The regulatory agency for the financial system was born as a result of the 1935 banking and monetary reform which put in place major changes by the enactment of six Acts of Congress on May 28, 1935 under the numbers 12155 through 12160.
That day marked the formal extinction of the Currency Board, which had been operative since 1899, and the birth of the Central Bank of Argentina (BCRA) as it is still organized today.
In turn, the Executive Decrees that established the formation of a Central Bank, as well as the termination of the Currency Board, the Government Credit Agency, and the Self-Regulatory Board are dated May 31, 1935.
On that same day, the Currency Board and the Bank of the Argentine Nation transferred to the newly organized BCRA all the funds from the appraisal and fair pricing of gold. And also the same date is considered the anniversary of Argentina’s Central Bank, even though the institution became operative as such some days later, on June 06, 1935.
The initiative to create a Central Bank system — in times of Agustín P. Justo as President of Argentina, and Federico Pinedo acting as Economy Minister- was based on an expert opinion issued in 1933 by a mission headed by British specialist Otto Niemeyer. Mr. Prebisch developed that idea to use it as the basis for the principles suited to the national economic reality, in his words, „a monetary and financial policy that responds to authentic national interests”.
This renowned economist -whose scheme was based on the need to overcome the serious monetary and banking situation created by the world crisis in the 1930s- then endured the plight of the 1938 recession, counteracting it by implementing a completely new policy against cyclical movements, and the 1939 recession, associated to the outbreak of World War II.
Thanks to Mr. Prebisch, who embodied the new Keynesian ideas in Argentina, the BCRA embarked on calculating Annual National Income for the first time. Along these lines, a training program for BCRA experts began in Harvard.
The infant Central Bank, pursuant to its 1935 Law, was geared „to promote the liquidity and smooth operation of credit”, and it prohibited banks to execute transactions that might endanger such liquidity.
After World War II, a period of violent structural changes was unleashed that lasted until the 1990s, where four successive Presidents of Argentina would hold office in one year, and six Economy Ministers would serve within a two-year period. It is worth mentioning that Ernesto Bosch was the single BCRA Governor to strike a 10-year record in such capacity, and that the same applies to Economy Minister Ramón Cereijo, who managed to complete his six-year term of office.
After 1970, an inflationary process speeded up, and the Argentine currency
lost 13 zeros between the turn of the century and 1991. The radical remedy applied to face hyperinflation was the Convertibility Law, the single tool available for this purpose.
Almost 11 years later, this model ceased to exist with the implementation of the 2002 Economic Emergency Law. Today, as in Mr. Prebisch’s times, we are back in a foundational moment for Argentina and its monetary policy.
Economist Raúl Prebisch (1901-1986) was the first Director-General of the Central Bank of Argentina (BCRA). Later he became an advisor to the temporary government that overthrew Juan D. Perón in 1955, and of President Alfonsín.
We could summarize the situational aspects created in the currency system and banking institutions by an acute global crisis in the following terms:
- Removal of the gold standard in a rigid monetary system. Destruction of the core foundations of this system and need for its substitution.
- Dangerous situation for banks, arising from crisis adverse impact as well as error and abuse acted upon the credit policy. Risk of collapse in the banking system. Need for restructuring and strengthening the situation, on the one hand, and preventing the occurrence of repeated evils, on the other hand.
- Disruption of public credit. Banks are laden with frozen Treasury securities, there is heavy floating debt, and absence of an organized financial market where the Government may regularly place its securities issues. Need to solve this problem.
- Dispersal of financial and monetary policy components: Currency Board, Bank of the Argentine Nation, Office of the Comptroller of the Currency and National Treasury. Need to bring these entities together and streamline them; and finally.
- Betrayal of public trust in the existing currency system and banking institutions.
Prebisch reformed existing institutions so as to adapt them to new economic realities. The most outstanding reform was that of the Central Bank, a project he carried out since 1931, while he was director of the Bank of the Argentine Nation’s Research Office. A committee in which he played an active role used to meet there and drafted a central bank
project. When the de facto government came to an end, in January 1932, Prebisch published La acción de emergencia en el problema monetario, in which he anticipated criticism of the gold standard and the Currency Board, only effective in cyclical rising stages. He proposed a banking reform, based on a Financial Institutions Act, and a Central Bank with joint management, which would absorb in a single institution various elements scattered in several institutions and would be able to cushion the wide scope of the economic cycle. Prebisch’s trip to the League of Nations in 1932 and to London in early 1933 allowed him to exchange views with Sir Otto Niemeyer in England, before returning to Argentina.
The adoption of a series of expansive measures, announced on November 28, 1933, as a National Economic Action Plan, was a turning point in the Argentine economic policy. This was first heterodox policy.
In 1934, Prebisch started devising his bank reform, also following Keynesian thinking and therefore bound to raise opposition from various sectors; among opponents were Dr. L. R. Gondra and Lisandro de la Torre.
The BCRA allowed the application of an anticyclical policy based on open market transactions, which proved to be successful in 1936-37. The cycle was conceived as the interaction of few monetary flows. The multiplier transmitted the cycle in the central country to the periphery.
Concerns regarding control over this cycle led to the most comprehensive measuring of the country’s activity, the national revenue, which began in 1940 under Prebisch’s advocacy.
The “structural” approach in Argentina dates back to 1939, when World War II broke out in Europe. Due to its similarity with the previous War, where supplies has been interrupted and overseas markets, closed, exports were faced with serious difficulties. Given the fall in exports –an active component of expenditure–, the multiplier, which transmitted the international cycle to the provinces, anticipated recession.
As a defensive plan, the Treasury Ministry entrusted the resolution of the case to the Central Bank general manager.
Prebisch and his collaborators –among whom were Ernesto Malaccorto (1902-91), Máximo Juan Alemann (1901-86), and Guillermo Walter Klein (1899-1986)– devised a Program for National Economic Reactivation (1940), to “provide the economic movement with a pace that will lead to the highest rate of employment.”
Prebisch’s foresight was revealed in that Program, in which he used an approach that involved technical instruments created years later in papers by Leontief, Goodwin, Hirschman, Watanabe, and Chenery published in the 1940s and ‘50s.
The appropriate instrument to counteract the expected recession was the public works-multiplier mechanism. However, the Argentine economy was strongly dependent on its exports, its own genuine source to generate foreign currency
, import, and pay financial services to foreign countries. A “general” reactivation would lead to unsustainable imports with less foreign currency inflow. Prebisch had already tackled this issue in 1933, in the PAEN (National Economic Action Plan), when an import-selective policy with foreign currency rationing was applied.
When the Program was introduced in the Senate in 1940, economists were already beginning to call “structural approach” the inter-industrial or input-product approach developed by Leontief.
In 1943 Prebisch left the BCRA. During the years he had worked there, he had been substituted in his position as professor in Economics II (Economic Dynamics) by Juan José Guaresti, Jr. and Julio Broide. By the end of 1943 he decided to fully resume his duties as professor. He meant to reflect on his own experience and revise current economic science.
In March 1944 Prebisch gave presentations at the Bank of Mexico on his experience at the Central Bank of Argentina, and published El patrón oro y la vulnerabilidad económica de nuestros países, in which he analyzed the disparities among countries, how they translated into disparities in trade, and how the gold standard enhanced the vulnerability inherent in primary-exporting countries. The center-periphery dichotomy was increasingly present in his works, and he went from referring to the center and the periphery of the cycle to designating by center those nations with more developed economies and by periphery, underdeveloped countries.
In terms of the promotion of economic studies, the 1955-65 decade may be considered the economists’ golden age. In this period, the Government based its acts on the expertise of new government officials –professors or graduates from the School of Economic Sciences (Eugenio J. Folcini, Eugenio A. Blanco, Roberto A. Verrier, Adalbert Krieger Vasena, Alizón García, Juan Llamazares)–, the advise of a Consultative Committee (in which Díaz Arana participated), or UN officials. The education of young economists was encouraged, partnerships flourished, academic activity was resumed, new courses of studies were created, postgraduate studies in foreign countries were given support, and public and private bodies run by economists were established.
The provisional government required Prebisch’s advice, which was put forward in his Informe preliminar acerca de la situación económica (10/26/1955), Moneda sana o inflación incontenible, and Plan de restablecimiento económico (1/9/1956).
In order to study Argentine economic development, the government asked a UN technical mission for help in January 1956; under Raúl Prebisch’s leadership and with the participation of John D. Black (Harvard University), Richard Goode (IMF), Alberto Fracchia, Ángel Monti, and Manuel Balboa, this mission carried out its task between 1956 and mid-1957. Carlos Brignone, Ricardo Cibotti, Norberto González, César Piana, and Jorge Trebino cooperated with the macroeconomic analysis. The BCRA National Income Department, formed by Alonso Olivera, Guarrochena, Guglieri, Monteverde, Trebino, Vicente, and Zorzano, cooperated as well.
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