L'expérience monétaire du Mexique
Authors: Hurtado Fernandez Ernesto , Villaseñor Eduardo 
Published: August 2023

Monetary experience in Mexico

During the last twenty five years Mexico, unlike many under-developed countries, has maintained a policy of complete external convertibility for its currency. This policy has enabled the country to avoid the worst effects of inflation and, at the same time, to increase production and maintain a sound financial position.

Mexico left the gold standard in 1933 and fixed the exchange rate for the peso at 0 278 dollars (U. S. A.). Since then the currency has remained convertible. This exchange rate coincided with the free rate observed during the worst year of the world depression. During the period up to the war, the increase in world trade allowed exports to increase while the newly created central bank gained the confidence of the population in the national currency. The increase in industrial capacity made it possible to finance investments by budget deficits and the expansion of credit without unfavourable effects on external payments. Two new problems arose during this period, however ; the finance of large scale public investments and the risk of short term capital flights.

During the war, export surpluses and the arrival of foreign capital greatly increased the gold and dollar reserves. The need to restrain the increase in home demand due, either directly to the purchase of consumption and investment goods, or indirectly to the expansion of bank credit, was a difficult task as the central bank did not possess the instruments of credit control. As a result, other measures could have been resorted to, in particular the revaluation of the peso and the creation of budget surpluses. But this was not done and, after the war, although prices had risen by 100 %, private cash balances and the credit creation potential of the banks were very high.

From 1946 onwards this excess demand stimulated a big increase in imports and gave rise to an external deficit. At the same time the government was unable to balance the budget and creation of credit by the banks continued. The subsequent loss of reserves obliged the authorities to devalue the peso in 1949 but still retaining its convertibility.

The world inflation of the Korean war provoked new price rises, however, and, at the same time, budget deficits become the rule after 1951. The period 1949-1951 , was therefore, very similar to the preceeding one. Export surpluses and the arrival of foreign capital stimulated credit expansion. From 1952 onwards exports fell off from their previous high level whilst imports continued to expand.

As a result, a new policy was inaugurated in 1954. The peso was devalued, credit expansion was limited by sterilizing bank deposits, investment demand was reduced, and taxes were increased to enable the budget to show a surplus.

Since then, capital returning to the country and the increase in home production, despite the fall in investments, have enabled the central bank’s reserves to be increased and the rise in prices to be held within limits.

There is no doubt that the preference given to economic growth rather than to the stability of prices and the rale of exchange has been helped by the maintenance of free convertibility which has stimulated investment by nationals and foreigners.