Eighty years of the Central Bank of Chile and how inflation was conquered in Chile The Central Bank of Chile was created in 1925 as an entity apart from the Executive Power. That year, also two laws related with the Bank’s startup were enacted: the Monetary Law and the General Banking Act. The former established a gold standard, while the latter created the Superintendency of Banks to supervise commercial banks. The Central Bank was granted the monopoly for printing bills, which under said Monetary Law would be gold convertible. But the foreign exchange regime and the Bank’s institutionality as set forth in 1925 weren’t strong enough to cope with the Great Depression with some success (it had enormous impact on the Chilean economy) and the growing demands for fiscal funding. These forced the abandonment of the gold standard, the imposition of foreign exchange controls, the creation of multiple exchange rates and the beginning of trade. Since the Great Depression – except for very short spans of relative macroeconomic stability –, the country suffered decades of high, volatile inflation. The ultimate cause of this was the systematic expansion of credit on the part of the Central Bank, both to state-owned organizations and to the private sector. Inflation followed inevitably and caused the failure of stabilization attempts in the years 1950 and 1960. The deterioration of the fiscal and monetary situation culminated in the early 1970s in a short hyperinflation.
This is something on which individual banks will have to take a view, but I would like to offer some general advice. First, banks should accept that profits for 2003 may not reach budgetted targets as a result of the outbreak; and they should not strain too much to make up the difference. When profitability comes under pressure, it is important to avoid the mistakes that might arise from over-aggressive business tactics. Keep the bank healthy from a capital and liquidity point of view in order to benefit from the business recovery when it comes, as it surely will. Banks should also monitor closely the financial position of their customers and adopt a supportive attitude to those experiencing financial difficulties as a result of the SARS outbreak. This means being prepared to offer temporary relief arrangements to borrowers who find that they cannot service their debts in the current environment. This should not be seen as soft option for customers since the banks will certainly not benefit if those customers go bankrupt. Nor do I suggest that relief should be offered indiscriminately. The long-term viability of the customer or his business, his track record and his willingness to cooperate with the bank are all factors to be taken into account in deciding whether to restructure debts. Each case thus needs to be looked at on its merits.