Historia del Banco de Mexico: Volumen 2, 1940-1946 (review)

During World War II, the Banco de México faced a number of challenges. War is an inherently inflationary environment, and Mexico, while basically a noncombatant, saw its prices rise rapidly. In part, inflation was imported, for the international supply of goods dried up while home demand increased. At the same time, Mexico attracted large flows of capital because it did not restrict access to bank accounts in any way, an important consideration for people looking to avoid the financial complications imposed by belligerency. As a result, the international reserves of the Banco de México rose to unprecedented levels and with reserves, so did the monetary base.

Yet, not all inflation was imported. During the sexenio of Lázaro Cárdenas (1934-40), the Banco de México was expected to supply resources to the federal government as a matter of course. Moreover, changes in the regulations governing the Banco de México in 1941 made the institution, if anything, even more sensitive to its political masters. In other words, this was not an independent central bank and was obliged to monetize the debt of the federal government. Since federal expenditure rose rapidly, the result, not surprisingly, was greater inflation.

One of the instruments open to the Banco de México to control inflation was sterilization of capital flows. Sterilization, the sale of government bonds to offset increases in the money supply, was attempted without success. The ostensible reason for the ineffectiveness of sterilization was the underdeveloped private market for government bonds and the lingering distrust that previous suspensions of debt service had created among the public. The Banco de México also repeatedly raised the reserve requirements of banks in the Distrito Federal and elsewhere, but the banks themselves succeeded in evading the higher reserve requirement by a variety of means.

In the final analysis, however, the government was not entirely serious about restraining inflation. Its overriding economic goal was growth, not price stability, which clearly took a back seat to increasing output and employment. Could inflation have been a policy instrument as well? By my reckoning, the purchasing power of the minimum wage in the Distrito Federal fell by an astonishing 48 percent between 1940 and 1946. Reducing real wages is certainly one way, in the short run at least, of raising employment and profits at the same time. The ensuing real appreciation of the exchange rate, a consequence of higher prices and the strong peso, was effectively concealed until the war was oven when, at last, the chickens came home to roost. The era of "stabilizing development" may have ended with the devaluation of 1976, but it also began with the devaluation of 1954.

This is an interesting account, although it will be of most use to financial and economic historians and to specialists working on the 1940s. It is based on materials drawn from the archives of the Banco de México, from newspapers and official publications, and from interviews that Turrent Díaz, an official of the Banco de México, conducted in the early 1980s with some of the principals involved. There is abundant statistical information, a bibliography that collects material on banking and monetary policy in the 1940s, and even a list of people supported by scholarships given by the Banco de México, including ministers, diplomats, politicians, and a central banker or two. The book is available directly from the Banco de México, Ave. 5 de Mayo no. 20, Planta Baja, Col. Centro 06059, México, D.F. For those interested in a concise summary of the period described here, as well as a brief but clear survey of the activities of the Banco de México since its founding in 1925, I recommend a visit to its website, www.banxico.org.mx/aAcercaBanxico/FsacercaBanxico.html.