Chapter XI

. At the beginning of the European war, the new money was exchangeable at par for sight drafts on New York. The inability of the government to replenish the exchange fund against which these drafts were drawn forced the National Bank to suspend their sale for a time, with the result that the premium on American exchange rose to thirty per cent early in 1915. More recently, however, the National Bank has resumed the sale of drafts at par with its own funds.

Honduras is still upon a silver basis. Silver coin circulates at its intrinsic value, and bank-notes, which are generally used in commerce, are accepted at par in the cities and towns, although the country people as a rule prefer to use specie. The Republic has coined little money of its own, but a considerable part of the silver of Guatemala and Nicaragua found its way over the border when those republics fell under a paper regime, and _pesos_, or dollars, from Salvador, Chile, and Peru are in general use. The monetary system of the Republic is thus better than that of the majority of its neighbors, but it can nevertheless hardly be said to be sound. The rise and fall of the price of silver in the world’s markets involves fluctuations in the rate of exchange which are only less violent than in the case of an unsecured paper circulation, and cause much inconvenience and danger to merchants dealing with foreign countries. A part of the Republic’s imports, which for several years past have exceeded the exports, are undoubtedly paid for in silver coin, despite the restrictions on the export of specie. This tends to leave only subsidiary coins, of a lower standard of fineness than that of the _pesos_, in circulation, and to make it more difficult also for the banks to maintain their metallic reserves. Since the beginning of 1916, especially, the scarcity of exchange on New York, combined with the high price of silver in the foreign markets, has threatened to drain the country of its circulating medium, and has forced the government to forbid entirely the exportation of coin.

The currency of Salvador was until very recently on a silver basis, but in August, 1914, the banks, whose notes formed a large part of the circulating medium, were allowed to suspend silver payments in order to safeguard their metallic reserves, and the exportation of specie was forbidden. Silver coin has now almost disappeared from circulation, and bank-notes and small nickel coins have taken its place in all transactions. The fact that the banks still maintain a large reserve for the resumption of specie payments after the war, however, has prevented a serious depreciation, although the rate of exchange has fluctuated considerably.

In Costa Rica, the depreciation of the currency had begun as early as 1882 with the issue of government paper and bank-notes which gradually drove silver coin out of circulation. Rates of exchange rose slowly until 1896, when President Rafael Yglesias procured the passage of a law which provided for the establishment of a gold standard. A unit called the _colón_, worth about 46¹⁄₂ cents in United States currency, was adopted, and certificates were gradually exchanged for the old money at the rate of one _colón_ for one _peso_. On July 15, 1900, the government was able to begin the redemption of these certificates in gold coin. A new law, meanwhile, had required the banks to guarantee their notes by adequate reserves of specie, so that the currency of the Republic was placed upon a sound basis. At the outbreak of the European war, however, the government relieved the banks of their obligation to redeem their notes in gold. A little later, finding that its revenues were falling off, and being unable to arrange for a loan with the existing banks, it granted to a new institution, the Banco Internacional, the privilege of issuing inconvertible notes secured by government bonds. The result was a rapid depreciation of the currency. The rate of exchange on New York rose from 218 on August 1, 1914, to 260 in January, 1915, and to nearly 300 a few months later. It has been reduced somewhat since that time, and a metallic reserve has gradually been accumulated by the Banco Internacional, so that there seems to be ground for hoping that the paper will be redeemed at par when normal conditions are restored.

The Central American republics will have to depend upon the assistance of foreign capital both for the readjustment of their foreign debts and the reorganization of their monetary systems,--reforms for which the need will become pressing soon after the conclusion of the war. The problem of placing their credit on a sound basis is one of the most important which confronts them today. If their economic development is to continue, they will require new loans from abroad, not only for refunding old obligations and stabilizing their depreciated and fluctuating currencies, but also for building railways and roads, improving ports, and making other internal improvements. These new loans, probably, can be obtained to best advantage only in the United States, with the aid of the American government, for no other country has the interest which we have in the solvency and the economic welfare of the Central American nations, and no other, while the Monroe Doctrine is maintained in its present form, is really in a position to guarantee to its bankers the full measure of protection which is necessary to make loans to the republics of the Isthmus a safe investment.

FOOTNOTES:

[78] Includes export duties.

[79] The internal debt of each of the republics, according to statistics compiled from their Treasury Reports and from the 1915 Report of the Council of the Corporation of Foreign Bondholders, was as follows on December 31, 1914.

(Figures in American gold.)

Guatemala 3,880,986 Salvador 4,563,676 Nicaragua 6,676,662 Honduras (July 31, 1914.) 1,844,585 Costa Rica 2,692,215

[80] These and other details in regard to the bonded debts of the Central American Republics are for the most part based on information in the 1915 Report of the Council of the Corporation of Foreign Bondholders in London.

[81] Message of President Jiménez to Congress, 1911.

[82] Costa Rica, _Memoria de Hacienda_, 1915. This sum includes certain minor obligations to correspondents in New York, London, and Paris.

[83] This does not include the accrued interest, which now amounts to a considerable sum, as the service of the loans has been suspended since 1914.

[84] Report of the Council of the Corporation of Foreign Bondholders, 1915, p. 207.

[85] Honduras, Boletín Legislativo, April 19, 1911. (Quoting from the Moniteur des Rentiers of Paris.)

[86] The treaty was exactly similar to that signed in the same year by the United States and Nicaragua. For the text, see the American Journal of International Law, Vol. 5, supplement, p. 274.

[87] See the 1915 Report of the Council of the Corporation of Foreign Bondholders.

[88] U. S. Commerce Reports, Supplement 29a, September 2, 1916.

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