Professor Edwin Walter Kemmerer to President Manuel Estrada Cabrera

Honored Sir: Commissioned by you in June of this year to make a study of the present currency system of Guatemala and to report to you such reform measures as I might consider desirable, I have the honor to submit to you the accompanying report.

The report is necessarily largely limited to the broader phases of the subject. Details will need to be worked out as the reform work progresses, and in the light of the experience gained in that work. If the reform is undertaken and the Guatemalan Government so desires, the writer will be glad to render the Government any assistance in his power in working out further details.

During his two months residence in Guatemala the writer has received most hearty and painstaking cooperation on the part of government officials, bankers and business men. The number who have so cooperated is so large that it is impracticable to mention names. For the assistance rendered by all these gentlemen the writer wishes to express his hearty appreciation. The assistance rendered by three persons however has been so great and so continuous that the writer cannot refrain from specifically expressing his appreciation for their cooperation. They are His Excellency Señor Guillermo Aguirre, Minister of Hacienda and Public Credit; Señor Federico Sanchez de Tajada, Chief of the Protocol; and the writer’s own secretary, Dr. John H. Williams, Assistant Professor of Economics in Princeton University, whose broad economic training and knowledge of Latin America have been invaluable to the writer in his work.

With appreciation, Mr. President, of your own most helpful cooperation, and of the many courtesies you have extended to me during my stay in Guatemala,

I am [etc.]

E. W. Kemmerer
[Page 280]

Report of Professor Kemmerer on Currency Reform in Guatemala

H. Summary of Conclusions

The principal conclusions of this Report may be briefly summarized as follows:

Among intelligent people interested in Guatemala, both citizens and foreigners, the demand is practically unanimous for a thoroughgoing currency reform that will give Guatemala a fixed gold standard.
The present unstable currency is a menace to Guatemala’s healthy economic life arid an obstacle to her economic progress. It is causing grave injustice to many classes in the community.
The present is an opportune time for currency reform, and a reform could probably be carried through today with less hardship than at any other recent date in Guatemala’s economic history.
Anything less than a thoroughgoing reform that would give Guatemala permanently a modern scientific currency system as good as the best should not be undertaken.
The monetary unit should be a gold unit consisting of 50 centigrams of pure gold, which, when coined, should be minted into coins .900 fine. It should be called an estrada in honor of Guatemala’s president. With a coinage charge of .3 per cent this new unit would be equivalent to one third of a United States gold dollar. It would fix the gold value of the peso at a rate of 30 to 1.
The new unit should be divided decimally into 10 pesos or 100 centimos, making the peso equal to 10 centimos. This would give the following table of equivalents:
E (estrada) 100 = P (pesos) 10
P 1 = 10ȼ (centimos)
$ (U.S. dollar) 100 = E 300
Guatemala should provide for the coinage at some foreign mint of a small amount of Guatemalan gold coins.
The new Guatemalan gold coins, and United States gold coins at the rate of E 3 to $1, should be unlimited legal tender in Guatemala.
Guatemala should coin on government account new silver coins at the ratio with gold of 15 to 1. These coins should be minted at that foreign mint from which the best terms can be obtained. Subject to the approval of the highest mint authorities in Guatemala and abroad, all the new silver coins should be .750 fine. They should be of weights proportionate to their denominations. The silver coins should be as follows: E 1, P 5, and P 2.
Guatemala should coin on government account at a foreign mint a nickel coin of P 1, and copper coins of 5ȼ, 2ȼ and 1ȼ.
Silver coins of the denomination of E 1 should be legal tender in one payment to the amount of E 100; silver coins of smaller denominations should be legal tender in one payment to the amount of E 10; minor coins of nickel and copper should be legal tender in one payment to the amount of E 1.
Existing coins of nickel and copper should be withdrawn from circulation as rapidly as possible and recoined.
A campaign of education should be carried on to make the public understand the general character of the currency changes that are being made, and the equivalence of the new coins and bills in terms of the old.
For the present no action should be taken by the government with reference to the circulation in Guatemala of United States paper money.
For the purpose of maintaining the parity with gold of the new silver coins and the coin of nickel and copper, great care should be taken not to issue them in excess of the normal demands of the public for coins of their respective kinds and denominations, and a gold reserve fund to be known as the Gold Standard Reserve should be created by the government. With the same purpose, all these coins should be receivable by the government in payment of all taxes and other government dues.
The Gold Standard Reserve should be a trust fund separate from all other government funds and used exclusively for the purpose of maintaining the parity of the fiduciary coins with gold. It should be not less than 30 per cent of the fiduciary coins in circulation, and should be constituted from the following funds, all of which should be turned into the reserve at the beginning, even though this would make a larger reserve than 30 per cent: (1) seignorage profits realized on the coinage of all kinds of money; (2) interest realized on that part of the reserve kept on deposit abroad; (3) premiums realized from the sale of exchange against the reserve.
The government should obligate itself to redeem in gold or its equivalent on demand its fiduciary coins when offered in amount not less than a stated sum; but should reserve for itself the option of making redemption in (1) gold coins of Guatemala or the United States; (2) standard gold bars; (3) drafts on New York (or some other important foreign financial center) at which most of its reserve would at the beginning be kept as an interest bearing bank deposit. When redemption is made in foreign drafts a premium should be charged equivalent to the normal expense of shipping gold between Guatemala and the city in which the draft is payable. Fiduciary coins thus redeemed should be withdrawn from circulation. The government should also authorize its foreign depositary to sell drafts abroad on the reserve in Guatemala against gold deposits abroad to the credit of the reserve. In other words, the principle of the gold exchange standard should be adopted by Guatemala.
For the purpose of permanently placing the currency and banking system of Guatemala upon the most modern scientific basis, a National Bank should be established, having the powers and duties that are usually possessed by national banks in other countries. The bank should have an authorized capital not less than E 30,000,000 and a paid-up capital, before beginning business, of not less than E 15,000,000. This capital should be subscribed chiefly by foreigners and should represent the broadest financial interests practicable. The bank should be subject to reasonable government supervision, and the government should participate in all profits realized by the bank above a certain percentage on capital.
The National Bank should be given liberal rights of note issue which should ultimately become exclusive. The note issue privilege, however, should be subject to such restrictions as would prevent the notes from being issued in excess, and as would assure the convertibility of the notes at all times on demand in gold or gold drafts.
The National Bank should lend money, in the form of its own notes, to the government at a reasonable rate of interest for the payment of the government’s debt to the banks.
Subject to certain qualifications, the present banks should be required to retire at once outstanding notes to an amount equal to four fifths the sum paid them respectively by the government in the settlement of its debt; provided that notes to that amount are outstanding, and provided further, that a limited note circulation should be allowed banks of issue whose charters have not yet expired, for the remaining years of their respective concessions. After the expiration of existing charters the National Bank should be given the exclusive right of note issue in the Republic. Notes of the National Bank should be unlimited legal tender so long as they are redeemable in gold or its equivalent on demand.
The National Bank should be authorized to make loans, discounts, and rediscounts, of short maturities, for the purposes of current production, but should not be permitted to make capital loans on real estate or other non-liquid securities.
The National Bank should be permitted to receive demand deposits against which it should be required to hold the same percentage of cash reserves as against its outstanding notes. It should be permitted to keep three fifths of its legal reserve in the form of demand deposits in approved foreign banks of high standing. Guatemalan banks should be permitted to keep part of their legal reserves in the form of deposits in the National Bank, but the National Bank should not be permitted to pay interest on such deposits.
The National Bank should be a depository of government funds, and the fiscal agent of the government.
The National Bank should be required to act as a clearing house for other Guatemalan banks if they so desire.
The bank should establish branches as soon as practicable in the principal cities of the Republic.
The bank’s charter should be limited to a period of 30 years.

In concluding this Report the writer wishes to say that the recommendations herein made are not made dogmatically. The problem is a complex one, and the conditions are continually changing. New and unforeseen conditions are likely to arise as the work of reform progresses. The details of preconceived plans should not be held too rigidly, but should be modified to meet unforeseen situations and varying conditions. The general principles of currency reform laid down in this Report, however, the writer believes are sound in theory, well supported by the experience of other countries, and thoroughly applicable to Guatemala.

  1. A single copy of this report in English was in the hands of Department officials on or before Oct. 14, 1919; mimeographed copies were available in Jan., 1920. No publication, either in English or in Spanish, was made until early in 1921, when a Spanish translation was published serially in the Diario de Centro-America (File No. 814.51/326).