Economic crisis in Chile of 1876

The economic crisis in Chile of 1876 was an economic phenomenon that strongly affected the economy of Chile at the end of the century XIX.

Background

The free trade course assumed by the Chilean economy after the discovery of Caracoles Mineral boosted foreign trade in raw materials and gave a great boost to stock market and banking activity. The latter was favored with the issuance of the banking law of 1860, which allowed banks to issue paper money, without state control, for up to 150% of their capital reserves. This produced a surplus of printed currency that was not metallically backed.

To these private factors, we must add the military and naval expenses incurred by the State through credits, to face the war with Spain in 1865.

During that same period, the Franco-Prussian War ended, in which France had to pay a large indemnity to Berlin and Vienna, which ignited a tremendous stock market fever that spread to New York, London and even Paris. German furnaces quadrupled their production, in the US iron extraction doubled. All of this generated over-speculation in the stock market that crashed in Vienna and New York in 1873. As a corrective measure, monometallism based on gold was adopted by the US and Europe (until then there was bimetallism)., that is, silver and gold were used interchangeably in large transactions).

Effects in the country

In Chile, the world economic depression hit in 1876, there was a drop in silver, there was a shortage of metallic currency, due to the drop in the price of copper and wheat, and the strong export of Chilean currency. gold and silver, which businessmen were forced to make to pay their commitments in Europe. Likewise, the speculation experienced during the Caracoles fever had made many risky placements and some frankly irregular ones that made many loans uncollectible, given the insolvency of numerous debtors ruined by the crisis. Likewise, the banks saw their shares depreciate since they did not have metallic reserves to convert the paper money they had printed, which is why they even made loans for up to a month without charging any interest in order to be able to preserve the reserves in cash. inside their vaults and replace it with their own banknotes.

To alleviate this situation, President Aníbal Pinto first appointed Rafael Sotomayor as Minister of Finance, who decided to reduce public spending by not increasing the salaries of public employees, which almost caused his fall from the ministry. To settle the deficit, it was finally decided to issue treasury vouchers or internal debt bonds for up to 3,000,000 pesos. However, this decision forced the following year, on January 10, 1877, the government of Chile to contract a loan for 5,000,000 pesos, in order to pay the bonds issued. Due to intrigues by the different political sides, Sotomayor was replaced by Augusto Matte on October 27, 1877.

This led the State of Chile to decree the inconvertibility of banknotes into gold, generating a crisis that was only managed to be overlooked after the victory in the Pacific War over Bolivia and Peru.