måndag, mars 24, 2008


Monetary reform for Chile

The intention of the author of this text is not to discuss whether the reforms the author of this text is proposing are wise or not. The intention is rather to show that the proposed reforms could be realized and that at least the copper mining sector of Chile would enjoy great benefits from the reform proposals.

My idea is in short to tie the value of the chilean peso to the world market price of copper. It's easy and could be done in the following manner.

  1. A rounding law according to which sums to be paid which are not a multiple of 1000 pesos are to be rounded is introduced. In case there is a need for change with smaller denominations than 1000 pesos, the private sector can mint token coins.
  2. All notes and coins, except the 1000 peso note loose their legal tender status. The coins with denominations below 1000 pesos are redeemed in US dollars at a fixed rate and the notes with denominations in excess of 1000 pesos are redeemed in 1000 pesos notes.
  3. If there is a deposit insurance, the deposit insurance ought to be abolished in order to make people suspicious about banks with expansionist lending policies. All taxation of capital gains and interest earnings also ought to be abolished in order to encourage savings.
  4. The Central Bank of Chile announces that it from now on will pay 20 million pesos per ton ton of copper delivered to the Central Bank. However, the Central Bank ought not to announce that it will sell copper at a rate fixed in terms of chilean pesos. I have choosen a low exchange rate for the chilean peso in order to establish purchasing power parity between Chile and those countries with the lowest real exchange rates.
  5. The Central bank of Chile announces that it's monetary policy interest rate is raised to one trillion percent in order to counteract the inflationary effects of the extremely high price of copper in terms of chilean pesos.
  6. The government of Chile abolishes all tariffs and quotas in order to encourage price competion on the domestic market. The massive initial devaluation would leave farming profitable anyway.
  7. The government of Chile declares that five grams of copper are legal tender for 1000 pesos.
  8. A special copper coin with no other inscript than "Cu" and a weight of 5 grams replaces the 1000 pesos note, which looses it's legal tender status after a short transition period.
  9. The Central Bank of Chile is closed.

The proposed reforms would greatly faciliate economic planning for the copper mining industry of Chile. The copper mining industry would produce legal tender and their only concern would be how much wages their workers would demand. If the world market price of copper would be high or low in terms of US dollars, euros and yens would not matter more than to the extent that a low world market price of copper in terms of foreign currencies would improve the ability of industries outside the copper sector to pay people higher wages than the copper mining industry, which in turn would depress the profitability of copper mining.

However; I do not think that the proposed reforms make too much sense. The cyclical fluctuations of the copper mining industry would just be transferred to other sectors and since copper is a key export commodity of Chile, the price of copper would after those reforms probably matter just as much as it did before.

Comments: Skicka en kommentar

<< Home

This page is powered by Blogger. Isn't yours?