Chile

Prior to the coming of the Spanish in the 16th century, northern Chile was under Inca rule while the indigenous Mapuche inhabited central and southern Chile. Although Chile declared its independence in 1810, decisive victory over the Spanish was not achieved until 1818. In the War of the Pacific (1879-83), Chile defeated Peru and Bolivia and won its present northern regions. It was not until the 1880s that the Mapuche Indians were completely subjugated. After a series of elected governments, a three-year-old Marxist government of Salvador ALLENDE was overthrown in 1973 by a military coup led by Augusto PINOCHET, who ruled until a freely elected president was installed in 1990. Sound economic policies, maintained consistently since the 1980s, have contributed to steady growth, reduced poverty rates by over half, and have helped secure the country's commitment to democratic and representative government. Chile has increasingly assumed regional and international leadership roles befitting its status as a stable, democratic nation.

Economical characteristics

 * Currency: Peso (ISO code: CLP)
 * Central bank discount rate: 8.25% (31 December 2008)
 * Commercial banks lending rate: 13.26% (31 December 2008)
 * Stock of money (M1): $14.72 billion (31 December 2008)
 * Quasi money (with M1 makes M2): $73.66 billion (31 December 2008)

Notable events:

 * Banking crisis: July 1898, 1907, 1976, 1980
 * Public default: 1826-1842, 1880-1883, 1931-1947, 1961, 1963, 1965, 1972, 1974-1975, 1983-1990 (external)
 * Years in inflation: 20.3% (share of years 1818-2009 with annual inflation above 20 per cent per annum)

Inflation in Chile, 1878-1914
Chile was a strongly export-oriented country, and badly hit in 1878 by an economic crisis in Europe. The banks were not able to redeem their banknotes for hard money, so the state suspended redemption and gave the notes a fixed exchange rate. In the next year, a war broke out with Bolivia and Peru (1879-1884) and Chile began to issue its own banknotes. Despite winning the war, their value against the golden Peso contined to fall; by 1886 to almost a half of the pre-war exchange rate. The unstable economic conditions and speculation led to an attempt to return to the old silver currency - foiled by the civil war in 1891. The currency fell even further. To stop the inflation, a change to gold was proposed, used then in almost all of Europe. A limit on the number of issued banknotes was made law and the state's treasury was used to cover this money. A large amount of gold (in value of $37.8 million) and silver coins ($8 million) were minted.

Even then, the economic conditions remained troublesome. A weakening of the export and mining industry coincided with bad harvests. In 1898, due to the threat of a war with Argentina, a bank run has found the banks unprepared. To avoid a collapse of the economy, the state took over the banks' banknotes. (However, they were lent to the banks at a 2% rate, and so they kept an indirect influence on the issue of banknotes.)

To prepare for the war, the president was authorized to issue further $50 millions of paper money. As a result of the new wave of inflation, the gold coins, kept at par with the paper money, have vanished from circulation and 'left the country' (see Gresham's Law). The convertibility of the paper money to gold was repealed. The monetary conditions did not recover until the increase in exports and economic recovery associated with the First World War.

Links

 * Chile on Wikipedia
 * Central bank of Chile
 * Country profile (pdf) from the Enterprise Studies page (part of the The World Bank Group)
 * Studies from the Library of Congress (1986-1998)
 * BBC country profile
 * How We Privatized Social Security in Chile by José Piñera
 * Chile’s Social Security Lesson For The U.S. by José Piñera, December 1997