
(in per cent)
Year 1925-29 1930-38 1939-44 1945-53
Machinery and Equipment 3b.4 22.0 ib.2 34.5
Building 12.2 lb.4 23.2 24.1
Other Construction Activities
and Improvements 51.4 61.b 60.6 41.4
Total Value of Fixed Gross
Investment 100.0 100.0 100.0 100.0
"Source: United Nations, Department of Iconomic and Social
Affairs, E.onomic Commission for Latin America, Analyses and Prolec-
tions of Economic Development, I1i, The Economic Development of
Colombia (EICN 12/3o5/Rev. 1, November, 195o) (Geneva, 1957), p. 21.
by 75.7 per cent and that in the field of transportation by 96.5
per cent. Similarly, during the same period construction investment
in urban dwellings rose by 310.5 per cent, investment in factory and
workshop building by 376.5 per cent while investment in rural, or
agricultural, building remained negligible.3
United Nations, Department of Economic and Social Affairs,
Economic Comoission for Latin America, Analyses and Prolecrions of
Economic Development, III, The Economic Development of Colombia
(E/CN.12/365/Rev. 1, November, 195o) (Geneva, 1957), p. 21.
2N h. u
oo f u
,.n r-. 0
CO0 0 0
S .n o
in in o
coN N o
oo 0 y
o o u o>|
0* -. f 0.4
o S a on
>-C aa -
s 3 o"
These same growth patterns continued throughout the nineteen-
fifties. Most of the investment in machinery and equipment and in
building has come to be in the areas of industry, commerce, trams-
portalton, or in public utilities. Government policies pursued
throughout this period have tended to accentuate and foster this
trend. Several of these policies will be discussed at a later point
in this chapter.
2-3 Structural Chaage: The Pattern of Employient and the Foreign
During the same period, beginning in the years after World
Var I and continuing until the present time, the pattern of employment
reflected a similar decreasing emphasis on agricultural output and
production for export in favor of employment in industry, construction,
and the services. As shown in Table 2-7, the percentage of population
engaged in the traditional agricultural sector has considerably de-
creased, while the reverse is most notably apparent in manufacturing
and artisan industry. These same trends continued from 1950 to 1960
kith the share of active population employed in industry reaching
15.8 per cent by 1960 (see Table 2-8), an all-time high.
Yet another strain which shaped the performance of the economy
during the decade of the fifties uas the relationship between the
value of Colombian exports of Loods and services and the Cross National
Product. As can be seen in Table 2-9, such a relationship expressed
as a ratio of the former to the latter shows no marked change of a
PERCENTAGE DISTRIBUTION OF ACTIVE POPULATION. BY ECONOMIC
ACTIVITIES, 1925, 1945, 1953d
(in per cent)
Year 1925 1945 1953
Agriculture 68.5 59.9 53.8
Mining 1.6 2.1 2.0
(a) Mining Proper 0.4 0.5 0.5
(b) Artisan Mining 1.2 1.6 1.5
Manufacturing 3.4 5.2 6.4
Artisan Industry 7.9 7.3 8.5
Construction 1.8 2.7 3.6
Energy 2.5 3.2
Trade and Finance 16.8 5.8 6.4
Government 2.4 3.7
Services 12.1 12.4
Total Active Population 100.0 100.0 100.0
aSource: United Nations, Department of Economic and Social
Affairs, Economic Commission for Latin America, Analyses and Pro-
lectlons of Economic Development, III, The Economic Development of
Colombia (E/CN.12/365/Rev. 1, November, 195b) (Geneva, 1957), p. 17.
permanent nature if exports are valued in current pesos. The con-
stancy of this ratio is largely due to the special treatment of
coffee-export incomes which the Colombian government instituted
in 1954. This policy will be discussed at a later point in this
Of more importance, however, is the ratio of exports to Gross
National Product when the former are valued in terms of United States
r Oi in?
.n 1S 0
in N of
03- T 'I
"I .iT 0
CT .I 0
0' .0 "I
." 4 o
.. r- r.,
r. .0 -
- -. 0
^ M W
* 3 1.
0 0 '**
**J C O *
sJ sa as
"o "o "a
M M 1
U -. 0-
V a .
a 0 -
.a 0 Z c -
u 90 u u
S a -o o
a C D0.
S0 .O ama
i 2t I U 0 f
f 0A 0 ( I-
aJ .m 0 '-
;< 3 u o s|
0 'a MN 0N 0
0 00i mo o inNCN 4
Go4r C4I in a c f i
SN 0' 04 111 a
-0 Mnm4 o- G N a0
^ip~~n~ri ^ ^ ^r esic
O cI s
L 0. m-m 0
or 0 P n
0 CL i.
a 0 a -a U -
Cu C -U -o
U2:&- ja- -
dollars and the latter to terms of constant pesos. This ratio more
realistically reflects the trend of the capacity of the Colombian
economy to import from abroad. Table 2-9 clearly indicates the rising
capacity to import prior to mid-1954 and the drastic decline following
the break in the New York price for coffee. The decline in this
ratio indicates a long-run trend operating since 1955 to reduce the
relative contribution of export income to Gross National Product.
Related to this declining ratio has been the failure of the
Colombian economy to diversify its export sector. Much official and
private concern has been expressed in Colombia indicating recognition
of this problem. But no structural reform of the export sector,
tending to reduce its dependence upon coffee sales abroad, was forth-
coming. Coffee exports, valued in terms of current United States
dollars, varied between 83 per cent and 71 per cent of the value of
all exports between 1950 and 1960.4
A recent study surveyed and ranked 76 countries according to
the dependence which each country placed on its three exports of
highest value (in 1957). In this survey Colombia ranked second (below
Venezuela), with coffee responsible for 77 per cent, petroleum 13
per cent and bananas 5 per cent of all exports. The three commodities
together accounted for 95 per cent of all Colombian exports in 1957.5
Departamento Adminiatrativo Naclonel de Estadfstica, Anusrio
de Comarcio Exterior (Annual editions, 195), 1960) (Bogota' Multilith
EBtadinal, 1960, 1961).
5Joseph D. Cappock, International Economic Instability (law York:
HcGrau-Hill, 1962), pp. 38-102.
percentage contribution of each commodity to total export value was:
70.9 per cent, 14.2 per cent, and 6.1 per cent.6
In summary, the basic sources of national income were gradually
being "disassociated from the external sector, which Little by little
lost some of its importance as a motive force in Colombia's economy."
When exports accounted for more than 30 per cent of the gross product
in Colombia (1937) the most important expansionist factor in the
internal economy was the external sector. But the relative importance
of exports has greatly diminished since the inter-war period, due to
the greater relative grouch of production for domestic consumption.8
The growth of production for home consumption was accomplished
by progressing industrialization, a second outstanding feature of the
Colombian economy. In addition to legislation for tariff protection,
special foreign exchange regulations, and general encouragement by
government, industry largely escaped the impact of the social and
political unrest that adversely affected agricultural production and
other rural economic activities. On the contrary, migration from rural
6United Nations, Analyses and Protections.... p. 32.
fEconomic Commission for Latin America, "Colombia's Economic
Policy In a Year of Balance of Payments Disequilibrium," Economic
Bulletin for Latin America, I (January, 1956), 54.
to urban areas gave industry the two-fold impetus of a larger avail-
able labor force and a rising demand for manufactured goods.9
However, the failure of the economy to diversify its export
sector was to have notable effects on the growth rate and continuing
industrialization of the internal sector. These effects, propitiated
by the progressive decline in the New York coffee price beginning in
the latter half of 1954, began to expert appreciable deflationary
tendencies in the internal sector by 1956.
The accelerated growth prior to 1956 was accompanied (until
mid-1954) by a rising purchasing power of exports as a consequence of
a favorable trend in the terms of trade.10 This trend permitted the
rapid and persistent expansion of imports of capital goods required
to sustain an investment coefficient between 20 and 25 per cent of
available goods and services during the period 1945-54.11 But with
the reversal of the trend in the terms of trade, resulting from the
combination of a declining price for coffee in the United States market
and Colombia's excessive reliance upon this commodity for export
earnings, the capacity to import drastically declined from the level
attained in 1954.
United Nations, Economic Commission for Latin America,
Economic Survey of Latin America: 1954 (Z/CN.12/3b2/Rev. 1, July,
1955) (New York, 1955), p. 154.
Economic Commission for Latin America, "Colombia's economic
11United Nations, Economic Commission for Latin America,
Economic Survey of Latin America: 1955 (E/CN.12/421/aev. 1, may,
1956) (New York, 1956), p. 15.
The declining capacity to import after 1954 contrasted with
a general fiscal and monetary policy directed at maintaining domestic
aggregate demand. The latter had the natural effect of maintaining
and even stimulating pressures in favor of imported consumption and
investment goods. The Intractability of imports in the face of the
declining capacity to import was largely responsible for the balance
of payments crisis which plagued Colombia in 1955 and 1956.
2-4 Economic Policies to Hid-1954
In the remainder of this chapter we shall examine some of the
most significant monetary and fiscal policies operative in Colombia
between 1950 and 1960 which contributed to the growth of income and
to the pattern of structural change. We shall center our attention
on the effects which these policies had on the main sectors of the
economy -- consumption and investment expenditures and the foreign
balance of trade.
To some extent the policies by which monetary and fiscal
authorities influenced aggregate expenditures between 1950 and 1960
were inconsistent and contradictory. This was especially true during
1953 and 1954, the great boom years for coffee exports, when Colombian
coffee generated unprecedented export earnings.
On the one hand there was a partial anti-inflationary policy
instituted by the Banco de la Republica. This took the form of in-
creasing required cash reserves during the period 1952-1954, shortening
the term for rediscounts, and implementing general credit restrictions.12
12United Nations, Economic Survey of Latin jAmeric: 19,4, p. 154.
These restrictive measures were supplemented by a moderately
compensatory policy vis-a-vis incomes earned from the export of coffee.
It had been official policy since the devaluation of 1951 to require
the surrender of foreign exchange earned through coffee exports
(I.e., United States dollars) to the Colombian exchange authorities.
This foreign exchange was then converted into pesos at an effective
rate lower than any of the other three principal buying rates,13 re-
sulting in a discriminatory (and compensatory) effective exchange
During the first half of 1954, when coffee incomes rose to
their highest level, the government imposed further measures on this
form of income designed to absorb some of the rising inflationary
potential. These measures were two-fold. First the official surrender
price for coffee exports was increased four times between January and
July, 1954 (from US $8b.50 per 70 kilogram bag to a high of US $128
13International Monetary Fund, Third Annual and Fourth Annual
Report: Exchange Restrictions (Washington: International Monetary
Fund, 1952, 1953).
1The original provision, promulgated on March 20, 1951,
following the official devaluation of the peso from PS. 51.95 = US $1
to PS. $2.50, allowed 25 per cent of the exchange proceeds from coffee
exports to be converted at PS $2.50 and the balance of these earnings
at PS. $1.95. On October 29 of the same year this regulation was al-
tered so as to permit 40 per cent of coffee earnings to be converted
at PS. 52.50 and provision was made for this percentage to be increased
progressively by 1 per cent each month until the PS. $2.50 rate be-
came applicable to the total proceeds (International Monetary Fund,
Third Annual Report..., p. 71). See below, Table 2-11, Column (5)
for the effective coffee exchange rate in pesos per dollar prevailing
from 1952 to 1958.
per bag). Against the dollar surrender value the discriminatory
coffee exchange rate was applied.
Second, on March 31 of 1954 a coffee export tax of 50 per cent
was established on the difference between the official surrender
price per bag and a base price equivalent to US $105 per bag (later
raised to US $115). However, it could be argued that the special
tax was imposed too late because the peak dollar price for coffee had
already been reached during the month of March.
These policies -- freezing the coffee exchange rate, mani-
pulating the surrender value, and varying the special tax -- all were
designed to dampen the full inflationary impact of the rapidly climbing
New York price for coffee. Yet the coffee policy was partially self-
defeating and not nearly as financially restrictive as it appeared.
Part of the proceeds of the 'coffee differential" and special
coffee tax accrued to the Fondo Nacional del Cafe (National Coffee
Fund). (The Fund received all of the proceeds from the special coffee
tax in 1954.) The Fund was required, in turn, to deposit 85 per cent
of its receipts in the Banco Cafecero. These parts of coffee income
were, therefore, not by any means frozen; they helped to finance rural
investment as well as the accumulation of coffee inventories in the
crop year 1954/55. 5
L5United Nacions, Economic Commission for Latin America,
Economic Survey of Latin America; 1)57 (E/CN.12/489/Rev. 1, 1959)
(New York, 1959), p. 15).
Also during this period of time a fiscal policy of budgetary
deficit was partially negating the restrictive policies. In both 1953
and 1954 the national government ran a budgetary deficit, with that
of 1954 exceeding by more than three times the deficit of the pre-
ceding year.16 These deficits were financed by the Banco de la
Rep6blica, thus contributing to the increase of money in circulation.
In fact, there was a persistent and rapid expansion of the money
supply during every year of this period, except 1951.17 The expanding
money supply, of course, had the natural effect of stimulating in-
ternal purchasing power and aggregate demand.
In addition to the inconsistent nature of these monetary and
fiscal policies relative to total demand, these policies also had an
effect on the distribution of aggregate demand between consumption
and investment. The special treatment of coffee income tended to re-
duce consumption demand (by the coffee growers and exporters) and to
stimulate investment demand through the activities of the Banco Cafetero.
Similarly, the budget deficits incurred during this period did not
serve to increase "government consumption," but rather provided a
means of financing government and qu.asi-public investment programs.
The result of the changed structure of aggregate demand is reflected
in Table 2-10. As a share of Gross National Product at market prices,
lbThe Colombian national government incurred a deficit of 30
million pesos in 1353 and 109 million in 1954. The latter deficit
was approximately 10 per cent of all national government expenditure
Csee, International Monetary Fund, International Financial Statistics,
17See Chapter III.
3 U i O a
a uN EL auM
000a000- C O L.
00 Oi 0-0-L.o 0 Di
adm ci wua- *aM
>n > LA U COL
l a B a g Li
LU Q 0 3
.3 cc 4
0 .0 co r
In .0 .0 N
N o In .
.3 IC'. .0 PN
N .0 N -
r n N 4
cc en 0 rN
CO .0 0 -M
re cc P1 -.
.0 .0 0 '-
o .0 4 a
Ns t'> N~ -
o 4 *4 30
-* r ^r
*^ / oo
u 0 '.
C -- -
* u mi
0 0 w
private consumption reached its lowest Level -- 70.8 per cent -- in
1954, while investment expenditures were notably rising.
2-5 Economic Policies after Mid-1954
The coffee boom, however, began to subside by late Spring of
1956, and the level of coffee export earnings (in dollar terms) de-
clined. As a result, during the second half of 1954 the Colombian
government began to initiate a series of fiscal and monetary policies
designed to maintain the internal purchasing power of the coffee sector
and to neutralize, by means of credit and public expenditures, the
deflationary effects of declining export earnings.8
Two particular policies were appropriately reversed after the
decline in coffee earnings began in 1954. These policies were the
countercyclical management of coffee incomes and the import restrictions
placed on consumption Imports.
The total value of current imports had begun to rise precipi-
tously by 1953 in response to rising export earnings. By February,
1954 the government eliminated the prohibited list of imports. A large
percentage of the increased imports during the 1953-54 period were
durable and semi-durable consumption goods, a fact that dome Colombian
economists felt was an undesirable use of foreign exchange.9 However,
18Economic Commission for Latin America, "Colombia's Economic
19cf. Dulcy Carces Molina, Memor(a. Primer Congreso tacional
de Economistas, Document No. 20: Proceso Historico del Problems
Cambi'rio en Colombia (Bogota: Sociedad Colombiana de Economistas,
1958), pp. 5-6.
3 1 ... ...... ..
the apparent official intention was to absorb part of the rising coffee
incomes, so as to reduce internal inflationary pressures.
As the coffee market changed in the course of 1954 the volume
of imports grew menacing, and it became official policy to inhibit
them. The new restrictions initiated in late 1954 were measures
adopted primarily to reduce imports of luxury and other consumption
imports. Investment imports were largely uneffected.
Thus, the effect of the new exchange regulations was to divert
an increasing share of total consumption demand into the domestic
market. The diversion of this consumption demand naturally served
to stimulate domestic demand for investment goods. This fact, plus
the special treatment allowed investment goods imports in the foreign
exchange market, tended to maintain the higher relative importance
of investment as a percentage of Gross National Product.
Countercyclical management of coffee income required a reversal
of the existing policy after mid-1954. Initial government action took
the form of reducing the coffee surrender price and temporarily eli-
minating the special 50 per cent export tax on coffee. This took place
in mid-October, 1954.20 More direct action followed in February, 1955,
when the "coffee differential" was entirely eliminated. This meant
that the PS $2.50 rate of exchange thereafter applied to all coffee
20International Monetary Fund, Sixth Annual Report: Exchange
Restrictions (Washington: International Monetary Fund, 1955), p. 98.
(The 1955 exchange regulations also created a broad free ex-
change market where foreign exchange earnings on most exports -- not
Including coffee -- could be converted at a rate higher than that pre-
vailing in the official market. The creation of this new rate -- the
"fluctuating free market rate" -- was virtually equivalent to a de-
valuation. By December 31, 1955 the official buying rate for dollars,
which applied to exports of coffee, petroleum and a few other goods,
was still PS $2.50, while the fluctuating free race had depreciated
to PS $4.15.)21
The actual level of income generated in the coffee sector,
which is one of the most important sectors in the Colombian economy,
is significantly dependent upon the effective coffee exchange rate,
as well as world market coffee prices and the volume of exports.
Table 2-11 illustrates the determination of this income.
As a result of the elimination of the "coffee differential"
in 1955, the average effective coffee exchange rate for the year was
higher than in 1954. This increase in the effective exchange rate
largely balanced the effect of the decline in dollar export values,
and the peso value of legal exports of coffee showed only a small de-
cline in 1955.
21International Monetary Fund, Seventh Annual Report: Exchange
Restrictions (Washington: International Monetary Fund, 1956), p. 83.
FACTORS INFLUENCING THE PESO VALUE OF COFFEE EXPORTS
AND THE INTERNAL INCOME OF THE COFFEE SECTOR,
New York Export Effective
Market Price Volume Hypothet- Exchange
Price (F.O.B., Exported ical Export Rate
(Manizales, Dollars (Millions Value (Pesos
cents per per 70 kg. oE 70 kg. (Millions per
Year pound Bag) Bags) of Dollars) Dollars)
(1) (2) (3) (4) (5)
1952 57 83 4.3 360 2.24
1953 60 89 5.7 504 2.34
1954 80 120 4.9 590 2.27
1955 64 96 5.0 484 2.45
1956 74 109 4.3 475 2.84
1957 64 93 4.1 385 3.61
1958 53 76 4.71 356 4.87
aColumns (1), (2), (5) and (r) are annual averages. Sources:
United Nations, Economic Commission for Latim America, Economic Survey
of Latin America: 1957 (E/CN.12/489/Rev. 1, 1959) (New York, 1959)
p. 155; and, Economic Survey of Latin America: 1958 (E/CN.12/489/
Rev. 1, 1959) (Mexico, 1959), p. 121.
bn.a. = not available.
TABLE 2-11 -- Extension
Export Estimated Allowance
Price Export for Investment Total
(F.O.B., Value in Inventories Income of
Pesos per (Millions and Contraband Coffee Sector
70 kg. Bag) of Pesos) (Millions of (Millions of
((2) x (5)) ((3) x (t)) Pesos) Pesos)
(6) (7) (8) (9)
186 800 +150 950
207 1175 -150 1025
273 1350 +150 1500
234 1175 -50 1125
319 1350 +250 lbO0
337 1400 +550 1950
371 1717 n.a.b n.a.b
rate, applicable to legal exports of coffee, remained pegged at PS
$2.50, it became increasingly profitable to avoid the surrender of
United States dollars at the official rate.
The Colombian government continued to maintain the purchasing
power of the coffee sector of the economy throughout the balance of
the decade. This is clearly reflected in the rising effective ex-
change rates applicable to coffee export income. The continuous rise
in this rate was effected not only through adjustment in the official
exchange rate itself, but also by the permanent elimination of the
special coffee tax and by adjusting the coffee surrender price to the
fluctuations in world coffee prices.
In response to a temporary strengthening of the world coffee
market in 1956 the surrender price was slightly raised from the low
level it had reached during 1955. However, a small percentage of the
surrender value was now allowed to be converted into pesos at a rate
higher than the official rate of PS $2.50.23 Therefore, the restrictive
effects of the increased surrender price were negated and the effective
exchange rate for coffee exports continued to rise.
United Nations, Economic Survey of Latin America: 1957, p.
23International Monetary Fund, Eighth Annual Report: Exchange
Restrictions (Washington: International Monetary Fund, 1957), p. 88.
During the following years, world coffee prices continued to
weaken, the coffee surrender price was regularly lowered: once in
1957, four times in 1958, and once in 1959.
The Federacibn Nactonal de Cafeteros (National Federation of
Coffee Producers), a semi-official organization, lent further support
towards maintaining coffee incomes. The Federation initially began
to support internal coffee prices in the latter part of 1954 by buying
from domestic coffee producers at quotations based on the previous
high export prices.
The Federation made heavier purchases in the domestic market
during the first half of 1955, when there was a strong contraction of
coffee exports, drawing upon the Fondo Nacional del Cafe, which it
administers, and on credit from the Banco de la RepUblica. During
the latter half of 1955, however, a considerable proportion of the
legal coffee exports came out of the Federation's inventories, so that
the peso incomes actually reaching the coffee growers and producers
was not notably higher in 1955 than in 1952 or 1953.
The Federation continued to support the coffee market and to
maintain the internal purchasing power of the coffee sector in 1957.
Continuous support of the coffee market by inventory purchases became
impractical, however, by 1958. During that year a new coffee policy
was adopted under which exporters of coffee were required to deliver
to the National Federation of Coffee Growers, without compensation,
United Nations, Economic Survey of Latin America: 1957,
a quantity of coffee equivalent to 15 per cent of excelso coffee in-
tended for export.25
This new policy was not apparently designed to reduce the
purchasing power of the domestic coffee sector because, at the same
time that the new tax in kind was instituted, the minimum surrender
price for coffee exports was also reduced. Furthermore, the minimum
surrender price was subsequently reduced three more times during the
When New York coffee prices began to recede in mid-1954 and
dollar export earnings began to decline, the Colombian government, as
we have seen, initiated a series of counter-deflationary policies de-
signed to maintain domestic income at a high level. In some cases,
however, the inflationary policies appropriate after mid-1354 were
already in existence prior to the middle of that year (at which time
they were contrary to deflationary needs of the time).
Monetary expansion had been very rapid prior to mid-1954.
It continued through the balance of the year, through 1955, and through-
out the remainder of the decade without interruption. However, the
rate of growth of the money supply in the post-1954 period never again
attained the rate of expansion achieved from 1951 to 1954. Further
discussion of the money supply and monetary policy will be postponed
until the following chapter.
2International Monetary Fund, Tenth Annual Report: Exchanae
Restrictions (Washington: International Monetary Fund, 1959), p. 92.
Fiscal policy had also been expansionary prior to mid-1954
and budget deficits had occurred in both 1953 and 1954. This policy
uas continued and intensified in the two years after 1954. In fact,
the size of the budget deficit increased with each year from 1953
The budget deficits of these four years are significant, how-
ever, for reasons aside from their absolute size. in addition to any
official considerations stemming from the desire to maintain private
domestic purchasing power, these deficits should be viewed in tbe con-
text of a general and longstanding policy of industrialization. The
expenditure pattern which underlay the budgetary deficits during these
years dictates this conclusion.
From 1953 to 1960 government expenditures were increasingly
dominated by investment in fixed capital goods and public works. This
is reflected in the allocation of total expenditures by government
ministries. During the years of deficit, 1953 to 1956, the entire in-
crease in total expenditures by the national government was absorbed
by two ministries -- the Ministry of Development and the Ministry of
Public Works. (Expenditures by the latter ministry rose by three
hundred per cent from 1952 to 1956, at which time they accounted for
approximately one-third of all government expenditures.) Even though
the national budget again showed a surplus in 1957, 1958 and 1959, the
Ministries of Development and of Public Works continued to absord a
26Departamento Administrativo Nacional de Estadfstica, Anuario
General de latadlatica, Colombia, (Annual editions, 1952 to 1960)
(Bogotal Multilith Estadinal, 1954-1962).
higher percentage of total expenditures than in the years prior to
1953. Investment expenditures remained high through the balance of
The emphasis on direct public investment by the national
government was parallelled by its' encouragement of private investment.
This policy, as has already been noted, was implemented primarily
through special treatment of capital and investment goods imports in
the foreign exchange market.
We have seen that restrictions on the free importation of luxury
and consumption goods were implemented shortly after the reversal of
the coffee export market in mid-1954. As a result, the composition
of Colombia's imports began to radically shift in favor of investment
and capital goods, especially in 1955 and 195b.
These variations in the structure of imports, together with
other measures to stimulate private investment, the generally ex-
pansionist monetary and fiscal policies described above, and the growing
volume of direct government investment, contributed greatly to the
maintenance of the high volume of investment characteristic of the
years 1953 to 1956. The relative success of these measures is re-
flected in the sharp increase in gross capital formation as a per-
centage of Cross National Product between 1953 and 1956 (see Table
2-6 Economic Policies and the Balance of Payments
However, a further consequence of these policies was less en-
couraging. The high rate of public expenditures and investment,
compensatory treatment of coffee incomes, special exchange provisions
for capital goods imports, and inflationary monetary and fiscal poli-
cies In general had, since 1954, tended to counteract the deflationary
Influence of external conditions. As a result there was continued
pressure on the demand for imports long after the decline in Colombia's
capacity to import
As a result, 1953 to 1956 were years of deficit in the balance
of payments, as well as of deficit in the national budget. We have
seen that a generally lenient policy towards all imports prevailed Ln
1953 and the first half of 1954, designed to reduce domestic inflationary
pressures. The large deficits which occurred after mid-1954 to 1956
were "essentially due to the fact that imports did not decline for
over two years after the coffee boom began to subside in 1954. 27
In Colombia movements of gold and foreign exchange reserves
have been the traditional method of covering such negative balances.
However, by 1956 these reserves, largely utilized to cover the deficit
in 1)55, fell too low to continue financing the deficit. As an alter-
native, trade debts were accumulated. By the end of 1956 trade arrears
totaled over US $200 million, representing US $60 million more than
the country's aggregate gold and foreign exchange holdings.28
27United Nations, Economic Survey of Latin America: 1957,
28United Nations, Economic Comnission for Latin America,
Economic Survey of Latin America: 1956 (E/CN.12/427/Rev. 1, 1957)
(Neu York, 1957), pp. 42-44.
For these reasons, plus Colombia's faltering credit abroad
and the deprecLating value of its peso in the international money
market, the government instituted a severe austerity program by the
end of 195b. Consequently the value of investment purchases from
abroad began to decline in the second half of 1957, the rate of
capital formation in the economy slackened, and the rate of real
growth began to decline.
In this chapter we have attempted to demonstrate and examine
the fact of continuing structural change and industrialization in
Colombia during the decade of the 1950's. For that reason, it was
necessary to explore some of the most important economic policies
which affected the demand for consumption goods and the demand for
investment goods. The analysis of these two types of demand dill
form the basis of our discussion of the Investment-demand and savings
supply schedules in Chapter VI.
The growth of income, both real and monetary, was necessarily
affected and, to some degree, shaped by the degree of monetary expansion
and the monetary and credit policies which prevailed in Colombia during
the decade under study. The following two chapters will attempt to
describe and analyze this expansion and some of the most important
financial policies of the period.
THE SUPPLY Or MONEY
3-1 Types of Banking Institutions and Bank Deposits
Several types of "banking institutions," in the broadest
sense, existed in Colombia during the decade of the fifties. These
institutions may be grouped into four general categories: Colombia's
central bank, the Banco de la Republica; the commercial banks, both
national and foreign; the savings banks, strictly limited in their
operations to the accumulation and subsequent investment of private
savings accounts; and, the various specialized credit institutions,
usually publicly-owned and semi-autonomous entities formed to meet
the credit needs of those economic sectors not adequately served
by the commercial banking system (e.g., agriculture, livestock,
The Banco de la Republica, organized under Law 25 of 1923,
was granted a legal monopoly on banknote issuance. The hand-to-hand
money in circulation is composed almost exclusively of these banknotes.
The remainder of the money in circulation is composed of small amounts
of treasury money -- national banknotes, silver certificates, silver
coins, and copper-nickel coins.
Lbey 25 de 1923, in: Carlos Julio Angel (ed.), Legislacfon
Bancaria Colombiana (Bagoti: Editorial Hinerva, 1959), p. 12.
The total stock of money in circulation is the sum of all
hand-to-hand money in circulation plus one or more of the various
types of bank deposits which exist in Colombia. These types of
deposits were originally defined In Law 45 of 1923, the companion-
piece to the central bank legislation.
All types of bank deposits were divided, by Law 45, into
three categories; term (dep6sitos a tirmino), demand (depositos
exigibles), and, savings deposits (depositos de ahorros). The first
type of account was defined as a deposit withdrawable only after 31
days and upon which interest is paid to the depositor.
The second type, demand deposits, may be withdrawn within 30
days of deposit and is non-interest-bearing. However, of great legal
and economic importance is the subdivision of "demand deposits' in
general into two categories. The most important of these is the sight
(a la vista) or current account (cuenta corriente) deposit, which is
virtually equivalent to what is commonly known as a checking deposit.
The other type of demand deposit is the order (a la orden) deposit,
which is not withdrawable by check but is freely available to the
depositor at any time.
In some respects, savings deposits, the third type of deposit,
are very similar to term deposits insofar as they are interest-
bearing and, at the discretion of the Directors of the central bank,
may not be withdrawn without prior notice. In fact, however, these.
sumilarlties can be misleading because savings deposits are legally
distinct from all other types of bank deposits in several important aspects.
2Ley 45 de 1923, in: Angel, p. 23.
Originally, only chartered savings banks were able to maintain
savings deposits. Prior to 1949 the Caja Colombiana de Ahorros, a
government-owned autonomous institution, bad a near monopoly on savings
deposits. In 1950, however, commercial banks were permitted to open
and expand special savings departments. The growth of savings accounts
maintained in commercial banks during the 1950's was very rapid.
Whether deposited in the savings banks or in the special savings
sections of the commercial banks, all funds accumulated in the form
of savings accounts were required by law to be invested in certain
specified documents. This mandatory investment has been almost en-
tirely in governmental debt and in mortgage bonds, particularly in
those of the government-owned Banco Central Hipotecario.
3-2 Alternative Money Supply Concepts
The multiplicity of the types of bank deposits in Colombia
poses the very interesting question of which type or types of deposits
to Include, with the amount of hand-to-hand currency in circulation,
in the computation of the stock of money.
The possibility exists that one or more of the relatively
"inactive" types of bank deposits may displace the holding of checking
deposits to satisfy the store-of-value function of money. The newly-
created "inactive" deposits do not purchase any goods or services,
but in satisfying the store-of-value function they do serve to diminish
the demand for money used in exchange and, therefore, to increase the
velocity of circulation. "The liquidity preference demand for money
that Keynes developed implies the existence of money assets that are
not necessarily exchange media."3
In terms of the types of bank deposits which exist in Colombia,
the problem is whether or not to include checking deposits only;
checking plus order deposits; checking, order, term, and savings
deposits. Table 3-1 summarizes the various possibilities in terms
of four hypothetical stocks of money. Several relevant observations
may be made on the data presented in this table. First is the obvious
quantitative importance of money and bills outside banks plus checking
deposits. That is to say, order, term, and savings deposits are all
quite small relative to amounts of money, bills, and checking deposits
Possibly of more significance, however, are the growth rates
demonstrated by each hypothetical money stock. Table 3-1 indicates
that the rates of growth of each money stock concept were greater
the more inclusive the concept of the money stock. The rates of
growth for all concepts were, however, remarkably similar. Undoubtedly,
a great deal of this similarity may be accounted for by the quanti-
tative dominance of one money stock: money, bills, and checking
3Richard H. Timberlake, Jr. "The Stock of Money and Money Sub-
stitutes," The Southern Economic Journal, XXX (January, 1964), 253.
Some preliminary research was done by the author to examine the pos-
sible inclusion of non-monetary financial assets (e.g., policy re-
serves of life insurance companies, government securities held by non-
bank investors, etc.) in the stock of money. Unfortunately, it was
discovered that data concerning these types of assets are either
completely lacking or insufficient for the formation of any conclusions.
FOUR ALTERNATIVE STOCKS
Money and Bills Outside Banks Plus
Checking Deposits of Public in all
Banks in Millions of Pesosb
Column (1) 1950 100
Column (1) plus Order Deposits in
all Banks in Millions of Pesosc
Column (3) 1950 100
Column (3) Plus Term Deposits in
all Banks in Millions of Pesos?
Column (5) 1950 100
Column (5) Plus Savings Deposits in
all Banks in Millions of Pesosc
Column (7) 1950 = 100
OF MONEY, 1950-19608
1950 1951 1952 1953
aSource: Revista del Banco de la Repablica (1950-1961).
bDoes not include Official Deposits in the Banco de la
Republica or the check float. Annual averages of 12 months.
cOrder, Term, and Savings Deposits are annual averages based
on January, April, July, and October, equally weighted.
TABLE 3-1 -- Etxenlson
1954 1955 1)56 1957 1958 1959 1960
1664.4 1808.5 2131.7 2594.1 3024.5 3536.3 3786.1
171.5 186.3 219.6 267.2 3L1.6 364.3 390.0
1824.3 2051.2 2630.5 3039.4 3358.4 3884.5 4267.2
lb9.8 191.0 244.9 288.5 312.6 361.o 397.2
1948.2 2198.4 2832.1 3292.3 3512.2 4016.0 4480.3
174.2 196.5 253.2 294.3 314.0 359.1 400.6
2181.7 2487.2 3170.8 3692.2 3985.9 4564.9 5094.8
178.5 203.5 259.4 302.1 326.1 373.5 416.9
deposits. This helps to account for the fact that while the rates of
growth of each money stock concept were very similar, the rates of
growth of each type of deposit were not equally similar.
The growth of order deposits between 1950 and 1960 was highly
uneven, being positive in live years, negative in two years, and
without change in three years. Term deposits grew at a more even
rate, at least until 1956. From that year until 1959 these deposits
actually declined, but began to increase again in 1960. The most
constant, and also the most rapid, rate of growth of all types of
deposits was that of savings deposits. Undoubtedly, this was caused
by the expansion of bank facilities legally permitted to accept this
form of deposit. The rate of growth of checking deposits was, after
1951, almost parallel to the growth of savings accounts. The net in-
creases in the amounts maintained in each type of deposit between 1950
and 1960 were as follows: for checking accounts, 384 per cent, order
deposits, 365 per cent; term deposits, 381 per cent; and, for savings
deposits 493 per cent.
Clearly, the overall growth rates of each type of deposit
were far more similar than were the year-to-year changes in these
3-3 The Honey Supply
On balance, it appears that very little would be lost or gained
by the inclusion of order, term, or savings deposits in the stock of
money. Therefore, we shall restrict oir attention in the remainder
of this study to the orthodox definition of the stock of money: money
and bills outside banks plus the total checking deposits of the public
in all banks.
Table 3-2 illustrates in a more detailed manner the grouch
of the stock of money between 1950 and 1360. This table, computed on
the basis of the stock of money at the end of each year, shows that
the rate of increase of checking deposits exceeded the rate of growth
of currency expansion during the years 1950 to 1954, and that the
amount of money and bills in circulation actually declined during
1950, the only year in which either component of the money stock did
During 1955 both currency and checking deposits grew at the
same rate, but in 1956 and 1957 the rate of increase of the former
exceeded that of the latter, the reverse of the situation between
1950 and 1954. The last three years of the period under study saw
both currency and checking deposits expanding at approximately the
same rate. The increase in each component of the money supply from
the beginning of 1950 to the end of 1960 -- 478 per cent for checking
deposits and 230 per cent for money and bills outside banks -- re-
flects the greater number of years in which checking deposits increased
more rapidly than did currency in circulation.
3-4 The Determinants of the Honey Supply
A more interesting and meaningful discussion of the rapid
expansion of the money supply in Colombia may be achieved through an
COMPOSITION OF THE MONEY STOCK AT END OF YEAR,
(in millions of pesos)
of the Total Vault
Banco de La Money Cash In Vault
Republican and Bills the Banco Cash
Treasury in in do la in other
Year Currency Circulation Circulation Republica Banks
(1) (2) (3) (4) (5)
Segunda Parte (Bogota: Talleres Crificom, 1963), pp. 128-131.
'Excluding Official Deposits in the Banco do la
not adjusted for check float. Source: Banco de la Rep
XXXVIII Y XXXIX Informe Anual del Gereute a ls Junta Di
TABLE 3-2 -- Extension
Total Checking Total
Vault Money Deposits Checking Checking
Cash and Bills of Public Deposits Deposits
in all outside in the of Public of Public Money
Banks Banks Banco de la in Other in all Banks Supply
(3) + (5) (3) + (6) Republics Banks (8) + (9) (7) + (10)
(6) (7) (8) (9) (10) (11)
25.9 486.7 3.8 428.0 431.8 918.5
28.3 471.6 6.3 498.6 504.9 976.5
35.5 515.0 1.1 606.7 607.8 1122.8
33.7 605.4 1.4 707.7 709.1 1314.5
47.2 672.3 20.0 856.4 876.4 1548.7
ol.2 752.6 1.5 1092.b 1094.1 1640.7
n0.4 775.0 3.0 1155.7 1158.7 1933.7
69.8 932.5 7.9 1474.9 1482.8 2415.3
80.3 116o.1 1.4 1577.0 1578.4 2744.5
98.9 1360.5 2.1 1955.5 1957.6 3318.1
119.3 1485.5 7.6 2222.1 2229.7 3715.2
118.6 1605.8 4.7 2492.1 24t).8 4102.o
examination of the relative quantitative importance of the most signi-
ficant determinants of the money supply. These determinants were (1)
the level of international reserves; (2) the amount of Treasury
currency in circulation; (3) the "net effect of the Banco de la
Republica," the Colombian central bank, and (4) the "net effect of
other banking institutions." 'Other banking institutions" include
all commercial banks, both foreign and national, the Banco Cafetero;
the Banco Canadero, the Caja de Credito Agrarlo, Industrfal Minera,
the Caja Colombiana de Ahorros prior to its absorption by the Caja
Agraria in November, 1955; the Banco Prendario Nacional prior to
December, 1957 at which time it was absorbed by the Banco Popular;
the Banco Popular, and the various small, privately-owned savings
In the case of the latter two categories -- 'net effect
of the Banco de la Repiblica" and "net effect of other banking in-
stitutions" -- "net effect" has been defined as the sum of credit plus
other assets minus non-monetary liabilities. Credit, other assets,
and non-monetary liabilities were determined by a compilation of the
relevant balance sheet items of the Banco de la RepUblica and of the
other banking institutions mentioned above.4
4See APPENDIX C. This method of arriving at the deter-
minants of the money supply closely parallels a similar analysis of
the Colombian money stock during 1960, 1961 and the first part of 1962,
in: Jorge Ruiz Lara and Martha Fernandez R., La Expansion Monetarlt
de 1960 a Marzo de 1962 ("Centro de Estudios Sobre Desarrollo Econ6mico,"
Monograffa No. 15; Bogota: Universidad de Los Andes, 19b2), pp. 1-5
It can be seen that the supply of money In circulation can be
closely approximated, as in Table 3-3, by aggregating the four major
determinants of the money supply. Table 3-4 presents the same data
as that contained in Table 3-3, with the data converted into the
form of index numbers.
It will be useful to summarize the most significant character-
istics of these determinants of the Colombian money supply as an In-
troduction to the discussion in Chapter IV of money and credit policies
from 1950 to 1960.
Excluding Treasury currency, which was not influenced by
fluctuations in the level of international reserves or by the volume
of credit, the remaining three categories reflect the sources of
monetary expansion. Of these three groupings, one is related to the
external sector -- international reserves -- and two reflect the
internal sources of the growth of the money supply.
As indicated in Tables 3-3 and 3-4, there was no decrease in
the total money supply in 1950 corresponding to the decline in inter-
national reserves during that year. During the following four years
both the level of international reserves and the total money supply
grew rapidly. However, it is significant that the rate of increase
of the former exceeded that of the latter, an indication that the of-
ficial policy designed to dampen the inflationary effects of rising
coffee export prices met with some degree of success.
During 1955 the slight decline in the total supply of money
was largely due to the declining level of international reserves,
THE DETERMINANTS OF THE HONEY SUPPLY
ON DECEMBER 31, 1949-1960O
(in millions of pesoa)
Year 1949 1950 1951 1952 1953
Reserves 233.0 206.2 257.1 326.0 395.0
Banco de la
Republica 258.8 227.6 260.1 284.6 249.0
Credit 302.6 282.1 239.1 342.4 322.4
Other Assets 126.7 135.4 204.0 143.1 145.9
Liabilities 170.5 189.9 183.0 200.9 219.3
Institutions 402.1 574.7 588.3 802.7 963.5
Credit 762.8 967.8 1124.4 1379.2 1622.0
Other Assets 156.1 226.6 239.7 263.2 290.0
Liabilities 516.8 619.7 775.8 839.7 948.5
Currency 36.3 36.8 28.0 29.3 31.4
Supply 930.2 1045.3 1133.5 1442.6 1638.9
"Source: APPENDIX C.
TABLE 3-3 -- Extension
1954 1955 1956 1957 1958 1959 1960
525.7 297.5 360.3 389.4 425.8 5b0.9 423.6
345.2 316.4 382.1 395.4 709.7 735.3 855.9
506.4 571.5 761.9 1446.2 1794.2 1746.7 1736.5
158.3 157.5 202.5 386.4 516.1 785.6 896.9
319.5 412.6 582.3 1437.2 1600.6 1797.0 1777.5
1160.9 1386.9 3292.2 3432.3 3757.0 4282.7 5083.5
2155.7 2562.4 2372.7 2456.4 2690.7 3031.4 3606.0
528.4 600.2 987.5 1231.9 1122.5 1116.7 1241.1
1523.2 1775.7 2504.5 2592.8 2548.5 2853.8 3355.2
33.7 35.7 38.1 43.6 54.2 64.2 63.0
2065.5 2036.5 2555.7 2899.8 3220.7 3906.0 4311.9
L7n N 3 0
lf 4 n
o r I 0 -: --
N G-NO 0 -'4 4 I N a o a
0 0 In
0 r4N0 in r'-f n
N N r.n..o 0 0 n N
GN N M CN N
c- -a N a -D
C Oa 0' -'ON N D
N O NNS N r0' 0 -
0' o .tINO 4 .-. ficO O N -
In r C" 4 4 I Nc
N^ I a* 0^ oN .0 m y"
S. .- . .N. .
S N N c Go Nco a' N
IT -p N N -. NN7 N Nc
.0 cc N C
S I n N N1 -, - j
0t 0 i r0 p O^ o oo c c
a cf r, O O .' C i N
OJ N 0 .P1
Le .. c. . . *
o 00- I CN3 0 N -a%
t I W4 0'0N 0 4
1-O M I. O Oi' 0r -o N
0' CO CO0'0 OfU 0 -n r s
S000 a 0 0 0 0 b0
.2 m .o DO.
S 0 000 0 000
c MI o ) wi 1
A a v2
I .14 aj au o i uo,.J Q .- a.
although the net effect of the Banco de la Republica wasa oderately
deflationary in this year also.
That year, however, was the last in which the level of inter-
national reserves decisively affected the growth of the money supply.
From 1956 through 1960 the total supply of money was apparently only
slightly influenced by the level of international reserves: the latter
expanded more rapidly than the former in 1956, 1957 and 1953. In
1953 there was a sharp increase in the level of international reserves
but no noticeable change in the rate of growth of the total money
supply from the preceding three years. Total money supply continued
to grow at this same rate in 1960 although the level of international
reserves fell sharply.
Thus, particularly in the years since 1355, we are able to see
the monetary consequences of the government policies, discussed in
the previous chapter, which attempted to Isolate the Internal economy
from fluctuations occurring in the external sector.
The direction of change of the net effect of the Banco de la
Repablica closely parallels the direction of change in the level of
International reserves from the end of 1949 through 1959. Nineteen
fifty three was the only notable exception to this rule, when the
level of international reserves was rising rapidly while the net effect
of the Banco de la Republica was deflationary. This is illustrative
of a significant difference between these two influences over the
supply of money.
While it is true that the directions of change of the level
of international reserves and of the net effect of the Banco de la
Republican were generally the same until 19b0, the rate of growth of
the latter was considerably less than the rate of increase of the
former from the end of 1950 to the end of 1954. The slower growth
rate of the net effect of the Banco de la Republica was, apparently,
in response to the official policy aimed at reducing the inflationary
effects of the rising level of international reserves. This largely
explains why the rate of growth of the total money supply during these
years was less than the race of increase of international reserves.
(Unfortjnately, the countercyclical policy influencing the Banco de
la Republican did not extend to the other banking institutions. The
net effect of these institutions was strongly expansionary during
During 1955 the rate of decrease in the net effect of the
Banco de la Republica was considerably less than that demonstrated by
the level of international reserves, a further countercyclical adjust-
'ent which helps to explain why total money supply contracted only
slightly while the level of international reserves declined drastically.
Between 1958 and 1960 the net effect of the Banco de la Rep6b-
lica and the level of international reserves tended to become increasingly
independent of each other. The former increased sharply in 1958 while
the rate of increase of the latter was very moderate. In 1959 these
trends were reversed. In 1960, for the first time since 1953, these
two monetary determinants moved in opposite directions: the level
of international reserves declined sharply while the eat effect of
the Banco de la Republica increased at a rate exceeding that of 1959.
In 1956 and 1957 the total supply of money and the net effect
of the Banco de la Republica increased at a very moderate rate. How-
ever, within the accounts of the Banco de la Rep6blica an important
new factor developed in 1957. During this year credit of the Banco
de la Republica rose by almost 100 per cent. However, the net
effect of the central bank increased by only 3.5 per cent. This was
due to the fact that non-monetary liabilities grew 147 per cent.
The growth of non-monetary liabilities during this year was
caused primarily by the increase in order deposits of juridical
entities and other official entities, and other official deposits,
which together rose from less than PS $21 million at the end of
195b to over PS $366 million at the end of 1957. The hugh increase
in these deposits was, in turn, apparently caused by the accumulation
in the central bank of large amounts of cash deposits which were re-
quired as a prerequisite for the registration of imports.5 (In 1957
these "prior cash deposits" were equal to 100 per cent of the peso
value of the imported good.)
As shown in Table 3-5, central bank loans and discounts to the
national goverrient and other official entities varied between zero
5The original purpose of the prior import deposit "has normally
been to discourage imports by increasing their cost as importers are
forced to obtain additional financing to make the deposits. But the
system also has the effect of temporarLly absorbing liquidity...."
[jugem A. Birnbaum and Kaeea A. Qureshi, "Advance Deposit Requlremnts
for Imports," Interg. tonal bIetAry Fuad Staff PaBer., VIII Novemberr,
rh.fn r- 0
'0 T- r 0
40 0 0
NO N 0
mC N 0
t-'0 ID 0
"'a a 0
in 4 0
a T 0n 0
o '- 0
c- 0 0
LN ~ 0
d in n o
r- T 0
ao.n a 0
0 0 'a C "453
a5 O- C o-. Q
and 22.b per cent of all Banco de La Rep6blica loans and discounts.
On the other hand, central bank investment in documents of public debt
absorbed between 38 per cent (in 1958) and 82 per cent (In 1953) of
all Banco de la Rep6blica credit. The years in which this type of
investment accounted for the greatest share of all central bank
credit, from 1953 to 1956, were also years of budgetary deficit. The
rate of increase In investment in public debt was very uneven from
1950 to 1960, but the years of greatest increase were the same years
in which this type of investment absorbed the greatest share of all
central bank credit.
There was no marked expansionary consequence in the net effect
of the Banco de la Republics during these years, however, with the
exception of 1954, because of the fact that loans and discounts of
the Banco de la Bepublica remained low. During 1957 these loans and
discounts began to expand rapidly, mainly to private borrowers. As
a consequence, Investment in public debt began to decline as a per-
centage of all Banco de la Repjblica credit. There was no quantitative
decline in this type of investment in 1957. As we have seen, the net
effect of the Banco de la Republica was not notably expansionary during
this year due to the sharp rise in non-monetary liabilities of the
The rate of increase exhibited by the net effect of other banking
institutions between 1950 and 19t0 was almost constant, as was the rate
of growth of the total money supply. However, the former grew far more
rapidly than the latter, so that the net effect of other banking in-
stitutions came to progressively dominate, in a quantitative sense,
the total money supply.
During the entire decade there was little or no correspondence
between the net effect, credit, other assets or non-monetary liabilities
of other banking institutions and the level of international reserves.
The net effect of other banking institutions was entirely
responsible for the increase in the total supply of money in 1950,
during which time both international reserves and the net effect of
the Banco de la Republlca were contracting. An expansionary net effect
of other banking institutions also largely offset declining international
reserves in 1)55 and 1960.
Quanticatively, the amount of total loans extended by other
banking institutions was the greatest expansionary factor contributing
to the growth in the net effect of these institutions in 1950, 1955,
and 1960. Also during these same three years the percentage of all
central bank loans and discounts absorbed by other banking institutions
sharply increased. Table 3-5 indicates that these loans and discounts
rose from 71.1 per cent of all Banco de la Repcblica loans and discounts
in 1949 to 81.i per cent by the end of 1950, from 62.3 per cent in
December, 1954, to 79.8 per cent at the end of 1955, and from 41.2
per cent in 1959 to 47.9 per cent in 19o0.
The relationship between loans and credit extended by other
banking institutions and the loan and discount operations of the
central bank is a significant factor to be considered in the following
This synopsis of the Colombian monetary expansion between 1950
and 1960 lays a suitable and necessary background for an examination
of some of the salient features of the banking system in Colombia
and for an analysis of the credit and monetary policies pursued during
THE BANKING SYSTEM AND MONETARY AND CREDIT POLICIES
4-1 The Structure of the Banking System
We have seen that the Colombian banking system is essentially
composed of four distinct types of institutions: the central bank,
the commercial bank, the savings banks, and the specialized credit
institutions. But perhaps the most striking feature of this system
during the decade of the fifties was the multiplicity of official
policies and legislative acts which regulated the financial institutions.
Moreover, these agencies, policies, and acts were often con-
tradictory and incompatible with each other. This phenomenon is, in
itself, not unusual and, for example, exists to some extent in the
United States: "Legislation at one time will reflect predominantly
a given point of view; at another, a quite different one. In the end,
institutions and legislative regulations have emerged which are funds-
mently [sic] inconsistent."' An understanding of the operation of
these inconsistent elements is basic to a grasp of the Colombian
monetary and credit experiences during the 1950's.
ILloyd W. Hints, Monetary Policy for a Competitive Society
(New York: McGraw-Hill, 1950), p. 183.
While the structure of the commercial banks is similar to
that of the United Kingdom or Canada, the organization of the central
bank and its relation to the commercial banks are modeled after the
Federal Reserve System in the United States.2 However, the growing
importance of the specialized, semi-autonomous credit institutions
appears to be essentially an indigeneous phenomenon.
In Colombia, the administration of public finances originates
In the decisions of the Minister of Finances. This office wields
final authority in the determination of the national budget, import
and export policies, the flow of bank credit, the selection of In-
vestments, the capital market, and the policies of the financial
Subordinate to the Minister of Finance is the Banco de la
Republica, which administers his policy. This line of authority is
insured by the fact that the Minister of Finance is a member of the
Board of Directors of the central bank and possesses veto powers
over the acts of this board.
2International Bank for Reconstruction and Development, The
Basis of a Development Program for Colombia (Washington: International
Bank for Reconstruction and Development, 1950), p. 295. This publi-
cation is more popularly known as The Currie Report, after the head
of the T.B.R.D. Mission.
3It has been alledged, however, that in actual practice the
"Minister of Finance makes hia final decisions through a system of
provisional estimates designed to cleverly elude the multiple con-
tradictory forces of the soliciting bodies that surround him.' [Jorge
Child, Memorfs, Primer Congreqo Nacional de conomiatas: Organizac fon
de las Finanzas Publicos (Bogota: Sociedad Colombiana de Econoistae,
1958), p. 1 .]
The contradictory aspects of the Colombian banking system,
and the somewhat confused monetary and credit policies which resulted,
s.ay be viewed as the product of a hybrid banking philosophy which
has attempted to blend three or four basically incompatible elements.
These key elements are, in the order in which they will be
discussed: the gold exchange standard, an element of automaricity,
or automatic control over the supply of money, the structure of the
Board of Directors of the Banco de La Republica, exercising die-
cretionary powers over the money supply and credit policies; the
Banking Laws of 1923, reflecting the influence of the "real bills
doctrine" and an element of supposed, but not actual automaticity;
and the recent growth of specialized credit institutions, representing
the fullest expression of official, selective control.
4-2 The Gold Exchange Standard
For many years previous to the period under study and through-
out this period, the Colombian banking system has operated under the
gold exchange standard. Adoption of the gold exchange standard, in
the first instance, gives the central bank permission to hold foreign
exchange instead of gold aa legal reserves against its notes in
circulation.4 Thus, the Colombian central bank must maintain a minimum
of 25 per cent in gold holdings (including its gold contribution to
United Nations, International Currency Experience (United
Nations Series of League of Nations Publications,) United Nations,
1947, (first published in 1944: League of Nations, 1944. II. A. 4),
the International Monetary Fund) and deposits in foreign banks as a
reserve against Its banknotes in circulation.
Such a system of international exchange and reserves represents
an attempt to legislate an automatic control over the quantity of money
in circulation in the domestic economy. The intention is to establish
a direct relationship between circulating currency, the level of
central bank reserves, and the balance of payments. With this done,
discretionary influences over the supply of money are reduced to a
minimum, and all but eliminated if the monetary authorities apply the
so-called "rules of the game."
The data indicate that, from the end of 1949 to the end of
1954, the Banco de la Rep5blica maintained actual reserves considerably
above the required reserves of 25 per cent against its banknotes in
circulation. In fact, these reserves never fell below 37 per cent
during this period, and reached almost 57 per cent in 1954. Therefore,
the central bank was in a position to freely expand the amount of
circulating currency, if it so chose, between 1950 and 1954.
With the drastic decline in international reserves in 1955 the
reserve requirement began to be felt as a restrictive Eictor on currency
expansion. However, legislation was subsequently implemented to virtu-
ally eliminate the minimum legal reserve requirement as a restraining
factor on banknote expansion.
This legislation actually Included two separate acts. Initially,
toward the end of 1956, the legal reserves of gold end foreign exchange
were revalued from PS $1.95 to the U.S. dollar to PS $2.50, thus In-
flating the value of the reserve in teris of domestic peaos.
This action proved insufficient and, therefore, in 1957 special
legislation was again passed. The 1957 legislation permitted the
central bank to allow its legal reserve to decline below 25 per cent
of its banknotes in circulation, "if necessary." The legislation was
timely, for by May of 1958 the legal reserves of the Banco de la
RepGblica had fallen to 23.38 per cent of its bills in circulation.
Although rising somewhat in 1958 and 1959, the reserve ratio had
declined to 21.74 per cent by December, 1960.5
Thus, the raison d' atre of the gold exchange standard and
the principle of central bank fractional reserves composed of foreign
exchange was, to a large extent, subverted by the acts of 1956 and
1957. Clearly, these special emergency measures serve as strong
evidence that, by the decade of the fifties, Colombian monetary poli-
cies had incorporated the principle of discretionary control. These
policies were not to be deferred by the operation of those automatic
forces inherent in a gold or gold exchange standard. Yet an awareness
of this principle did not extend to the point of repealing the gold
exchange standard, nor, apparently, to the contradiction which it
posed to the principle of discretionary monetary policies.
4-3 Discretionary Powers and the Policies of the Central Bank
The Board of Directors, or Junta Directiva, of the Banco de
La Republica has full authority over the policies and operations of
the central bank. The Board consists of ten members: the Minister
5Revista del Banco de la Republica, (1957-1961).
of Finance who, as previously mentioned, has veto powers over the
actions taken by the Board, two directors appointed by the government;
four directors elected by the national and foreign banks as shareholders
of the central bank; one director named by the Agriculturaliats' Society
(Sociedades de Agricultores) and Livestock Associations (Asociaciones
de Ganaderos); one director named by the Chamber of Commerce; and the
director of the Federation of Coffee Growers.6
The Board of Directors, in its legal form and intent, is quite
similar to the Board of Governors of the Federal Reserve System in
the United States. Indeed, the Banco de la Republica itself was estab-
lished as a direct result of the Kemmerer mission to Colombia in the
early 1920's, and the 'Kemmerer legislation" of 1923 was modeled after
the Federal Reserve System of the United States. Thus, as is true in
the United States, the governing board of the banking system represents
the principle of discretionary powers.
During the period from 1950 to 19bO the two most significant
discretionary powers wielded by the Board of Directors over the supply
of money in circulation, i.e., the quantity of money, banknotes, and
checking deposits, were its control over the discount policies and
techniques of the central bank and its authority to vary the required
cash reserves against specific types of bank deposits.
6The Board membership, as prescribed in Paree 2051 of 2051
of 1951, consisted of only nine members. [Julio Angel (ad.), Legis-
lacron Lancaria Colombiana (Bogota: Editorial Minerva, 1959), pp. 282-
283]. This was subsequently changed to ten when the shareholding
banks were allowed a fourth representative.
Discount policy may be defined as "the varying of the terms,
and of the conditions in the broadest sense, under which the marker
may have temporary access to central bank credit through discounts
of selected short-term assets or through secured advances.'7
The discount race itself has been characterized by two signi-
ficant aspects: first, the low level at which it has been maintained
and, secondly, the remarkable stability of the rate.
The intention of the central bank to maintain an artificially
low discount rate Is illustrated by its initial actions in 1923. At
the time of the founding of the Banco de la Rep6blica in that year
the market rate of interest was fluctuating between 12 and 15 per cent.
Accordingly, so as not to upset the financial market, the Bank insti-
tuted a discount rate of 12 per cent on commercial loan rediscounts,
the only paper then eligible. Less than a year later the central bank
had reduced this to 7 per cent, and by July, 1933 to 4 per cent.8 This
action was taken without regard to market forces, but was simply de-
signed to provide cheap credit for short-term commercial operations.
A similar policy apparently still prevails. The ordinary com-
mercial discount rate which existed during the 1950's was never lower
than 4 per cent nor higher than 5 per cent, except for a short period
Peter G. Fousek, Foreign Central Banking: The Instruments
of Monetary Policy (New York: Federal Reserve Bank of New York, 1957),
8G. Botero de los Rios, "Breve Exegesis de lea Funciones Mone-
tarias del Banco de aI Repo6lica," Revista del Banco de la RepublLca,
KXXVI (August, 1963), 1007.
during 195b when a small percentage of these discounts were eligible
at 3 per cent. As we shall see at a later point in this chapter,
these rates do not seem to reflect the forces existing In the market.
As mentioned above, by July, 1933 the ordinary commercial dis-
count rate had declined to 4 per cent. This rate was maintained with-
out change until L95b. At that time an experiment was attempted
which set a discount rate of 3 per cent on commercial loans granted
by the banks at 5 per cent interest, a 4 per cent discount rate on 75
per cent of the discount quota of each individual bank; and, a rate
of 5 per cent on the remainder of each bank's discount quota. In 1957
the special 3 per cent rate was eliminated, the discount rate of 5
per cent applied to 40 per cent of each bank's discount quota, and
the remaining 60 per cent of the quota was eligible at 4 per cent.
In 1959 this structure was simplified by discounting sil eligible
commercial loans at 5 per cent.
The ordinary commercial discount rate, however, was not the
only discount rate which existed In Colombia during the period under
study. As is common in many countries, Colombia maintained a structure
of differential discount rates established on the basis of the dif-
ferent kinds of paper eligible for rediscount. In addition to the
"basic" 90-day commercial loan rate, a 3 per cent race existed through-
out the fifties for loans made against agricultural products in bonded
An additional rate of three and one half per cent was estab-
lished in 1957 on paper representing medium-term loans (i.e., less than
150 days) for certain agriculture and cattle operations, extended in
1959 to include loans to industry. This race however, applied only
to loans made at 6 per cent, or less, interest.
In 1958, discount loans were extended to cover an entirely
different type of operation: long-term development loans to agriculture
and cattle firms,10 later extended to include some types of rural con-
struction. The eligibility of these types of loans, ranging 1 to 5
years in maturity depending upon the use of the loan, marked a true
exception to the rules under which the Banco de la Republica had
operated since its founding in 1923.
We shall discuss these rules and the philosophy of the Banking
Laws of 1923 more explicitly at a later point in this chapter. For
the present it is only necessary to note that the eligibility of
these long-term loans for discount at the central bank was an unprece-
dented action; the the discount race which was applied was one point
less than the ordinary commercial Loan rate; and that the commercial
banks were directly forbidden to charge more than 7 per cent interest
on this type of loan. Due to the apparent reluctance of the commercial
banks to grant this type of loan further legislation was enacted in
1959, which required all commercial banks to extend this type of credit
equivalent to not less than 15 per cent of its demand and term deposits.11
9RevLsta del Banco de la Rap~blica, (1957-1961).
10Decreto Extraordinario 198 de 1957, in: Angel, p. 360.
lLey 26 de 1959, in: Angel, p. 392
This differential discount rate structure was, of course, a
form of selective credit control. However, the most significant aspect
of the discount rate techniques employed by the Directors of the
Banco de la Republica has been the effect of the discount rate on
the general level of interest rates in Colombia. Ordinary commercial
loans, in order to be eligible for discount at the central bank,
could not be made at more than 2 points above the existinA discount
rate. We have already seen that the commercial loan discount rates
in effect during the period 1950 to 1960 were quite low in an absolute
sense, either 4 or 5 per cent or, for a short time in 195b, 3 per cent.
This meant, therefore, that eligible commercial loans could not be
made at more than 5 to 7 per cent interest.
The other types of loans, eligible for preferential discount
rates, were similarly controlled. As we have seen, b per cent was the
maximum allowed for 150-day agriculture and cattle loans, while banks
could charge no more than 7 per cent interest on the long-term develop-
Since early 1952 the central bank has directly intervened to
set maximum limits which banks were permitted to pay on eligible types
of deposits. As we have seen in Chapter III, banks could pay interest
on term and savings deposits only, and were specifically forbidden
to pay interest on either type of demand deposit. These interest rates
were also characterized by their rigidity -- once set in April of 1952,
they remained unchanged for the balance of the decade -- and their ab-
normally low level. These rates of interest were structured according
to the length of time which the deposit remained in the bank, rising
from an annual rate of 1 per cent for deposits remaining in the bank
for a minimum of three months to a legal maximum of 4 per cent a year
on deposits of over two years.2
It will be useful to compare the interest rates charged and
paid by Colombian banking institutions with an estimation of the
"market interest rate, or the rate of interest which the market
factors would tend to produce were they permitted to do so. Since
no such interest rate actually existed in Colombia during the period
under study, the "market" rate of interest may be imputed by calcu-
lating dividend yields in the stock market and estimated yields of
Colombian bond issues. The results are shown in Tables 4-1 and 4-2.
The bond yields shown in Table 4-1 clearly fall into two categories.
Bonds of the public or quasi-public entities generally produced a
lower yield than bonds of the private entities. Such low yields were
made possible because only a relatively small part of these bond
issues were held on a voluntary basis. If the various banking and
financial institutions were not required by law to hold these bonds,
undoubtedly yields would be much higher. The bond issues of the pri-
vate entities and the Anctoqula issue were not affected by these holding
requirements. Therefore, the much higher yields of these bonds are
fairly illustrative of the unregulated race of interest in the bond
1Acuerdo de 18 de Abril de 1952, in: Angel, p 289.
04 H a
0 0 0 n m
L In I. !
0 4 U O a
i, B U -B
o~ > *0 i a j
"SU 4 0
0 10 0 0 01 i m
0 .0 -0 r4 a 0 B
0- 7- an *
o U a 0 0 01
C Go n c- %: x
ca m a Md-V
0 u -w
0 0 a a 0u
- 0 'D 'an
i ** 0 0 1 a a i 0
5. SNf S o' * 0 -o
> 0 01 m I
- o -- i-
3.- 3 B 01 L
L. en .401
0 0 1
0I >i .-.S.I U B S
0- 0 o u t
z0 0 00 0
m 0 a -
S0 -' 01 -'S 0 E 0
ml r*. -* 0 1 0 1 0 1 -^ M
;a aI - 3 u00
> a O 30 o M -U
N \0 n04n >0 W0 C u wm
04 '3 0 C13' c = u 1 a
q U .0 *r ^ P 0. 0>'0 W I '- 0 0
0 0 0 .4 v
00- -1 W. 01 '
"I Z-I 0-
a T.o ou j P
CL, Q, -o o 3
uu M D 4 iu j a "02 !I -
w ~i oua o av T w &o
Sb 5. 0 EU 0
.o m u 0. c o
u3oaO a *o o
'h AW Z
00 l ON4m0-1NO0
00 0 09O& O sC
0O ." Oc0990 N *
Or e on m.-0
S> s m w w I e
i u Bco u
-,0 0 0C B
H C ai q
cra mc u o
C Uh 0 0 i
3 0 u
.n .0 M c
u w m
B1 .C -
e .0 1
a B u
u "o a e
The dividend yields obtained in the stock market were, in
most cases, similar to the yields on the bond issues without holding
requirements. The dividend yields, as shown in Table 4-2, are actu-
ally an understatement of the real rate of return due to the valuation
of stock dividends, when declared, at par value rather than market
From the data contained in Tables 4-1 and 4-2, it appears
that market factors tended towards a rate of interest of 10, 12 or
even 14 per cent. The full extent of the disequilibrating influence
of the central bank interest rate policies may be seen by comparing
the imputed "market" rates of interest to the rates of interest which
the central bank tended to maintain through the use of its discretion-
In addition to its discretionary powers over discount and
interest rates, the Board of Directors of the central bank have had,
since 1949, the discretionary authority to vary the reserve require-
ments of the banking institutions. As in the United States, there
were legal limits set on the level of these reserves: between 10 and
30 per cent against demand deposits and between 5 and 20 per cent
against term deposits.1 Within these limits, however, Directors of
the Banco de la Republica wielded discretionary powers.
13Non-shareholding banks, of only very minor importance in
Colombia, were required to maintain 100 per cent reserves against
deposits; see Decreto Extraordlnario 756 de 1951, in: Angel, p. 277.
In both preference and in actual practice, the Directors of
the central bank have preferred manipulation of the reserve require-
r.ent rather than changes in the discount rate as a means of influencing
credit and monetary conditions.6 Thus, while the basic discount rate
remained almost stationary between 1950 and 1960, the level of re-
quired reserves of commercial banks against demand deposits was
changed no less than 34 times during this period, while reserves
against time deposits were altered on 22 different occasions.15
In addition to its discretionary powers over the level of
these required reserves, the Directors of the central bank also were
endowed with the authority to impose special "marginal" reserve re-
quirements. These "marginal' or supplementary reserve requirements
were applied against increases in deposits on current account.
In Colombia, where export and import operations are of con-
siderable importance to the entire economy,
"variations in primary reserve requirements, and in the im-
position and removal of supplementary requirements against in-
creases in deposits, were at first mainly intended to offset
the effects of gold and foreign exchange gains or losses upon
the money supply. More recently, however, reserve ratio changes
were used in a more positive manner, and requirements were
tightened on several occasions in order to help curb domesticL
inflationary pressures by restraining bank credit expansion. '
14cf: Editorial, Revista del Banco de la Republica, XXIV
(September, 1951), 900.
Revista del Banco de la Republica (1950-1961)
Fousek, p. 51.
Thus, with the rising coffee earnings prior to 1955, for
example, the regular reserve requirements were slowly rising -- from
12 per cent in early 1951 to a high of 22k per cent in April, 1955 --
while supplemental reserve requirements were in effect during most
of 1952, the better part of 1954, and during the middle of 1955.
Again from the middle of July, 1957 until May, 1960 marginal reserve
requirements were used to supplement increased regular reserve re-
quirements to reduce domestic inflationary pressures.17
Without considering seasonal fluctuations, the data indicate
that commercial bank reserve balances increased steadily from 1950
to 1960. Amounting to about PS $90 million in December of 1949, these
reserves had grown to PS $644 million in July, 1960. In addition,
despite attempts to restrain bank credit expansion, the commercial
banks were able to maintain a fairly safe cushion of excess reserves
until early 1958. By March of that year, however, the combination
of rising reserve requirements and high marginal reserve requirements
had all but erased commercial bank excess reserves. Indeed, until
the end of 1960, except for seasonal fluctuations, the commercial
banks were operating with only minimal excess reserves and, on
several occasions between middle 1958 and middle 1960, reserves
actually declined below the minimum level required.
As we have seen in Chapter III, the money supply expanded
rapidly and at a nearly constant rate during the entire period 1950
to 1960. Similarly total loans outstanding of the commercial banks
17tvista del Banco de la4 epablica (1950-1961).
grew throughout the same period, from PS $4b9 million in December,
1349 to over PS $2453 at the end of 1960. The rates of nrouth in
both cases were not altered during the last two and one half years
of this period during which time commercial bank excess reserves
iere practically non-existent.
To a large extent the failure to effectively restrain money
and credit expansion is to be explained through the discount quota
system which existed in Colombia during this period. This quota
system allowed commercial banks to discount eligible paper at the
Banco de la Republica up to a certain percentage of each bank's
capital and legal reserve. The board of Directors of the central bank
were invested with the discretionary power to adjust the commercial
bank discount quota within the legal limits set by law.18
As we have seen, the level of legal reserves maintained by
the commercial banking system rose steadily from 1950 to 1960. With
these rising reserves the discount quota of the commercial banks
automatically would rise. The Directors of the central bank could,
however, at their discretion merely lower the discount quota as a
percentage of reserves and capital when these increased, thus off-
setting the one expansionary factor with a parallel deflationary
factor. In fact. the opposite occurred. In the face of an auto-
matically rising discount quota due to rising reserves, the discount
quota was further increased by raising the quota as a percentage of
18Decreto Extraordinario 756 de 1951, in: Angel, p. 276.
reserves and capital. While at the beginning of the period under study
each commercial bank was entitled to discount paper up to an amount
equal to 120 per cent of its capital and reserves, by June, 1960
these banks were able to discount paper equivalent to 370 per cent
of capital and reserves.
These contradictory policies were quite notable, for example,
during the period from the middle of 1958 to the end of 1960. We have
seen how the Directors of the central bank raised the level of re-
quired reserves during this period in an attempt to reduce the ability
of the commercial banks to extend loans. However, durlnb the same
period of time the discount quota of the commercial banks actually
rose from 250 per cent to 370 per cent of capital and reserves,
thereby increasing the capacity of the commercial banks to extend
loans, not to mention the automatic increase in the discount quota
due to rising reserves and capital.
In this way, the existing monetary policies were working at
cross purposes and tended to produce contradictory effects. As a net
result, the commercial banks were in a position, throughout most of
the 1950's, to freely expand their loans, thus adding to the money
In sum, it may be said that the discretionary powers of the
Board of Directors of the Banco de la Republica between 1950 and 1960
did not appear to be exercised with a single-minded intent. The
artifically low interest rates which the central bank Directors were
able to create through its discount policies insured a steady and
strong pressure from borrowers on the credit capacity of the commercial
banks. The reserve requirements and marginal reserve requirements
generally tended towards contracting the loan capacity of the com-
mercial banks. And, finally, the system of discount quotas success-
fully circumvented the restrLctive effects of the system of required
reserves, thereby permitting the commercial banks to freely accomao-
date the demands of the public to borrow. A3 a result, the level of
commercial bank loans outstanding rose rapidly and continuously.
4-4 The Commercial Loan Doctrine
The principle of discretionary authority, upon which the
powers of the Board of Directors of the Banco de la Republica to
influence the money and credit market rested, was in contradiction
to the philosophy of the banking system as embodied in its founding
legislation, the Banking Laws of 1923.
The philosophy of this legislation, which continues to define
the broad legal authorities of banking institutions in Colombia, was
the principle of automaticity. The intent of the rules laid down
was to insure an automatic regulation of the supply of money sufficient
to meet the money and credit needs of the country without deliberate
interference from the monetary authorities, or, In other words, with-
out the use of discretionary powers.
The implementation of this philosophy rested in the provision
of Banking Law 25 that the central bank could not make loans, discounts,
or investments in documents, bonds, or bills of exchange maturing In
more than ninety days, except for paper fully covered by agricultural
ments in Colombia.
The commercial loan, or 'real bills," doctrine assumes that
the demand for such loans, and hence the supply of eligible paper,
will adjust itself to the current volume of production and thus match
each peso of credit with a peso of available goods.21 Unfortunately,
however, there is no force within the banking system which tends to
automatically adjust the volume of bank loans at any one time to
the requirements of monetary stability.
"The essential error in this real-bills doctrine is the con-
tention that basing the money on the mangy value of some kind
of economic good will limit its quantity. When it is proposed
that the quantity of money be made to depend upon the value of
some commodity, the unsoundness of the proposal has usually been
recognized; but for some very strange reason it has not been so
frequently understood that money which is related in quantity
to the money value of some kind of credit instrument arising
out of business transactions suffers from precisely the same
19Bernardo Rueda Vargas, A Statement of the Laws of Colombia
(Washington: Pan American Union, 1961), pp. 221-222.
International Bank, p. 303.
"2hints, p. 178.
In an inflationary environment prices will be driven up by
several producers or merchants bidding for the same available re-
sources, goods, or commodities. In the process, the extention of
commercial bank loans to meet the competitive demands for credit
adds to the inflationary pressures, even though these banks remain
wholly within the rule that only eligible loans should be granted.23
It appears, therefore, in light of the monetary expansion
in Colombia between 1950 and 19o0, that the rigid restrictions imposed
by the Banking Laws of 1923 were of little or no merit as a means
of automatic credit control. However, these regulations did tend
to develop a complete separation of the commercial banking system
from the process of capital formation.24
In the course of their development in Colombia, the commercial
banks have always been managed as any other capitalistic Industry
whose principle incentive Is profit and whose raw material is the
supply of credit.25 The central bank, particularly through its
discount policies, has made the short-term loan the most profitable
and has oriented the commercial banking system toward short-term
credit operations, while discouraging longer-term credit by excluding
these loans from rediscount priviledges. The only notable exception
to this rule, as noted earlier, was the creation of a special discount
rate in 1957 for which certain types of long-term obligations were
231nternational Bank, p. 303.
24bid., p. 304.
25Antonio Garcsa, "La Reforma Bancaria y el Control Selactivo
del Credito *n Colombia," 11 TriJrastre Economico, XVIII (July-September,
1951), p. 460.
These conclusions may be illustrated by the data contained
in Table 4-3. It can be seen that the distribution of commercial
bank loans and discounts remained very nearly unchanged from 1952 to
1960. The small increase in loans destined to agriculture and the
cattle industry is largely explained by the favorable treatment
which these types of obligations received at the central discount
The term structure of commercial bank loans is equally re-
vealing. In 1953, fully 90 per cent of all commercial loans were
short-term, while one-tenth of one per cent were long-term. At the
end of the decade short-term loans continued to absorb over four-
fifths of all commercial bank credit and long-term loans accounted
for about four per cent of all commercial credit.26
4-5 The Specialized Credit Institutions
A significant change, however, was occurring in the Colombian
credit system during these years. While the social role of the com-
mercLal banking system continued to be oriented along the lines dis-
cussed above and the distribution of commercial bank credit remained
almost unchanged, longer-term development-type loans were becoming
increasingly available. These funds bad their origin with the specialized
credit institutions that were gaining increasing prominence in Colombia
during the 1950'6.
26l Bnco de la public 1950-1 ).
Revista del Banco de la Repiblica (1950-1961).
0 O 4
"I Cc I r- rl a( r- 0 C
-MN M O i
h.I I ..
oT> -' ra44 f 'JrnO r 0 1 w
D0 x -r 0 <
Q In -0n ai' N O 0 019
in -^ -nc' 0 .4
C -n CO O aO
W- >d ci '-c
P C! *
00 3' I-nflflfl 44
v 1 0 Q1 W, qn jM
4 r-) d. CO. 0 &A
0> mN o
-m &W 0 In
U h* Chi
-I -rN 0 2
O < *0
a c' r4t 0 ." F
C C 4
B! o y ad
a. hi 0
>000 0 m0 *
-0.u C I.
7 UC h IC W
4W W U -n C 0
Sue UL -
7'U..Q(J J U
3j aw)00 q o
The growth of these Institutions was reflected in the declining
hare of all bank loans and discounts originating with the commercial
banks While commercial bank loans and discounts accounted for over
31 per cent of all loans and discounts granted by all banking institu-
tions, excepting the Banco de la Republica, at the end of 1949, this
share had declined to 68 per cent by the end of 1960.
This trend had similar important effects in the term structure
of total bank credit. While commercial banks continued to allot 80
to 90 per cent of their credit to short-term obligations, by the end
of 1960 medium and long-term credit amounted to over 42 per cent of
all credit granted by all banking institutions, excepting the central
The growth and activities of these specialized credit institu-
tions merit full and detailed study. Unfortunately, however, due to
the essential limitations of space we must confine ourselves to a
brief discussion of the role and importance of these institutions.
With the exception of the savings banks, which might also be
regarded as a specialized credit institution, these institutions were
usually formed as a means of providing medium and long-term credit to
various sectors in the economy which were not adequately served in
their credit needs by the commercial banking system. Their subsequent
Calculated from Departamento Administrativo Nacional de
Estadfstica, Anuario General de Estadsftica, Colombia, (Annual editions,
1952 to 1960) (Bogota": Multilith Estadinal, 1954-1962).
growth reflected an increasing awareness of the necessity to foster
certain activities calculated to further the process of economic
development in Colombia.
The most important of these credit institutions were grouped
around three areas of activity. These were, in agricultural and
livestock development, the Caja de Credito Agrarlo, Industrial and
Minero -- the largest savings bank in Colombia; the Banco Agricola
Hipotecarlo, which merged with the Caja Agraria in 1955; the Banco
Ganadero, the Banco Cafetero y de Exporcaciones; the Instituto de
Colonizacion e Inmigracron; the Instituto de Fomento Algodonero, and
several others. In industrial and energy development the Instituto
de Fomento Industrial, the Banco Popular, and the Instituto de
Aprovechamiento de Aguas y Pomento Elictrico were most significant.
The institutions involved in the development of construction, housing,
and municipal works were the Banco Central Hipotecario, the Instituto
de Credito Territorial, the Instituto de Fomento Municipal, and the
Banco Hipotecario Popular.
The remarkable growth of these institutions during the decade
of the fifties presented serious problems which arose in connection
with obtaining the finances necessary to allow them to conduct the
credit operations for which they were created. These entities re-
ceived the bulk of their resources principally from allocations under
2BUnited Nations, Department of Economic and Social Affairs,
Economic Commission for Latin America, Analyses and Projections of
Economic Development. III, The Economic Development of Colombia
(E/CM.12/365/Rev. 1, November, 1956) (Geneva, 1957), p. 117.
the national budget, investments in bond issues by public and private
financial LnrtitutLons, and from the Banco de La Republica.29
In our examination of the expansion and sources of the money
supply In Chapter III we saw that investment in documents of public
debt by the Banco de LI Republica expanded from PS $141.4 million at
the end of 1949 to about PS $750 million by the end of 1960. The
bulk of the central bank's long-term credit contribution to the
specialized credit institutions is contained in these statistics.
Unfortunately, it is difficult to estimate the exact percentage
of all central bank investment in documents of public debt that was
absorbed by the specialized credit institutions. However, it may
be said that most central bank investment in the specialized credit
institutions was funnelled into the Banco Central Hipotecario, and
that at the end of December, 1960 this amounted to over PS $111 million,
or about 15 per cent of all central bank investment in documents of
Central bank loans and discounts to the specialized credit
institutions have been, at least since 1957, on a larger scale. Table
3-3 illustrates the amount of Banco de La Republica loans and discounts
to the national government and other official entities. It may be seen
that the amount of this credit remained very moderate until 1957, at
which time it suddenly expanded to over PS $300 million and remained
291bid., p. 120.
3See Table 3-3.
31anco de La Repiblica, iXXIX Informe..Anual del Gerente a la
Junta Directive. Primere Parte, (Bogota; Banco de La iWiSblics, 1963),