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ABSTRACT Since 1940 inflation has been a characteristic of Colombia's economy, and may indeed continue to be a major problem for a con— siderable time, bringing with it the usual effects of intensification of inequalities of income and encouragement of Speculative, rather than productive, investment. Between 1940 and 1949 the consumer goods price index rose by 172 percent, and the currency in circulation rose by 343 percent. The causes of the price rises were partly a reflection of world deveIOpment. During World War 11, Colombia accumulated a consider- able exchange balance, and could not import proportionately, increas- ing the bank deposits and reserves. At the end of the war the situ- ation changed, but'the expansion of commercial bank credit and government borrowing from the central bank more than offset the drain on foreign exchange, and further encouraged inflation. There are ten Colombian and four foreign banks in the country; about 70 percent of all commercial bank credits are lodged with the three biggest national banks, which have branches throughout the country. The organization of the commercial banks is similar to that in the United Kingdom, but the organization of the Banco de la ii ‘ 350 338 Republica and its relations with the commercial banks resemble the Federal Reserve System of the United States. All the commercial banks are affiliated with the Banco de la Republica. The central bank is the sole note-issuing authority, and, by means of its rediscount facilities and power to alter the amount of deposits required from the commercial banks, it is able to control their credit capacity. The report and recommendations of an economic mission under the title "Basis of a Development Program for Colombia," usually known as the "Currie Report," made a thorough investigation of the banking system and its operation, and criticized the theory underlying the banking system. They argued that the Banco de la Republica should be empowered to ration credit, that the government should avoid borrowing from the central bank, and that the shortage of credit in certain spheres of the national economy should be met by allowing the commercial banks to invest a large proportion of their assets in longer-term loans. Some control of this sort was necessary to enable the banks to contribute more effectively to the economic development of the country and to correct the tendency of the traditional policy to aggravate the inflationary tendency of the previous ten years . iii It is characteristic of the underdeveloped countries such as Colombia that the resources they put into investments are a much smaller pr0portion of their national income than is found in the more highly developed countries. The proportionally low level of investment in underdeveloped countries may be due principally to the unavailability of savings. In Colombia there are opportunities for profitable and productive invest- ments that cannot be exploited because sufficient finances cannot be obtained. The inadequacy of investment is prima-facie evidence that there is deficiency of savings. In order to increase resources available for the domestic financing of economic development, recourse may be had to a variety of methods; these include voluntary saving, fiscal measures, and di— rect controls which limit the use of various factors of production or rest rict c onsumption. iv ACKNOWLEDGMENTS I want especially to thank Professor John M. Hunter, for much useful advice and valuable comments in compiling the data, and also for his painstaking help which led to great improvement in every aspect of the entire thesis. Finally, I want to thank Mrs. Helen Harder, to whom I owe a debt of gratitude for her help in improving my English grammar. TABLE OF CONTENTS CHAPTER I. MONETARY STRUCTURE OF COLOMBIA ....... Present Monetary Structure ............... Kinds of Money in Colombia .............. The Circulating Medium in Colombia ...... Banco de la Republica ................... Rate of Interest ..................... Agencies .......................... Development of Activities .............. Policy ............................ Banco de la Republica and Money Supply ..... Commercial Banks ................... Savings Banks ...................... Colombian Monetary History .............. Colonial Period ..................... Independence Period, 1811-1819 .......... The Gran Colombia, 1819-1829 ........... Republica of Colombia, 1830- ............ Fluctuating Paper Money ................. vi N 13 15 17 17 18 19 19 20 23 CHAPTER Other Financial Institutions ............... Commercial Banks ................... Caja Colombiana de Ahorros ............ Caja de Credits Agrario Industrial y Minero .......................... Banco Central Hipotecario .............. Stock Exchange ...................... Insurance Companies .................. II. DESCRIPTION OF INVESTMENT IN COLOMBIA . . . Resources of Colombia .................. Emeralds .......................... Petroleum ......................... Agriculture ........................ Coffee ............................ Livestock .......................... Ag ricultural Inve stment .................. Number, Distribution, and Occupations of Colombia .......................... Inve stment in Colombia .................. Early Inve stment .................... vii 46 47 47 48 49 50 50 50 52 52 55 59 60 61 62 64 65 CHAPTER Page Historical Development of Tropical Oil Company ....................... 67 Manufacturing Industry .................. 67 Stage of Industrial Development .......... 68 Types of Manufacturing Industries ........ 69 Size of Industrial Development ........... 69 The Industrial Trend in Colombia ........... 69 Current Position of the Industry ............ 73 Background of Industrial Development ........ 78 Socio-Political Factors ................ 78 Economic Impulses Behind Industrialization . . . . 79 Stimulation by the World Wars ........... 79 Protection Afforded by High Custom and Exchange Restriction ............... 80 Financial Assistance by the Government ..... 81 Institute of Industrial Deve10pment ...... 82 Financial Assistance Provided by ForeignCapital.....................‘ 83 Depression ......................... 84 Major Manufacturing Industries ............ 85 Future Investment ...................... 87 Communication and Transportation .......... 91 viii CHAPTER Page Rail roads .......................... 93 Water TranSportation ................. 93 Roads ............................ 93 III. SOURCES OF FOREIGN INVESTMENT OUTSIDE THE MONETARY STRUCTURE ........ 96 Data ............................... 96 Great Britain's Capital in Colombia . . . . . . . . . 100 Economic Significance of British Investments in Colombia .......................... 106 French Investment in the Republic of Colombia ............................ 107 French Investment Following 1902 ........ 108 French Investment After the First World War ......................... 110 United States Investment in Colombia ........ 112 Security For These Loans .............. 115 Defaults of the Colombia Bonds .......... 118 The Economic Effects ’of Investment from 1913 to 1929 ......................... 118 Public Investment in Colombia ........... 120 The Export-Import Bank ............. 121 International Bank for Reconstruction and Deve10pment ................... 123 ix CHAPTER IBRD projects .................... United States direct investment, 1929 to 1936 ..................... United States direct investment, 1936 to 1940 ..................... United States- direct investment, 1940 to 1950 ..................... Effects of Investment from 1940 to 1950 . Investment Climate in Colombia ............ IV. SHORTCOMINGS OF THE MONETARY SYSTEM .............................. Functioning of the Present-Day Banco de la Republica ................... Brief Review of the Situation of the Banking System in Colombia ............ Status and Operations of the Banco de la Republica ............................ Bank Credit and Capital Formation ........ Inflation ........................... 1 Shift of Income and Wealth ............. Forms of Investment .................. Attempts at Credit Controls ............. Foreign Exchange Operation and Central Bank ....................... Page 123 126 127 128 129 132 134 134 135 137 143 144 145 147 149 151 CHAPTER Page Capital Formation in Colombia ........... 152 Structure of capital formation ......... 153 Capital formation and imports ......... 157 Magnitude of savings and investment in Colombia ...................... 157 Financial aspects of capital formation in Colombia ...................... 161 Origin of capital formation ........... 162 Resumé ............................. 164 V. RECOMMENDATIONS ..................... 167 Deve10pment, Investment, and Savings ........ 168 Capital Formation and Saving .............. 169 Financing Economic Growth ............... 170 Promotion of Voluntary Saving by Individuals and Enterprises ............... 172 Fiscal Methods ........................ 172 Control of Money and Credit Supply ......... 174 Banking Legislation ..................... 175 Agricultural Financial Organizations ......... 178 Conclusion ........................... 179 BIBLIOGRAPHY ............................... 181 xi TABLE II. III . IV. VI. VII. VIII. IX. XI. XII. XIII. XIV. XV. XVI. LIST OF T AB LES Value of the Colombian Peso in Terms of the Dollar Composition of Colombian Money Supply Reserve Ratio of Banco de la Republica Growth of Business Since the Founding of the Central Bank Distribution of Savings Deposits ......... Early Banks in Colombia .............. Dollar-Peso Rates, 1900-1905 .......... Monetary Stock of Colombia, 1923-1926. . . . Money Supply, 1940-1949 .............. Annual Increase in Money Supply, 1941-1949 Sources of Money Supply, 1941-1949 ...... Price Indexes, 1940-1949 .............. Gold Production .................... Production and Exportation of Hydrocarbons Agriculture: Estimated Value of Production, 1939-48 .......................... Occupations of Gainfully Employed, 1939-1947 xii 10 18 22 26 33 40 42 43 45 51 54 57 63 TABLE XVII. XVIII. XIX . XX. XXI. XXII . XXIII . XXIV . XXV. XXVI. XXVII. XXVIII. XXIX. XXX. XXXI. XXXII . Industrial Establishment According to Capital Invested, 1941 ................... Major Manufactures .................... Colombian Production, 1944-45 ............. Components of Value of Production (manufacturing) of All Industrial P roduction (1944- 45) .................... Projected Investment Program, 1951-55 ...... Recommended Investment in Specific Industries, 1951-1955 ................... 1949 Appropriations for National Highways, Ministry of Public Works ................ B ritish Mining As sociations ............... British Investment in Economic Enterprises in Colombia Ending 1876 ................. British Investment in Colombia Ending 1890 British Investment in Colombia Ending 1913 British Investment in Colombia at the End of 1939 .......................... Liquidation of British Investment, 1941 ....... French Investment at the End of 1902 ........ French Investment in Colombia at the End of 1913 .......................... French Investment in Colombia at the End of 1938 .......................... xiii Page 70 74 75 77 90 92 102 103 104 104 106 107 109 109 111 TABLE XXXIII . XXXIV . XXXV. XXXVI. XXXVII.. XXXVIII. XXXIX. XL. XLI. XLII . XLIII. XLIV. XLV. XLVI. XLVII. XLVIII. French Investment in Colombia, 1943 ......... Investment of United States at the End of 1898 United States Investment in 1913 ............ United States Loans to Colombia from 1926 to 1929 .......................... List of Loans of Export-Import Bank ......... Ame rican Di re ct Inve stment Direct Investment Abroad of the United States in Colombia, 1950 .................. Direct Investment in Colombia, 1950, by Type of Foreign Organizations, Number ....... United States Manufacturing Investment in Colombia, 1945-1950 ................... Price Index, 1940-1949 ................... Increase in Money Supply and Price, 1940-1949 . . Sources of Money Supply, 1941-1949 .......... Gross Capital Formation, 1939 to 1947 ........ Gross Capital Formation by Economic Sectors, 1939 to 1947 .................... Relative Importance of Imports in Various Sectors of Capital Formation from 1939 to 1947 ................................ Estimate of Savings and Investment in Colombia ............................. xiv Page 112 113 114 116 122 128 130 130 131 139 139 141 155 156 158 159 TABLE Page XLIX. Estimates of Savings and Investment in Colombia as Percentage of Gross National P roduct ........................ 160 L. Budget for Colombian Economy, 1947 ......... 163 XV CHAPTER I MONETARY STRUCTURE OF COLOMBIA The purpose of this chapter is to outline in general terms the present monetary and central banking systems of the Republica of Colombia, and also to summarize briefly the principal aspects of Colombian monetary problems, together with the techniques and mea- sures ad0pted for their solution. P re sent Monetary Structure In Colombia the unit of account is the P333, divided into one hundred Brita/£3. In accordance with Law No. 90 passed in 1948, the gold content of the Colombian peso is 0.50637 gram.l The parity intrinsic with the dollar is: One dollar = 0.888671/0.455733 = 1.949982 Colombia pesos. The gold content of the Colombian peso in 1938 was 0.56424 gram, and the parity intrinsic with the dollar ' 2 was: One dollar = 1.7499862 Colombian pesos. The value of the 1 Gustavo Otero, Monerafia de Colombia, Edition Paris, 1950, 2 Revista de la Regublica de Colombia, Enero 1954, Bogota, Colombia, p. 75. peso varied from 0.97 United States cents in 1928 to 0.51 United States cents in 1953, as is shown in Table I. These figures are for the official free rate, but do not ac- count for black-market rates. It should be remembered that the value of the dollar dropped to 59 percent of its value in terms of other currencies in 1933, because of the devaluation of the dollar by the provision of the Gold Reserve Act of 1934. Kinds of Money in Colombia Colombian money can currently be classified as follows: 1. Full-bodied money. 2. Credit money. (a) Token coins. (b) Circulating promissory notes issued by banks. (1) Circulating promissory notes issued by central bank (by the government). (2) Circulating promissory notes issued by other banks. (3) _ Demand deposits subject to check. The principal full-bodied money appearing in the money sys- tem 0f Colombia consisted of coins of the standard metals that were ( issued when Colombia utilized a bimetallic standard (i-e-v 115mg bOth i r 1 u TABLE I VALUE OF THE COLOMBIAN PESO IN TERMS OF THE DOLLAR 1928 1932 1934 1938 1940 1945 1948 1950 1951 1953 97 95 62 56 57 57 34.15 50.51 51.5 51.5 Sources: United States Tariff Commission, Foreign Trade of Latin America, Part I, pp. 141-142; and Revista del Banco de la Repub- lica, January, 1954, p. 124. gold and silver) or metallic standard (i.e., gold standard). Full- bodied money has in the past played an important role in the mone- tary system of Colombia. Credit-money is any money that circulates at a value greater than the commodity value of the material of which it is made. All money in circulation at present in Colombia is credit money. The principal types of credit money are token coins, paper money, and checking deposits. Circulating promissory notes are issued by the government; the government also issues credit money. This practice was first used by the government in financing its early military expenditures. All circulating coins in Colombia-~silver peso, half peso, Cluarters, dimes, nickels, and pennies--are token money. Circulating promissory notes issued by the central bank con- stitute a considerable part of the hand-to-hand currency. Demand deposits at banks are the major part of the money supply in Colombia. .‘ i The Circulating Medium in Colombia Table II shows the composition of the Colombian supply of money. All types of these circulating monies in Colombia, except checking deposits, have full legal-tender power; that is, they have the legal power to discharge debts. Though checking deposits are not themselves legal tender, the banks are obligated to redeem them on demand in legal-tender money. The Banco de la Republica must maintain reserves equal to at least 25 percent of its notes outstanding; however, it often main- tains reserves above that requirement (see Table III). 4 Banco de la Republica The Government Law No. 25 passed in 1923 created the re- PUblic bank. This bank started functioning with a capital of ten Eh Information taken from Colombia in Cifras, 1948-49, Extra- ordlnary Edition, Colombia, Bogota. TABLE II COMPOSITION OF COLOMBIAN MONEY SUPPLY (in thousands of pesos) Notes - s' ' - of the Gov ilver ‘ Nickel Demand Total Banco ern- Cer- Silver Cop- Year , , Total De- Money de la ment t1f1- Coins per 't S 1 Re- Paper cates1 Coins p051 s upp Y publica 1949 476,340 7,931 838 19,929 7,604 512,642 431,802 926,444 1950 463,182 7,931 312 10,134 7,847 489,406 504,836 994,242 1951 522,527 7,931 236 12,294 7,848 550,836 607,827 1,158,663 1952 609,727 7,931 236 12,401 8,806 639,101 709,101 1,348,202 1953 688,088 7,931 216 13,572 9,713 718,820 876,372 1,595,142 Sources: Revista del Banco de la Republica; Enero, 1954, p. 70. for full-bodied coins or their equivalent in bullion. Silver certificates are the only representative full-bodied money in Colombia, and are in effect circulating warehouse receipts TABLE III RESERVE RATIO OF BANCO DE LA REPUBLICA (in thousands of pesos) Note Actual Minimum Present Year Capacity Note Reserves Reserves Authorized Issue 1 (pct.) (pct.) 1949 817,659 476,340 25 42.25 1950 685,323 463,182 25 36.99 1951 922,945 522,528 25 44.16 1952 1,044,038 609,727 25 42.81 1953 1,345,391 688,088 25 48.88 Sources: Revista del Banco de la Republica; Enero, 1954, p. 53. million pesos; it was organized by the government in conjunction with local and foreign commercial banks. The charter of the Banco de la Republica has been extended for twenty-five years. It retains its privileges as the sole bank to issue notes, for which the bank Pays the government a royalty of 13,754,000 pesos annually. The bank is required to maintain reserves equivalent to 25 percent of Its demand deposits and 30 percent of its outstanding notes, exclud- ing silver certificates, against which a 100 percent reserve of silver coins is required. These reserves, other than those against silver certificates, consist of gold in the vaults of the bank or held abroad as demand deposits in foreign banks of high standing. The control of the bank is in the hands of a board of directors com- posed of nine members, three of whom represent the government, and the remainder represent the national and foreign banks. Members of this board serve for a period of two years. The presi- dent of the bank is elected by a vote of seven of the nine members. The law contains also an agreement between the bank and the government to the effect that the latter will not issue, nor allow to be issued, any kind of paper money or media that may circulate as money, The bank is guaranteed freedom in the importation and ex- portation of gold, although in times of war the bank and the government may agree upon a temporary suSpension of free gold movements. The bank is made the principal depository of the funds of the national government and of public or semipublic institutions founded by law, and is made the government's fiscal agent. The bank has assumed the function of paying-agent at home for the public debt, and transmits funds for the service of the external debt. The actual capital of the bank is 15,358,600 pesos, distrib- uted in the following manner: Class A, stocks (government) ...... 5,000,000 pesos Class B, stocks (domestic banks) . . . 7,372,200 pesos Class C, foreign banks .......... 989,700 pesos Class D, private investment ....... 1,496,700 pesos Total .................. 15,358,600 pesos Each share of stock has a nominal value of 100 pesos. The stocks of the government can be neither above nor be- low 5,000,000 pesos. In respect to the foreign banks, their percent iIlttarest in the Banco de la Republica is calculated from such cap- ital as they have designated for doing business in Colombia. The stocks of Classes B, C, and D are interchangeable with each other. if the holders desire to change. .... ..~ 0. .p. .1. w r. 3.. «.1. T Jun.- I . i 1111.!5 inlsufllv I f :5 at I“ a o --‘: Rate of Inte re st The Banco de la Republica rediscounts to its members at an annual rate of 4 percent when the loans are to industrial operators, and at 3 percent when backed by agricultural products. However, member banks are authorized by the central bank to charge interest rates 2 percent above that fixed by the Banco de la Republica. Agencie s The law requires that the Banco de la Republica must maintain a principal office in the capitol city of each state. Deve10pment of Activitie 5 Table IV shows the growth of business since the founding of the central bank . 5 Policy The Colombian central banking legislation of 1923 was modeled in imPortant respects after the early Federal Reserve System. The \ International Bank for Reconstruction and Development, The B~a-s-‘EL2L3LDeveloLment Program for Colombia, ”Money, Deficits and Inflation.” 10 TABLE IV GROWTH OF BUSINESS SINCE THE FOUNDING OF THE CENTRAL BANK (in millions of pesos) Gold Loans i 1 Year Reserves Discounted Deposits . 7 i 1924 23.173 4.071 5.691 ii. 1928 64.658 13.251 10.855 1932 17.171 28.541 19.001 1936 41.977 41.242 33.135 1940 43.562 58.520 51.507 1944 276.909 28.723 134.598 1948 175.484 169,689 171.796 1950 160.484 150.670 145.790 Source: Colombia in Cifras, 1948-1950, Bogota, Colombia. 11 underlying idea was to give an elastic supply of currency and bank credit,“ to avert crises by pooling reserves, and, at the same time, to obtain a certain degree of liquidity of commercial assets through adequate supervision. Rediscounts of the central bank, operating under eligibility requirements, were to gear the volume of credit to the supply of eligible paper, thus serving the proper needs of trade. Since that time the concept of the central bank's function has changed. The commercial loan theory of banking Operations required that bank credit should not be used to finance additions to fixed p1ant and equipment; that these, rather, should be financed from savings of individuals and business firms. Only loans for commer- cial purposes (as distinguished from investment, consumption, and speculative motive) should be made by commercial banks. More Specifically, only goods-in-process should be financed by bank credit. Such financing would mean that deposit-money created by bank Credit expansion could not outgrow production. It also would mean that a decline in the money supply would always accompany a decline in the volume of transactions involving goods—in-process. Bank 1Dans extended for such commercial, productive purposes were described as self-liquidating, since they could be repaid in a short 12 period of time from the proceeds of the sale of goods. Each of these transactions would create new money when loans were made, and contract the money supply when it was repaid. This process would, when repeated, result in the creation and retirement of money as before . Short-term commercial loans are the most desirable type of I " assets for commercial banks, yet it must be recognized that these 10ans--rising in prosPerity, and falling promptly in recession-«may a'CCentuate rather than mitigate business cycles. In most periods of upturn in business activity an increase in commercial loans accompanies an accumulation of business inven- tories. This development may be partially speculative in character rather than purely commercial. It is also to be noted that inventory- accumulation, financed by bank credit, not only increases the money Supply, but also increases the business demand for goods, while the Slipply available to the public is not increased proportionately. This inventory—accumulation, based on commercial loans, can set in .1 m°ti°n a chain of cause and effect that increases the public money Supply at more than a one—to—one relationship to the supply of finished goods available to the public. 13 This commercial-loan theory under the central bank set a standard of eligibility of paper for rediscount by member banks. The result was that the central bank had power to convert customers' paper into currency or excessive reserve power. Should member banks choose the latter a1ternative--the conversion of eligible assets into reserve balances--the money-creating potentialities of bank loans would multiply several times. The foregoing discussion on the commercial-loan theory was given in order that one might understand the role that the central bank of Colombia played from the beginning in the inflation of the country. Banco de la Republica and Money Supply The extension of credit by the Banco de la Republica is two- fold. When the central bank makes a loan to the government or Purchases paper in the market, it thereby creates deposits, and, in this way, increases the money supply. However, credit creation by the central bank also adds to the reserves of commercial banks. The ability of commercial banks to create credit is thereby in- creased, and since credit-creation may proceed on a multiple basis, c . . . . hanges 1n the reserve p031tion of commerc1al banks are of great 14 importance. Sometimes lending by the central bank is aimed directly at providing commercial banks with additional reserve funds, as in the case of the rediscounting of commercial paper presented by the member banks. At other times, the primary objective of credit creation by the central bank is to give credit to the government or other nonbank-borrowers, either directly or through various lending institutions. But even though the primary objective of such trans- actions is not expansion in commercial bank reserves, they will, nevertheless, have this result, even as do rediscount operations; thus, when the government proceeds to spend the money, for instance, to erect a school, it will pay the construction company by a check drawn on its own account with the Banco de la Republica. This check will be deposited in the commercial bank of the construc- tion company, the construction company will receive credit on its deposits account, and the commercial bank will present the check for collection for the Banco de la Republica. The Banco de la Republica will debit the treasury account and give a credit to the commercial bank, thus raising the reserves of this bank. Expand- ing 01‘ contracting central bank credit has important effects on the money 8 upply. \it.).. it... p Ana... . 15 C omme rcial Bank 5 There are ten Colombian and four foreign banks in Colombia. About 65 percent of all commercial credit and deposits are with the three largest commercial banks, which have branches in all parts of the country. The system of commercial banks in the country is . very similar to the system in the United Kingdom: the banking I System is organized as a branch system. There are three power- ful banks with branches distributed all over the country. However, the commercial banks stand as member banks in relation to the Banco de la Republica. They must hold their required reserves in deposits with the central bank. Only the Banco de la Republica has the privilege of issuing notes, and, by using its rediscount agency, and by changing the reserve requirement of the member banks, the Banco de la Republica could exert certain control over the commercial bank reserves. This resembles the operation of the Federal Reserve System. Decree No. 1732 of September 30, 1951, required that all comrrlercial banks maintain reserve deposits with the Banco de la \ This information has been taken from U. S. Department of Commerce, International Reference Service, January, 1945, Colom- 51a. Vol. 2. 5 3171 '52: IIEKJIQI )1”. il? 1.- n . .M v ELI : A A “’52-;1. q 16 Republica of an amount equal to 25 percent of their demand deposits and 12.5 percent of time deposits. However, banks maintaining in- terest rates at less than 2 percent above the rediscount rate of the Banco de la Republica were permitted to reduce their reserves to 15 percent of demand deposits and 5 percent of time deposits. The terms of Decree No. 1148 of June 10, 1943, raised these reserves requirements by 100 percent, and stipulated that increases be invested 7 in 3 percent certificated deposits, payable in foreign exchange or 10cal funds. Decree No. 2579 of December 23, 1943, further increased the required reserves against demand deposits. The principal limi- tations in the operations of commercial banks are: (1) Loans to one individual or corporation may not exceed 10 percent of the lending bank's capital and reserves. (2) Loans may not extend for a period longer than one year, except those secured by agriculture pledges, in which case the maturity of each loan may not exceed two years, and their total is limited to one-half of the amount of the bank's time deposits. (3) Total loans in real estate as security may not exceed 30 percent of the total assets of aacommercial bank. In The deposits are nonnegotiable certificates of the Banco de la Republica with two years' maturity and bearing interest at 3 percent. 17 addition to these restrictions, commercial banks may not deal in merchandise, or invest in corporation stocks and bonds, although they may purchase public securities, land-mortgage bonds, and other obligations eligible for the investment of savings accounts. Savings Banks Savings banking is carried on in Colombia on a small scale. Only seven institutions engage in this type of banking. Such savings banking as there is has developed during the past 20 years. Total Savings deposits amounted to 40,355,000 pesos at the end of 1943, compared with less than 1,000,000 pesos in 1924. Table V shows the distribution of savings from 1949 to 1953. Colombian Monetagr History During her economic life, Colombia has employed several kinds of bimetallic, gold, and inconvertible paper money standards. It is possible to enumerate four periods of her monetary history: (1) the colonial period, from 1610 to 1810; the independence period, from 1811 to 1819; the Gran Colombia Republica, from 1819 to 1829; and the Colombia Republica, from 1830 to the present. 18 TABLE V DISTRIBUTION OF SAVINGS DEPOSITS (in thousands of pesos) Depository 1949 1950 1951 1952 1953 Pct. Caja Co- lumbiana . 76,154 90,596 112,464 141,443 157,357 77.71 Caja Par- ticulares . 5,258 6,372 7,811 9,452 10,839 5.35 Banks . . . 9,108 10,648 14,519 21,913 34,357 13.35 Source: Revista del Banco de la Republica, Evero 1954, p. 63. Colonial Pe riod Colombia, like all countries in South America except Brazil, inherited her monetary system from the Spanish administration. Be- fore her independence the circulating medium was a hodgepodge of varieties of foreign coins--British, French, Portuguese, and Spanish. * Their relative value fluctuated from time to time. The most plentiful of all the coins was the Spanish silver coin known as ”pesos duro" (dollar), Paper money at that time was not circulated extensively. 19 Independence Period, 1811-1819 After the declaration of independence a kind of bimetalism was the prevailing monetary system. Gold and silver coins were supposed to circulate side by side at a fixed rate, but in reality, there was considerable fluctuation due to changes in the availability of the two metals. On August 27, 1811, a law was passed which authorized for the first time the emission of one million pesos of paper money, at full legal tender. This paper issue brought about some difficulty because people tried to get rid of it by exchanging the paper for metallic currency. During this period counterfeiting was very general; private citizens and business concerns alike tried to debase the gold and silver coin, necessitating drastic action by the gove rnment. The Gran Colombia, 1819-1829 During this period, in which Colombia and Venezuela were united under one political regime, the Congress adopted officially the monetary system of Spain. The law reads as follows: ”All coins made in Colombia shall have the same weight which was given by the monetary law of Spain, together with a bimetallic standard." This was the only significant law concerning monetary activities .- 20 throughout the period. Nevertheless, the leaders and the government of the country were convinced of the necessity for uniformity in the standards of the values as represented by the coins, and of a stand- ard legal weight. ‘ "“"‘ “1"} neg? Republica of Colombia, 1830- During this period were passed important laws regarding the monetary system of Colombia.8 The Congress of 1846, at the re- quest of President Mosquera, provided that all coins of the country should be nine-tenths pure metal and one-tenth alloy (0.900). The making of inferior coins ceased, and the "macuguinas" (coins made in Lima and introduced in Colombia) still in circulation were col- lected in order to issue new coins in their place. The Granadina dollar of ten reals was created, and, in order to remedy the scar- city of medium circulation, French and Belgian silver coins were received in the government office at two reals per franc. The gold coins, according to the new legislation, were to be the onze (worth_ eight escudos and the doblon (worth two scudos). The silver coins Taken from Henao Arrubal, History of Colombia, University of North Carolina, 1938, pp. 449-456. 21 were the peso, the half-peso, the quarter—peso (or peseta), and the eighth-peso (or real). In 1853 a law provided that the unit be silver pesos of one hundred cents, and the real was abolished. The old peso of eight reals was to be known thereafter as the piece of eight-tenths; the peseta as a piece of two-tenths, and the real as one-tenth. By 1871, commercial banking was established. During this period the commercial bank issued banknotes and checking de- posits, but the latter were unsuited to a country predominantly agri- cultural, with few towns and slow travel and communications. Chronologically, the banks were established as shown in Table VI. In 1880, the Congress decided to create the Banco National of Colombia.9 The capital stock was 10,000,000 pesos, of which 6,000,000 were subscribed by the federal government; the remainder were subscribed by private individuals, some of them residents of foreign countries. Its head office was located at Bogota. The purpose of such an institution was to encourage the eco- nomic activity of the country, and at the same time to lay the Manuel Samper, Escritos Economics, Edition Bogota, Co- lombia, Vol. 111, pp. 7-22. 22 TABLE VI EARLY BANKS IN COLOMBIA. Banks Created Capital Reserve (gold pesos) Banco de Bogota .......... 1871 1,000,000 10 percent Banco de Colombia ........ 1875 600,000 10 percent Banco Popular ........... 1877 50,000 - Source: EncicloRedia Illustrated, ”Colombia," Editions Madrid, Spain, p. 151. foundation for the public credit of the nation. The bank performed both commercial and central banking functions. As a commercial bank it loaned to individuals and business firms. It also performed various functions that are usually entrusted to a central bank (i.e., it held government deposits, acted as fiscal agent of the government, and transferred funds from area to area for government accounts). When the bank was created, the country had a metallic currency of gold and silver coins in circulatio‘n, and a considerable amount of bank notes backed by the capital of the commercial banks, but this normal situation gradually changed to unsound paper currency because of the enormous amount of bank notes issued by the Banco National in later years. The bank notes of the Banco National circulated at 23 par value with the metallic coins until 1884, but from then on they depreciated, and metallic money was found only in the more remote parts of the country. 1 Fluctuating Paper Money 0 The notes issue of the Banco National had increased steadily, but not yet in excessive quantities. In 1886, after several years of political disorder, the government required the bank to issue 4,000,000 pesos, giving the notes full government guarantee. The one-peso note of the Banco National was made the legal monetary unit. Trans- actions based on any other money were forbidden, and issuance of notes by other banks was prohibited. By 1889 the circulation of notes of Banco National was 9,400,000 pesos. As the end of the decade drew near, the quotation of exchange approached the figure of 100 percent, premium. In other words, two pesos in paper money were approximately equal to one United States dollar; but the note issue of the Banco National expanded steadily, until, in 1894, when the institution was liquidated, the total amount of note-issues was 10 The following description of the monetary history of Co- lombia was taken from U. S. Department of Commerce, Colombia Public Finance, Trade Bulletin Series No. 43, 1926, pp. 59-69. 24 found to be over 26,000,000 pesos. Most of this enormous amount had been issued to meet the needs of the government, but there were also clandestine issues for private purposes in excess of the amount authorized by law. The outstanding paper money was now under government re- sponsibility. Subsequently, still more issues were made by the Congress to meet deficits. There was much political unrest during the closing years of the century, culminating, in 1899, in bloody civil war which lasted until late in 1902, and which brought about a complete disruption of the currency. During these three years of warfare, paper money was issued in great quantities by the central government, by the various prov- inces, and the military leaders in the field. The total amount at the end of 1902 seems to have been about 850,000,000 pesos. Prices of all kinds of commodities rose to fantastic heights. Such public revenues as were collected were paid in paper money of insignificant value; debts were paid off in worthless, depreciated paper money, impoverishing the creditors; in fact, all the usual effects of a rapid depreciation of a monetary unit were experienced. It is estimated that the civil war cost fifty thousand lives and immense destruction of tangible property, but the economic results of the monetary col- lapse were regarded as almost equally disastrous. 25 Just before the outbreak of the civil war the exchange value of Colombian paper currency reached about 300 percent premium for gold; that is, four pesos were equal approximately to one United States dollar. The premium in 1890 had been nearly 100 percent. There was a constant increase during the following years. In 1898 the rate advanced to a little over 200 percent, and in 1899 was from 290 to 350 percent. During this period normal trade and finance were disorganized to such a degree that foreign-exchange quotations of the Banco de Colombia of Bogota indicated that the range for the years 1900 to 1904 was about as shown in Table VII. The conclusion of the civil war found the country with an enormous supply of paper money, a peso of which was worth slightly less than one one-hundredth of the gold peso which had long ceased to exist, although retained for a quarter of a century as a measure by which to compute a relative value of the actual circulation. The years of restoration immediately following the peace brought a number of legislative measures aimed at the establishment of a stable currency. The following were the principal measures that brought back order and regularity: Restoration of free stipulation: Law No. 33 of 1903, and No. 18 of 1904, rescinded the measure of 1886 which had forbidden _-. ‘ fl 1: 1 --_=.d;_ - 26 TABLE VII DOLLAR-PESO RATES, 1900 - 1905 Year Dollar-Peso Rates 1900 . 999 - 1,163 1901 2,075 - 4,600 1902 4,250 - 9,100 1903 9,800 - 10,000 1904 9,400 - 10,000 1905 9,900 1—— zrce: U. S. Department of Commerce, Colombian Public Finance, 6, p. 30. acts specifying payments in any money other than the notes of an0 National. Henceforth there was to be freedom to specify t in any kind of coin and currency, foreign or domestic; but 'ent paper money was to retain its legal-tender status at the "ate or equivalence. The official rate at which the paper 3 received in payment of public dues was 10,000 percent, er pesos to one gold peso. The commercial rate of iowever, was still subject to fluctuation, but these move- .ot appear to have exceeded 10 percent of the legal ex- -,;mr-=-r*'rv: ,_; has" I. ’, .._.'_' 27 Law No. 59 of 1905 authorized the coinage of a new gold cur- rency and fixed the value of the paper money at 100 to 1 for the payment of all obligations contracted in gold. Law No. 35 of 1907 changed the gold peso to the equivalent of one-fifth of the pound sterling, making the 5—peso gold piece the exact equivalent in weight and fineness of the English sovereign. It was still permissible, however, to contract obligations in terms of any foreign or domestic currency, payable in national currency at the market rates of equivalence. Law No. 69 of 1909 created a "Conversion Board" whose principal function was to attend to the exchange of worn-out cur- rency for new standard series of notes, issue new subsidiary coins, take measures for stabilization of the value of the paper money, and > furnish backing for the currency. It gradually accumulated funds ' the formation of the conversion notes, but they were apprOpriated he government during the period of stringency which followed utbreak of the European War in 1914. The Junta de Conversion began Operations in January, 1910, nained in existence until it was superseded in July, 1923, by riding of the Banco de la Republica in 1923. s 3. «’17? 35“... dud. .. . ‘ 28 The net result of these measures described above was the attainment of a fairly uniform and stable value for the paper money, effective from the time the Junta de Conversion started operations. The improvement in conditions following the restoration of order was reflected in a satisfactory revival of industry and trade. For- eign gold coin entered the country and circulated freely beside the depreciated paper. In 1913 the Junta de Conversion was directed by law to replace all paper money in circulation with a new issue of notes representing gold pesos at the rate of l to 100. The new notes were called ”gold notes." The entire issue ultimately amounted to 10,360,700 pesos, which included the redemption of the wartime issue in the amount of about 850,000,000 pesos previously cited. This period of fluctuating paper money in Colombia may be said to have ended in 1910, when the various measures taken to restore order became effective. General conditions in Colombia improved after 1910 because of greater productivity resulting from the maintenance of peace and to the rise in price of agricultural commodities. It is true that the bulk of the circulation was still composed of inconvertible and in- flexible paper money, but it was no longer subject to more than the usual fluctuations in exchange value relative to the course of trade 29 and other normal variations. A certain amount of foreign gold coin had entered the country. Preparations were being made to resume the coinage of Colombia gold currency, although this coinage did not begin until the mint at Medellin had turned out increasingly larger amounts of gold late in 1914. If the war had not come in 1914, it seems likely that the operation of the Junta de Conversion would have gone forward without interruption, and that eventually a fund would have been accumulated with which to redeem the paper money. However, the effects of the war interrupted the progress of the monetary reform and the chance for a return to gold currency. The first effect of war conditions on the currency and ex- change situation in Colombia were noted in the disappearance from circulation of the relatively small stock of gold coins and the ad- vance of exchange rates to a level of about 106 pesos to 100 dol- lars in place of the par of 102—3/4. Apparently this was due to the dependence of the country's financial structure on the markets of Europe and the United States. Foreign trade was curtailed; the currency was reduced in volume through the loss of gold from circulation; and credit was restricted, leaving in circulation only the old paper money, 30 supplemented with a supply of minor nickel coins. The stock of money was only 10,000,000 pesos, a volume so small, in fact, that scarcely enough currency existed for the needs of business even in the rather depressed conditions of 1914 and 1915. The first new element in the currency was the "cedule hipo- tecaria"; these were mortgage bonds of very small denominations with an interest rate of 2 to 3 percent which were put out by the banks. The issue of such bonds in small denominations was an unauthorized effort to provide a sufficient local supply of something that could circulate as money. By 1917 the cedules in circulation were sufficiently numerous to be commonplace, so, in 1919, Law No. 89, which forbade the issue of any such cedule designed for hand-to-hand use, was enacted. In order to provide more currency, Law No. 9 of 1918 uthorized the issue of Special notes (bonos bancarios) by banks nich would meet the prescribed conditions. This monetary strin- ncy just described, which prompted the issue of emergency pape1r, : caused in part by the hoarding of silver coins induced by the silver prices from 1916 to 1920. It was also found that unusual 'ity in the production of platinum so increased the demand for 31 . . . 11 old Silver coms that the1r value almost doubled. It may be noted here that few restrictions were placed on the free movement of gold during the entire war and postwar periods. The introduction of these emergency issues into the currency does not seem to have caused any pronounced inflation. All kinds mm .“ ’ In? , I! ' ‘ . _ of paper money circulated indiscriminately. After World War I ended, the economic situation of Colombia improved, and from 1919 until 1920 there was a notable business boom brought by the war inflation. The price of coffee went to unprecedented levels, and the Colombian supply was large. But the world-wide collapse of 1920-21 affected Colombia acutely, because the lower classes suffered from a lack of employment, while the merchants and landed pr0prietors experienced a severe restriction >f income, and the banks were loaded with frozen assets so that, r a long time, there was almost no available liquid capital with ich to make loans of the customary kind on crops. In 1922 a. new administration came into office, and in its ram the reform of fiscal matters occupied a prominent place. cordance with this policy, permission was obtained from the 1 1 Silver compounds are required in the production of ,m. 32 Colombian Congress for the engagement of foreign experts to make recommendations for the improvement of the currency and banking structure. The Banco de la Republica was established in July, 1923, upon ewe?" ." L the bases recommended by the commission of financial experts from ‘V'.’ the United States. When the bank opened for business it immediately W p- 1‘ “6.? +3 began the issue of convertible notes. This inaugurated the return to the full gold standard. The Banco de la Republica was given the responsibility to act as the instrument for the withdrawal from circulation of the various kinds of fiduciary paper money. A provision was made that dividends on government shares of the bank should not be received by the national treasury, but should be used by the bank for the retirement of equivalent amount of the gold notes or bills representative of gold--the old national paper money. This process was to be continued until all the issues should >e retired. Table VH1 shows the outstanding amounts of the various kinds money from 1923 to 1926. The convertible notes show a very large increase, while the onvertible paper money, which formed practically all of the cir- ition as recently as 1922, has been reduced to a fairly small s'fnh f5: 33 TABLE VIII MONETARY STOCK OF COLOMBIA, 1923-1926 Items 1923 1924 1925 1926 Convertible notes: Coined gold . 2,892,668 7,825,932 13,601,360 15,522,610 Silver ..... 9,778,533 9,778,533 9,778,533 9,778,533 Nickel ..... 2,000,000 2,000,000 2,000,000 2,000,000 Notes of the Banco de la Republica ..... 0 10,179,632 23,195,182 36,923,549 Inconvertible paper: Fiscal bills 10,360,709 10,360,709 10,360,709 9,785,709 Treasury cedules 3,214,405 999,699 242,813 86,718 Treasury bonds ..... 5,090,793 4,254,768 1,646,505 581,463 Bank bonds . . 673,000 162,572 39,875 28,800 Bank cedules. 4,095,572 3,163,413 1,938,336 906,736 tals 38,069,680 48,725,258 62,803,313 75,814,118 rce: U. S. Department of Commerce, Colombia Trade Bulletin Les No. 43, p. 78. *— 34 prOportion of the whole. The remainder of the Treasury cedules, bank bonds, and bank cedules are simply those for which funds rested in the Banco de la Republica which have not been presented for redemption. A further reduction was made in July, 1926, with the sum of 475,000 pesos received in dividends for the year 1925-26. The central bank was helpful in avoiding bankruptcies and consequent financialpanic, but its effectiveness went no further because monetary management was outside its sphere of action. The money was under a rigid gold standard and the only influence of the bank was the manipulation of the discount rate. Eligible paper was scarce and the weapon of the discount rate soon became an il- lusory one. In reality the Kemmerer Commission constituted only a minor improvement over the old banking system. The bank was unable to control the great increase of money created during the 1920's as a result of enormous exportations and the incoming of arge foreign investments. For example, from 1924 to 1927, the uantity of money in Colombia increased by 36 million pesos, owing a favorable balance of trade, while the increase in credit of the ntral bank was less than one million pesos. In 1929 the situation was the reverse: the bank could not trol the deflationary impact of the adverse balance and contraction Jan. Tami; . 35 of private credit. Between 1929 and 1931, the bank sacrificed re- serves because it hoped to maintain the stability of the currency, and to remain on the gold standard; it was believed that a strong deflationary period would bring proper adjustments. _ 5, 4_ In 1931, widespread public complaints arose due to the severe deflation, so a reversal policy was instituted--a policy of easy credit E fl") 1‘51. _ - protected by exchange depreciation and exchange control. Today the influence of the Kemmerer Commission is very weak, since the government is accepting more responsibility for the management of the currency and control of the exchange rate. The strong influence of international trade and the movement of heavy investment create a special problem in Colombian financial history. The inflow or outflow of foreign exchange sets the pattern for its economic activities. Savings and domestic investments are of small proportion in Iolombia; hence the business cycle is dominated by fluctuations of nports and exports; for example, an inflow of foreign exchange ought a multiple expansion of money and spending, and an outflow ought a multiple contraction, through the operation of reserves of commercial banks. 36 The reserves of commercial banks are created from two sources: first, they may be created or augmented by the creation of credit of the Banco de la Republica; and second, they can be created by the gains and losses of foreign exchange as a result of , ‘1 . eXports and imports. These factors have caused inflation or defla- 9 :- -_'.- "a; h'.‘-"__ The process of adding reserves -__..' “LL. tion in the economy of Colombia. in the central bank, and of increasing the supply of money, is the result of a favorable balance of trade. The foreign exchange bal- ance goes to the central bank, thereby providing the means for On the basis of this new money, the bank can credit expansion. grant additional loans, which mean additional deposits. In this way gold import increases the amount of purchasing media by an amount much greater than the export balance itself; conversely, if the bank loses reserves, credit tends to contract. During the depression, Colombia passed through one of the most difficult periods of her economic life. Although Colombia is rich in natural resources, her >rosperity depends principally upon the exPortation of coffee, which tands next in importance to petroleum and bananas as an eXport roduct. That the price of coffee should be adversely affected by a ‘rld-wide depression was inevitable. By 1929, it had dropped by 37 more than half, coincident with the general decline in price of agri— cultural commodities. Any decrease in the proceeds from the sale of the Colombian coffee crop abroad has a tremendous effect on the economic activi- ties of Colombia. These factors bring into sharp focus the sensi- tivity of Colombian economy to foreign stimulation. Prices abroad may spell boom or bust for the large sector of the Colombian economy which is dependent on coffee. Thus a decrease from the sale of coffee meant less gold with which to pay for articles imported. This decrease affected the national revenue from customs duties, rendering the government in- capable of meeting its current expenditures and its public debts. The year 1931 was the worst year for Colombia, because foreign commercial banks suddenly canceled the credit to Colombian banks. This act created a financial and commercial panic. Foreign :apital disappeared from the country and the gold reserves of the ianco de la Republica were cut in half, thus effecting a contraction ' the credit and currency which assailed the stability of the peso. Colombia had been on the gold standard since 1923, so that circulation of the notes of the Banco de la Republica could be hanged free for gold, but now, as the situation grew steadily a ‘thy 7 Tin 38 worse, and the gold reserves were diminishing, the government issued a decree (No. 1643) by virtue of which the free movement of gold was temporarily stopped and its export prohibited. The Banco de la Republica assumed the responsibility of buying and selling, and as- sumed control of the international exchange transactions. This de- cree also ordered that notes of the Banco de la Republica could be redeemed only through sale of sight-drafts on New York upon author- ization of the Commission. A few days later another decree was issued (No. 1723, September 30, 1931) which required all the banks of the country to deposit their metallic reserves in the Banco de la Republica, and declared, moreover, that all private citizens having more than 1,000 pesos abroad must inform the commission to that effect. Decree No. 1887 appointed a commission to control exports. The exporters were to sign agreements with the commission stating that they would agree not to make transactions which would cause a flow of capital out of the country. These measures were not efficient because neither one re- (uired them to sell to the Banco the exchange obtained through sales f commodities abroad, so the government decided to create the ffice of Exchange Control. This office limited the amount . . ‘. ,r" L313 (LL 39 of exchange which could be purchased for the expenses of Colombians abroad, or foreign business in Colombia, and a tax of 10 percent of face value would be paid by everyone abroad except students. After the world economic conditions improved, Colombia be- gan to make substantial gains in many phases of her economic ac- tivity, including higher foreign trade values, a budget surplus, and improvement of agricultural conditions. Higher prices were being received for agricultural products. Of particular significance to Colombia was the marked rise in the price of coffee. World War II brought further inflation. It seems relevant to outline the sources of increase in the money supply. The term "money supply" here will be understood to include the total cur- rency outside banks, plus demand and term deposits at commercial banks. Savings deposits are excluded. The money supply was increased from December 31, 1940, to June 30, 1949, by 728 million pesos.12 Seventy-five percent of ts total supply of money was in deposits and about 25 percent in urrency, as shown in Table IX. The currency supply was created 12 The following sections are taken from Basis of a Develop- Lnt Program for Colombia, sponsored by International Bank for Re- instruction and Deve10pment, "Money, Deficits and Inflation," Wash- gton, 1951. ‘hyfl‘ ..o “KC. 4 inthlixbn .. v 40 TABLE IX MONEY SUPPLY, 1940-1949 (in millions of pesos) Deposits Currency : 1 Dec. Banco de la Com- Banco Grand Republica de la 3 31 mer- In Total i , Total Repub- Total T a c1a1 1i a Banks I re 5 Other Banks C - (”E ury Notes . (1) (Z) (3) (4) (5) (6) (7) (3) 1940 11.0 13.8 107.6 132.4 62.3 10.5 79.9 212.3 1941 11.3 13.7 117.4 142.4 74.4 7.5 95.0 237.4 1942 10.3 20.7 151.6 182.6 103.6 12.0 119.8 302.4 1943 30.7 42.7 187.9 261.3 125.4 9.2 144.7 406.0 1944 31.1 28.1 251.6 310.8 179.3 10.1 198.2 509.0 1945 64.1 27.2 300.0 391.3 204.9 13.3 221.5 612.8 1946 53.2 32.6 379.7 465.5 260.1 17.4 274.6 740.1 1947 31.5 33.8 401.4 466.7 297.9 20.3 312.3 779.0 [948 20.8 28.8 457.0 506.0 361.8 22.9 374.5 881.1 9491 14.3 29.5 535.3 579.1 347.3 22.3 360.6 939.7 >urce: Balance sheet of the Banco de la Republica, Annual Report HBanco de la Republica, 1948, and Appendix G. Includes demand deposits and term deposits. Excludes savings deposits and interbank deposits. Columns (4) plus (7). vlumn (3): lumn (8): June 30. 41 by the notes issued by the Banco de la Republica, and the deposits were held by the commercial banks (see Table X). In addition to the increase in money supply, there was an increase in savings de- posits which rose from 9.5 million pesos in December, 1940, to more than 90 million pesos by 1949. The increase of money supply was mainly in the type of bank credit (deposits or notes), which was the result of three factors: (1) the inflow of foreign exchange in the wartime period, which brought a favorable balance of payments; (2) the easy-credit policy of the banks to business; and (3) the extension of loans by the banks to the Colombian government. In Table X1 is shown the money- increase caused by these three sources; the table notes a distinc- tion between credit from the Banco de la Republica and that of com- mercial banks. The table also shows how these three sources of money supply varied in relative importance. Between 1941 and 1945 rxchange inflow was the main factor of increase, and the extension f credit remained relatively small; but from 1945 to 1949 the 'edit to the government became a considerable factor in the increase the supply of money. The private lending by commercial banks 5 a direct result of the increase of credit of the Banco de la »ub1ica. The effects of the increase in the supply of money 42 TABLE X ANNUAL INCREASE IN MONEY SUPPLY, 1941-1949 (in millions of pesos) Increase Over Preceding Year Year , Percentage Deposfis Currency Total Increase 1941 10.0 15.1 25.1 11.8 1942 40.2 24.8 65.0 27.4 1943 78.7 24.9 103.6 34.3 1944 49.5 53.5 103.0 25.4 1945 80.5 23.3 103.8 20.4 1946 74.2 1 53.1 127.3 20.8 1947 1.2 37.7 38.9 5.3 1948 39.9 62.2 102.1 13.1 19491 72.5 -13.9 58.6 6.7 Source: Currie Report, p. 292 (Table 106). January 1 to June 30. TABLE XI SOURCES OF MONEY SUPPLY, 1941-1949 (in millions of pesos) 43 _.-.___»? Sources 1941-45 1946-48 1948-491 ‘ Foreign Exchange ........... 265.9 -121.9 -11.0 Credit to Government and Public Institutions ......... __2_5_.__2_ 163.6 13.3 Banco de la Republica Government ........... 15.8 66.4 2.8 Stabilization fund ....... -1.6 28.2 -5.3 Caja de Credito Agrario and other member banks ............. -2.5 33.7 4.9 Banco Central Hipotecario . -3.2 29.0 4 8 Caja Colombiana de Ahoros - 8.0 ' Commercial Banks Government ........... 16.7 -1.7 15.7 Credit to Private Borrowers 107.9 220.6 56.4 Banco de la Republica ...... -21.1 17.5 51.9 Commercial Banks ........ 129.0 203.1 4.5 reasury Currency .......... 1.8 5.7 - Total ............ 400.8 268.0 58.7 .II‘CCI Annual Report of Banco de la Republica. January 1, 1948, to June 30, 1949. 44 resulted in an inflationary process which deeply affected the price index in Colombia. The index of consumer goods prices rose from an average of 100 in 1940 to 272 in December, 1949, as shown in 1 . Table X11. t . During this period of rapid inflation, the Banco de la Repub- lica instituted anti-inflationary measures which were much criticized. i E I 4 i .t‘ .5] 4 Importers were also required to invest to the amount of 10 percent of the value of their imports. Banks were ordered to raise their reserves by 100 percent, investing the increase in certificates of deposit bearing 3 percent interest. It was believed that these dras- tic measures would absorb in two years the excess inflow of 100 million pesos which had resulted from Colombia‘s favorable balance of payments. By 1943 the result was that certificates of deposit 13 totaling thirteen million pesos had been sold. Other Financial Institutions A recent development in Colombia is the growth of Special banking agencies for public investment. 13 Robert Triffin, Money and Bankipg in Colombia, Board of overnor of the Federal Reserve System, Washington, 1944. 45 TABLE XII PRICE INDEXES, 1940-1949 Annual Ave rage Dec., Item 1949 1940 1946 1948 Prices of Consumer Goods Food .................. 100.0 181.8 250.1 271.7 f Housing ................ 100.0 192.7 265.7 275.9 Clothing ................ 100.0 197.3 250.1 277.7 Construction Materials ....... 100.0 226.8 254.4 286.6 Coffee ................... 100.0 276.2 398.9 716.1 Cattle ................... 100.0 217.0 335.5 415.3 Wages ................... 100.0 151.04 255.0 - Source: Currie Report, p. 288 (Table 103). 46 Commercial Banks The role of commercial banks in Colombia was discussed at some length in the preceding pages. Colombian commercial banks supply an enormous amount of funds to commerce and trade. In 1948, commercial banks provided 40 percent of funds to the domestic economy of Colombia. Caja Colombiana de Ahorros Over 80 percent of the Colombian savings deposits are held in the Caja Colombiana de Ahorros. In 1949 the amount was 772 million pesos, as against 18.5 million pesos held by all the other institutions. The Caja Colombiana is run by a board of directors in a manner similar to the Banco de la Republica. This institution acted as intermediary in financing other public credit institutions and at the same time helping the government with funds to balance .ts budget. In 1948, out of the total Caja Colombiana, assets were 07.8 million pesos; 58 million pesos were in national government ands, including 10 million in Credit Agrarian and 4 million in edit te r ritorial. saw—«e 47 Caja de Credits Agrario Industrial y Minero This institution is the major supplier of agricultural credit. It is controlled by the Board of Directors of the Banco de la Repub- -.- . Lain-i. 'i lica. Its capital in 1949 was 4.5 million pesos. In 1949 the total . funds amounted to 161 million pesos, which was derived from the issue of bonds and from capital subscription. It provides agricul- tural credit from six months to twelve years with interest ranging from 6 to 7.5 percent. The loans to any borrower are limited to 25,000 pesos for short-term, and 50,000 pesos for long-term credit. This institution has fourteen branch offices in different de- partments, and a number of local offices. The total loans granted have been steadily increasing during recent years, but the funds available are by no means sufficient for the needs of Colombian agriculture. Banco Central Hipotecario Another important institution is the Banco Central Hipotecario. 'he capital of the Banco Central was 15-million pesos in 1949, and e total assets were 119 million pesos. The main function of the Banco Central Hipotecario is to )ply mortgage funds for high-cost housing; this is the only ~ ‘13 in 48 institution which raises funds to make long-term loans in adequate amounts. lts loans are made at 8 to 9 percent, or 2 percent above the bank rates paid by the Banco Central Hipotecario, with gradual amortization over a twenty-year period. Loans are extended up to 50 percent of the property value. This institution makes no contri- bution to medium and lower-cost housing. Sto ck Exchange The only stock exchange in Colombia is the stock exchange of Bogota. It is a private corporation supervised by the superinten- dent of banks. The companies registered at the stock exchange in- creased from forty in 1939 to ninety-four in 1949, and capital re- serves rose in the same period from 140 million to 600 million, but only 20 percent was obtained by the issuance of new shares; much of it was by the retention of earnings. The transactions of this stock exchange are concentrated in a few companies. The stock exchange has not provided access to capital markets for new com- panies which are not fully popular with the public. Those needing 'unds must obtain them through the retention of profits in their own vusinesses or from friends. 49 Insurance Companies The increase in insurance is a source of growth every year. The total investment of insurance companies rose from 23 million in 1946 to 45 million in 1947, and 57 million in 1948. Unlike the other institutions of credit, the insurance companies have distributed their funds between public and private investments of various kinds. In 1948, holdings of government bonds were increased by 22 million, while private investments and loans rose by 10 million pesos. CHAPTER 11 DESCRIPTION OF INVESTMENT IN COLOMBIA. Understanding of Colombia's economic development requires a review of her geographic and political attributes; however, an at- tempt has been made to list only the outstanding natural resources. Re source s of Colombia Gold Colombia is the largest producer of this metal among the Latin American countries. It is estimated to have one-third of the . . . l continent's known resources, and ranks eighth in the world. The principal producers are the states of Antioquia and Cauco; the gold production of Colombia for the last four years is shown in Table XIII. Gustavo Otera, Monografia oLColombia, Bogota, Colombia, 1950, p. 6. 50 __.__.?,.—_....A s—-.~__ "a g-; if». '7 0‘.- ‘2' '- dorsal}: 1} . - ..... 51 TABLE XIII GOLD PRODUCTION 1950 1951 1952 1953 States Ounces Pct. Ounces Pct. Ounces Pct. Ounces Pct. Antioquia . 224.799 59.3 292.340 67.2 280.918 66.5 304.245 69.8 Caldas . . . 10.995 2.9 8.630 2.0 6.079 1.4 7.694 1.8 Cauca 32.074 8.5 29.703 6.9 30.644 7.3 22.537 5.2 Choco 57.227 15.1 52.344 12.2 61.496 14.6 53.837 12.3 Huila . . .. 0.844 0.2 0.394 0.1 0.222 0.1 0.385 0.1 Narino . . . 46.095 12.1 36.628 8.5 34.936 8.3 40.174 9.2 Santander . 2.633 0.7 4.289 1.0 2.697 0.6 2.440 0.6 Tolima 2.191 0.6 2.414 0.5 2.272 0.5 2.354 0.5 Valle. . 1.280 0.3 1.874 0.4 2.193 0.5 1.845 0.4 Varios . .. 1.234 0.3 2.107 0.5 0.783 0.2 0.533 0.1 Total . . . . 279.414 100.0 430.723 100.0 422.240 100.0 436.045 100.0 :rce: Revista del Banco de la Republica, Enero p. 8, 1954. i l "J v I 52 Emeralds Colombia has practically a world monOpoly, under the control of the government, giving to the market the best type of emeralds. The mines are located in the state of Boyaca (see Map I). Petroleum Colombia is second only to Venezuela among the South Arner- ican countries in output of petroleum. In 1952 Colombia occupied tenth place in world production. The production of crude oil is con- fined to three fields for practical purposes. Two of these--the Infant and La Lira--are in the De Mares concession in the state of San- tandara, about 400 miles from the Magdalena River. Other impor- tant zones are in the state of Magdalena and Guajira state (see Map I). The production of crude oil from 1921 to 1947 was about 291,122,406 barrels of 42 gallons each. Total production for 1950 was 30 million barrels, of which 26 million were exported. In 1937 petroleum constituted 23 percent of the total value of Colombia's exports. The figure in 1949 was 19 percent. The oil industry con- tributed 3.1 percent of government revenues in 1949. Production and exportation of petroleum for the last four years are shown in Table XIV. 53 VENEZUEM MINERAL "mucus OH. 0530 coat-nu m. 0.. MAPI 54 TABLE XIV PRODUCTION AND EXPORTATION OF HYDROCARBONS Exportation Total Production Year Value (barrels) . . Barrels (millions of U.S. dollars) 1949 29,723 24,167 58.191 1950 34,059 28,269 64.489 1951 38,398 32,237 72.872 1952 38,683 32,030 73.388 1953 39,434 32,069 76.306 Source: Revista Del Banco De Colombia, Enero 1954, Bogota, Colombia, p. 84. dwfi.......% . r :1: 55 Ag ric ultu re Colombia's wide variations of terrain, soil, and climate allow a wide diversity of agricultural production (see Map 11). About 74 ;' . i J 4 .1 . i- ill .1 7 1 1‘ d 0..-.- ,. percent of its population is occupied in agriculture and cattle industry. Although only about 2 percent of the total land is under cultivation, Colombia produces enough food for its people. There are 15,491,300 acres utilized in crop production, and 1,149,100 are used by the cattle industry. The typical farm unit is small, with an average of five acres. Statistics available show about 709,000 small farms. Colombia's major crops are coffee, sugar cane, corn, potatoes, rice, wheat, yucca, and bananas (see Map 11). The commercial crops are potatoes and barley. Table XV shows an estimate of the value of Colombian agriculture production from 1939 to 1948. It shows the expansion of production of rice, beans, sugar cane, and the relative stable position of other products such as wheat, potatoes, and cocoa. 2 Commercial Atlas and Marketing Guide, Rand McNally, 1954, p. 54. 56 VENEZUELA ECURDOC £01.10an neonates: AMA ZOUAS ”7“ 00...... _ BRAZ'L pm 5 O O O O 5 «PER. 11’0“ stuns»! IAQ annual! MAPH sand. -.}}}--}-.1 }. 57 TABLE XV AGRICULTURE: ESTIMATED VALUE OF PRODUCTION, 1939-48 (in millions of pesos) Item 1939 1940 1941 Export crops: ‘ Coffee ..................... 70.7 71.2 76.3 Bananas .................... 8.8 __(_)_.__1_ 3.7 Total .................... 79.5 77.3 80.0 Percentage ................ 19.4 18.5 18.9 Crops for domestic consumption: Rice ...................... 16.1 16.5 18.7 Maize ..................... 56.3 62.4 59.2 Wheat ..................... 23.7 23.5 26.7 Barley ..................... 0.1 0.1 0.3 Beans ..................... 8.6 8.1 7.9 Potatoes ................... 54.0 52.2 46.8 Cassava .................... 23.9 25.8 27.6 Plantains ................... 49.7 49.7 49.7 Sugar ..................... 16.7 17.4 21.0 Cacao ..................... 8.0 9.3 8-0 Tobacco .................... 9.9 10.6 11-9 Unrefined sugar .............. 63.0 64.4 65-9 Total .................... 330.0 340.0 343.7 Percentage ................ 80.6 81.5 81.1 Grand total ................... 409.5 417.3 423-7 J Source: U.N., Economic and Social Council, Economic Commission for Latin America, Recent Trends and Developments in theMX of Colombia, p. 21, 1950. TABLE XV (Continued) 58 1942 1943 1944 1945 1946 1947 1948 87.8 84.6 88.6 88.8 86.7 92.6 98.2 0.3 g_ _ 0.6 1.4 2.0 31) 4.0 88.1 84 6 89. 90.2 88.7 95.6 102.2 20.5 20.4 20.2 19.8 18.6 19.7 19.5 18.7 14.6 18.9 17.8 25.3 24.2 39.1 56.1 57.7 63.2 63.0 63.5 63.5 65.0 20.3 17.1 15.2 15.4 22.4 22.6 22.2 0.1 0.1 0.1 0.1 0.4 0.4 0.4 8.1 10.1 12.0 14.0 14.7 13.5 14.7 412 40.6 47.3 52.7 54.1 54.1 57.2 29.5 31.4 33.2 25.1 36.8 28.7 39.1 49.7 49.7 49.7 49.7 49.5 49.4 47.8 23.2 24.3 26.1 27.6 27.6 30.1 39.6 81) 6.0 6.0 6.7 7.3 5.3 7.3 10.6 9.9 9.9 10.6 12.5 12.5 13.2 67.3 68.9 70.5 72.0 _73.7 75.4 77.0 iftfi 330.4 352.1 364.8 387.8 389.7 422.6 79.5 79.6 79.8 80.2 81.4 80.3 80.5 \ '4289 4151) 441.3 455.0 476.5 485.3 524.8 59 Coffee Constituting one of the bases of the economy of Colombia, coffee represents 31 percent of the total agricultural production and about 78 percent of the total value of eXports.3 Coffee represents to Colombia 75 percent of its earnings of foreign currency, and at the same time the source of exchange for its imports. The cultivation of 150,000 coffee trees occupies one million acres. During the years 1946 to 1951, Colombian production of cof- fee remained uniform at a yearly average of 5.5 million bags. During this period Colombia produced 18 percent of the world's production. Sugar cane is the second product in value. The deve10pment of this industry is in the hands of the government. Colombia is virtually self-supporting in rice. Production in 1950 was 18,000 tons, and it increased 10 percent in 1951. Gustave Otero, Colombia, Nat. Resources, Bogota, Colom— bia, 1950, p. 19. “ 4 StudLof Latin America Countries, Senate Report No. 1082, 1954, Colombia, p. 94. 5 Walter C. Galbraith, Colombia, Royal Institute of Interna- tional Affairs, Oxford University, 1953, p. 87. 60 Bananas are the other main agricultural product. They are shipped abroad, especially to the United States. Cotton has suffered a severe setback in production owing to a disease called ”picuds,” which has necessitated importation of cotton fibers from neighboring countries. Tobacco is mostly used for local consumption in cigars and cigarettes . Corn is cultivated throughout the country, and is the basic food for the population in general. The government has tried to encourage the cultivation of other craps such as coconut and sesame. Livestock The cattle industry has long been one of Colombia's principal occupations. A great deal of improvement has resulted from the application of modern scientific methods. From 1938 to 1947, the cattle industry increased by 4.5 million head, with a correSponding 6 U. S. Office of International Affairs, Basic Data on Other Republicas, 1945, Colombia, p. 42. Taken from the official publication of the government of Colombia in the Report, presented by the Ministre de la Economica Memoria, 1946-47, Bogota, Colombia. 61 increase in production of meat, hides, wool, and milk and its deriva- tives. In 1951 Colombia had 15 million head of cattle, and the poultry population was 21 million. About 600,000 cattle are produced by the state of Bolivar. Colombia eXports cattle to the Canal Zone, Trini- dad, and Venezuela. A characteristic of the industry is an animal wastage equal to 50 ,000 cattle due to the high mortality rate and loss of weight in transport from the ranges to the markets. The government and private businessmen are trying to im- prove the situation by establishing slaughterhouses and meat-packing plants in the cattle-raising areas. Only a small number of sheep, hogs, and goats are raised. Estimates for 1951 show a production of 1.3 million sheep and 2.7 million hogs. Agricultural Investment Machinery and implements were the most important forms of private agricultural investment, although investment in plants for processing agricultural commodities and expenditures for improve- ments of agricultural methods were of normal proportions. The 8 Senate Report, Study of Latin American Countries, 1953, No. 1082, Colombia, p. 233. 62 main reason for this investment was to increase production in order to continue agricultural trade exports. The tendency for exports to outstrip production became apparent in the period beginning in 1940 and extending to 1944. The chief reason for the greater increase in export products was the higher rise in postwar prices for exports--crops such as coffee and oilseeds--compared with those crops produced for home consumption. In some cases (e.g., coffee), there was an actual di- version of production from the domestic market to export. The government has sought to counteract the effects of the rise in export prices by compelling the increasing production of food crOps for domestic consumption by supporting and encouraging public agricultural credit for such crops. Number, Distribution, and Occupations of Colombia The first census in 1841 reported two million pe0p1e, and that of 1900, 3,880,000. The results of the census of 1951 are not yet published, and the most recent figures available are those of the census of 1938, which counted 8,407,956. This represents an increase of 2.15 percent per annum, and, on this basis, the official estimate of the total population in 1950 was 11,259,739 (see Table XVI). 63 TABLE XVI OCCUPATIONS OF GAINFULLY EMPLOYED, 1939-1947 Equivale nt Full- Time Workers Pct. Occupation (in thousands) Increase 1939 1947 Grand total ................. 2417 2880 18.1 Rural ................... 1527 1755 14.9 Total urban ............... 890 1125 26.4 Mining ................. 57. 60 4.5 Manufacturing industries 100 146 46.0 Handic rafts ............. 148 185 25.0 Construction ............. 72. 96 32.0 Transport .............. 66. 95 43.0 Commerce .............. 145 194 31.0 Government ............. 95 98 3.0 Services ............... 67 79 18.0 L‘iberal professions ........ 19. 25 28.2 Domestic services ........ 110 140 27.2 Other ................. 6 7 17.0 Source:: 4.— The Basis for a Development Program for Colombia, p. 33. 64 The distribution of the urban force in industrial employment increased almost 50 percent in nine years, then followed the rela- tively rapid increase in transportation and trade. However, in some fields it has shown little progress, as, for example, the fixed number of government employees. Investment in Colombia Colombia, in her early stage of economic development, relied on foreign capital to finance its growth, and thus she depended on other nations for the productive factor: capital. The investment in Colombia may be analyzed by pointing out three stages in the economic evolution of the area.9 The first was characterized by a simple system of economic life. In that period there was a com- plete absence of manufactured products since the economic environ- ment was not suited for a large outlet of capital from an industrial country. The second period, from the end of the nineteenth century to World War I, was characterized by the increase of investment mainly in mines and textile industries. The improvement of harbors 9 Max Winkler, Investment of U. S. in Latin America, World Peace Foundation, Boston, 1928, pp. 17-22. 65 and growing European demand for foodstuffs were features of this period, too. The third period of investment in Colombia dated from World War I to the present time. The expansion of local industries was the characteristic of this period. Early Investment Early investment may be classified as follows: railways, canals, mining, agricultural, newspaper, and mercantile establish- ments. United States investors were among the first to become in- terested in transportation. The construction of the Panama Railroad in 1855, which cost 8 million dollars, was sponsored by North Amer- icans, who also secured concessions for roads between Chirigui Lagoon and the small town of David, in 1854, and the line which con- nects Cartagena to Calamar. The government was helpful in provid- ing large grants of land. 10 The material here follows Professor J. Fred Rippy, The Capitalist and Colombia, Chapters III and VIII (New York: The Van- guard Press, 1932) . 66 Public utilities in Santa Marta were the telephone and electric lighting system developed in 1909. In 1899 the United Fruit Company was launched. Also there were some investments in urban real es- tate and neWSpapers. All types of investments about that period amounted to 14 million dollars. One of the first oil investments in Colombia was in the year 1908, when the Cartagena Oil Company was formed by Colombian citizens. In 1914 the Standard Oil Company made an agreement with the owners of the Cartagena Company to take control and to explore oil in the district. By 1916 another company was formed, the TrOp- ical Oil Company, which was soon taken over by Standard Oil Com- pany of New Jersey. The exploitation of petroleum on a large scale, however, started in 1926. In 1921 the Tropical Oil Company made a 30-year contract with the Colombian government for the purpose of developing the petroleum industry in the DeMares Concession situated in the state of Santander. Upon eXpiration of a 30-year lease held by the Tropical Oil Company in August, 1951, the DeMares Concession reverted to the government. 67 Historical Development of Tropical Oil Company The Tropical Oil Company was the first to produce on a com- mercial basis the petroleum from Barrancarmeja (located in the De- Mares Concession). This concession was given to the TrOpical Oil Company August 25, 1919; thus, for 30 years the Tropical Oil Com- pany was active in the economic develOpment of Colombia. In 1922 the company installed the refinery in Barrancarmeja and constructed the pipeline of the Andian. Production in 1921 was 66,750 barrels, and in 1926 it reached 6,443,587 barrels. Today the activities of the Tropical Oil Company extend into numerous regions of the country and give occupation to more than 6,000 pe0ple. The contribution of the Tropical Oil Company to the general economy of Colombia was mainly in fiscal matters. Between 1921 and 1947 they paid 39,310,000 pesos in direct and indirect taxes on importations. The Tropical Oil Company has endeavored to increase its exchange reserves through the introduction of United States dollars. Manufacturing Industry Three decades ago Colombia was a country exclusively agri- cultural, pastoral, and mineral. Colombia produced fruits and raw 68 materials and exported what it did not need. In recent years indus- tries other than processing of local agricultural materials have made considerable progress. Colombia has witnessed a period of acceler- ated production in the last half-decade. New industries were created and the value of industrial output rose sharply to meet the require- ment of a war-fostered trade and self-dependency. Stage of Industrial Development At the present time the occupational distribution in Colombia tends to conform to that stage of deve10pment which Professor George Wythe has characterized as ”the intermediate industrial order,”ll meaning that Colombia is still in the early stage of industrializa- tion. The principal manufactures are of types involving relatively simple processes like the preparation of food, meat, sugar, paste foods, and articles with a popular—demand market, such as cotton, shoes, glassware, et cetera. Heavy industries are the exception rather than the rule, largely because of a shortage of good coking coal and the unfortunate location of iron deposits. 11 George Wythe, An Outline of Latin American Economics (New York: Barnes Noble Inc.), p. 149. 69 Types of Manufacturing Industries Light industry in Colombia involves two principal types of activity: (I) the production of consumer goods for domestic con- sumption, and (2) the processing of raw materials for exPort. The greatest development activity has been in the field of con- sumer goods. Cotton textiles first achieved importance, followed by shoes, printing, soap, furniture, matches, and other articles of wide use. At the same time various food-processing industries became more mechanized; sugar and flour mills, meat-packing and the foodstuff industries embraced a wide variety of activities. Size of Industrial Deve10pment The most striking characteristic of the manufacturing and processing industry in Colombia is the large number of small es- tablishments (see Table XVII). The Industrial Trend in Colombia Industrial data for the years prior to 1934 are very poor, yet it is possible to achieve a realization of some general charac- teristics of industrial growth even without precise statistical material. From a historical point of view it is possible to outline three periods 70 TABLE XVII INDUSTRIAL ESTABLISHMENT ACCORDING TO . CAPITAL INVESTED, 1941 (Directory de la Industry, Manufacturing in Colombia) Over 50,000- 5,500- Under I d t n “5 ry 250,000 250,000 50,000 5,500 T°ta1 Food products . . . . 120 56 359 1,059 1,486 Beverage ........ 18 17 62 188 283 Tobacco ......... 7 5 60 124 151 Oil ............ 7 2 7 6 16 Chemicals ....... l 20 105 274 400 Rubber ......... - 1 4 4 9 Wood ........... 1 5 37 332 375 Paper .......... 3 2 8 14 27 Geographic arts 2 13 64 270 379 Leather ......... l 5 24 175 205 Textiles ......... 17 22 51 58 139 Wearing apparel . . . 2 17 106 653 778 Power water supply 011 and fuel ...... 26 45 33 164 468 Nonmetallic minerals 2 — - - 3 Metallurgy ....... 7 10 54 275 346 Common metal . . . . 2 6 29 86 133 Machinery ....... 2 5 28 188 223 Metal stones ..... - 3 13 91 133 Miscellaneous ..... - - 4 18 72 Total ........... 104 234 1,222 3,990 5,550 Percent . ........ 1.9 4.1 22 71.9 100 Source: Lloyd J. Hughlett, Industrialization of Latin America, p. 49. 71 12 of industrial advance in Colombia: first, from 1880 to 1914; sec- ond, during World War I and postwar; and third, from 1931 onward. Manufacturing in Colombia did not take root until the last quarter of the nineteenth century. However, this manufacturing was very meager yet; it was an elementary manufacturing industry, in some cases its origins, as in the tanning of leather, were in the 13' crafts of the colonial period. Among the products of these indus- tries were laundry soap, cigars, alcohol, et cetera. During the second period, from 1914 to 1931, Colombian in- dustrial development saw the introduction of textile manufacturing, shoe manufacturing, and commercial wire production. In 1915 there were 121 manufacturing establishments with a total capital investment of 168 million pesos. The textile industry accounted for more than . . l4 one—fourth of the total capital invested. After World War 1, industrial expansion continued. A petro- leum refinery was built and considerable expansion occurred in the 12 George Wythe, "The New Industrialism in Latin America," lgurnal of Political Economy, Vol. XLV, No. 2 (April, 1937), p. 208. 1 3 Wendell G. Gordon, The Economy of Latin America, Co- lumbia University Press, 1950, p. 108. 4 United Tariff Commission, Mining and Industry in Colom- b_i_a_, Washington, D. C., 1949, p. 8. 72 processing of foodstuffs; however, the industrial potential of Colombia was still small in 1921, and the growth continued to be very moder- ate throughout the 1920‘s. The next great impetus to manufacturing occurred between 1930 and 1933. In this period most of the basic industries were established, and since then Colombia's industrial expansion has been largely centered in these same industries. With the exception of rubber tires and the caustic soda industries, which are of consider— able size, small plants prevail. The magnitude of the expansion is shown by the increase from 1934 to 1938 of 400 percent in the pro- duction of cement, 200 percent in the sugar industry, and 400 percent in electric power output. In 1936 the Controlleria General of Colombia made an inves- tigation and found 469 manufacturing establishments, representing a combined investment of $64.3 million, producing goods valued at 106.2 million pesos (60.7 Unites States dollars), and employing 29,154 persons. By 1940 the number of establishments investigated by the Controlleria had increased to 1,541, the total investment was 1,224 million pesos ($69.9 million), and total production was valued at 1 5 United Tariff Commission, Mining and Industry in Colom- b_i_a_, Washington, D. C., 1949, p. 8. 73 187.7 million pesos ($108.3 million), and a total of 42,681 persons 16 we re employed. In 1943, 633 companies were organized in Colombia with aggregate capital of 21,882,500 pesos; of these, 357 were manufac- turing establishments and 274 were commercial or sales organiza- tions. It is significant that the capital invested in industrial enter- prises in 1943 was three times greater than the investment in com- mercial companies. Table XVIII shows the major manufactures in Colombia in 1938 and 1942. Current Position of the Industry In 1945 an industrial census was made; this census showed 20,000 salaried employees and 115,000 workers in the industrial field. About half of these workers were occupied in food—processing and textile plants (see Table XIX). (Geographically, industry was concentrated in four cities: Bogota, Medellin, Cali, and Barranguilla. It is estimated that in 1944-1945 nearly 70 percent of the industry was centered around these four cities.) International Bank for Reconstruction and Deve10pment, The Basis of a Deve10pment Prgram for Colombia, Washington, D. C., 1950, p. 87. TABLE XVIII MAJOR MANUFACTUR ES 74 (number of establishments, number of workers, and value) Establish- Value of Output in Products ments Workers United States Dollars 1938 Total ......... 1,031 34,422 84,838,371 Beverage ...... 171 4,506 22,234,801 Chemical Phar. . . 175 2,793 5,277,725 Clothing ....... 162 2,171 2,079,769 Food ......... 81 1,851 6,973,421 Glass ........ 10 1,001 610,403 Leather ....... 60 797 1,710,763 Machinery ..... 80 1,011 10,864,208 Other Metal . . . . 58 1,432 2,268,347 Rubber ....... 7 132 120,608 Stone ......... 47 1,860 2,916,474 Textiles ....... 64 11,371 14,525,179 Tobacco ....... 70 4,955 14,197,929 Wood paper 13 315 504,531 Miscellaneous . . . 33 227 554,213 1942 Total ......... 1,415 54,473 135,871,364 Beverage ...... 201 5,251 25,623,765 Chemical Phar. . . 125 2,094 5,502,546 Clothing ....... 281 3,053 3,824,230 Food ......... 110 2,685 11,044,827 Glass ........ 12 1,138 627,458 Leather ....... 74 1,356 3,068,908 Machinery ..... 125 5,932 15,154,800 Other Metal . . . . 87 1,919 3,545,809 Rubber ....... 7 440 981,919 Stone ......... 62 1,661 3,903,864 Textiles ....... 77 19,751 36,788,798 Tobacco ....... 93 5,340 18,658,494 Wood paper 19 457 1,388,797 Miscellaneous . . . 122 1,396 5,702,517 Source: Encyc10pedia Britannica Wogd Atlas Trade Edition, 1940, p. 63. TABLE XIX COLOMBIAN PRODUCTION, 1944- 45 75 Category 3:113:22: Percentage Foodstuffs ..................... 263,000 41.12 Textiles ....................... 84,000 13.23 Beverages ..................... 52,000 8.18 Instrument and metal ............. 35,000 5.55 Clothing ....................... 34,000 5.45 Chemicals ..................... 24,000 4.32 Leather goods .................. 27,000 4.28 Nonmetallic .................... 24,000 3.79 Metallurgic .................... 21,000 3.37 Wood manufacturing .............. 19,000 2.97 Tobacco ....................... 15,000 2.48 Graphic arts ................... 14,000 2.21 Petroleum ..................... 11,000 1.74 Rubber ....................... 4,000 0.71 Paper, cardboard ................ 2,000 0.35 Miscellaneous ................... 1,000 0.24 Industrial ...................... 72 0 .01 Total ......................... 633,072 100.00 Source: Colombia, Controllaria General §_enso Industrial de Colombia, 1945. de la Republica, Primer 76 Capital and reserves amounted to 508,200,000 pesos. Sixty percent of this amount was invested in plants manufacturing textiles and processing foodstuffs. Another relevance in assessing industry's contribution are the figures on value added, or, in other words, the contribution to over-all production represented by the value of the work of labor, management, and capital. In 1939 this figure of value added in manufacturing amounted to about 120 million pesos, and grew to 494 million pesos in 1947. These figures represent, resPectively, 11.5 and 15.3 percent of the total of the value added by all economic activities, or the net national income. Table XX shows the extent to which Colombian production is utilizing locally produced raw materials. In 1944—1945 only 21 percent of all raw materials used in manufacturing were imported. In general, Colombia is supplying through domestic fabrica- tion practically all of its current consumption of processed foodstuffs, beverages, tobacco, textiles, et cetera. It is fabricating a very substantial part of its building‘material requirements. The major classes of fabricated items which are still being imported include transportation vehicles and machinery. International Bank for Reconstruction and Deve10pment, The Basis of a Development Program for Colombia, 1950, p. 87. 77 TABLE XX COMPONENTS OF VALUE OF PRODUCTION (MANUFACTURING) OF ALL INDUSTRIAL PRODUCTION (1944-45) Value of Items Percent Component 1944—45 (thous- of ands of pesos) Total Raw Material .................. 484.3 58.4 Local agriculture ............. 260.0 31.3 Local other ................. 119.0 14.4 Imports .................... 105.3 12.7 Wages and Salaries .............. 97.3 11.7 Fuel ...................... 14.4 1.7 Depreciation ................. 21.5 .6 Taxes ..................... 59.8 7.2 Retained earnings ............... 45.9 5.5 Wet products ................ 70.5 7.2 Other ..................... 36.5 8.5 Total ........................ 830.0 Source: The Basis of a Deve10pment Program for Colombia, p. 89. .78 Background of Industrial Develoment The forces that have operated to produce the movements to industrialization in Colombia are complex. Viewed in the broadest perspective, the development may be considered as partly socio— political and partly economic factors such as the growth of the mid- dle class, technological changes, and the gradual diffusion of indus- 18 trial skill. The nature of these developments will be discussed in the following paragraphs. Socio-Politic a1 Facto rs Progress toward industrialization in many Latin American countries during 1930 helped Colombia to realize the influence of certain socio-political factors on industrialization. Leaders began to think of two possibilities: (I) an increase in per capita purchas- ing power and the growth of the middle class that would take interest in politics and develop a body of intelligent voters; and (2) other factors for industrialization—-the desire for increase in national 18 Paul V. Horn and Habert E. Rice, Latin America Trade and Economics, Chapter 11, Latin America Industry, Prentiss Hall Inc., 1949, p. 286. 79 power and commercial prestige, called by Wythe the "new national- ”19 ism. Economic Impulses Behind Industrialization The economic impulses behind industrialization were: (1) stim- ulation by world wars; (2) protection afforded by high customs and ex- change restrictions; (3) financing assistance by the government and other institutions; (4) financial assistance provided by foreign capital; and (5) great depression. They will be discussed in the following paragraphs. Stimulation by the World Wars Efforts toward Latin American industrialization were greatly increased during the two world wars by a variety of causes. The influx of European refugee capital helped a considerable expansion in the number of manufacturing establishments, and further funds were made available by unusually large exports to the United States and the United Kingdom. Dollar and pound sterling credits accruing from these exports and converted into bank credits, in local 19 George Wythe, Industry in Latin America, Chapter I, Indus- try As the Way Out, Columbia University Press, 1945, p. 11. 80 currencies, were seeking profitable employment. Other influences were the inability of industrial countries to supply the usual im- ports, which created acute shortages of many essential goods. The high prices resulting from these conditions still further stimulated the desire for industrialization that would yield profits to domestic business enterprises and assure greater self—sufficiency and improved living standards. Protection Afforded by High Custom and Exchange Restriction Colombian factory industry in the past has been built up largely by utilizing the tariff for protective purposes. Before 1931 the tariff was used primarily to raise revenue, but subsequently it has been employed in even-increasing measure to stimulate certain . . 2 branches of agriculture and certain manufacturing industries. New plants now are supported by a policy which limits imports by quota until the capacity of the plant is absorbed by the domestic market. The duties are high. Automobile tariffs range from 40 to 60 per— 1 cent of landed cost. Tariffs are also high against wheat and flour. 20 Taken from U. S. Tariff Commission, Colombia Commer- cial Policy, Washington, D. C., 1945. 81 Exchange control and adjustment of exchange rates at times, how- ever, takes the place of the tariff. For instance, coffee can be purchased only at the official exchange rate of 2.5 pesos per dollar, rather than at the market exchange rate, approximately 3 pesos per dollar. The result is that coffee costs more in dollars. Certain luxury items such as fruit and stuffed olives may be imported only by purchasing exchange certificates at a premium exchange rate. As a means of encouraging the development of new manufac- turing enterprises in Colombia, the government has granted tax exemption to them in the early years of their existence. So far new plants in three important industries (cement, sugar, and tanning), representing an investment of nearly 10 million pesos ($57 million), have been benefited from this aid. Finance Assistance by the Government The movement toward industrialization in Colombia does not consist of an expressed desire for an unconscious imphlsion toward the establishment of a factory system. A schedule of industrialization has been deliberately planned with respect to financing and encourag— ing (1) basic industries of primary importance to the nation's indus- trial pattern, (2) industries that convert raw materials into semifinished 82 products, and (3) industries that can economically compete by manu- facturing consumer goods imported in prewar years. Institute of Industrial Deve10pment. The Institute of Industrial Deve10pment was created by Decree No. 1157 of June, 1940. This organization has quickly become a major factor in the field of indus- trial promotion. It is not designed merely to provide capital, but also to act as ”promoter" and partner in those basic industries that require costly preliminary surveys and large capital that may not be within the immediate reach of private parties. The minimum capital of the Institute was set at 4,000,000 pesos, of which 3,000,000 were to be subscribed by the Colombian government and 1,000,000 by the Central Mortgage Bank. Enterprises which the Institute had initiated, or in initiation of which it had participated, included those concerned with the fol- lowing: production of iron, coal, and mineral water; forest products; and the manufacturing of tires, woolens, and glass. Many of these enterprises are in actual operation, whereas others are still in the experimental stage. At the end of its third year of operation, the Institute of Industrial Development held investments in industry totaling 2,706,000 pesos, and had funds amounting to 3,012,000 pesos awaiting such investment. In several instances the Institute has 83 participated jointly with United States capital in the establishment of new enterprises. Financial Assistance Provided by Foreign Capital Foreign capital has been significant in the advance of manu- facturing industry in Colombia. Some of the outstanding manufactur- ing industries are branches of foreign enterprises, particularly pack- ing houses, chemicals, and tire factories. There is enormous and continued drawing upon foreign countries for capital, for machinery, and for management and technical assistance. In some cases, the foreign contribution has been large; for example, the United States aided industrialization of Colombia by the establishment and expansion of industrial enterprises. Loans were made through the Export-Import Bank to finance the purchase of equipment for the development of manufacturing in Colombia. The formal endorsement of continuing establishment of new industries in Latin America by the United States was made by the Conference of Commission of Inter-American Deve10pment in 1944. 84 Depression The economic depression of the 1930's ushered in a decade of industrial expansion in Colombia. This period of greatest decline in exports coincided with a period of marked industrial advance in Colombia. That advance was the counterpart of the trend toward agrarian self—sufficiency in Europe that restricted the outlet for raw material and forced Colombia to fall back on its own resources. All restrictions helped to set in motion this chain of events: shrunken export balances in Colombia; lack of purchasing power necessary to import manufactured goods in large amounts; inability to service large foreign debts; and a consequent determination to establish in- dustries for converting into finished goods many raw commodities for domestic consumption. The decline in the income received by Colombia during the early 1930's resulted in a decline in the value of its currencies in relation to currencies of EurOpean countries and the United States. Then Colombian importers increased their local currency prices of imports in order to secure for their products the same amount as before in pounds sterling, dollars, and other foreign currencies. But local manufacturers were at a decided advantage, for their cost of native raw materials, labor, and overhead were not affected by 85 currency depreciation. So it was increasingly profitable to manufac- ture an ever-growing number of products previously imported. . 21 MaEr Manufacturing Industries Ninety-seven percent of the total production of Colombia takes in the following industries: textiles, food products, beverages, metal- lurgical products, chemicals, pharmaceuticals, clothing, leather, and tobacco. The textile industry has grown to a great extent. From a capital of 2,100,000 pesos in 1930 it increased to 81 million pesos in 1950. Profits rose from 776,000 pesos to 26,700,000 pesos during the same period, and the net worth increased from 4 million pesos to 196 million pesos. The manufacturing of wool, rayon, and silk has progressed notably. The cement industry has doubled its pro- duction within five years, and has added production capacity of 1,000 tons. Domestic iron and steel production began in 1942, with the Empresa Siderugirca metallic plant in Medllin. Equipped with 21 Interim Report of the Senate Committee of Banking and Currency, Study of Latin American Control, Colombia, Manufacturing, Washington, D. C., 1954, p. 23. 86 modern steel furnaces, coke ore, and rolling mills, its capacity is 12,000 tons of steel per annum. In 1952 a 40-million-peso integrated steel mill project was begun at Pas del Rio in Western Boyaca Department. This state contains good deposits of iron ore, bituminous coal, coking coal, and limestone. The cigarette industry has recently surprised its South Ameri— can competitors. In 1919 the industry imported 90 percent of the tobacco it used; now it is all produced domestically. The tire industry is just beginning. New plants have also been erected for producing paper, paints, glass, candy, and milk products. Other principal industries include leather, chemicals, and pharmaceuticals. In addition, Colombia produces beer, soap, and woodwork. A soda-ash plant is among the major industries founded since 1950. It uses domestic materials to produce 100 tons of soda per day, and was built by the Bureau for Industrial Deve10pment. Another important plant is Celanese Colombia of Cali, a subsidiary of the Celanese Corporation of America. 87 Future Inve stment The International Bank for Reconstruction and Deve10pment (IBRD) organized an economic mission which, after nearly one and one-half years, published its report: The Basis of A Development Program for Colombia. The report is also known as the "Currie Report." The head of the mission was Dr. Lauchlin Currie, who was assisted by fifteen experts from the International Bank; these experts were given assistance by an additional sixteen Colombian specialists in economic, political, and social fields. This report is not a study of the entire economic life of Colombia; it is, never- theless, very useful and helpful, since there are few serious studies on the country's economic problems. The Currie Report has been used as a basis for this chapter, and tables and data concerning Colombian industry have been taken therefrom. The purpose of the mission was to make recommendations as to (1) direction in which investment might be channeled, especially recommendations as to investment priorities among various important sectors of the economy and among various types of undertakings within such sectors; (2) other methods and measures which might raise the level of agricultural and industrial production and improve 88 the efficiency of the distribution system; (3) public financial and economic policies and administrative mechanism appropriate to carry out the deve10pment objectives. Following transmittal of the mission report in 1950, the gov- ernment established a Committee on Economic Deve10pment to assist the government in formulating an over-all deve10pment program based on the report, and to recommend steps to be taken to assure the effective execution of the program. At the government's request, two staff members of the IBRD assisted the committee in its work. The government has taken a number of steps based on the recommendations of the mission and the committee. Measures have been taken to check inflation, new regulations relating foreign-exchange control have been enacted, and a comprehensive highwayerehabilitation program has been adopted. In 1952 a National Planning Council was established to coordinate all government activities involved in the execution of the development program. In addition to helping the government in its overeall planning for development, the IBRD has . provided assistance in working out specific measures to achieve development objectives in particular fields. These activities will be discussed in the next chapter. 89 It is useful to consider the main line of the Currie Plan as indicative of experts' opinions of the potentialities of the Colombian economy. The program envisaged a total capital outlay of about 5,000 r3. million pesos over the years 1951-55 (assuming stable prices), 3 about one-fifth of which would be required for imported equipment. a 7.5-1'87" 0 , This sum was allocated as indicated in Table XXI. This assumed that prices and exchange rates would remain stable through the period, that an increase in productivity of 4 per- cent per year would be achieved, and that foreign capital would flow in at a rate of about 60 million pesos a year. It further assumed that the total foreign exchange requirement each year would amount to 900 million pesos. After the presentation of the report, the Committee on Eco- nomic Development made its recommendations. for investment and deve10pment projects totaling 3,300 million pesos over the succeeding five years. The task of implementing this is in the hands of a special branch under the president's secretary, which has been created under the title of "Economic Planning Office." The committee estimated that, during the next five years, foreign investment in Colombia should maintain an average rate of 90 TABLE XXI PROJECTED INVESTMENT PROGRAM, 1951-55 Total Private Public Total Imports Investments Investments Investments Investment . , . _ , , , , Pct. (millions (millions (millions (millions U.S. $) Of pesos) of pesos) of pesos) Industries .. 191.5 741.5 - 741.5 14.5 Agriculture. . 109.0 341.0 176.0 517.0 10.3 Transport. . . 322.5 878.0 645.5 1,523.5 29.9 Mining ..... 46.0 135.5 - 135.5 2.7 Construction . 14.0 40.5 - 40.5 0.8 Housing . . . . 43.5 1,145.4 - 1,145.5 22.5 Building . . . . 28.5 150.0 297.7 447.7 8.8 Municipal fa— cilities and power ..... 98.5 - 136.6 136.6 10.5 Total ...... 853.5 3,431.0 1,655.8 5,087.7 100.0 Source: International Bank for Reconstruction and Development, The Basis of a Development Program for Colombia, 1950, p. 594. mHVvJJV-WJJ ‘.' 1' 91 37.5 million United States dollars per year, derived as follows: $20 million from loans, $10 million from private investment, and $7.5 million from oil companies. With regard to the general future of the country's economy, a sentence from the preface to the Currie Report may be quoted: "All members of the Mission, although they found need for improve- ments in many Specific conditions and practices, became intensely interested in and most enthusiastic over, Colombia's potentialities." It is difficult to forecast the industrial expenditures needed in Colombia for the development of its natural resources. Quoting from the Currie Mission, "we can attempt it; just assuming certain rates of growth in the demand for various industrial products and calcu- late the additional capital investment necessary for expansion of plants to meet such growth." Table XXII indicates the cost of pro- jected industries. The projects recommended by the mission are not total investment, but priorities within a large plan of investment. Communication and Transpgrtation The huge mountains of the Andes complicate the problems of tranSportation; in fact, transportation is one of the most difficult problems facing the economy of Colombia. Some progress has been made through building of roads, but much remains to be done. 92 TABLE XXII RECOMMENDED INVESTMENT IN SPECIFIC INDUSTRIES, 1951-195.5 Foreign Exchange Domestic Industry Investment Investment (millions U.S. $) (millions pesos) Cotton textiles ......... 0.75 - Wool textiles .......... 2.00 1.00 Rayon textiles ......... 1.00 — Shoes ............... 0.70 2.80 Mineral water ......... 0.80 - Sugar ............... 3.50 1.50 Fats ................ 0.42 0.40 Leather .............. 1.00 4.00 Glass ............... 0.70 1.60 Chemicals ............ 0.60 O .80 Concrete batching ....... 1.00 - Lumber .............. 3.50 3.00 Scrap and pig iron ...... 5.00 8.00 Electric smelter ........ 0.55 - Petroleum ............ 9.60 4 . 80 Coal ................ 4.80 6.40 Total ................ 35.92 34.30 Source: The Basis of a Develgiment Program for Colombia, p. 437. 93 Railroads During Colonial times no effort and interest were shown in building roads and bridges, and the civil war and lack of money after their independence hindered the improvement of transportation in Colombia. Until 1900, transportation in Colombia was very primi- tive; pack mules traversed hills and mountains, while much of the country remained unexplored. Railroads are not well developed owing not only to lack of capital but also to the altitude of the mountains. This caused a lack of homogeneity in the transport system of Colombia. Wate r Transpo rtation The River Magdalena constitutes the principal means of communication between the interior and the Atlantic coast, but trans- port on the River Magdalena is declining due to a low water level in the dry season. The Rivers Patea, San Juan, and Putumayo also are important for water transportation. Roads In 1948 there were 12,500 miles of roads, but 1,750 miles of these are unusable at certain seasons of the year. Only about 4 94 percent of the roads are asphalt. Three trunk routes exist, running from north to south parallel to the three Andean chains, and two more run transversally across these ranges. The over‘all highway improvement has been impressive, in View of the great difficulties of construction and maintenance in such a rugged country. The Transportation Act of 1949 set aside 1‘. "the sum that is necessary to take care of maintenance additions and betterment service." This law is an encouraging sign of the interest of the government in transportation, and shows its aware- ness of the importance of good roads. The funds available under the Act of 1949 provided that annual appropriations for general road construction shall not be less than 12 percent of the common taxes; for example, a portion of the national gasoline tax is Specifically earmarked for surfacing national highways. Total appropriations for highways in 1949 were 37,317,000 pesos, as shown in Table XXIII. Future projects for surface transport involve a cost of $23.9 million, and are allocated as follows: Railroads ........... $15.3 million Pipelines ........... 2.6 million Highways ........... 4.5 million Port facilities and inland waterways . . . _1___5_ million Total .......... $23.9 million 1| 95 TABLE XXIII 1949 APPROPRIATIONS FOR NATIONAL HIGHWAYS, MINISTRY OF PUBLIC WORKS Approp riated Pet. of Purpose 1949 (pesos) Total Maintenance and equipment ......... 10,900,000 29.2 Paving ........................ 4,800,000 12.9 Construction .................... 18,473,000 49.5 Department contracts ............. 1,905,000 5.1 Bridges ....................... 1,239,000 3.3 Total ......................... 37,317,000 100.0 Source: The Basis of a Development Program for Colombia, p. 119. CHAPTER III SOURCES OF FOREIGN INVESTMENT OUTSIDE THE MONETARY STRUCTURE Foreign capital has played a vital role in facilitating the ex- ploitation of Colombian resources and in shaping the peculiar develop- ment of Colombian economy. Without the huge volume of foreign capital which has been invested in Colombia, export industries could scarcely have been established upon such a large scale; the exPort trade, the fiscal system, and the internal economy of Colombia would have assumed a different nature. Any analysis of the economic de- velopment of Colombia must utilize this pivotal role of foreign in- vestment as one point of departure. Data It is impossible to obtain perfectly reliable data as to the volume of investment undertaken by nationals of any country within the geographical confines of another country. Even when statistics are available it is often difficult to ascertain their precise meaning or to know if they are comparable with statistics from other sources. 96 97 The available estimates are considered in some detail in the follow— ing pages. From these data it is apparent that the principal creditor nations today are Great Britain, France, and the United States. The British investment in Colombia amounts to 21 million pounds, and American investments are 193.4 million dollars. French investments were 120 million francs, and there are also indeterminate amounts invested by other countries. Great Britain's investment in Colombia is distributed among government bonds and municipal bonds and securities of private rail- way enterprises and public utilities. The investments of the United States are distributed in a very similar way, though there is some tendency to prefer the newer types of public utilities--telegraph and telephone companies, for example—-to railways. The extent to which principal creditor countries had invested capital overseas is not easily measured statistically. Some attempts to do so have been made, notably by Dr. Rippy, from whose books and articles many of the estimates in the present chapter have been taken. These estimates are subject to wide margin of error. They do, however, help to present a picture of the importance of international invest- ment during the period when its advantages were most needed in Colombia . 98‘ The classifications of foreign investments as adopted by the various countries of the world are usually determined by the condid tions under which the investments are held, by the sources from which the necessary data can be obtained, and by the desirability of certain classifications for analytical purposes. A brief discussion of the classifications adopted by (1) Sir Robert Kindersley, regarding British investment, and (2) the Depart- ment of Commerce, regarding American investment abroad, will be illustrative of the influence of these factors. British investments in Colombia are of many types. First, there are the extensive holdings by the British of Colombian govern- ment bonds. Second, there are many large investments by private corporations operating in Colombia which have their head offices in England and most of their securities listed on the London Stock Exchange. Third, there are substantial holdings of foreign securities not listed on the stock exchange. American investments are classified by the Department of Commerce as foreign direct investments and portfolio investments. Foreign direct investments, as herein considered, include those com- mercial and industrial prOperties situated abroad and belonging to residents of the United States and its territories, from which a 99 return is normally expected. In the categories of direct investment are embraced corporate investment in (1) American-controlled manu- facturing and sales organizations in foreign countries; (2) the stocks and bonds of foreign-controlled manufacturing and sales corporations; (3) purchasing agencies; (4) petroleum refining and distribution fa- cilities; and (5) public utilities, et cetera. Portfolio industries in— clude equity and other securities investments in Colombia, and the issue of Colombian government bonds. The characteristic feature of this type of investment is for purposes of income, rather than control. The data on investment (direct and portfolio) in Colombia were classified by the Department of Commerce. In tabulating the data it had in mind the following objectives: (1) to ascertain the total investment in Colombia; (2) to distribute the data by industries and also by commodities, since by that means the motive for the investments might be judged more accurately; and (3) to make a start in the analysis of the origin and the life history of the invest- ment. The following pages are devoted to the accomplishment of this objective to the extent that the available sources of information permit. 100 Great Britain's Capital in Colombia In 1820, Fea, who was Vice-President of Colombia, appeared in London. Delegated with the powers of minister-plenipotentiary, he had come to plead for British financial aid in the cause of the colonial revolt against Spain. Britain was keenly interested in the establishment of foreign centers for the establishment of trade relations, and so a loan was granted. It was, however, pitifully short of the 2,000,000 pounds which Lea had asked for. After paying commissions and interest for the two-year duration of the loan, there remained to'the revolt- ing Colombians but 640,000 pounds, with which they purchased a ridiculously small navy and an inadequate number of guns. However, this was the beginning of the Colombian-British trade relations; and from that time forward Britain took the lead and dominated not only capital export to Colombia, but to other Latin American countries as well. Within a few years, the expansion of British capital to the young republic of Colombia had begun to pyramid. Simon G. Hanson, Economic Development in Latin America, Chapter XII, Inter-American Economic Affairs, 1951, p. 280. I a- v» WI.- flu” “.9.- _—-_ ._ _.‘_, -4 1 O t I 101 This period was known as the "British Investment Boom." Great Britain invested unprecedented amounts of capital, not only in Colombia, but in other parts of Latin America. These investments were made in bonds and securities of many joint stocks. "Get rich quick in South America" was the slogan of the day. Bankers, lawyers, and gamblers swarmed the streets of London solicit- ing support for their schemes. Journalists and government adminis- trators were caught in the spiraling excitement, and corporations mushroomed overnight. In 1824 the Gran Colombia, then embracing what later were the nations of Colombia, Venezuela, and Ecuador, had 6,750,000 pounds of British investment with a rate of interest of 6 percent. The nature of this investment in Colombia was in mines, especially gold and silver, and their capitalization in some companies was as shown 2 in Table XXIV. Such is, in brief, the early story of British investment in Colombia. In 1827 the inevitable happened. The shaky superstruc— ture built in the South American economy collapsed, carrying thousands 2 J. Fred Rippy, "Latin America and the British Investment Boom 1820," Journal of Modern History, 1947, pp. 123-29. 102 TABLE XXIV BRITISH MINING ASSOCIATIONS Capital (in pounds) Companies Authorized Paid In Anglo-Colombian ................. 1,500,000 75,000 1,000,000 150,000 Colombian ..................... Source: .1. Fred Rippy, Latin America and the British Investment Boom 1820, Journal Modern History, 1947, pp. 123-29. to financial ruin, and for a third of a century British investments in South America were negligible. However, by 1870 the British people had forgotten their tragic experiences in Colombia and started to invest again. They invested a considerable amount in many of the Colombian government bonds, which proved later to be as worthless as those of the earlier period, but the investments in mines and natural resources were sound (see Table XXV). During the decade following the year 1880, British capitalists invested large sums in Colombia. In no other period of equal length, with the exception of the ten years following 1903, did they send a greater volume of capital into the region. The number of investments in economic enterprises increased, and the aggregate ‘1' u ‘1 twmmxau-z1 5 i u ‘Tp! -; 103 TABLE XXV BRITISH INVESTMENT IN ECONOMIC ENTERPRISES IN COLOMBIA ENDING 1876 Investment t . Type En erprise (pounds) Bonds Railroads Panama (1868) ............. 569,800 Mining Antiquina ........................ 42,453 Mining Tolima ......................... 43,450 Source: J. Fred Rippy, British Investment in Latin America, End, 1876, Journal of Modern Histogy, Sept., 1947. nominal capital in such enterprises also increased. The distribution of British investments in Colombia in 1890 is shown in Table XXVI. There were also British investments in corporate real estate enterprises and public utilities, mainly in submarine cables, gas plants, and telephones. Such was the magnitude and character of the British investments in Colombia a decade before the close of the nineteenth century. The railroad investment, together with the 1 rush of capital into mining, was the most outstanding feature of the movement of British capital into Colombia during this decade. However, British investment did not reach its maximum until 1931, but in the year 1913 the number of enterprises financed by the British probably reached its peak (see Table XXVII). m‘ . Ann-l"..- -m§‘“m I“ 104 TABLE XXVI BRITISH INVESTMENT IN COLOMBIA ENDING 1890 Total Economic Nominal Government Enterprises . . No. _ Investment Securities Nominal (pounds) Capital 5,399,383 1,913,500 23 3485.883 Source: J. Fred Rippy, A Decade of British Investment in Latin America, p. 38, Journal of Modern History, Nov., 1948. TABLE XXVII BRITISH INVESTMENT IN COLOMBIA ENDING 1913 (government bonds and economic enterprises) Total Government Economic Railways Investment Bonds Enterprises 6,654,094 3,388,874 3,265,220 3,265,220 Source: J. Fred Rippy, British Investment in Latin America, End 1913. p. 231, Journal Modern History, Sept., 1947. F-__. .1 105 British investment in government bonds exceeds their rail- ways investment, and even their economic enterprises. The invest- ment in railroads includes eleven railroad organizations. British investments in economic enterprises include those made in shipping, public utilities, trading companies, and in financial institutions such as private commercial banks, loans, and investment establishments. They were also engaged in manufacturing and processing. The year 1939 marked the decline of British capital abroad; re5ponsible factors were the rise of economic nationalism in Co- lombia and the British liquidation of investments abroad (see Table XXVIII) . British capital was invested in other diverse projects. It was invested altogether in eleven mines. The British financial petroleum enterprises operating in Colombia at the end of 1939 were the British-controlled Oil Fields Ltd., and the Royal British Shell Company. There was also some British capital invested in coffee plantations. Although British investment in Latin America had been grad- ually decreasing since 1931, it was not until 1939 that the devastat- ing effects of World War II were to sharply affect British invest- ments not only in Colombia, but also in other overseas countries. 106 TABLE XXVIII BRITISH INVESTMENT IN COLOMBIA AT THE END OF 1939 Total Government Economic , . Railways Investment Bonds Enterprises 5,797,087 3,252,480 2,544,607 2,095,444 1, l i Source: J. Fred Rippy, British Investment in Latin America, 1939, I p. 64. J 1 Before 1941, Britain had sold holdings worth 4,500 million pounds (see Table XXIX). Economic Significance of British Investments in Colombia In reviewing the work of the British in Colombia it was nec- essary to enter into statistical information, and this has been shown clearly on the preceding pages. After Colombia hadwon its inde- pendence, it looked abroad for financial and industrial assistance. Since neither Spain nor Portugal were able to tender it, it was to Great Britain that Colombia turned during most of the nineteenth century for capital, machinery, and technical assistance inithe 3 W. H. Koebel, British Explorations in South America, Ch. XXV, Investment in South America, Century Co., 1917. 107 TABLE XXIX LIQUIDATION OF BRITISH INVESTMENT, 1941 (in millions of pounds) Area Sold Western Hemisphe re ............................ 210 Canada ..................................... 905 South America ................................ 381 Source: Donald Bailey Marsh, World Trade Investment, p. 380. building of bridges and railways, and the development of ports, steamship lines, communication facilities, and public utilities in large cities. They also invested in banking, mines, and manufactur- ing; the latter, however, comprised only a small part of the total British investment. French Investment in the Republic of Colombia The largest single investment of French private investors in Colombia was the investment in the Universal Inter-Oceanic Canal Company, which was organized in 1881 for the purpose of construct- ing a canal across Panama, which was at that time part of Colombia. The total nominal capitalization of this corporation was over two ’4"! l' . m 1?“. pr- 1‘“ _~ .5: ru- 108 illion francs. The total French investments in Colombia are diffi- :ult to evaluate because of the disposition of the French to purchase securities in foreign markets, and minority holdings in economic enterprises controlled by capitalists of other nations. Table XXX is a tentative estimate of French investments in _’ Colombia at the end of 1902. French investments in real estate, including extraction of forest products, were rather heavy, comprising over 40 percent of 1....-.3.“ the aggregate in all economic enterprises. The approximate amount was 10 million francs. The amount of French capital in urban and agricultural properties and the exploitation of forest in Colombia has not been ascertained, but the aggregate in mining investment was calculated as 5 million francs. French Investment Following 1902 French capital flowed rapidly in Colombia during the decade 1903-1913. The aggregate nominal value of French investment in Colombia at the end of 1913 is shown in Table XXXI. This French investment was mainly in mining and government bonds. 109 TABLE XXX FRENCH INVESTMENT AT THE END OF 1902 (in thousands of francs) Government Economic TOtal I n ' 1 Securities Enterprises F 246,000 - 246,000 ‘ :1 .T F Source: J. Fred Rippy, Inter-American Economic Affairs, French Investment in Latin America, 1951, Vol. 2. g- —_,""‘“. ______- TABLE XXXI FRENCH INVESTMENT IN COLOMBIA AT THE END OF 1913 (in thousands of francs) Government Economic Total . . - Sec uritie 5 Enterprises 15,000 70,000 142,000 _— ‘R Source: .1. Fred Rippy, French Investment in Latin America, Inter- Lmerican Affairs, p. 62, 1951, Vol. 2. 110 French Investment After the First World War Largely because of the impact of the first World War, French nvestments in Colombia rapidly declined. The fall in the exchange value of the franc in contrast to the more stable United States or English currency sharply reduced dividends in all instances in which the gold clause of the contracts could not be upheld, and made it profitable at the same time for Colombia to pay off French debts 'in paper francs when this could be done legally and conveniently. Moreover, economic conditions in France immediately after the war, and again after the depression, did not, in general, favor investment. The aggregate nominal French capital in Colombia at the end of 1938 was probably considerably more than 90 million francs; but it is impor- tant to bear in mind that the value of the franc had dropped decidedly since 1913. In terms of United States dollars, which had also been reduced in value in 1934, the franc had fallen from nearly twenty cents to a fourth of a cent. The figures in Table XXXII represent estimated French capital in Colombia at the end of 1938. Information on French investments in Colombia after 1938 is very scant. A considerable influx of capital may have entered Colombia during the following decade, but French assets were frozen during World War II in order to prevent their utilization by the Nazis. ' ‘iwmi‘ m-f 1 1" 7"“ '9 :3 111 TABLE XXXII FRENCH INVESTMENT IN COLOMBIA AT THE END OF 1938 (in thousands of francs) Government Economic Total . . . Securities Enterprises 90 ,000 72,500 17,500 Source: J. Fred Rippy, French Investment in Latin America, Inter- American Affairs, Vol. II, p. 67, 1951. Table XXXIII is based mainly on estimates made by the Office of Strategic Services of the United States. Stated in francs, French investments may well have reached their peak in Colombia in 1943. The value of French capital steadily declined after the First World War. The main reason for this was the liquidation and sale of the canal company and its subsidiary railway, together with the political instability of Colombia. Such new French capital as may have fled to Colombia during the months following the termination of World War II was undoubtedly more than counterbalanced by liquidation, sales, and redemptions of existing investments. 112 TABLE XXXIII FRENCH INVESTMENT IN COLOMBIA, 1943 (in thousands of francs) Country Total Colombia .................................. 121,600 Source: J. Fred Rippy, French Investment in Latin America, Inter- American Affairs, Vol. II, p. 70, 1951. United States Investment in Colombia United States enterprises began to expand in Colombia as early as 1886. The movement, however, was not sustained, and the United States foreign investment had little attention until after World War I. This date marked the peak of a period of prosperity in the United States which coincided with financial stringency and political disturbances in Europe, and provided an impetus for the first real interest on the part of United States financiers and indus- trialists. The exact figures of the transactions prior to 1914 are unknown, but probably were as shown in Table XXXIV. These investments may be classified in order of importance as follows: railways, canals, agriculture enterprises, newspapers, and mercantile establishments. The brief history of these early 5' WI- “WA' ":‘m‘-'$Ofi1. 113 TABLE XXXIV INVESTMENT OF UNITED STATES AT THE END OF 1898 (dollars) Total Railroad Loans U rb an State All Othe rs 14,000,000 8,000,000 3,500,000 1,000,000 2,000,000 , Source: J. Fred Rippy, The Capitalist in Colombia, p. 16. 177;. “4‘55; '0" .'. . investments were discussed in the last chapter. In 1913, the United States investments decreased enormously. Table XXXV shows the amount of investment at the end of 1913. The main reasons for this decrease were the Colon fire of 1885 which destroyed half of the town, the subsequent revolutionary disturbances in the State of Panama (which was trying to separate from the republic of Colombia), and the feeling of the United States investor that under such disturbed conditions his capital was in con- stant danger of being confiscated or destroyed. But the principal factor why the United States investment capital decreased was the ‘secession of the Panama Canal Zone from Colombia in 1903, with the aid of the United States, which resulted in a deep hatred in Colombia for anything connected with the United States. Roughly, these comprised the investment activities of the United States in Colombia prior to 1919. 114 TAB LE XXXV UNITED STATES INVESTMENT IN 1913 (dollars) Investment Amount 55 United States Fruit .......................... 2,000,000 1 Bananas Companies .......................... 200,000 g: Mines ................................... 10,000 i All others ................................ 800,000 .. Source: J. Fred Rippy, The Capitalist in Colombia, p. 28. From 1918 to 1924 came the oil boom. United States citizens began to engage in the oil industry in Colombia. The actual invest- ment did not exceed 45 million dollars. The Tropical and Indian Corporations expended 30 million in refineries, roads, and pipelines. Then came the period known as the "Dance of Millions." From 45 million dollars invested in 1920, there was, at the end of 1926, 80 million dollars, and at the end of 1929, 280 million dollars. It is believed that in 1928 United States capital in Colombia amounted to more than twice the total of all other foreign investments com- bined. Most of the investments of the United States in Colombia were securities sold on the New York Stock Exchange. 115 The special circular sent out by the Bureau of Foreign and Domestic Commerce of the United States on September 29, 1928, commented on the amount of the United States loans to Colombia since 1920. Prior to 1920 Colombia foreign loans had been floated almost a. -.1-—_-L\-'- exclusively in Europe. In the eight years that had since elapsed practically all the foreign financing by the central government, the ’m M. uh. I department, the municipalities of the Colombian Republics, had been done by the United States. This loan was distributed as shown in Table XXXVI. The so-called "Dance of the Millions" aroused great contro- versies in the Colombian press; the public was alerted. It was thought that the credit of the nation was in danger. The minister of finance decided to place the issue before the Colombia Congress, which in June, 1928, passed a law stating that the National Govern- ment would thereafter have complete control over the contracting of future loans by all Colombian departments and municipalities. Security For These Loans The loans made by the national government were not secured by specific guarantees, but the department and municipality loans 116 TABLE XXXVI UNITED STATES LOANS TO COLOMBIA FROM 1926 TO 1929 (dollars) Recipient Amount Central Government ....................... 64,445,307 Agriculture Mortgage Bank .................. 16,000,000 Department C ............................ 65,520,000 Municipalities ............................ 25 ,10 9 ,000 Miscellaneous ............................ 21,904,000 Mining Companies ......................... 15,000,000 Oil Companies ........................... 20,046,000 Total .................................. 215,324,557 Source: The Capitalist in Colombia, p. 38. g“ 117 were secured by rather extensive mortgages on public properties and revenues. For example, in the Department of Antioquia, bonds were secured by the net operating income of the Antioquia Railway, together with 75 percent of the departmental tobacco tax revenue. The loans were soundly employed in public projects such as buildings, highways, and railroads, improvements of rivers and .l "ALQr: .5... an .m-iv.-_.Lr harbors, public health, or for the refunding of loans contracted at higher rates of interest. Besides these large loans, there were also I... . large sums invested in oil, mining, meat packing, agriculture, and other enterprises, to the amount of 20 million dollars. Some of the important United States companies operating in Colombia at that time were as follows: Capitalization South America Gold, Platinum ......... $10,000,000 Choco Platinum Delaware ............ 5,000,000 Colombia Emeralds Company .......... 5,000,000 Agricultural enterprises of the United States were numerous: Colombia Sugar Corporation ........... $ 2,000,000 United States Company .............. 13,500,000 Atlantic Fruit Company .............. 4.000 .000 I-‘i'u‘. 118 Other forms of American properties in Colombia were city real estate, equipment, and stocks of goods to the amount of nearly 2 million dollars. Defaults of the Colombia Bonds The business recession which began in the latter part of 1929 marked the first major world economic depression. The change in business conditions and price levels made it more difficult for debtors to meet their obligations. The result was the failure of many government bonds and corporations of Colombia to pay the full interest on their bond issues in the United States. The collapse of coffee prices, with the resulting depreciation of the currency, caused the Colombian government to announce on October 31, 1951, that it was unable to obtain the necessary foreign exchange to pay the service on its dollar bonds. The Economic Effects of Investment from 1913 to 19294 Between 1913 and 1929 the history of Colombia was charac- terized by important changes in material progress. During this 4 J. Fred Rippy, Historical Evolution of Spanish America, Ch. XIII, Progress in Colombia, Crost Co., 1943, p. 286. 119 period. British and United States investment served as great stimuli to the economic development and activity of the Republic of Colombia. The increase in Colombian investments was phenomenal from 1915 to the world depression; national trade increased from 63 million to 223 million pesos--an increase of 254 percent. Most of this trade represented the transactions of foreign individuals and corporations—- that is, a large part of the profits went to foreigners--but even so, the national wealth was increased by the payment of more wages and greater economic activity. Telephone lines increased during this 16-year period from 5,094 miles to 34,680, the number of telephones increased from 3,177 to 21,110, the mileage of telegraph lines almost doubled, and railway lines increased more than eightfold. In 1913 there were only a few automobiles in the nation; by 1929 there were 13,300. Colombia supplied and exported mainly petroleum, hides, coffee, and cacao. During this period foreigners engaged his business in the region purchased from abroad an approx- imately equal amount of manufactured products such as locomotives, steel railways, and other machinery. 120 Public Investment in Colombia Until 1930, the foreign investment in Colombia was monopo- lized by private capital invested in minerals, foodstuffs, and other raw materials, and in public utilities industries. The colonial nature of such investments in Colombia is shown by the disproportionately large volume of direct to portfolio industry. During the latter phases of the great depression, a slight shift toward government loans and investments could be observed. The defaults of foreign debtor’s, the economic depression of 1929. the flight of capital to the United States, and the Johnston Act of 1934 helped to make the decade of the 1930's one in which United States investment abroad decreased. Private investment in Colombia declined, and yet there remained roads yet to build and extensive development programs to finish, which were not by their nature very attractive to private investors. Differences of opinion exist about the role of public invest- ment, but regardless of such an issue, it is obvious that in some fields such as repairing earthquake devastation or making roads, the propriety of using public funds is generally accepted. '3‘“ u: ‘71—5-‘4 ,. 121 The Export-Import Bank. The most important public agency for lending large sums to Colombia has been the Export-Import Bank of Washington. This bank was created in 1934 as an export credit agency. to meet the emergency caused by the growth of bilateralism and restriction in foreign trade. According to the National Planning Council of Colombia, the Export-Import Bank has been the largest single lender to Colombia during the life of the bank. Of the 83 million dollars loaned, a great portion has already been repaid. Good returns have been in evidence from these loans. Irrigation works in the Magdalena Valley have made thousands of acres, formerly arid, into good crop-producing fields. Export-Import loans for transportation, hydroelectric power, and reconstruction of the capital of Colombia in 1945 have been of enormous value to the Colombian economy. Of the 257 millions of Colombia's public debt in 1952, about 40 percent was owed to the Export-Import Bank and IBRD. Recently, the Export-Import Bank and the International Bank for Reconstruction and Development have been providing over half of the new loan funds obtained by Colombia. See Table XXXVII for the loans of the Export-Import Bank in Co- lombia. 122 TABLE XXXVII LIST OF LOANS OF EXPORT-IMPORT BANK Export-Import Serial Purpose Amount Loans No. Outstanding May 1, 1941: $20,- 296 Financing the purchase $14,842,717 000,000 loan to the of U.S. equipment for Republic of Colombia construction of public service July 1, 1943: $14,- 346 Financing projects to 9,239,750 500,000 loan to Caja develop and improve de Credit Agrario agriculture March 29, 1944: $2,-— 351 Financing cost of 50,000 787,528 625,000 loan to Em- kilowatts additional ca- pera de Energic pacity Electrica December 10, 1947: 438 Construct seagoing hop- 1,714,790 $1,978,609.44 loan to per dredge for use in Co- Rejublic of Colombia lombian post-improvement June 8, 1950: $750,- 442B During violence in 1948 450,000 000 loan to Republic there were 28 streetcars of Colombia destroyed in ijpta February 21, 1951: 442D Financing U.S. railroads 62,728 $105,000 loan to spare parts Mblic of Colombia March 27, 1952: $2,- 518 To make funds available 1,717,538 600,000 loan to Em- for the completion of fa- Presa Electrica cilities financed under credit 351 May 27, 1954: $372.4 562 Expansion of telephone 372,000 000 loan to Empresa equipment W June 17, 1954: $53,- 564 Highway equipment 53,000 000 loan to Empresa W K Source: Export—Import Bank of Washington, Fourteenth to Eighteenth Semiannual Report to Congress, Washington, D. C. "‘7'" ’- “an-1.3.113- _— 4.7 123 International Bank for Reconstruction and Development. In ad- dition to helping the Colombian government in planning its economy, the IBRD and the government sponsored a visit by an expert from a New York investment firm to Colombia to advise concerning ways to increase the flow of capital in production to private enterprises, 1 and on means to develop markets for public securities. Also, the i IBRD arranged for the services of a firm of engineering consultants ,i' to study the administration and financial aspects of the pr0posed re- 3” organization of the Colombian government facilities and communication programs. The government has since retained this firm to coordi- nate and supervise the execution of the national railroad program being financed by the IBRD. IBRD projects. The Farm Machinery Project was made pos— sible by Loan No. 18 CO. The loan amounted to 5 million dollars, at a rate of interest of 3.5 percent per year, over a period of seven years; it was dated August 19, 1949. The amount disbursed as of September 30, 1953, was $4,925,441 (the balance of $74,559 has been canceled). The borrower was the Caja de Credit Agrario, Industrial Minero. A description of the project is as follows: The purchase of agriculture and equipment for repair and maintenance centers (the machines include heavy and light tractors, with complementary 124 equipment, tools, et cetera). The farm machinery project loan bene- fits the economy of Colombia by increasing farm production to meet eXpanding domestic needs. About 4 million dollars have been ex- pended in tractors; purchase of hand tools amounted to $210,000. This machinery has been used to. expand cotton production and to increase production of rice in regions which are very fertile and suited to mechanization. The Anchicaya Hydroelectric Project was made possible by Loan No. 38 CO. The loan amounted to $3,530,000, at an interest rate of 4 percent per year, over a 20-year period; it was dated November 2, 1950. The amount disbursed as of September 30, 1953, was $2,899,749. The borrower was the Central Hidroelectric del Rio Anchicaya. The project may be described as construction of a 24,000-kilowatt hydroelectric plant, together with the necessary transmission lines. The plant will supply power to the city of Cali. The project was started in 1950, but the progress was slow for lack of capital. After the IBRD loan was made, the work progressed satisfactorily . i The Highway Project was made possible by Loans No. 43 CO and No. 84 CO. The total amount of the loans was $30,850,000 (No. 43 CO amounted to $16,500,000, and No. 84 CO was $14,350,000). Ff. 2....— .4.-..--—_.-—__,_,1...._T _.._..__'.._— 1'1 9 125 Loan No. 43 CO was made at an interest rate of 3.25 percent, and Loan No. 84 CO was made at an interest rate of 4.75 percent, both over a period of 10 years. The date of Loan No. 43 CO was April, 1951, and that of No. 84 CO was September 10, 1953. The borrower was the Republic of Colombia. The project may be described as an 1 emergency program to remake the 2,906 kilometers of deteriorated 3' sections of the major truck roads (80 percent of these roads needed paving), and the construction of 155 kilometers of new connecting- :. link highways. The total cost of the program is 109.8 million United States dollars, and represents 199 millions in local currency. Forty United States contractors are carrying out the project; the work has progressed despite adverse weather conditions. The IBRD has sta- tioned a highway engineering consultant at Bogota since 1951 to assist the Ministry of Public Works and to keep the IBRD informed of the progress of the project. The Magdalena River Valley Railroad Project was made pos- sible by Loan No. 68 CO, which amounted to 25 million dollars, at ,an interest rate of 4.75 percent, over a period of 25 years. The date of the loan was August 26, 1952. The amount disbursed as of September 30, 1953, was $3,752,810. The borrower was the Republic of Colombia. The project is part of a broad program being carried 126 on to improve the Colombian railroads. The plan is: (1) to build a railroad line 235 miles long in the Magdalena River Valley to con- nect the country's eastern and western rail networks (120 million dollars). Contracts for the construction work were signed in April, 1953, with two Colombian firms and one American firm, and work is getting under way. The project is expected to be finished in 1956, although some sections will be opened to traffic earlier. United States Direct Investment, 1929 to 1936. The United States direct investments in Colombia at the end of 1936 were in most instances lower than at the end of 1929. Changes during these years in the type, value, and distribution of investments were numer- ous. One of the most important reasons was the depression which, by 1931, had become world-wide. The depression resulted in the failure of many enterprises and the reduction of the net worth of many others as a consequence of the losses incurred. The total amount of investments in Colombia in 1936 was $107,549 in com- Parison to $123,994,000 in 1929. More than half of this total was invested in the production of raw materials. Mining, petroleum, and public utilities were the first groups in value. 127 United States Direct Investment, 1936 to 1940. The period from 1936 to 1940 was, in general, more favorable than the period from 1929 to 1936. Investments in Colombia totaled $111,616,000 at the end of 1940. More than half of these investments were concen- trated in the production of raw materials and petroleum. Seventy- five million dollars of the total of $111,616,000 was invested in pe- troleum. A comparison of 1936 and 1940 valuations of identical foreign investments is desirable, but the lack of available industry data, owing to the fact that some companies have sold or liquidated and some new ones have been formed, together with the fact that the methods of valuation are not comparable, make it impossible to do so. Table XXXVIII shows a comparison of American direct in— vestment in Colombia during 1929, 1936, and 1940. Although the Export-Import Bank has been the primary agency through which United States public funds have been channeled to Latin America, other government agencies have also participated. United States departments, bureaus, and agencies have helped and assisted Colombia. The departments of Commerce and Agriculture have utilized such appropriations. Funds have been also utilized in Colombia, and a number of loans have been made by the subsidizing of Reconstruction Finance Corporations. 128 TABLE XXXVIII AMERICAN DIRECT INVESTMENT (in millions of dollars) 1929 1936 1943 124.0 107.5 117.0 7; Source: Foreign Investment of the United States, State Department, 1 p. 48. United States Direct Investment, 1940 to 1950. Direct invest- ment in Colombia increased from 1943 to 1950. It amounted to 193.4 million dollars. The increase followed the decline of 1929 to 1943. The flow of new investment capital after the end of World War II was into petroleum and manufacturing. Manufacturing investments grew most rapidly in Colombia. In 1929 the investments in the food and meat-packing indus- tries accounted for more than half the total investments in Colombia. The depression of 1930, and World War II, caused manufacturing investments to drop, and they did not recover until after the war, 1 when many sizable manufacturing investments in Colombia were encouraged. The main factor was, of course, the war, because Colombian markets were cut off from European sources which earlier had 129 supplied a portion of imported manufacturing goods. This factor led to increases in manufacturing investment. The largest amounts were invested in chemical products, electrical equipment, and motor vehicles,(see Tables XXXIX, XL, and XLI). Although most United States petroleum investment in Latin 1, America was in Venezuela, there were sizeable investments in 1 l Colombia. ,i Effects of Investment from 1940 to 1950 Increased use of capital equipment and the concentration of investment on various projects greatly increased from 1940 to 1950. This was especially true in the war years: 1940 to 1945. A high proportion of Colombian investment from 1940 to 1950 was in agri- culture and motor vehicles. In petroleum, investments were almost entirely confined to developing existing fields and adding refining and transportation facilities, which yielded results early by increas- ing the amount of petroleum products marketed; on the other hand, little was invested in exploratory drilling, where costs would have been higher and results less rapid. Although the cement, iron, and steel industries, which required large amounts of capital, advanced more rapidly than other expenditures, they made up only a small part of the total industry. 130 TABLE XXXIX DIRECT INVESTMENT ABROAD OF THE UNITED STATES IN COLOMBIA, 1950 (in millions of dollars) - T - ° - Petroleum Manu rans Trade Finance Miscel facturing portation laneous 111.6 24.8 29.2 8.8 3.9 3.0 Source: Foreign Investment of the United States, 1950, United States Department of Commerce, A Supplement to Survey of Current Busi- ness, p. 44, 1951. .__ ._.‘a‘___m_w_ . _ _ _ -.~ - _.. TABLE XL DIRECT INVESTMENT IN COLOMBIA, 1950, BY TYPE OF FOREIGN ORGANIZATIONS, NUMBER (in millions of dollars) Item Numbe r Value Total ............................. 152 193.4 Foreign corporations .................. 68 75.3 Branches .......................... 34 113.1 #- Source: ForeiJEl Investment of the United States, 1950, United States Department of Commerce, A Supplement to Survey of Current Busi— ness, p. 45, 1951. 131 TABLE XLI UNITED STATES MANUFACTURING INVESTMENT IN COLOMBIA, 1945-1950 (in millions of dollars) 1945 1950 Increase , 6 25 19 percent 5 Source: Foreijg Investment of the United States, 1950, United States I Department of commerce, A Supplement to Survey of Current Busi- ness, p. 11, 1951. Investment in public facilities including highways, railroads, large-scale electric power plants, and community work accounted for a portion of the investment. There was a small amount of public-building construction from 1940 to 1950; there was some con- struction of eXpensive housing for the well—to-do, and some hospitals and institutions of higher learning. It must be concluded that an impressive increase in national income was achieved from 1940 to 1950. In no previous period in Colombia's history was the rate of 1 economic growth as high as in this period. Colombia would be doing exceptionally well if the same rate of expansion per capita were to continue over the succeeding ten years. 132 Investment Climate in Colombia At the moment, conditions are favorable for the investment of North American capital in Colombia. The government, although not confirmed in its position by popular election, seems to have the confidence of Colombian and United States business. There is a feeling that in order to achieve economic development of the country and a higher standard of living it will be necessary to use foreign capital. Under 1950 legislation, foreign capital may be freely im- ported into Colombia and freely repatriated, although an export per- mit must be obtained to ship dollars out of Colombia. In general, the law does not require that Colombia own part of a foreign-owned business. Foreign nationals are permitted to engage in business in Colombia on the same terms as Colombian nationals, for all practical purposes. Recent legislation concerning petroleum develop— ment offers more encouragement to the investment of foreign capital. The government encourages the eXport of crude oil by levying no export or severance tax against it. 1 The government receives a royalty based on a sliding scale ranging from 4 to 13 percent, with an average of 10 percent. Never- theless, two of the obstacles to the development of foreign capital are the low incomes and the low standard of living. Colombian 133 businessmen know this, and have tried to remedy it through legisla- tion to increase the purchasing power of the peon (worker), while industrial expansion is helping to increase the standard of living. Colombia still derives about 40 percent of its income from agricul- ture. The diversification of the economy would help the investment climate. In late years extensive studies have been made in the woolen, rayon, silk, and cement industries. CHAPTER IV SHORTCOMINGS OF THE MONETARY SYSTEMl With this chapter we pass from a study of the nature and source of foreign investment to a consideration of the part that the monetary system plays in the general economic organization of ,, Colombia. It is the purpose of this chapter to consider the nature ~“— of credit that exists today in Colombia and to indicate in a general way the shortcomings of such institutions of credit as factors of economic development in Colombia. Functioning of the Present-Day Banco de la Rgpublica The main thesis in these pages is that the Banco de la Repub- lica of Colombia has not supplied the economy in any state of its deve10pment with the optimum amount of money because the money flow in certain periods was excessive, and at other times it was deficient relative to the flow of goods. 1 Much of the information in this chapter has been taken from the United Nations Department of Economic Affairs, Economic Moi Latin America, 1948, 1949, and 1950, New York. 134 ‘i&.;,. 135 Under the present-day monetary mechanism the money supply might rise in periods of prosperity and decline in times of depres- sion as much as in the past. There is no automatic regulator that governs either its rate of increase or decrease; instead, management I _. Mrmsmg of money supply is relied upon more than ever before. The central ‘2’. bank is in a position either to facilitate or to halt this expansion. as, J: The central bank, however, can facilitate the expansion by. lending 7 i V: 7.1.5.3er directly to the government, which will strengthen the free reserves "‘-------5’ of the bank, or by lending to the banks through rediscount or advances, which will strengthen the free reserves of the bank, and can con- tract the credit of the economy by using the same measures in a reverse manner. Brief Review of the Situation of the Banking System in Colombia For several years, it has been evident (for the general eco- nomic situation of Colombia) that a fundamental reform or reorgani- zation was inevitably necessary in the banking system (see Chapter I). The inadequacy of the Colombian banking mechanism to provide for the requirements of business activities of the country has long been evident. It was necessary to permit the existence of extensive inno- vations in its banking practice, sanctioned first by experience of 136 older nations. These are exemplified in the custom of dividing the accommodations of larger business enterprises among a considerable number of banking institutions. In the early part of the decade from 1920 to 1930 it was for the first time recognized as the outgrowth of fundamentally wrong organization of Colombian banking system. The weakness of the Banco de la Republica was apparent failure to control inflation in the decade following World War 11. However, these conditions were slowly appreciated, and the legislation of Congress subsequently attempted to adopt measures for complete rectification and reconstruction even of the very foundations upon which the present-day banking system of Colombia rested. The case calls for a thorough reconsideration of the theory upon which the Colombian banking system has been based, as well as the thor- oughness with which it has been conducted. The test of soundness in any banking system is its ability t0 withstand the onslaughts which develop as the result of friction inside the economy mechanisms, as well as those acts that are due t0 changes of a more profound nature, in the relationships of eco- nomic groups. The Colombian banking structure has not found it- Self able to withstand such a test, and the following questions have inevitably arisen: (1) What must be done to adapt the Colombian 137 banking system to immediate necessity? (2) What long-run changes must be attempted in order to make it responsive to the states of soundness and safety, thereby reducing the danger of a recurrence of the banking difficulties which have been conspicuous since 1929? The problem involves fundamental questions of central bank- ing, and they require a treatment which shall include within itself a discussion of central banking relationships-~of the banking system as a whole, as well as international aspects of its reserve system. The banking problem in Colombia thus becomes a question of both commercial and central banking structure and management, as well as a restoration of international soundness. Status and Operations of the Banco de la Regublica Before turning to recommendations for measures in the mone- tary structure for economic deve10pment and investment in Colombia, it is necessary first to outline the increase of money supply of the Banco de la Republica, the lack of credit of financial institutions other than central bank, and to enumerate the shortcomings and de- ficiencies of the present system that require correction. As is well known, an inflationary situation has influenced the economic history of Colombia during the last decade (see page 16), and still 138 is a characteristic of the Colombian economy. The index of consumer goods prices provides the measure of Colombian inflation (see Table XLII); the average index price rose from 100 in 1940 to 272 in De- cember, 1949. Usually, the rise of price (which is, of course, the result _of much expenditure without an equivalent supply of goods) is coupled ._. fl-‘-—=-_Mx‘v 'n—‘Ar --ba—‘. 4 . 4 with an increase in the money supply from the Banco de la Reserve. m.- r'. The relationship between money supply and the level of prices in Colombia is shown in Table XLIII. The term "money supply" is here defined to include the total of currency outside banks, plus de- mand and term deposits at commercial banks. Savings deposits are not taken into consideration. From 1940 to 1949 the cost of living, or price level, rose 172 percent, and the money supply increased 340 percent. The war period was characterized by unavailability of imports, which led to postponement of purchases. Many individuals had huge amounts of cash, which were channeled into speculation, such as real estate, which rose from 65 million pesos to 311 million pesos. In other words, during World War II the money supply, or purchasing power, increased at a faster rate than expenditures on goods and services. TABLE XLII PRICE INDEX, 1940-1949 139 _- Item 1940 1946 1948 1949 Price of consumer goods ...... 100.0 151.8 250.1 271.7 Food .................. 100.0 192.7 265.7 275.9 Housing ................ 100.0 146.8 199.8 248.0 Clothing ................ 100.0 197.3 250.1 277.7 Construction materials ....... 100.0 226.8 254.4 286.6 Coffee ................. 100.0 276.2 398.9 716.1 Cattle ................. 100.0 217.0 335.5 415.3 Shares ................. 100.0 186.9 126.5 130.1 Wages ................. 100.0 151.0 255.0 - Source: The Basis of Development Program for Colombia, p. 288. TABLE XLIII INCREASE IN MONEY SUPPLY AND PRICE, 1940-1949 Item 1940-1946 1946-1949 1940-1949 Increase in the money supply: In millions of pesos . . . . 527.8 199.6 127.4 ‘ In percent ........... 248.6% 27.0% 342.6% Increase in cost of living: In index point ......... 81.8 89.9 171.7 As percent ........... 81.8% 49.4% 171.7% Source: The Basis of Devplopment Program for Colombia, p. 289. ’5'. _8Mfl_M—_M. nub—.rx. ’ 140 Table XLIV shows the main sources of the money supply: (1) the increase in foreign exchange during the postwar period, (2) the exPansion of the volume of bank loans to businesses, and (3) the extension of bank loans to the government. The most significant of the sources was bank-lending to pri- vate individuals throughout the period from 1941 to 1949. The ex- tension of bank credit to businessmen did not happen without an increase in Banco de la Republica credit. As a result, the demand for consumer goods and services tended chronically to exceed avail- able supplies at any given level of prices, and prices were continu- ally pushed upward. The persistent rise in prices in turn set up reactions that reinforced the inflation. For example, the increased profits resulting from the lag in wages behind prices, instead of causing an increase in the over-all prOpencity to save, and thereby tending to wipe out the "inflationary gap," tended to be Spent on the hoarding of goods (a special form of investment expenditure) in view of anticipated further increases in price. The inflation, moreover, provoked demands for higher wages, as workers sought to make good the decline in their real wages, and thereby resulted in a familiar wage-price spiral; it increased the size of the budget deficit, in view of the inevitable time lag between public expenditures on the _ f——v. . - v j” ,2 141 TABLE XLIV SOURCES OF MONEY SUPPLY, 1941-1949 (in millions of pesos) Sources 1941-1945 1946—1948 1948—1949 Foreign exchange ........ 265.9 -121.9 -11.0 Credit to government and public institutions ........ 25.2 163.6 13.3 Banco de la Republica Government .......... 15.8 66.4 2.8 Stabilization fund ...... - 1.6 28.2 - 5.3 Caja de Credit Agrario . . - 5 33.7 4.9 Banco Central Hipoticario . . - 3.2 29.0 - 4.8 Caja Colombiana de Ahorros. - 8.0 - Commercial banks Government .......... 16.7 — 1.7 15.7 Credit to private borrowers . 107.9 220.6 56.4 Banco de la Republica. . . -21.1 17.5 51.9 Commercial banks ..... 129.0 203.1 4.5 Treasury Currencies ...... 1.8 5.7 - Total ............... 400.8 268.0 58.7 !"_" Source: The Basis of the Development Program for Colombia, p. 297. Table 107. 142 one hand and the assessment or collection of taxes and other reve- nues on the other. All these factors independently reinforced the inflation. The increase in production during the period was entirely inadequate to offset the prevailing inflationary pressures. Even with increased output, there was no increase in the propensity to save, since, as already suggested, all money income tended to be spent; ,; nevertheless, the inflationary process resulted in forced savings. Inflation has tended to discourage typical forms of voluntary a“... savings which had acquired growing importance in Colombia. Here may be found the sources of future savings for industrialization, when monetary stability can be restored. The principal objective of central banking is to promote monetary stability and to regulate the volume, character, and cost of the money supply in such manner as to be conducive to a healthy level of employment, national income, and economic development. The Banco de la Republica has not been in a position to render its full contribution to capital formation. The central bank and private banking facilities and resources are extremely limited in the country as a whole. Banking practices are founded on a strictly commercial basis except by the Industrial Development Corporation; loans are made almost exclusively to finance commerce or trade, rather than production of goods. 143 Bank Credit and Capital Formation The supply of money which is available from any central bank is unlimited, in a monetary sense. The government can print bonds and sell them to the banks. The government then has the money (bank notes) which banks have paid for the bonds. Meanwhile, the banks can use the bond certificates as the reserves behind new bank note issues or other types of credit extension. In this way, and on the basis of fractional reserves, the central bank can create a con- siderable amount of credit without government participation in issu— ing bonds; but it does not follow from this fact that the rising of capital funds in this way will immediately bring aboit unlimited amounts of capital goods. The operation does increase the amount of money and credit in circulation, and therefore the amount of actual or potential capital funds; but it does not automatically mean that capital goods will be produced or will be available in the coun- try. The net result of the whole operation may be merely to raise the price level of these reservoirs of resources, manpower, and technical skill.- During the ten. years the Banco de la Republica has been doing this, the results have been unsatisfactory. Capital goods have not been produced or made available in sufficient quantities, nor has the exPansion of consumer-goods production been of sufficient r.’ 3,": ‘ i H JME‘mF 7“.“ it‘lnemi ! v 144 size to utilize all the money and credit in circulation without sub- stantial rises in the price level. Success in attracting savings de- posits in recent years has been poor, due in part to the inflation, which had discouraged savings deposits, and in part to the attractive- ness of other investments which may yield 10 to 15 percent, as k‘tfln‘J’. ifqafii‘ compared with 4 to 6 percent from savings deposits in the bank. “ 7"— RA..H.:‘ r" Commercial banking, though relatively highly developed in Colombia, is concentrated in urban areas and large cities. Rural banking, aside from credit cooperative and money lending, is almost non- existent. Inflation It is generally agreed that inflation causes certain social injustices and gives rise to various economic evils. The effects of a large and continued inflation are quite pervasive. The economic and social cost of continuous inflation can be appreciated by consid- ering the shifts. in income and wealth, and the distortion of invest- ment, both of which reflect the uneconomic use of productive re- sources . 145 Shift of Income and Wealth In order to increase investment under conditions of inflation, businessmen must bid up the prices of materials and labor needed for investment, using for this purpose the credit made available to them by the banks. By offering higher prices and higher wages they attract productive resources away from the consumption field | into the investment field. Prices must rise in turn in the consump— ) i tion sector partly because income will be higher and because the supply of consumer goods will be diminished. The rise in prices and the lag in wages, particularly in the consumer goods industry, will increase profits and shift real income to the recipients of profits. It is out of these increased profits that the additional savings will take place, which is equivalent to the increase in investment that businessmen have undertaken on the basis of bank credit. The proportion of the increase in profits that remains as savings for the increase in investment will determine how large a shift in real income is necessary to induce a given increase in in- vestment. Some shift in income to profit-receivers is essential to secure the additional investment. The smaller the shift in income relative to investment, the less will be the social cost that the 146 inflation entails. In developed industrial countries like England or the United States, the shift in real income would be much smaller than in undeveloped countries like Colombia, because the high rate of corporate income and excess-profits taxes would take a consider- able part of the increased profits for the government. However, in Colombia, taxes on profits are generally much lower. A large part of the shift in real income to profits causes a disposable income for profit-receivers, and is used for purposes other than financing of new-home investments. That is why the shift in income to profit- receivers is much larger than the amount of additional investment undertaken by businessmen. If two-thirds of the increase in real income in the form of profits is used for all purposes other than to finance the increase in the volume of home investment, then the shift in real income will have to be three times the volume of ad- ditional investment financed through the inflation process. This kind of inflation, which increases the investment, will not only re- duce consumption in proportion to the investment, but also reduce the consumption of the public, which does not belong to the profit- receivers. It has been pointed out that the savings that businessmen are amassing from their inflated profits do not represent a net increase elm-“mun” H»... was." a, n 147 in real savings. In the absence of inflation there would have been some voluntary saving, however small. With inflation, some Volun- tary savings will cease because it no longer pays to hold savings in the form of money assets, and because the real income of some ,. savers will be reduced. From the moment that firms provide sav- ings out of profits in proportion to the reduction in savings by other sectors of the economy, there is no net increase in real investment; - 3‘ only a shift in the ownership of such investment from the general public to the profit—receivers. The public thus pays a high price for investment financed by inflation. Forms of Investment The form of the investments induced by inflation is as sig- nificant as their aggregate amount. It is well known that all in- vestments contribute in equal degree to the increase of higher pro‘ ductivity and higher standard of living. Prolonged inflation induces the wrong kind of investment: the investment is the type that offers Q great profits, and holding wealth rather than using it gives a high International Bank for Reconstruction and Development, The Basis of a Development PrOgEam for Colombia, Washington, D. C., 1950, p. 48. 148 degree of ownership advantages and less degree of use benefits. There are three kinds of investment in which the use benefits are low and the ownership benefits are high: inventories, some types of construction, and foreign assets. During an inflationary period cash accumulations and fixed money assets depreciate in real value, and such holdings are avoided. A businessman who is accumulating cash from inflationary profits may find that the opportunity for expansion in his own business is .:... limited; for such businessmen the accumulation of inventories is a desirable procedure, because prices will rise and supplies will be scarce. For this and other reasons, inventories are a favored type of investment. Another kind of investment likely to be abnormally expanded under inflation is real estate inveStment, particularly in the form of high-spriced apartment and commercial buildings. Professional people with limited opportunity for investment in an operating enterprise are likely to be attracted by real estate investment, with its sure appreciation of the money value of investment. Finally, the ownership of foreign assets is a form of holding wealth which may become extremely profitable. When continuous inflation leads to an expectation of exchange depreciation there is a strong tendency to hold some assets in the form of foreign funds. 149 Attempts at Credit Controls Despite the huge increase in bank credit underlying the eXpan- sion in Banco de la Republica money supply (1941-1949), few attempts at credit control were undertaken. Clearly, the Banco de la Repub- lica was not in a position to restrict its overdraft to the government by resisting the latter's demand. Nor could it easily restrict its loans to government agencies, since such loans were predominantly for the purpose of financing government-sponsored undertakings. Its ability, moreover, to restrict loans to private parties was limited by the fact that it was not equipped with adequate credit control power until a later time, when the inflation was very advanced. The Banco de la Republica was essentially a passive instrumentality of the authority, unable to pursue a credit-control policy of its own. Traditional weapons of credit control in a country with an undevel- oped financial structure such as Colombia would in any case have been largely ineffective. Nevertheless, a few attempts at credit control were made by the government and the board of the Banco de la Republica. The major form of credit control pursued by the authorities was to require government approval for all bank loans to private parties in excess of certain specified sums, the osten- sible purposes being a measure of qualitative control over large 4 :7?me T _ I :1“:— '. , 1 l , . “mow-J 150 loans, and also perhaps indirectly a measure of quantitative control over the aggregate of bank loans. Open-market operations, normally one of the most effective and flexible credit-control techniques available to monetary authori— T' 7 ties, are of no real importance in Colombia at the present time, be- 1 cause there is neither a money market nor a market for government I securities . l-o. !. . r In large part, the failure of the Banco de la Republica to effect deflationary tendencies has been due to a lack of apprOpriate controlling power and inadequate appreciation of its special functions and responsibilities as a controller of credit. The need is for Specialized institutions or other facilities for providing intermediary and long-term credits financed from gen- uine noninflationary sources, such as from long-term deposits or sale of securities to the public. But the baSic fact, which cannot be emphasized too strongly, is that, at the present time, there are no such sources of finance to be tapped on any appreciable scale, because of the continuing inflation, which makes potential savers reluctant to put their money into long-term deposits or obligations. 151 Foreign Exchange Operation and Central Bank One of the important functions of a central bank is to serve as the custodian of all or the bulk of a country's gold and foreign exchange reserves, and to administer the reserves in such a way as to safeguard the external value of the country's currency and to as- i sure its convertibility into other freely convertible currencies. The relationship between foreign exchange resources and internal credit conditions is important to Colombian economic con- ditions. The fundamental idea is to relate the monetary structure to external trade. Typically, the thesis is that in the prosPerity phase of the business cycle Colombia has an excess of exports sold at profitable prices, whereas in depression years imports increase relative to exports and relatively higher prices prevail. A small country like Colombia cannot influence world prices, and perforce must do the next best thing. So, according to this approach, the central bank should curtail credit expansion within the country during the prosPerity phase of the business cycle and expand credit during the depression phase; that is, the foreign exchange resources accru- ing during the prosperity phase should not be used to expand credit during that period. 152 This is not the standard procedure of the international gold standard, which would have involved gold inflow during the prosperity phase--accompanied by an expansion of credit, so that the resultant rise in prices in the exporting country would eventually cause a cur- tailment of exports. The "specie-flow mechanism" was built on the idea that an excess of exports from one country would be paid for by excess gold from another country; the importation of gold would lead to an expansion in the money supply in the country. In inter- national gold-standard theory, the supply of money and credit avail— able internally should expand in proportion to the increase in the gold stock; this followed because it was assumed that fractional gold behind the money in circulation either was or should be the dynamic force controlling the amount of money in circulation. So, according to this analysis, the balance of trade normally adjusts itself to changes in the price level, and vice versa. Capital Formation in Colombia It is probably true that, at the present time, there is more private venture capital in Colombia than ever before. The export Taken from Basis of a Development Program for Colombia, Chapter IV, p. 37. 153 surplus and high profits of the war period did much to bring this about; but even so, it is probably true that there are not at the present time enough private funds to finance a major eXpansion of capital goods. Of course, the situation would change as the amount of capital goods increased as a result of the increased investment. Given the present organization of Colombia, it is possible to say that capital funds are a necessary element in the development proc- ess, and even more important than capital funds in the process of creating capital goods are technically trained labor, plus the proper raw mate rials . Structure of capital formation. Capital formation as defined in national income statistics includes expenditures on plant and equip- ment, as well as in residential and business construction and changes in inventory holdings; it excludes investment in human resources such as improved health or education. It should bear in mind, therefore, that, on the one hand, estimates of capital formation presented here include luxurious homes and automobiles, while, on the other hand, theY exclude investment in workers' health and education other than those represented by exPenditures on Schools, hOSpitals, and health centers , . 154 Data on capital formation in Colombia are available for the years from 1939 to 1947; these data will give a comparison of capital formation during prewar and postwar years. The year 1947 was ab- normal because of the resumption of large-scale imports which had been suspended during the war, and because of increased prices. Table XLV shows that capital formation quadrupled from 1939 to 1947, rising from 153.5 million to 612.2 million pesos; between 1939 and 1947 the growth was arrested because it was a war period when imported equipment was difficult to acquire. Equipment's share in the total rose from just under half to almost 55 percentfrom 1939 to 1947. This was probably caused by both increased prices and greater equipment availability in 1947. In- vestment in labor remained at a steady pace, but dropped somewhat in 1942 and 1944. In the period as a whole, investment in building construction more than tripled. Table XLVI shows a more detailed view of capital formation in the years 1939 to 1947. In industries and public works, capital formation in equipment increased more than sixfold, while the rest of the economy more or less quadrupled. Total capital formation in agriculture, transportation, mining, and construction is at practically the same rate as the equipment swam—m, -». . . ~ A. ,. [’- fixnm -m; . I 155 TABLE XLV GROSS CAPITAL FORMATION, 1939 TO 1947 (in millions of pesos) Delivered Year Cost of Building 17:55:): Total Equipment 1939 72.0 50.1 31.4 153.5 1940 70.3 46.5 47.9 164.7 1941 74.4 51.4 51.7 177.5 1942 21.3 55.0 80.4 156.7 1943 44.6 52.4 62.8 159.8 1944 66.5 64.6 57.8 186.7 1945 102.1 118.2 80.4 300.7 1946 183.1 156.0 155.1 455.0 1947 332.0 170.0 110.2 612.0 Source: Basis of a Develogment Proggam for Colombia, p. 38. 57.04.! ‘ R. .‘E r 1 '“T—"“.-.. . - 1.7—7; mt?!- 156 TABLE XLVI GROSS CAPITAL FORMATION BY ECONOMIC SECTORS, 1939 TO 1947 (in millions of pesos) Economic Equipment Building Labor Cost Total S t 8C °rs 1939 1947 1939 1947 1939 1947 1939 1947 Industry... 13.8 87.3 1.1 7.5 1.4 8.8 16.3 103.6 Agriculture . 11.6 45.0 - - 3.7 11.5 15.3 56.5 Tran5por- tation . . . . 26.7 117.0 - - 10.4 32.0 37.1 149.0 Mining . . . . 5.0 19.8 - - 0.5 2.0 5.5 21.8 Construc- tion ...... 0.9 6.0 - - 0.1 0.6 1.0 6.6 Residential . - - 36.0 123.0 - - 36.0 123.0 Commercial - — 2.9 17.2 - - 7.9 17.2 Public work ..... 14.0 56.9 10.1 22.3 15.3 55.3 39.4 134.5 Total ..... 72.0 332.0 50.1 170.0 31.4 110.2 153.5 612.2 Source: The Basis of a Development Program for Colombia, p. 40. 5"mmfiitv .7. 1 t u . “‘2‘.— ' 3.13:1" 157 category in these sectors because there was no great variation in the behavior of the labor-cost component. Capital formation and imports. Imports are vital for Colom- bian capital formation. In 1947, from the total capital formation of _L'_" 1;. Lu. ‘ ' 'I. K'- 612.2 million pesos, about 22.2 million were in the form of imported items. Table XLVII shows the vital importance of foreign exchange costs of capital formation. The importance of the availability of foreign exchange and wise use of foreign exchange resources are therefore vital to the country's economic development. Magnitude of savings and investment in Colombia. In the past few years measurements have been made of savings and investments in Colombia; while the measures are not accurate, nevertheless they give the idea of the rate of capital formation in Colombia. In general, the methods followed in obtaining these estimates (Tables XLVIII and XLIX) are: Gross investments are taken from the basis of imports of machinery and equipment, plus domestic con- struction and domestic production of capital goods. Gross savings- have been derived from gross investments, by adding or subtracting the balance of deficits or surpluses on current accounts. .N.. ' TABLE XLVII 158 RELATIVE IMPORTANCE OF IMPORTS 1N VARIOUS SECTORS OF CAPITAL FORMATION FROM 1939 TO 1947 (in millions of pesos) Imports CGross Percentage Economic Sector apital Imported 1939 1947 1939 1947 1939 1947 Industries ........ 8.2 54.9 16.3 103.6 50.3 53.0 Agriculture ....... 7.1 27.7 15.3 56.5 46.4 49.0 Transport ........ 16.2 71.6 37.1 149.0 43.7 48.0 Mining ........... 3.3 13.2 5.5 21.8 60.0 60.5 Construction ....... 0.6 4.0 1.0 6.6 60.0 60.6 Residential building . . 6.6 22.9 36.0 123.0 18.3 18.6 Commercial building . 0.5 3.2 2.9 17.2 17.2 18.6 Public work ....... 7.3 24.9 39.4 134.5 18.5 18.5 Total ............ 49.8 222.4 153.5 612.2 32.4 36.3 STmrce: The Basis of a Development Program for Colombia, p. 41. a ‘- 159 TABLE XLVIII ESTIMATE OF SAVINGS AND INVESTMENT IN COLOMBIA (in millions of pesos) Item 1946 1947 Gross national product .................... 2906 3674 Gross private domestic investment ............ 324 447 Gross public domestic investment ............. 131 165 Total gross domestic investment ............. 445 112 Foreign balance ......................... - 75 -l93 Gross saving ........................... 380 419 Consumption ............................ 2526 3255 Loss in monetary reserves ................. 0 119 Net capital inflow ........................ 75 74 Source: "Financing Economic Growth in Undeveloped Countries," by Philipe Pazos, Chapter 16, Saving in the Modern World, p. 312. MIL 160 TABLE XLIX ESTIMATES OF SAVINGS AND INVESTMENT IN COLOMBIA. AS PERCENTAGE OF GROSS NATIONAL PRODUCT Item 1946 1947 Gross national product .................... 100 100 Gross private domestic investment ............ 5.3 11.2 Gross public domestic investment ............. 4.5 4.5 i Total gross domestic investment ............. 15.7 16.7 A Foreign balance ......................... - 2.6 - 5 3 Gross saving ........................... 13.1 11.4 Consumption ............................ 86.9 88.6 Loss in monetary reserves ................. 0 3.2 Net capital inflow ........................ 26 2.1 Source: Financing Economic Growth in Undeveloped Countries, by Philipe Pazos, Chapter 16, Savingin the Modegrn World, p. 3.12. 161 According to the estimates in the immediate postwar year (1946-1947), Colombia had gross savings that equaled some 9 to 16 percent of its gross national product (see Table XLIX). Colombia's average savings from 1946 to 1947, as a percentage of gross national product, was 12.2 percent. ,1 Investment figures presented a completely different picture. i . ~. 9- ?‘x‘m' ‘53-"? - Colombia drew against its monetary reserves in order to invest more 7" Z __ than saved. The rate of capital formation as a percentage of gross national product was 16.2 percent. The proportion of net capital inflow in gross capital formation was very small; it averaged 2.4 percent of gross national product. Colombia has been able to save a part of its income owing to a high level of exports and relatively favorable terms of trade; if world trade should decline, Colombia would suffer a setback in its economic deve10pment. Financial aSpects of capital formation in Colombia. Capital formation has been financed by inflationary methods during recent years in Colombia. It is clearly seen that a high rate of future capital formation will be compatible with price stability only if people Felipe Pasoz, "The Problems in Latin America," edited by Walter W. Heller, Savings in the Modern World, by University of Minnesota Press, 1953., 162 are willing to undertake an equally high rate of saving out of their current incomes and if the community as a whole is willing to im- pose high taxes. This will be considered in the last chapter of this paper. Origin of capital formation. There are no data giving an accurate estimate of the sources of financing capital formation in Colombia; nevertheless, it is possible to obtain information from the national income data of Colombia. Table L shows the national income divided in four sectors of the economy, with the purpose of giving a clear picture of the ex- penditures made, and the difference between the current income and the expenditures is the amount of saving. The income of the consumer amounted to 3000.9 million pesos, but consumer expenditures were only 2895.5 million pesos, and the consumer savings equaled 15.5 million pesos. Current receipts to business, including retained earnings and depreciation, equaled 278.5 million pesos, and business expenditures amounted to 447 million, giving an excess of expenditures over receipts of 168.5 million pesos. Foreign trade is equal to net imports, representing net receipts rather than payment to other sectors of the economy. [IT-TI“ .~ gut-0. “met-smut “.qu 163 TABLE L BUDGET FOR COLOMBIAN ECONOMY, 1947 (in millions of pesos) Sector Income Expenditure Saving 1 Consumer .............. 3000.9 2985.4 + 15.5 , 2 BuSIness .............. 278.5 447.0 -168.5 , 3 Foreign trade ........... - -l93.0 +193.0 4 Government ............ 436.4 476.4 - 40.0 , 5 Adjustment ............. - 42.0 - 42.0 - Total gross national product . 3673.8 3673.8 0 Source: The Basis of a Development Program for Colombia, p. 50. Income equals personal income after taxes; expenditures equal consumer expenditures. Income equals retained earnings plus depreciation charges. Expenditures equal net exports. 4 . . . Income equals tax receipts minus deficit of government enterprises; expenditures equal total goods and service expenditures plus domestic transfer expenditures. Equals domestic transfer expenditures. This must be de- ducted, since it is not a factor income or a product expenditure. 1 164 The income for the government sector is equal to current tax receipts of national, departmental, and local government, which amounted to 436.3 million pesos, and total expenditures, amounting to 476.4 millions, leaving a deficit of 40 million pesos. The total expenditures by all the sectors equal the total cur- rent income of all factors, and both are equal to the total gross national product for the year 1947. The equality between receipts and expenditures combined indicates that any excess of saving will be offset by an excess of expenditure. These data give us some insight into the financial side of capital formation. First, they show the small amount of the) total supplied by personal savings, indicating that personal savings in Colombia are very low. The greatest amount of savings out of cur- rent income are supplied by retained business earnings. Second, it seems that domestic investment was larger than the total of funds available out of current income; in other words, one-third of pri- vate domestic investment depends on external financing. 1 Resume The financial structure of the Colombian capital market shows a very uneven distribution of funds among various uses. These are 165 abundant supply of short-term credit for commercial and industrial purposes, but lack of short-term agriculture funds. There is an ample supply of funds for long-term investment in high-cost houses, but the supply for low-cost housing is insufficient. While long-term funds are available in substantial amounts to established corporations, it is very difficult for the outsider to get capital from the market. The present distribution of investment gives a tendency to over- development in certain sectors of the economy at the expense of other vital areas. The availability of medium and long-term credit within the banking system is generally restricted due to the pre- dominant role of the commercial banks and their short—term opera- tions. While there are Colombian governmental and semigovernmental institutions designated to accommodate the credit needs of industries, their resources for the granting of medium and long-trun credit are very limited. As far as private individuals are concerned, in addition to their preference for real estate investment, only a small minority are familiar with the factors affecting prices of industrial shares and the advantages of holding securities as an investment. Also, the organization of the securities markets in Colombia does not seem to be sufficiently widespread. As a result of the low level of saving Ir. 2.;- V V "in .t 4m.‘r._nwmc——i . v 166 and the prevalent investment pattern, the banking system, including the central bank, is looked upon as the most readily available source of development credit, both public and private, and the effect of it is largely inflationary. The financial problems of agricultural production are generally more acute than those of any other productive activity. An impor— tant institutional factor affecting agricultural credit is the present organization of the market for agricultural products, their loose network, the role of the middleman, and lack of agriculture cooper- atives. Agricultural credit receives little attention from commercial banks, particularly when these institutions consider profits which can be derived from financing trade activities, or the security that real estate offers. In recent years Colombia has made an effort to assist agri- cultural development by establishing, under government auspices, specialized credit institutions. They are intended to grant credit at 1C>W€r rates of interest and on terms which better meet the require- ments of agricultural production, but these institutions lack sufficient funds, and are not well distributed over the entire country. -"'t. '- CHAPT ER V RECOMMENDATIONS1 The fundamental relationship between monetary policy, eco- nomic stability, and economic development must finally be considered. The process of economic development is indeed complex. It re- quires much more than the provision of mechanical equipment. It requires an attitude receptive to the new fields and new methods of production, and institutional arrangements that encourage enterprise and investment. It requires a healthy and well-trained labor force that can adapt itself to new methods of production. Such an economic environment is not created in a short period of time. The following recommendations were made, thanks to the voluminous literature of the United Nations. Among the books read, the following contributed most: (1) "Methods of Financing Economic Development in Under-Developed Countries," by the United Nations, Department of Economic Affairs, New Yor, 1949; (2) "Domestic Financing of Economic Development," by the United Nations, De- Partment of Economic Affairs, New York, 1950; (3) "Measures for International Economic Stability," by the United Nations, Department Of Economic Affairs, New York, 1951; and (4) "Measures for Eco- nomic Development of Under-Developed Countries," by the United Nations, Department of Economic Affairs, New York, 1951. 167 168 Development, Investment, and Savings There is a fundamental basis upon which the problem of cap- ital formation may be considered. This involves the relationship between savings, investment, and income. In discussions of economic activity of underdeveloped countries, a phrase which is mentioned frequently is the "vicious circle of poverty." The most popular circular relationships of this type are those with reference to the accumulation of capital in underdeveloped countries. The supply of capital is governed by the ability and willingness to save; the demand for capital is governed by the incentives to invest; and so, then, a circular relationship exists on both sides of the problem of capital formation in such countries. On the supply side, there is small capacity to save, because of the low level of real income, and the low level is a reflection of low productivity, which, in turn, is due to the lack of capital. The lack of capital is the result of the small capacity to save, and so the circle is complete. On the demand side, the inducement to invest may be small because of the small buying power of the people, which is due to the small real income, which again is due to low productivity; the low level of productivity, however, is the result of a small amount 169 of capital used in production, which in turn may be caused at least partly by small inducement to invest. Capital Formation and Saving The increase of capital formation depends upon the increase of the margin of saving, which depends ultimately upon the increase of productivity. At the present time Colombian productivity is very low, owing to the lack of sufficient capital, and this lack of capital is due to the narrow margin of saving, which would result again in low productivity. The national economy consists not in the accumulation of gold and silver, but in the increasing productivity of a country, brought about largely by the accumulation of capital in the form of machinery and other productive equipment. In other words, increase in pro- ductivity requires that some of the income must be saved and invested. Savings release part of the country's productivity energies from the services of direct consumption, and thereby make them available for the production of capital goods. Savings are related to economic welfare, reflecting the willingness and ability of the different groups Ragnar Nurkse, Problems of Capital Formation in Under— developed Countries, Oxford University Press, 1953, p. 5. ( '1‘ 170 in the population to add to their wealth. The slowness of economic progress today in Colombia is due in great part to its inability to acquire extensive savings, and to channel savings into production uses. Financing Economic Growth When economic resources are absent or very scarce, not even a perfect financial institution would be able to improve the economic development of a country. The improvement of the finan- cial mechanism is to guide the utilization of economic resources to a better development and prevent dislocation of resources by the process of economic activity. The financial structure of Colombia is capable of improvement in a number of ways, and striving for such advancement must be part of all policies directed toward development. The first and most obvious means of securing addi- tional resources is from voluntary saving. The desire to accumu— late moderate savings can be increased by a restoration of monetary stability, which is certain to have a beneficial effect on the saving habits of those for whom the holding of money assets is the only convenient form of saving. Small savings may be stimulated by providing easier access to savings institutions and postal savings ‘fi‘fiei-imr‘z'. ' “I ‘-_._*n 171 institutions, with convenient forms of deposit, and by offering savings institutions as convenient places of deposit, and saving certificates and saving bonds as convenient forms for holding savings. Never- theless, it is very unlikely that any considerable increase in small savings can be secured merely through a better institutional arrange- ment. The most important factor limiting the amount of small sav- _ . ' them-3'1.— ‘ .. ings is the low level of income. __.._v__'._.—.'_ A ‘ ~\ ' ' 1-. ’71-. t Institutional arrangements are likely to be of greater signifi- cance in determining the direction, rather than the size, of invest- ments. The primary objective of development, an increase in the productivity of labor, can often be achieved not only by means of great irrigation and power projects and large industrial undertakings. but also by providing the small farmers, the cottage workers, and the small manufacturers with very modest financial assistance and technical advice. The rural banks should associate themselves with a farm-management service which would provide advice on farm management and the proper use of credit production. If the provision 0f credit and the dissemination of technical knowledge thus go hand in hand, the traditional fear of the farmer in dealing with financial institutions and hesitation in introducing better methods of cultivation could be ove rcome. 172 Promotion of Voluntary Saving by Individuals and Enterprises Measures which can be taken to increase the willingness of the general public to deposit savings and to create confidence in the stability and banking and financial institutions are: 1. Measures of general economic policy, such as avoidance of inflation, and the stability of financial institutions. 2. Encouragement of organizations, especially in rural areas, which collect savings and lend productively as part of their general activities. 3. Extension of the banking system by establishing branches of the government bank, using local authorities as agencies of gov- ernment banks. Fiscal Methods Fiscal policies exercise an important influence on methods of financing open to underdeveIOped countries. The objectives of fiscal policies in connection with economic development are as follows: 1. Fiscal policies may be used to counteract the inflationary Pressure arising from economic deve10pment by reducing over-all ef- fective demand. In doing so they establish conditions in which anti- .=&;¢ ‘3‘” 173 inflationary methods of financing, especially voluntary saving, as well as encouragement of forming capital, may be employed. 2. Fiscal policy may be employed by a combination of posi- tive inducement for desirable investment and negative discouragement of undesirable investment. This objective is achieved by differential rates of taxation: a discriminative tax system or grant of tax ex- emption in suitable directions. Subsidies may be viewed as negative taxes. or as an extreme case of tax exemption, and thus may be brought under a broader concept of fiscal policies. 3. Finally, fiscal policies may also be designed to promote such objectives as changes in income distribution by progressive income taxation, and others not strictly of an economic nature. The specific methods of taxation available for financing of economic development cover a wide range. They include tax on income (domestic consumption or turnover), taxes on imported consumption goods or other unessential imports, taxes on pr0perty (land taxes, estate taxes, et cetera), taxes on profits, and others. Conditions in underdeveloped countries, in which a high pro— portion of the national output may not reach the market at all, and nonmonetary transactions may be wideSpread, often creat difficult situations for fiscal administration. Unequal income distribution in 'IJ‘! I. v': 3.1;...m' iwmoul - C" “if. 174 nonmarket economies also make income taxation desirable. Accord- ingly, commodity taxation, land taxation, and similar means occupy an important place. The use of fiscal methods as a weapon of dis- crimination among different types of investment and expenditure is of special importance in underdeveloped countries. Widespread use must be made of such methods as directed subsidies, tax exemption , for certain imported commodities, tax exemption for enterprises using domestic primary materials, et cetera. 3...... Control of Money and Credit Supply Practically all the operations performed by a central bank have the effect of increasing or reducing its monetary liabilities. They also increase or reduce the total money supply, or at least the reserves of the banking system. The central bank will have to under-— take such operations whenever monetary conditions threaten to pro- duce an unwholesome expansion or contraction. In the Colombian economy there are three major sources where su;ch disturbances are likely to occur: (1) balance of payments, (2) commercial bank be- havior, and (3) government deficits. An active or passive balance of payments will increase or reduce income and prices, expand and contract the volume of money, 175 and affect both the demand and supply of bank credit; changes in commercial bank credit, whether or not accompanied by balance of payments disturbances, will have the same effect. A government deficit, which under prevailing conditions would have to be financed largely by the central bank itself, would likewise expand the money "mfien‘ ‘- 9',- supply unless instituted to offset a shrinkage produced by the other factors. The specific corrective action which the central bank may have to take would in part depend upon the origin of the disturbance. 1‘. A curtailment of bank credit, for instance, might be an appropriate means in case of speculative excesses, but not necessarily the means for dealing with an inflation produced primarily by the balance of payments. Likewise, open market sales might help to restrain a balance of payment boom but might not be feasible at a time when the government had exhausted the capital market and was drawing on the central bank. Bankirig Legislation 1 Creating adequate channels for credit control is only a por- tion of the institutional banking problem. Legislative provisions with respect to reserve requirements are another factor which may encourage or impede the pattern of development. Since this country 176 is largely agricultural, note issues are more important than deposits for the small farmers, many of whom do not have access to banking facilities. It may be observed that two or three different theories are exemplified in the note issue requirements of the banking systems of Latin America. The first theory reflects the principle advocated by the late Professor Kemmerer, which is the view that stability of a country's currency can best be insured by maintaining sizable reserves in gold or silver, with little or no flexibility. A second theory exemplified is represented by the principle held by Herman Max, a Chilean economist who served as financial advisor to some countries in Central America. His recommendations for complete flexibility in the issue function of the central bank are opposed to that of Professor Kemmerer. The degree of freedom permitted the central bank is surely a factor of importance vis-a-vis development; the Kemmerer position provides for stability rather than development, whereas that of Max makes available to the central bank power to more effectively promote development. A. third, and relatively new, theory is represented by the work of Robert Triffin in the banking law of Guatemala. In these cases the reserve requirement varies with the maturity of the banks' exchange obligations. Thus, obligations m—.-, |. - v E- ‘5 c Ina—cunn- ,1 :2 l. . 177 under thirty days require 100 percent reserves; from thirty days to one year, 75 percent; from one year to three years, the reserve is 50 percent. This approach is different from the conservative Kem- merer position in that it requires no rigid reserves as an automatic check upon expansion. At the same time, it departs from the Max theory by focusing attention upon the foreign trade position of the country. This is particularly suited to Colombia, where economic welfare depends so much upon the balance of payments, requiring the central bank to hold reserves withla view to their anticipated foreign exchange position. Thus, if a large number of short-term obligations must be met, the central bank is required to anticipate its needs and accumulate reserves in advance. At the same time, complete flexibility is permitted in the expansion of the currency for domestic needs. In general, we may conclude that a flexible money supply is an important factor promoting economic deve10pment, while the older policy of requiring substantial and rigid reserves is a factor which may retard the development of the country. 178 Agricultural Financial Organizations Since agriculture is the principal economic activity in Colombia, the organization of agriculture is an institutional factor of great im- portance. It might be assumed that a government agency, such as the Ministry of Agriculture, would occupy a strategic place in the structure of an agricultural economy and exercise considerable in- fluence in the formulation and execution of policies for agricultural development. The improvement and extension of mortgage banks are posi- tive factors in economic development, for they are designed to give longer credit terms, e3pecially to agriculture, under conditions which the ordinary commercial bank could not meet. Here again it is the number of branches and flexibility of their function which count. When these mortgage banks are coupled with a decentralized credit system, the resources for long-term loans are widely distributed throughout the provinces. Much of the economic development in these agricultural regions lies in the direction of increased mechani- zation requiring investment in machinery and heavy equipment. Such large commitments can rarely be made by farmers unless some insti- tution provides funds that can be amortized over a considerable period. 179 The availability of mortgage credits also affects other objec- tives of economic development, such as diversification of crops to meet domestic needs and reduce imports of foodstuffs. This means a partial shift from large landed estates usually given over to a single crop cultivation to smaller units of production which are suit- able for crops such as beans, rice, and corn. Small farmers cannot h0pe to acquire land without financial help on a long-term basis. This provision of mortgage credit is a factor of greatest impor- tance in attacking one of the root problems of agricultural finances in Colombia. Conclusion Colombia is an overwhelmingly agricultural country, with about 65 percent of its working population engaged directly in agri- cultural and other primary production pursuits, and with coffee con- stituting over half of the total revenue value of its agricultural out- put. Because of its concentration on relatively few staple commodi- ties, the Colombian economy is subject to sharp seasonal and cyclical movements. Like other underdeveloped countries, Colombia has low real income per capita, low average productivity (reflecting the small amount of capital per worker and the lack of productive technique), 180 a high propensity to import, and a low rate of voluntary savings and of capital formation. The financial structure is not highly developed, there are no capital markets in the accepted sense of the term, and no really adequate facilities for mobilizing such savings as are currently made and for channeling them into productive investment. From a longer—range viewpoint, Colombian economic well- being depends upon a well-regulated capital investment program, and appropriate facilities for mobilizing them into long-term productive investment will definitely be required. The development of such facilities, however, will depend primarily on the restoration of monetary stability. BIBLIOGRAPHY Arrubal, Henao. History of Colombia. 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