IN THE FEBRUARY 1950 issue of Staff Papers, a technique for analyzing quantitatively the forces creating an inflation was described, and applied to data for Western Europe in the decade 1938-48.1 The application of this technique is extended in the present paper to data for 11 Latin American countries for the years 1938-49. Since the terms used and the procedures followed are given in detail in the earlier paper, they are not repeated here; for convenience, however, they are summarized below in an Appendix.


IN THE FEBRUARY 1950 issue of Staff Papers, a technique for analyzing quantitatively the forces creating an inflation was described, and applied to data for Western Europe in the decade 1938-48.1 The application of this technique is extended in the present paper to data for 11 Latin American countries for the years 1938-49. Since the terms used and the procedures followed are given in detail in the earlier paper, they are not repeated here; for convenience, however, they are summarized below in an Appendix.

IN THE FEBRUARY 1950 issue of Staff Papers, a technique for analyzing quantitatively the forces creating an inflation was described, and applied to data for Western Europe in the decade 1938-48.1 The application of this technique is extended in the present paper to data for 11 Latin American countries for the years 1938-49. Since the terms used and the procedures followed are given in detail in the earlier paper, they are not repeated here; for convenience, however, they are summarized below in an Appendix.

Two points should be emphasized. First, the comparatively inadequate statistics available for many of the Latin American countries make it impossible to use refined methods of econometric analysis and compel recourse to rather crude approximations. Second, a survey of a whole continent necessarily gives a false impression of symmetry in the developments in various countries, which actually differed widely between themselves. For both these reasons, this study can give no more than a very rough over-all view of the problem.

In the previous paper, it was suggested that there were three main sources of error in the assumptions underlying the technique.2 For Latin America all three of these disturbing factors have considerable significance:

(a) The base year (usually 1938) was chosen more for statistical considerations than because it had any particular suitability as an equilibrium year. In fact, 1938 was generally slightly deflationary, although 1939 (and, still more, the later years necessarily substituted for some countries) was generally marked by the mild inflation which has been characteristic of fairly normal years in Latin America. So, too, the influence of political conditions has often been considerable, usually in the direction of increasing government activity, leading to a decline in the proportion of the national income available for consumers at their free choice. In some countries this factor affected the base year, while in others it developed later; but in most it had a tendency to cause the index of measurement used in this study—an index termed the “gross inflationary quanta”3—to underestimate the inflation present.

(b) The long-run, world-wide tendency toward increased wealth per capita should, other things being equal, increase intentional savings. In Latin America, this has not, broadly speaking, been accompanied by that parallel long-run tendency toward greater equality of incomes which is noticeable elsewhere and which elsewhere tends to lower the proportion of income saved. It may accordingly be assumed that in this respect our technique of measurement (i.e., the gross inflationary quanta) will tend slightly to overestimate the inflation experienced in the later years of the period.

(c) Among short-run factors, World War II considerably affected the balance of payments of Latin American countries and thus indirectly their inflationary situation. However, the changes in the terms of trade which have taken place over the decade,4 partly as a result of the war, have in general favored Latin America, and thus added a further factor tending to expand savings. On the other hand, there has been considerable dissaving since the war, as imports of durable goods have become more freely available.5

The net effect of these conflicting influences is difficult to assess. It appears possible that the consequences of (b) and of the changes in the terms of trade may have outweighed (a) by, say, 1941 and that for the war years the gross inflationary quanta tend to overestimate the inflation. In the postwar period, this has almost certainly been reversed by the widespread dissaving. But in all cases the errors so caused are probably small compared with those inherent in the inadequate statistics (particularly of investment), and it is not profitable to attempt to refine upon them too closely. Despite these qualifications, it is believed that, in a broad way, the statistics compiled below are significant. This is not to say, however, that figures for individual countries in individual years may not be subject to special errors. For a more elaborate application of the technique to individual countries, refinements would certainly be required which cannot be introduced in this over-all summary.

General Survey

Inflation in a greater or less degree has long been characteristic of many Latin American countries. It is not unnatural that this should be so. As with most underdeveloped countries, there is a constant urge to push ahead with development as quickly as possible, and this tends to outrun the pace of current saving. The latter, in any case, tends to be small, partly because the institutional set-up is not in general sufficiently well-developed to enable local savings to be offered a wide and secure market. In addition, all Latin American countries, at least before the war, were net debtors to a lesser or greater degree. Much of the new capital investment received by these countries in the thirties took the form of direct investment, mainly the import of capital goods. Where, therefore, contractual amortization payments were being made, it was necessary to develop an annual export surplus on current account by means of which these payments could be transferred abroad. A surplus in the balance of trade was also needed to cover interest payments. International investment in these countries offset these requirements only to the extent that it provided free foreign exchange. An export surplus is of course, other things being equal, inflationary. It could have been non-inflationary in Latin America only to the extent that a corresponding part of the national income was withdrawn annually from circulation, either by new savings or by a government surplus. As has been indicated, the urge to expedite development prevented such a balanced economy being achieved. The fact that voluntary savings represented only a small proportion of the national income meant also that any growth in the income of any part of the community tended to express itself almost wholly in additional spending. In technical terms, a high propensity to consume implies either a high multiplier or a high propensity to import. In normal times, the latter was more usual, since the supply of consumers’ goods in these countries was rather inelastic. As far as agricultural products were concerned, there was not much relationship between domestic demand and the volume of the crops, partly because the latter were conditioned by climatic changes, but partly because crops were raised predominantly for the world market rather than for domestic requirements. At the same time, the industrial facilities in Latin America were to a large extent rudimentary, so that it was difficult to expand output of industrial products even when a strong demand for them existed.

In such circumstances, the impact of World War II was inevitably still further inflationary. Under the pressure of war some belligerent countries sought new sources of supply for goods which it was no longer convenient to produce at home; they were also anxious to replace Far Eastern supplies cut off by the Pacific War, and additional increased demand was engendered by inflationary increases in their national incomes. To meet all these rising demands, Latin American exports were increased substantially. A similar influence was exerted in several countries by military expenditures by or on behalf of the U. S. Government. Meanwhile, imports tended to decline, at least in volume, because of the universal shortage of the manufactured products which Latin America typically imported. Not only did this directly lead to an inflation by reducing the already inadequate supply of consumer goods on Latin American markets, but it also tended to create government deficits, because government incomes had frequently relied to a large extent on import duties.

At the same time, the pressure for development continued, and both governmental and commercial corporations added substantially to their capital assets, frequently in the form of new buildings, since these did not call for the types of imports no longer obtainable. National incomes were, therefore, substantially increased and prices rose sharply in almost all countries. Although increases in wages were somewhat belated, they were eventually widespread and further strengthened the upward tendency. Meanwhile, although prices were controlled inadequately, if at all, there was some tendency, in most countries, for the velocity of circulation of bank deposits to fall, which implied that latent inflation was banking up.

When, therefore, in the postwar era imports began to be available again, there was an ebullition of spending in nearly every country. Intentional saving was probably negative in most Latin American countries during 1946 and 1947. Nor did the increased imports entirely eliminate the inflationary situation, partly because their prices were sharply increased; partly because they consisted, to a very considerable degree, of machinery or commodities required to rebuild industry and of luxury goods such as automobiles; partly because exports also rose, so that import surpluses, when they developed at all, were comparatively small.

Meanwhile, government policies in most countries (possibly influenced by the expectation of a depression in the United States) were to maintain expenditures and to push ahead with development. Deficits, therefore, persisted and added to the inflationary result of the heavy investment characteristic of the period. A further factor in some countries was the repeated revision of wages, to match increases in the cost of living, since these set the pace for further increases in prices.

In 1948 and 1949 the general picture was not much altered, but in one or two countries (e.g., Cuba, Guatemala), the inflation seems to have been checked; there was also a rather more widespread tendency toward a slowing down of the fall in liquidity, which may imply the retardation of dissaving.

The next four parts of this paper present the results of an attempt to quantify these processes and causes. It should be emphasized again that the methods adopted are the merest approximations. At the same time, they do afford some insight into the distinctive characteristics of each period.

Financial Activity

As explained in the Appendix, the absence of figures for the national income of the Latin American countries compels the use, as a substitute, of an index of financial activity (Tables 1 and 2). This is calculated

Table 1.

Indices of Financial Activity for Six Latin American Countries

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Table 2.

Indices of Financial Activity for Eleven Latin American Countries

(1941 = 100)

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as follows: (1) the velocity of circulation of bank deposits is ascertained by dividing the total of checks cleared in a given year by the average of the volume of bank deposits at the end of that year and at the end of the previous year; (2) the volume of money in circulation in a given year is approximated by taking the average of the volume of currency and bank deposits at the end of the year and at the end of the previous year; (3) the product of (1) and (2) expressed as indices (1938 = 100 wherever possible) yields the index of financial activity.

There are obvious defects in this procedure; for example, the proportion of the money supply consisting of deposits may vary widely at times when the velocity of circulation of currency is quite different from that of deposits; the volume of money may vary seasonally in a way not reflected in an average of December figures; and the importance of the monetary sector in the economy may be increasing. Nevertheless, the indices compiled from these series may be accepted as meaningful, reflecting the varying extents to which increased economic activity and increased prices have in combination expanded the monetary turnover in each country. In particular, they are believed to be more accurate indications of the growth of the national income than any available indices of prices; usually the only price statistics published are limited cost of living indices, which are believed to underestimate the over-all price changes.

Table 1, giving indices for six countries, shows particularly steep increases in 1941 and 1943; and in the postwar years, an average figure of 654 (1938 = 100) was reached in 1949. Figures for the period 1941-49 are available for eleven countries (Table 2); these show a somewhat steeper rise after 1943, the average figure for 1949 being 464 (1941 = 100), whereas for the six countries in Table 1 the comparable 1949 figure was only 433.

The average figures may also be analyzed by studying their cumulative growth, measured by the ratio between the average index for each year and that for the preceding year (Table 3). The years when financial activity grew most rapidly were 1941 and 1943. For the whole period, the cumulative rate of growth of the average index of financial activity was approximately 20 per cent per annum. Some part of this is attributable to the growth of output and of the cash-using population, but the combined effects of these two causes cannot account for more than a small part of the increase; the remainder must accordingly be due to inflation. It also seems prima facie probable that the years 1941, 1943, and 1946 were especially inflationary. However, the possibility must not be overlooked that some part of the growth of financial activity in, say, 1941 was the result of inflationary forces developed in 1940; the 1940 index of financial activity, being an average for the whole year, might in some circumstances reflect such forces inadequately. Hoarding or dishoarding would also affect the index, the former tending to retard and the latter to accelerate its growth. This possibility may next be explored.

Table 3.

Cumulative Growth of Financial Activity for Selected Latin American Countries

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Countries included in Table 1.

Countries included in Table 2.

Latent Inflation

In countries where controls over consumption and investment are strict and efficient, there is a tendency for inflation to give rise to substantial holdings of cash, bank deposits, and other relatively liquid assets in excess of those which would voluntarily be held by business and consumers. In countries such as those of Latin America, where controls have not been very effective, this tendency toward excess liquidity is noticeably smaller. Nevertheless, it is still a factor to reckon with, because involuntary hoarding may be the result of the impossibility of obtaining desired commodities or supplies, even though there is no rationing or similar system in operation. In Latin America during the war the inevitable curtailment of imports did in this way bring about a condition of latent inflation. This was supplemented by increases in the money holdings of private individuals or businessmen who were influenced by scarcities or high prices to defer, albeit reluctantly, some of the expenditures they wished to make, in the hope that more favorable opportunities would occur later. It is immaterial, for present purposes, whether such postponed spending is regarded as having been at the time voluntary or involuntary. The point is that it resulted in a banking-up of purchasing power which was later unloaded, either because goods previously unobtainable became available, because prices fell, or because it was realized that prices were not going to fall.

A priori, the period since 1938 may from this standpoint be divided into four parts. From 1938 to 1941, there was no single factor making for any marked tendency for hoards to rise or fall; they may be expected to have varied according to the individual conditions in each country. From 1941 to 1944, the wartime curtailment of imports undoubtedly led to an over-all tendency for hoards to increase. From 1945 to 1947, a nearly universal fall each year in the volume of hoards was to be expected, as spending opportunities re-emerged, and excess liquidity could be utilized. Thereafter, liquid holdings in most countries may have declined still further, but at a slower rate.

For an adequate measurement of these changes in liquidity, details would be necessary of private holdings, not only of cash and bank deposits but also of foreign exchange and of readily marketable securities, since excess liquidity might be held in any one of these forms. Unfortunately, no such comprehensive statistics are anywhere available. The only available index of excess liquidity is, therefore, the volume of currency and deposits divided by the index of financial activity, viz., M+M1(M+M1)V, where M is the volume of currency, M1 that of deposits, and V the velocity of circulation of bank deposits. As this fraction reduces to 1/V, a “liquidity index” has been constructed from the reciprocals of the velocities shown by the statistics of checks cleared, usually in one principal city. Where the rapidity of payments slows down, this liquidity index rises, indicating a tendency to excess liquidity. While such an index can be regarded as significant only as a general indication of the trend of liquidity, it does bear out the general expectations set out above.

An average of the indices (1938 = 100) for the six countries for which data are available for 1938-41 (Table 4) rose to 108 in 1940 and then fell to 96 in 1941. Subsequently there was a steady rise to 115 in 1944. From 1945 to 1949 there was an equally steady fall to 94 in the last year, although these averages concealed in the later years some rather wide individual country fluctuations both ways. For the eleven countries for which figures are available for 1941-49 (Table 5), the rise to 1944 was nearly as steep, and the subsequent fall (to 91 per cent of 1941) considerably steeper. In both sets of figures, the average index reached a maximum in 1944 and then fell to a figure below that of 1938 or 1941. In other words, it appears that the average rate of spending of available resources (the reciprocal of the index) had fallen toward the end of the war to something of the order of 15-20 per cent less than in prewar years and subsequently increased to above the prewar normal.

Table 4.

Indices of Liquidity for Six Latin American Countries

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Table 5.

Indices of Liquidity for Eleven Latin American Countries

(1941 = 100)

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In each country there was a fall from 1945 to 1947, showing that the tendency to a postwar ebullition of spending was universal. Moreover, in every country except three there was a fall between 1945 and 1946 and between 1946 and 1947, so that the tendency was progressive, as indeed might be expected from the knowledge that the supply of available imports was steadily improving throughout these two years. The general average fell further after 1947, but at a slower pace.

There is a significant contrast between the seven countries whose index of excess liquidity fell between 1941 and 1947, and the three countries in which the index rose. In the former group, the velocity of circulation of bank deposits was higher—in some cases substantially higher—in 1947 than before the war; this indicates that the effects of credit creation were supplemented by a greater intensity of use of available resources. In the latter group (Colombia, Cuba, and Uruguay), such large holdings of liquidity were apparently built up during the war that the period 1945-47 was insufficient to dissipate them. In Cuba, indeed, the trend has been toward increased liquidity.

Gross Inflationary Quanta

In the following series of tables the gross inflationary forces for each country are set out and discussed.6 Since these figures are necessarily expressed in national currencies and are therefore not internationally comparable, it appears best to consider each country separately, rather than attempt to review collectively the influence of each force (e.g., budget deficits) over the whole area. The opportunity will be taken to consider any special causes of inflation (e.g., a building boom), which may not be directly reflected in the figures cited.

The figures for the inflationary forces in the following tables have been compiled by dividing the crude data for each category by the index of financial activity for the year. Thus the actual increase in bank credit in Brazil in 1949 was 7,870 million cruzeiros; as the index of financial activity for Brazil that year was 689 (1938 = 100) the corresponding figure in Table 6 is 1,142 million cruzeiros. In order to give the longest possible series, the index of financial activity used is based on the earliest available year after 1937, even if one of the other figures is missing for the first year or years included.

Table 6.

Brazil: Gross Inflationary Quanta

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As explained in the Appendix, gross inflationary quanta which exceed the figure for the base year are prima facie evidence of inflation, since the volume of intentional saving in each year may be presumed in general to remain (after deflation by the index of financial activity) of the same order of magnitude as the gross inflationary quanta in the base year.

A comparison of the gross inflationary quanta for each year with the increase for that year in the index of financial activity presents a rough indication of the extent to which the former were actively inflationary. Similarly, changes in the liquidity index suggest at what periods the inflations generated were mainly latent, and at what other times the inflationary forces were reinforced by dissaving. The indices of financial activity and of liquidity for each country are therefore reproduced with each country table. For three countries, the initial year for which figures are available is 1939 or 1940; in those instances the figures quoted differ from those shown in Tables 1, 2, 4, and 5.

In the countries for which some national income statistics are available, the figure for the earliest known year is also added to the appropriate country table. This provides some indication of the relative order of magnitude of the gross inflationary quanta.


The monetary history of Brazil for the twelve years 1938-49 may be divided into two periods: a period of uncurbed inflation (up to 1945) followed by one in which the after-effects of inflation were worked out in a monetary environment over which the Government exercised a greater degree of control.

For the first period, the prime factor of the inflationary expansion was clearly the war, acting through (a) a favorable change in the balance of trade, and an ensuing accumulation of reserves (expenditures by belligerents, increased demand by other Latin American countries, increases in prices abroad, unavailability of more desirable import commodities), and (b) expanded budgetary deficits due to military and war expenditures.

The resulting expansion in money incomes and in money supply found outlet in rising economic activity and rising prices; a disinclination to hold liquid assets seems to have accentuated the upward movement. Credit expansion appears to have been an effect rather than one of the main inflationary factors; it was due mainly to the adoption of liberal credit policies in the face of rising prices and increased economic activity. The noticeable expansion of rural and agricultural loans may, however, be considered as an independent inflationary force.

During the second period (roughly since 1945), the after-effects of inflation and a further fall in the preference for liquidity (see the liquidity index in Table 6) have resulted in a steady reduction in the favorable trade balance, notwithstanding the increased prices abroad for the chief export commodities of Brazil and some inflow of exchange on capital account. The monetary policy of the Government has reduced the effects of the domestic inflationary forces through some restrictive measures (sterilization of proceeds from exports and blocking of excess profits).


Inflationary tendencies prevailed in Chile for a number of years before the war, and during the period under examination these forces gained momentum. Government deficit spending appears to have been a major factor in the continuous expansion of the money supply. The increasing intervention of the Government in economic activity (industrial programs of diversification and stabilization, low cost housing, hospital construction, price support programs for agricultural products, etc.), as well as the steady expansion of expenditures on education, national defense, etc., resulted in an increasing excess of expenditures over revenues. During the war a shrinkage in revenues from customs duties aggravated the budgetary position.

Only a minor proportion of the deficits could be financed out of savings, since the security market was nearly saturated. The chief source of financing has been, traditionally, central bank credit. The credit policy of commercial banks has been lenient, the reserve requirements rather low, and the discount policy of the Central Bank liberal. Thus the expansion of commercial bank credit, especially to agriculture, has added substantially to the expansion of the money supply.

A considerable increase in monetary reserves due to an expansion of exports and a contraction in imports (particularly in 1942-43) resulted in an additional inflationary increase in the money supply and in an expansion of income. In 1946 and 1949, however, the favorable balance of payments position was reversed.

Over the period as a whole, the desire for liquidity has fluctuated within narrow limits (Table 7). Prices rose steeply owing to other factors, such as speculative, investment and the rapid increase in import prices. The price rise was reflected until 1946 in larger budgetary deficits (higher wages, expenditures), and particularly since that year in a further expansion of bank credit.

Table 7.

Chile: Gross Inflationary Quanta

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Substantial increases in the annual issues of mortgage bonds from 1940 through 1946 suggest that during this period private building added noticeably to the inflationary pressure. Increases in the outstanding values of mortgage bonds adjusted by the use of the index of financial activity, to be comparable to the data in Table 7, are as follows:

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The large export surpluses of 1942, 1943, and 1944 raised the gross inflationary quanta in Colombia to a maximum in 1943-44 (Table 8). In 1943, however, a considerable increase in liquidity, due to the unavailability of imports, exerted a temporary anti-inflationary effect. This has been reversed since the war, and the inflationary pressures currently generated have thus been reinforced.

Table 8.

Colombia: Gross Inflationary Quanta

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With a few exceptions, the budget deficit has been steadily inflationary, mainly owing to the pursuance of a development program, though the rise in prices (the cost of living index in 1949 was 304 on a 1937 base) has naturally inflated government expenditures. During 1946-48, the budget deficit was financed to a considerable extent by bank credit, and most of the long-term securities issued by the Government were also held by the banking system.

The postwar years have also seen a considerable expansion of credit for business purposes, the effects of which have been reinforced on the one hand by dishoarding, and on the other by a large growth in the outstanding volume of mortgage bonds, arising from an extensive building program. Increases in the outstanding value of mortgage bonds adjusted by the use of the index of financial activity, to be comparable with the data in Table 8, are as follows:

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Costa Rica

As a predominantly agricultural country, Costa Rica had export surpluses in 1938-39 and between 1941 and 1943, due to the increased demand for her exports, to the unavailability of her usual imports, and to foreign expenditures, especially in connection with the Inter-American Highway. The inflationary effect of those export surpluses was not, however, corrected during the periods of import surpluses (1940 and 1944-47) because the latter tended to be financed by new bank credit, fostered largely by the Banco Nacional to avoid the depressing effects of deflation (Table 9). The commercial banks have extended their operations on the basis of the credit thus created by the Banco Nacional. The continuous budget deficits between 1940 and 1946 were caused mainly by a decline in the all-important revenues from import duties and by the influence of rising prices on government expenditures.

Table 9.

Costa Rica: Gross Inflationary Quanta

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The fact that the U. S. dollar was legal tender in Cuba throughout the period under review somewhat reduces the significance of variations in the visible foreign exchange reserves (mainly dollars) held in Cuba; fluctuations may have occurred because of the substitution of pesos for dollars, or vice versa, in current use and in undeclared private holdings. (For example, U. S. Treasury data show an increase in Cuban assets in the United States in 1940 of $11 million, compared with no change as shown in Table 10.) The third line of Table 10 must, therefore, be interpreted with caution. With this reservation, it may be said that the major inflationary pressure from large export surpluses between 1941 and 1947 dwarfed the effects of moderate increases in bank credit, especially in 1946. In 1938 the government deficit was important.

Table 10.

Cuba Rica: Gross Inflationary Quanta

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The inflationary forces were damped down in 1940, and between 1941 and 1944, by an increase in liquidity, some (but not all) of which was lost in the immediate postwar years. More recently, liquidity has grown to a new peak.


During the early war period (1941-43), the large surpluses from international transactions were the only strong inflationary factor in Guatemala. The impact on the domestic monetary situation was in part counterbalanced by the conservative credit and fiscal policies of the monetary authorities. Accumulation of liquid funds by the public also contributed to restrain inflationary forces. After 1943, the export surplus declined in importance as an inflationary factor; however, some expansion of credit and budgetary deficits due to the more liberal fiscal policy of the new Government contributed during the next two years toward maintaining the inflationary quanta at a fairly high level (Table 11). Moreover, there was a marked reduction of liquidity, which indicates some dissaving. In 1946 the anti-inflationary fiscal policy adopted by the Government was a partial offset to some credit expansion and to the moderate surplus on international account.

Table 11.

Guatemala: Gross Inflationary Quanta

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Except for the fiscal years 1944-45 and 1948-49, when the expenditures of the Government increased sharply, fiscal policy in Guatemala has generally accounted for a reduction rather than an expansion in the money supply. Balance of payments surpluses have not been made a basis for credit expansion. The principle that credit and fiscal policy should be used to mitigate the effects of external cyclical fluctuations has been adhered to fairly well; this constituted one of the main objectives of the new banking legislation of 1946.

The Government has also tried to establish a money market where long-term credit needs can be met. The issue in 1947 of 1.5 million quetzales of bonds by the National Mortgage Bank (about one third of which was absorbed by the public) and of 1.5 million by the municipality of Guatemala may have implied, however, a considerable diminution of the savings available that year for other investment. Over-all, the sharp fall in liquidity must be held mainly responsible for the Guatemalan inflation.

The year 1940 was probably one of deflation; the quantum for 1941 (1.9 million quetzales yielding an increase of 10 points in the index of financial activity) is therefore a better basis for inter-temporal comparison.


The inflationary expansion of the Mexican money supply has been chiefly of internal origin. It was most rapid during the war period (1939-45), when a long-term government public works and industrial development program required sustained financing by the Central Bank (credit to the Government and investment in securities) and by other banks. In addition, a large export surplus (1943) added to the inflationary expansion. A further rapid expansion, due to bank credit, took place in 1948-49.

The lack of a well-developed capital market for the channeling of savings to long-term investment, the use of commercial bank credit for speculative activities (especially in real estate), and the increase in the share of income of the wealthy class have made it difficult to control monetary conditions in Mexico. The inflation of income and prices, as well as the high liquidity of the money market, contributed in the recent period (1945-48) to reverse Mexico’s balance of payments position. The loss of reserves in these years, however, was not allowed to produce a corresponding decline in the money supply since the expansion of credit continued.

The fluctuations in the index of liquidity (Table 12) during the period under examination are worthy of notice. As in other Latin American countries, there was a certain degree of latent inflation in 1941-45, when there was some shortage of commodities. This factor helped to check, during those years, the inflationary expansion. In the recent period, on the contrary, the rapid conversion of liquid assets into commodities has added to the other inflationary factors.

Table 12.

Mexico: Gross Inflationary Quanta

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Monetary conditions in Mexico seem to be affected mainly by the general aims of government policy; the effects of an expansion in the money supply escape close control because of the highly speculative attitude of the money market toward the wide fluctuations in the level of liquidity, and of wide changes in the psychological attitude of the public. The balance of payments position seems to be more a dependent than an independent factor.


Some large export surpluses (1942-43), added to the sustained credit expansion (1941-45) which took place after the establishment of the National Bank (1941), were responsible for the inflationary increase in the money supply in Nicaragua during the war. In 1944-45 the expansion in the money supply of internal origin was partly offset by a contraction in that of external origin. From 1944 to 1948, a large volume of imports created an unfavorable balance of payments position. Considerable dishoarding, which more than doubled the rate of monetary turnover between 1944 and 1947, also maintained the inflationary pressure; however, this tendency was partially reversed in 1949.

The increase in government debt in 1944-47 and 1949 (Table 13) reflects increased expenditures, in part due to upward revisions in salaries of government employees as well as to higher expenditures for public buildings, roads, health services, and national defense.

Table 13.

Nicaragua: Gross Inflationary Quanta

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Credit for agricultural and industrial development was expanded after the adoption of the 1940 banking laws, and there was some delayed reaction to the increases in prices and costs brought about by the exchange depreciation of 1938. Credit to importers has also been expanding owing to the profitability of international trade.


For more than two decades Peru has been faced with the problem of large budgetary deficits. During and immediately after the war, this problem became even more acute and seems to have been the prime cause of both the active and the latent inflation. During the war, the rise in expenditures resulted mainly from an expansion in military outlays. From 1945-47, deficit spending continued at high levels; the inflationary spiral, acting through increases in wages, salaries, and prices, seems then to have been the main cause of the deficit. In addition, there were some large expenditures on public works programs and on price subsidies.

Since 1930, budgetary deficits have been financed mainly by various forms of Central Bank credit. This has constituted the basis for a secondary expansion in commercial bank loans. The existing banking regulations were not modified to meet the new situation, and commercial banks acquired a highly liquid position. After the rapid increase of activity in 1946, the expansion of commercial bank credit, including short-term loans to the money market, intensified the inflationary spiral rather than imposing any check upon it.

In contrast to other Latin American countries, Peru did not accumulate large foreign exchange and gold reserves during the war. The comparative immobility of its export prices and some outflow of capital may explain this.

Until 1945 price control measures and an accumulation of liquid assets appear to have damped down the active inflationary forces. In the recent period, the relaxation of price controls in both Peru and the United States in 1946, and the spending of accumulated balances, rendered these checks ineffective; prices rose much more steeply than the inflationary quanta (Table 14) would suggest. Increased imports at higher prices and some speculative activity supported by an expansion in bank loans may also explain the inflationary forces in 1946 and 1947.

Table 14.

Peru: Gross Inflationary Quanta

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The accumulation in 1943-46 of gold and foreign exchange reserves, resulting from large export surpluses and a sustained capital inflow, added to sizable budgetary deficits throughout most of the period under consideration, have been the major threat to monetary stability in Uruguay. However, the adoption of conservative banking policies and the successful direction of the stream of savings to government uses have been of major importance in preventing the usual inflationary spiral from taking place to any dangerous extent. The steady rise, until 1945, of the liquidity index (Table 15) shows the part played by this factor in restraining inflationary forces. As a whole, Uruguay was more successful than any other Latin American country in checking price inflation. Some increase in production may also have helped to prevent the increase in the money supply from having any dangerous effect on prices.

Table 15.

Uruguay: Gross Inflationary Quanta

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In recent years an expansion of bank credit has been an important influence. Although there has been no recourse to the banking system to finance the government deficit, a well-organized capital market has made possible a steady flow of savings to the Government. The influx of capital during the war added to the demand for bonds, so that, the per capita debt is now the highest in Latin America.

Such expansion as there was in credit was chiefly to meet increased normal requirements. A credit policy based on quantitative and qualitative credit control explains the expansion in loans to industry and agriculture and the contraction in short-term speculative loans. The Government has been successful in its anti-inflationary campaign carried out through price controls and credit restrictions.

Expenditures out of accumulated savings to satisfy pent-up demand have, during the recent period, made the balance of payments position of Uruguay the weakest link in an otherwise well-balanced economy. To some extent, however, a building boom in 1946-47 contributed to the inflation, as is shown by the following figures of increases in the outstanding value of mortgage bonds, adjusted by the use of the index of financial activity, to be comparable with the data in Table 15:

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The continuous inflow of gold and of foreign exchange resulting from an expanding program of foreign investment has been the chief factor making for an expansion in the money supply in Venezuela. The internal factors, i.e., banking and budgetary policies, were during some years (1942, 1945, and 1948) a partial offset to this expansionary force.

In 1946 and 1947, the balance of payments surpluses declined. The expansion in incomes, resulting in part from the adoption of developmental programs by the Government, and in part from some dishoarding of accumulated balances, caused a sustained increase in imports. The expansion in the money supply did not, however, cause any considerable rise in prices until after 1946, probably owing to the accumulation of liquid balances in the former period and to the greater availability of imported goods in the more recent period. In the last three years, a sudden decline in liquidity (Table 16) has added intensively to the inflationary pressures.

Table 16.

Venezuela: Gross Inflationary Quanta

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The Government’s fiscal policy, which involved the accumulation of budgetary surpluses, was anti-inflationary during some years. The financing of public works by public bond issues rather than by drawings on Treasury reserves represented a conscious governmental effort to curb inflation. An increasing proportion of the budget in recent years has represented capital expenditures for development. In view of the resources of the banking system, the increase in bank credit has been moderate, reflecting the conservative character of bank policy.

Quantitative Summary

As explained below, the gross inflationary quanta are not themselves directly comparable between countries, either in the form of sums in national currencies or when reduced to index numbers. A comparison of such index numbers does, however, indicate how the rates of growth of inflation differed in different countries.

A brief survey may first bring together some of the points which emerge from the detailed country tables. Nearly every country has a distinctive pattern of inflationary pressures, and the relative weight of each separate force is not easy to estimate. Broadly speaking, however, they may be classified as follows according to the periods in which the influence of each was strongest:

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Some additional light is thrown on the inflationary trends by a comparison of index numbers based on the gross inflationary quanta of the separate countries. This comparison cannot well be begun in 1938, because complete figures for that year are available only for four countries, and because the deflationary situation then prevailing makes its gross inflationary quanta of doubtful value as a base on which to calculate indices. The comparison is therefore begun with 1941 for all countries (Table 17). Because of random fluctuations in the quanta for several countries, the indices have not been based on the quantum for any individual year, but on the average quantum for the period in each country. Thus the indices show the fluctuations below and above the mean for the nine years of the period (six years for Brazil; eight for some other countries).

Table 17.

Indices of Gross Inflationary Quanta, by Countries

(Mean for each country = 100)

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Ten countries only.

Table 17 brings out the fact that, taking unweighted averages for the eleven countries, inflationary pressure was greatest in 1943, and only a little weaker in 1942 and 1944. As far as the gross inflationary factors are concerned, therefore, the war years appear to have been most severely inflationary. Table 17 does not, however, reflect the changes in liquidity exhibited in Table 4; it will be remembered that 1941, 1946, and 1947 were years when liquidity fell, on the whole, quite sharply, and it may not be too far from the truth to suggest that in these years the over-all large increase of financial activity was due mainly to dissaving.



For the purpose of this study, inflation is defined as implying the existence in an economy of dynamic forces which (a) increase the national money income both in absolute terms and relative to the antecedent value of available real resources (i.e., their value at the prices of the beginning of the period observed), and (b) unless offset by opposite forces, bring about an increase in the real income currently enjoyed by one or more groups in the community at the expense of another group or groups; the effect on either set of groups may be either absolute or relative to income. A net inflationary pressure exists when the inflationary forces in the community exceed the anti-inflationary ones. It tends to cause an excess of current expenditure over the antecedent cost of currently available goods.

Savings and liquidity

A distinction is drawn between “intentional” and “unintentional” savings. The former is that which conforms to plans made by the savers independently of changes in prices or other economic magnitudes during the period in which the savings are accumulated. In other words, intentional savings are ex ante savings. Unintentional savings are those created by the impact of changing prices, etc., on unchanging plans—e.g., increases in business reserves derived from prices rising more than costs, or in private reserves due to rationing of consumption while income is unchanged. These unintentional savings are collectively called “Excess Liquidity”; they include, in particular, holdings of cash and bank balances. The development of excess liquidity and its probable effect on other aspects of the situation are discussed above.

Active, repressed, and latent inflation

Given sufficiently rigid and accepted controls, an inflation may show itself not in rising prices but in the accumulation of excess liquidity. Such a development is called a “repressed” inflation, as distinct from an active inflation in which the resources coming into the hands of the public are all spent, with the result that prices rise. The developed result of a repressed inflation, i.e., the situation in which liquid assets exceed the proportion of current income which consumers and investors would hold if there were no controls on consumption or investment, is called “Latent Inflation.”

Net inflationary forces

Inflationary forces are of four main types: (a) a budget deficit; (b) capital formation (including building up of inventories) and the drawing-down of reserves to pay deferred dividends or maintenance; (c) dissaving for consumption purposes; (d) an export surplus. Anti-inflationary forces work along the same channels but in the opposite direction, either by curtailing the flow of money or by increasing the supply of goods, e.g., a budget surplus, personal saving, an import surplus, or a reduction of inventories. Any element in the problem considered in this paper may thus be either inflationary or anti-inflationary. It is, however, convenient to be able to use a standard formulation, and the convention that has been adopted here is to regard all magnitudes capable of measurement as positively or negatively inflationary. Provided reasonably adequate investment statistics are available, (a), (b), and (d) above can be measured ex post (i.e., as realized), and it is not unreasonable to assume that their observed total measures fairly closely their intended (ex ante) magnitude. Some changes between plan and realization are inevitable, especially in an active inflation; but it can be inferred that in the aggregate the change in the total will be relatively small, especially as the separate elements will be affected in opposite directions. This, however, is not true of saving, upon which the main changes between plans and outcome are concentrated. Hence (c) above—intentional saving or dissaving (including some intentional changes in undistributed profits)—has been treated here as a positive or negative anti-inflationary element. Using the positive forms, the net inflationary forces are expressed as Government Deficit + Investment + Export Surplus—Intentional Saving. The first three terms in this expression are called the “gross inflationary forces.”

Gross inflationary quantum

Although intentional savings are not directly measurable, they will be equal to the gross inflationary forces in any year in which there is no inflation. Moreover, they are likely, in the absence of structural disturbances in the economy, to be proportional to the national income. Where, as in many Latin American countries, the national income is unknown, an approximation to it, called the “Index of Financial Activity,” may be substituted. This is derived by multiplying the average volume of money in the year under review by the velocity of circulation of bank deposits in that year and expressing the result as a percentage of the corresponding product in a non-inflationary base year. Hence, if the gross inflationary forces for any given year are multiplied by 100 and divided by the index of financial activity for that year, they will indicate an inflation if the dividend exceeds the gross inflationary forces in the base year. The expression is called the “gross inflationary quantum.” If the “gross inflationary quantum” increases over time, it will be assumed that intentional savings will no longer suffice to offset the inflationary activity recorded; and that, therefore, a net inflationary pressure will be exerted. Series for the index of financial activity are given in Tables 1-3 above, and for the gross inflationary quanta in Tables 6-16.


By expressing for each country the gross inflationary quantum for each year as a percentage of its mean value for the period under review, subsidiary series are derived which are to a limited degree internationally comparable. While they give no indication of the relative intensity of the inflationary forces in any two countries at any one time, they do indicate roughly the relative trend over time of the inflationary forces in the different areas. If in one case the index numbers are tending to grow larger, it is probable that inflation there is becoming more intense, in comparison with another country for which the indices are stable or are tending to decrease. Such comparisons are made above (see Table 17).

Government deficit

The government deficit should represent the excess of expenditure over receipts (other than borrowing) for all taxing authorities. Since, for Latin American countries, comprehensive statistics of budget deficits are frequently not available, use has been made of the net increase in the internal government debt adjusted for changes in government deposits, which reflects with reasonable accuracy the gross inflationary effect of these deficits.


Strictly defined, the inflationary force generated by business consists in the excess of businessmen’s current expenditure over their current recovery through prices of the costs (including depreciation and profits-loading) of previous output. Parallel effects are caused by individuals whose expenditure exceeds their income. No complete figures of investment are available for Latin America, and only two aspects have been studied here: (a) increases in bank credit, other than to the Government, account for most of the domestically-generated investment expenditures other than those covered by current saving; (b) an exception is private construction work financed by the issue of mortgage bonds by ad hoc institutions. These bonds, being subscribed by the public, are not directly inflationary, but where they increase sharply from year to year they may absorb the limited savings otherwise available for other forms of investment, and be therefore indirectly inflationary.

Balance of international payments on current account

Other things being equal, a “favorable” (active) balance of international payments on current account is inflationary because it increases the money income within a country without any simultaneous increase in the goods available there for purchase. Correspondingly, an “unfavorable” (passive) balance is per se deflationary, though this effect may of course be offset if the imported goods are purchased out of newly created credit. The terms “export surplus,” “import surplus” are used in this paper for convenience to indicate an active or a passive balance, respectively. In order to avoid the complications caused when capital goods are imported in consequence of foreign investment in the importing country, the change from year to year in the local currency equivalent of the country’s monetary reserves has been used for the export or import surplus.

March 1950


Mr. J. K. Horsefield, Chief of the British Commonwealth Division, European and North American Department, is a graduate of the University of Bristol, and was formerly Lecturer in Banking at the London School of Economics and Assistant Secretary in the British Ministry of Supply. He is the author of The Real Cost of the War (Penguin Books) and articles, mainly on British banking history, in Economica and elsewhere.


J. Keith Horsefield, “The Measurement of Inflation,” Staff Papers, Vol. I, No. 1 (February 1950), pp. 17-48.


Ibid., pp. 21-22.


For a description of the gross inflationary quanta, see the Appendix.


Cf J. Ahumada and A. Nataf, “Terms of Trade in Latin American Countries,” Staff Papers, Vol. I, No. 1 (February 1950), pp. 123-35.


For a statement on the effect of building booms in certain cases, see the Appendix, section on Investment.


The detailed comments which follow were prepared in collaboration with Mr. B. Brovedani. The statistics were partly furnished by the Latin American, Middle Eastern, and Far Eastern Department of the Fund.