DEPARTMENT OF COMMERCE BUREAU OF FOREIGN AND DOMESTIC COMMERCE JULIUS KLEIN, Director

TRADE PROMOTION SERIES—No. 30

PERUVIAN PUBLIC FINANCE

BY CHARLES A. McQUEEN Special Agent

I

PRICE, 20 CENTS Sold by the Superintendent of Documents, Government Printing Office Washington, D. C.

WASHINGTON GOVERNMENT PRINTING OFFICE 1926

CONTENTS

Page Letter of submittal „ v Introduction 1 Aspects of subject and preliminary remarks-..- 1 General characteristics—Historical influences 1 Method of treatment 2 Sources of information 2 Explanation of currency terms 2 Sketch of Peruvian financial history 3 Division into periods 3 History to 1879 _. 3 The guano period 5 The War of the Pacific and its immediate effects 10 Progress from 1886 to the present 1 12 Rehabilitation, 1886-1900 .. 12 From 1900 to the European War 19 From 1914 to the.present 23 Chapter I.—Revenue and expenditure 33 The fiscal system . 33 National revenue and expenditure 34 The budget law„_T . 34 Budgets from 1846 to 1926 36 Early fiscal results 37 Beginning of the modern fiscal system 40 Fiscal results, 1910-1924 42 Sources of ordinary revenue, 1913-1924 45 Itemized ordinary revenue, 1922-1924 46 Direct taxes 46 Import customs duties . 47 Export customs duties 49 Miscellaneous customs collections 51 Internal revenue ^ 51 Revenue from fees, stamp taxes, and consular service 52 Monopolies and public services 53 Government enterprises , 55 Miscellaneous revenue . 1 56 Review of principal revenues and their application , 57 New taxation.... 58 Budgeted and actual ordinary expenditures, 1913-1925 58 Expenditures for specific purposes 60 Revenue and expenditure of the departments and municipalities 60 Departmental finance 60 Provincial and municipal finance 61 Revenue and expenditure of the societies of beneficence-_~-. 61 in IV CONTENTS

Pago Chapter II.—The public debt.. ____ ... 62 External debt -- 63 Funded debt in sterling _ . 63 Funded debt in dollars _ 67 Recognized claims in French francs and dollars 69 Internal debt 70 Funded debt -____ 70 Debt to Tax Collecting Co__ 74 Bank loans and advances ----- 75 Various advances 76 Floating and contingent debt _ .: 76 Computation of debt in dollars •_ 77 Cost of the debt , _ 78 Other treasury responsibilities ~ 79 Origin of the present debt 79 Credit operations during and after the war '. 81 Developments of late years 82 The public debt before the War of the Pacific 85 Cancellation of the early foreign debt—The Peruvian Corporation. .88 General topics _ . J 91 Quotations of Peruvian bonds in London 91 Method of authorizing and contracting public debt 92 Chapter III.—Currency and exchange 93 Review of early monetary history _ 93 Bimetallism, 1821-1872. ______,93 The first silver period, 1872-1888 95 Inconvertible paper _ 96 The second silver period, 1888-1897 98 The gold standard, 1897-1914 _ . 98 Currency and exchange during and after the war 100 Issuance of the cheques circulares 103 Exchange depression—The economic collapse of 1921 ___. 105 The currency under the Reserve Bank ______108 Developments during .1923 and 1924... ______Ill The Peruvian exchange market ___— ... 113 Sterling and dollar exchange . __, . 116 Factors that influence exchange ___ 117 Appendix ---•.-.- 119 Current sources of information on Peruvian economics ... 119 Statistical tables ______121 Area and population by Departments 121 Altitude and population of principal towns 121 Railroad mileage, traffic, and revenues ___- 122 Bank statistics, 1897-1924 .____ 122 Individual bank statistics, December 31, 1924 123 Agricultural production by volume . 123 Value of mineral production, 1918-1923.- 123 Imports and exports, 1877-1924 .... 124 Imports by countries of origin . . 124 Exports by countries of destination . 125 Exports of sugar and cotton _ 125 Exports of minerals , - 126 LETTER OF SUBMITTAL

DEPARTMENT OF COMMERCE, BUREAU OF FOREIGN AND DOMESTIC COMMERCE, Washington, December 21, 1925. SIR: The report submitted herewith, Peruvian Public Finance, is the third of a series, of which the first (Chilean Public Finance) appeared last year and the second (Bolivian Public Finance) was published last April. Like the others, it is the product of studies made by Charles A. McQueen, formerly chief of the Latin American Division of this Bureau and later commercial attache at Santiago, Chile. The value of these expositions resides in the fact that the com­ mercial and industrial welfare and progress of practically all the Latin American countries are closely related to the conduct of public finance, involving fiscal operations, taxation, public loans, currency administration, and the like. A systematic review of such matters, therefore, has a fundamental and permanent usefulness that will, become more and more apparent in the future. It is believed that a reading of the following pages will point to the conclusion that Peru is entering a period of stable economic growth likely to surpass that witnessed in the past. Much Ameri­ can capital has already been drawn into productive use there. Our technical experience and the products of our factories are especially suitable for meeting the conditions and problems presented in developing Peruvian resources. The practical information contained in the present report, therefore, should help in the maintenance of progressive and sound economic relations between the two countries. Respectfully, JULIUS KLEIN, Director of Bureau. To Hon. HERBERT HOOVER, Secretary of Commerce. v

PERUVIAN PUBLIC FINANCE

INTRODUCTION

ASPECTS OF SUBJECT AND PRELIMINARY REMARKS

GENERAL CHARACTERISTICS—HISTORICAL INFLUENCES It is necessary to have some knowledge of Peruvian history in order to understand the evolution and the present features of the public finarices of the country. It is true that the world events of the past few years have largely determined the contemporary finan­ cial position, but it is equally true that modern methods and tendencies have sources far back in the rather eventful'history of the country. This is partly explained by the fact that the charac­ teristics of Peru are relatively very similar, in,a broad economic sense, to those of a century ago. The country is still a producer of raw materials, still has a comparatively large Indian population, and, of course, is composed of regions—the coast, the "sierra" or high mountain district, and the "montana" or Amazonian forest—- which are marked by a great natural dissimilarity' and which are somewhat isolated from each other in spite of the improvement in means of communication which has taken place. Until the opening of the Panama Canal, Peru was not so readily accessible to world trade as it is now. The direct effect of European commercial and financial enterprise and emigration was not felt there so strongly as it was in other American regions, and the pas­ sivity of the United States toward foreign trade until about 1900 hampered intercourse between the two countries. Therefore, Peru was not exposed nor, in fact, was it well adapted to the sort of inten­ sive development that went on, for example, in the River Plate region and in the United States. During that period of time, how­ ever, Peru passed through a number of most important and interest­ ing experiences the effects of which, taken in conjunction with the gradual development of the natural resources of the country, have their result in present-day conditions. It is a matter of general knowledge that the city of Lima, founded in 1535, was the seat of a viceroy whose jurisdiction extended over the greater part of South America. It was not until 1776 that part of Bolivia, together with the highlands of northern Argentina, was transferred to the viceroyalty of Buenos Aires. For several hun­ dreds of years, therefore, Lima was the administrative and commercial center of an immense region. It is also a matter of general knowl­ edge that the Spanish colonial system militated against the rise of an independent local economy. The interest of the Spaniards and their descendants was turned to the exploitation of mines and lands 1 2 PEETJVIAN PUBLIC FINANCE and not toward matters of self-government. This tended toward the creation of a quasi-feudal social system based on the labor sup­ plied by the conscription of Indians. Political thought naturally took an autocratic or militaristic point of view, which later accounted for the difficulty of adaptation to the forms of democratic govern­ ment and for the long survival of a preoccupation for bureaucratic positions among the higher classes. The despotic rule of the vice­ roy, tempered though it was by innovations introduced during the later colonial years, laid the foundation for the centralized form of government which has persisted to the present. Without going to the length of recording the political history of the years after the emancipation from Spain, we find that the terri­ tory of Peru has now been reduced to a small part of the original viceroyalty. While the successive authorities which governed Peru in its earlier years of independence introduced various tem­ porary changes in the form of government, the country finally resolved for a strongly centralized form of administration. The tendency, as elsewhere, has been for the proprietary class to live in the cities, especially in Lime, leaving the greater part of the country less modernized and with little local means or initiative for improve­ ment and progress. In a financial and economic sense, therefore, the country has developed along simple lines and important events have reacted upon "the nation as a whole.

METHOD OF TREATMENT The following chapters discuss in some detail Peruvian revenue and expenditure, national debt, and the related topics of currency and exchange. They are preceded by a brief outline of the economic and financial history of the country, in which an attempt is made to present the influential facts of history in perspective, leading down to a fairly large-scale presentation of conditions of the latest years, while the principal financial developments, treated more technically, in their respective chapters, are given weight according to their contemporary importance.

SOURCES OF INFORMATION The bulk of the statistical information has been obtained from the annual reports of the Ministry of Finance, the annual treasury state­ ment (Balance y Cuenta General de la Republica), the President's annual message, and unofficial domestic and foreign publications. The principal, and in fact the only general work on Peruvian finance, is the " Anales de la Hacienda Publica del Peru," the first 10 volumes of which were prepared by P. Emilio Dancuart and the other 12 by J. M. Rodriguez. These volumes cover events down to 1892 only. Thanks are due to the Pan American Union, to various American banks, and to the firm of W. R. Grace & Co. for their valuable cooper­ ation in furnishing publications and documents.

EXPLANATION OF CURRENCY TERMS The unit of Peruvian currency until about 1865 was the peso, the descendant of the old Spanish silver dollar. Later the silver sol of approximately the same value replaced the peso. The value of the PERUVIAN PUBLIC FINANCE 3 peso and of the sol was originally about 48 pence or five to the pound sterling. As, after 1870, the value of silver fell in terms of gold, the sol eventually was stabilized at 24 pence when the gold standard was adopted in 1897. The new gold unit then established, the Peruvian pound, was exactly the same as the British sovereign in weight and fineness. The contraction used to denote the Peruvian pound is Lp. (libra peruana). The pound equals 10 soles and each sol has 100 centavos. The sum of 18 pounds 5 soles 15 centavos is properly written Lp. 18.5.15; in practice often, Lp. 18.515. The dollar mark ($) is used in this pamphlet only to denote United States dollars, and the conventional sign (£) is used for the pound sterling. SKETCH OF PERUVIAN FINANCIAL HISTORY

DIVISION INTO PERIODS Peruvian financial and economic history may be divided most accurately and simply into two major periods, with a minor period between them, as follows: From the time of independence until the outbreak in 1879 of the War of the Pacific, waged between Chile on the one side and Peru and Bolivia on the other. The years from 1879 to 1886, during and immediately after the War of the Pacific. The time from 1886 to the present. The conditions prevailing in Peru before and after the War of the Pacific were so radically different that changes caused by any other events of passing importance are overshadowed. This was due not only to the direct results of the conflict but to the fact that Peru when the war began, was passing through a severe crisis that amounted to an entire financial overturn. The conjunction of these circum­ stances explains the presence in the modern Peruvian debt of some items originating before 1879 and the very recent recognition of certain claims dating equally far back. The present fiscal and mone­ tary systems are also the fruit of the reconstruction carried on after 1886. HISTORY TO 1879 Since Lima had been the center of Spanish colonial government in South America, the movement toward independence came later in Peru than elsewhere. The citizens of Lima declared their inde­ pendence on July 28, 1821, but the decisive battle of the ensuing campaigns did not take place until November, 1824, when the Spanish general Serna was defeated near Ayacucho by the forces under General Sucre. The final expulsion of the Spanish forces was effected in February, 1826, when those that had taken refuge in the Castle of Callao surrendered. Thus for nearly five years the Spanish colonial power was not effective, nor had a real govern­ ment been organized by the Peruvians. The years between 1826 and 1845 may be described as a time when political and military questions completely absorbed the attention of the people. There were wars with Colombia and Bolivia; from 1836 to 1839, Peru and Bolivia were joined in a confederacy under the rule of the Bolivian general Santa Cruz; from 1839 until 1845 the 4 PERUVIAN PUBLIC FINANCE country was under the domination of a succession of military chiefs who occupied the government with a greater or less degree of perma­ nency, exposed to revolts from various quarters and almost inevitably overthrown by a rival. It was not uncommon to have two or more leaders disputing power at the same time. As a result of this inability to establisn a stable administration, very little progress was made in commerce or industry.1 The intervention of the numerous governments, it is needless to say, created much confusion in financial affairs, so that the fiscal history of those times, even if it had been recorded, could riot be counted of importance. Some revenues were collected, chiefly from the customs and frdm taxes imposed on the aborigines and on business and the professions, but the system of the colonial regime was inter­ rupted. The economic power of the people was small; indeed, tfhe impoverishment of the mining industry during the final years of Spanish power is considered one of the causes of the discontent that resulted in the struggle for independence. The year 1845 has been taken as a dividing line, because it was then that the first president of administrative ability and adequate power came into office. President Castilla, who had been a soldier since boyhood, was the first ruler of Peru not of Spanish blood, having been born in Tarapaca of Italian and Indian extraction. He succeeded in establishing his power over the entire country, submitted to Congress in 1845 the first budget for the nation, and introduced a degree of system into public finance. Aside from the generally beneficial effects of peace during the rule of President Castilla, which lasted, with one interruption, from 1845 until 1862, this time is noteworthy as coinciding with the early exploitation of the guano deposits, which were destined to place Peru for 30 years on a relatively affluent basis, a most surprising contrast to previous conditions. Of the financial and economic features of the first quarter century of Peruvian independence, a few are worthy of mention. During the war of liberation, from 1822 to 1825, two loans aggregating £1,816,500 were obtained in London, but no interest was paid on these debts until 1849, when they were refunded. At about the same time, obligations were recognized in favor of Colombia and Chile for help extended in the revolution. The currency of the country, although nominally bimetallic, was in reality on a silver basis, the old Spanish dollar or peso having been retained as the unit. There were no banks until 1862. The mining of silver and gold, with some copper, continued to be one of the chief industries, although it had suffered a considerable decay, owing both to the exhaustion of the more accessible and richer deposits and to the troubled conditions of the times. The cultivation of sugar cane, begun in early colonial days, did not reach a commer­ cial stage until after 1830. An industry of relative importance was the gathering and exportation of cinchona bark from the southeastern transandine region. Nitrate of soda began to be exported from Tara­ paca soon after 1826. Steam navigation was established along the coast in 1840. Until that time trade remained in a primitive condition. Exports of small

1A vivid account of early political history, written in 1839, is contained in the first volume of Wilkes' "Expedition" (published in 1845). PERUVIAN PUBLIC FINANCE 5 quantities of the products just mentioned (excepting sugar), together with salt, wool, and hides, supplemented by personal effects of value, were sent abroad in return for essential manufactures.

THE GUANO PERIOD President Castilla's administration began, as we have said, the period of system in financial affairs. The first budget was put into effect in 1846; thereafter the income and expenditures of the Govern­ ment were recorded and discussion of financial matters appeared in the public press. Income between 1845 and 1850 was about 5,000,000 pesos per annum, with corresponding expenditures. The revenue from guant) began to assume importance, and we find that until the outbreak of the War of the Pacific the entire economic and financial history of the country revolved about this source of wealth. The first generally disseminated reports of the existence and extent of the deposits of guano on various desert islands along the Peruvian coast were made in 1827, but it was not until 1840 that studies made in Germany emphasized the value of this substance as a fertilizer. Soon thereafter, with the progress of chemical knowledge and the scientific study of agriculture, the topic was a matter of research and comment in other countries- of Europe and general attention was turned toward Peru. The Peruvian Government was not slow to see the advantages which the country might derive from the practical monopoly of so valuable a product (a ton of good guano was worth about £25 in Europe), and in 1842 declared all guano deposits' to be public property. In 1840 the first sale of guano to Europe had been made. This was followed by several others, with the result that about 295,000 tons had been exported up to the end of 1847. Most of the permits for shipment granted by the Government were based upon a partici­ pation in the profits and were accompanied by advances of money to the treasury or the cancellation of outstanding obligations. The exact income thus derived by the Government from the earliest trans­ actions in guano is unknown, but it is estimated at about 5,500,000 pesos, of which over 3,000,000 pesos represented the extinguishment of Government obligations. These relatively small returns were due to the fact that the use of guano in Europe had not yet become ex­ tensive and that the management of the business, both by the Govern­ ment and by the private interests involved, was experimental. It was in 1849 that the Government made terms with the English bondholders of the old issues of 1822 to 1825 by issuing new bonds to take up the principal and accrued interest of the outstanding issues. One-half of the revenue from guano sold in Great Britain was allotted as security. This operation was followed in 1852 by the sale of new bonds. The credit of Peru in foreign markets was soon established, and the result was the succession of later borrowings which made much of the history of the following years. The internal debt also received attention; a decree of 1848 had provided for the inscription of certain obligations, and this was followed by a law of 1850 which gave such latitude to the recognition of claims that a sum of over 23,000,000 pesos was recognized and funded. In 1850 the Government changed its method of handling the guano business. The old contracts were not generally renewed thereafter; 6 PERUVIAN PUBLIC FINANCE in their place the method of consignment was adopted. The con­ signees who were favored by the various contracts, amounting to 16 in all, undertook the extraction, loading, transportation, and sale of guano, on a commission basis, in the markets assigned to them under various conditions, depending on the wording of the several agreements. Under this system the average exports during the 12 years from 1850 to 1861, inclusive, were about 340,000 tons per annum, according to statistics. However, in the absence of an efficacious system of supervision, it is probable that a larger quantity really was shipped without record. The net return to the Govern­ ment during this time is put at approximately £18,000,000, a figure very large for the times and one that explains the receptivity of foreign financial markets to Peruvian loans in amounts entirely beyond the capacity of the country except for this one source of revenue." The income from guano furnished about three-quarters of the public receipts. The budget expenditures had increased greatly, but very little money was spent for productive purposes, the major portion serving to support military and civil establishments and pen­ sioners and to meet the public debt requirements. Nevertheless, the time was one of genuine prosperity. Trade responded to the increasing guano exports in remarkable fashion; exports were valued in 1855 at 13,000,000 pesos, and in 1860 at 35,000,000 pesos (guano accounting for 27,500,000 pesos); imports advanced in the same years from 9,000,000 to 15,500,000 pesos. An idea of the activity of the guano trade may be gained from the fact, according to Markham, that in 1860, 433 ships were loaded at the Chincha Islands off the Bay of Pisco. The years between 1861 and 1875 saw the maximum development of the guano trade. Shipments from 1862 to 1872 averaged 467,000 tons per annum, and the Government income from this source has been calculated at £33,383,628. But so large a part of this was swallowed up by the service of the constantly mounting public debt and by the various financial manipulations that characterized the complicated relations between the Government and the guano shippers that the public treasury was chronically embarrassed and deficits actually began to appear after 1861. Heavy expenditures, both of an ordinary and an emergency nature, were the rule, while sources of income other than guano were neglected. Affairs were in a critical condition from 1864 to 1868, aggravated by a state of war with Spain and disturbances of internal order. The accumulated deficit amounted to 17,000,000 pesos, aside from advances due to guano consignees, and the net income from guano sales was practically absorbed by the debt charges. At this time dissatisfaction with the policies previously followed became so acute that a lav/ was passed forbidding guano consign­ ments in the future (1867) and a commission was later sent to Europe for the purpose of making more satisfactory arrangements. By "satisfactory arrangements" then and thereafter was meant a contract of which the proceeds would satisfy the service of the foreign debt (all based on a pledge of the guano revenue) and at the same time guarantee a free portion for the pressing needs of the home administration. The negotiations of 1868 and 1869 resulted in the making of a contract with the firm of Dreyfus Bros. & Co., of Paris, which was approved in the latter year by the Peruvian Congress PEB.UV1AK PUBLIC FINANCE 7 in spite of the active opposition of the parties previously engaged in the guano trade and their adherents. The bases of the Dreyfus contract seemed more promising than the previously existing arrangements. Briefly stated, it provided for the sale to Dreyfus Bros. & Co. of 2,000,000 tons of guano on a certain price basis, subject to market conditions. Besides being granted the monopoly of the sale of the guano in all parts of the world, save North America, Dreyfus Bros. & Co. were appointed fiscal agents of the Government abroad. They assumed the service of the loan of 1865 (£10,000,000, which had refunded prior debts) and the settle­ ment of the outstanding accounts with the guano shippers by taking over the stocks of the latter and paying off the balances of the ad­ vances made by them to the Government, amounting to 15,000,000 soles. They were to make a regular monthly payment of 700,000 soles in Lima for the current needs of the Government. Had this contract been carried out without complications which were later introduced, it is possible that the country would have regained financial stability, but its advantages were nullified by later develop­ ments which plunged Peru into overburdening debt. President Balta, who had assumed office in 1868, desired to find some way of eliminating internal strife and invigorating the indus­ tries of the country. The best means of achieving this purpose was considered to be the building of railways, which not only would give occupation to many people and stimulate general business, but would furnish communication much needed as an encouragement to the development of agriculture and mining. In 1868 the Congress authorized a program of railway construction requiring many millions of pounds sterling. Under the best of conditions, the current reve­ nue from guano would not have sufficed for carrying out this work; therefore, bearing in mind the excellent credit still accorded Peru in foreign markets, it was decided to float new loans for the purpose. Accordingly, a bond issue amc anting to £11,920,000 and secured by 300,000 soles of the monthly stipend of 700,000 soles was sold in London in 1870 through Dreyfus Bros. & Co., and another of £15,000,000 was offered in 1872. The former loan was applied exclusively toward the cost of the railways from Lima to Oroya and from Arequipa to Puno, while the second was to be used chiefly for the line between Trujillo and Cajamarca and from Chimbote to Huaraz. The service of these loans absorbed the monthly stipend from Dreyfus Bros. & Co.—the principal support of the ordinary functions of government. At this time ordinary income from the customs and taxation was about 8,500,000 soles, while ordinary expenditure came to 17,000,000 soles. The accounts of Dreyfus Bros. & Co. with the Treasury showed a continual balance in favor of the former, and the final result in 1874 was that the guano revenues were completely absorbed by the debt service; a considerable amount (7,000,000 soles) was owing to Dreyfus Bros. & Co.; and Peru was still in need of money with which to cover its deficit, to meet its internal obliga­ tions, and to go ahead with contracted railway work to a sum of 40,000,000 pesos in excess of the proceeds of the loans of 1870 and 1872. At this time, another unfavorable development took place. Since 1863 the silver currency had maintained a fairly stable level of 8 PEKUVIAST PUBLIC FINANCE value. In 1872, however, the value of silver began to fall decidedly. In order to meet foreign payments there had been a steady exporta­ tion of silver, both coin and bullion, from the fairly important pro­ duction of the Peruvian silver mines. These foreign remittances finally became so burdensome, owing to the declining rate of ex­ change as expressed by the value of the silver peso, that it was not longer possible for the banks to keep on hand an adequate stock of metallic currency with which to secure their circulating notes* At this time there were in Peru 11 banks, all more or less dependent upon the business which they had enjoyed as intermediaries between the Government and the guano shippers whose privileges were ter­ minated by the Dreyfus contract of 1869. The difficulties of the banks began in 1871, increased in 1872, and were not removed by the Government decree of December, 1873, which specified the conditions under which the notes, in certain restricted volume, would be stamped as receivable in the public treasury. The conditions gradually grew worse until on August 1, 1875, the banks were relieved of the responsibility of converting their notes into silver. Still later, in 1877, the Government, in con­ sideration of the cancellation of an equivalent debt due the banks, definitely assumed responsibility for the bank notes. The deprecia­ tion of the latter advanced rapidly, and by 1878 the premium on silver coin over the paper currency fluctuated between 40 per cent and 80 per cent. As we have seen, the results of the Dreyfus contract were not satisfactory. The 2,000,000 tons of guano which the Paris house was authorized to export had been shipped, and by the end of 1877 its account with the Government showed a balance due it of around 18,000,000 pesos. However, a number of disputes on various points had arisen during the life of the contract, with the result that no final agreement was ever reached as to the exact settlement and termina­ tion of these financial relations until the matter was the subject of arbitration before The Hague Tribunal in 1921, which gave recogni­ tion of a balance of 25,000,000 francs due the Paris house. The termination of the Dreyfus contract practically marked the end of the guano period. It is true that another contract was made in 1876 with an organization formed by the British holders of Peruvian bonds, called the Peruvian Guano Co. (Ltd.), but this company did littie business, since it was first faced by the difficulty of selling guano in Europe in competition with Dreyfus Bros. & Co., which still had an unsold stock of 850,000 tons, and later was prevented from ship­ ping by the outbreak of the War of the Pacific in April, 1879. Fur­ thermore, the price of guano and other fertilizers had declined between 1873 and 1879, and the best deposits in Peru were exhausted or near- ing depletion. Thus in any case the end of the time of easy returns was near. Following the financial difficulties that have been cited in the pre­ ceding paragraphs, the service of the Peruvian foreign debt was suspended in 1876. The currency became inconvertible and rapidly depreciating paper. Internal political disputes became more acute as the financial distress deepened. Of the wealth reaped from the trade in gtiano, practically nothing remained to the State but the railways built with the proceeds of the bonds then in default. Ni­ trate of soda, of which valuable deposits were being worked in the PERUVIAN PUBLIC FINANCE 9

Province of Tarapaca, had promised to come forward as a profitable source of income to supplement the guano revenue, the industry hav­ ing been expropriated by an act of 1877. The income from nitrate helped to steady the financial position in 1877 and after, but before the fruition of the efforts to effect the necessary reforms and changes in financial policy the war with Chile began (April, 1879). Needless to say, the beginning of hostilities found Peru in a decidedly unfavor­ able position. The guano period had lasted almost 40 years. The wealth which it brought served as the mainspring of the commercial activity of the country, supported the public administration, furnished capital for the development of agricultural properties, and built railroads that put Peru far ahead of other South American countries in this respect. In an economic sense, the expansion which it encouraged so far out­ stripped the natural development of other more commonplace re­ sources as to result in a dangerously unbalanced position. The Eublic administration was faced by unprecedented responsibilities efore national life and institutions had become settled; as a result, personal aspirations and political rivalries fostered extravagant policies that brought about the paradoxical situations in which, in the words of a Peruvian chronicler, " the shower of gold poured on the public treasury had the odd and fatal result of impoverishing it more and more." The publications, both official and unofficial, of the last years of the guano period devoted little space to the consideration of topics other than the financial crisis. As to foreign trade, the totals of 1877 are given as follows: Imports, 24,179,000 soles; exports, 81,634,000 soles. There are no details, but the principal exports undoubtedly were guano, nitrate, sugar, wool, hides, and silver coin and bullion. Nitrate exports in 1875 had been over 7,000,000 quintals (1 quintal equals 101 pounds), but dropped to 4,500,000 in 1878, perhaps owing to the operation of the plan of expropriation. The cultivation of sugar had become of some importance after 1860, when modern machinery began to be imported, and late in the seventies over 100,000 tons were produced annually; of this a certain quantity was exported, although the exact amount is unknown. Another agricultural resource was cotton which, indigenous to Peru, had long been culti-f vated; the aboriginal spinning industry, however, had practically died out under the Spaniards and the production of cotton, though stimulated temporarily by the Civil War in the United States, relapsed into relative unimportance, from which it did not revive until near the end of the century. According to the fragmentary accounts available, the condition of silver mining from 1877 to 1879 was worse than at any previous time. There was a lack of technical knowledge (to remedy which a a school of mines was established in 1876, a measure that stands out because its effects survived the war and helped the subsequent recovery) and the mines were generally abandoned when the richest ores were exhausted or when water was encountered. The deprecia­ tion of the paper currency after 1875 also discouraged silver production. Of social conditions there are no adequate records, but a number of important developments took place. Negro slavery was abolished in 1855, the owners being indemnified at the rate of 300 pesos per 10 PERUVIAN PUBLIC FINANCE slave, paid in the form of " manumission bonds." In the early days of guano extraction on the Chincha Islands, coolies were brought from China to work there in a condition of virtual servitude. It is said that about 87,000 were imported from 1855 to 1874. Gradually the coolies were introduced to the mainland, and their labor helped the revival of agriculture after the setback caused by the liberation of the slaves. It would seem that the Indians of the coastal regions had not survived in sufficient numbers to furnish the labor necessary to work the plantations.

THE WAR OF THE PACIFIC AND ITS IMMEDIATE EFFECTS The time between April 5, 1879, when war was declared between Peru and Chile, and the beginning of the administration of President Caceres in 1886 was a period of calamity for Peru in both a military and an economic sense. The triumph of the Chilean arms was the climax of the difficulties toward which Peru had been moving since 1860. At the beginning of the war, as we have seen, the service of the Peruvian foreign debt had been in default for three years; such revenue as still was obtained from exports of guano was swallowed up in the satisfaction of advances owing to the shippers; the silver standard of currency had been replaced by inconvertible paper money of which the exchange value had fallen to less than a third of that of the old silver sol. It is apparent that the adverse outcome of the war, resulting in the loss of the Province of Tarapaca, with the valuable nitrate deposits that might have helped toward the recupera­ tion of financial stability, were but an accessory to the other detri­ mental factors just mentioned. It was this conjunction of misfor­ tunes which makes the war period the outstanding crisis of the entire history of Peruvian finance. The outbreak of war found Peru in an almost impotent situation as respects the resources available for military operations. A con­ temporary report of the Minister of Finance said that the Treasury was empty; the Government had drawn for six months ahead upon the payments due it from the Peruvian Guano Co. (Ltd.), which at the time had a monopoly of exportation to Europe; the current revenues from the customhouses were very small, owing to a very light movement of imports at the time; there was no revenue from nitrate, since Tarapaca had immediately been occupied by the Chilean forces and the nitrate consignees refused to make any pay­ ments. Notwithstanding the fact that almost one-third of the Gov­ ernment revenues had been expended on the army and navy for many years, the equipment was in poor condition and entirely inade­ quate to the needs of active service. Of the various means of ob­ taining funds, such as the floating of loans and the imposition of increased taxes, none promised immediate results. For five or six months after the beginning of the war various ex­ pedients were tried, none of which proved efficacious. The Govern­ ment did everything in its power to avoid the issue of paper money, but finally was forced to have recourse to this sole available means of obtaining cash. A law of October 28, 1879, authorized the issue of 32,000,000 soles in fiscal bills ("billetes fiscales," circulating notes for which the Government assumed the sole responsibility), the pro­ ceeds of which were applied partly to internal expenses and partly PERUVIAN PUBLIC FINANCE 11 toward various manipulations in the exchange market and in the pur­ chase of sugar and silver, the producers of which were obliged to sell to the Government. In this way, by means of an ingenious handling of the situation, it was found possible to set up abroad credits aggre­ gating nearly £1,500,000, while at the same time maintaining the exchange value of the paper sol at around 15 pence. By the end of November, 1879, much of the ground lost in the previous months of inaction had been regained and negotiations for the purchase of ships and munitions abroad were well under way. However, much of this advantage was lost when, in December, 1879, a revolt of the troops in Lima overturned the existing administration and placed the power in the hands of a dictator. The subsequent history of the war period offers relatively little of interest from a financial standpoint, in view of the rapid success at­ tained by Chile in its military operations. The munitions expected from abroad failed to arrive and after nearly two years of effort, Lima was captured by the Chileans. From the time of their entrance in January, 1881, until their departure in October, 1883, the invaders controlled the finances of Peru. The noteworthy feature of the Chilean administration of the revenues which came into its power was the immediate repudiation of the local paper money by its fiscal agencies. The provisional government set up in Lima during the Chilean occupation and recognized by Chile as the only agent with which terms of peace might be arranged, enjoyed but a short term of power after the departure of the invader. Until the restoration of the constitutional order in August, 1886, the country was practically in a condition of anarchy, marked by the establishment of inde­ pendent factions in various regions, local disorders due to bands of soldiers whose exactions or depredations were beyond the control of the authorities, the existence of martial law wherever it could be made effective, and the abuses committed by those who exercised office with impunity during the period of general confusion. The economic measures taken by the de facto government at the end of 1883 and during the beginning of 1884 were necessarily limited to the simplest acts of reestablishing the functions of government, regu­ lating the collection of income, and attempting the elimination of the paper money which was then in circulation to the amount of over 100,000,000 soles. Its efforts were disturbed by conflicts with the followers of General Caceres, who bad held out against the Chileans in the remote mountains and who now came forward as the champion of those irreconcilable to the peace treaty and other acts of the Lima Government. This internal strife lasted until 1885. At the end of 1885 the revolutionaries under General Caceres succeeded in expelling the opposition and instituted a return to con­ stitutional procedure, whereby Caceres was duly elected president. The question of the foreign debt remained pending. The nitrate deposits of Tarapaca had been lost to Chile. Chile was likewise in possession of the guano islands, although these were later relinquished. The paper currency outstanding represented a considerable responsi­ bility on the part of the Government. Numerous claims for services and supplies during the war period remained for recognition, not to speak of the internal debt held over from pre-war times. The 65880°—26t 2 12 PEBUVIA^ PUB1AC EI^A^CE industrial equipment of the country, including the railroads and sugar centrals, was in bad condition. All the banks had failed, with the exception of one foreign institution and one small bank in Callao.

PROGRESS FROM 1886 TO THE PRESENT The 40 years, more or less, that have elapsed since 1886 have seen the development of a new Peru. Industries which formerly were overshadowed by the importance of guano have come forward to put the national economy on a more stable basis and have contributed to the advancement of the people, not only by affording oppor­ tunities for individual enterprise but by encouraging the subordination of political to economic interests. Among the tangible accomplish­ ments may be mentioned the reform of the currency and the establish­ ment of a gold monetary standard, the extinction of the old external debt, the achievement of a practically self-supporting position in finance, an improvement in means of transportation and communica­ tion, a steady broadening of agriculture based upon the profitable output of sugar and cotton, and important advances in mineral production, especially that of petroleum, copper, and silver. Such developments have not come easily or spontaneously, for the topog­ raphy of the country does not lend itself readily to exploitation, nor has there been such an influx of immigrants as helped the growth of Argentina and Uruguay during the same period. Not all of the handicaps imposed by nature and by the effects of past history have been overcome. Nevertheless, progress has been encouraging in practically all respects. Had it not been for the intervention of the World War, this period of years could probably be treated as a whole. But the results of the recent war have been so important that it is necessary to divide the review of modern times into three sections: (1) From 1886 until 1900, when the gold standard became fully effective; (2) from 1900 to the outbreak of war in 1914, years of relative calm and consistent progress; and (3) the time from the outbreak of war in Europe until the present. These last years, because of their unusual character and because they so largely determine the present conditions which are of immediate interest to the reader, are subdivided and presented on a comparatively large scale.

REHABILITATION, 1886-1900 General Caceres assumed power on June 3, 1886. As a successful soldier, he was especially well equipped to restore public order; the authority of the central Government was once more established throughout the country, and the system of administration was reor­ ganized. The Constitution of 1860 was reinstated. In fact the political elements now in power called themselves " constitutionalists " indicating their purpose of putting an end to the regime of the emergency governments which had ruled since the advent of the dictator Pierola at the end of 1879. The financial situation was sufficiently discouraging. The amount of the public debt, both external and internal, was large although not exactly known. There was some silver money in circulation, but everyday business was done with inconvertible paper for which the Treasury was responsible; the amount outstanding was about PERUVIAN PUBLIC FINANCE 13 100,000,000 soles and its value in 1886 was from 18 to 21 paper soles for one of silver. The national revenues were uncertain. The guano question was troublesome, since the financial relations with Dreyfus Bros. & Co. and their successor, the Peruvian Guano Co. (Ltd.), remained for adjustment and settlement. Among the problems of administration, one of the first was to promulgate a budget for the succeeding biennial period, 1887-88. There had been no budget since 1879, at the end of a time when the income from guano and nitrate had formed 48 per cent of the ordinary revenues. Taking into account the necessity of organizing all public functions anew, there naturally was some difficulty in arriving at satisfactory figures of dependable income and essential expenditure. The Congress finally passed a budget which calculated the revenue for each of the two succeeding years at around 8,000,000 silver soles of 34 pence, with expenditures of 6,800,000 soles. The actual results did not correspond to these figures, moderate as they were in com­ parison with those of 10 years before. The revenue grew very slowly during 1887 and was in fact only rising to adequate figures by the end of this period, or about 1900. On the other hand, the expenditures generally exceeded the budgetary calculations, since it'was found impossible for the customs houses and other administrative branches to function with the limited personnel and facilities contemplated by Congress. Approximate budget stability remained unattainable for several years. A number of measures were passed in 1886 with the object of reorganizing the revenues. A new schedule of import duties was adopted which reduced the rates to comparatively low figures, with the double purpose of reviving the import trade and reducing the cost of living. A new law assessing stamp taxes and regulating the use of stamped paper was passed. A tobacco tax was created. Most important of the fiscal measures was a law of November 13, 1886, called the decentralization act (ley de descentralizacion fiscal), which divided the public revenues between the central Government and the Departments. Departmental councils (juntas departamentales) were formed to have charge of the collection and disbursement of the revenues assigned them. Under this act the income of the central Government was composed of the customs duties, stamp taxes, the tobacco tax, and other general revenues, while to the Departments were assigned the poll tax or "contribution personal77 (4 soles on the seacoast and 2 soles in the mountains), the direct property taxes, and other strictly local assessments. The departmental councils were empowered to form their own budgets, subject to governmental approbation, and to administer their own revenues. This measure was one of the developments marking various changes in the national attitude toward local autonomy that have characterized the financial history of the country. Under the circumstances of the time, its effect was to hinder somewhat the work of national fiscal reorganiza­ tion. The monetary system likewise called for action and gave rise to acute differences of opinion. Under the Chilean regime silver coin had gone back into limited use and was required for public payments, but along with the silver coins was a circulation of over 100,000,000 soles of paper money for which the Government had assumed respon­ sibility. By a law of 1879 part of the customs receipts had been set 14 PERUVIAN PUBLIC PlKAKCE aside for the retirement of this currency, but the operation of this law had been suspended after a short period. By a new act of October 28, 1886, the old system was revived and 5 per cent of the customs receipts were declared payable in paper money at a rate of equivalence to the silver sol decreed by the Government from time to time according to market quotations. The notes taken in were to be incinerated and the amount thus gradually diminished. Another important question which arose was that of the determina­ tion and adjustment of the public debt. The external obligations, consisting of the bonds outstanding of the issues of 1869, 1870, and 1872, had been in default since 1876. During that time the principal had remained at about £32,953,000. With nine years of unpaid interest, the amount would have been about £48,760,762 at the beginning of 1887. In July, 1886, the London bondholders, repre­ senting deposits of £30,600,000 out of a total of £31,500,000 out­ standing (for apparently there had been some reduction of the debt on account of guano shipments authorized by the Chileans during their administration after the war), organized a committee to nego­ tiate with the Peruvian Government, and appointed a representa­ tive in Lima. The latter, in October, 1886, presented to the Govern­ ment a plan whereby the bondholders agreed to cancel all outstand­ ing obligations in return for the cession to them of the principal rail­ ways and a number of other properties and privileges, the operation and utilization of which they estimated would reimburse their claims against the Government. This original proposal formed the basis for subsequent negotiations which finally resulted in the contract of 1890, followed by the organization of the Peruvian Corporation. Tke adjustment of this matter" was an issue that gave rise to lengthy discussions both in the Congress and among the public. An agreement signed on October 25, 1888, was approved by presidential decree and submitted for the ratification of Congress, but was defeated by minority opposition. In the determination to effect a settlement on a basis which had acquired the support of the dominant elements, parliamentary opposition was finally subdued by the arbitrary calling of new elections, thus removing the obstructionists. These maneuvers took time arid it was not until 1890 that congres­ sional approval was finally obtained for the agreement between the bondholders and the Government, which relieved Peru of all respon­ sibility for its foreign debt in return for certain concessions of which the chief were the cession of the principal railways for a term of 66 years (later prolonged to 1973), the right to extract and export 2,000,000 tons of guano, and other minor privileges which were destined to be of small importance. Another step of importance was the adjustment of the internal debt. The last general consolidation and funding of internal obliga­ tions had taken place in 1873, with an issue of bonds at 6 per cent interest. The service of these bonds had been suspended since 1879. In addition to them, a great number of other claims now called for at­ tention. The first measure for a new systematization and recognition of the internal debt was presented in 1887, and the matter received the attention of Congress a number of times during that year and in 1888. In its final form the new law of consolidation was passed on June 7, 1889. It provided for the presentation and consideration of ail obligations and claims, except some that were arbitrarily excluded as PERUVIAN PUBLIC FINANCE 15 being unconstitutional. Following the passage of the law, the ma­ chinery for the inscription of obligations was put into movement and continued for several years, the final result being the issuance of 36,232,600 soles, nominal value, in bonds paying 1 per cent interest, of which a part is still outstanding (consolidated bonds of 1889). The paper money finally disappeared from circulation in 1888. In the absence of any positive official support for its status or value, save the provision that required 5 per cent of the customs revenue to be paid in paper which was then retired, public repudiation grew, and the value of the paper sol in terms of silver became less and less. At the various times when discussion of this question came up in Congress, official opinion tended toward the evasion of responsibility. By the end of 1887, 35 soles paper were equivalent to one in silver. Since at this time an official decree advised the local authorities against taking any measures to enforce the legal tender value of the paper currency, it no longer was taken by merchants, and its func­ tional value was lost. According to the best available computation the total sum of the bills thus demonetized was 96,600,000 soles. Later, the holders were granted the privilege of conversion into the 1 per cent consolidated internal bonds of 1889. It will be observed from the foregoing paragraphs that much was accomplished between 1886 and 1890. The fiscal system of the country was put upon a more normal basis, the internal debt was in rocess of recognition, and the external debt was extinguished, Jt is true that the actual cost of the latter operations was still to be liquidated. Nevertheless, the period of uncertainty was passed and a basis for future progress had been established. During the decade from 1890 to 1900 the country maintained a gradual material progress. Internal order was preserved except for some months during the latter part of 1894 and the first part of 1895, when a civil war occurred which resulted in the downfall of the established Government at the hands of the opposing political parties, known as the "coalition.'' The benefits of previous financial measures were seen in a slow but steady improvement in public and private finances and in the growth of industry. The only detrimental factor of importance was the instability of the silver currency, which fluctuated in value and tended downward with the fall of silver in foreign markets. The definite loss of the nitrate and guano deposits of Tarapaca and the practical exhaustion of the guano deposits that remained in Peru­ vian territory forced an economic readjustment upon the country. The production of sugar became the principal resource, for while the extraction of silver continued, the falling value of the metal and the lack of capital sufficient for economical production caused the mining industry to lag for several years. As for sugar, some time passed before even so great a production was reached as that attained before 1878^—estimated at around 100,000 tons annually. After the end of the war conditions were such as to make a prompt recovery impos­ sible. Much of the equipment had been destroyed or had deterio­ rated from lack of care, settled labor conditions were slow in return­ ing, and little capital was available with which to renew operations on a large scale. Many of the proprietors of sugar plantations who were not ruined outright were burdened with debts and were heavy losers through the repudiation of the paper currency and the writing 16 PERUVIAN PUBLIC FINANCE off of a large part of the advances made to the Government during and after the war. In 1889 exports of sugar were but 45,000 tons. In the following years an improvement took place, exports rising to 72,000 tons in 1895 and 104,000 tons in 1899. The expansion was due largely to the investment of foreign capital in plantations and machinery. During the first years of this time the fluctuations in the value of the silver money were somewhat detrimental to the in­ terests of the exporters because of an appreciation that sometimes took place during the shipping season. On the whole, however, the gradual decline in the value of the silver sol (from 34 pence in 1890 to about 24 pence in 1897) favored the producers of exportable products. While sugar remained the principal money crop, the growing of cotton became quite important. Up to 1890 the principal variety of cotton grown was the characteristic Peruvian rough, which brought a price about twice that of American cotton in foreign markets. Exports of cotton in 1889 were 1,336 tons, mostly of the rough variety, which was shipped to Germany. After 1890 the planters began to introduce Egyptian and other varieties which were found well adapted to Peruvian conditions and furnished ' an increasing source of revenue. The growing of cotton was accelerated by the extension of simple irrigation works in a number of coastal valleys. While exports of cotton were increasing, the consumption in domestic industry was likewise progressing; the establishment of some cotton mills gave favorable results and by 1900 a number of factories were in operation, producing a large part of the coarser cloth demanded by the population. Other branches of agriculture, while not so important as sugar and cotton, also gained in prosperity. Rice, cacao, coffee, coca, corn, potatoes, and wheat were the chief food crops. The output was suf­ ficient to supply the needs of the country, except in the case of rice and wheat, the importation of which was necessary in large or small quantities, according to the degree of prosperity and the demands for labor on the part of the other industries. The extraction of wild rubber in the Amazonian region began to attract attention, although the greatest activity came later. In 1898, however, there were two lines of steamers running from Iquitos to Liverpool, indicating a con­ siderable increase of business in the "montafia." Changes of importance took place in the mining industry. The production of silver, the old standby of the Peruvian miner, had been diminishing, both absolutely and relatively, although the introduc­ tion of the iixiviation system about 1895 did something to arrest this decline. But the principal change in the situation was brought about by the growing exploitation of copper and petroleum. Valuable deposits of high-grade copper ore were discovered in the mineral region of Cerro de Pasco in the Department of Junin, where the silver deposits had been worked for generations. Native enter­ prises took advantage of the transportation facilities afforded by the completion of the railway from Lima to Oroya to start production on a relatively small scale, shipping ore of 40 per cent to 50 per cent copper content. In 1897 and 1898 about 800 tons monthly were being produced. Petroleum production at this time was becoming prominent and was destined to grow steadily in importance, The petroleum field PERUVIAN PUBLIC FINANCE 17 is found on the northwestern coast of Peru in the Department of Piura and in the Province of Tumbes. The first scientific explorar- tion of the region is said to have taken place from 1864 to 1868, and the first barrel of oil from the Zorritos .field was taken out in the early seventies. The Negritos field was discovered in 1878 and sold in 1888 to an Englishman, who in the next year leased it to its present holders for a term of 99 years. In 1890 the production of Negritos was 185,000 barrels, of which 120,000 were distilled at Talara. Sta­ tistics of the early years are lacking, but the moderate growth of pro­ duction is shown by the fact that the total production of 1903 is given as 37,000 tons. Among the developments of these years, perhaps the most impor­ tant from a financial point of view was the settlement of the matter of the foreign debt with the London bondholders, resulting in the forma­ tion of the Peruvian Corporation as already described. The debt had actually been no burden on the country, since its service had been suspended for more than 10 years and its settlement by some com­ promise had been a foregone conclusion. Its existence perhaps had been beneficial in that it completely eliminated the possibility of incurring any new foreign indebtedness during the years of recon­ struction when Peru was forced to rely on its unassisted efforts. But the benefits of the contract with the corporation were of considerable importance in other ways. Work was promptly begun on the repair of the principal railway lines now entrusted to the corporation; ade­ quate operation was assured and extensions were started involving the expenditure of large sums of money. This activity provided employment and invigorated trade. At the same time foreign in­ vestments of certain importance were made in the sugar industry as well as in mining. This trend showed that Peru was once more on the up-grade and helped to maintain confidence during the time when the people of the country were still shaking off the effects of the stag­ nation and hopelessness that immediately followed the war. The inadequacy of the silver currency was a positive drawback of these years. Reference has already been made to the fall in the value of silver, caused largely by the general movement of more important nations toward a gold basis of currency. The fluctuation of the exchange value of the silver sol from 1890 to 1897 was sufficient to cause a perceptible disturbance in commerce and industry. The effects were principally seen in the rise of prices, the diminution of imports in such measure as to depress business, and the dissatisfac­ tion of labor with its traditional wages. The necessity of raising wages, together with the difficulty of rinding workmen, impelled the producers of sugar and cotton to join the merchant and consuming classes in a demand for stable money. Definite action was begun in 1897 toward fixing the exchange value of the silver sol at around 24 pence, or at the rate of 10 soles to the pound sterling, by stopping the free coinage of silver, and by requiring that customs dues be paid in gold. The step was taken at a time when the price of silver remained stable and the industries of the nation were generally prosperous. The preliminary measures were success­ ful and were followed by other legislation making gold legal tender while limiting the legal tender value of silver. In 1898 the actual coinage of gold was begun; the Peruvian pound, a gold coin exactly the equivalent of the English sovereign, was adopted as the monetary 18 PEBUVIAK PUBLIC FINAKCE unit; the silver currency, reduced in volume, was retained as sub­ sidiary money at the equivalent of 10 soles to the pound. The reform was entirely successful. Thenceforth, and until the outbreak of the European war in 1914, Peru was on an exclusively "hard money" basis. The banking system of the country now began to revive. Only one native institution, the Banco del Callao, was in existence in 1890, for every commercial bank in Lima, save the local branch of the Bank of London, Mexico, and South America, had gone out of business in the years following 1878. The foreign bank just mentioned was merged in 1897 with the Banco del Callao to form the Banco del Peru y Londres, oldest of the present-day institutions. In 1889, however, the Italian colony in Lima had sponsored the organization of a com­ mercial bank, the Banco Italiano, which since that time has grown to large proportions. The favorable conditions thereafter resulted in the founding of the Banco Internacional in 1897 and the Banco Popular in 1899. At the end of the latter year the combined deposits of the commercial banks just mentioned, together with those of the Lima Savings Bank, or Caja de Ahorros, which had been in exist­ ence since 1868, w^ere Lp.1,558,159 and their paid capital and reserves amounted to Lp.530,000. The recuperation of public finances proceeded slowly. In 1891 the receipts of the National Treasury (exclusive of the departmental revenues, which were administered autonomously) were 8,608,000 soles. Expenditures were 8,180,000 soles. These figures refer only to actual cash transactions and do not indicate that all of the current obligations had been satisfied. As a matter of fact, in this as in practically all previous and subsequent years, the end of the fiscal period found certain obligations and services unpaid, later to become claims and to constitute a growing floating debt or deficit. The figures of revenue and expenditure in the following years showed but a slow expansion. The country was evidently incapable of supporting any material increase in the range or rates of taxation. The cus­ toms houses supplied about 60 per cent of the receipts and the remainder came from the taxes on tobacco, alcohol, salt, and opium, and the returns from stamped paper and documentary stamps. Im­ port duties, however, continued to be moderate and exemptions or nominal rates were granted in the case of equipment and materials used in native industry, together with those for railway construction and other public works.- No export duties were assessed except upon old bullion and silver coin. In 1899 the public income amounted to f /p. 1,370,000 (the Lp., of course, being equivalent to 10 silver soles). The growth was due to generally larger returns from the established revenues. In the meantime the needs of administration were expand­ ing with the enhanced prosperity of the country, so that the Treasury never was in a really easy position. It will be seen that the country had greatly improved its condition during these 14 years of slow but steady progress. Agriculture and mining were in a favorable position, although their real expansion came in the following decades. The administration of the principal railways by the Peruvian Corporation and the building of new lines and extensions had greatly improved communications, with resultant benefits both in a political and in an economic sense. Commerce had been reestablished on a basis of confidence. The statistics of foreign PERUVIAN PUBLIC FINANCE 19 trade showed an increase in the total of imports and exports of from Lp. 3,685,000 in 1890 to Lp. 4,946,000 in 1899, with adverse balances in 1890 and 1891 turning to an excess of exports of over Lp. 1,000,000 in each of the years 1897, 1898, and 1899. The fiscal system had met the test of adaptation to trying conditions and had emerged with deficits not too heavy to be borne by the general increase in public wealth. A general spirit of moderation had prevailed in the conduct of public finance. A decisive reform had been effected by the sub­ stitution of a gold currency for the old silver system. The latter event, the success of which was definitely demonstrated by 1901, is sufficiently important to mark the end of this period.

FROM 1900 TO THE EUROPEAN WAR No events of outstanding importance took place during this time. The years were marked rather by a regular advance in industry and foreign trade, accompanied by a like increase in the public revenues. The new monetary system retained equilibrium, although somewhat shaken by a trade depression in 1901. Taxation became further sys­ tematized and yielded growing returns without many new burden­ some impositions; the foreign credit of the nation showed signs of emerging from the eclipse which it had suffered after the war of the Pacific. In short, a new period of activity began, involving general improvement in the economic organization of the country. There were setbacks caused by reactions to outside world conditions and to occasional political uncertainties. Whatever detrimental features may have appeared during these years, from the financial point of view, were caused by the growing necessities of the public adminis­ tration as opposed to an income that was somewhat inflexible and inadequate for more than the simplest necessities. The commerce of the country felt the quickening influence thai pervaded world trade after 1900. The geographic position of Peru was still comparatively isolated, but greater competition brought freight rates to lower levels very advantageous to trade. Exports in 1900 were valued at Lp. 4,498,000; in 1913 they were Lp. 9,138,- 000'. Imports grew in the same interval from Lp. 2,317,000 to Lp. 6,089,000. The indicated expansion was spread consistently among the intervening years. The imports were generally much less in value than the exports, indicating that the balance of trade was favorable; this is confirmed by the detailed annual statistics, which show that a substantial quantity of gold coin was being imported. Again, the inflow of foreign capital, in the shape of machinery, transportation equipment, and industrial supplies, was of importance. Imports of articles for the consumption of the population remained moderate, showing that the steady growth of production had not yet resulted in a marked increase in the purchasing power of the people in general. The composition of the export trade shifted toward the form that has characterized the latest years, copper, cotton, and petroleum taking more prominent places. The rubber trade was perhaps the most picturesque feature of this period. Rubber gathering in Peru came somewhat later than similar activity in Brazil and Bolivia. Its importance had first attracted attention about 1895, when the port of Iquitos on the Amazon became prominent as the center of trade in that region. 20 PERUVIAN PUBLIC FINANCE In subsequent years the output grew steadily according to the widening activities of the rubber gatherers, the availability of labor, and the organization of enterprises with sufficient capital to conduct the business on a practical basis. Roads, or rather trails passable for pack animals, were extended from the foothills of the eastern mountains down into the lower country, or montana; communities were founded and an international trade grew up, served chiefly by the steamers which entered the Amazon and made their way as far as Iquitos. This development brought with it a stimulus to activity in the montana which made it appear for some time that the eastern section of Peru might be destined for a degree of importance not much inferior to that of other parts of the country. Rubber gathering maintained a high degree of activity in the years between 1900 and 1910, although with prospects not entirely promising, since the wasteful and destructive methods caused the exhaustion of the more accessible supplies and forced a resort to more isolated districts. Finally, the mounting production of the East Indian plantations (from about 3,500 tons in 1909 to 8,000 tons in 1910) signaled a decisive change in the conditions. The demand for wild rubber became less, prices weakened, and it was apparent that the high tide of activity and prosperity in the Peruvian rubber fields had been passed. The high price of fine rubber in Iquitos in 1910 was 147 soles per arroba of 15 kilos. In 1911 it was 82 soles and as low as 53 soles was offered. Thus, when the war came in 1914 the Peruvian rubber industry was in decadence. Its permanent effects were of small importance, so far as the country as a whole was concerned, but it served the purpose of bringing about a better knowledge of the montana and drawing that region into closer contact with the rest of the country. The two chief products of the coastal valleys, sugar and cotton, maintained the progress noted previously. The development of cot­ ton was *the more rapid, according to trade statistics, for the value of cotton exports, which in 1900 had been less than a quarter of the value of the sugar exported, grew to almost an exact equality with sugar in 1913. The relatively greater advance in cotton was duato the fact that its production started later than that of sugar, which had always been a matter of large-scale plantation operation, natu­ rally taken up by landowners who could command the necessary capi­ tal. Cotton, on the other hand, was raised by smaller proprietors, and its production was a symptom of social as well as industrial progress. During the period under review the prosperity of the sugar producers was affected by several years of price depression, for the methods used were not yet sufficiently improved to realize to the full the natural advantages enjoyed by the Peruvian growers. Nevertheless, improvements were going on, and in 1911 and 1912 there were nota­ ble importations of modern sugar-mill machinery. The advance in cotton, however, was more noteworthy, owing, as has been said, to its incipient character; exports valued at Lp.326,000 in 1900 grew to Lp.1,424,000 in 1913. Irrigation projects carried to completion in Piura and elsewhere helped this development. At the same time the cultivation of the soft-fiber varieties (as distinguished from the indigenous "Peruvian rough") was spreading. Seed brought from Egypt was first planted about 1902, producing the "mitafifi" variety, and the growing of "suave"—similar to American upland—was PERUVIAN PUBLIC FINANCE 21 broadened. The native cotton mills were flourishing, five such establishments being in operation in 1909. The outstanding feature of Peruvian industry and foreign trade from 1900 to 1913 was the advance of the two mineral products, copper and petroleum, into places of first importance. Copper ex­ ports first exceeded those of silver in 1905 as the direct consequence of the development of the Cerro de Pasco properties under North American ownership. In 1907 Cerro de Pasco was producing 1,300 tons of 98 per cent copper monthly. Total Peruvian exports of cop­ per in all forms in 1913 came to 24,745 metric tons of fine copper. It is to be noted that the ores of Cerro de Pasco also carried a sub­ stantial proportion of silver, which went to increase the exports of this metal. The operations at Cerro de Pasco were facilitated by use of near-by coal deposits, also under the control of the mining company. The latter acquired later the Morococha mines, its com­ bined activities thereafter placing it in a preeminent position in the Peruvian mining industry. Petroleum production hardly shared the spectacular progress of copper, rubber, and cotton during these years, but operations were broadened and modern facilities were installed. From 37,000 metric tons in 1903 the output grew to 273,500 tons in 1913. Besides sup­ plying fuel oil for the railroads, refined products were sold both in the country and abroad, and the way was prepared for the realization of the possibilities latent in this industry, which were to have a greater development in succeeding years. Among the minor branches of industry, wool, vanadium, and borax deserve mention. Alpaca wool from Peru, originating chiefly in the southern mountains, of which the port is Mollendo, provided more than half of the world supply. Vanadium was first discovered in 1904 and soon thereafter was exploited on a growing scale by an American corporation. . Borax deposits near Arequipa were acquired by a British corporation. These commodities, together with the more important ones already discussed and supplemented by smaller quantities of sheep's wool, hides, and other products, composed the Peruvian stock in international trade. The progress made in all lines of extractive industry, for which the foundations had been laid in earlier years, was so marked after 1900 as to merit calling this period that of industrial advancement. The improvement in public finance during this time was perceptible though not so positive as the general advance in industry. It has been noted that the first years of reconstruction after the war period were filled with problems chiefly originating in the necessity of deriving from an impoverished population revenues sufficient to extend the benefits of stable and promotive government through a country of great distances and difficult communication. Obligatory economy was exercised from the beginning, but there evidently was never a time when urgent demands on the Treasury could be met with comfort. Recourse to credit, except in very limited amounts, was denied for many years. The public income from customs and taxation advanced slowly until in 1900 it was about Lp. 1,300,000. Thereafter the increase in ordinary receipts became larger, until in 1913 they amounted to about Lp.3,550,000. In order to increase the tariff income, as well as to provide a degree of protection for the small domestic industries, a new tariff 22 PEKUVIAN PUBLIC FINANCE was put into effect on May 1, 1901. A decree of 1901 declared the sale of salt a Government monopoly and a fiscal company (Cia. Salinera del Peru) was founded to sell that commodity at prices fixed by the Government. In 1904 a tobacco monopoly was created. In the same year the taxes on alcohol and sugar were revised and a tax was assessed on matches. The fiscal system still depended on import duties and other customs revenue for nearly 50 per cent of the total revenues, the remainder being supplied by the taxes just mentioned, together with consular fees, stamp taxes, the returns from such Government functions as mails and telegraphs, and other minor sources of income. This was the situation in 1913. In spite of the favorable developments in industry touched upon in the preceding paragraphs, the distribution of wealth throughout the population had not been carried to such a point as to insure very lucrative returns from the indirect form of taxation on which the fiscal system was based. Peru was in a position which normally would have caused recourse to foreign credit during this time of development and exten­ sion of productive activity, but under the circumstances most of the outside capital which came in was that brought by private enterprises. The generally straitened condition of the Treasury impeded progress in the regularization of the public debt and the recovery of foreign credit. At the beginning of this period, two consolidations of the internal debt had been effected, those of 1889 and 1898. There still remained certain obligations, both internal and external, whose final recognition and disposal were effected very slowly. Among these might be mentioned the claim on behalf of Dreyfus Bros. & Co. dating back to their contract of 1869, less important sums claimed by other foreign interests arising from services and supplies rendered in past years, certificates of annuities and chaplaincies in default, and unsatisfied accounts in the budgets of the previous years that became claims for later adjustment. In the meantime new tangible interest-bearing debts were in­ curred. In 1906, in order to acquire small cruisers for the navy, a loan of £600,000 was obtained from German interests in consideration of the hypothecation of the operations of the salt company. Local banks were persuaded from time to time to make advances in current account, such advances aggregating Lp.665,000 in 1912, at which time concerted action was taken by the banks to secure an agreement providing for systematic payment of interest and reduction of prin­ cipal. The German loan of 1906 was canceled in 1909 when French bankers were given control of the salt company in return for a loan of £1,200,000, most of which was used for reduction of outstanding obligations and for payments on munitions bought in France. In 1913 the Tax Collecting Co. (Cia. Recaudadora de Impuestos), which had existed in various forms since 1896, was reorganized on the basis of a permanent loan to the Government of Lp. 1,245,000, the proceeds of which went toward the extinguishment of advances made by the superseded tax-collecting company (Cia. Nacional de Recaudacion), and to the satisfaction of other debts, some representing munitions purchased in previous years of strained relations with Brazil, Bolivia, and Ecuador, over boundary questions. Besides these obligations the Government had guaranteed two foreign loans obtained by the newly formed Peruvian Steamship Co. (Cia. Peruana de Vapores y Dique del Callao). Thus while the increase of revenue had made it PEKTJVIAN PUBLIC FINANCE 23 possible to finance pressing administrative and military necessities, it is evident that a stage had not yet been reached where loans for constructive purposes were feasible. Between 1900 and 1913 the country passed through two financial crises. The first came in 1901 when the business prosperity that had reigned since 1897 was interrupted by a fall in the prices of sugar, cotton, and silver. This brought about a suspension of gold payments by the banks, whose stock was small; for a time silver again became the sole circulating medium. In 1902, however, exchange again returned to par and from this time until 1908 conditions were good. No more trouble was experienced with the monetary system. In the middle of 1908 business began to slacken; there was an oversupply of imported goods and commercial credit was strained. This appears to have been a reflection of the panic of 1907 in the United States. The export trade weakened somewhat; furthermore, there had been boundary disputes during preceding years with Brazil, Bolivia, Ecuador, and Colombia, which led a to rather acute situation from 1908 to 1910. Actual warfare was averted, but large sums were spent on the army and navy. In 1910 it was necessary for the Gov­ ernment to extend some of its local debts. Political agitation within the country was bitter and labor troubles were more in evidence. The trade depression of 1908 thus initiated a period of somewhat disturbed conditions. The notable improvement in the export trade during 1911 and 1912 held out hope for a definite recovery but some important factors remained unfavorable. The statistics of banking operations from 1900 to 1913 furnish tan­ gible evidence of economic progress. The deposits of the five banks established at the end of 1899 had aggregated Lp.1,558,000. In 1905 two new institutions were founded. At the end of 1913 the deposits of the seven banks then operating amounted to Lp.8,107,000. Largely owing to labor troubles, political unrest, and the effects of the world financial stringency that characterized the year 1913, the time immediately preceding the outbreak of war in Europe was one of unsatisfactory trade and fiscal conditions. The quotations of foreign exchange had shown something of a strain since the middle of 1912. In previous years sterling 90-day bills had generally been at a discount sufficient to encourage the importation of gold; but at the end of 1912 and throughout 1913 and the early months of 1914 the position had changed to a slight premium on sterling, or practically the gold export point. This fact was noted by local bankers, although the statistics do not show an important outward gold movement. The public Treasury was embarrassed by the heavy rate of expenditure main­ tained for some time, so that early in 1914, for the fiist time in years, the payment of Treasury warrants was irregular and there was a lack of punctuality in serving the public debt.

FROM 1914 TO THE PRESENT Peru was not involved in the hostilities that began in Europe in August, 1914, and was not directly concerned in the conduct of the war nor in the subsequent political reactions, but its industries, trade, and finance were fundamentally affected. This was an inevitable condition, owing to the fact that the major portion of the principal products of Peru must be sold abroad and a great 24 PERUVIAN PUBLIC FINANCE part of the goods consumed in the country must be imported, while the monetary and banking systems were closely connected with the international gold and money markets. The general course of events in Peru was not unlike those in the other important countries of South America. Following the first shock of the war panic there was a depression that lasted nearly to the end of 1915. The years immediately following were marked by a degree of prosperity never before experienced. The depression that began in the second half of 1920 brought an interval of business stagnation, deflation, and financial stringency similar to that expe­ rienced elsewhere. Having passed through the effects of the latter crisis, the country began to recover in 1922 and is found to-day, like its sister nations, at a point of relative stability in commerce and finance, awaiting the further stimulus that is expected with the gradual recuperation of Europe and the return of world trade to a new phase of activity. The main events and developments of the years thus summarized are presented in the following paragraphs: Crisis at the outbreak of the war.—The presentation of events down to the time of the war has shown that conditions in Peru were not especially favorable, owing to somewhat of a financial stringency witnessed in those years. Trade was not entirely unfavorable in 1912 and 1913, since prices of exports were fairly well maintained and shipments were normal, but internal political conditions were not of the best. Strikes and other manifestations of unrest were especially prevalent during 1913. Thus the conservative spirit in world finance felt during that year was accompanied by a some­ what pronounced lack of confidence in Peru. Political unrest came to a head in February, 1914, when President Billinghurst was de- osed and exiled. A provisional government was installed which Eeld power until the middle of 1915. These events formed a back­ ground of uneasiness for the more striking developments that came with the outbreak of the war. It has been seen that the national Treasury was somewhat bur­ dened with responsibilities assumed largely in connection with the acquisition of warships and military supplies. The ordinary receipts had been strained to care for the steadily growing demands of the various administrative divisions of the Government. When the war came it found the Treasury practically impoverished. The immediate reduction in customs income, caused by smaller importa­ tions, served to heighten the difficulties and for several months the Administration was forced to seek money from every possible source and at onerous terms in order that the operations of the Govern­ ment might continue. In spite of an attempted reduction of expendi­ tures and the imposition of higher rates of taxation, the year 1914 closed with a heavy deficit. Fiscal improvement came but slowly during 1915, since the import trade improved only very gradually— in fact, as was natural, this branch of commerce and prime source of revenue was diminished throughout the duration of the war. The Treasury income thus remained depressed until 1916; new export duties placed in 1915 upon the principal agricultural and mineral products yielded but a small return in that year. While 1915 did not bring a genuine recovery in public finance, it marked the beginning of the industrial and commercial expansion PERUVIAK PUBLIC FIKA2STCE 25

brought about by the world demand, first for sugar and copper and later for cotton and practically all other raw materials. The price of sugar, which had moved between 9 shillings and 15 shillings per quintal of 100 pounds before the war, was quoted during 1915 at be­ tween 16 shillings and 20 shillings. Standard copper closed in 1915 at £84 per ton as against around £70 in 1913. The advance in the prices of cotton, silver, and wool was less marked, but they showed unmistakable strength. In spite of advanced freight rates, in some cases to three times pre-war figures, the export business soon began to expand, and the trade statistics of 1915 showed total exports valued at Lp.ll,500,000, more than Lp.2,000,000 greater than the previous high mark of 1912. A striking feature of the events of the early war years was the dis­ appearance of the gold currency, which went into hiding almost im­ mediately. A moratorium decreed in the first days of August, 1914, helped to protect the banks from the consequences of the natural de­ sire of the public to hoard its cash and of foreign interests to with­ draw their balances, and served to counteract the perturbed opera­ tions induced by a spirit of panic, speculation, or distrust. Peru, which for some 17 years had enjoyed the benefits of a strictly gold currency, now experienced the disadvantage inherent in its adapta­ bility to sudden withdrawal from circulation. Prompt measures were necessary in order to provide a circulating medium. The first was taken by a law of August 22, 1914, which authorized banks to issue notes payable to bearer to an amount not exceeding Lp.l,100,000. Against these notes a reserve was required of 35 per cent in gold and 65 per cent in pledges of property, mort­ gages, and warehouse warrants. This new paper money was given the characteristic name of "cheques circulares" (circulating checks). A subsequent law of October 1, 1914, increased the permissible issue to a total of Lp.2,500,000. The administration was put in charge of a commission of business men and bankers, called the Junta de Vigilancia. The emergency currency system thus forced upon the country was destined to be successful in its operation, but for many months the cheques circulares were taken with reluctance by the people and there were quotations of a premium for gold and silver coin in spite of legal prohibition. The issuance of the cheques cir­ culares, like other similar measures taken in other countries at the same time, proved to be more permanent in its nature than was an­ ticipated. This paper money formed the circulating medium of Peru for the following years until its gradual replacement, commenc­ ing in 1922, by the notes issued by the new Reserve Bank of Peru. The normal rate of foreign exchange in Lima for a number of years had been from one-half to 1J^ per cent discount for 90-day drafts on London (that is, Lp.983^ to Lp.993^ for £100), and for sight drafts on New York from $4.80 to $4.90 per Peruvian pound. The rates at which actual transactions were made following the news of war are not disclosed by published statistics on account of the moratorium and the closing of the Lima stock exchange. The records of October and thereafter show that the value of sterling and dollars was rising, reaching an average London rate oi 7J4 Per cent premium, and a New York rate of $4.42 in December. The lowest value of the Peruvian pound in terms of sterling was reached in June, 1915, at nearly 10 per cent premium. The dollar value was proportionately 26 PERTJVIAK PUBLIC FIKAKCE somewhat lower, owing to the weakness of sterling in New York. At the close of 1915, however, the upward reaction was beginning. Among the reasons for the fall of the exchange value of the Peruvian currency was the tendency of foreign interests to make extraordinary remittances to their home offices, but the lack of confidence in the cheques circulares, which amounted to a considerable depreciation, had a powerful influence. The growing preponderance of the export trade over the depressed imports was not sufficient to offset the adverse factors until some time had passed and it had become apparent that definite prosperity was on the way. The improvement in sentiment was helped by the subsidence of political unrest and the restoration of normal administration under President Pardo, who took office in August, 1915, after having been elected by a combination of all the political parties. The prosperous years from 1916 to 1920.—The upturn apparent in 1915 bore fruit in 1916. For approximately four and one-half years thereafter there were few drawbacks to private and public welfare. The activity in industry and foreign trade formed the basis of a striking period of prosperity. Prices of copper, sugar, and cotton tended upward decisively until 1918 and, after some hesitation when the war ended, went on to surpass even the war-time quotations in the boom that characterized the greater part of 1919 and 1920. Other minor commodities, such as wool and hides, shared the bonanza and helped the distribution of the returns among the general popula­ tion. It is needless to say that production during these years was limited only by physical factors and conditions. Shipping space was both scarce and dear and insurance rates and other charges correspondingly heavy, but these disadvantages were largely overcome, from the standpoint of the Peruvian exporter, by the institution of the custom of selling goods f. o. b. Peruvian port instead of retaining the old system of quotations c. i. f. Europe or United States. Foreign trade grew amazingly, until in 1920 exports were valued at Lp.35,300,000, compared with Lp.9,000,000 in 1913. From 1916 to 1918, inclusive, the increase in the value of exports was more pronounced than their expansion in volume, while in 1919 and 1920 both volume and value were phenomenally large. A free movement of imports was not experienced until near the end of this period. The total values of imports increased greatly, but they were due to the high prices then obtaining rather than to the volume of commodities. This was a natural result of the inability to secure abroad the goods that might have been purchased and shipped under normal conditions. In 1916, for the first time since 1907, the Treasury revenue exceeded ordinary expenditures. The ordinary income of that year was Lp.3,900,000, or Lp.1,000,000 more than in 1915. The new export duties contributed Lp.476,000; import customs collections improved although they were but 72 per cent of those of 1913; and other general revenues were larger. The stringency of 1914 and 1915 had prevented an expansion in budget appropriations, so that when all the accounts of 1916 were balanced there was available some Lp.750,000 which was devoted largely toward the reduction of the debts incurred during the previous two years. In formulating the budgets of succeeding years the Congress became increasingly liberaHn allowances for all branches PERUVIAN PUBLIC FINANCE 27 of the public service; special appropriations were also made for public works and for other purposes. In spite of this the fiscal receipts con­ tinued so favorable that the country was able to make a great improve­ ment in its credit position by eliminating much of the floating debt and fulfilling scrupulously its various obligations. Furthermore, a new issue of 7 per cent bonds (internal bonds of 1918) extinguished a mass of old claims and provided funds for public works: The regu- larization of financial matters included the submission to The Hague Tribunal of the " Dreyfus claim," according to a protocol with the French Government subscribed in 1914. The new monetary system based on the cheques circulares reached a position of general acceptance and success early in 1916. Some minor difficultie3, connected chiefly with the impracticability of keep­ ing in circulation silver coins whose content at the prevailing prices for silver encouraged melting and exportation, were met in 1917 by the introduction of fractional paper currency notes secured in full by gold deposited with the Junta de Vigilancia. While the currency was entirely inelastic, it sufficed as a means of payment during times when abnormal conditions were the rule. Once the original distrust was overcome, the new money soon fulfilled its function and with its establishment came a return to par of exchange. It has already been noted that the price of sterling drafts was at nearly 10 per cent premium in the middle of 1915. The improvement in 1916 was rapid, fey February, London exchange was quoted at par and in May the dollar was practically at parity. With slight fluctuations this level was maintained through 1916 and until the United States, drawn into the World War, placed an embargo on the exportation of gold in Septem­ ber, 1917. The maintenance of exchange parity, however, in the face of an overwhelming export trade balance, was secured only by heavy gold importations as long as they were possible. Net gold imports in 1916 amounted to Lp.948,865 and in 1917 came to Lp.2,775,109. The greater part went to increase the gold security held by the Junta de Vigilancia against the outstanding cheques circulares. The impossibility of drawing an appreciable quantity of gold to Peru under the American embargo placed the sellers of foreign drafts in the predicament of having to accept whatever rates were offered in a glutted market. Both individuals and banks left as large bal­ ances abroad as they found safe or practicable, but the many obliga­ tory transactions caused a most embarrassing rise of the exchange value of Peruvian currency. At the beginning of November, 1917, the Peruvian pound was worth around $5.15. By February, 1918, the rate was $5.43 and in June, 1918, came the maximum of $5.70. At the same time 90-day drafts on London had fallen to 17 per cent discount. To meet this unexpected situation, new measures were necessary and the remedy was finally found in an act, approved in September, 1918, which authorized the issuance of cheques circulares in Peru against gold deposited in New York or London to the order of the Junta de Vigilancia. This measure also fixed an arbitrary rate for ^conversion at about $5.04 to the Peruvian pound. At the same time it remedied an incipient currency shortage which had come into being through the general rise in prices, the wage advances, and the high degree of business activity. 65880°—26f 3 28 PEKTJVIAK PUBLIC FINANCE The end of hostilities in November, 1918, brought with it a natural pause in business, but the effects were comparatively slight; in fact the really impressive boom in Peruvian trade was still to come. The maintenance of high prices for sugar and cotton—and for practically all other commodities with the sole exception of copper—carried the wave of prosperity past the slight ebb noted at the end of 1918. And while commerce was somewhat disturbed, the situation was generally ascribed to the reflection of certain internal conditions rather than to external influences. But in spite of the high figures of foreign trade of. 1919 (Lp.26,899,422 in exports and Lp.12,203,840 in imports), the novel feature of which was the quick response of imports to the relaxation of the previous restrictions on trade, there were signs of coming difficulties during this year. The "unpegging" of sterling exchange in New York in March, 1919, resulting in a drop to excep­ tionally low levels, was an unsettling influence in Peru. The tradi­ tionally close relation between the Peruvian and British financial markets was shown by a contemporaneous fall in value of the Peru­ vian pound in terms of dollars. The difficulty of adaptation to such abnormal conditions and the anomalous situation in which the Peru­ vian market was placed may be judged by the fact that in December, 1919, while 90-day drafts on London were around 18 per cent dis­ count, the value of the Peruvian pound in dollars was about $4.60. The superficially encouraging but fundamentally uncertain condi­ tions of 1919 carried some warning of the shock to be experienced in 1920, when the first effects of the world-wide trade depression were experienced. An idea of the course of events may be gained from the following movements of prices: Sugar from a price of 40 shillings in January, 1920, rose in May to 104 shillings and dropped to a level of 21 shillings in December; moderate rough cotton fell in the same time from 30 pence to 9 pence; standard copper opened the year at around £110 and closed at £73. Other minor export commodities moved in a similar way. A natural result of so sweeping a decline in export markets was demoralized trade, manifested in ways which the business world still remembers. The end of the war boom was so spectacular and thorough in its effects that almost a new period of history was to be expected thereafter. As we have seen, a period of ease in public finance had accompanied the prosperity of private business. The export duties assessed upon the coTnmodities that composed most of the exports soon produced sums of importance, while practically all sources of revenue showed consistent increases in harmony with the growing wealth of the people. The formulation of Government budgets was characterized by moderation for several years and the results were seen in the accumulation of surplus funds which went to reduce the public debt, to regularize the financial situation of the Treasury, and to afford means for public improvements on a fairly important scale. So great was the annual increase of the national income that it con­ sistently exceeded budgetary estimates in spite of the inevitable later tendency toward optimistic calculations. As an illustration of the advance in actual revenues, the budget estimates for 1916 of Lp.3,097,000 may be contrasted with the actual income of 1920, which amounted to Lp.8,087,000. A difference of such magnitude in the space of five years may justly be called extraordinary, while granting the depression in the purchasing power of money which went on PERUVIAN PUBLIC FINANCE 29 during that time. The expansion of budgets under the influence of such conditions and the tendency to overlook the probably transitory character of the situation, to say nothing of the real difficulty of retrenchment at short notice, presented tangible obstacles to a prompt adaptation to less favorable developments. The end of the war prosperity came in the middle of 1920. On the whole, the situation in public finance at this time was more en­ couraging than ever before in Peruvian history. Public revenues had reached a level characterized no doubt by some temporary inflation, but fortified by a more general diffusion of wealth among the people. The ordinary Government services had been adequately administered for a number of years and many of the old debts and claims had been extinguished or funded in an acceptable way. The currency, while inconvertible, was secured by gold in a high ratio. The principal financial and commercial institutions were solidly established. A sustained period of business prosperity had benefited socially a large part of the population. Domestic manufacturing industries, supported by the absence of foreign competition, had greatly strength­ ened their position and promised a continued further development. Furthermore, it appears that economic welfare had drawn the at­ tention of the people from purely political matters, so that"for a num­ ber of years the country enjoyed relative tranquility in its internal affairs. Depression and recuperation.—The conditions ruling between the middle of 1920 up to the end of 1924 are so intimately connected with contemporaneous problems and developments that they do not lend themselves to a final critical examination. To present the course of events in a way that will facilitate reference in the light of future history, a chronological relation of recent years is adopted. The effects of the collapse of 1920 were acute at the beginning of 1921. Business stagnation continued throughout the year, although I there was some relief following the improvement of cotton prices in I August. The values of sugar, copper, and wool continued the descent noted in 1920; sugar ended the year at 9 shillings compared with 21 shillings in January, copper fell from £72 to £67 per ton, and the \ prices of the various grades of alpaca and sheep's wool suffered a (drop of from 10 to 50 per cent. Cotton, on the other hand, reached I a low point from April to August, but thereafter recovered until the final quotations of the year were generally equal to or better than those of January. The export trade, as the result of the generally lower level of prices, fell off decidfcdly in value, although the actual volume of shipments was not much less than that of 1920. As opposed to diminished exports, the imports were large. This was not because of the actual , demand for merchandise, but was due to other factors characteristic of the time, such as the previous tendency to place abroad orders in excess of the actual amounts needed, the delay of foreign exporters in shipping goods ordered during the boom of 1920, and the rush of foreign exporters to outside markets when business depression be­ came manifest in the United States and Europe during the early part of 1920. The relatively high value of the import trade during 1921, therefore, was not a symptom of prosperity but rather the reverse, and this flood of merchandise caused many of the numerous difficulties that arose in the settlement of the unprofitable busi- 30 PEKTJVIAN PUBLIC FINANCE ness negotiations of the time. Internal business was reduced to about 50 per cent of the previous year's activity and was accentu­ ated by labor troubles caused by wage reductons, the high cost of living, and the influence of radical agitators. The exchange value of the Peruvian currency reached its lowest levels during this year. Dollar exchange was quoted as low as $3.15 in August, after beginning the year at about $4; in December the average was $3.55. This movement carried the pound sterling to a premium of 15 per cent at the close of the year in spite of its depreciation in New York. So surprising a collapse, in the face of the high ratio of the gold reserve held against the cheques circulares (about 90 per cent), was due primarily to the distorted foreign trade situation and secondarily to the other factors, material or psycho­ logical, that increased the demand for foreign bills while diminishing the supply. Among these factors may be mentioned the tendency of foreign interests to maintain balances abroad or in foreign cur­ rency, the relatively small amount of new foreign capital brought in, and the uncertainty of the currency and banking situation in view of a project entertained at that time by the Government for the establishment of an official bank with functions unacceptable to the leaders in business and finance. The fiscal results of 1921 offered a very unfavorable contrast to those of the five preceding years. Income under the budget of 1921, estimated at Lp.7,405,000, was but Lp.6,186,000. Smaller customs collections on both exports and imports accounted for the deficiency. The actual disbursements under the budget amounted to Lp.7,655,000. The resultant shortage of nearly Lp.1,500,000 was met partly by resort to credit and partly by taking advantage of special oppor­ tunities for realization of public assets. This unfavorable result of 1921, due to the abrupt decline in revenue coming at a time when expenditures had advanced, did much to overcome the favorable status of previous years and was the first stage in a new period of difficulties in public finance. Measures looking to greater financial stability in the future, instituted when the tendency of events was realized, took the form of changes in the customs service and in the monetary system. Foreign experts were engaged to reorganize the customs and to lend their advice in fiscal matters. The original project for a govern­ mental bank was withdrawn and was replaced by a measure more conducive to public confidence, providing for the establishment of a central bank of rediscount and issue that should lend both stability and flexibility to the paper money while preserving a position inde­ pendent of the fiscal administration of the Government. The silver coinage which had been a continual source of trouble because of its relatively high bullion value under depressed exchange conditions was replaced by a new issue of coins oi less intrinsic value to serve strictly the purpose of a token money. These reforms did not help the immediate situation so far as the attainment of an equilibrium in Government revenue and expenditure was concerned, but they established better bases for the future. The prices of export commodities improved sufficiently in 1922 to indicate that the depression had been passed. Exports returned to the very satisfactory figure of Lp.18,700,000 and imports fell to Lp.10,600,000, showing that a new and more stable phase of foreign PERUVIAN PUBLIC FINANCE 31 trade had been reached. The industrial situation was satisfactory if allowance is made for the natural tendency toward comparison with the boom years just after the war. The year generally was one of relative tranquility, devoid of either detrimental or exceptionally favorable features. Recovery in public finance did not proceed as rapidly as that of private business. It was impossible, practically speaking, to put into effect the stringent economies and drastic revision of expenditures which would have been required to reduce the outgo to a figure corre­ sponding to the diminished income. The revenues actually did ex­ ceed the budget estimate of Lp.6,228,000, but the expenditures were not held within the limits of the budget law. Disbursements of Lp. 1,177,000, partly of ordinary character and partly for public works, were authorized in addition to the budget. When the period covered by the budget of 1922 was closed it was found that it had been necessary to make expenditures of slightly over Lp. 1,000,000 from the proceeds of loans or from the income of the following year, while slightly more than Lp.300,000 remained as floating debt. Credit operations had produced a total income of Lp. 1,800,000, of which nearly Lp.700,000 represented operations of repayment or amortiza­ tion of debts outside the ordinary budget items for such purposes. The various borrowings were made up of sundry bank advances, drafts on the Tax Collecting Co., and the proceeds of the loan of $2,500,000 obtained in the United States, as well as part of the guano loan of £1,250,000 secured from British bankers. The new Reserve Bank of Peru was established in April and began active operations about the middle of the year. During the year the paper money outstanding was reduced from Lp.7,200,000 to Lp.5,400,000, while the gold reserve was maintained at about 95 per cent. Progress was made in exchanging the cheques circulares for the new notes of the reserve bank, in placing the new subsidiary coinage into circulation, and in the introduction of the process of rediscounting commercial paper for the member banks. The opera­ tions of the year were generally satisfactory. Partly because of the confidence introduced by the operation of the reserve bank, supple­ menting the natural effects of the revival of the export trade and the creation of a substantial export surplus in place of the slight adverse merchandise balance of 1921, rates of foreign exchange became much more favorable to Peru. At the close of 1922 the Peruvian pound was quoted at $4.20, as against a rate of $3.55 in January. The feature of the year in industry was the advance of crude petroleum production to a total of over 700,000 metric tons, compared with 373,000 tons in 1920 and 488,000 tons in 1921. The value of petroleum exports for the first time exceeded that of any other single commodity. A long-standing dispute with the principal producer over the title to the " Brea y Parinas " field was settled by arbitration, the Government receiving a consideration of $1,000,000. An organic law governing petroleum exploration and exploitation was promul­ gated, reserving to the Government a participation in the production of concessions. The years 1923 and 1924 may be considered the first of the new normal period dissociated from the transient effects and after effects of the war. The spirit of caution or apprehension has given way to an equanimity based on the vitality shown by the major industries of the country. Although world conditions have not been considered 32 PERUVIAN PUBLIC FINANCE generally as conducive to a broad international trade, Peruvian ex­ ports have maintained a level much above that of the best pre-war years. Cotton exports, for example, of 43,000 tons in 1923 and 40,000 tons in 1924 may be compared with 24,000 tons in 1913. Sugar shipments in 1913 were 143,000 tons; in 1923, 282,000 tons; and in 1924, 265,000 tons. Wool, while considerably depressed, shows greater volume and value than in pre-war times. Copper is firmly established, and promises still greater development when new plants now contemplated are erected. The petroleum industry has grown five-fold since 1913. The economic situation has thus provided a favorable basis for general national progress. The commercial aspects of 1923 and 1924 were somewhat mixed, although not unfavorable. The weather conditions were somewhat abnormal and prevented large harvests, while prices of cotton and sugar showed some uncertainty. The drought oi 1924 made it neces­ sary to import larger quantities of foodstuffs than usual. The fiscal results of 1923 and 1924, because of a general increase of revenue, due mostly to larger customs collections, were quite favor­ able. Ordinary Treasury operations showed a very slight deficit in 1923 and a comfortable surplus in 1924; part of this*result is attrib­ uted to the operation of the new organic oudget law adopted at the end of 1922, which is designed to check the lavish granting of supple­ mentary appropriations. The principal fiscal measures adopted recently have consisted of a new import customs tariff effective July 1, 1923; the increase of the tax on movable capital (stocks, bonds, and bank deposits) from 4 per cent to 6 per cent; the creation of alcohol and playing-card monopo­ lies; the increase of the corporation and professional income tax from 5 per cent to 7 per cent; and the imposition of a tax of 20 centavos per word on cable messages. The effect of these measures is seen in an inclination of local commercial organizations to oppose new taxation proposed from time to time, on the ground that the system has now developed to a point beyond which extension would be unwise. The Reserve Bank of Peru experienced satisfactory development during 1923 and 1924, the first two complete years of its history. Its notes have gradually been replacing the. cheques circulares without perceptible effect on public confidence, and the ratio of gold reserves has been retained at around 90 per cent. Nevertheless, the exchange value of the currency has not shown the upward trend toward parity that was anticipated; the average for 1923 was $4.11 and for 1924, $4.05. It is evident that other influences must be awaited before the return to a gold basis can be expected. Before leaving the subject of recent financial conditions, it should be noted that the past few years have seen constructive developments in the credit of the nation. The " Dreyfus claim" was recognized in 1921, following a decision of The Hague Tribunal, and was listed among the debts of the country, with a principal value of .25,000,000 francs. Other latent obligations, some of which had awaited at­ tention for many years, have been paid or funded into internal bonds. For the first time in the modern history of the country, the public Treasury has been able to present definitely the status of all obli­ gations. The borrowings of the latest years have not gone exclusively toward current expenses but have represented sums invested in city drainage and water supply, paving, irrigation works, railroad build­ ing, and other productive properties. Chapter L—REVENUE AND EXPENDITURE

THE FISCAL SYSTEM As Peru has a centralized form of government, its fiscal system has but two branches—national - and municipal. The former, dealing with the revenues and expenditures of a national character, admin­ istered by the central Government, is by far the more important. The finances of the municipalities and communes are relatively in­ significant from a foreign point of view, except in the case of two or three of the largest cities. During the history of Peru there have been several changes of policy affecting the centralization or decentralization of fiscal ad­ ministration. The political customs inherited from the Spanish colonial system favored the establishment of a centralized form of government, but in the earlier years the natural aspirations of different localities, founded on the difficulties of communication with the central authorities in Lima, tended toward the recurrence of efforts for local autonomy. A number of experiments along these lines were made during the ascendency of leaders sympathetic to such ideas. For reasons easily understood—principally the looseness of political organization, the uneven development of re­ munerative industry, and the isolation of the various parts of the country from each other—such efforts at the encouragement of local self-support were not considered successful. The development of means of transportation, of ports and other facilities for commerce, of irrigation and other such enterprises required resources that could only be found by mobilizing the national revenue. These practical considerations, together with the influences exercised by the personal or political principles of those in power, have brought about a general trend toward the concentration of fiscal administra­ tion at Lima. The adoption of a more highly centralized policy than any pre­ viously in effect was signalled by a recent law (No. 4232 of March 14, 1921), which abolished entirely the " juntas departamentales/7 the elective councils which since 1873 had enjoyed a certain degree of power in administering the financial affairs of the Departments (the major political divisions of the country). Revenues that formerly were departmental were transferred to the provincial (municipal) councils. Of the departmental revenues, however, 30 per cent were to go to the central Government for application toward public education. Other local sources of income devoted to special purposes were likewise excepted from the distribution. In all, allowing for the gradual limitation of the responsibilities of the juntas departamentales that had been going on for a number of years, the municipalities were left with very few of the revenues that originally had been considered departmental. 33 34 PERUVIAN PUBLIC FINANCE At the present time, therefore, practically all of the principal sources of revenue are under the control of the National Treasury. The Departments, the main political divisions of the Republic, have no financial autonomy, while the local districts (provincias) into which the Departments are divided and the municipalities have very modest revenues, derived chiefly from local assessments, licenses, and public services. Nearly all of the public revenues are collected either by the custom­ houses or by the Tax Collecting Co. (Cia. Recaudadora de Impuestos). The latter owes its existence to a measure passed in 1895 by which the executive was authorized to take steps to improve the collection of the principal internal revenues, which formerly had been farmed out by auction. In the following year the Sociedad Recaudadora de Impuestos Fiscales was organized and was given charge of the opium, tobacco, and alcohol taxes and the documentary stamp revenue. In 1900 a new company was formed (Soc. Nacional de Recaudacion), which in turn was succeeded by the present organization in 1913. The Tax Collecting Co. now collects not only the greater part of the internal fiscal revenues and those of the municipalities but admin­ isters the tobacco, opium, and salt ^ monopolies, and is charged with the collection of numerous local and special taxes whose proceeds are kept for application to certain specified purposes. It is allowed a fixed annual sum of Lp. 115,000 for expenses and receives a com­ mission of 1 per cent on its collections for the central Government, with higher rates for certain municipal and special services. Its aid-in capital amounts to Lp. 1,500,000, on which in recent years it Eas paid annual dividends of 10 per cent. The term of years for which it was originally constituted expired in 1917, but, as provided in the statutes, the arrangement has been continued by virtue of the fact that its loan of Lp. 1,250,000 to the Government has remained unredeemed. Other organizations that participate in revenue collection—aside from such public institutions as the post office, telegraph system, State railroads, consular service, etc.—are the Salt Co. (Cia. Salinera del Peru) and the Guano Administration Co. (Cia. Administradora del Guano), which are described later in referring to the revenues which they administer. Occasional attacks have been made upon the present method of tax collection, but the steady broadening of the .activities of the Tax Collecting Co. seems to show a general satisfaction with the system. Aside from the convenience of utilizing a medium whose facilities are well established and whose costs are fixed, as opposed to the draw­ backs inherent in a governmental bureau connected with political administration, the Tax Collecting Co. is a handy source of credit and serves as a useful instrumentality for giving effect to the hypothecation of revenues which are offered as security for outside loans. NATIONAL REVENUE AND EXPENDITURE

THE BUDGET LAW Peru adopted a budget system in 1846, and the budgetary method of controlling public revenue and expenditure has been followed ever since, although with some lapses during times of war or public disturbance. PERUVIAN PUBLIC FINANCE 35 The present law which governs the formulation of the budget and regulates the application of public funds is that of December 26, 1922 (No. 4598). A few of its principal provisions are as follows: The Minister of Finance shall prepare on June 1 of each year a calculation of the probable revenues of the next calendar year, which is also the fiscal period. He shall then notify each of the other ministers of the share allotted to his branch of administration. Each minister shall thereupon formulate his budget of expenditures based on the revenue indicated and submit it to the Minister of Finance not later than July 15. The Minister of Finance shall then combine the various proposals into a budgetary project, indicating the dispositions which he considers necessary for an equilibrium be­ tween probable income and expenditure. This project, after being approved by the Council of Ministers, shall be sent to the Chamber of Deputies not later than August 31. At the same time a copy shall be submitted to the consideration of the Senate. The measure shall thea be subject to the usual legislative procedure. The budget law shall be divided into three parts—the calculation of revenues, the authorization of expenditures by ministries and items, and the balance. The balance or summary of revenue and expenditures must not show a deficit. It is provided that the section containing the estimated revenues may not create new taxes nor modify or suppress tributary laws already in effect; special legislation is necessary for such purposes. The law contains no reference to the legality of the authorization of loans as part of the budget measure. The budgetary period shall consist of the fiscal year beginning January 1 and ending December 31, together with a complementary period terminating April 30 of the following year, during which time the incompleted operations of collection and disbursement shall be effected. At the latter date the accounts shall be closed and balanced. Various restrictions are laid upon the voting of additional credits and the application of items allowed for extraordinary or unforeseen expenditure, with the purpose of emphasizing the finality of the budget law and insuring that so far as is possible it will actually govern the*conduct of various offices of the Government during its period of effectiveness. The new measure above described represents an attempt to elim­ inate defects in previous measures and to correct some abuses which Shad grown out of those defects. The last formal budget law had been th>t promulgated September 16, 1874, which, although modified in some particulars in later years, had retained its general effectiveness. j The law of 1874 had divided revenue and expenditure into two classi­ fications—ordinary or fixed, and extraordinary or temporary. In the latter category were placed all such revenues and expenditures as were either represented for the first time in the budget law or were regarded as transitory. This method of formulation did not lend itself to easy comparison for purposes of future calculation, and it encouraged an excessive use of the extraordinary items to the point of losing contact with the original intent of the law. As a ractical matter, the administrative necessities were considered Eefore the means with which to satisfy them. Another serious defect of previous budget procedure was found in the length of time allowed as a complementary term, or period of liquidation, after the actual conclusion of the fiscal year. While this period of liquidation was 36 FEKTJVIAK PUBLIC MHANCE altered at various times, it generally remained unnecessarily long— in some years until September 30. This hampered the formulation o accounts and induced so great a vagueness in statistical reports that for a number of years no definite figures are vailable as to the transactions of this complementary period. The unusual conditions o the recent war and postwar years had a disturbing effect on fiscal routine in Peru as el ewhere. During this time of exceptional fluctuations in revenues, there was frequent provocation and need for altering the procedurj contemplated in the, budgetary legislat on. To correct the development of this tendency to view amend­ ments and emergency measures as a matter f course, the present budget law has laid down a rather stringent code of procedure. The intent is to (1) restrict appropriations to sums that will square with probable recei ts; (2) regard all normal and n cessary expendi­ tures as ordinary, to be met from ordinary revenue; and (3) include items to cover t e unforeseen r sponsibiliti?s oc the variotas offices of the Government, t.us diminishing the necessity for supple­ mentary appropriations during the year. Even if the new pro­ cedure doe 5 not succeed at once in subordinating expenditures to revenue, it contains in embryo the principle of th3 divisi n between current and capital expenditure, in that extraordinary Treasury perations arj now separated from th3 bud etary balance. BUDGETS FROM 1846 TO 1926 To show the financial development of Per , the national budgets for the years rom 1846 to 1926 are presented ia an accompanying table. Th biennial method was first adopted, the allowances to be divided equally between the two years composing the period. After 1890 the system was changed for that of separate considera­ tions of the budget for each year.

BUDGETS FROM 1846 TO 1926

Expendi­ Year Receipts Year Receipts Expendi­ tures tures

Peruvian Peruvian Pesos Pesos pounds pounds 1846-47 8,383,600 11,926,722 1900... 1,385,320 1,424,820 1848-49. . 10,644, 846 10, 630, 620 19011 _ 1,385, 320 1,424,820 1850-51 1. 10, 901, 952 10,901,952 1902 _. 1,461,286 1,461,286 •1852-53 14,227,000 14,276, 502 1903 i... 1,461,286 1,461,286 1854-55 19,882,808 19,882, 808 1904 2,107, 874 2,107,874 1861-62 41, 526,072 32,912,036 1905 .-__. 2.223.488 2,222,543 1863-64. 46,106, 664 44,164,484 1906 2, 506,386 2,506,386 Silver soles Silver soles 1907 2, 681,193 2,681,193 1908 _ _. 2,997,444 2,997,444 1869-70 44,723,100 61,948,896 1909 3,075,987 58,582,851 58,582,851 3,075,987 1871-72 --„_- __ 2,784,513 2,775,061 1873-74 66,188, 542 80,543,415 2,784,513 1875-76 . 65, 567,032 74,377,380 2,775,061 1912 3,313,397 3,313,397 1877-78 43, 978,168 43,229, 590 3,313,397 1879-80 _ 35,190,170 36,051,394 3,313,397 19141 3, 313, 397 3,313,397 1887-88. _ 16,183, 674 13, 599,104 1915 2,847,275 13,329, 762 12, 716, 304 2,973,479 1889-90 1916 3,097,030 1891 6,728,022 6, 602, 687 3,109,808 1917 1 _ 3,097,030 3,109,808 1892 7,105,131 7,104,423 1918 4,828,744 7,942,841 8,027, 848 4,834,214 1893 ! 1919 _. 5,169,147 7,296, 502 7,346,942 5,169,147 1894. 1920 _ 7,926,452 6,995,457 1896 _ 8,405,921 9,293,433 7,404,961 10, 721, 523 11,308,243 7,402, 601 1897 6,164,750 6,033,741 Peruvian Peruvian 1923 7,084, 684 7,084, 684 pounds pounds 1924 _ 7.879.489 7,879,489 1898 1,078,585 1,148,825 1925 8,862,245 8,862,245 1899 ... ' 1,185,265 1,260,468 1926 _ 9,417^619 9,417,619

1 The budget of the preceding year was prorogued. PERUVIAN PUBLIC FINANCE 37 The budgets up to and including the year 1888 embrace revenues and expenditures for both the National Treasury and those of the Departments. In 1887, the last year of this arrangement, about 15 per cent of the income was expended for departmental purposes. After 1888 the Departments became financially autonomous, and the budgets include only revenues and expenditures collected and dis­ bursed by the National Treasury for general purposes of the nation. EARLY FISCAL RESULTS Until the guano revenue began, soon after 1840, the customs duties on imports furnished the larger share of the fiscal receipts. In 1825, for example, 800,000 pesos of the total estimated income of about 1,500,000 pesos came from this source. In 1840 of a total of about 3,000,000 pesos, the customs contributed 1,600,000 pesos, while the balance came from the poll tax, paid chiefly by the Indians, and vari­ ous taxes on property and commerce. Many of the taxes assessed by the colonial government had been abolished and the growth of a national fiscal system was impeded by the unsettled state of the coun­ try under the various authorities that held power in this comparatively brief period. The available resources hardly sufficed for the mainte­ nance of the simplest form of government; the foreign debt was in default; and a comparatively large volume of unfunded internal obligations had been accumulated. • The complexion of affairs changed decidedly after 1845, when General Castilla took power. The State had obtained its first revenue from the sale of guano in 1841 and thereafter the income from this source (largely taking the form of advances, credits, and the extinction of outstanding obligations) constituted an increasing part of the revenue. A number of years passed, however, before it became preponderant. In 1851, one of the earliest years for which detailed figures can be obtained, the net return from guano was 2,200,000 pesos, almost exactly the same as the yield from customs; total revenue came to. 7,763,900 pesos. The principal internal taxes were the tribute paid by the Indians (contribucion de indi- genas); the "patentes" or commercial and professional licenses; and the tax on the income from real property (predios). The revenue from guano sales (declared a State monopoly in 1842) grew very rapidly during the fifties. Although the successive biennial budgets increased remarkably, the actual receipts tended to surpass the estimates. In the meantime a number of the internal taxes were abolished and the remainder were neglected. The follow­ ing statistics of the financial operations of 1859 are illuminating:

KEVENUES PeSOS EXPENDITURES Guano — 15,875,352 ._ 211,084 Customs, etc 5,079,439 Army and navy and military pensions,_ 9, 746,432 Balance from 1858 938,389 Civil expenditures and pensions... 2,129,904 Bond redemption 3,218,700 Bond interest.. _.. 2,191,777 Other 2,889,848 Total 21,893,180 Total 20,387.745 The economic and political organization of the country had not reached a stage where the bountiful revenues might have been applied to constructive purposes. The effect of the guano prosperity was to emphasize the desirability of employment under the Government or of participation in some form of activity directly or indirectly connected with the guano industry. Public administration revolved about the negotiation of guano contracts, the complex official rela^ 38 PEEUVIAN PUBLIC FINANCE tions with the shippers, bankers, and contractors that grew out of the numerous ramifications of the business, and the political maneuvers incident to the official control of so rich a national resource. Con­ sequently the number of public servants and pensioners, both civil and military, increased steadily, The liberal recognition and fund­ ing of claims against the Government dating from the time of independence, decreed by a law of 1850, absorbed large sums, as did the refunding in 1849 of the old external debt and the assumption of a share in the revolutionary borrowings of New Granada and Chile. The manumission in 1854 of the negro slaves, redeemed from their owners at 300 pesos each, put another burden on the treasury. Practically all of the steady inflation of expenditures was met out of the guano income, since the customs collections and puny internal revenues scarcely satisfied the needs of local administration, police, and education. The very first guano contracts had been characterized by credits and anticipatory advances to the Treasury by the shippers. Thence­ forward there occurred the paradoxical situation commented on by historians, in which the greater the public income, the more penurious the fiscal situation. The consignees who controlled the business until 1869 were always creditors of the Government. Thus at the end of 1861 the floating debt was 13,000,000 pesos, most of which consisted of balances in favor of the guano shippers. At about this time the annual operations of the Treasury began to assume a more definitely unfavorable aspect. Heavy military expenses were caused by wars with Ecuador, Bolivia, and Spain; disturbances in public order were general from 1862 until 1868; revenues began to fall below budget estimates; the richest guano deposits were nearing depletion; the Civil War in the United States depressed the guano trade. The real heyday of the guano period had been passed, although the ultimate collapse did not take place until 15 years later. But it was apparent that a change was taking place in fiscal conditions. This was demonstrated by the statistics of 1863, in which the guano income •was but a little over 11,000,000 pesos out of a total of 26,000,000 pesos. Of the balance nearly 9,000,000 pesos came from the proceeds of the foreign loan of 1862. The time was at hand when expenses must be checked or reduced or new dependable income created. These simple words explain the inevitable developments that followed the failure to make the necessary reforms. It is true that a dictatorial government in oower from 1866 to 1868 took steps which, if followed thereafter, might have saved the situation. The personal tax was revised and taxes were placed on liquor, inheritances, and principal export products. Revenue from documentary stamps and stamped paper was created. By this means internal revenue, which had dwindled to 156,000 pesos in 1865, grew to 544,000 pesos in 1866. Economies were effected in the civil lists. New regulations were imposed on the guano shippers whereby the net income was improved. However, after the fall of the dictatorship the majority of these measures were rescinded. There ensued a period of four years of over-optimistic activity in railroad construction based on extravagant foreign loans (1868-1872). The system of marketing guano on the consignment plan was aban­ doned when the Dreyfus sale contract was celebrated in 1869. The1 Dreyfus contract was authorized by a law of broad general terms that empowered the executive to do what was necessary to eliminate PERUVIAN PUBLIC FINANCE 39 the floating debt and improve the position of the Treasury. A regular monthly payment of 700,000 soles (the silver sol had now replaced the peso) was guaranteed by Dreyfus Bros. & Co. This allowance, together with the yield from the customs and internal taxes, was thought to be sufficient for the maintenance of the Gov­ ernment and the care of the internal debt; the foreign debt was to be administered by Dreyfus, as Peru's fiscal agent, in accordance with the existing hypothecation of the guano revenue to the bond­ holders. But the service of the new foreign loan of 1870 reduced the monthly remittance by Dreyfus to 400,000 soles, and the latter sum was later absorbed by the service of the loan of 1872. The result was that the internal expenses of the country, which could not be reduced to less than 17,000,000 soles, had to be met from a reve­ nue of about 8,700,000 soles plus what might be obtained from extraordinary sources. At the same time (end of 1872) the floating debt was over 7,000,000 soles, and public works under way involved an outlay of more than 80,000,000 soles, part of which sum was expected from the final liquidation of the loan operation of 1872. The efforts to meet this situation took the form of an increase in customs duties, some relatively unimportant changes in stamp taxes, the creation of the nitrate monopoly (followed in 1875 by the ex­ propriation of the deposits and plants), and a new agreement with Dreyfus Bros. & Co., whereby the latter advanced to the Treasury 6,000,000 pesos in cash. An attempt was made to issue Treasury notes, but they were unplaced except for some issued in payment for public works. The biennial budget for 1873-74 was finally closed with a deficit of 14,000,000 soles. Under the terms of the original contract and later agreements with Dreyfus, the service of the foreign debt had been assured up to the middle of 1875, and the chief preoccupation of the authorities had been to obtain funds sufficient for home expenses. As the first of 1876 approached the question of the foreign-debt service came into prominence. No more money was forthcoming from Dreyfus. Emissaries were sent to Europe to treat with the bondholders, and out of their negotiations came a new contract with a corporation formed by the bondholders in London (the Peruvian Guano Co., Ltd.) which provided for the consignment of guano up to 1,900,000 tons. The corporation agreed to make an annual payment of £700,000 in monthly installments, free of liability on account of the external debt, and the balance of the profits realized from the business was to be deposited for the service of the bonds. The annuity was paid in 1876, 1877, and 1878, but was suspended in 1879 when the Chilean forces took possession of the guano deposits. This allow­ ance, together with borrowings from the Lima banks in 1875 and the returns from nitrate, helped the fiscal position to a certain degree. The budget of 1875-76 closed with a deficit that was undoubtedly large, although definite figures are not available. i The last year of this period for which statistics are at hand is 1877. Actual revenue and expenditure were as follows:

| REVENUE EXPENDITURE Soles ; Customs- • , 6,885,214 Ministry of Government.. 6,337,948 , Guano _ , 5,334,953 Ministry of State 268,435 } Nitrate 5, 297,902 Ministry of Justice 885,600 I Taxes 234, 637 Ministry of Treasury... 7,140,003 i Various 2,358, 208 Ministry of War ,_„ 6, 240,178 Total . 20,110,914 Total 20,872,164 40 PERUVIAN" PUBLIC PlKAKCE Actual expenditures in 1875 and 1876 had been around 30,000,000 pesos. The drop in 1877 was due to smaller disbursements on ac­ count of public works and the nitrate monopoly. It will be noted that the income from taxation was nominal; this was owing to the fact that a law of 1873 had diverted the proceeds of local taxations to the municipal and departmental councils, for the purpose of freeing local administration from the uncertainties of dependence upon the National Treasury and relieving the latter of calls for subsidies. The one important resource developed by the Treasury during the difficulties that began soon after 1860 had been the nitrate revenue. Nitrate of soda had been exploited as early as 1830 in the province of Tarapaca. In 1868 an export duty of 4 centavos per quintal (101 pounds) had been assessed as a fiscal measure. A law of Jan­ uary 18, 1873, created a nitrate monopoly in favor of the Govern­ ment, which was to buy the product at 2.40 soles per quintal; pro­ ducers, however, had the option of shipping independently under an export duty of 15 centavos per quintal. This alternative was pre­ ferred by the trade, and as the Government had insufficient funds for administering the monopoly, the latter in reality was never effective. Consequently the measure was rescinded by a new law of May 28, 1875, which provided for the expropriation of all nitrate deposits by the Government, the owners to be paid in " nitrate certificates " which were to be redeemed within two years. The banks of Lima entered an association to finance and administer the project. By the end of 1877 the sum of 19,550,000 soles in nitrate certificates had been issued in payment for 146 properties, nearly the entire Tarapaca field. A loan of £7,000,000 had been authorized to take up the nitrate certificates and provide funds for railroad construction in the nitrate district. Efforts were made to float this loan in Europe and to ar­ range for a combination with the foreign interests handling guano, with the purpose of reducing competition between guano and nitrate. The negotiations failed, with the result that the Government was compelled to make less advantageous terms with a local bank. On the whole, the nitrate expropriation did not yield the revenue that might have been obtained from a judicious export tax, because of heavy disbursements on account of costs of manufacture, interest, commissions, and various expenses. The period just surveyed came to an end in April, 1879, when war with Chile was declared. The long struggle against the train of conditions set in motion by the guano prosperity was not won, although a strong reaction against previous abuses and extrava­ gances was in evidence. The tangible result of the situation was a fatal lack of resources in cash or credit at the critical moments of the war. BEGINNING OF THE MODERN FISCAL SYSTEM The budget of 1879-80, the execution of which was interrupted by the war, was the last authorized until that covering the period 1887-88. In 1886 constitutional administration had been restored by President Caceres and the normal processes of government were resumed, but necessarily on greatly different bases as far as financial methods were concerned. The revenues from guano and nitrate, which had accounted for approximately 48 per cent of the income of the years just before the war, were missing entirely, for the nitrate PEKUVIAN PUBLIC FINANCE 41 and guano deposits of Tarapaca had passed to Chilean sovereignty. Other guano deposits were either exhausted or still occupied by Chileans under the terms of the Treaty of Ancon, providing for the extraction of certain quantities.; the Peruvian share of the returns was turned over to the foreign bondholders. The guano revenue thus was eliminated entirely, not to be restored in appreciable measure until 1915. The immediate financial problem was to find means with which to meet ordinary expenses. The resumption of service on either the foreign or the internal debt was out of the question. As a basis for the budget there existed the customs duties and a few miscellaneous internal revenues, for the collection of which practically no machinery existed. The problem was made still more difficult by the passage of the so-called "decentralization law" of November 13, 1886, which gave the departmental treasuries the administration and disburse­ ment of the personal tax (contribucion personal), the "predios" or direct property taxes, and other strictly local assessments. To the National Treasury were assigned the customs duties, the stamp taxes, the new tax on tobacco, and some other general revenues. Under the circumstances, this attempt to make the Departments financially independent had the practical effect of hampering somewhat the work of national fiscal reorganization. (The departmental councils, as a matter of fact never gave satisfaction, and a series of laws promulgated during succeeding years gradually limited their functions and responsibilities, culminating in their entire abolition in 1921.) A number of measures passed in 1886 were the first of the modern code of taxation. There was a natural recourse to indirect contri­ butions, for the impoverished population was in no position to pay direct taxation of any consequence. A new schedule of import duties was adopted; the rates, however, were very moderate, with an eye to helping the revival of trade and reducing the cost of living. A measure revising the stamp taxes and regulating the use of stamped paper was adopted. A tobacco tax was created—the first of the important consumption taxes on principal commodities which were to form the bases of the modern monopolies and excise taxes. For a number of years the final liquidation of budgets bore only a nominal relation to the original estimates, but the gradual revival of trade and industry was seen in the slow advance in the yields of the customs and internal revenues, reducing the margin between authorized expenditures and those actually permitted by the current income. After 1890 the old system of biennial budgets was replaced by that of annual estimates. In the meantime actual receipts had reached the sum of about 8,000,000 soles, with equivalent expendi­ tures. The fiscal system was strengthened by the imposition of an excise tax on liquors, and several years of internal quiet permitted the extension of administrative power to all parts of the country. A period of relative ease in financial matters was experienced, so that the records of the decade following 1891 show very moderate deficits, due more to arrears of payments subsequently recognized than to actual excess of disbursements during the fiscal periods. The sounder fiscal conditions permitted the recognition and funding in 1889 and 1898 of the old internal obligations, plus those incurred during the war and in subsequent years. 42 PERUVIAN PUBLIC FINANCE In 1900 the revenue came to Lp.1,309,000 (the Peruvian pound, equivalent to 10 soles, was now the monetary unit). A regular annual growth took place during the decade as is shown by the table given hereinafter, which shows the estimated and actual revenue and expenditure of the years 1901 to 1909, inclusive. It is to be noted, however, that the statistics are incomplete, as they present only the operations of the calendar years and not those of each complete fiscal period. Income and expenditure pertaining to one year but realized during the supplementary period or "period of liquidation," which consisted of nine months of the'following year, were not in­ cluded in the accounts presented annually and consequently are not found in statistical publications. The figures, however, are useful as indicating the progress of the financial capacity of the country.

REVENUE AND EXPENDITURE. 1901-1909

Revenue Expenditure Year Budgeted Actual Budgeted Actual

Lp. Lp. Lp. Lp. 1901 _ _ 1,385,320 1,526,208 1,424,820 1,383,800 1902 1,461,286 1,473,759 1,461,286 1,328,489 1903 _ 1,461,286 1,606,591 1,461,286 1,478, 537 1904 _... 2,107,874 1, 990,568 2,107,874 1,884,950 1905 _. 2, 223,488 2,178,320 2,222, 543 2,089,463 1906 _._ _ 2, 506, 386 2,555,463 2,506,386 2,444,185 1907 _._. _-._ 2,681,193 2,830,324 2,681,193 2,722,579 1908 ..._.. _ 2,997,444 2,945,354 2,997,444 3,294,859 1909 3, 075,987 2,614,028 3,075,987 2,865,348

No attempt can be made to indicate the surplus or deficit of each .year, since the figures are incomplete and include extraordinary items. The period was one of generally favorable conditions, and it is possible that a small surplus or a virtual equilibrium might be ascribed to some of the years. On the other hand, there were un­ favorable years when actual disbursements exceeded revenue or when the floating debt was increased by neglected services or unpaid credits. During this time new taxes on salt, alcohol, sugar, and matches were created, and the tobacco monopoly was substituted for the former excise tax. The collection of taxes had been systematized by the procedure of farming them out to a private corporation formed for the purpose. An import tariff effective in 1901, whose average rates were about 37 per cent ad valorem, including surcharges, was replaced in 1910 by a new schedule of specific duties.

FISCAL RESULTS, 1910-1924 A detailed inspection of fiscal results may conveniently begin with the year 1910, when the system under formulation since 1886 had reached a settled condition. Few further changes were made, in fact, until after the beginning of the war in 19l4. The results in the ordinary operations of 1910, 1911, and 1912 are shown in the following table. Complete statistics for 1912 are not available. It is to be noted that in these, as in nearly all subsequent years, there are deferred liabilities to be added to the actual excess of disbursements over ordinary revenues; these items were presented PERUVIAN PUBLIC FINANCE 43 for auditing and recognition to the claims commission appointed to consider such obligations incurred in the years 1895 to 1915, in con­ nection with the issuance of the internal bonds of 1918. The amounts shown include the status of such recognized claims as of June 30,1923.

FISCAL RESULTS, 1910-1912

Items 1910 1911 1912

Lp. Lp. Lp. Revenue in calendar year 2, 795, 775 3,227,417 0) Revenue in period of liquidation-.. 123,495 126, 265 (1) Total ordinary revenue 2,919,270 3,353,682 3, 535,877 Expenditure in calendar year, budgetary 2,653,336 2,833,072 0) Expenditure in calendar year, unforeseen2 31,986 427,446 0 Expenditure in period of liquidation 242,224 139,152 0) Total ordinary expenditure 2,927,546 3,399,670 3,711,320 Deficit from above operations ..—.. 8,276 45,988 175,443 Add deferred liabilities 3 „ 35,632 198,303 48,250 Total deficit 43,908 244,291 223,693

i Not available. 2 Not itemized. 3 As recognized by Claims Commission up to June 30,1923. The more detailed statistics available for later years permit a more satisfactory presentation of the accounts from 1913 to 1924, inclusive. The "fiscal year" includes the calendar year and the subsequent "period of liquidation" during which the delayed budgetary collec­ tions and payments are effected and the accounts closed; the "period of liquidation" lasted to September 30 until 1916, when it was advanced to March 30; by the new budget law of 1922 it is put at April 30. The extraordinary accounts consist of the Treasury operations of the calendar year apart from budgetary income and outgo.

FISCAL RESULTS IN ORDINARY AND EXTRAORDINARY OPERATIONS, 1913-1924

Item 1913 1914 1915 1916 1917 1918

Lp. Lp. Lp. Lp. Lp. Lp. Ordinary revenue, fiscal year. 3, 549,283 3,069,451 2,837,881 13,942,383 4,510,435 4,892,461 Ordinary expenditure, fiscal year 3,720,600 3,289,090 2,821,957 13,193,610 3,330,484 4,693,343 Deficit in above operations 171,317 219,639 215,924 2 748,773 21,179,951 2199,118 Add deferred obligations 3 58,851 3104,589 3 259, 639 Deficit in ordinary accounts - 230,168 324,228 243,715 2 748,773 21,179,951 a 199,118 Extraordinary income: Credit operations - .__ 1, 776, 744 909,446 312,078 64,714 328,864 Other.- - - ~ 8, 766 37,118 * 63, 704 16,968 67,100 139,896 Total extraordinary income., 1,785,510 946, 564 375, 782 81,682 67,100 468,760 Extraordinary expenditure: Credit operations- 1,045,205 403,711 179,390 214,178 363,168 37,699 Public works 57,377 18,898 20,367 28,322 123,098 258,947 War-Navy - 330,955 190,463 21,013 26,969 Other - 147,843 155,866 69,168 98,512 819,827 293, 587 Total extraordinary expenditure 1,581,380 768,938 289,938 341,012 1,306,093 617,202 Surplus in extraordinary accounts 204,13Q 177,626 85,844 « 259,330 «1,238,993 «148,442

See footnotes at end of table. 65880°—26t—^ 44 PERUVIAN PUBLIC FINANCE

FISCAL RESULTS IN ORDINARY AND EXTRAORDINARY OPERATIONS, 1913-1924— Continued

Item 1919 1920 1921 1922 1923 1924

Lp. Lp. Lp. Lp. Lp. Lp. Ordinary revenue, fiscal year 6,154,171 8,087,297 6,186,337 6,584, 701 7,584,637 9,184,028 Ordinary expenditure, fiscal year 5,799,981 7,481,303 ,7,654,719 6,906,516 6 7,336,161 8,493,391 Deficit in above operations 2 354,190 2 605,994 1,468,382 321,815 * 248,476 2 690,637 Add deferred obligations (7) 8 307,464 8 284,683 88,583 Deficit in ordinary accounts 2 354,190 2 605,994 1,468,382 629, 279 »36,207 " 602,054 Extraordinary income: Credit operations 203,152 269,430 567,020 1,807,002 1,755,585 3,336,556 Other— 249,090 491,409 1,438,182 447,806 23,459 331,108 Total extraordinary income 452,242 760,839 2,005,202 2,254,808 1,779,044 3,667,664 Extraordinary expenditure: Credit operations 46, 658 94,419 77,170 695,650 983,302 1,334,930 Public works - 105,860 430,696 140,952 364,888 368, 681 632,900 War-Navy '. 77, 676 61,106 30,397 326,713 Other 527,371 748,256 672,950 811,729 121,891 939,742 Total extraordinary expenditure 757,565J 1,334,477 921,469 1,872,267 1,473,874' 3,234,285 Surplus in extraordinary accounts ••> 305,323| * 573,638 1,083, 733 382, 541 305,170 433,379

1 Includes export duties. 2 Surplus. 3 As recognized by Claims Commission up to June 30, 1923. 4 Including Lp 55,953 from new export duties. * Deficit. 6 Includes the sum of Lp.578,608 authorized by special laws. By provisions of the new budget law such expenditures, formerly regarded as extraordinary, are now charged to the current budget. 7 Unknown. 8 Status according to the annual financial statement; probably reduced somewhat by subsequent delayed collections. 9 The annual statement offsets this by the sum of Lp.25,324, accounts due but not collected. 10 Surplus; the annual statement increases this amount by Lp.29,505, accounts due but not collected. The term of years covered in the table might be divided into sev­ eral distinct periods: (1) The period of depression from 1913 to the end of 1915, when ordinary revenues decreased and deficits were incurred despite a curtailment of expenditure; (2) the period of ad­ vancing revenues through 1920, when ordinary operations yielded an annual surplus; (3) the highly unfavorable years of 1921 and 1922, when inflated expenditures coincided with a drastic fall of revenue; and (4) the years 1923 and 1924, which present a relative equilibrium based on a new stage of economic conditions. The course of events is very clearly revealed by a simple inspection of the.figures. It is seen that in the earlier years a deficit in ordinary accounts is accompanied by rather large extraordinary income, mostly in the form of loans; at the same time disbursements in credit opera­ tions were fairly large, because new obligations were generally predi­ cated on the application of part of the proceeds to the extinction of other loans. Sometimes the budget of expenditures omitted items which had to be served by extraordinary resources. Passing to the more favorable conditions of 1916 and after, the surplus in ordinary accounts was attended by a more or less similar excess of extraor­ dinary payments; this, of course, represents the extinction of debt and the application of money to purposes not contemplated when the budget was formed. It is interesting to note the increase of funds devoted to public works; at the same time, greater liberality was possible in extending the public services. PERUVIAH PUBLIC FINANCE 45

SOURCES OF ORDINARY REVENUE, 1913-1924 The ordinary income is shown in the subsequent table according to the classifications adopted in the official Statistical Abstract, which are, however, not those of the annual "cuenta general" (gen­ eral financial report). Under "taxation" are included: (1) The direct taxes on mining and oil property, personal and real property, business and profes­ sions, etc.; (2) the customs collections; (3) the proceeds of monopolies and excise taxes; (4) the miscellaneous stamp taxes, consular fees, inheritance tax, sale of stamped paper, etc. The income from "national dominion" is composed chiefly of the guano revenue and the receipts from State railroads and port facilities. " Public serv­ ices" are the post office, telegraphs, mint, and other similar institu­ tions. SOURCES OF ORDINARY REVENUE, 1913-1924

Item 1913 1914 1915 1916 1917 1918

Taxation: Lp. Lp. Lp. Lp >Lp. Lp. Direct 122,915 133,167 156, 650 152, 542 164,330 196,839 Customs 1,444,285 1,041, 591 713, 081 1, 569,849 1,835,806 2,080,068 Consumption and monopo­ lies 1,299,805 1,235,055 1,279, 960 1,395, 751 1,457,817 1, 527, 646 Miscellaneous 168, 718 173, 599 137, 997 170, 862 223,441 251,973 3,035,723 2, 583,412 2,287, 688 3,289, 004 3, 681,394 4,056, 526 National dominion 29,200 33,942 110,400 131, 359 225, 256 199, 598 Public services 484,360 452,097 390, 955 522, 020 603, 785 636,337 Total 3,549,283 3,069,451 i 2, 789, 043 3,942,383 4,510,435 4,892,461

Item 1919 1920 1921 1922 1923 1924

Taxation: Lp. Lp. Lp. Lp. Lp. Lp. Direct _ 201,283 265,678 515, 693 548,182 552, 638 537, 661 Customs 2, 728,619 4,325,805 2,485,401 2, 249, 270 3,411, 702 4,144,842 Consumption and monopo­ lies 1, 735, 216 1,933, 065 2,020,811 1,979, 965 2,009,593 1,855, 214 Miscellaneous 299, 588 349,239 655, 538 1,033, 960 877, 013 1, 805,181 4, 964, 706 6,873, 787 5, 677, 443 5,811,377 6,850,946 8,342,898 National dominion 47% 406 339,078 305,994 565,843 497,385 578,977 Public services. 717,059 874,432 202,900 207,481 236,306 262,153 Total 6,154,171 8,087,297 6,186,337 6,584, 701 7,584, 637 9,184,028

i An unitemized amount of Lp.164,080 was collected during the period of liquidation, making the total ordinary revenue for the year Lp 2,837,881. The fiscal system has undergone numerous changes since the beginning of 1913. Very few of the established sources of income have remained unaltered. Export taxes have taken a prominent lace among the revenues. Budgetary and accounting procedure Eas been improved under the law of 1922 already described. The central government has a firmer hold on local fiscal administration. The field of the Tax Collecting Co. has been widened to include the collection of nearly all internal revenues, including those of the municipalities. The guano revenue has assumed considerable importance under a new form of administration, involving scientific conservation and assistance to national agriculture. The various con­ sumption taxes, whether on a monopoly or excise basis, have been highly systematized. There has been a growing tendency to set aside certain revenues through a fiduciary agency for application to specific 46 PERUVIAN PUBLIC FINANCE purposes, such as municipal improvement and sanitation, railroad building, irrigation projects, and the like. These developments are more clearly shown in the subsequent detailed analvsis of the revenues since 1922. ITEMIZED ORDINARY REVENUE, 1922-1924 Taking the classification of income used in the annual financial reports, the ordinary revenues of 1922, 1923, and 1924 were as shown in the following table:

CLASSIFICATION OF ORDINARY REVENUE, 1922-1924

Item 1922 1923 1924 Item 1922 1923 1924

Lp. Lp. Lp. Lp. Lp. Lp. Direct taxes 470,493 Monopolies.. 1,300,113 1,836,972 1,855, 214 Import customs 354,132 537, 661 Public services... 201, 558 205,439 262,153 duties. 2, 229,617 Government en­ Export customs 1,577,141 2,966,523 terprises.- 361,085 459,163 578,977 duties. 1,025,090 Miscellaneous Miscellaneous 602,471 1,101,961 revenue 835, 697 365,199 453,392 customs charges 69,656 62, 359 76,358 Internal revenue. 895, 200 363,976 567,810 Total 6, 584,700 .7,584,637 9,184,028 Fees and stamp taxes 387,647 566,329 783,979

The various categories are discussed in the following pages, and an attempt is made to indicate their legal source, their character, and the special uses, if any, to which they are put. On account of the changing nature of fiscal legislation, these remarks can serve only the limited purpose of conveying a general idea of the system of taxation.

DIRECT TAXES Real direct taxation by the central government, is scarcely in its incipiency in Peru, as is shown by the character of the items officially included in this category.

REVENUE FROM DIRECT TAXATION

Item 1922 1924

Lp. Lp. Eural property tax (for sanitation) 15, 254 10, 810 10,986 Urban property tax (for sanitation).__ 52,062 52,333 50,706 Income or securities tax : 46, 263 50,647 71,655 "Patentes," Lima and Callao ; 116, 930 166,299 167,088 Mining tax 65, 338 65,169 71,157 Petroleum production tax,.. _ 48,156 65, 768 30 per cent of former departmental revenue, for educational 32, 257 30,831 34,753 Other taxes .._ 26, 028 46, 248 65, 548 Total. 354,132 470, 493 537,661

Rural and urban property tax (for sanitation) .-—The property tax (predios rtisticos y urbanos) has been a local or provincial source of revenue in most of Peru's financial history. At present the income from the predios in certain cities and provinces is collected by the National Treasury under the provisions of law No. 4126 of May 6, PEKTJVIAN PUBLIC FINANCE 47 1920, which provided for the sanitation of those cities and dedicated certain revenues to the work. The sums above shown compose the collections thus affected, which are pledged to the service of the sanitation loan of 1924 obtained in the United States. The balance of the predios goes directly to the municipalities where collected. The rate has generally been 5 per cent of the calculated income or rent from the property taxed. Recently, by virtue of the national defense law (No. 4936) of January 30, 1924, it has been raised to 7 per cent, the proceeds of the increase or additional 2 per cent being set aside exclusively for the national defense fund created by that law. Income or securities tax (impuesto sobre la renta del capital movi- hle).—A tax of 4 per cent annually has been collected on the income from stocks and bonds, mortgages, bank deposits, and on other forms of movable capital. The rate was raised to 6 per cent by law No. 4644 of April 2, 1923. Patentes of Lima and Callao.—The patentes are the annual busi­ ness or professional licenses-—fixed at 5 per cent of the reported profit derived from the exercise of each individual business or professional practice—collected in the municipalities. The patentes of Lima and Callao were converted into national revenues many years ago. The rate was raised to 7 per cent by law No. 4644 of April 2, 1923. Mining tax.—According to the mining code now in effect, each perteneiicia or claim (a pertenencia is 4 hectares in the case of oil or gold claims and 2 hectares for other minerals) pays an annual fee of 30 soles. This revenue is appliecl to the maintenance of the School of Engineering and Mining in Lima and for other purposes which tend to further the mining industry. Petroleum production tax.—Law No. 4452 of January 2, 1922, governs the exploration and development of petroleum lands. Petro­ leum deposits are regarded as national property. There is a scale of taxation upon both exploration and development concessions, based upon location and extent. The production tax authorized by law is that of the equivalent of 10 per cent of the crude petroleum derived, in the case of deposits within 150 kilometers of the sea, and a minimum of 6 per cent otherwise. This tax was to be effective July 1, 1922. Thirty per cent of former departmental revenues.—-By law No. 162, 30 per cent of the revenues then assigned to the departmental coun­ cils was to become fiscal income and applied toward the maintenance of the school system, which at the same time was placed directly under the central government. Other direct taxes.—Other taxes classified as direct, including those on inheritances and hydroelectric concessions, have not produced important revenues, if exception is made of the annual contribution of the Peruvian Corporation, now fixed at Lp.15,000.

IMPORT CUSTOMS DUTIES The revenue from import customs duties is derived from the basic duties on imported merchandise, together with various sur­ charges that have been added from time to time for some specific purpose. 48 PERUVIAN PUBLIC FINANCE

IMPORT CUSTOMS DUTIES

Item 1922 1923 1924

Lp. Lp. Lp. Maritime customhouses . 1,187,719 1,655,129 2,169,556 Additional 8 per cent 95,568 132,081 173,494 River customhouses _ 18,578 39,679 34,265 109,863 177,790 309,240 Additional 10 per cent for sanitation 132,694 185,671 229,552 Various. . ._ 32,719 39,267 50,416 TotaL : 1,577,141 2,229,617 2,966,523

The present import customs tariff is that established by law No. 4679, which went into effect July 1, 1923. A number of minor changes have been introduced by subsequent measures. The 8 per cent surcharge on customs duties dates from 1892, when it was imposed for the purpose of supplying funds with which to meet the annuity of Lp.80,000 to the Peruvian Corporation in compliance with the contract of 1890. The funds were never separately collected and administered; and a later agreement pledged the revenue from the excise tax on sugar for the purpose. The surcharge, however, has remained as a permanent feature of the general tariff system. Collections from "river customhouses" (as opposed to "maritime customhouses/' those on the coast) are those of Iquitos and other ports of entry in the Amazon basirf. Differentials established from time to time have caused this item to be treated separately in the accounts. During the prosperity of the rubber industry the receipts from Iquitos were important, but after 1912 they diminished greatly, although recent years have shown an upward tendency. Duties collected upon imports through the mails are collected by the Post Office Department, the same tariff applying to parcel-post shipments as to others. The surcharge of 10 per cent on customs duties, the proceeds of which are set aside for purposes of sanitation, originated in law No. 4126 of May 12, 1920, which authorized the construction of sani­ tary works and paving in a number of Peruvian cities. This revenue is consequently pledged to the service of loans obtained for such urposes, specifically at present that of $7,000,000 contracted in the PFnited States in 1924. The collections as made are deposited with designated trustees for application to the purposes provided by law. The basic import customs revenue is not pledged to any Govern­ ment obligation, although old legislation provides that the internal bonds of 1889 be served by the application of 5 per cent of the import duties, and the dollar loan of 1922 is secured by petroleum revenues, including the duties on petroleum imports. In addition to the more important surcharges above described, there are various other local impositions of 1 or 2 per cent extra on import duties, generally applied specifically to public works* in the district where collected. Eecently, by law No. 5072 of March 18, 1925, an additional customs duty has been created of 2 per cent ad valorem on goods brought in through the customhouses and 5 per cent ad valorem on parcel-post imports. Certain foodstuffs are exempted. The revenue thus derived is to be devoted exclusively to primary education. PEEUVIAN PUBLIC FINANCE 49

EXPORT CUSTOMS DUTIES Export taxes had practically no place in the fiscal system of Peru until 1915, when the need of the Government for funds caused the imposition of a proportional tax on the exports of the principal agri­ cultural and mineral products, the prices of which were then rising with the beginning of the abnormal war demand. The basis for the majority of export duties now in effect is found in law No. 2727 of March 20, 1918. There have been a number of modifications, and in general the legislation on the subject is varied and liable to changes. Export duties are fixed or variable, the latter predominating. The principal fixed taxes are those on gold, petroleum, hides, and cotton­ seed oil and cake. Variable taxes are imposed on sugar, cotton, wool, silver, copper, and lead. The principle of the variable taxes is that of direct participation in the profits obtained by producers and ex­ porters as the market prices of commodities exceed a basic figure taken to represent cost of production plus a normal profit.

YIELD OP EXPORT CUSTOMS DUTIES

Articles 1922 1923 1924 Articles 1922 1923 1924

LV. Lv. Lv. LP. Lp. Sugar 111,209 357, 052 270, 528 Rare metals 103 13,685 20,136 Cotton 144,135 267,029 325,487 Petroleum and de­ WooL _ 10, 811 11,715 24,018 rivatives 180,308 195, 568 272,256 Rubber 3,390 6,379 2,671 Profits taxes on Gold (in bars, ce­ i other products 38,010 21,960 42,154 ment, or matte) _ 19, 507 27,043 23,844 , Various 11, 506 13, 775 17,356 Silver (in all forms) _ 62,199 72,103 96,812 Copper (in all forms). 21,293 38, 781 6,699 j Total- 602,471 1,025,090 1,101,961

As will be seen from the following descriptions, some of the chief duties are computed and collected in terms of sterling; taxes on copper, however, are paid in United States currency, and some others, especially petroleum, are assessed in Peruvian money. Sugar.—The basic tax is 4.2 pence per Spanish quintal (101 pounds) on sugar in all forms, when the Liverpool or New York price of 96° granulated sugar is at 11 shillings 6 pence or its equivalent per quintal. When the price is higher, 10 per cent of the gross excess is to be collected in addition. A law of March 23, 1925 (No. 5076) provides that when the quotations on sugar in Liverpool or New York are lower than the prices of sale at the Peruvian ports of ship­ ping, the duties on sugar shall be assessed on the basis of the Peruvian quotations. Cotton.—The duties vary according to the kind, grade, and lo­ cality. In general, the basis of the tax is that of 24 pence per quintal when the market price of the " good fair grade " is 10 pence per pound. The duty is increased by 10 pence per quintal for each increase of 1 penny per pound in price. This basic rate is subject to various modi­ fications for grades and place of production, so that the current schedule, as published weekly by the Government, contains some 22 items. The Peruvian consulates in New York and Liverpool are required to report current prices in those markets. Wool.—Duties on wool are based on current market prices in New York or Liverpool and calculated in United States currency or 50 PERUVIAN PUBLIC FINANCE sterling, according to the destination of shipments. A tax of 2 shillings per quintal is assessed when the Liverpool quotation is 14 pence per pound* with a 10 per cent surcharge on values in excess of that basis. In the case of shipments to the United States, the duty is 48 cents United States currency per quintal when the New York quotation is 28 cents per pound, with the same surtax of 10 per cent on higher values. About 14 different kinds of wool are recognized, with varying duties announced weekly as in the case of cotton. Rubber.—During the period of prosperity in the rubber regions of the Amazon, an export duty of approximately 8 per cent ad valorem was assessed and revenues of some importance were obtained. Later, it was necessary to reduce the scale of taxation, and for a time prac­ tically all duties were suspended. At present exports of fine rubber, excepting balata, are subject to duties varying from 2 per cent to 6 per cent, depending on price fluctuations from 25 pence per pound to 49 pence and upward.1 The London quotations, with a reduction of 30 per cent, are taken as the basis for levying the duties. The duty on common rubber is computed on the same scale, with a fur­ ther reduction of 30 per cent applying to the tax. Exports of balata from the port of Iquitos are subject to a duty of 5 per cent. Gold.—A duty of Lp.10 per kilo of fine gold is assessed upon that exported in ordinary forms, including that contained in bars or ingots of other metals the gold content of which is at least 6 grams per ton. Gold precipitates obtained by the cyanide process, however, are taxed at Lp.2 per kilo. Silver.—When the quotation of silver is 24 y2 pence per Troy ounce standard, silver exported in any metallic form is taxed at the rate of 1 shilling per fine kilo, with the addition of 10 per cent of the excess of quotations over that basis. Silver sulphides and precipitates are taxed on gross weight, at a rate equal to 25 per cent of that charged for metallic silver, when the market quotation of silver is 2934 pence per ounce or higher. Gopher.—Metallic copper, including bars containing 80 per cent or more, is taxed at the rate of $1.25, United States currency, per gross ton of 2,000 pounds, when the price of electrolytic copper in New York is 13 cents per pound. For quotations above that figure, 10 per cent of the excess is added. Cement and bars containing from 60 to 80 per cent pay one-half of the above tax. Bars containing less than 60 per cent copper are assessed at 40 per cent of the scale for .metallic copper. Other metals.—Unspecified ores, whether metalliferous or not, are taxed at the rate of 2% pence per 100 kilos gross weight; any kind of mechanical or chemical concentrates are taxed at 5 pence per 100 kilos. Vanadium ore is taxed at $1.50 per ton when the price of the metal is $3 per pound or less in the United States market. When the price is between $3 and $4, the duty is increased 50 cents per ton for each 10 cents in excess of the $3. When the quotation is above $4, the surcharge is $1 for each 10 cents in excess of $4. Molybdenum and tungsten ores are assessed at Lp.2 and Lp.l, respectively, per metric ton; a 10 per cent surcharge applies to the latter. Borax pays 24 pence per metric ton.

1 The rate of 8 per cent ad valorem ruling prior to 1916 was restored in September, 1925. PEKUVIAN PUBLIC FINANCE 51 Petroleum.—According to present legislation effective in March, 1922, crude petroleum and its products are taxed at 3^ soles per metric ton. This tax is not to be increased for 20 years. This revenue is pledged to the service of the loan of $2,500,000 obtained in the United States in 1922. Profits taxes on other products.—Under this heading are included various minor assessments on hides, skins, cottonseed oil, cottonseed oil cake, coca, alcohol, etc. Temporary surcharges are sometimes assessed upon the dutiable exports through certain customhouses, the proceeds of which are applied to local improvements. In 1923 the only charge of this character was that of 1 per cent upon the mineral products exported through the customhouse of Salaverry. The revenue amounted to over Lp.6,000 and was devoted to the construction of a road to the mineral region of Quiruvilca.

MISCELLANEOUS CUSTOMS COLLECTIONS The revenues from charges made by the customhouses for handling and storage of merchandise, anchorage dues, wharf charges, rental of space, customs fines, etc., constitute this item.

INTERNAL REVENUE In this category are found such excise taxes as those on sugar and matches, the property transfer tax, and inheritance dues.

INTERNAL REVENUE

Items 1922 1923 1924 Items 1922 1923 1924

Lp. Lp. Lp. Lp. Lp. Lp. Sugar 141,806 131,622 162,620 Inheritance tax 40,832 63,108 94,458 Matches _ 34,934 40, 999 36,072 Alcohol 503,112 135, 993 "Mojonazgo" for in­ struction 99,661 43, 791 Total 895,200 363,976 567, 810 Property transfer tax... 74,855 84,456 138,667

Sugar.—A law of March 26, 1904, is the basis of the present con­ sumption tax on sugar. It is collected by the Tax Collecting Co. at the place of production or, in the case of imported sugar, from the consignee. Sugar destined for export is exempt. The tax varies according to grade and according to whether the sugar is produced in the coastal region or in the "sierra" or "montafia." First quality ranulated or washed sugar in any form is taxed at 4 centavos per Gilo on the coast and 3 centavos in the "sierra" or "montana." The lower-grade sugar products of the coast are taxed at 2 centavos and 1 centavo per kilo (the latter for chancaca or brown bars) and else­ where at 1 ]/2 centavos and % centavo per kilo, respectively. According to the contract of June 20, 1907, with the Peruvian Corporation, the revenue from the sugar tax is pledged for the pay­ ment of the latter's annuity of Lp.80,000. Matches.—By law of March 26, 1904, a package of 70 wooden matches or less is taxed 1 centavo; one of wax matches, 2 centavos; 52 PERUVIAN PUBLIC FINANCE and a packet of 20 or less cardboard matches, 1 centavo. The tax applies both to the domestic and imported product. By a law .of May 7, 1918 (No. 2741), the match revenue was assigned to the pay­ ment of dividends upon shares of the Peruvian Steamship Co. not owned by the Government. However, there has been a disagree­ ment over the settlement of accounts originating in the relations be­ tween the steamship company and the Government, so that the matter has been in abeyance. In the latter part of 1924 and early in 1925 there was a move toward the establishment of a match monopoly, and a bill to that end was passed by Congress. It was understood that the Swedish Match Co. was to be awarded the management of the monopoly, but no further steps had been taken at the time this was written.2 Mojonazgo.—This is a local tax upon the movement of certain commodities, especially alcohol, tobacco, and coca, into the munici­ palities. By a law of June 30, 1920, the product of the mojonazgo was turned to the National Treasury for application to public educa­ tion, provided the funds thus diverted from any municipality did not exceed 50 per cent of its income. Property transfer tax.—Real property or rights in real property when transferred were taxed at 2 per cent of the value involved, by law of November 1, 1879. Law No. 4881 of February 16, 1924, raised the rate to 4 per cent. Inheritance tax.—-By law No. 2227, inheritances and legacies are taxed on a scale running from 1 per cent to 11 per "cent, depending on the degree of consanguinity and on the values involved. The organic law relating to public instruction now in effect provides that the revenue from this tax, excepting a portion allocated to the departmental councils (now abolished and succeeded by the munic­ ipal councils) shall be devoted entirely to the purposes of higher education, including technical schools. Alcohol.—Until 1923, when the alcohol monopoly was established, the revenue from potable alcohol was governed by a series of laws which assessed taxes of various kinds according to the product and the locality. The revenue was pledged to the service of the 7 per cent internal bonds issued in 1918, up to a sum of Lp.160,000. By legisla­ tion passed in 1922, creating the alcohol monopoly, this item passed into the category of monopolies during 1923, but because of public dissatisfaction the monopoly was revoked in 1925.

REVENUE FROM FEES, STAMP TAXES, AND CONSULAR SERVICE The income from fees charged for the incorporation of business enterprises and the inscription of property in the legal records, from the sale of stamped paper and documentary stamps employed in connection with financial, judicial, and official transactions, from the consular fees collected abroad, and from various other services of similar character, is shown in the following table:

2 The Swedish Match Co. took charge of the match monopoly in November, 1925. PERUVIAN PUBLIC FINANCE 53

REVENUE FROM FEES AND STAMP TAXES

1922 1924

Lp. Lp. Lp. Registration of mercantile societies 26, 274 32,086 48,444 Registration of real property ^ 24,451 25, 594 Documentary stamps 61,881 71,222 125,011 Stamped paper , 37,883 40,907 52,365 Consular invoices. . __. 343, 691 467,491 Various consular fees 230, 769 14,205 17,114 Certification of consular invoices for parcel post.. 13, 937 19,924 20,285 Various-- 16,903 19,843 27,675 TotaL. 387, 647 566, 329 783,979

Registration fees.—Articles of business association (except in the case of joint stock companies) are taxed at the rate of one-quarter of 1 per cent on the amount of capital involved, as^well as that added later. Joint stock companies are taxed at the rate of one-half of 1 per cent (unless the tax is paid in advance on the full nominal capital stock contemplated, in which case one-quarter of 1 per cent is assessed). These provisions are contained in a law of January 3, 1896. Stamped paper and documentary stamps.—The present law govern­ ing the varied requirements is No. 4831, of December 12, 1923. Consular invoices.—By a decree of May 10, 1922, the fees charged by Peruvian consuls for the certification of invoices were increased from 2 per cent to 4 per cent of the declared values.

REVENUE FROM MONOPOLIES AND PUBLIC SERVICES

This category of income embraces the gross returns from the Government monopolies on potable alcohol, tobacco, salt, denatured alcohol, and opium, together with the gross income from the mails, public telegraphs, schools, and institutions.

REVENUE FROM MONOPOLIES AND PUBLIC SERVICES

1922 1923 1924

Monopolies: Lp. Lp. Lp. 524,187 466,752 901, 645 910,434 986, 091 Salt 343, 533 348,957 349,982 Denatured alcohol 41,762 46,180 50,423 Opium__ __ 13,173 7,214 1,966 Public services: Mails _ 97,515 123, 810 161,293 Telegraphs 56, 530 53,678 64,291 Schools and institutions __ 47, 513 27,951 36, 569 Total - - i, 501,671 2,042,411 2,117,367

Alcohol monopoly,—The alcohol monopoly was established by law No. 4650 of April 23, 1923, replacing the system of excise taxes previously in effect, and was put under the administration of the Tax Collecting Co. The results, however, were unsatisfactory and the system of excise taxation was reestablished by law No. 5049 of March 5, 1925. 54 PERUVIAN* PUBLIC FINANCE Tobacco monopoly.—The tobacco monopoly was established by law of February 22, 1904, and is administered by the Tax Collecting Co. Modern factories for producing cigarettes, cigars, and other products on a smaller scale are operated in the principal towns. Expenditure on account of the monopoly came to Lp.413,520 in 1923. The net revenue derived has been one of the principal sources of internal income. Legislation now in effect, authorizing the construction of railroads and governing the methods to be followed, provides that the net revenue from the tobacco revenue shall be applied to construction or shall serve as security for the issue of bonds. Accordingly, the rail­ way work for account of the Government is financed by drafts drawn against the Tax Collecting Co. on account of the tobacco revenue. Some small bond issues for local work have also been authorized. Until 1924 the tobacco revenue was also subject to a lien constituted against 10 per cenj| of its product in favor of the Lima banks which had made a loan in cheques circulares to the Government in con­ formity with laws No. 1968 and No. 1982. It is announced that this debt having finally been extinguished in 1924, the entire tobacco revenue is now free for railway purposes. Salt.—A salt tax was created by a law of January 11, 1896, with the idea of accumulating funds with which to meet charges connected with the prospective recovery of the Province of Tacna after the hold­ ing of the plebiscite provided for by the treaty of peace with Chile in 1883. An outright monopoly was established in 1901. In 1905 the National Salt Co. (Cia. Salinera Nacional) was formed to serve as the instrumentality for devoting the salt revenue to the payment of interest and amortization on a loan of £600,000 obtained from Ger­ man bankers. This company was succeeded in 1909 by the present Peruvian Salt Co. (Cia. Salinera del Peru); the loan of £600,000 and other current advances then outstanding were refunded into the present "salt loan" of £1,200,000. The salt company sells the com­ modity at prices fixed by law. Its authorized capital is Lp.100,000, with Lp.70,000 paid in. It has an allowance of Lp.20,000 for ex­ penses of administration and receives a commission of 2 per cent on its sales. The disbursement of the Treasury on account of the salt com­ pany in 1923 was Lp.221,785. In recent years, besides conducting the salt business, the company has been intrusted by the Government with the distribution of foodstuffs and other articles of primary neces­ sity that have been imported and sold at cost by the Government in times of unusual scarcity. The revenue obtained by the Government from the operation of the salt monopoly is applied to the service of interest and amortization of the salt loan of 1909. A second charge on this income is constituted by the service of the railway purchase bonds of 1920, but during most of the recent years the net revenue, after satisfying prior claims, has afforded little or no surplus for this purpose. Denatured alcohol.—This monopoly, administered by the Tax Col­ lecting Co., was created by law No. 1276 of March 16, 1910. Opium.—The opium monopoly was established by a law of October 31, 1887, and was later intrusted to the Tax Collecting Co. for oper­ ation. Its net revenues are pledged to the service of the railway purchase bonds of 1920. PERUVIAN PUBLIC FINANCE 55 Mails and telegraphs.—The preceding table shows the gross income from the sale of postage stamps and other postal services and the receipts of the Government telegraph lines. They do not yield a net revenue, as they are generally surpassed by the expenses of operation of the two services. At present, under a contract of April 21, 1921, both the mail and telegraph departments are operated by the British Marconi Co. Schools and institutions.—The table shows the gross revenues from the operation of technical and agricultural schools and from sanitary and penal institutions.

REVENUE FROM GOVERNMENT ENTERPRISES

The returns from the operation of the State-owned railways, fiscal wharves, and the extraction of guano furnish the principal items.

REVENUE FROM GOVERNMENT ENTERPRISES

1922 1923 1924

Lp. Lp. Lp. Guano 221,427 280, 585 370,081 Fiscal wharves 22,115 27, 674 35, 780 Railways 107, 674 107, 321 122, 255 Various 1 9,869 43, 583 50,861 Total 361,085 459,163 578,977

Guano.—After the arrangement with the Peruvian Corporation in 1890 and 1907, which gave that organization the exclusive right of exporting guano, the encouragement of the latter's use in national agriculture became an important economic policy of the Government. Accordingly, extraction of guano by the Peruvian Corporation was gradually circumscribed by virtue of the clauses in its contract which acknowledged the prior claim of national agriculture on the guano deposits, and a beginning was made at the scientific operation of the industry on a basis of conservation. In 1909 this policy was con­ firmed by the establishment of the Guano Administration Co. (Cia. Administradora del Guano, Ltda.), whose function is to exploit the guano deposits with due regard to the perpetuation of the industry, and to deliver the material to agriculturists at the various Peruvian ports at a minimum price, collecting incidentally the tax originally of 1 sol per ton, authorized by a law of 1889. The profits of the company are limited to 10 per cent on its paid capital. The operations of the guano company have been admirably directed, and by rotating activities at the guano deposits and by protecting the sea birds the progressive expansion of this source of national wealth has been assured. At present the guano is sold at actual cost of extraction and delivery plus a tax of 2.50 soles per unit of nitrogen content in the ton, the latter constituting the Government tax or fiscal income from this source. The guano "campaign" begins on April 1 of each year, before which time purchasers are required to place their orders, backed by a cash deposit. The company then plans its activities for the ensuing 12 months, taking into account the volume of guano required and that available in deposits which, according to its plan of operation, have 56 PERUVIAN PUBLIC FINANCE been left undisturbed for at least 30 months. When delivery of the guano is made, purchasers are permitted to pay the balance of their accounts in 90-day drafts or notes, subject to renewal, but payable finally not later than one month after the close of the campaign on March 31. The quantity of guano sold during the past 10 years, together with the net revenue received by the Government, is as follows: REVENUE FROM GUANO

Year Amount Amount sold Revenue Year§ sold Revenue

Tons LP. Tons Lp. 1915-16 46,389 86,236 1920-21-. _ 62,388 197,661 1916-17._ _._ 55, 664 105,033 1921-22 59,438 201,433 1917-18 86,313 176,635 1922-23-. _ 69, 286 221,428 1918-19__ _ 79, 230 129,902 1923-24.- 93,408 280, 585 1919-20.- 55,354 168,299 1924-25 118,637 370,081

The guano revenue at present is pledged to the service of the loan of £1,250,000 obtained from British bankers in 1922. As further security the Government acquired 100,001 shares out of the total of 200,000, into which the stock of the guano company is divided, and pledged these with the bankers. Further details regarding this loan will be found in Chapter II. Fiscal wharves.—The wharves or piers at most of the more im­ portant Peruvian ports3 are the property of the Government. They are generally leased for operation to private enterprises, more espe­ cially the Peruvian Corporation and the Tax Collecting Co. The gross income shown in the preceding table is offset by expenses of operation and maintenance. Railways.—The figures shown are the receipts of the five small lines operated directly by the Government. The more important are those connecting Lima with Huacho and Lurin, respectively. The lines return little if any profit.

MISCELLANEOUS REVENUE Income of a miscellaneous, temporary, or incidental character is shown under this heading.

MISCELLANEOUS REVENUE

1922 1923 1924

LV. Lv. Lp. Profits from shares in reserve bank 101,416 25,091 40,206 Assessment for retirement fund (montepio) _ 25,627 22, 847 26,667 Fines, auctions, etc , 29,469 131, 527 215,394 Profits from sale of bills of exchange resulting from export duties 94, 636 67,804 Various 679,185 91,098 103,321 Total. _ 835, 697 365,199 453,392

Profit from reserve lank.—The charter of the Reserve Bank of Peru (Banco de Reserva del Peru), founded in 1922, provides that after

3 Excepting Callao, where the port works are operated by a French concession. PEKUVIAH PUBLIC FINANCE 57 paying fixed dividends and setting aside part of the profits of each year to reserve and other funds, the balance shall go to the Govern­ ment as a franchise tax. The reserve bank is exempt from other forms of taxation. Montepio.—Civil or military employees of the Government, whose service has been such as to justify claims for pensions on the part of their families, are subject to a deduction of 4 per cent from their salaries. REVIEW OF PRINCIPAL REVENUES AND THEIR APPLICATION The chief individual sources of revenue, with their gross yield in 1923, are shown in the accompanying table. The application pre­ scribed by law, if any exists, is also indicated.

Amount Sources of revemn (1,000 Application Lp.)

Ordinary import duties 1,655 5 per cent was pledged to internal bonds of 1889.1 Surcharge on imports (10 per cent) 185 Pledged for sanitation lean of 1924. Export duties 1,025 Petroleum duties pledged for dollar loan of 1922. Tobacco monopoly :__ 943 For railroad building or service of bonds issued for the purpose. Alcohol monopoly (or excise) 524 Pledged for internal bonds of 1918 (up to Lp.160,000).2 Salt monopoly 348 Pledged for salt loan of 1909, surplus to railroad purchase (sterling) bonds of 1920. Consular invoices 343 Guano revenue 280 Pledged for guano loan (sterling) of 1922. "Patentes," Lima and Callao '. 166 Sugar tax _ 131 Pledged for annuity to Peruvian Corporation. Stamped paper and documentary 112 Pledged for Lp.500,000 bank loan of 1924. stamps. Property transfer tax 84 Urban and rural property tax__ 63 Pledged for sanitation loan of 1924, in localities benefited.

i Import duties collected on petroleum products are pledged for the dollar loan of 1922. 2 Two small bank loans are also secured at present by the alcohol revenue. The dollar bonds placed in the United States in 1922 carried warrants entitling the holders to turn in their bonds at par in sub­ scribing for a new issue that might be offered subsequently, guaran­ teed by the general customs revenue. This indicates that such an operation was contemplated at the time. It has not been realized, however, and the customs revenues are now free of pledge, with the exceptions noted in the table. In official statements the import duties are regarded as clear of liens, although it is uncertain whether or not the application of 5 per cent of them to the internal bonds of 1889 has been repealed. The export duties are affected occasionally through advances made to the treasury by large exporters, who are reimbursed from the duties incurred subsequently by them, until the debts are extinguished. A revenue of some importance not included in the table is the 8 per cent surcharge on imports created in 1892 to provide funds for the payment of the Peruvian Corporation's annuity. The lien is supposed to be removed by the contract of 1907, which specifically pledged the excise tax on sugar to this purpose. The surcharge has continued in effect through numerous changes of import tariffs, but has come to be considered a part of the ordinary customs revenue. The revenue from the opium monopoly is pledged for the service of the railroad purchase bonds of 1920. 58 PERUVIAN- PUBLIC FINANCE The revenue assigned to sanitation work, now specifically pledged to the $7,000,000 loan secured in the United States in 1924, includes the collections of water rent from the properties benefited, in addi­ tion to the 10 per cent surcharge on customs duties and the local urban and rural property taxes. The general income from the revenues administered by the Tax Collecting Co. is pledged to the service of the debt of Lp. 1,245,000 in favor of the latter, and also for special advances made from time to time. Minor revenues, especially those yielded by the operations of public enterprises such as the Caja de Depositos y Consign aciones and the Fiscal Warehouse Co., are frequently pledged for the security of loans obtained from local banks and s^mipublic institutions. The procedure for giving effect to the various hypothecations of revenue is more clearly explained in the subsequent exposition of the public debt. NEW TAXATION Measures creating new revenues or increasing the taxation already in effect, some of which are referred to in preceding pages, although their returns are not yet fully apparent in the statistical reports available, are the following: National defense fund.—Law No. 4936 of January 30, 1924, created certain income to be set aside for administration exclusively by the Ministry of War, in ways to be determined by law. The items were: That derived from the increase in the property tax (predios) from 5 per cent to 7 per cent; a tax of 10 centavos per kilo on coca leaves; a tax of 20 centavos per word on cablegrams dispatched or received; a stamp tax on passports; the revenue obtained from the additional import duties assessed on certain liquors, perfumes, cosmetics, con­ fectionery, and vehicles (including aiitomobiles); the net proceeds of the playing-card monopoly which the Executive is authorized to establish. The proceeds of these taxes in 1924 were reported by the Tax Collecting Co. as Lp. 76,460. Match monopoly.—Law No. 5085 of April 18, 1925, authorized the establishment of a match monopoly. The monopoly was put into operation in November, 1925. Additional tax on cigarettes.—The tobacco monopoly was directed to increase the price of cigarettes by one-quarter and one-half ceniavo, depending on the kind, by law No. 5064 of March 13, 1925. The increased revenue from this measure, after 1925, was to be devoted to road construction. New import surtax.—Law No. 5072 of March 14, 1925, placed an additional duty of 2 per cent ad valorem on goods imported through the customhouses (excepting certain foodstuffs), and of 5 per cent ad valorem on importations by parcel post. The proceeds were to be used exclusively for primary education.

BUDGETED AND ACTUAL ORDINARY EXPENDITURE, 1913-1925 The following tables show the ordinary expenditures of the years 1913 through 1925. The estimates or appropriations for each ministry are indicated, together with the amounts actually disbursed. Until 1923, when new accounting methods were adopted, the addi­ tional appropriations passed during the year were not recorded in the PERUVIAN PUBLIC FINANCE 59 official statistical reports. Such additional credits, however, were customary, as is demonstrated by the usual excess of actual disburse­ ments over those authorized by the original budget law.

BUDGETS AND ACTUAL ORDINARY EXPENDITURES BY MINISTRIES, 1913-1923

1913 1914 1915 1916 Ministries Estimated Actual Estimated Actual Estimated Actual Estimated Actual

Lp. Lp. Lp. Lp. Lp. Lp. Lp. Lp. Legislative 107,943 119,413 107,943 84,405 97,942 62,416 108,322 108,322 Government-_ 559, 716 613, 360 559, 716 662, 572 476, 733 497,802 510,104 529,122 Foreign Affairs 98,621 148,157 98,621 89, 858 53,047 51,223 55,807 53, 683 Justice 520, 326 539,129 520, 326 491,228 , 480,761 430, 842 497, 893 506,148 Finance 1, 070, 829 1,138,099 1, 070, 829 1, 085,154 997,172 924,072 1,190,102 1,215,064 War and Navy 738,401 907,014 738,401 710, 321 724,191 711, 302 599, 593 624, 671 Public Works. 217, 561 255,428 217, 561 165, 552 143,633 144, 300 147,987 156,600 Total. _. 3,313, 397 3,720, 600 3,313,397 3,289,090 2,973,479 2,821,957 3,109, 808 3,193,610

1917 1918 1919 1920 Ministries Estimated Actual Estimated Actual Estimated Actual Estimated Actual

Lp. Lp. Lp. Lp. Lp. Lp. Lp. Lp. Legislative 108,322 117, 563 159,219 161, 942 202, 809 191, 557 241, 024 198,110 Government., 510,104 521, 999 655,126 629,159 656,106 807, 235 1,000, 731 963, 650 Foreign Affairs 55, 806 61, 432 78, 307 100,105 72, 720 149, 839 187, 441 134, 029 Justice 497, 894 521, 518 677, 609 727, 778 783,798 858,697 1,091, 543 449,528 1,190,102 1,222,837 1,899,445 1,803, 500 1, 840,408 2,121, 728 2, 246, 622 652, 605 1,344, 705 War 839, 509 1,035, 663 /l, 089,712 Navy } 599,593 676,167 856, 560 864,079 \ 341,518 574, 834 Public Works. 147, 987 208,968 528,068 343, 780 773, 797 635,262 1,204, 010 3,163,842 Total- _- 3,109, 808 3, 330,484 4,854,334 4, 693,343 5,169,147 5, 799,981 7,402, 601 7,481,303

1921 1922 1923

Ministries Estimated Additional Estimated Aciaal Estimated Actual A ctual credits Total

Lp. Lp. Lp. Lp. Lp. Lp. Lp. Lp. Legislative _ _ 241,024 256, 518 210,249 217,116 254,909 254, 628 254,628 Government.. 1,000, 731 1,257,139 800, 722 1, 039, 541 1, 055,196 1, 025,887 152,893 1,178,780 Foreign Affairs 187,441 289,827 148, 648 251, 282 201, 557 202, 340 51, 573 253,913 Justice 1. 091, 543 1,168, 613 800, 000 1,000, 861 1, 011,061 983,931 74,224 1, 058,155 Finance ._ 2,246, 622 3,049,745 2,243,099 2,270, 498 2, 625, 071 2, 360,167 35,909 2,396,076 War ___ 1,089, 712 1,351,326 900,000 1,037,854 974, 200 997, 535 24,306 1,021,841 Navy 341, 518 348, 655 298, 501 276,170 275,448 275,087 11,763 286,850 Public Works. 1,204,010 1, 550,024 632,522 813,194 687,242 657,978 227,940 885,918 Total. __ 7,402, 601 9,271, 847 6, 033, 741 6, 906, 516 7,084, 684 6,757, 553 578, 608 7, 336,161

1924

Ministries Additional Estimated Actual credits Total

Lp. Lp. Lp. Lp. Legislative 255,809 252,450 7,500 259,950 Government... 1, 302, 939 1,343, 910 302, 763 1, 646, 673 Foreign Affairs. 235,086 226,140 94,136 320,276 Justice 1, 045, 012 1,063, 953 56, 966 1,120, 919 Finance 2, 753, 703 2, 618, 530 90,439 2 708, 969 War 1, 045, 321 1,040,278 37, 596 1,077, 874 Navy 342, 833 327,807 2,753 330, 560 Public Works.. 898,786 817, 689 210,482 1,028,171

Total 7,879,489 7,690,757 802,635 8,493,392

65880°—26t- 60 PEiftJVlAK PUBLIC IFlNAffOE Budget estimates for the several ministries for 1925 are as follows: Lp. Legislative 309, 245 Government 1, 385, 742 Foreign Affairs . 264, 795 Justice 1, 277, 515 Finance 3, 130, 358 War 1, 136, 130 Navy 373,095 Public Works 985, 365 Total - 8, 862, 245

EXPENDITURE FOR SPECIFIC PURPOSES From the data available in official statistical reports, there has been compiled the following table, which shows approximately the amounts spent on specific Government activities, independent of divisions by ministries or administrative offices:

PRINCIPAL ITEMS OF EXPENDITURE AND THEIR PROPORTION TO TOTAL, 1914-1922

Items 1913 1914 1915 1916 1917

Per Per Per Per Per Lp. cent Lp. cent Lp. cent Lp. cent Lp. cent Service of the public debt. 1, 338, 809 24.75 747, 304 18.22 191,769 5.91 659,789 18.56 836,919 17.57 234,023 4.33 214, 677 5.23 191,742 5.91 264,277 7.43 269,055 5.65 Army and Navy 1,072,913 19.84 747,930 18.23 586,342 18.08 492, 490 13.85 531,207 11.15 Diplomatic and consular service 40, 518 .75 42, 968 1.05 30,336 .94 31, 994 .90 38,721 .82 Police 308,095 5.70 314, 380 7.66 287,778 8.87 293,427 8.26 275,864 5.79 Instruction.. 259, 998 4.80 210,400 5.13 203, 468 6.27 263,027 7.40 267, 852 5.63 Public works 109, 499 2.02 26,844 .65 46,059 1.42 42,762 1.20 153, 961 3.23 All other 1, 879, 560 34.74 1, 524,806 37.16 1, 552, 382 47.86 1,449, 375 40.77 2,220,932 46.63 Period of liquidation l 166,222 3.07 273, 625 6.67 153,824 4.74 57,767 1.63 168,285 3.53 Total 5,409, 637 100.00 4,102,934 100.00 3,243, 700 100.00 3, 554,908 100.00 4,762,796 100.00

Items 1918 1919 1920 1921

Per Per Per Per Per Lp. cent Lp. cent Lp. cent Lp. cent Lp. cent Service of the public debt. 564, 306 10.49| 648,845 9.891 363,189 4.121 206,223 2.40! 1,574,103 17.93 Eetirement pensions 283, 380 5.27 283,267 4.32 223,527 .2. 54 192, 5091 2.24 236,738 2.70 Army and Navy 632,288 11.75| 870, 241: 13.26 1,245,253 14. 12:1,115,32 2 13.04 1,238,129 14.10 Diplomatic and consular service 49,092 .91 80,1841 1.22 91,354 1.04 146,736 1.71 102,498! 1.17 Police 374,174 6.951 447,053 6.81 701, 817 7.95 731,302 8.52 589, 518| 6.71 Instruction 352,2111 6.55 415, 633 6.331 59,115 .67 98, 668 1.15 609, 566 6.94 Public works 382, 6151 7. Ill 502,292 7.65 313,259 3 55 266,828 3.11 150,264 1.72 All other _ j2, 421,127 44.99|[2,772,12 7 42. 25 ,5,416,028 61.44 5, 818, 599 67.83114,277,967 i 48.73 Period of liquidation1 322,058 5. 542, 642 8.27 403,198 4.57

Total 5,381,251 100.00 6, 562,284100.00 |8,816,740J100. 00 8, 576,187 100.00 |8,778,7831100.00

1 Expenses not itemized. REVENUE AND EXPENDITURE OF THE DEPARTMENTS AND MUNICIPALITIES DEPARTMENTAL FINANCE Until the year 1923, the departmental councils (juntas depart- mentales) collected and administered certain local revenues, which went to the maintenance of the departmental activities and the exe­ cution of works of suitable character. The budget law of 1922 abolished the juntas departamentales and obliterated the depart- PERUVIAN PUBLIC FINANCE 61 ments as fiscal entities. The administration of public instruction and of public works generally has been taken over by the central Government, while the strictly local revenues and activities have been entrusted to the provincial councils (juntas provinciales), which govern the local districts and municipalities. As a matter of interest, it may be said that the departmental budgets for 1920 showed total revenues and expenditures of Lp.316,237. Income from real-estate taxes (nredios) was estimated at Lp.171,584, and that from taxes on business at Lp.44,760. Of the expenditures; Lp.81,045 was destined for public instruction, Lp.87,350 for public works, and Lp.44,000 for the maintenance of hospitals and relief of the poor. PROVINCIAL AND MUNICIPAL REVENUE AND EXPENDITURE Excepting those revenues of more or less local character which have passed to the management of the central Government the sources of income which formerly supported the Departments are now shared by the provinces or municipalities into which the De- artments are divided. Except in some of the large cities, the Enancial affairs of the municipalities are very simple and unimportant. According to the most recent statistics available, the budgets of in­ come for the year 1923 of the 99 local councils, the estimates of which were submitted to and approved by the central Government, came to a total of Lp.562,872. The proposed expenditures were practi­ cally the same. The major part of the income is derived from local business and professional licenses (patentes), charges for such public services as lighting and water supply, from excise taxes on certain goods, from the proceeds of such municipal properties as markets and abattoirs, and from other miscellaneous local sources. The ex­ penditures are devoted to the cost of local police and administration, the maintenance of public buildings, and in a few cases to the service of debts incurred for public works. The municipal revenues collected by the Tax Collecting Co. in 1923 and 1924 for some of the larger cities and towns were as follows:

MUNICIPAL TAX COLLECTIONS IN 1923 AND 1924

Cities 1923 1924 Cities 1923 1924

Lp. Lp. Lv. . Lp. 163,824 186, 248 ! Huaras__ 1,585 1,569 Callao 49, 709 55,941 I Arequipa 29, 586 25,858 5,443 5,223 Huanueo 2,748 2,957 7,246 6,837 Lambayeque 4,114 4, 201 Miraflores _ 5,183 3,774 Chiclayo! 9,839 11,019 18,012 19, 223 Ferrenafe 2,370 2,347 9,116 10, 634 Iquitos. 6,242 6,477

REVENUE AND EXPENDITURES OF THE SOCIETIES OF BENEFICENCE The "sociedades de beneficencia" are important organizations conducting charitable institutions and hospitals, and generally filling the place of private charitable organizations in the United States. Their annual budgets must be submitted for the approval of the central Government, since they are partly supported by subsidies and taxes authorized by Congress. The combined budgets of reve­ nue and expenditure for the year 1923 of the 57 such organizations which submitted data amounted to Lp.516,202. Chapter II.—THE PUBLIC DEBT The form which Peruvian official reports have customarily used in presenting the status of the public debt does not bring out some dis­ tinctions of primary interest to foreigners. A rearrangement of the most recent data obtainable gives the following status of the major classifications of the Peruvian debt at the end of 1923 and 1924:

THE PERUVIAN PUBLIC DEBT

1923

EXTERNAL DEBT Lp. LP- Funded debt in sterling 3,355,541 3,766,150 Funded debt in dollars ___ * 533, 750 1,802, 630 Recognized claims in French francs and dollars.. 431,250 284,024 Total external debt 4,320, 541 5,852,804

INTERNAL DEBT Funded .__.__ __. 5,430,245 5, 250,810 Debt to Tax Collecting Co 1,358,419 1,448, 591 Bank loans-_ _ 224, 023 329,854 Various advances. _ 187,901 537,421 Floating debt 2,308,226 2,453,458 Total internal debt- _ _._ 9,508,814 10,020,134 Total public debt 13,829, 355 15,872,938

The amounts are approximate, since the debt in sterling is taken at par of exchange (£1 = Lp.l), obligations in dollars are converted at the arbitrary rate of $4 to the Peruvian pound, and the internal funded debt is presented at its face or nominal value instead of fol­ lowing the custom sometimes adopted in Peruvian reports of reducing the figures to conform with the market or conversion value of certain issues. It is.to be noted, also, that locally published balances of foreign loans do not always agree with the amount of the bonds actually outstanding, on account of the lapse of time between re­ mittance and the application of the funds by the foreign paying agents. More exact data and further details are supplied in the following discussion of the various items that compose the debt. For the strictly investment features of the foreign issues, the reader is referred to the various investment manuals. 62 PERUVIAN PUBLIC FINANCE 63

EXTERNAL DEBT

FUNDED DEBT IN STERLING The following table shows the obligations that compose the Peru­ vian funded debt in sterling:

FUNDED DEBT IN STERLING

Outstanding Dec. 31 Original Inter­ Amor­ Annual Matu­ Item Date principal est tization service rity 1923 1924

Per ct. Per ct. Salt loan 1909 £1,200,000 1A £84,000 1948 £849,140 £811,460 City of Lima loan i 1911 600,000 5 33,000 1965 557, 400 553, 300 Railway purchase bonds.__ 1920 720, 620 5 A 49, 832 1946 699, 001 670,090 Guano loan. 1922 1,250, 000 22 3 112, 500 1948 1, 250,000 1,231,300 Bank gold loan of 1924 < 1924 500, 000 m 1A 50, 926 1944 500, 000 8 Total 4,270, 620 2 330, 258 3, 355, 541 3, 766,150

i Responsibility assumed by the State in 1919 2 Approximate. 3 According to the contract, amortization began June 1, 1924. 4 The debt was incurred in Peruvian pounds, but bondholders may require payment of interest and principal in 90-day sterling drafts; hence the debt must be regarded practically as payable in sterling.

SALT LOAN By authority of law No. 1082 of August 21, 1909, the Government concluded a contract on December 11 of that year with two Paris banks, the Banque de Paris et des Pays Bas and the Societe Generale, for a loan of £1,200,000. The interest rate was fixed at 5^ per cent, with semiannual amortization beginning August 15, 1910, by means of an annual cumulative sinking fund of 1^ per cent, sufficient to retire the bonds in 283^ years. Redemption is at par, determined by drawings in January and July of each year. The Government, at six months7 notice, may redeem all outstanding bonds at par. The bonds are issued in sterling with the corresponding par value in French francs expressed upon them and are free of all Peruvian taxation. Matured bonds and coupons are receivable at their nom­ inal value in Peruvian customhouses in payment of duties. The loan was taken by the bankers at 94, and the bonds were sold in Lon­ don, Paris, and Hamburg in 1911 at the price of 98 J^. In addition to its general responsibility for this obligation, the Government pledged the revenue from the tax on salt created by a law of January 11, 1896. To give effect to the pledge, a separate contract was made with the bankers on December 16, 1909, whereby the latter engaged to form in Peru a joint stock company capitalized at Lp.100,000 to administer the salt monopoly and to supply the local representatives of the bankers with funds sufficient to purchase the remittances needed to meet the service of the loan. The contract was to last four years, until February 15, 1914, but it was provided that the functions and privileges of the company were to continue automatically so long as any bonds of the salt loan were outstanding. This organization, the present Compania Salinera del Peru, superseded a similar concern, the Compania Salinera Nacional, which had been formed in 1905 to collect the salt revenue and apply part of the pro- 64 PERUVIAN PUBLIC FINANCE ceeds to the service of a loan of £600,000 placed with German bankers in that year. The proceeds of this loan were used in large part to repay the bal­ ance of the debt of £600,000 just mentioned and to extinguish short- time advances, all of which bore more burdensome charges. While no exact statement of the whole operation is available, it seems that the money went, directly and indirectly, toward the deficits of the preceding years. The mechanism set up for the service of the loan has assured the punctual payment of interest and amortization, except for the period between August, 1914, and August, 1916. During that time the difficulty of remitting to Paris and the moratorium declared in France caused a delay in the usual operations, which, however, was remedied by the latter date. CITY OF LIMA LOAN By a supreme decree of November 27, 1911, the municipal council of Lima was authorized to contract a loan of £600,000 at 5 per cent interest and J^ per cent annual amortization for the principal purpose of refunding all the debts of the city with the exception of one mort­ gage amounting to about Lp.30,000. The balance of the proceeds estimated at about £75,000, was to be used for public improvements. The bonds were sold to the bankers at 87 and offered in the London market in December, 1911, at 9334. Law No. 4013 of December 15, 1919, which provided for sanitation work in Lima and authorized the floating of a loan for the purpose, converted these bonds into a national obligation. The Government was authorized to establish a new agreement with the bondholders, whereby the city revenues affected to the service of the loan (which were paid by the Tax Collecting Co. directly to the bankers) were to be freed and replaced by the guaranty of the State. Up to this time, however, no new arrangement has been made with the bond­ holders. The pledged municipal revenues are paid to the local agent of the bankers and the municipality receives from the National Treasury an equivalent subsidy included in the national budget. At times after July, 1922, there was a delay in the payment of interest, which is attributed to the lack of an understanding as to liability for loss in exchange, incurred in the transfer of funds. The contract between the municipal council and the bankers, dated December 2, 1911, contained the following provisions: The bonds were to be served by an annual payment of £33,000, covering interest at 5 per cent and amortization at j^ per cent, the latter to be effective on and after July 1, 1916, and to be made by purchase in the open market if the price were below par, otherwise by drawings at par; as security for the loan, first mortgages were constituted upon the Central Market, the abattoir, and other municipal real property, as well as upon other property that might be acquired with the pro­ ceeds of the loan; to meet the service, the revenues from the Central Market and from the rental of other city property, together with the returns from the sanitary service, the meat tax, city lighting, vehicle tax, and others were pledged; to insure punctual service, the Tax Collecting Co., which collects the fiscal and local taxes, was directed to make fortnightly delivery of funds to the Lima representatives of the bankers, and for this purpose the Tax Collecting Co. was made PERUVIAN PUBLIC FINANCE 65 a party to the contract; the bondholders might receive, at their option, payment in London, New York, Paris, or Lima—in New York at $4.80 per pound sterling, in Paris at 25.20 francs per pound sterling, in Lima at the current rate of exchange on London; the redemption of the loan in full or in part of not less than 10 per cent was permitted on three months7 published notice; the bondholders were relieved of any liability on account of Peruvian taxation; the whole of the loan outstanding was declared due and recoverable, in case a delay of more than four months should be experienced in the payment of interest or amortization, or if any creditor should establish a lien on any of the mortgaged property by claims representing as much as 20 per cent of the municipal income.

RAILWAY PURCHASE BONDS OF 1920 Law No. 4141 of June 10, 1920, authorized the issuance of bonds to the principal amount of £720,620 in exchange for the ownership of the line and equipment of the railroad from Lima to Huacho (Northwestern Railway Co. of Peru, Ltd.). The bonds are dated January 1, 1920, bear interest at 5 per cent, and are redeemable at par by semiannual drawings through an annual accumulative amor­ tization fund of approximately 2 per cent. (The contract provides for semiannual remittances of £24,916 for interest and retirement of bonds.) The revenue from the opium monopoly and the surplus of revenue from the salt monopoly not needed for the service of the salt loan are specifically assigned and pledged to the service of these bonds; if necessary, the balance is made up by the Government out of its general funds. Payments are made free of Peruvian taxation. The railroad from Lima to Huacho was built under a concession granted to British interests in accordance with law No. 470 of January 7, 1907. The State guaranteed a return of 6 per cent for 30 years upon the capital invested in the work. The total of capital to be recognized was fixed at £830,513 by a decree of September 22, 1908, and in October, 1908, the Northwestern Railway Co. of Peru (Ltd.), was organized in London. The subsequent financial relations be tween the company and the Government are not clearly recorded, but the returns from the operation were not sufficient to meet the bond interest and the Government was called upon for various sums. When the transfer of the property was effected, a payment of £100,000 was made by the Government to cover certain expenses and to satisfy all claims for guaranty of interest up to December 31, 1919. According to the Stock Exchange Yearbook (London), the service of these bonds has been irregular. At the end of 1923 the Govern­ ment was in arrears in respect of interest and amortization, but regu­ larity was restored in 1924.

THE GUANO LOAN Laws No. 4545 of November 18, 1922, and No. 4574 of December 11, 1922, authorized the Executive to contract a loan of £1,250,000 by pledging as security the revenue from the tax on the sale of guano for national agriculture. The bonds were sold to the bankers in December, 1922, at 89 and offered immediately in London at 95, with interest at 73^ per cent and annual cumulative amortization of 1}4 per cent, free of Peruvian taxation. They mature on June 1, 1948. 66 PERUVIAN PUBLIC FINANCE In addition to the general responsibility of the State, the service of the loan is secured by a provision requiring that the fiscal company which conducts the sale of guano (Cia. Administradora del Guano) shall deposit its revenues weekly with the bankers' agents in Lima. As additional security, the Government shares in the guano company, acquired with the proceeds of the loan (100,001 shares out of a total of 200,000), are held by the bankers as trustees with all the powers of owners, and it is established by law that so long as bonds of the present issue are outstanding the guano tax shall be collected by the present company or by its successors, in which the bankers shall hold the same proportionate control. In the event that Peruvian currency depre­ ciates so as to make the tax inadequate for furnishing the required sum in sterling, the tax shall be raised sufficiently. The purpose of this loan was to meet the difficult fiscal situation of the time, caused by the budgetary deficits of 1921 and 1922, and espe­ cially to permit the cancellation of arrears of the Peruvian Corpora­ tion annuity and overdue service of the railway purchase bonds of 1920. Of the nominal principal of £1,250,000, the initial discount, British stamp tax, expenses, and interest fund reserved by the bankers absorbed £214,031; the acquisition of 100,001 shares in the guano company cost £107,139; debt payments made by the bankers took £107,380; the Peruvian Corporation annuity payment was £120,322; approximately £700,000 was left for application to other needs of the Treasury. BANK GOLD LOAN OF 1924 For the payment of unforeseen expenses of the current year (sup­ posed to refer particularly to the celebration of the centenary of the Battle of Ayacucho), law No. 4979 of December, 1924, authorized the Executive to effect a loan of Lp.500,000, to be placed at 96 per cent with interest at 8 per cent, and to be amortized within a period of 20 years by means of an annual accumulative sinking fund of approxi­ mately 2 per cent. The operation was concluded on these terms with a group of Peruvian and foreign banks in Lima. The bonds are dated December 15, 1924, and the interest is to be paid quarterly thereafter. Maturity is at December 15, 1944. An annual payment of Lp.50,926 or £50,926 is specified to cover interest and cumulative amortization, the latter to be effected semiannually by drawings at par. Holders may require payment either in Peru­ vian gold or in 90-day drafts on London at par of exchange. Exemp­ tion from all Peruvian taxes is granted. At 30 days' notice the Government may make extraordinary amortizations or may redeem all the outstanding bonds at par and accrued interest. The security is provided by the assignment to the underwriting banks of the right to administer the sale of stamped paper and docu­ mentary stamps, and to deduct from the collections the sums neces­ sary for the service of the debt. For the present, the Tax Collecting Co. is to continue in charge of this branch of revenue as agent of the bankers. It is understood that part of this issue has been sold abroad. PERUVIAN PUBLIC FINANCE 67

FUNDED DEBT IN DOLLARS Peru's external debt in dollars consists of the outstanding portions of two issues of bonds sold in New York in 1922 and 1924, respectively as follows:* PERUVIAN DOLLAR LOANS

Outstanding Dec. 31 Item Principal Amorti­ Annual Matu­ Date Interest zation service rity 1923 1924

10-year external se­ cured 8 per cent Per cent gold bonds 1922 $2,500,000 8 0) $500,000 1932 $2,135,000 $1,787,500 Sanitation loan of 1924— 1924 7.000,000 8 0) 2 700,000 1944 6,985,000 Total 9,500,000 1,200,000 2,135,000 8,772,500

i See text. * After Apr. 1,1926; see text.

TEN-YEAR GOLD BONDS OF 1922 The bonds are dated June 1, 1922, bear interest at 8 per cent, and mature June 1, 1932, when they are payable at*par. They are exempt from Peruvian taxation. According to the contract between the Government and the bankers, the revenue from the export and import duties on petroleum and all collections from taxes of any kind imposed on the petroleum industry in Peru are pledged to the service of this loan. Such revenues as collected are deposited with the Lima agent of the bankers, and fortnightly remittances are made to New York up to a total of $250,000 each six months. From these sums, after payment of interest due and provision for the sub­ sequent coupon (including, furthermore, the maintenance of an interest reserve fund equal to six months' requirements), bonds may be purchased in the market or by tender at prices not to exceed par and accrued interest; if bonds can not be obtained on these terms they are to be called by lot for payment at par and accrued interest at 60 days' notice. The issue is callable as a whole or in part at 60 days' notice at par and accrued interest. Each bond bears a warrant entitling the holder to subscribe to a contemplated issue of customs-secured bonds at their original offering price (pro­ vided the option is exercised within one year from the date of said offering), and the holder has the option of tendering bonds of the present issue at 100 and accrued interest in payment of such sub­ scription. The conversion and subscription rights expire five days before redemption or maturity.

* A change was made in the status of the dollar debt by the issuance, in November, 1925, of a new loan of $7,500,000, which incidentally involved the redemption of the outstanding balance of the dollar loan of 1922. The new bonds are dated November 1, 1925, and mature November 1, 1940 The interest rate is 7}4 per cent, and a sinking fund is provided to retire not less than $500,000 face amount of bonds annually, by purchase at not exceeding 1Q7}4 and accrued interest, or by call by lot at that price. The service is secured by a pledge of the revenues of all nature obtained from the petroleum industry and trade (in which respect the new loan exactly resembles that of 1922), with provision that the collection of these revenues shall be put in the hands of a local corporation formed for the purpose (Cia. Administradora de Rentas), which shall make the necessary remittances of funds to the paying agent for the loan in New York. The bonds are free from Peruvian taxation. The purposes of the issue were: To redeem the outstanding dollar bonds of 1S22 and any other local debts secured by secondary liens on the petroleum revenues; to close the budgetary accounts of the years 1922,1923, and 1924, which represented a floating debt of the Treasury (see subsequent pages); and to provide funds for the prosecution of irrigation works or for other needs of the State. The outstanding bonds of 1922 amounted to about $1,600,000 and the unbalanced budgetary ac­ counts of 1922, 1923, and 1924 aggregated Lp.454,758. This borrowing was authorised by law No. 5249 of November 3,1925. 68 PERUVIAN PUBLIC FINANCE This loan was obtained for the purpose of repairing the position of the Treasury when the slack foreign trade of 1921 and the con­ tinued depression early in 1922 caused ordinary revenues to fall short of appropriations. It was based on law No. 4387 of November 11, 1921, which authorized the hypothecation of the petroleum revenues for borrowings up to Lp.700,000. The proceeds were devoted to the service of the public debt.

SANITATION LOAN OF 1924 These bonds are dated October 1, 1924, and mature October 1, 1944, when they are payable at par and accrued interest. At the option of the holder, interest and principal may be paid in sterling in London at the par value of sterling in dollars, or £1 for $4.8665; or in Lima in Peruvian pounds at par of exchange. They are exempt from Peruvian taxation. The loan was contracted by authority of law No. 4126 of May 6, 1920, and law No. 4603 of December 12, 1922, which provided, respectively, for the execution of sanitary works and paving in various ^cities, assigning certain revenues to defray the cost, and for the contraction of public debt up to a total of $25,000,000 for such purpose, with the guaranty of the same revenues. A general con­ tract was given to an American corporation, and local advances and loans (now canceled) were secured which permitted the begin­ ning of the program of work. The revenues designated as "sanitation revenues" by law No. 4126 are the following: (1) A surtax of 10 per cent on import duties, whether collected at the customhouses or, in the case of parcel- post shipments, by the post offices; (2) the proceeds of the direct property taxes (predios rusticos y urbanos) in the municipalities and provinces to be benefited by the improvements; (3) the local water rates and paving assessments. The income from these sources is turned over by the collecting agencies to the local representative of the bankers and it is agreed that, for the service of the present loan, the following disposition shall be made of the funds: Those collected between October 1, 1924, and January 1, 1926, shall be remitted to New York in their entirety; from January 1 to April 1, 1926, the sum of $175,000 shall be forwarded; after April 1, 1926, the sum of $350,000 shall be remitted semiannually. After provid­ ing for the payment of interest, the surplus shall constitute a sinking fund in charge of the loan trustee. The sinking fund shall be used to purchase bonds in the open market at prices not to exceed par and accrued interest, or, with the consent of the Peruvian Govern­ ment, at a premium; money that can not be so employed shall be invested by the trustee for account of the sinking fund. As further security for the issue, mortgages are constituted upon the properties, improvements, and facilities created with the pro­ ceeds of the loan or with the surplus sanitation revenues. This loan operation is noteworthy in that it represents the first foreign debt incurred in the modern history of Peru for purely con­ structive purposes. The proceeds were used both to retire outstand­ ing loans and advances incurred in payment for work already com­ pleted or under way, and to undertake further operations. With regard to further issues of sanitation bonds under the authority of PERUVIAN PUBLIC FINANCE 69 law No. 4603, it is understood that no such issue will be made before April 1, 1926, and that any subsequent issue will be contingent upon the maintenance of the sanitation revenues at a level one and one- half times that required for the service of old and new bonds.

RECOGNIZED CLAIMS IN FRENCH FRANCS AND DOLLARS Foreign unfunded obligations recognized by the Peruvian Govern­ ment were two in number at the end of 1923 and one at the end of 1924. At the end of 1923 those outstanding were the so-called " Dreyfus claim," estimated at Lp.413,493, and the, "Landreau claim," taken as Lp. 31,605. The latter was canceled in 1924, so that at the end of that year the Dreyfus claim alone was left; the principal of the latter remained unchanged at 20,000,000 French francs, plus accrued in­ terest, the total amounting to Lp.284,024 at the exchange of about 75 francs to the Peruvian pound. (Formerly the arbitrary rate of 50 francs had been used in conversion for statistical purposes.)

THE DREYFUS CLAIM A disagreement between the Peruvian Government and the French banking house of Dreyfus Bros. & Co. over the final liquidation of accounts originating between 1869 and 1879, was the cause of a long contest, finally settled by a decision of The Hague Tribunal in October, 1921. Dreyfus Bros. & Co. had acted for the Peruvian Government in Europe both as selling agents for guano and as fiscal agents. They had a practical monopoly of the loading, transporta­ tion, and sale of guano and negotiated several loans on behalf of the Government, thus handling very large sums. The accounts of these complicated transactions became the source of misunderstandings and objections that were aired at various times in succeeding years, without arrival at a satisfactory agreement. The matter finally became one of diplomatic negotiation. By a protocol of February 2, 1914, the Governments of France and Peru agreed to submit the claims of the Dreyfus creditors to the decision of The Hague Permanent Court of Arbitration. The de­ cision was rendered October 11, 1921, and fixed the sum due by the Government of Peru to that of France in the Dreyfus matter at 25,000,000 francs, payable in annual installments of 5,000,000 francs, which, if not punctually paid, were to incur interest at the rate of 5 per cent. The first payment, with interest at 5 per cent from the date of sentence, was made on January 9, 1923. The next installment was paid early in 1925, with interest from October 11, 1922.

THE LANDREAU CLAIM On October 24, 1865, the Peruvian Government issued a decree providing for rewards to John Theophile Landreau, a French subject, for discovery of guano deposits in Peru. A contract existed between the individual mentioned and his brother, John Celestin Landreau, a naturalized American citizen, whereby the latter was to advance funds to the former and share in the profits of his discoveries. A settlement was made between the Government of Peru and John Theophile Landreau in 1892, in which an attempt was made to cut 70 PERUVIAN PUBLIC FINANCE off the interests of the American citizen. Following diplomatic action by the Government of the United States, a protocol was signed by the United States and Peru providing for the submission of the claim to an arbitral commission. The latter, sitting at London on October 26, 1922, ordered an award of $125,000 in favor of the United States in settlement of the claim. Payment was made by the Peruvian Government on March 29, 1924.

INTERNAL DEBT FUNDED DEBT The issues of bonds payable in Peruvian pounds, which compose the internal funded debt, are as follows:

INTEKNAL FUNDED DEBT

Outstanding Dec. 31 Original Inter­ Amorti­ Annual Item Date principal est zation service 1923 1924

Lp. Per cent Lp. Lp. Lp. Lp. Consolidated, bonds. __- 1889 3,623,260 1 None. 23, 655 2,365,4S0 2,365,490 Redeemable bonds 1898 4,697, 500 None. 25,000 25,000 393, 565 253, 730 Per cent Consolidated bonds.. 1918 7 1 209,000 2, 282,890 2,368,990 Municipality of Callao loan 1920 100,000 8 3 12,000 63,300 57,100 Sanitation bonds, Series A 1923 400,000 8 10 325, 000 Postal bonds.. ... 1924 8 97, 500 Bonds of the tobacco revenue _. _ _ 1924 8 2 108, 000 Total ._- 5, 430,245 5,250,810 1

The first three items are those generally known as "issues of the consolidated internal debt7' and really deserve to be considered in a category of their own, as will be apparent from their description hereinafter. The other bonds represent public works operations and are a manifestation of the policy adopted in recent years of capitalizing certain revenues for such purposes.

CONSOLIDATED BONDS OF 1889 The first step toward order in matters affecting the public debt was made in 1889, when the confusion after the War of the Pacific had subsided. A law of June 12 of that year had as its object the consolidation of all the recognized internal debts of the State out­ standing on December 31, 1888. The obligations eligible for funding under this act were of many different kinds and of varied character. The original law mentioned the following: The principal amount of the bonds of the internal consolidated debt created by the law of May 1, 1873; the outstanding certificates of the later consolidated debt issued in the Presidency of Balta; and other funded obligations of the Government or recognized debts represented by notes or certificates outstanding, together with the accumulated interest on all such funded debt up to December 31, 1888, except interest accumulated from January 1, 1881, to October 1, 1883, during the Chilean occupation. The unpaid interest on certificates of quitrents and chaplaincies, with deduction of that accumulated during the interval referred to in the preceding item. The principal and interest of the loans of the Governments of 1879, 1881, 1882, and 1884. PERUVIAN PUBLIC FINANCE 71 The various outstanding warrants and orders of payment issued by the offices of the Treasury up to January of 1880. Pensions and salaries of Government employees unpaid up to December 31, Sums due on account of contracts, loans, and supplies originating prior to 1880 or during later administrations, with the exception of the period of the Chilean occupation. The depreciated and noncirculating paper money in soles and jncas then out­ standing. To cover these obligations, bonds to the amount of 40,000,000 sqles were to be issued. Old debts or obligations incurred or payable in silver soles were converted at par. Others were converted by taking the equivlent value in silver soles of the sums expressed. In the case of the paper money, that representing soles was funded at the ratio of 15 to 1, while the inca bills were taken at the rate of 8 paper soles to 1 inca. The rate of interest of the bonds was fixed for the present at 1 per cent per annum, payable quarterly, and it was provided that there should be a quarterly amortization by tender out of the funds appropriated for service after the payment of interest. The certificates issued in payment of interest recognized on the old funded debt, however, were not to bear interest, but were to be amortized by tender. (These certificates later were made convertible into the redeemable bonds of 1898.) The funds for the service of this issue were to be provided by the proceeds of the excise tax on alcohol and 5 per cent of the import duties which by a law of October 25, 1886, had been set aside for the redemption of the paper money. Law No. 2713 of January 31, 1918, referred to in the next paragraph, confirmed the application of the alcohol revenue to such bonds of this issue as were not converted into the new consolidated internal debt of 1918. Out of the total of 40,000,000 soles authorized, bonds were issued during succeeding years to the amount of 36,232,600 soles. The amortization prescribed by the law was carried out until 1894, when it was interrupted by internal political disorder. Up to that time, bonds totaling 9,626,150 soles had been redeemed, leaving in cir­ culation a total of 26,606,450 soles, or Lp. 2,660,645. This sum remained unchanged until 1918. Then law No. 2713, which created the new issue of internal bonds of 1918, provided for the conversion of the 1889 bonds into the new issue at the rate of 14 per cent, or Lp. 1 of the new issue for Lp. 14 face value of the old. The conversion was not obligatory, but the privilege was exercised to some extent so long as the bonds of 1918 retained a satisfactory quotation, and the amount now outstanding has been reduced to that shown in the preceding table. From 1919 to 1924, inclusive, the annual budget laws have not carried an appropriation for the payment of interest on these bonds, but the service has been met as an extraordinary expense. Apparently the payment of interest was maintained with general regularity until 1914, when service for the latter half of that year and all of 1915 was postponed until 1916. There were also lapses from 1921 to 1923, corrected in 1924. The range of quotations of the bonds on the Lima Stock Exchange in recent years have been as follows, in per cent of face or nominal value: 1918, 14 to 11.6; 1919, 11.75 to 10.4; 1920, 12.4 to 10; 1921, 10 to 6.7; 1922, 10 (nominal); 1923, 7.5 to 6.3; 1924, 9 to 6.3. 72 PERUVIAN PUBLIC FINANCE

KEDEEMABLE BONDS OF 1898 A law of December 17, 1898, provided for the issuance of an un­ limited amount of noninterest-bearing redeemable bonds to fund the following obligations: The credits specified in the refunding law of 1889, either unclaimed or recog­ nized, but not converted into bonds of that issue. Special legislative or judicial grants. The claims arising from budgetary deficits from January, 1889, to March 20, 1895. The capital value of quitrents and chaplaincies which were transferable by the beneficiaries. The advances in money or supplies to the revolutionary forces of 1894 and 1895. The noninterest-bearing certificates issued under the law of 1889, representing payment of interest on the old funded dent. The nominal value of the bonds issued up to June 30, 1918, was Lp.4,401,180. Law No. 2713 of February 6, 1918, added to the eligible claims certain accumulated interests on certificates of quit- rents and chaplaincies. The total that had been issued up to the end of 1924 rose to Lp.4,697,500, according to figures given in the 1925 report of the Lima Stock Exchange. Redemption of the debt was to be effected through an annual appropriation of not less than Lp.25,000, which must be included in the yearly budget. Tenders were to be invited quarterly, and the lowest oners were to be accepted up to the sum available. The amortization was carried out regularly, with the exception of the year 1915, until 1921. The process was resumed in 1924. The range of quotations for these bonds on the Lima StockExchange have been as follows in recent years: 1918, 28 to 13; 1919, 32 to 10; 1920, 22.5 to 10; 1921, 12.75 to 9; 1922, 12.5 to 10; 1923, 11 to 9; 1924, 40 to 9.5. The resumption of redemption in 1924 caused an evident appreciation in the market value; according to recent infor­ mation, the prices obtained by the successful tenders in the first quarter of 1925 were from 45 per cent to 54 per cent.

CONSOLIDATED BONDS OF 1918 Law No. 2713 of January 31, 1918, authorized the executive to issue at par bonds of the internal debt up to Lp.2,000,000 for the pur­ pose of converting (at 14 per cent of their face value), the consoli­ dated bonds of 1889, paying credits and claims arising from the budg­ etary deficits from March 20, 1895, up to June 30, 1915, and pro­ viding funds for certain public works. The bonds were to bear in­ terest at 7 per cent, payable quarterly, and were to be amortized in 31 years by means of an annual cumulative sinking fund of 1 per cent. They were to be free of income tax (exentos de cualquiera contri- bucion que afecte especificamente la rent a del capital movible). Matured coupons and bonds called for redemption were declared receivable at par for payment of all public dues excepting export duties. The alcohol revenue, up to Lp. 160,000 annually, was to be devoted to the service of this debt, after setting aside a proportionate amount for the payment of such of the bonds of the issue of 1889 as were not converted. Later laws (No. 4075 of May 1, 1920, No. 4117 of May 11, 1920, and No. 4230 of Mar. 14, 1921) amplified the issue by Lp.255,970 for various specified purposes, making the total authorized Lp.2,255,970. PERUVIAN PUBLIC FINANCE 73 Again, in February, 1924, an increase of Lp.1,200,000 was authorized, " to be effective when the interest service of the bonds now extant is regularized;'7 this amount was allocated as follows: Lp.545,054 to rovide for additional applications based on law No. 2713; and Eip.654,946 to fund outstanding credits and claims originating in fiscal operations from July 1, 1915, to December 31, 1921. This portion of the issue was to bear interest from January 1, 1925. There are no recently published reports that show the total of bonds issued and those redeemed under this legislation. The pre­ scribed amortization took place until 1921, and bonds aggregating slightly more than Lp.30,000 were redeemed. The payment of interest became irregular in 1921; at the end of 1923, arrears were Lp.455,875. It is understood that back payments of interest have been made up. In order to guard against future irregularity of the service of the internal debt, a contract was signed between the Government and the Tax Collecting Co. early in 1924, whereby the latter undertakes to furnish the funds necessary to meet such budgeted payments by delivering them, three days in advance of the due date, to the Caja de Depositos y Consignaciones, which makes the actual payments. The bonds of 1918 were authorized at a time when the financial condition of the public treasury was excellent. For the first time in modern years, the small creditors on account of budgetary deficits were granted practically the full value of their claims. Other claim­ ants were willing to accept bonds that promised to have a satisfactory market value, and in this way a number of long-standing obligations were discharged. The range of transactions in these bonds on the Lima Stock Exchange has been as follows: 1919, 85.5 to 65; 1920, 89 to 58; 1921, 62.5 to 45; 1922, 69 to 50; 1923, 55 to 44.5; 1924, 71 to 48. MUNICIPALITY OF CALLAO LOAN The city of Callao issued bonds in 1910 to the amount of Lp. 100,000, for the refunding of some outstanding debts and the extension of sanitary works. The rate of interest was 8 per cent, with an annual accumulative amortization fund of 3 per cent. (The total annual service, however, was fixed at Lp. 12,000.) English bankers sub­ scribed to 60 per cent of the loan, and the balance was taken by a local bank at 95. The Tax Collecting Co. was authorized to deduct from the municipal revenues and turn over to the bankers the sum of Lp.500 bimonthly. In 1920, when the Government made nlans for an extensive program of municipal improvements under national auspices, it was found desirable to readjust the application of local revenues, and accord­ ingly, by virtue of law No. 4126 of May 12, 1920, the National Treasury assumed full responsibility for this obligation. Payment of interest and amortization has been made punctually.

SANITATION BONDS, SERIES A, OF 1923 Laws No. 4126 and No. 4603, already described in commenting on the dollar sanitation bonds of 1924, were the basis for this local credit operation. The bonds were issued in May, 1923, under a contract with a local bank provided for a total amount of Lp.400,000. 74 PERUVIAN PUBLIC FINANCE They were sold to the bank at 95 and carried interest at 8 per cent, together with an annual amortization fund of 10 per cent. As security for the service, the bank was authorized to collect the sanitation revenues provided and assigned by law No. 4126. The issue was redeemed and retired in 1924 out of the proceeds of the sanitation loan of $7,000,000 obtained in the United States.

POSTAL BONDS Law No. 4107 of May 11, 1920, authorized the issuance of bonds to a total of Lp. 100,000 for the reconstruction of the Lima post office. No bonds were put out, however, until 1924. They are secured by an additional 2 per cent ad valorem duty on goods im­ ported by parcel post, decreed for the purpose. No details are available at the time this is written as to the features of the new bonds, excepting that they bear interest at 8 per cent. The funds as collected are deposited with the Caja de Depositos y Consig- naciones, which acts as agent for the payment of interest and amortization. BONDS OF THE TOBACCO REVENUE The proceeds of the tax on tobacco had been destined from early days to the building of railroads. Law No. 2886 of November 29, 1918, provided that the net revenue «of the tobacco monopoly, after deducting a small proportion pledged to some outstanding bank loans, be applied to the service of Treasury drafts issued to finance certain railroad works then in progress or contemplated. Later, other projects involving pretentious railroad construction plans were advanced, with the tobacco revenue as their financial prop; however, they were finally abandoned. In the meantime work has gone for­ ward on certain lines of local importance to the limit permitted by available resources. The issue of bonds called " bonds of the tobacco revenue" had its origin in 1924, by virtue of a supreme resolution of April 23, which contained the following provisions: Internal bonds may be issued up to Lp.200,000 and delivered to the Caja de Depositos y Consigna- ciones, which will issue them in settlement of Treasury orders of payment for railroad purposes, as prescribed in law No. 2886; in­ terest will be 8 per cent, payable quarterly, and there will be quar­ terly amortization by lot at par, from a cumulative sinking fund of 2 per cent; the bonds are exempt from taxation; the funds for service shall be taken from the net profits of the tobacco monopoly, which are pledged for the purpose, and which the Tax Collecting Co. shall deposit fortnightly with the Caja de Depositos y Consignaciones.

DEBT TO THE TAX COLLECTING CO. The present Tax Collecting Co. (Cia Kecaudadora de Impuestos) was organized in 1913, succeeding a similar agency which had been entrusted with the collection of the more important revenues of the nation (with the exception of the customs dues) on an expense and commission basis. The contract between the Government and the new company, under authorization of law No. 1566 of March 28, 1912, provided for a loan to the former of Lp. 1,245,000 at 7 per cent interest, deductible quarterly out of the funds credited to the Treas- PEEXJVIAN PUBLIC FINANCE 75 ury. The loan was to be payable at the end of four years, when the original contract terminated; but the contract was to subsist so long as the Government remained debtor to the company. No payment having been made on the principal of the loan, the contract has de facto remained in force to the present. By a decree of March 14, 1921, the interest rate was advanced to 8 per cent in consideration of the company's calling upon its stockholders for a final payment of 10 per cent to complete the authorized capital stock of Lp.1,500,000. The sum of Lp. 1,245,000 was advanced in full to the Government in March, 1913, and was used to cancel obligations pending at that time, especially the accounts owing to the preceding tax collection company (Cia. Nacional de Recaudacion). Other debts paid con­ sisted of sums due the local banks, the guaranty on the construction cost of the railroad from Lima to Huacho, and accounts owed abroad in connection with the purchase of military supplies. In exercise of the privileges granted by the original contract and subsequent arrangements, the Government has been accustomed to discount with the local banks drafts accepted by the Tax Collect­ ing Co. against the current and future revenue, in amounts varying with the needs of the Treasury. At the end of 1924 such drafts out­ standing totaled Lp. 203,591, divided into two categories: Lp.199,062 representing drafts on account of normal proceeds (giros por cuenta de productos), and Lp.4,529 representing drafts on surplus proceeds (giros sobre may ores productos). At the end of 1923 these latter figures had been Lp.57,500 and Lp.55, 919, respectively.

BANK LOANS AND ADVANCES Accommodations obtained by the Treasury from local banks have formed a considerable part of the public debt at times in the past, but at present they are relative^ less important. Such obligations at the end of 1923 and 1924 were as follows:

BANK LOANS OUTSTANDING, 1923 AND 1924

1924

Lp. Lp. Balance of associated bank loan of Lp.500,000 in cheques circulares, 1914 43,308 Balance of loan of Lp.180,000 made by Banco Aleman Transatlantic, 1915. 53,803 32, 681 Balance of loan of Lp 25,500 made by Banco Popular, 1915 6,521 3,295 Banco Italiano, various accounts __. __ 57,715 39,346 Anglo-South American Bank, current account 38,676 45,886 Banco Popular, current account __. 24,000 Banco del Peru y Londres, various accounts., 85,800 Bank petroleum loan of 1924 108,000 Other bank advances. 14,846

Total. 224,023 329,854

Loan of Lp.500,000 in cheques circulares.—When the outbreak of war in 1914 made necessary the issuance of bank notes (cheques cir­ culares) to replace the hoarded gold coins, the Government required from the six Lima banks an advance of Lp.500,000 in such cheques circulares, upon which advance no interest was to be paid until such time as the "cheques circulares" were redeemed in gold. To pro- 65880°—26t 6 76 PERUVIAN PUBLIC FINANCE vide for a regular amortization of the debt, the Tax Collecting Co. was instructed to set aside 10 per cent of the net returns from the tobacco monopoly; the returns from the tax of 3 per cent assessed upon the circulation of cheques circulares in excess of the gold cover were also devoted to this purpose. The loan was thus reduced by- quarterly payments until its extinction in 1924. Batik petroleum loan of 192^.—In October, 1924, the Government borrowed Lp.108,000 in equal parts from two banks in Lima, at 8 per cent interest, secured by a second lien on the petroleum revenues pledged to the dollar loan of 1922. The proceeds were used to clear up some arrears of payments on account of the 1923 budget. Other hank advances.—The balance of the obligations shown above are of unimportant or routine character. The inability of the Treas­ ury to accumulate a reserve fund causes a resort to bank credit when unforeseen necessities arise. The banks, however, safeguard their liquid position by a strict limitation of such accommodations.

VARIOUS ADVANCES The relations of the Government with private enterprises that enjoy concessions, administer public services, or have outstanding industrial importance result often in the contraction of loans for various pur­ poses, whether or not connected with the operations or functions of the lenders. Such "various advances" always have a place in the Peruvian debt, but they are generally of a temporary or intermittent character, and therefore do not warrant any more comment than that entailed by recording them.

VAKIOUS ADVANCES OUTSTANDING, 1923 AND 1924

1923 1924 1923 1924

Lp. . Lp. Lp. Lp. Foundation Co 71, 328 Supe Pier Adm. Co 36,100 Gildemeister & Co 26, 859 26, 947 1 Peruvian Corp.—Pacasmayo Cia. Adm. Almacenes Fiscales___ 10, 866 147 Pier 21,020 Marconi Wireless Telegraph Co._ 75,091 25, 845 Other companies 3,757 12,251 82,195 Swedish Match Co _ 302, 617 Total 187, 901 537, 421 Cia. Salinera del Peru 30,299

FLOATING AND CONTINGENT DEBT The systematic recording of the floating debt is in itself a feature of the later years of Peruvian debt history. The progress that has been made in the regularization of fiscal affairs, notwithstanding the setback suffered in 1921 and 1922, is seen not only in the recent fund­ ing of various liabilities long disregarded, but in an advance in accounting procedure and in statistical presentation. None of the floating debt bears interest (except such interest as may ultimately be conceded in the process of liquidation). It represents in general those obligations which have been delayed beyond the budgetary period to which they belong or are in dispute or are destined for funding. PERUVIAN PUBLIC FINANCE 77

FLOATING AND CONTINGENT DEBT

Items 1923 1924

Lp. Lp. Peruvian Corporation annuity_._ 40,000 Recognized credits to end of 1921 _ 590, 235 590, 235 Arrears of bond interest 434, 221 110,527 Peruvian Steamship Co 64,278 64,278 Callao Dock Co _ 41, 436 41,436 Treasury obligations 1,500 500 Treasury warrants ..- 269, 665 169, 904 Provincial treasury di afts 193,095 93,021 Accounts pending—Ayacucho Centenaiy.. 338,189 Budget accounts, 1922 215, 337 246, 784 Budget accounts, 1923._ 462, 661 119,392 Budget accounts, 1924 679,192 Total.. 2,312,428 2,453,458

Some of the items are self-explanatory. Others are described below. Recognized credits to the end of 1921.—These pertain to the budg­ etary period 1915 to 1921 and are to be canceled by the issue of 7 per cent internal bonds of 1918, as already noted. Arrears of bond interest.—Payment of interest on certain bonds was delayed during 1921 and 1922 but made up in 1924, largely by employ­ ing the proceeds of new borrowings. Peruvian Steamship Co.—The sum shown is that carried for several years as due on account of passenger and freight bills, subject to adjustment when matters at issue between the Government and the company (Cia. Peruana de Vapores y Dique del Callao) are settled. Callao Bock Co.—This item also has stood for some time as an unad­ justed credit due the Empresa del Muelle y Darsena del Callao, the French company which, under an old concession, built and operates the Callao docks. Treasury obligations (obligaciones del tesoro).—Treasury promissory notes payable to bearer at a fixed date. They were first authorized by supreme decree of April 24, 1896, to facilitate the financing of the current budget, and were supposed to be met from the revenues of the current year. The limit of issue was fixed at Lp. 10,000, but was increased to Lp.100,000 in 1913, and to Lp.200,000 by a decree of November 8, 1922. Treasury warrants (vales del tesoro).—Promissory notes issued in individual cases and under special decrees for the settlement of accounts against the treasury, payable at a fixed date. It is not known what, if any, basic legislation exists for this custom. Provincial treasury drafts (letras de tesorerias fscales).—Drafts drawn on the central treasury by the branch treasuries and fiscal offices in the country to provide themselves with funds.

COMPUTATION OF DEBT IN DOLLARS An approximate conversion of the Peruvian public debt into dollars may be made as follows, based on its standing at the end of 1924: External debt: Funded debt in sterling $18, 339, 384 Funded debt in dollars 8, 772, 500 Recognized foreign claims (francs) 1, 160, 620 Total external debt 28, 272, 504 78 PERUVIAN PUBLIC FINANCE Internal debt: Funded $13, 117, 540 Other _. 16, 210, 039 Total internal debt 29, 327, 579 Total public debt 57,600,083 The internal funded debt has been reduced by taking the bonds of 1889 at their conversion value of 14 per cent in place of their nominal or face value. Based on the above computation, and estimating the population of Peru at 3,750,000, which is the figure indicated by the best available information, the per capita foreign debt would be $7.50, the per capita internal debt $7.80, and the total per capita debt, $15.30.

COST OF THE DEBT Based on the debt status as of the end of 1924, the annual service for interest and amortization of the sterling debt is £330,258 and of the dollar debt $1,200,000. The equivalent in Peruvian currency may be taken as about Lp.383,000 and Lp.292,680, respectively. Payment on the Dreyfus claim should be 5,000,000 francs annually (until about 1928, if payments are regular), or around Lp.67,000. The care of the present external debt, therefore, requires some Lp.742,- 860, taking sterling at 15 per cent premium, dollars at 4.10, and francs at 75 per Peruvian pound. This is less than 10 per cent of the ordinary revenues of the Republic in recent years. Payments by the Treasury on account of the internal debt are subject to fluctuations because of the continual transactions in un­ funded items. The chief fixed annual charges may be taken as follows: Lp. Consolidated bonds of 1889 23, 655 Redeemable bonds of 1898 25, 000 Consolidated bonds of 1918 209, 000 City of Callao loan 12, 000 Tax Collecting Co. fixed loan 99, 600 Total 369,255 To this should be added interest on such obligations as advances from the Tax Collecting Co., current accounts with local banks, various borrowings on account of special transactions with other financial or industrial organizations, and the like. At the end of 1924 the amount of such debts, together with some minor funded items not already considered, was Lp.1,285,570. The interest, at an average of 8 per cent, would be Lp. 102,845. Amortization need not be taken into account, for the aggregate principal tends to remain around the same figure. The internal debt, then, requires in all about Lp.477,100 to meet the entire service of funded items and the interest on a fairly constant volume of unfunded obligations. This figure is, of course, exceeded in the actual accounts, because repay­ ments of principal are effected, though generally balanced by new borrowings. The total current cost of the public debt, external and internal, may thus be put at Lp.1,219,960, or about 15 per cent of an esti­ mated annual income of Lp.8,000,000. The floating debt, however, PERUVIAN PUBLIC FINANCE 79 contains items that will eventually be funded and require payment of interest. The public improvements under way and contemplated, including sanitation works, railroads, irrigation, and generally im­ proved facilities for education, and other forms of national service, will no doubt require greater sums than those available from general revenue, so that the debt service is likely to increase both absolutely and relatively as the economic power of the country increases. OTHER TREASURY RESPONSIBILITY The annuity of £80,000 which the Government is bound to pay the Peruvian Corporation for 30 years, dating from 1907, is in effect a public debt expense. This obligation has been discharged with some irregularity during times of fiscal stringency. The National Treasury is responsible for the service of a loan floated by the Department of Lima in 1907 in favor of a local school (Colegio de Nuestra Senora de Guadalupe). The original issue amounted to Lp.80,000 at 8 per cent interest and was to be served by the sum of Lp.7,800 annually, taken from the property tax (predios) of the Department. This tax is now included in the " sanitation revenues " paid into the National Treasury, the service of the " Guadalupe" loan remaining a charge upon it until such time as the debt may be extinguished. The balance outstanding at the end of 1924 was Lp.21,100. Under dispositions of the Civil Code and a law of December 15, 1864, properties subject to quitrents and chaplaincies might be freed by the deposit of specified sums with the Government, which assumed the payment of a fixed rate of interest. " Certificates of redemp­ tion" were issued to a total of 2,005,010 spies. Payment of interest went on regularly until 1879, when it was interrupted and never has been resumed. Accrued interest was funded at various times into bonds of the internal debt, and part of the capital value of the cer­ tificates was converted into redeemable bonds of 1898. According to an official statement of May 20, 1923, the capital value of the cer­ tificates then outstanding was Lp.112,371, and unpaid interest of Lp.269,379 had accumulated. Proposals have been made to convert this obligation into a funded debt. There is an unliquidated account between the Government and the Peruvian Stfeamship & Dock Co. (Cia. Peruana de Vapores y Dique del Callao) growing out of subsidies granted some years ago when the steamship company was first established. In 1923 the steamship company's debit against the Government on this score was about Lp.600,000, while the Government's contention was for a sum around Lp.200,000.

ORIGIN OF THE PRESENT DEBT The Peruvian debt is composed of obligations of comparatively recent date, but if examined carefully it will be found to contain traces of responsibilities incurred far back in the history of the coun­ try. On the whole, the growth of the modern debt has taken two forms: (1) The gradual recognition and funding of claims and obli­ gations originating in past years, more or less remote; (2) the financ­ ing of current deficits. Only in the most recent times have there 80 PERUVIAN PUBLIC FINANCE been borrowings representing direct expenditure on public works. The slowness of the process of attaining a really clear debt position was caused by the fact that there have been relatively few periods of sustained prosperity when public revenues were sufficient to bal­ ance ordinary expenditures. As a rule, periods of comparative ease have been followed by new depressions with their train of financial disturbances and new borrowings. More than 40 years have been required for the attainment of a condition like that of today, in which it may be said that no latent obligations of any magnitude exist. The modern neriod in Peruvian public debt history begins after the war with Chile, when the country was prostrate. For some time after 1883 effort was directed solely at the recovery of normal ad­ ministrative and business conditions. The external debt, represented by the sterling bonds sold during the guano prosperity, was in de­ fault, but no attempt could be made toward resuming its service. This debt can be disregarded henceforth, as it was adjusted later by the arrangements with the Peruvian Corporation*. The formation of a new foreign debt did not begin until 1906. In the meantime the old internal debt was consolidated into the new bond issues of 1889 and 1898. This took care of the greater part of the internal liabilities but did not include such matters as the claim of Dreyfus Bros. & Co. and other accounts against the Government held by various foreign firms and individuals, all of which came up subsequently for treatment and adjustment in various ways. Nevertheless, these operations introduced the beginning of order into the public debt and served as the starting j>oint in the rehabilitation of public credit. But new responsibilities at once began to accumulate, since the public revenues were generally in­ sufficient to carry out the program of government. At the end of each fiscal year a certain number of claims and services rendered in accordance with the budget remained unsatisfied, to appear later for recognition. Such deficits, however, were necessarily moderate and did not constitute a heavy burden when finally assumed. In general, the years from 1890 to 1910 were characterized by care­ ful disposition of the funds available for public administration, and few new debts of any importance were incurred. Moderate current advances were obtained from the banks and from the organization which collected a large number of fiscal revenues, but the amount of such credits was kept within reasonable proportions! The salt loan of 1909, described in preceding pages, was the first new external debt of importance to be incurred by Peru. It refunded a loan of £600,000 obtained in 1906 from German bankers for the purpose of buying two small warships. The credit of Peru was not yet sufficient to warrant a loan on an unsecured basis; therefore the revenue from the tax on salt was sequestrated 'and administered by an autonomous corporation which acted as the agent of the bankers in the collection and remittance of the necessary funds. The purchase of warships in 1906 was almos the first manifestation of the return of Peru to a sounder financial footing. It was followed by other activities, such as the enlargement and improvement of the army, the undertaking of more ambitious and costly public works, and in general an expansion of Government services in line with modern tendencies. It may be noted that at this time the industries of the country had attained a considerable degree of prosperity and PERUVIAN PUBLIC PIKAKCE 81 the gold monetary system, established in 1897, had imparted stability to trade and finance. Because of the optimism with which administration was con­ ducted for a few years before 1910 and thereafter until the beginning of the European war, the budgetary deficits and the debts of the Government increased noticeably. The loan of Lp.1,245,000 ob­ tained from the Tax Collecting Co. in 1913 was a consolidation of various recent obligations. Sums due the banks, which had grown to such volume as to brin ab ut a demand for reduction, had been placed in 1912 on a consolidated basis at Lp.664,800. In 1909 and 1913, the Government guaranteed loans secured by the Peruvian Steamship Co. for the purchase of ships. The total recognized public debt, so far as can be determined from the unofficial statistics available (for complete official figures are lacking), had increased between the end of 1910 and the end of 1913 from Lp.6,198,000 to Lp.7,630,000. Its composition at the latter date is shown in the following table: Internal debt: Lp- Consolidation of 1889 (1 per cent) 2, 660, 645 Redeemable bonds of 1898 979, 570 LP- 3, 640, 215 Loans: Salt loan of 1909 (5^ per cent) 1, 121, 260 Peruvian Steamship Co. loan of 1909 (6 per cent)__ 311, 720 Peruvian Steamship Co. loan of 1913 (8 per cent)__ 250, 000 Grace Syndicate loan of 1913 170, 650 — 1, 853, 630 Bank loans: Consolidation of 1912 539, 800 Tax Collecting Co.: Funded loan of 1913 (7 per cent) 1, 245, 000 Advances, etc_ 248, 346 — 1,493,346 Various debts 32, 500 Floating debt—Treasury warrants 71, 250 Grand total 7, 630, 741 These figures present the internal bonds of 1889 and 1898 at their face or nominal value, whereas the actual market value was not more than 25 per cent of par. These internal issues, the service on which came to only about Lp.50,000 per annum, accounted for about half of the total. The interest and amortization of the public debt were paid regularly and took but a moderate portion of the national revenue. The debt represented a rather large increase over a period of six or seven years, but it seemed justified by an encouraging im­ provement in the industry and trade of the country. On the other hand, some difficulty was experienced in 1913 and the early part of 1914 in meeting the debt service regularly, indicating that the expansion had been bverrapid, while it must also be remembered that a number of large contingent liabilities still awaited adjustment. The debt status at this time was, therefore, not entirely representa­ tive of settled conditions, although nearly 30 years had elapsed since the treaty of peace with Chile. CREDIT OPERATIONS DURING AND AFTER THE WAR The depressed public revenues during 1914 and 1915, due chiefly to the smaller customs returns derived from a restricted foreign trade, made it necessary for the Government to resort to credit during those years in order to maintain the public organization. 82 PERUVIAN PUBLIC FINANCE The service of some obligations was suspended and temporary accommodation was sought through all the channels available. Advances were obtained from the banks and from the fiscal organ­ izations connected with the administration of official functions and monopolies. Budget operations gave rise to deficits composed of claims and unpaid services, which were to appear for later adjust­ ment. According to the best figures obtainable, the total of the public debt increased by about Lp.2,250,000 from the end of 1913 to the end of 1915, the figure at the latter date being Lp.8,897,568. Most of the increase was found in the category of local short-time advances, but about Lp.400,000 represented the inscription of credits and claims dating from previous decades. The prosperity which the war eventually brought to all Peruvian industries made the following years unusually favorable from a financial standpoint. Export duties assessed upon the principal products, the value of which was greatly enhanced, brought in large sums, and practically all sources of revenue soon reflected the increase of wealth among the people. The mounting Treasury income not only covered the increased allotments to the various Government offices, the extension of public instruction, and the undertaking of public works, but permitted the clearing away of floating obligations, unpaid debt services, and the reduction of the principal of the obli­ gations outstanding. A number of the emergency borrowings were canceled. By June, 1920, the total public debt had been reduced, in nominal or face value, to Lp. 7,110,952. This figure includes over Lp. 780,000 as the outstanding amount 'of the new internal bond issue of 1918, which had been authorized to refund the internal bonds of 1889 and to settle other approved claims and recognized obligations, including practically all those incurred up to the middle of 1915. Not only had the debt of the Government been reduced and its credit improved by the equitable recognition of pending obligations, but it was true of this period, as of almost no other in the history of Peru, that the liquidation of each year's budget left practically no floating debt to be disposed of later.

DEVELOPMENTS OF LATE YEARS The effects of the economic depression which began in 1920 was seen in greatly decreased revenues during 1921 and 1922 as compared with budget calculations based on the preceding years of prosperity. The total deficit of the two years, or the amount by which the ordinary revenues fell short of the authorized expenditures, amounted to nearly Lp. 3,000,000—a situation which brought a train of unsatis­ fied and pending obligations, floating debts, and the like, the effects of which are still visible in the public accounts. This development arrested the process of reduction of the public debt which had been going on since 1915, with the result that the total once more began to show decided increases from one fiscal period to another. Other developments were also under way, however. The financial strin­ gency of the past four years has not prevented the attainment of a much greater degree of regularity and precision in recognizing and presenting the actual obligations of the country than has in general characterized the past. The history of this most recent period in Peruvian public finance, therefore, is not entirely one of public PERUVIAN PUBLIC FINANCE 83 debt expansion caused by unfavorable economic conditions. Much of the apparent increase in the figures is due to the adoption of improved accounting methods and a persistence in the policy, already indicated, of bringing to light and placing on a formal basis a number of old responsibilities. Speaking more specifically, the advance in the total of the public debt from Lp.4,940,629 * at the middle of 1920 to Lp.11,805,823 at the middle of 1924 was due to the following: (1) An increase of over Lp.1,500,000 in the outstanding principal of the internal bonds of 1918, representing mainly the consolidation and funding of obligations incurred prior to 1915. (2) The large budget deficits of 1921 and 1922, represented in part by new funded debt and in part by short-time or floating obli­ gations, including book accounts carried pending definite disposition. (3) The adoption of a program of sanitation and other necessary public works in the principal cities, which involved the issue of new bonds, the securing of temporary advances in anticipation of later funding obligations, and the assumption by the National Treasury of responsibility for the outstanding bonds of the city of Lima issue of £600,000 and the city of Callao issue of Lp.100,000. (4) The inclusion on a formal basis of the debt to Dreyfus Bros. & Co., of Paris, and other minor claimants, in accordance with arbi­ tration awards—all such obligations dating from before the War of the Pacific. (5) The adoption of a system of making an exact presentation of the floating debt, including the back service of interest and amortiza­ tion due on certain obligations and the unsatisfied items of the budgets of the latest years, carried as book accounts pending dis­ position. These considerations warrant the statement that the Peruvian debt, although many of its items date from comparatively remote times, can be intelligently studied only from a presentation of its annual status from 1920 to the present, for the reason that the official reports of previous years rarely contained data sufficiently complete to give an accurate idea of the real sum of the obligations of the nation and the facts that determine its credit. The following table presents the official figures of the total public debt from the middle of 1920 to the middle of 1924, according to the classification used by the Peruvian Treasury:

STATUS OF PERUVIAN PUBLIC DEBT AS OF JUNE 30 FROM 1920 to 1924

Debts 1920 1921 1922 1923 1924

Internal debt: Lp. Lp. Lp. Lp. Lp. Consolidated bonds of 1889 (1 per cent) - 334,168 331,169 331,169 331,169 331,169 Redeemable bonds of 1898 489, 330 377, 615 393, 565 393, 565 280, 590 Internal bonds of 1918 (7 per cent) _ 784, 260 1, 580, 610 1, 935, 464 2,223,460 2,315,890 Recognized credits _ 305, 463 305,463 590,235 Total 1, 607,758 2,289,394 2,965,661 3,253, 657 3, 517,884

i The figures here quoted and those given in the subsequent table are taken from the latest issue of the Peruvian Statistical Abstract. The discrepancy between this figure and that previously cited as repre­ senting the debt at the middle of 1920 is due mainly to the official method of presenting the value of the internal bonds of 1889 at their present conversion value of 14 per cent. 84 PERUVIAN PUBLIC FINANCE

STATUS OF PERUVIAN PUBLIC DEBT AS OF JUNE 30 FROM 1920 TO 1924—Con.

Debts 1920 1921 1922 1923 1924

Government loans: Lp. Lp. Lp. Lp. Lp. Salt loan of 1909 (5H per cent) 980, 587 934, 840 901, 940 867, 220 830, 560 Railway purchase bonds of 1920 (5 per cent) 699, 002 684,590 670,177 Guano loan of 1922 (7K per cent) 1,250,000 1,231,300 City of Lima bonds of 1911 (5 per cent) _. 568, 600 561,200 553, 600 City of Callao bonds of 1910 (8 per cent) _ 71,200 66,100 60,300 Dollar loan of 1922 (8 per cent) 535, 714 491,250 Other 200,000 100, 028 64, 225 530, 732 Total 1,180, 587 1,034,868 2,304, 967 3,964, 824 4,367,919 Bank loans, total 680,391 312,841 648, 648 401,836 295,909 Tax Collecting Co.: Loan of 1913 (8 per cent) 1,245,000 1,245, 000 1,245,000 1,245, 000 1,245,000 Other advances 170,346 491, 258 522,166 195, 968 506, 227 Total _ 1 1,415,346 1,736, 258 1, 767,166 1,440,968 1, 751, 227 Sundry loans, total 14, 559 17,167 385,362 250,976 93,919 French claims, total 518, 743 441,243 417,452 Floating debt: Bond service pending 411, 575 467, 200 214,469 Treasury warrants and drafts 41, 988 95, 350 405,441 404,374 484, 726 Budget accounts for liquidation 972,480 1,021, 530 516, 604 Various 221, 248 105, 714 145, 714 Total 1 41,988 95, 350 2,010,744 1,998,818 1,361,513 Grand total 1 4,940,629 5,485,878 10,601,291 11,752,322 11,805,823

A study of the preceding table in conjunction with the itemized description of the present debt given in the first section of this chapter will probably serve to explain the character of the various obligations. The following remarks, however, should be noted. The internal debt.—This includes only the various issues of the funded debt, together with the amount of the "recognized credits" that are eligible for conversion into bonds of the series of 1918. The consolidated bonds of 1889, which are convertible into the issue of 1918 at 14 per cent of their nominal or face value, are presented at the reduced figure. The redeemable bonds of 1898, however, are recorded at their full nominal value. Government loans.—This classification as used by the Treasury includes both internal and external obligations, of which the majority are funded, and of which the principal is payable variously in sterling, in dollars, and in Peruvian pounds. The principal items are the salt loan of 1909, the guano loan of 1922 in sterling, the bonds repre­ senting the purchase of the Lima-Huacho railroad, also payable in sterling, and the various obligations connected with the present program of public works and municipal improvement. Bank loans.—Less recourse to bank credit has been the rule in recent years because of the availability of other methods of meeting the needs of the Treasury. Debt to the Tax Collecting Co.—The increasing yield of the general revenues and monopolies administered by the Tax Collecting Co. has made it possible, when needs arise, to obtain large advances from that institution. Sundry loans.—Under this heading are found miscellaneous advances by official and semiofficial organizations, and by banks, PEKTTVIAH PUBLIC FINANCE 85 large exporters, or other interests operating in the country which have been called upon occasionally for accommodation to the Treasury. French claims.—The obligation recognized in favor of Dreyfus Bros. & Co., of Paris, is the principal item. It has been explained in preceding pages. Floating debt.—During 1919, 1920, and 1921 the reported floating debt consisted only of Treasury warrants outstanding or other pay­ ments pending. The increase during 1922, 1923, and 1924 was due to the inclusion of unpaid service of the internal debt and of the Lima-Huacho railroad bonds; Treasury drafts issued in payment for railway construction against the tobacco revenue; various obligations subject to future determination; and the accounts of the budgets of prior years not yet closed.

THE PUBLIC DEBT BEFORE THE WAR OF THE PACIFIC The history of the debt of Peru begins in 1822, three years before the successful end of the war of independence. In that year a loan of £1,200,000 at 6 per cent was obtained in London. After the reser­ vation of a sum sufficient to pay interest for three years most of the net proceeds were supplied in the form of munitions of war. A loan on similar terms was contracted in 1825, but of the authorized amount of £1,500,000 only £616,500 was actually placed. These obligations, together with the debt of 'about 1,500,000 pesos recog­ nized in favor of the Republics of Colombia and Chile on account of military assistance during the revolution, constituted the external debt until the year 1849. The nation was not well enough organized to maintain the service of its debt; hence its bonds went into default until the recuperation that took place under President Castilla, who took office in 1845. During the early years of military governments and constant changes of authority, the individuals and institutions within the country which advanced funds or extended credit for public purposes fared little better than the foreign creditors. The earliest internal obligations of the new community were only partly discharged, by such means as the transfer of public lands or the issuance of " public debt certificates" that were in effect a fiat money. In following years, with the gradual constitution of government, a greater measure of order was introduced, but there was no regularized internal funded debt* until 1850, when there occurred the lirst of the opera­ tions of general adjustment and consolidation of claims against the Government that have marked various periods in the history oi the country up to the present day. The funding operation of 1850 to 1853 resulted in the recognition of a debt amounting to about 22,500,000 pesos, and a corresponding amount of public obligations was issued paying interest at 7 per cent. A portion, amounting to 9,000,000 pesos, was converted into bonds payable abroad. Such liberality was exercised in adjudicating claims that a civil war followed, in 1854-55. The revolutionaries, under former President Castilla, were successful, but the issue of bonds remained unaltered. Later, in 1869 and 1873, new consolida­ tions of the internal debt were effected. During the years between 1850 and 1879 there was constant cur­ rent borrowing from banks, individuals, business houses, guano 86 PERUVIAN PUBLIC FINANCE shippers and consignees, and other entities. Following the abolition of negro slavery in 1855, ''manumission bonds" were issued to a total of over 7,000,000 pesos. The internal debt, however, was served with general regularity until 1879, and it never grew to troublesome size until a few years before the war with Chile. The total in 1860 was 9,231,000 pesos; in 1867, 8,500,000 pesos; and in 1876, 24,723,000 pesos. Turning back to the course of the external debt, it is found that the foreign credit of Peru was revived soon after 1840, in which year began the exploitation of the guano deposits of the islands and seacoast. The appreciation of the value of these resources grew steadily as the Peruvian Treasury receipts from guano sales expanded. Negotiations were begun in 1847 with a view to reaching a settlement with the holders of the bonds of 1822 and 1825. The result was the issuance in 1849 of bonds of the principal amount of £1,788,800 with initial interest of 4 per cent, which was to increase one-half per cent annually until reaching 6 per cent, to convert the outstanding principal; and bonds amounting to £1,891,300 with initial interest at 1 per cent, increasing one-half per cent annually until reaching 3 per cent, to represent the accrued interest of the old issues. The old bonds were retired and, with the cooperation of the foreign interests identified with guano extraction and distribution, the way was prepared for a succession of financial operations of truly extra­ ordinary character, based solely on the ever-increasing returns which the exports of guano yielded to the Government and to those engaged in the trade. In 1853 the active debt at 6 per cent, resulting from the foregoing transaction, was redeemed from the proceeds of a new loan of £2,600,000 placed at 4^ per cent interest and 2 per cent annual amortization. The bonds were issued at 85. In 1862 another loan was secured in London, involving £5,500,000 in bonds at 4*^ per cent interest, with 8 per cent annual amortization, sold to the public at 93. All the prior sterling debt was retired, leaving net proceeds of £2,400,000, of which part was used for currency reform in Peru. Three years later, in 1865, during a short period of war between Peru and Spain, another issue of £10,000,000 was authorized at 5 per cent interest and 5 per cent annual amortization. Outstanding bonds were convertible into this issue, and with the cash proceeds some old debts to the Eepublics of Colombia and Ecuador were canceled; an indemnity of £600,000 was paid to Spain; and a modern warship was purchased. Because of conditions at the time of this operation, the issue price was 83y^. All these successive borrowings were secured specifically by the revenue from guano sold in Great Britain and some Continental markets, and the service was met out of the proceeds realized by the consignees, who acted also as paying agents. At this time the credit of Peru in Europe, as judged from the tenor of contemporary publications, was very highly regarded, for every shipload of guano was considered a ready equivalent of so much gold. There were not wanting observers who pointed out that the extrac­ tion of guano could not proceed indefinitely and that the political and economic organization of the country did not afford a basis of credit beyond that represented by the guano resources still available. PERUVIAN PUBLIC FINANCE 87 However, the period of really extravagant operations was still to come. At the end of 1869 the funded debt situation was still within reason­ able limits, notwithstanding the fact that the internal finances of Peru had been in a somewhat precarious position since 1865. The total external debt was 42,930,280 soles, or about £8,600,000. The outstanding principal of the bonds of 1865 was 35,996,000 soles, that of the bonds of 1862 not exchanged for the later issue was 4,759,750 soles, and other debts held in the United States and in Ecuador came to 2,174,530 soles. Obligations recognized in favor of Chile, Colom­ bia, and Venezuela in the settlement of accounts dating from revolu­ tionary times had been paid off. The internal debt at this time was quite moderate, at something less than 8,000,000 soles. The accounts with the various guano consignees, however, constituted a burden­ some floating debt; it4was to ameliorate this situation that the con­ tract with Dreyfus Bros. & Co. was effected in* 1869. The latter firm undertook the discharge of the debt due the consignees, and, as the affairs of the latter were wound up, became the fiscal agent abroad of the Peruvian Government, attending to the service of the out­ standing loans in accordance with the provisions of the contracts. But before the benefits of this arrangement were realized the Peru­ vian administration incurred new obligations that turned out to be ruinous. For the purpose of constructing railroads, a loan of £12,000,000 was authorized in 1870. The interest was 6 per cent and the bonds were sold at 82 J^, producing for the Government the net sum of £10,500,000, which was expended in the building of the railways from Callao to Oroya and from Arequipa to Mollendo. The debt was se­ cured, as usual, by the hypothecation of the guano revenue, but it involved the retention by Dreyfus, Bros. & Co. of 300,000 soles out of the monthly stipend of 700,000 soles which had been allocated to the internal expenses of the Government. Despite the signs of approaching trouble which were evident to those who were in a position to appraise the value of the remaining guano deposits and appreciate the strain placed upon the finances of the Government by the heavy obligations which it had assumed, the zeal of the Government for public works continued. A law of January, 1871, authorized a new loan of £15,000,000, of which £2,000,000 was to be used for irrigation and £13,000,000 for railroads. The amount might be increased by that necessary for refunding the outstanding bonds of previous issues; in all, the principal amount of £23,215,000 was eventually issued. The public subscription, opened early in 1872, was a complete failure, as opposed to the success attained by the flotation of 1870. The bonds, bearing interest at 5 per cent with 2 per cent annual amorti­ zation, were offered at 773^, but only £230,000 was subscribed. Dreyfus Bros. & Co. purchased £6,000,000 firm. After several years of effort more were placed, and all of the bonds of the 1865 issue were converted. As a result, the external debt of Peru, including a small issue of bonds for £290,000 that had been sold in 1869 for the purpose of constructing and building the railroad from Pisco to lea, amounted to over £35,000,000. The annual service came to around £2,700,000 and absorbed the entire guano revenue. 88 PERUVIAN PUBLIC FINANCE Taking into account the unimportance of the other Government resources—for the cultivation of other returns, saving that of the customhouses, had practically been neglected—and the settlement pending with Dreyfus Bros. & Co., the public Treasury was in a desperate if not hopeless position. In spite of efforts made by those who saw the danger and attempted at the last moment to obtain other resources by levying on the nitrate industry of Tarapaca and creating new taxes, the Treasury was obliged to default on its foreign payments in the latter part of 1875. The difficulties were not caused by the exhaustion of the guano deposits, for although the best supplies were depleted, there still remained enough to produce a fair revenue. But shipping had pro­ ceeded at too rapid a rate, so that the market was glutted; further­ more, the demand had diminished, owing to the competition of other fertilizers. When Dreyfus Bros. & Co. had shipped the total sold them, they were left with a large stock that was gradually disposed of, and the proceeds were applied to the reduction of their accounts against the Government. Thus the operations of the Peruvian Guano Co. (Ltd.), which succeeded Dreyfus Bros. & Co. as a market­ ing and fiscal agency, were so circumscribed as to leave practically no surplus which might be applied to the debt service. The outbreak of war with Chile in 1879 put an end to this phase of the country's history. According to contemporary statistics, the principal amount of the bonds outstanding at the end of 1879 was £31,840,220, without counting accrued interest.

CANCELLATION OF THE EARLY FOREIGN DEBT—THE PERUVIAN CORPORATION Foreign holders of Peruvian external bonds organized soon after the default of 1876 and participated in various negotiations carried on thereafter with representatives of the Peruvian Government,, resulting in the so-called uRaphael contract" with the Peruvian Guano Co. (Ltd.). Owing to circumstances already described, the attempt to revive the guano trade through this arrangement was ineffective, so far as the resumption of the debt service was concerned. All efforts to secure revenue from the sale of guano, of course, became futile when the War of the Pacific broke out in 1879. The Chilean forces took possession of the guano deposits. As soon as the success of the Chilean arms was assured the bondholders' committee took up with the Chilean Government the question of the rights of the bond­ holders to participate in the proceeds of guano sales made by that Government, basing their stand on the hypothecation of the revenue from such deposits prescribed in the loan contracts of 1870 and 1872. The question of guano shipments became a matter of diplomatic interest to the Governments of Great Britain, France, and the Netherlands, through the representations of the bondholders, and the Chilean authorities felt it advisable to respect their claims. Accordingly, the treaty of peace of 1883 contained provisions for the due apportionment of the proceeds of the guano extracted by the Chileans. Considerations of policy therefore prompted Chile to assume a certain share of responsibility in the matter of the Peruvian debt while disclaiming any direct liability. Direct negotiations with the Government of Peru were begun by the bondholders in 1886, when the administration had returned to a PERUVIAN" PUBLIC FINANCE 89 normal basis. The question of the recognition of the debt became an acute political issue. On one side there was a party which main­ tained that the negotiations of the bondholders with Chile had deprived them of any recourse against Peru; in fact, the dictatorial government of Pie>ola had publicly affirmed this stand by a decree of 1880. The majority in power, however, favored the cancellation of the debt through a compromise, the general terms of which were advanced by the bondholders in 1886, and which were very similar to those finally adopted. After the presentation of various projects to the Congress, a great deal of popular and official discussion, and the employment of politi­ cal maneuvers of all kinds, the Peruvian Congress finally approved on October 25, 1889, a law ratifying an agreement with the committee of bondholders, whereby the responsibility of the Government for the outstanding debt was entirely extinguished. The bondholders formed the Peruvian Corporation, to take and administer the con­ cessions granted. The contract with the corporation was made on January 11, 1890. The original contract was not carried out in full by either party and so modifications were introduced in 1907. As they now stand, the principal features of the relations of the Peruvian Corporation with the Government are as follows: Railways.—The usufruct of the State railways was granted the corporation for a period of 66 years. The following lines were in­ volved and are still operated, either directly or through a lessee (in the case of the Pisco-Ica line only): Central Kailway, including the extension subsequently constructed from Oroya to Huancayo; Southern Railway, including the extension to Cuzco; the Paita- Piura Railway; the Trujillo line; the Pacasmayo Railway; and the Chimbote Railway. The corporation agreed to put the lines and equipment in repair and maintain them in good order, as well as to complete certain extensions planned as part of the properties. The new construction work, however, was not done in accordance with the contract of 1890, and rearrangements were made in 1907. AH such work has now been completed. The new arrangement of 1907 extended the 66 years of operation, adding 17 years, or until the year 1973. During this 17-year extension, however, the Government is entitled to 50 per cent of the profits of operation, after deducting certain specified charges. In addition to the lines received from the Peruvian Government, the corporation purchased from the Government of Bolivia the railway from the port of Guaqui on Lake Titicaca to La Paz. Lake navigation.—The corporation was given the franchise for the operation of steamers on Lake Titicaca and took over the Government boats already in operation. Guano.—The original concession allotted the corporation the free disposal and the exclusive privilege of exportation of guano, up to 3,000,000 tons, of which 1,000,000 tons was contingent upon certain conditions which lapsed unfulfilled, leaving a total of 2,000,000 tons actually granted. From 1891 until 1915, according to the figures of of the Government, the corporation exported 1,237,128 tons. Diffi­ culties then arose, due to the increasing use of guano in native agri­ culture, the wants of which were supplied by the Guano Administra­ tion Co., organized by the Government in 1909. The original 90 PEBUVIAN FtTBUC FINANCE contract had contained the clause "the right of using such guano as might be required for Peruvian agriculture is reserved (to the Govern­ ment)." The policy of the conservation of the seabirds and scientific care of the guano deposits, adopted by the administration, was an innovation contrary to the previous method of extraction at the lowest possible cost. Limitation of ocean tonnage during the time of war was another factor in the suspension of shipments from 1915 until 1920. In 1922 arrangements were made with the Guano Administration Co. for the periodical extraction of a quantity in keeping with the present official system of guano exploitation. According to the records of the Guano Administration Co. (which is officially responsi­ ble for the supervision and recording of the guano operations of the corporation), the following shipments have been made by the Peruvian Corporation for export: Tons. 1891 to 1915 . 1,237,128 1920 . 4,000 1921 5,950 1922 . 23,850 1923 22, 780 1924 :. 22,300 The total, including a small quantity sold in Peru from 1891 to the end of 1924, comes to 1,317,518 tons, leaving a balance of 682,482 tons at the beginning of 1925. Annuity.—The original contract provided that the Government should pay the corporation an annuity of £80,000 for 33 years. The Government was unable to meet this charge with regularity, although a reduction to £60,000 was made in consideration of the exemption of the corporation from taxation. The new contract of 1907 provided for an annuity of £80,000 payable in monthly installments for 30 years, and pledged the revenue from the sugar tax, which might not be altered without the consent of the corporation. The corporation agreed to pay on the score of taxation £12,000 for 10 years, £15,000 for the next 10 years, and £20,000 for the third 10 years, thereafter paying the same taxes as other railways in Peru. During periods of fiscal stringency, the payment of the annuity has been irregular, but arrears in principal and interest have eventually been discharged. Other features.—The contract included a grant of 500,000 hectares of land in the Perene Valley of the department of Junin, on the eastern side of the mountains, where a colony has been established but with indifferent financial success. This and other activities of the corporation have been of slight importance. The Peruvian Corporation was organized with an issue of £16,- 500,000 capital stock against the Peruvian debts of 1869, 1870, and 1872. Of this, £9,000,000 is ordinary stock on which no divi­ dends have been paid. The issue of preference stock at 4 per cent cumulative amounted to £7,500,000. At the end of June 1924, the dividends accrued amounted to slightly over 105 J^ per cent. As authorized by its contract, the corporation issued first mortgage bonds to a principal amount of £5,400,000 at 6 per cent. After 1895 the financial position of the corporation caused a change of the bond interest rate to 3 per cent, later advanced to 4 per cent. Under the present arrangement with the bondholders, dating from PEEUVIAN PUBLIC FINANCE 91 March, 1896, only limited interest can be paid on the preference stock so long as the full 6 per cent rate is not allotted to the bond­ holders. During recent years, or since 1916, the 6 per cent rate has been paid, and the sinking fund, which provided for annual redemption at 105, has been in operation since 1910. On June 30, 1924, the bonds outstanding amounted to £4,239,950. The bonds are due and payable on April 1, 1926, but an arrangement has been made recently to extend them until 1945, providing an annual amortization which will redeem them at 105 by that time. The preceding paragraphs show that the operation of the Peruvian Corporation has not been of a notably profitable character. The slow recuperation of the country from the economic depression that followed the war with Chile impeded the growth of railway earnings; therefore it may be said that only within recent years have the pos­ sibilities been near to realization. From the Peruvian standpoint, the contract has probably turned out to be as favorable an arrange­ ment as could have been found for redeeming the credit of the country without attempting to assume an impossible burden. The railways intrusted to the corporation have received a care and conservation which they might not have enjoyed if their operation had remained with the State. The corporation brought in new capital at a critical stage in the country's history, helping to sustain industrial and business activity at a time when such stimulus was needed.

GENERAL TOPICS

QUOTATIONS OF PERUVIAN BONDS IN LONDON The following table shows the annual high and low quotations of Peruvian bonds in London, according to the figures of the Investor's Monthly Manual. The difference noted in the price ranges of the salt and guano loans, on the one hand, and the railway purchase bonds and those of the city of Lima, on the other, is due to the regularity of service on the former, insured by the mechanism set up for collection and application of the respective hypothecated revenues in the way already described.

Railway pur­ Salt loan (5% City of Lima Guano loan per cent) (5 per cent) chase (5 per cent) (7% per cent) year

High Low High Low High Low High Low

1912_ „_ 100% 96 1913 102 96% 1914 101% 90% 1915 86 69 1916 91% 79 1917 „ 91 82 1918„_ -. 93% 88 1919 94 85 1920 86 74 71% 59M 1921 84% 78% 74% 57 50 44 1922___ 95% 80% 74 57% 61% 40 1923 96 91 62 55 102 W4 1924 __ 97% 93M 65M 59% 63% 48% 104^ 96 1925 99 94% GQ% 59 71 62M 105% 100

65S800—26t 7 92 PERUVIAN PUBLIC FINANCE

METHOD OF AUTHORIZING AND CONTRACTING PUBLIC DEBT The Peruvian Constitution, framed in 1919 and effective on Jan­ uary 18, 1920, has the general provision regarding the public debt, contained in article 10, that "the Constitution guarantees the pay­ ment of the public debt. Every lawful obligation of the State is inviolable." A lawful obligation is construed as one incurred either by act of Congress or by Executive action under due authorization of the laws overning the special or routine functions of the executive power, f n practice, acts of Congress authorizing national loans originate in the Chamber of Deputies and are effective upon completion of the normal passage by the Congress and the signature and promulgation by the executive. The actual centralization of most of the practical details of gov­ ernment in the hands of the executive and the important part played by financial considerations in the conduct of public affairs make the executive power, in fact, the initiator of a large part of the cur­ rent financial legislation presented in Congress. Chapter III.—CURRENCY AND EXCHANGE The monetary system of Peru has undergone numerous changes before arriving at its present status. Briefly, the original unit was the peso of 48 pence, or approximately the equivalent of the United States dollar. The peso became the silver sol, the value of which, as a subsidiary unit, was finally fixed at 24 pence, or one-tenth of the Peruvian pound, when the gold standard was adopted. The gold Peruvian pound, identical with the British sovereign, itself gave way during the European war to the present paper currency, the ex­ change or gold value' of which has not yet returned to that of the metallic money which it displaced.

REVIEW OF EARLY MONETARY HISTORY In general, the early history of Peruvian currency followed a course similar to that of the other west coast countries, Bolivia and Chile, in which the native production of gold and silver provided means for the coinage of both metals. The royal mint in Lima, established in 1561, had coined gold and silver at the relations fixed by the decrees promulgated at various times by the Crown. Miners were obliged to deliver gold and silver to the mint, paying the "quinto" or 20 per cent tax to the Crown (reduced to 10 per cent in 1735) and assayers' fees. The product of the mint became the principal article of export to Spain under the colonial regime. In 1830, under the Kepublic, the tax of 10 per cent was abolished, presumably because the metal presented for coinage was insufficient to provide a circulating medium. The successive stages in Peru's monetary history down to the time when the outbreak of war in Europe in 1914 gave rise to the particu­ lar conditions that now exist, are generally given as follows: Bimetal­ lism, from 1822 to 1872; the first silver period, from 1872 to 1888 (including the paper-money regime from 1875 to the latter date); the second silver period, from 1888 to 1897; the gold standard, from 1897 to 1914. BIMETALLISM, 1821-1872 The 50 years, called the period of bimetallism by Peruvian writers, were full of interesting developments, but the time is so remote and so faintly associated with modern conditions that it can be passed over with little attention. In reality the maintenance of a well-balanced bimetallic system was an ideal that could scarcely be realized. The war of independ­ ence evidently left the country impoverished, and there was a pro­ nounced shortage of money, for this form of capital was naturally subject to exportation in return for necessities. Immediately after independence the money used in Lima was composed chiefly of tokens accepted by the shops. But about 1830 the mint began operations, coining gold and silver pieces in denominations equivalent to those 93 94 PERUVIAN PUBLIC FINANCE of the colonial period. A total of 21,316,162 pesos in silver and 1,865,356 pesos in gold was minted up to 1836. From 1836 to 1863 the country was filled with Bolivian silver coins about 25 per cent less in intrinsic value than the product of the Lima mint. This condition started when Peru and Bolivia were joined in a confederacy under Santa Cruz (1836-1839), the Bolivian coins having been made legal tender by treaty. After the confederation was broken they continued in use, especially in the southern part of Peru (which was then of greater relative commercial importance than it is to-day)* and soon came to be the general medium of exchange. The early coinage laws of Peru tended to undervalue silver in terms of gold, a circumstance which led to the exportation of silver and naturally called into use some cheaper substitute for small trans­ actions. In the decade from 1850 to 1860 the confusion in the settlement of debts and contracts caused by the employment of base money became so pronounced that a number of administrative acts were suggested and attempted but without success. The situation was complicated by the rise in the value of silver—or, more properly, the fall of gold, owing to the greater world production of the latter metal. Several new coinage laws were passed reducing the content of the silver coins; the old silver peso of 542 grains 0.916 fine was replaced in 1857 by one of 475 grains 0.900 fine. The legal ratio between gold and silver was about 16.50 to 1. At this time the world commercial ratio was 15.25 to 1. The monetary difficulties were not settled until 1863, when a sweeping reform was effected. From the proceeds of the foreign loan of 1862, about £1,000,000 in gold were imported into Peru and devoted to the establishment of a new monetary system based on the law of February 14, 1863. The new unit of currency was the sol of silver, weighing 25 grams 0.900 fine. The coinage of gold was also established at a ratio of 15.50 to 1. The money in circulation, including the Bolivian coins, was demonetized, bought up, and recoined. The activities of the mint, which had languished for many years, were renewed, and the country soon received a plentiful supply of the new standard coins. The coinage of gold was very small, but the silver sol was produced, in varying quantities and with some interruptions during wars and economic depressions, until it in turn was replaced by the present moneda feble in 1921. The Peruvian sol was known not only in Peru but in Central America and other regions whither it migrated and served as money. The law of 1863 established a stable silver currency, but it did not bring about a permanent bimetallic system. Gold apparently re­ mained in circulation, however, until it was definitely demonetized by a law of December 30; 1872, which declared that gold coins were to have no legal value, but only that determined by individual contract. The foreign-exchange value of the Peruvian currency during this period is generally recorded as around 48 pence per peso until after 1860, when quotations of 46 and 44 pence are met. In practice, how­ ever, the rate of exchange in sterling (which was the principal foreign currency dealt in, because of the financing of most of the guano trade through London); probably depended on the form of local money which entered into the calculations. There wefe varying rates PERUVIAN PUBLIC FINANCE 95 between gold or silver, and premiums or discounts according, to the intrinsic value of the coins offered in exchange. Bank notes made their appearance in the currency in 1862, when the first commercial bank was established. Excepting for one issue of fiduciary paper—-billetes de cr6dito publico, put out before 1830 to meet public obligations and later withdrawn—there had been no official paper money in circulation. Commercial houses, howeyer, had been accustomed to issue bills drawn against themselves when cash was scarce. The banks made free use of the privilege thus tacitly accorded them—for there was little official control or limita­ tion of banking functions in those times—and gradually increased their circulation of notes, convertible into silver coin on demand.

THE FIRST SILVER PERIOD, 1872-1888 After 1872 the silver sol and its subsidiary pieces remained the sole legal-tender currency. Gold had been leaving the country for several years because of the gradual fall in the price of silver, and the comparatively small place it had occupied in commercial transactions was thenceforth taken by silver. But the period of monetary tranquility was short, for other conditions of a grave nature had arisen. In 1874 and 1875 the country passed through a crisis with four primary aspects. There was a guano crisis, caused by smaller ship­ ments and lower prices, owing to overproduction and the competition of other fertilizers. There was a fiscal crisis, chiefly because of the absorption of public revenues by the service of the foreign debt. There was a banking and credit crisis, brought about by the drain of public expenditures (for debt and public works purposes) on the supply of local capital. Lastly, there was a monetary crisis owing to the flow abroad of silver money, exported when the exchange market could not furnish the necessary bills. The whole was the manifestation of the impending collapse of the long-sustained guano boom. In 1873 the Government had taken steps to regularize the bank-note circulation by recognizing the notes of banks which agreed to accept certain conditions and by making them legal tender for public dues. The conditions were: (1) That issuance of notes be limited to an amount not in excess of the paid capital of the bank; (2) that the notes be secured 25 per cent by cash and 75 per cent by deposit of Govern­ ment bonds; and (3) that notes of denominations below 4 soles be withdrawn. The authorized issue at that time came to 5,650,000 soles. They were convertible into specie and circulated at their par value. In 1875 the banks had about 10,000,000 soles of notes in circulation, and the crisis was now approaching an acute condition. The Govern­ ment no longer had surplus funds in Europe to sell; therefore, im­ porters and others who had foreign payments to make were obliged to resort more and more to the shipment of silver coin and bullion; the quantities thus required grew larger as the value of silver fell. The cash reserves of the banks were reduced to approximately 1,750,- 000 soles against liabilities of 15,000,000 soles. The small shops in Lima were refusing to accept bank notes, and some were even closing until such time as metallic money returned. Seeing that the situa- 96 PERUVIAN PUBLIC FINANCE tion -v^as getting beyond control, four of the principal banks applied, on August 1, 1875, for a suspension of specie payments. The Gov­ ernment granted them four months in which to replenish their reserves, and in the meantime relieved them of responsibility for the conversion of their notes. Some of the banks' difficulties were laid to the frozen condition of their advances to the Government. The latter was unable to help on this score; on the contrary, it was in desperate need of funds. There was no prospect of any immediate amelioration of conditions; therefore, a new arrangement was effected in September, whereby the banks were to associate in the administration of the newly- decreed nitrate monopoly. Secured by this fiscal income, they were to extend further credit to the Government so that old and new debts combined came to 18,000,000 soles. The associated banks were permitted to raise their note issue to a total of 15,000,000 soles. This abandonment of the idea of a return to convertibility marked the beginning of the period of fiat paper money that lasted until 1888. When the banks applied for the moratorium in August, 1875, silver coin was at a premium of only 1 per cent over the bank note. The premium grew to 20 per cent at the end of the year. Ninety-day drafts* on London went from 40 pence to 35 pence per paper sol. The silver sol became practically demonetized.

INCONVERTIBLE PAPER After the arrangement of 1875 the monetary situation remained unchanged for two years, although the premium on silver money in terms of the bank notes continued to advance until it reached 54 per cent at the end of 1876. By a decree of August 17, 1877, the Government assumed entire responsibility for the authorized 15,000,000 soles in bank notes, con­ verting them into billetes fiscales (fiscal bills). The public debt to the banks was cancelled by this act and by the issuance to them of 3,000,000 soles in bonds. The Government also assumed something over 5,000,000 soles in notes issued by the Public Works Co. as pre­ viously authorized. The banks were to continue to administer the nitrate monopoly and the sale of guano in the island of Mauritius, from which revenue 1,000,000 soles annually were to be applied to the redemption of the fiscal bills. This measure was actually effec­ tive until the war with Chile came in 1879, and over 2,000,000 soles were withdrawn. The foreign exchange value of the paper sol reached a level around 18 pence. When war was declared in April, 1879, the financial resources of the Government were so impoverished and the sums available from public donations and subscriptions to the war loan were so inadequate that new paper issues were found to be the only way of meeting ex­ penses. At the end of 1879 61,000,000 soles were in circulation, and exchange was at 8 pence. Coin was very scarce. A belated effort to stabilize foreign exchange, so that munitions might be purchased abroad, was made later in 1879. Certain export products were expropriated at fixed prices and sold abroad by the Government. The latter by using various resources at its disposal was able to bring exchange to 15 pence and maintain it, thus trans­ ferring considerable sums to its foreign emissaries. This procedure PERUVIAN PUBLIC FINANCE 97 was interrupted by a revolution in November, 1879, which installed a dictatorial government. The new authorities, in January, 1880, decreed a gold standard making the pound sterling legal tender and requiring that customs duties be paid in gold. Paper money in circulation was to be taken at the rate of 12 pence and incinerated, while the plates that had been used for printing it were destroyed. A decree of March, 1880, provided for the renewed coinage of silver soles and of a new gold unit to be called the "inca." Some silver was coined as a result of this, but no gold. After the lapse of one month, the silver coinage stopped and an issue of 5,000,000 paper incas was printed and de­ clared legal tender at the rate of 1 inca to the silver sol. The old paper money in soles was to be received at 8 soles per inca. This was in November, 1880. A few weeks later the paper sol was declared receivable at 15 to the inca. When the Chileans entered Lima in January, 1881, the issue of inca bills stopped and they were repu­ diated by the people. By this time the value of the paper sol had gone down to 2 pence. This closed an interesting instance of the attempted valorization of money by decree and by change of name. The circumstances could not have been more unfavorable, and in fact the circulation of incas had not been received cordially. It is recorded that in some instances intimidation had to be used to compel mer­ chants to take them at the declared official value. The Chilean authorities now took charge of public administration in the territory controlled by their armies, and among the first financial measures taken by them was that requring that all public dues be paid in gold, silver, or Chilean paper money. The need for metallic money thus created brought a gradual reimportation of silver soles, especially from Ecuador and Central America, where they had formed a large part of the currency in circulation. Some silver came back into circulation and the Lima mint was opened. Thenceforth major commercial transactions were in silver, but the paper money remained as the medium for ordinary business. This was the situation when peace was declared in October, 1883. The paper sol in 1883 was valued at from 14 to 16 to the silver sol. The equivalent of 100,000,000 paper soles was in circulation. The new Peruvian administration made no change in the monetary situation for some time, being occupied with other more important matters. However, the administration which took power in 1886 dispatched several measures aiming at the elimination of the paper money. It was provided that 5 per cent of the customs duties be paid in paper, which was then incinerated. In this way a slight diminution in volume was effected, without arresting the fall in value, which in 1887 reached 35 to the silver sol. On account of the lack of a definite and-continuous policy of stabilization or valoriza­ tion, the people could not be inspired with renewed confidence in the money. Finally, by a decree of November, 1887, the Government declared that no one was under legal obligation to accept the paper money, and thereafter none was taken in business. For all practical purposes, the circulation of paper stopped in December, 1887, and the silver standard was resumed. The decrease in the value of the paper money, culminating in its final repudiation, was naturally the source of great loss to the holders who had been compelled to pass it from hand to hand at a constantly 98 PERUVIAN PUBLIC FINANCE shrinking valuation. This loss represented in part the direct cost of the war to the Peruvians. * The bitter experience was well remembered and helped to form the public opinion which later caused the adoption of the gold standard and made the task of the Government difficult when, in 1914, it was necessary to find a substitute for the gold coins that no longer could be kept in circulation. The question of the disposition to be made of the repudiated paper was settled by a law of June 12, 1889, which funded the internal debt. According to this law, the paper soles were received at the rate of 15 to 1 (incas were valued at 8 paper soles), and holders who presented their notes received bonds at that rate. These bonds paid 1 per cent per annum in interest and'were later (1918) made convertible into new consolidated internal bonds, paying 7 per cent interest, at the rate of 14 soles of the old issue for one of the new.

THE SECOND SILVER PERIOD. 1888-1897 From 1888, when the paper money no longer appeared in com­ mercial use, until 1897, when the beginning was made in the transition to a full gold standard, Peru was again on a silver basis, with the sol of 25 grams, 0.900 fine, as the unit. But soon after the new system was inaugurated, or to speak more accurately, the old system had been resumed, a new source of trouble appeared. The decline in the value of silver had proceeded steadily though gradually until in 1888 the foreign-exchange value of the silver sol, or its value as bullion, had fallen to 3334 pence. Noteworthy fluctuations were experienced in accordance with the quoted price of silver in London. After dropping to 32 % pence in 1889, there was a rise to 38x /ipenc e in 1890, followed by a continued decline culminating in a quotation of 22 pence in 1894. This situation was not only disturbing to trade, but was impeding the movement of capital into the country. The instability of the silver currency finally brought about a desire to imitate other nations which were then definitely adopting the gold standard. The complete realization of the transition from silver to gold took four years, or from 1897 until 1901, but since the first measures were effective and the entire plan proved successful, the former date is generally taken as marking the end of the silver standard in Peru. From 1886 until 1897 the approximate annual exchange value of the silver sol had been as follows: Pence per sol Pence per sol 1886 _ -__. 36 1892_ — _ 30^ 1887_ -_.. uy2 1893. 27 1888 _ .... 3334 1894_ 22 1889_ — - 32H 1895. — - 22% 1890_ .... 36M 1896- ____ 23M 1891. .__. 34M 1897. 21 THE GOLD STANDARD, 1897-1914 The establishment of the gold standard in Peru furnishes an ex­ cellent example of practical statesmanship. The country was not in the best of condition, since the impoverishment caused by the war had hardly been repaired, but there were several favorable circumstances: The export trade was sufficiently restored to furnish a reliable balance of foreign credits; there was no foreign debt requiring service; a quantity of English gold coin had entered the country and PERUVIAN PUBLIC FINANCE 99 was being used in some transactions; furthermore, Peru was fortunate in having men who were capable of guiding the project successfully. Three specific objectives were recognized: (1) To increase the ex­ change value of the sol to 24 pence, in order that 10 soles might come to equal 1 pound sterling, this having been fixed as the new par value of the currency; (2) to stabilize the ratio of 10 soles to the pound sterling; (3) to mint national gold coins for the new system. The various steps taken were asfollows: A decree of April 10, 1897, suspended the free coinage of silver and prohibited the importation of silver soles except as merchandise to be delivered to the mint and melted into bars at the expense of the importer. A decree of October, 1897, then required the payment of customs dues in sterling exchange at the rate of 10 soles per pound sterling. Two months later payment was specified in English gold coin, with a surcharge of 5 per cent in cases where duties were necessarily paid in silver. At this time the executive was empowered to take steps to reduce the amount of silver in circulation by melting superfluous coins and selling them abroad as bullion, the gold equivalent to be imported. With reference to the coinage of gold, a law of December, 1897, authorized the coinage of gold pieces identical in weight and fineness with the British sovereign. The existing export duty,of 3 per cent on gold bullion was retained, although there was free trade in gold coins, and the mint charge for coinage was placed at 2 per cent, the difference being sufficient to turn the native production of gold to­ ward the mint. The various acts of 1897 met with uninterrupted success, and there was left only legislation of routine character, such as the definition of the new gold coins and their legal tender power (shared also by English gold), and the limitation of the legal tender status of silver to sums not in excess of 100 soles (Lp.10). Coinage of gold began in 1898. The native coins were supplemented, especially after 1901, by incoming English gold that generally exceeded each year the production of the mint. The last step was to induce the banks, which had been led by conservatism, skepticism, or other motives to retain the use of the sol in their operations, to change over to the new system, and to convert all balances at the legal rate. This was done by an agreement effective March 3, 1903. By this time all doubt of the success of the reform was dissipated, for a severe test had been experienced and passed successfully in 1901, when a trade depression caused a temporary reversal of foreign payments. With the implantation of the gold standard thus achieved, the currency and exchange question in Peru was settled until the extra­ ordinary events of 1914 caused an inevitable disturbance. During the intervening years the only objection to the existing order was voiced on two points: First, the question as to whether a unit of too great intrinsic value had been adopted for a country of low average purchasing power; and second, whether it was wise to have retained the coinage of silver at so close an approximation of its value in gold (the silver coins still retained the basis of 22 J^ grams of fine silver to the sol so that the ratio was about 31 to 1). However well founded these criticisms may have been, no really adverse effects can be traced to the facts on which they were based. It is true that thererwere some instances of the hoarding and exporting of silver coins when silver 10Q PERUVIAN PUBLIC FINANCE was quoted at 32 pence or over in London, but the only effect dtiring the time under discussion was one recorded instance—in 1906—when the exportation of silver coins had to be prohibited and new coinage authorized. The period of tranquility in currency matters between 1897 and 1914 affords no developments to record. Business and industry proceeded on a basis of stability and the inflow of foreign capital was steady. Peru's growing exports created abroad a sufficient balance of credit to meet all ordinary needs, and in many years there was a substantial importation of gold coin from Europe. At times when foreign bills of exchange were in such unusual demand that the London exchange was quoted at 2 or 3 per cent premium (102 or 103 Peruvian pounds to £100), exportation was automatically stimulated and imports were reduced, thus maintaining a balance in full accord with the economic laws governing foreign exchange under the gold system. This stability was no doubt maintained the more easily in that Peru had little or no foreign debt during these years, with the result that international payments were left almost exclusively to the automatic regulation of commerce and capital movements. As a rule sterling bills at 90 days sight were at a discount, for all the years from 1898 to 1914 showed an excess of gold imports over exports with the exceptions of 1901 and 1908.

CURRENCY AND EXCHANGE DURING AND AFTER THE WAR

ISSUANCE OF THE CHEQUES CIRCULARES The outbreak of war in Europe in July, 1914, immediately produced a violent disturbance in the commercial and financial life of Peru. The derangements experienced in trade were accompanied by efforts on the part of business organizations and individuals to adjust their obligations and contracts, with the result that the exchange and money markets were subjected to a severe strain.1 While the reac­ tions were modified by the moratorium measures put into effect, it was impossible to arrest the tendency, soon apparent, toward the hoarding of gold and its consequent withdrawal from circulation. The rapid diminution of the gold supply so threatened to undermine the position of the banks and the maintenance of adequate credit conditions that a resort to some kind of emergency currency was im­ perative. Following consultations among the banks, business men, and the Government, it was decided to permit the banks to issue paper money. The first law on the subject (law No. 1968) was passed on August 22, 1914. It provided for the constitution of a semiofficial super­ vising committee, the Junta de Vigilancia, composed of five mem­ bers—two designated by Congress, one by the Executive, one by the banks, and one by the Chamber of Commerce of Lima—to which was entrusted the administration of the emergency currency to be issued. The notes thus authorized were given the name of cheques circulares or circulating checks—a name intended to avoid associa­ tion with the paper money of the past, to indicate a temporary char­ acter, and to suggest the several responsibilities of the banks. The issue was similar to those made in the United States by clearing

»A subsequent table shows monthly exchange rates from 1913 to 1925. PERUVIAN PUBLIC FINANCE 101 houses during the currency panic of 1907. As security for the cheques, each bank was required to deposit with the Junta de Vigi- lancia an amount of gold equivalent to 35 per cent of its quota and acceptable collateral for the balance. The cheques represented a preferential lien upon the resources of the bank and were to be redeemed finally in gold. The amount of cheques cireulares to be issued under this law was placed at Lp.1,100,000, of which Lp. 100,000 represented a loan to the Government. The formation of the Junta de Vigilancia and the issue of cheques were quickly consummated and a partial relief from the money shortage was obtained. However, the measure did not meet the situation with entire adequacy, and at the urgent request of the banks a new law was passed on October 1, 1914, which increased the issue of cheques by Lp.1,400,000, making Lp.2,500,000 in all. The sum in cheques cireulares loaned to the Government was increased from Lp.100,000 to Lp.500,000. At the same time the required gold re­ serve was reduced to 20 per cent and the remaining 80 per cent was to be covered as follows: 30 per cent in land mortgage bonds taken at their face value, in ordinary mortgages at 75 per cent of their face value, in real property owned by the banks at 75 per cent of its market value, or in warehouse receipts, and 50 per cent in listed securities or negotiable commercial paper acceptable to the Junta de Vigilancia, with a margin of 30 per cent. The complete issue of cheques cireulares was taken by the banks of Lima in the following proportions : Lp. Banco del Peru y Londres 882, 000 Banco Aleman Transatlantic 670, 000 Banco Italiano 332, 000 Banco Popular 220, 000 Banco Internacional *. 96, 000 Caja de Ahorros 300, 000 Total - . 2, 500, 000 Despite the obvious necessity for adopting some such measure as that just described, which was the only practical means of insuring a supply of money that would remain in circulation and protect the banting and credit structure, the people of Peru for some time took the cheques cireulares with reluctance and displayed a general lack of confidence in them. This attitude can be traced to the memories and traditions of the bitter experiences during the period of paper money from 1875 to 1888. Other causes of popular distrust were an uncertainty as to the ability of banks to withstand the crisis without a collapse and a feeling of insecurity as to public administration, engendered by political unsettlement during the past few years. In the country districts and in regions remote from Lima, the cheques cireulares were quite generally rejected, especially by the working classes who insisted on being paid in the coins of silver to which they were accustomed. So while the forms of monetary stability prevailed, the actual situation throughout the country was unsettled and premiums were paid for coin, in spite of legislation to the con­ trary. This situation continued for some time. In the latter part of 1915 came the turning point both in the quotations of foreign exchange and in the public acceptance of the cheques cireulares. During the greater part of this year drafts on 102 PERUVIAN PUBLIC FINANCE London were maintained at a little less than 10 per cent premium through cooperative measures among the banks. In December artificial control was lifted because 01 the greater supply of drafts then available as the result of the growing exports, and the premium on foreign remittances receded rapidly until, by the early part of 1916, the pound sterling was at a slight discount. At the same time the betterment of the general public situation had been sufficiently reassuring to remove the doubts held as to the integrity of the cheques circulares, so that for practical purposes the new emergency circulation was as good as at par, although there was still some demand for metal currency for country use which caused the pay­ ment of a premium of 1 or 2 per cent. The cheques circulares in the hands of the public and the banks amounted to Lp.2,316,242 at the end of 1915, compared with Lp.l,979,606 at the end of 1914. The gold reserve held by the Junta de Vigilancia remained practi­ cally stationary at 23 per cent in 1915, as against 22 percent in 1914. The exchange recovery was due not only to the revival of the export trade but to the sale by the Government of foreign drafts col­ lected in payment of the new export duties assessed first in 1915. When par of sterling exchange was reached the Government remitted its drafts to New York for the purchase of gold and silver. In the first half of 1916 gold to the amount of Lp.300,000 was imported. The mint resumed operations, and gold began to reappear in general circulation. From this time onward began the period of exceptional prosperity in private business and in public finance which lasted until the postwar deflation of 1920. Henceforth the problems were technical, caused more "by the occurrence of unprecedented and unusual conditions than by such difficulties as insufficient revenues, limited credit, and depressed industry. From the beginning of 1916 until the United States entered the war and placed an embargo upon gold exports in September, 1917, exchange remained at a figure—from $4.95 to $5.01 per Peruvian pound and at about 5 per cent discount for London 90-day bills— which represented the gold import point. Gold shipments from the United States to Peru continued in considerable volume until they were stopped by the embargo. The total of the gold thus shipped, according to the American trade figures, was $6,012,292 in 1916 and $11,978,544 in 1917. During these two years the volume of cheques circulares extant remained close to the maximum of Lp.2,500,000 authorized by law, while the gold reserve held by the Junta de Vigi­ lancia grew notably, amounting to 47 per cent at the end of 1916 and 65 per cent at the end of 1917. Practically the only drawback to normal monetary conditions at this time was the decrease in the available supply of subsidiary silver coins. The price of silver began to advance in 1916 and early in the year went to a point where its bullion value exceeded its value as currency. Consequently, silver coins were hoarded and melted. At first efforts were made by the Government to remedy the ensuing shortage by an increased mintage but these efforts were futile and in August, 1917, it was necessary to authorize the issue of paper money of the denominations of 5 and 50 centavos. These bills were called gold certificates and were secured by a complete gold cover maintained by the Junta de Vigilancia. The coinage of fractional nickel and copper money was also sanctioned. PEEUVIAH PUBLIC FINANCE 103 When the United States in September of 1917 forbade the export of gold, exchange stability in Peru was once more disturbed. The mounting prices of export commodities, shipped abroad to the limit of the supplies and the tonnage available, had brought into the market a much greater supply of foreign drafts than was needed to meet the demand. Now, instead of collecting the proceeds in gold in the United States and bringing the gold to Peru, exporters who could not leave their drafts on deposit abroad were obliged to sell them at home at diminishing rates—or in other words, the Peruvian pound went to a phenominal premium over sterling and the dollar. The Peruvian pound in terms of dollars rose from $5.15 in November, 1917, to $5.70 in June, 1918, and 90-day drafts on London went from 7 per cent to 17 per cent discount. To remedy the situation it was finally decided, after much discussion in Congress, to authorize the issuance in Peru of additional cheques circulares, secured in part by gold deposited in the Federal Reserve Bank of New York, according to a tentative agreement made some time before with the United States Govern­ ment. The law (No. 2755 of June 13, 1918) placed the limit of the additional issue at Lp.3,000,000. This law, however, was found impractical, and it was replaced by Law No. 2776, of September 14, 1918, which permitted banks to issue cheques circulares in Peru against gold deposited in New York and London as a result of proven export operations. To allow for banking commissions and the esti­ mated cost of insurance and freight on the gold involved, an arbitrary exchange rate for such transactions was adopted, based on the rate of $5.01% Per Peruvian pound for cable transfers on New York. All banks and private firms engaging in exchange operations were required to conform to these rates. All banks were required to turn in to the Junta de Vigilancia the gold in their possession not required to meet special obligations. The gold held abroad was to be brought to Lima as soon as export embargoes were lifted. The effect of Law No. 2776 on the exchange market is shown in the " pegged" quotations that prevailed from about September, 1918, until the middle of the following year. The rates published by the banks, upon which these statistics are based, remained at $5.04 for sight drafts on New York and at 734 Per cen^ discount for 90-day drafts on London. At the rate for the conversion of foreign deposits into cheques circulares prescribed by Law No. 2776, it was still profitable to im­ port such gold as could be obtained abroad, with the result that gold continued to enter the country. The beneficial effects of Law No. 2776 on exchange caused a new procedure to be adopted, enacted into law (No. 3063) on January 18, 1919, whereby the Junta de Vigilancia was empowered to issue an unlimited amount of cheques circulares to anyone presenting gold in exchange. At the same time all banks, whether or not they had participated in the previous issue of cheques, were required to turn in their entire stock of gold, ex­ cepting that necessary as a legal reserve against their deposits and to meet special obligations, in exchange for cheques. The banks were also directed to turn over to the Junta de Vigilancia in the same way whatever stock of silver coin they might have on hand. The Junta de Vigilancia was empowered to sell this silver as bullion and apply the profit toward the reduction of the debt of the Government to the banks, involved in the previous issue of cheques circulares. 104 PERUVIAN PUBLIC FINANCE The end of the war, it will be noted, brought no immediate change in the legal status of the currency. The situation was too complex to warrant a simple change back to the pre-war gold basis, as had been contemplated in the original legislation authorizing the cheques circulares. (Law No. 1968 had provided that the latter be with­ drawn from circulation six months after the cessation of a state of war in France, Germany, and Great Britain.) On December 29, 1919, Law No. 4017 was promulgated, declaring that, "as soon as the international financial situation caused by the war was regular­ ized," the Executive should determine the time and method for ef­ fecting the various operations entailed in the demolition of the exist­ ing system. Throughout 1919 business and industry were very active. The prices of export products still tended to rise and actual exportation was heavy, while the import trade was reviving after its enforced diminution of recent years. Wages and prices were high. Under these circumstances it was found that the supply of money and credit was hardly sufficient. In considering the probable trend of the future with an eye toward retaining and utilizing, so far as was pos­ sible, the increased wealth of the country, public officials and busi­ ness men began to discuss the establishment of a central or national bank which would serve as the basis for the currency system of the future. The functions of the Junta de Vigilancia had grown to be of such importance, involving as they did the custody of the re­ serves against the large quantity of currency in circulation, the general administration of the cheques circulares, including the re­ placement of worn bills with new issues and the supervision of the fractional money, both of paper and nickel, that it seemed desirable to entrust them to some more permanent and formal organization. The people had become so accustomed to the use of paper money that it seemed reactionary to contemplate a return to the exclusively metallic currency system of pre-war times. At the same time it was recognized that the circulating medium was highly inelastic. In all, there were good reasons for advocating the adoption of a more scien­ tific system which would use the accumulated gold stocks as the basis of a new paper money, while introducing modifications that would permit the expansion and contraction of the currency with greater facility than was possible under the depository or gold cer­ tificate plan. These general ideas were acceptable to public opinion, but as they were advanced by Government officials early in 1920, they included other projects not so cordially received. The plan put forward by the administration included the assignment to the proposed national bank of such functions as that of collecting and disbursing the public revenues, financing the national budget, and fomenting the con­ struction of public works. Although it was proposed that the bank should be under private control and administration, the commercial and financial world was not prepared to support a measure which would so intimately connect the functions of currency control and fiscal operations. PERUVIAN PUBLIC FINANCE 105

EXCHANGE DEPRESSION—THE ECONOMIC COLLAPSE OF 1921 Unsettling influences had been at work in the outside world for some time before their effects reached Peru. It must be remembered that dealing in foreign exchange in Lima had been dependent pri­ marily on London, since the earliest days of the Eepublic. The war brought the beginning of a change, but all conditions became so abnormal that small attention was paid to the growing importance of the exchange and financial relations with New York. The latter were stimulated not only by the commanding importance of trade between the United States and Peru, but by the fact that New York was the only gold market that had been open for the greater part of the war period and had provided the means for the retention of the gold standard in Peru. When the pound sterling was "unpegged" in New York in March, 1919, and soon thereafter began to fall from the level at which it had been maintained, the exchange market of Lima did not respond at once to its movements. This was owing to the continuation of commercial activity in Peru at a degree which, if anything, was even more notable than that obtaining during the actual time of war. The phenomenon of the depreciating pound sterling was reflected in Lima, as in New York, by an increasing discount on sterling bills. So long as exports continued sufficiently in excess of imports to keep exchange rates at the gold-import point, the movements of the pound sterling in New York had no effect. The turning point in the exchange market of Lima came in July, 1919. Although actual statistics and corroborative information are meager, it seems reasonable to suppose that in this month the demand for foreign remittances became at least equal to the supply, for exchange quotations departed from the point of $5.04 per Peruvian pound, at which they had been maintained for the past nine months. For about a year thereafter, or until September, 1920, exchange rates showed some uncertainty, moving with apparent indecision between the points of $4.85 and $4.60. This coincided with the period of world-wide, postwar inflation, and was characterized by conditions outwardly prosperous, but in reality unsound. The beginning of the economic and exchange depression was seen in September, 1920. There was a sudden collapse in the demand for Peruvian export commodities and prices became nominal. It may be recalled that the value of the pound sterling in New York had already fallen in February, 1920, to about $3.38. The later exchange unsettlement in Peru may be laid, therefore, to the local effects of the world crisis. The value of the Peruvian' pound, in terms of dollars, continued to fall, passing the $4 mark in January, 1921, and descending to a low of about $3.20 in August of that year. After this a recovery took place, marked by generally sustained increases until a figure of $4.02 was again registered in June, 1922. For reasons that are not susceptible to satisfactory explanation, the exchange value of the Peruvian pound then became relatively stable at slightly over the $4 level. Not only was this approximate figure maintained for the rest of 1922, but it did not change materially in 1923 or 1924. In the latter years the approximate annual averages were $4.11 and $4.05, respectively. The table here inserted shows exchange rates (monthly averages) as quoted in Lima on London and New York from 1912 through 1924: 106 PERUVIAN PUBLIC FINANCE

AVERAGE MONTHLY QUOTATIONS OF EXCHANGE ON LONDON AND NEW YORK, 1912-1924

19141 1915 1916

Month Lon­ Lon­ Lon­ Lon­ Lon­ Lon­ don New don New- don New don New don New don New 90 York 90 York 90 York 90 York 90 York 90 York days sight days sight days sight days sight days sight days sight

Per Per Per Per Per Per cent cent cent cent cent cent January... -1^1 $4.87 +K| $4.77 $4.77 +7M| $4.36 +2 $4.50 -5H\ $4,92 February.. -H 4.83 +M 4.77 4.77 +7K\ 4.33 Par. 4.68 -5tf 4.92 March Par. 4.80 +K 4.77 4.77 +7M 4.30 4.68 -5H 4.92 April Par. 4.80 +M 4.77 4.77 +7M! 4.30 4.71 -BX 4.92 May P.r. 4.80 +M 4.77 4.77 +8 I 4.28 4.80 -5M 4.92 June 4.84 +K 4.77 +H 4.77 +9M 4.20 -m 4.94 -5M, 4.94 July 4 82 +M 4.77 4.77 +8H 4.21 4.91 -5M 4.94 August 4.80 +M 4.77 4-1/ 4.77 +S1A\ 4.18 4.91 -5H 4.94 September 4.79 +V2\ 4.77 4.77 +8H 4.14 -m 4.92 -6M 5.02 October. _. +K 4.78 +H 4.77 +^ 4.75 4.16 -4M 4.90 -7 5.10 November +V2\ 4.78 +3^2 4.77 4.56 +m\ 4.15 -5 4.91 -7 5.12 December. 4.78 4.77 3 4.40 4.19 4.92 5.17 +y2\ + , -5M -7H\ +H +8^ 4.81 4.77 +1M 4.72 4.23 -5M 4.82 -6M 4.99 +M +8M -2%\ 1918 1919 1920 1921 1922 1923 1924

Month Lon­ Lon­ Lon­ Lon­ Lon­ Lon­ Lon­ don New don New don New don New don New don New don New 90 York 90 York 90 York 90 [York 90 York 90 York 90 York days sight days sight days sight days sight days sight days sight days sight

Per Per Per Per Per Per Per cent cent cent cent cent cent cent January -10 $5.28 •1M $5.04 -23 $4.74 -10HI $4.05 +16K| $3. 55 +13 54.06 +6 $3.97 Februaiy... -13 5.43 -7M, 5.04 -27H 4.10 -3 3.91 +19 3.57 |+14 , 4.08 +7 , 3.99 March __*___ -13 5.38 -7H 5.04 -22H 4.69 -m\ 3.86 +25^ 3.44 +&A 4.26 3.96 April 13J4 5.39 -7H 5.04 4.74 3.54 3.57 4.23 +7X\ 4.01 -isy2 +M +22 +9 May 15H 5.54 -7M 5.04 -19M 4.75 +4 3.80 +17M 3.73 +S% 4.22 +7H 4.11 June __ 17 5.65 -7M 5.04 -18H 4.77 +2 3.60 +9M 4.02 4.21 +6 4.07 July 5.37 -7M, 4.92 4.81 +4 3.42 +8H 4.05 +m\ 4.12 +5 4.05 5.10 4.83 -20^ 4.82 +7 4.09 August -10H -25M +11 3.21 +9 , 4.05 +10 4.06 September. 5.05 4.80 4.58 +8M, 3.36 +10M 3.98 4.08 +8K 4.05 October 5.04 -14K 4.80 -25 4.39 3.43 3.94 +HH 4.04 +9 4.08 -14 +9^ +11M +9 , November. 5.04 -15 4.78 -22M 4.11 3.51 +8M 4.12 +io 4.00 4.12 December .*___ 5.04 4.63 4.12 +11** 3.55 4.16 +10M 4.01 +10M 4.13 -7M| -18 -17H +10 +m\ +13 Average. -li 5.2751-11M I 4.92 -18 4.59 +5 3.60 +14 3.86 +7M 4.11 +8 4.05 -22K| +10M 1 The figures from August to October are nominal. NOTE.—The average exchange rate during 1925 was $4.02, with the following monthly figures: Janu­ ary, $4.06; February, $4.17; March, $4.16; April, $4.10; May, $4.10; June, $4,105; July, $4.04; August, $3,915; September, $3.94; October, $3,865; November, $3.94; December, $3,855. The fall of exchange rates during the year was attributed to the diminution of export trade in sugar and cotton, caused chiefly by unusually adverse weather conditions from February to April. The causes of exchange dislocation in 1921, attributed primarily to adverse foreign-trade conditions (according to official statistics, the value of imports in that year slightly exceeded that of exports—a radical change from the status of the past), probably embraced such factors as increased voluntary remittances abroad. In other words, there was, according to the opinion of local writers, a flight of capital, or at least an outward movement of capital toward Europe and the United States, independent of commercial obligations. This was attributable partly to the distrust of the central-bank project, else­ where described, but more probably to a feeling that profitable opportunities for the employment of funds in Peru would be con­ siderably less in the future, whereas there was considerable speculative interest in foreign investments. The industrial inactivity in Peru PERUVIAN PUBLIC FINANCE 107 liberated a supply of capital which could be converted into some depreciated European currencies at a large apparent advantage. The period of extreme weakness in exchange came to an end when the liquidation of 1920 and 1921 had run its course and a renewal of industrial and commercial activity was in prospect. In fact, the export trade revived during the second half of 1922 on a new basis of values which, considering the general condition of the times, was not at all unsatisfactory. Prices of sugar and cotton advanced to remunerative figures, petroleum production attained a large volume, and the operation of copper mines was revived. General industrial conditions in Peru soon improved and attained a status of relative prosperity, if judged by any other standard than that of the peculiar war years. The statistics of foreign trade showed that a favorable merchandise balance once more existed. It may be said, therefore, that the explanation of subsequent exchange movements or of the maintenance of the particular level of exchange value which the Peruvian pound had reached., was to be sought in other directions.* No changes took place in the character or method of administra­ tion of the currency during the exchange depression and the subse­ quent partial recovery. The volume of cheques circulares in circu­ lation remained during 1921 at the high level reached as the result of the operations of previous years, since there was no way in which any substantial reduction might be made. The exportation of gold remained prohibited. However, a feeling in favor of a new central bank or similar organization to take the place of the Junta de Vigil ancia slowly grew, as exemplified in the advocacy of a new central or national bank to which reference has already been made. This sentiment finally crystalized in the adoption of the measure organizing the Reserve Bank of Peru (Banco de Reserva del Peru), established in 1922. The statistics of the circulation and guaranty of the cheques cir­ culares from 1914 to July 26, 1922, when the Junta de Vigil ancia wound up its affairs, are given in the following table:

VOLUME OF ISSUE OF CHEQUES CIRCULARES AND THEIR GUARANTIES

Gold deposits Collateral Cheques security End of— in circu­ lation In Peru Abroad Total Per Per cent Amount cent

Lv. Lv. Lv. LV. Lv. 1914 1,979, 606 441,947 441,947 22 1,605,438 78 1915 -- --- 2,316,242 535, 838 535,838 23 1,823,412 77 1916 - 2,304, 665 1,084, 731 1,084, 731 47 1,250,196 53 1917 ._ 2,443,919 1, 604, 910 1,604,910 66 863,511 34 1918 --- — 4, 592, 727 2,236,162 1, 641,272 3,877,434 84 731, 656 16 1919 6,329, 588 2,919, 023 2,899, 999 5,819, 022 92 512,397 8 1920-_ 7,250,804 3,921,170 2,899, 999 6,821,169 94 433,915 6 1921-_ — 7,349, 668 4,067,213 2,899,999 6,967,212 94 386, 329 6 1922 i__ - 7,221, 976 4, 230,858 2, 619, 950 6,850,808 95 375,947 5

i July 26, when the Junta de Vigilancia was dissolved. 65880°— 26bf——8 108 PERUVIAN PUBLIC FINANCE

THE CURRENCY UNDER THE RESERVE BANK The first definite project for the formation of a central bank was submitted to Congress on October 10, 1921. It provided for the creation of an institution to be called the Bank of the Peruvian Nation (Banco de la Nacion Peruana). Following the lines of similar institutions in Argentina, Uruguay, and Bolivia, it was proposed that the bank partake of the nature both of a public and a private institution, in the sense that it was to extend loans and advances to the Government, to provincial or municipal councils, anil to private interests. A wide range of powers and privileges was contemplated, including the issue of bank notes to be secured in certain proportion by cheques circulares, supplemented by commer­ cial paper and securities. It was proposed that the new bank be capitalized at Lp.10,000,000. In general the measure provided for an institution of such scope and importance that, if it had been adopted, it would have introduced changes of great magnitude in the conduct of public and commercial finance. In the subsequent discussion, the banks of Peru expressed the sentiment of the business community in a formal communication addressed to the Government, in which they pointed out certain features of the project which in their opinion were of doubtful prac­ ticability or wisdom. Emphasis was laid upon the likelihood that the demand for credit from such an institution under the conditions ruling at the time would probably exceed the resources contributed by fiscal agencies and by the public, and that the result might be an inflation of currency or credit which would ultimately place the industry of the country in a position where its products would have difficulty in regaining a foreign market. As an alternative, the banks proposed the creation of a bank of issue which would have practically no relations with the public or the Government but would serve the commercial banks when conditions made it advisable for the latter to resort to it for the issue of fiduciary currency required to meet current necessities. After giving due consideration to these and the other arguments adduced, the bill for the establishment of the Bank of the Peruvian Nation was withdrawn and another measure submitted to Congress in January, 1922, embodying the recommenda­ tions of the banks of Peru. The final result was the promulgation on March 9, 1922, of Law No. 4500, which governed the organization of the present Reserve Bank of Peru (Banco de Reserva del Peru). The legal constitution of the bank took place on April 4, following. The principal features of the act were as follows: The capital of the bank was to be Lp.2,000,000, in shares of Lp.10; half of the shares to be offered for subscription by banks and half to the public. The banks' shares were to pay 6 per cent dividends and the Class B or public shares, 12 per cent. The Government supplied none of the capital, but it was entitled to appoint three of the ten directors of the bank, and it was to receive all of the net profits of the institution after setting aside 10 per cent for eventualities and a sum sufficient to pay cumulative dividends on the paid-up capital—and after, furthermore, the following deduc­ tions had been made from the resulting balance: 20 per cent for the reserve fund until the latter reached an amount equal to the paid capital, after which the sum set aside should be reduced to 10 per PERUVIAN PUBLIC FINANCE 109 cent; 2 3^ per cent for the directorate; 2}/% per cent for the employee's fund. In return for this participation the Government relieved the bank from any taxation, present or future, on account of its capital, profits, or note issues. The bank is permitted to perform the following operations: To receive deposits from the Government, from official organizations, and from shareholding banks; To rediscount for the shareholding banks commercial paper (including bills of foreign exchange) bearing their indorsement, which represents actual commer­ cial, industrial, or agricultural operations, as well as commercial bills and bills of exchange secured by merchandise or agricultural produce, all of which might not have longer than 90 days to run from the date of rediscount, with the excep­ tion that no more than 20 per cent of the bank's rediscounts might include agri­ cultural paper with not more than six months to run; To discount acceptances of the shareholding banks representing commercial transactions either in the domestic or foreign trade, with maturity not greater than three months; To discount promissory notes of the shareholding banks, due in not more than three months, secured by commercial paper or bills of exchange eligible for redis­ count, or by public securities, mortgage bonds, or warehouse receipts in specified proportions and at prescribed evaluation; To conduct open market operations, when conditions justified, in acceptable two-name commercial paper, subject to the eligibility qualifications already specified; To receive deposits from the public without interest; To buy and sell gold coin and bullion; To buy and sell bills of foreign exchange representing commercial transactions of the kind and maturities eligible for rediscount. The duration of the charter of the bank under this law is 25 years, and no modification of the act is possible except by consent of the bank's directorate. The most important function intrusted to the reserve bank is that of responsibility for the paper currency. It succeeded the Junta de Vigilancia in the administration of the cheques circulares and in addition was given the privilege of issuing its own notes, in ex­ change for cheques circulares, against its authorized operations of discount and rediscount, or in return for gold deposited by the public. A minimum gold reserve of 50 per cent against the out­ standing cheques circulares and reserve notes is required (the gold might be held abroad in part), and the same ratio is to be kept against deposits. It may be remarked that the name of the bank is due, of course, to its position as custodian of the reserves held against the fiduciary currency. Unlike the Federal reserve banks of the United States, it is not the depository of the cash reserves of the stockholding banks. Under the conditions it was not practicable to retire the cheques circulares, as this would have required redemption in gold, but in order to substitute gradually for them the notes of the reserve bank a supply of the latter was set aside, exactly equivalent to the cheques circulares then extant. (The reserve notes are convertible into cheques circulares on demand.) This fund of reserve notes was to be drawn upon as the cheques circulares came into the bank for exchange and vice versa. It was provided that when the convertibility of paper money into gold was resumed, the cheques circulares should finally be destroyed. In the meantime their volume might be per­ manently reduced in three ways only: (1) In amounts equal to the 110 PERUVIAN PUBLIC FINANCE repayment of the debt of the Government to the several banks which had participated- in advances to it in cheques circulares when the latter were first issued; (2) by redemption of the cheques circu­ lares of the denomination of 1 sol, which were to be replaced by the new base money coined by the Government (moneda feble) to be described later; and (3) in amounts corresponding to the sale by the bank of bills of foreign exchange drawn upon its gold reserves abroad, this being construed as redemption in gold. On July 26 the reserve bank received formally from the Junta de Vigilancia the transfer of the affairs of the latter. According to the final report of the Junta de Vigilancia, there were outstanding on that date cheques circulares in the amount of Lp.7,221,976. The total of cheques circulares engraved and received by the Junta de Vigilancia had been Lp.8,800,000, divided as follows: Lp. Laws No. 1968 and No. 1982 2, 500, 000 Law No. 2776.. T. . 3, 000, 000 Law No. 3063 . 3, 300, 000 Total 8, 800, 000 The unissued cheques remaining in possession of the Junta de Vigilancia amounted to Lp.1,051,825, and the worn bills presented for exchange during previous years had aggregated Lp.526,199. The unissued cheques, together with those presented for exchange, were incinerated. The reserves against the balance of Lp.7,221,976 still outstanding, transferred by the Junta to the reserve bank, were composed of the following: Gold coin and bills held in Lima, representing the deposits of the LP- banks 4, 216, 527 Bank deposits in London—£2,675,897, taken as 2, 619, 950 Gold and certificates of the mint received from the public 14, 331 Balance of the Government debt to the banks in cheques circulares- _ 142, 741 Mortgage bonds pledged by banks „ 180, 482 Commercial paper pledged by banks _ 52, 724 Total 7, 226, 755 Other transfers were made of gold held against the fractional paper money still outstanding (Lp.77,177), together with the unissued portion of the new nickel coinage, for which the Junta had been responsible. . This closed the affairs of the Junta de Vigilancia, which for eight years had managed the currency of the country. During this time the profits which it had realized, through operations of conversion, exchange, and the collection of interest in accordance with the laws, had brought in about Lp.1,600,000 as extraordinary revenue for the Government. Among the minor responsibilities assumed by the reserve bank was that of acting as agent for the Government in the conversion of part of the outstanding cheques circulares into the new token money (moneda feble) which had been authorized by Law No. 4471 of January 27, 1922. This new money consisted of sol and half-sol coins, weighing 25 and 123^ grams, respectively, but with a silver fineness oi .500 in place of the .900 which had characterized the silver coins of Peru since the coinage law of 1863. The experiences of the years from 1916 through 1920, when the price of silver had PEEUVTAN PUBLIC FINANCE 111 so risen that silver coins were kept in circulation only with the greatest difficulty, gave support to a project for so changing the coinage law that there would he no likelihood of a repetition of that condition. The urgent need of the Government for funds was another cogent argument. Law No. 4471 provided that this issue of token money might reach the amount of 7,045,932 soles, exactly the equivalent of the outstanding cheques circulares and fractional money of 1 sol and under. Later the authorized amount was increased to 23,000,000 soles. However, a representation made by the reserve bank to the Government on this matter caused the latter to decree that for the time being the new silver coins should be issued only in exchange for the small paper money. The Government likewise agreed to limit its future issues of silver to amounts recommended by the reserve bank. It has been seen that when the reserve bank was opened the ex­ change market was in the process of recovery from the extreme of the depression of 1921. In April, 1922, the value of the Peruvian pound was around $3.57. One of the most important operations of the reserve bank during its first year of existence was that of disposing of a part of its foreign reserves by the sale of bills of exchange in Lima, with the double purpose of steadying the market and of reducing the circulation to figures which were thought more compatible with the needs of the time. Following out this policy, th^ reserve bank sold a total of drafts representing £2,092,604, and the net result of its exchange operations was the diminution of the amount of cheques circulares in circulation by more than Lp. 1,000,000. By the end of the vear, exchange had so improved that the Peruvian pound was at $4.16. Beginning on December 1, the bank began to issue its own notes against operations of discount and rediscount. At the end of the year the reserve notes in circulation came to Lp.331,970, of which Lp.211,438 represented those exchanged for cheques circulares kept in custody, and Lp. 118,470 those which had been issued to share­ holding banks through authorized operations. The small balance covered gold deposits.

DEVELOPMENTS DTJKING 1923 AND 1924 The improved economic outlook manifest during the latter half of 1922, owing to the revival of the export trade and the rising prices of export commodities, together with the beneficial influences exerted by the establishment of the reserve bank upon lines generally approved by the community, brought about a decided increase in the exchange value of Peruvian money. A period of relative stability followed. From January, 1923, until the end of 1924, the average monthly quotations moved from a high of $4.26 in March, 1923, to a low of $3.97 registered in January and again in March, 1924. There were no major events, either favorable or unfavorable, to exert a decisive influence in one or the other direction. Business conditions were generally favorable. The export trade was satisfactory, imports were conservative, and the position of the public Treasury was im­ proving after the embarrassments of 1921 and 1922. The operations of the reserve bank during 1923 and 1924 were of routine character. The table herewith presented shows the changes in the currency out- 112 PERUVIAN PUBLIC FINANCE standing, the gold reserve, and a record of the gradual issuance of notes of the reserve bank in place of the cheques circulares:

PERUVIAN PAPER CURRENCY IN CIRCULATION UNDER THE RESERVE BANK

Reserve notes

Cheques Total Dates paper Gold Per circulares In exchange Bank circulation reserve cent for cheques operations Total circulares

Lp. Lp. Lp. Lp. Lp. Lp. Dec. 31, 1922_._ 5,089, 521 211,438 120, 532 331,970 5,421,491 5,189,118 96 Dec. 31, 1923 3,703,974 1,578,008 402,209 1,980,217 5,684,191 5,108, 559 90 Dec. 31, 1924 2,823, 320 2,152, 625 855,843 3,008,468 5,831, 788 5,204,742 89

During these years the bank redeemed permanently and inciner­ ated cheques circulares to a total of Lp.2,170,923, leaving Lp.5,051,053 in existence. At the end of 1924 the substitution of moneda feble for the cheques of 1-sol denomination had been concluded, and the balances of the bank loans of 1915 in cheques circulares had been reduced to about Lp.36,000. After its dealings in the exchange market in 1922 when, it is to be supposed, the result of the experiment was such as to make it seem injudicious to subject the resources of the bank to the strain of arbitrary market leadership, foreign-exchange operations have been nominal. Attention has been given chiefly to the development of the functions of the bank along domestic lines—as a credit auxiliary to its shareholding banks, as an instrument for attaining the desired flexibility in the volume of currency in circulation, as a stabilizing influence on interest rates, as a source of statistical information on the banking and credit situation, and as a clearing house for the member banks. The following table shows the sources of the profits of the bank and the disposition made of them:

EARNINGS OF THE RESERVE BANK OP PERU AND THEIR DISTRIBUTION

Source Revenue Item Distri­ bution

In 1922: Lp. In 1922: Lp. Interest and discounts - 52,752 Administration 38,514 Exchange 151,643 i Dividends __ 20,156 • 17,264 Total 204,395 Reserve fund 27,044 101,417 Total.- _ 204,395 In 1923: In 1923: Interest... , 32,735 Administration 23,244 Discounts.. __ 42,280 Dividends _ . 28,013 Exchange 14,854 Fund for contingencies 6,830 6,691 Total- 89, 869 25,091 Total 89,869 In 1924: In 1924: Interest 29,980 Administration 19,835 Discounts,. . _ 65,219 Dividends.. 28,013 Exchange __ __ _ 12,197 Fund for contingencies 9,069 10 272 Total , __ 107,396 To Government , 40, 207 Total ._ _ 107,396 PERUVIAN PUBLIC FINANCE 113 The bank's rate of discount for accommodations based on short- time commercial paper was placed originally at 8J^ per cent and was reduced gradually during 1922 to 6J^ per cent. In April, 1923, the rate was fixed at 6 per cent, where it remained through 1923 and 1924. Operations based on agricultural paper with not over 180 days to run were favored with an original rate of 6)^ per cent, also reduced in April, 1923, to 6 per cent. In 1923 a special rate of 5 per cent was granted on cotton growers' paper, but little use was made of this accommodation. During 1924 it was decided to fix 5 per cent as the rate for discounts secured by Government securities or for rediscounts of commercial bills in which the signature of the State figured. The growth of the utilization of the reserve bank's facilities is shown in the following table, which presents the total sums involved in operations of discount and rediscount during the years of its ex­ istence up to the end of 1924:

DISCOUNT AND REDISCOUNT OPEEATIONS OF THE RESERVE BANK

Kediscounts Year Discounts Agricul­ Commer­ Total tural cial

Lp. Lp. Lp. Lp. 1922 _. 718,928 102,000 929,442 1, 750,370 1923 .___ 607,814 120,900 4,270, 645 4,999,359 1924 _._ 1,164, 598 89, 500 8,220,454 9,474, 552

THE PERUVIAN EXCHANGE MARKET The foregoing description of recent Peruvian monetary and exchange history naturally leads to a discussion of contemporary conditions and invites a consideration of probable future" develop­ ments. Briefly put, the situation in the last months of 1925 is as follows: (1) Th e currency of the country, excluding the subsidiary siJver and nickel coins of fiduciary character and limited volume, consists of inconvertible notes circulating under the responsibility of the Reserve Bank of Peru. The cheques circulares still outstanding and the notes of the reserve bank are indiscriminately accepted. Together they are secured by a gold reserve of nearly 90 per cent, supplemented by short-time commercial paper endorsed by the commercial banks of the country.1 (2) Notes of the reserve bank may be issued to shareholding banks on their application, against the rediscount of eligible commercial paper. (3) A minimum gold reserve of 50 per cent is required against the total of cheques circulares and bank notes outstanding. The provision for the issuance of inconvertible notes is a feature of some significance. The natural result of this procedure is to furnish a supply of credit that would otherwise have to be drawn from exist­ ing tangible resources. It has enabled the shareholding banks to lower their own reserves and to do business with greater liberality than might otherwise have been the case. The logical conclusion to be drawn is that, in a measure, the establishment of the reserve bank has tended to stabilize exchange at about the level warranted by the

i The ratio of gold reserve at the end of 1925 was reduced to 72.5 per cent, due to the effects of the agricultural depression of that year 114 £E&trviA:i$r PUBLIC MISTA^CE economic situation of the country at the time its influence on the currency and credit structure became effective. The greater part of the supply of foreign exchange available for purchase in Peru comes directly or indirectly from the sale of the natural products of the country, such as cotton, sugar, petroleum, copper, silver, wool, and others of less importance. Payments from abroad on any other account are insignificant, if we except the occasional loans contracted by the Government. Incoming capital is represented chiefly by shipments of machinery and supplies used in the establishment or operation of industrial plants, or for the execution of public works. Speculative conversion of foreign balances into Peruvian money may be disregarded, although it is possible that such movements might exercise considerable influence if there were a decided upward trend in the exchange market, indicating a per­ manent advance in the level of quotations. Under present conditions, however, it is safe to say that most of the foreign exchange offered for sale represents merchandise exports, with a supplementary and occasional supply of drafts representing that part of the foreign borrowings of the Peruvian Government which is applied to internal payments. The demand for foreign exchange is connected chiefly with the foreign trade of the country and represents the drafts bought by the Peruvian importers in payment of their foreign accounts. To this must be added the requirements of the Government on account of the service of interest and amortization on foreign loans. Other remittances abroad are not very important, with the sole exception of those of the Peruvian Corporation, which converts into sterling its annual net profits from the operation of the railways which it operates. Superficially, it would seem as though the foreign indus­ trial interests operating in Peru would account for a considerable volume of foreign payments, but in fact this is not the case, since the direct exportations of these enterprises are often made without covering drafts, the proceeds being deposited abroad. The profits of such enterprises therefore accrue abroad and affect the exchange market only oy the absence of drafts representing a part of their production. Taking the visible statistics of foreign trade as a basis for an estimate of Peru's balance of payments, it would seem that under the normal condition of a large excess of exports there should be no lack of foreign drafts and that consequently there should be no difficulty about the maintenance of exchange parity. This was indeed the case for many years prior to the war. That the balance of payments was in favor of Peru during most of the pre-war years is demonstrated by the fact that there was generally a net annual importation of gold. The present conditions are much more com­ plicated. There still appears to be an ample margin of exports over imports, even allowing for the fact that such commodities as petro­ leum, copper, and silver do not produce an equivalent volume of bills of exchange. Conversely, the greater part of the material imported by the foreign enterprises which produce and export these commodities is paid for abroad and does not cause a local demand for foreign drafts. With due consideration of the service of the external public debt, the remittances of the Peruvian Corporation, and the shipments sent PERUVIAN PUBLIC FINANCE 115 abroad by foreign enterprises and individuals, it seems likely that there is still a favorable balance subject to the call of Peru. That this hypothetical balance may exist and still fail to cause an active appreciation in the exchange value of the Peruvian pound is probably attributable to the availability within the country of additional credit created by the Reserve Bank under the conditions already described, and to what might be called the psychological factor, induced by the uncertainty of many of the conditions that surround the conduct of commercial and public finance, the national and world­ wide economic situation, and the status of the currency. Under such conditions there probably does exist a certain volume of marginal or "optional" exchange transfers, the presence or absence of which has an_important influence on the market. The foreign exchange business of Peru is practically concentrated in Lima, where the banks and brokers buy and sell foreign drafts. Here the exchange value of the Peruvian pound is determined, for Peruvian products, including those shipped to neighboring countries, are uniformly sold in terms of sterling or dollars, while imports are covered by similar drafts in foreign currencies. The smaller exporters usually sell their bills of exchange to the banks, where the importers resort for their needs. The larger international-trading houses may send their shipments abroad on open account (largely to their home offices or closely-affiliated correspondents in Europe and the United States), while they meet their needs for local currency either from the proceeds of their import sales or from the disposal of finance bills, at their convenience. As a general thing the native producers of and dealers in cotton, wool, and miscellaneous agricultural produce sell to the larger exporters in terms of Peruvian currency. The returns from these commodities are thus disseminated more generally among the population than those from the other principal Peruvian exports. Sugar, which is shipped largely to Bolivia and Chile, is often exported directly by the larger producers, but is more usually handled by the larger trading houses; its exportation is usually cov­ ered by 90-day drafts on London. In the case of copper, silver, and petroleum, there is often a less direct connection with the exchange market, since these industries are largely in the hands of foreign enterprises which draw finance bills upon their resources abroad in preference to using documentary drafts. In addition to the commercial bills of exchange that come upon the market there is a certain supply of foreign drafts representing the payment to the Government of export duties. " These drafts, in the case of duties on copper and silver, are drawn in dollars in accord­ ance with the law, and in the case of sugar, cotton, and minor dutiable commodities, are drawn upon London. The Government may dispose of such drafts in the local market or may use them in building up foreign balances to meet payments abroad. However, since the service of some of the more important foreign loans is effected di­ rectly by such revenue-collecting agencies as the Salt Co. and the Guano Administration Co., there is a tendency to center such exchange transactions in Lima and it seems likely that the greater part of the foreign drafts which come into the possession of the Government is disposed of locally. The consular fees collected abroad diminish the requirements of the Government for foreign remittances. 116 PERUVIAN PUBLIC FINANCE

Exchange trading constitutes a profitable part of the operations of the Peruvian banks, although statistical information of this character is incomplete. It may be noted, however, that under recent currency conditions there has been a tendency for the accounts of the banks representing obligations in foreign currencies to grow. This is taken to mean that commercial concerns and individuals have been gradually adopting the policy of keeping a part of their resources in such form rather than in local currency. This widens the exchange market, as it results in the "book" purchase and sale of exchange as distinguished from operations directly connected with specific imports and exports. Nevertheless, speculation in exchange has not reached in Peru the importance which it had in paper-money countries, such as Chile. Large exchange transactions tend to unsettle the market and may be reflected in temporary fluctuations of considerable importance.

STERLING AND DOLLAR EXCHANGE During the long period of currency and exchange stability which Peru enjoyed until the outbreak of war in 1914, exchange transactions were conducted chiefly in 90-day drafts on London, and the value of Peruvian currency in terms of other moneys was determined by rates quoted in London. The fluctuations were very small, for there was a free international movement of gold. While trade with the United States was growing steadily, the London draft formed so convenient a means of settlement that direct dollar exchange was practically nonexistent. As the war progressed, economic and financial relations with the United States grew closer, while the European financial markets became isolated. As we have seen, the result of the preponderance of exports from Peru was a flow of gold from New York, lasting until an embargo was placed upon its exportation late in 1917. There­ after, however, deposits of gold in New York, accumulated by the concentration of the foreign accounts of Peru in that market, served as the basis of the issue of circulating notes in Peru. Subsequently, the depreciation of sterling and other European currencies in terms of gold or dollars so unsettled all normal calculations that the finan­ cial relations between Lima and New York were emphasized. The previous dependence of the exchange market on sterling thus changed, perhaps not exactly to a similar relation toward the dollar, but at least to a condition of independence which has continued to the present time. In spite of the fact that the sterling bill is probably still of more importance than dollar bills of exchange in actual transactions in Peru, the statistics of exchange movements do not show convinc­ ingly that the value of the Peruvian pound follows that of the pound sterling. It will be rioted that the increase in the value of the pound sterling in New York which went on uniformly through 1924, was not accom­ panied by a corresponding rise in the Peruvian pound in terms of dollars. On the contrary, its value in dollars remained quite stable during the year, while the advance of sterling was reflected in an increasing premium in Lima. From this, the conclusion may be drawn that monetary and exchange condition's in Peru are such that the market is not "tied" to any foreign money system. This condi­ tion is probably caused by (1) the present constitution of the cur- PEBUVIAN PUBLIC FINANCE 117 rency and the influence of the Reserve Bank of Peru, which mini­ mizes the effects of changing credit conditions upon the international transfer of funds; (2) the breaking of former ties with foreign money markets; and (3) the existence in Lima of banks representing American interests, combined with the less intimate European relations that formerly characterized the older institutions.

FACTORS THAT INFLUENCE EXCHANGE The present situation of Peruvian currency is anomalous, in that it is neither on a gold basis nor, strictly sneaking, is it on what is ordinarily called a fluctuating, inconvertible paper-money basis. Although it is inconvertible into gold, it is not a purely fiduciary meclium, but has a substantial backing, the availability of which is not so remote that it has ceased to count in the maintenance of a relative stability. At present it shares, therefore, the situation at­ tained by a number of South American currencies as a result of the peculiar war and postwar conditions, in which considerable gold re­ serves exist, though temporarily isolated and ceasing to function except as a factor in the prospective resumption of specie payments. In the meantime the effect of supply and demand in the exchange market is the principal influence on exchange values, although un­ doubtedly the free play of the current influences upon supply and demand is limited by the underlying confidence in the feasibility and probability of an eventual return to gold parity. In such a situation it is conceivable that public confidence might be gradually undermined by progress away from convertibility—that is, by the continued issue of paper against the stationary or diminishing gold reserve, through the intervention of the Government. Such a development would signalize a trend toward a really inconvertible paper currency. There have been no signs, however, of such a development in the case of Peru. As a consequence, the movements of exchange during the recent times of relative quiet and prosperity have shown very small fluctuations from day to day, with only gradual changes in level over longer intervals. Although the supply of foreign exchange in the Peruvian market is provided almost entirely by exports of a few principal products, there is no one commodity which exerts a preponderant influence. It would seem that, all other conditions being equal, exchange would be in greater supply during the months when shipments of cotton and sugar are at their maximum. Owing however, to the abnormal conditions of the present, it is not possible to discern any seasonal fluctuations on this account. Probably the commercial structure and trade customs of Peru cause a spread of exchange transactions— the principal element in foreign trade being a small number of large international business houses of which the interests and affiliations are sufficiently extensive to permit relative freedom in their financial operations. The commercial side of the exchange market is thus relatively placid, marking a close adjustment of the normal supply and demand. To account for extraordinary movements it would be natural to look for some extraneous influence, such as political developments directly or indirectly affecting the administration of the currency or the general 118 PERUVIAN PUBLIC FINANCE economy of the country, or the prospects for the consummation of a foreign loan, or any unusual event with commercial, industrial, or financial consequences. Such outside influences might have an important bearing on the exchange market or even on the general permanent level of exchange values, since the tendency of ordinary commercial factors is'to arrive at an equilibrium; as this equilibrium is disturbed, the exchange value of the Peruvian pound seems as likely to retain a new status as to return to its former position. APPENDIX

CURRENT SOURCES OF INFORMATION ON PERUVIAN ECONOMICS

OFFICIAL The President's annual message to Congress (Mensaje Presentado al Congreso Ordinario por el Presidente de la Republica) is delivered when that body convenes in regular session in the last week of July. It contains, in effect, a resume of the activities of each governmental department or ministry during the preceding year, discussing espe­ cially such topics as foreign relations, changes in internal administra­ tion, progress in public works, the principal features of .the financial situation of the country, the progress of foreign trade, and others of importance. The official daily gazette, El Peruano, contains the text of laws and administrative decrees, together with bank statements, applica­ tions for patents, and such other announcements as the law requires. Foreign subscription is 24 soles per annum. The address is Cercado (Giron Huaylas), Lima. The annual report of the Minister of Finance and Commerce (Me- rnoria del Ministro de Hacienda y Comercio) generally appears in September or October following the year to which it refers. Several volumes of appendices contain practically all of the official documents pertaining to the administration of the department for the year. The annual volume of Government accounts (Balance y Cuenta General de la Republica) appears soon after the middle of the year following that to which it refers. The receipts and disbursements of the treasury are given in detail, together with the condition of the various branch treasuries and a statement of the status of the public debt. Soon after it has been dispatched by Congress the budget (Presu- puesto General) for the year is published. The annual report of the Minister of Industry and Public Works (Memoria del Ministro de Fomento) is devoted chiefly to the report of the progress of the various public works under construction. The annual statistics of foreign trade (Comercio Especial del Peru) contain the customary detailed data on the movement of imports and exports. The Statistical Abstract is a collection of statistical tables covering all phases of national progress, taken from the figures collected by each department of the Government on activities under its jurisdic­ tion. An English translation is published. In addition to the above, reports are issued by various other branches of the Government covering such activities as bank inspec­ tion, agricultural and mineral production, etc. 119 120 PERUVIAN- PUBLIC FINANCE

SEMIOFFICIAL The Association of Mining Engineers (Cuerpo de Ingenieros de Minas), which receives a subsidy from the Government, publishes a series of bulletins under the name of Boletines del Cuerpo de Inge­ nieros de Minas. The annual reports (memorias) of the fiscal organizations, such as the Tax Collecting Co. (Cia. Recaudadora de Impuestos), the Salt Co. (Cia. Salinera del Peru), the Guano Administration Co. (Cia. Administradora del Guano)> the Warehouse Administration Co. (Cia. Administradora de los Almacenes Fiscales), and the Caja de Deposi- tos y Consignaciones, should be mentioned as containing data of value in connection with their operations.

UNOFFICIAL The annual report of the Lima Chamber of Commerce (Memoria de la Camara de Comercio de Lima), which appears in March of each year, contains a good, though concise, review of the general public conditions of the preceding year, together with useful statis­ tics on exchange rates, commodity prices, and exports of principal products. The annual report of the Lima Stock Exchange (Memoria de la Camara Sindical de la Bolsa Comercial de Lima) contains statistical tables showing the quotations of the principal local securities during the year, the condition of the banks, and commodity prices. The West Coast Leader, a weekly journal published in English at Lima, contains much material of economic interest. It mentions the principal administrative developments, often contains interesting geographical articles, and has news from Bolivia and Chile. The principal daily newspapers of Lima are El Comercio, La Prensa, La Cronica, and El Tiempo. They contain a certain amount of statistical information, but do not comment as freely on matters of administration and public finance as is general in many other countries. There are no economic journals that appear with regularity. El Economista Peruano, the mail address of which is Apartado 1074, Lima, now appears at intervals of about two months. El Financista (post-office address, Apartado 1687, Lima) is a monthly review treat­ ing chiefly commercial finance, containing the annual reports and statements of corporations. The Association of Merchants of Lima publishes a monthly— K-evista Mensual del Comercio del Peru (Apartado 1938, Lima)— which discusses chiefly topics of interest to the import wholesale and retail trades. Special attention is paid to the rulings of the Tariff Commission (Junta de Arancel) on the classification t of import merchandise. A monthly review of agriculture is given in La Vida Agricola (Apartado 1679, Lima). Special attention is given to the condition of the cotton and sugar crops and the features of the market. PEBUVIAN PUBLIC FINANCE 121

COMMERCIAL HANDBOOK "For complete data on the industries; commerce, and economic features of Peru, the reader is referred to a recent publication of the 'Bureau of Foreign and Domestic Commerce entitled, "Peru: A Com­ mercial and Industrial Handbook'* (Trade Promotion Series No. 25).

STATISTICAL TABLES

AREA AND POPULATION BY DEPARTMENTS

I Square Popula­ Department I kilometers tion i

Amazonas.. 36, 122 13, 947 70,676 Ancachs 38. 085 14, 705 428,703 Apurimac. 21, 200 8,189 177, 387 Areqiuipa.-. 50, 857 21, 952 229,007 Ayacucho. - 47, 111 18,190 302,469 Cajamarca.. 32, 482 12, 541 442, 412 Callao * 37 14 48,118 Cuzco. 144, 344 55, 731 438, 646 Huancavelica.,- 21, 496 8,300 223,796 Huacuco.. 39,965 15, 430 145,309 lea 25, 379 9,799 . 90,962 Junin. 59, 105 22,820 394,393 Lambayeque... 11,952 4,615 124,091 LaLibertad 26,441 10,209 250,931 Lima 38, 984 15,052 298,106 Loreto 422,903 163,283 100, 596 Madre de Dios. 152, 402 58,842 (») Moquegua* 14, 375 5,650 42,694 Pmra.._ 39, 468 15, 239 213,909 Puno 67, 703 26,140 537,345 San Martin 45, 202 17, 450 70,361 Tacna 32, 618 12, 594 50,449 Tumbes J 4,120 1,591 <*) Total - - 1,378,360 532,183

i Estimated as of 1896. No official census has been taken since 1876. There is considerable uncertainty as to the exact figuies, soine observers considering the above figures highly overstated, their estimates varying from 3,500,000 to 4,000,000. * Littoral provinces. • Statistics not available

ALTITUDE AND POPULATION OF PRINCIPAL TOWNS

Altitude Town Population Meters Feet

2,301 7,547 45,000 Ayacucho - _ - 2,716 8,908 15,000 2,765 9,068 5,000 Callao . - -- .- 2 7 52,843 Guzeo. - - ... 3,474 11,395 19,823 Ohiclayo - 25 82 20,000 3,340 10,955 15,000 lea - _. 402 1,319 10,000 Lima.. - _ 156 512 1202,940 Piura. _ _ . ... 50 163 15,000 Trujillo ._ - 62 203 22,000

1 Including suburbs. 122 PERUVIAN PUBLIC FINANCE

RAILROAD MILEAGE, TRAFFIC, AND REVENTTEB

Average annual traffic i Mileage Net Railway in 1924 revenue in Passengers Freight 1924

Tons Cential System 257 3. 280, 851 703, 938 £249, 628 Cerro de Pasco Railway _. 118 2 139,105 3 1, 053, 961 3 $1,173, 035 Chimboteto Huallanca Railway 86 <<> 4,727 £1, •542 Lima to Lurin Railway. __ _ 28 J 135, 489 »18, 947 ' Lp.3, 967 Northwestern Railway of Peru... _ - 132 J 169,874 »92,633 •Lp.n, 7*6 Pacasmayoto Chilete Railway _ 65 190, 035 37, 039 £11, 615 Paita to Piura Railway _ 61 190,791 84,010 054 Southern System _ ... 534 335, 859 143,903 108', 333 Trujillo Railway _ _ 48 751,381 177,289 26, '214 All other (including private plantation and mining lines) 783 (•) w Total steam lines _ 2,112 Electric lines _- 101 Total ._. — 2,213

i Period of 5 years, 1919-1923. * Figures available for 1922 only. 3 Gross earnings for 1921. No other figures available. * Statistics not available. * Figures available for 1922-23 only.

BANK STATISTICS, 1897-1924

[In thousands of Peruvian pounds]

Number Paid Loans of capital and Year institu­ and Deposits invest­ Cash tions reserve ments

1897, December _ 4 391 1,371 1,102 502 1898, December .._ 4 390 1,480 1,280 487 1899, December - 5 530 1,558 1, 467 455 1900, December 5 658 1,774 1,735 553 1901, December 5 G78 1,929 1,925 503 1902, December .._ 5 70S 2, 249 2,277 528 1903, December _ _ 5 755 2,638 2,585 624 1904, December 5 888 2,727 2,587 547 1905, December _. 7 1,196 3,274 2, 891 730 1906, December _ 7 1,207 3, 759 3,487 689 1907, December . - _ - 7 1,823 4,035 4,124 905 1908, December _ 7 1,832 4,366 4,358 1,013 1909, December _. .__ 7 1,733 4,267 4,052 999 1910, December 7 1,739 5,630 4,768 1,421 1911, December » 7 1,745 6, 378 5,379 1,453 1912, December __. 7 1,776 7,664 6,389 1,561 1913, December _ 7 1,779 8,108 6,613 1,118 19l4,June 7 1,783 7,777 6,483 1,302 December 7 1,787 5, 374 6,149 1,601 1915, June - .. -- - 7 1,690 6,047 5,630 1,686 December, ... _._ 7 1,687 4,379 5,270 1,539 1916, June. 7 1,693 4,821 5,210 1,659 December.- 8 1,795 5, 769 5,032 2,239 lG17,June _ .-- 8 1,800 6,521 5,128 2,542 December 8 1,808 7,903 5,497 3,177 1918, June _. 8 1,820 8,376 6,450 2,093 December 8 1,827 10,054 6,266 2,890 8 2,201 6,934 1919, June _. 2,221 11,186 3,559 December _ _ . . 8 14,482 7,758 4,188 10 2,687 9,681 1920, June _ __. 30 2,698 17,121 3,298 10 2,716 15,645 11,352 3,395 1921, June._ _ _ 10 2,598 13,914 11,399 3,415 December . _ 10 2, 559 13, 649 10, 569 3,819 1922, June.. ,_„,...... _„ „. 11 2,594 13,758 10,425 4,026 December 11 2,637 13,391 10,784 2,672 1923, June - _ _ 12 2,920 13,244 10,104 3,179 December _ - 12 3,081 14,143 10, 564 2,611 1924, June _ _ 12 3,186 15,955 12,401 3,150 December _ _ 16,774 13,601 3,234

Source: Statistical Abstract ol Peru, 1923. PERUVIAN PUBLIC FINANCE 123

INDIVIDUAL BANK STATISTICS, DECEMBER 31, 1924

Capital and] Bank reserve Deposits Advances Cash

Lp Lp Lp. Banco del Peru y Londres 886,937 4,334,784 1,667667,,1 61 0 1,284,373 Ca& de Anorros de Lima 62, 417 1, 210. 221 , 219,690 89,259 ,200,091 5,216,656 t, 925,843 1,418,742 Banco Italiano . ------149,990 549, 517 605,728 140,886 Banco Intemacional del Peru 291.358 794,250 930,022 236,148 Banco Popular del Peru.. 166, 425 805,875 695, 689 206,071 Gate de Depositos y Consignacioncs.,- 685,129 Banco Aleman Transatlantic 220,500 2,116,955 ,697,106 259, 564 445,938 654,838 213,155 Banco Mercantil Americano > 478,904 Banco Anglo Sud-Americano . 200,000 924,720 723,671 200,000 649, 953 620,662 727,094 National City Bank of New York 8,392 Banco de Reserva del Peru .__.__ 500, %5 762, 423 , 825,38J 0 Commercial Bank of Spanish America 30,000 (2) ( ) 1 As of May 1, 1925, this bank and two branches were taken over for operation by the Royal Bank of Canada. „ .. J Statistics not available Source- Memoria de la Camara Sindical de la Bolsa Comercial de Lima.

AGRICULTURAL PRODUCTION BY VOLUME

Year Sugar Cotton Wheat Rice

Bale8 0f600 Short tons pounds Bushel* Pounds 206,405 1912 (») 0) 0)l 1913. 197,326 (») 0) <) 245, 706 ! 1914. ('l) 0) ( ) 1915 283,445 ( ) 2,847,647 73,413,180 1916 298,423 117,271 2,609, 387 78, 263,300 1917. 273,222 115,159 2,620,923 83,750,627 1918. 311,509 135,309 2,282,333 88,789,579 1919 310,704 147,924 2,626,478 79,440,717 1920 345, 057 169,205 2,356,466 68,640,624 1921 295,911 177,867 3,001,003 68,507,946 1922 351, 253 187,958 2,994,338 92,681,384 1923 352, 501 200,897 2,344,645 1924 348, 594 C1) 0) 8 i No statistics available.

VALUE OF MINERAL PRODUCTION, 1918-1923

Year Copper Silver Gold Petroleum Other Total

Lp. Lp. Lp. Lp. Lp. Lp. 1918 _ 3,947,975 1,635, 659 221, 373 2,009,268 510,685 8,324,960 1919 _ 2,879, 983 2,071,257 267, 301 2,363, 544 724,689 8,306,776 1920 2,358,243 1,779,088 265,972 2,494,570 1,236,821 8,134,694 1921 2,175, 407 1,609,403 411, 438 3,620, 749 531,638 8,348,633 1922- 2,430,542 2,115, 246 412,399 5,091,338 295,142 10,344,667 1923 3,009, 723 2,710,657 564,598 5,139,349 440,279 11,864,606

65880° 124 PERUVIAN PUBLIC FINANCE

IMPORTS AND EXPORTS, 1877-1924

Year Imports Exports Total Year Imports Exports Total

Lp. Lp. Lp Lp. Lp. Lp 1877.. 4,281,715 8,601, 903 12,883,618 1 1907 5, 519, 752 5, 744, .545 11,264,297 1887 1,244,664 1.275,391 2,520,055 • 1908 5,273, 079 6,478,941 10, 752,020 1890 1,865,435 1,819,651 3,685,086 ! 1909 4, 298,627 6, 492,671 10, 791,29S 1891.._ 2,148, 577 1, 752, 576 3,901,153 ; 1910 4,980,697 7.074, 076 12,054,773 1892 1,968,722 2, 513.201 3,481,923 ] 1911 5,438, 246 ! 7, 422. 028 12,860,274 1893 1,123,711 1,928,025 3,151, 736 1912 5,140, 339 9,438. 582 14,578,921 1894 943,069 1,100,000 2,043, 069 1 1913 6,088,777 9, 137, 781 15, 226, 558 1895... 1,040,499 1, 406, 250 2, 446, 749 . 1914 4,827, 930 8,767,790 13, 595,720 1896 1, 677. 577 2,095,140 3,772,717 ' 1915 3, 095, 545 11,521,807 14,617,352 1897 1, 612,863 2,779, 357 4,392, 220 i 1916 8,683,150 16, .541, 063 25, 224,213 1898 1,929,727 3,027,478 4,957, 205 ! 1917 ... 13, 502,851 18,643,415 32,146,266 1899... 1,873,495 3,072, 591 4,946,086 1 1918 9,705,114 19,972, 595 29,677, 709 1900 2,317,151 4,498,000 6,815.151 ! 1919 12, 203, 840 26,899,422 39,103, 262 7,035, 884 1901_ 2,717,107 4, 318, 777 ! J920 18, 358, 224 35, 304,155 63, 662, 379 1902 3,428,284 3, 703,971 7,132, 255 1921 16,669,188 16.660,484 83, 329,672 1903 3,783,381 3, 857. 754 7,641,135 J 1922 10, 592, 554 18,692,870 29.285,424 1904 4,357, 339 4, 066,640 8. 423, 979 1923 14,132, 307 23,950,987 38,083,294 1905 4,357,697 5, 757,351 10,115,048 1924 18,029,418 25,114,377 43,143, 795 1906 5.010,497 5,695,879 10, 706.376 i i

IMPORTS BY COUNTRIES OF ORIGIN*

[Values in thousands of Peruvian pounds)

1913 1914 1915 191 6 1917 1918 Country Per Per Per Per Value Value Value Value Per Value Value Per cent cent cent cent cent cent

Australia 130 2.1 187 3.9 12 0.4 235 2 7 232 1 7 53 0.6 Belgium 384 6.3 274 ' 5 7 Chile 213 3.5 90 1.9 95 3.1 299 3 4 357 2 6 717 1 7 4 China 158 2.6 129 2 7 182 5.9 302 3.5 454 ; 3 4 371 ' 3. 8 France. 281 4.6 156 3 2 89 2.9 196 2.3 225 1.7 135 ! I 4 Germany 1,056 17 3 Great Britain._. 1,599 26.3 1.339 27 7 663 21.4 1,496 17.2 1,935 1 1, 566 16. 1 Italy -_ 264 4.2 201 4.2 158 51 237 2 7 249 ! 138 • 1 4 United States.-. 1,755 28 8 1,571 32.5 1,488 48.0 5,117 59 0 8,793 | H.3 5, 269 ; 54. 3 All other 259 4.3 881 18 2 409 13. 2 801 9 2 1,258 j 1 9 1.456 i 15.0 65. 1 Total 6,089 100.0 4,828 100 0 3,096 100.0 8,683 : 100.0 13.503 ! 100 0 9,705 ! 100.0 1

Country Per Per Per Per Per Value Valuvalue ! I VnhwN aluc cent cent cent ; cent j cent cent -i Australia... 88 ! 0 5 577 257 2 4 : 38 i 0 3 120 0 7 Belgium.-. 81 j 4 181 1.1 172 1 6 ! 313 i 2 4 440 2.4 Chile 683 5.6 040 ' 5.7 1.028 6 1 408 3 9 ! 415 j 3.2 000 5 6 China 365 3 0 .380 3 1 685 4.1 374 3. n i 364 ! 2 8 633 3 6 France 153 1 2 547 ! 3 0 633 3 8 323 3 i ; 552 ! 2 5 724 4 0 Germany.. 313 i 1 7 741 4 4 1,146 10 8 I 1,480 ! 10 0 846 10 2 Great Britain..- 1,646 694; 14 7 2.275 13 - j 2,025 19 1 ; 2.866 i 19.6 353 18.6 Italp 112 4u ; 2 2 492 3 0 | 301 2 y : 595 3.8 871 4.8 United States.,. 7,550 61.9 10, 169 I 55. 4 8,247 49 5 ! 4,213 5, 726 : 39 0 056 39 1 39 7 i 16 4 Another ! 1,514 12 4 2, 435 13 3 1,810 10 9 I 1,374 13 0 1,781 11 0 Total ..-112,204 I 100 0 18,358 100 0 16,669 , 100 0 ;i0,593 100 0 ; 14,132 100 0 Il8,629 100 0 PERUVIAN PUBLIC FINANCE 125

EXPORTS BY COUNTRIES OF DESTINATION

[Values in thousands of Peruvian pounds]

1913 1916 1917 1919 Country Per Per Per Value Per Per cent cent cent cent cent

Argentina 2 0.0 108 0.6 609 2.3 Belgium 250 2.7 2 .0 Bolivia 131 1 4 1 8 373 2.0 476 1.8 Canada * 157 8 414 1 5 Chile 1,203 13.2 10 8 2,440 13.1 2,527 12 7 3,232 12 0 France 322 3.5 87 .5 14 .1 384 1.4 Germany 610 6.6 51 .2 Great Britain. 3,403 37 2 2,962 17.9 3,793 20 3 6,334 31.7 8,441 31.4 Japan 2 .0 13 .1 16 1 91 3 United States. 3,033 33.2 10, 404 62 9 10,942 58.7 9,299 46 6 12,499 46.5 All other 182 2.2 5 5 727 3 9 785 4.0 700 26 Total. 100.0 16, 541 I 100 0 18,643 100 0 19,973 100.0 26,899 100.0

Country Por Per Value Value Per Value Per Per cent cent cent cent cent I

Argentina 1 0 0 803 4 8 1,093 5 8 3.7 1,743 6.9 Belgium 140 .4 68 .4 201 1 1 293 1 2 25 .1 Bolivia 413 1.2 241 1.5 221 1 2 278 I 1 228 .9 Canada- 88 .2 13 .1 347 1.9 716 3.0 932 3 7 Chile —. 3,214 9.1 1,938 11.6 1,691 9 0 2,299 9.6 2,440 9 7 France-. 840 2.3 49 .3 194 1.0 78 .3 153 6 Germany 15 2 94 6 392 2 1 725 3 0 568 2.3 Great Britain. 12,682 35 9 5,806 34.8 6,592 35 3 7,950 33 2 9,458 37 5 Japan- 102 3 IIS 1 36 .2 17 1 56 2 United States. 16, 265 46 1 6, 539 39.2 6,583 35 2 9, 518 39 7 8,393 38 4 AHother 1,544 4 3 994 6 6 1,343 7.2 1,201 5 1 1,118 4 7 Total 35,304 | 100 0 : 16,660 100 0 18, 693 J 100 0 23,950 100.0 ; 25,114 100 0

EXPORTS OF SUGAR AND COTTON

Sugar Cotton Year Volume Value Volume Value

Pounds Lp. 500 lb. bales Lp. 1912 - 328,215, 518 1.406,673 84,807 1,042.867 1913 314, 383, 641 1, 412, 665 105, 480 1.424.230 1914. 388, 675,560 2,640,952 100,988 1,405,220 1915 484, 566,641 2, 976, 60ft 93,159 1,260,477 1916 525, 820, 964 3,978,779 106, 835 1. 722, 806 1917 466,488,161 4,111,463 76,628 2,878,515 1918 _. 435, 568, 740 4,162,595 94.914 3, 760, 812 1919 8,311,321 175.131 6,938,008 15,584,889 150.508 11,190,061 1921 .... 526, 583,053 4, 696, 385 160.639 3, 585,050 1922 603,632,014 4. 248. 322 176,196 4,338,161 1923 _ 621,482.400 6,266,209 191,513 6,138, 209 1924 584, 120, 783 ! 4. 976. 430 180, 741 6,671,286

Source: Statistical Abstract of Peru, 192a. 126 PERUVIAN PUBLIC FINANCE

EXPORTS OF PRINCIPAL MINERALS

[In kilos)

Year Goldi Silver » Copper l Petroleum

1918 1,035 303,272 43,934,328 182,191,495 1919 1,163 321,073 41,178, ft4 258, 327, 217 1920 973 275,984 31,454,378 177,951,047 1921 - _ .-_ - - 2,049 304,329 34,304,331 321,082,450 1922 ... (») (*> 528,693,934 1923_ ' (») 571,542,631 1924 . .. (») h 8 785,871,986 » Net metallic content of bars, ores, etc. »The official statistics of these years give only the gross volume of bars, ores, etc., without indicating the net metallic content. Source: Estadletica del Comercio Especial del Peru

O