Functions of the Central Bank of Chile
- Objectives of
- Central Bank
Origin of the Central Bank of Chile
One of the Treasury vaults with the door open
The Central Bank of Chile was created by decree law No. 486, 22 August 1925, under the government of President Arturo Alessandri Palma. This initiative arose as one of four projects presented that year by the Kemmerer mission. That mission, which was hired by the government of the time to restructure Chile’s monetary and financial system, was headed by Edwin Walter Kemmerer, professor of economics at the University of Princeton. The projects included the monetary law, which sought to stabilize the value of Chile’s currency and the gold standard as the basis of the country’s monetary unit, the creation of the Central Bank of Chile, the passing of the general banking law and the general budget law.
The same dispositions established in decree law No. 486 authorized the creation of an organizing commission for the Central Bank of Chile, whose express purpose was to develop the institutions necessary to ensure the functioning and management of this body, and bring it into being. Thus, the Central Bank of Chile opened its doors to the public on Monday, 11 January 1926.
The institution began activities with a nominal capital of 150 million pesos, of which about 13% was contributed by the State, 40% by Chilean and foreign commercial banks operating in Chile and the remaining 47% by the public, through a share subscription.
Ten people made up the new institution’s board of directors. The President of the Republic had the right to name three, Chilean commercial banks two, foreign banks one, representative associations three, and the shareholding public one. This same board was empowered to appoint the governor and vice-governor of the Bank, with the first officers being Ismael Tocornal Tocornal and Francisco Garcés Gana, respectively. One fundamental aspect implicit in the functioning of the Central Bank of Chile, which resulted from how the board of directors had been constituted, was its ability to function autonomously and independently. From the legal point of view, this meant providing the institution with its own legal status, independent of the Government.
Despite this, the Central Bank of Chile remained subject to the general supervision of the Superintendent of Banks, created by the General Banking Law (Ley General de Bancos), whose original text was approved by decree law No. 559, 26 September 1925.
In this context, the objectives of the Central Bank of Chile were essentially of a monetary nature. In the first place, the Bank was to watch over the stability of the value of Chile’s currency under a fully convertible gold standard regime and, in the second place, it was to regulate currency according to the needs of the monetary market, for which the basic constitutional law assigned the Central Bank a monopoly on issuing bank notes.
Finally, the law required that the Central Bank permanently hold a gold reserve equivalent to no less than 50% of total emission. If it were to fall below this limit, it would have to pay a fine to the state proportional to the deficit.