payments. The changes in the Argentine balance were in the same direction, and scarcely less marked. Yet the movement of Buenos Aires exchange, as shown by our chart, appears insignificant as compared with that of Valparaiso exchange. The maximum rise of Buenos Aires exchange was but 13 per cent. As has been intimated in an earlier place, the reason for this marked difference in the movements of these two exchanges is to be found in the different character of their monetary bases. The Buenos Aires exchange is a gold exchange; that of Chile is a paper exchange. The currency of Chile is depreciated inconvertible paper. There is no specie in circulation, and no specie basis for foreign exchange transactions.

In a comparative summary of South American exchange conditions it is impossible to consider adequately the peculiarities of the paper exchange mechanism, or the forces which govern its operation. In Chile foreign exchange is bought with and sold for paper pesos. The value of the peso, and hence the rate of exchange of bills, depends on a number of highly unstable factors - on the quantity of paper in circulation relative to the domestic demand for money, on rumors as to the probability of the conversion of paper money into specie at some fixed date, on the degree of confidence reposed in the government, and hence on political changes, political gossip or scandal, a controversy in Congress, a political attack in the press. In a country like Chile, whose economic life (and public revenues) depend so largely upon foreign trade and foreign capital, the best single measure of the value of the paper peso is the rate of foreign exchange, which indicates what the peso is worth in terms of foreign gold moneys.' Anything which

1 In other words, the rate of foreign exchange of a depreciated paper currency is substantially identical in meaning with a statement of the value of the depreciated currency in terms of a premium on gold.

affects, or is likely to affect, the conditions of supply of and demand for bills of exchange, will exercise a powerful influence on the (gold) value of the currency, or in other words, on the rate of foreign exchange. If a strike is threatened in the nitrate fields, down goes exchange, for there is danger that the supply of exchange will be reduced by reason of a reduction of exports of nitrate. If there is a rumor that the Chilean government intends to buy submarines in the United States, down goes the exchange again, for the purchase will increase the demand for bills of exchange, and thus drive down the rate.1

This condition of unstable currency goes back into the nineteenth century. The present system began with the law of July 31, 1898, which authorized the emission of 50,000,000 paper pesos. At the same time all bank notes previously issued were taken over by the government. Since 1898 the quantity of paper in circulation has been increased to 159,840,119 pesos (December 31, 1916), of which 150,000,000 have been emitted under the act of 1898.2 The law of 1898 provided for a conversion fund, by means of which the conversion of the paper money into gold at the rate of 18d. per paper peso was to begin January 1, 1902. Conversion was postponed, however, until 1905; and before that date was reached a further postponement to 1910 was announced, and then to 1915. Meantime, the gold value of the paper peso, as indicated by the rate of foreign exchange, after maintaining a relatively high level through 1904 (about 16.5d.), declined gradually, and for the period 1908-13 ranged between 9.6d. (the average for 1908) to 10.8d. (the average for 1910). On the outbreak of war, exchange fell still lower, reaching 7 d. in January, 1915,

1 Sterling exchange in Valparaiso, it will be remembered, as well as everywhere else in South America, is expressed in terms of British pence.

Extracto Estadistico, p. 65.

a depreciation of 61 per cent from the statutory par. Conversion was again postponed to January 1, 1917, and then to January 1, 1919. In the summer of 1918, with exchange at 16-17d., there appeared to be a strong prospect that specie payments would this time be attempted, at the par rate of 18d. named in the law of 1898. This prospect was strengthened by the considerable inflow of gold in 1917. Notwithstanding the reluctance of the nations at war to part with gold, Chile secured their consent to considerable shipments of specie, especially from the United States, as a condition of the sale of nitrate. The following figures show the specie movement for the years 1914-17.

In addition to these gold imports the Chilean government had collected (prior to the war) a gold fund with which to undertake the conversion of the 160 millions of paper pesos in circulation. At the end of 1916 this fund amounted to 87,759,702 pesos (gold), and was deposited in banks of foreign countries, as follows:

1 Most of the gold imports of 1917 were in connection with the purchase by the United States government in the fall of 1917 of 200,000 tons of nitrate which had belonged to German firms (see above, p. 442). This sale had a double purpose. The United States wanted nitrate; Chile wanted to secure the portion of the Conversion Fund (see text) which was in Germany - about $10,000,000 -- and have it transferred to Chile. A three-cornered arrangement was therefore made. The United States bought the 200,000 tons of German nitrate; the United States instructed the Federal Reserve Board to allow the shipment of the equivalent in gold to Chile; the German government arranged the payment in Germany to the former owners of the nitrate (probably in government bonds).

Extracto Estadistico, 1917, p. 64; and Pan American Union, Bulletin of April, 1918, p. 537.

By March, 1918, the conversion fund had grown to 94,000,000 pesos (gold).1

But since the signing of the armistice, there has been a complete reversal of the Chilean exchange situation. The chart at p. 426, shows the fall of Valparaiso exchange in the closing months of 1918. From 16ğd., the rate for September, we have a fall to 9 d. by December 24. In other words, in a space of three months, the rate of exchange returned approximately to the pre-war level. Nothing could indicate more strikingly the fact that the rise of Chilean exchange was purely a phenomenon of war, the consequence of the abnormal demand for nitrate. With the armistice the large purchases of nitrate ceased. The correspondent of the South American Journal, writing in January, 1919, stated that "there have been practically no sales at all since October," tho the stocks in Chile were very large; and he estimated that the quantity still in the hands of the British government for sale amounted to 600,000 tons. The price had fallen to about 9s. per quintal, and the oficinas had cut down to about half their normal production.2

3. Brazil

The experiences of Brazil during the war present a rather striking paradox. Apparently she was the hardest hit and at the same time perhaps the most benefited, in a material sense, of all the Latin American

1 The Economist (London), January 18, 1919, p. 70.

2 South American Journal, January 11, 1919, p. 77.

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countries. The effect of the war upon Brazilian finance, upon the currency, the course of foreign exchange, the foreign trade, has been distinctly less favorable than in the case of the other leading countries.

On the other hand, the serious dislocation of trade occasioned in virtually all Latin American countries by the war has in the case of Brazil brought about industrial and commercial changes which appear to mark the beginning of a new period in its economic life. Much attention has been devoted to cattle raising in southern Brazil.1 Great packing plants, financed chiefly with American capital, have been built. There has also been a marked increase in the production of cotton and of cane sugar, for which the soil of Brazil, in the long coastal belt stretching from São Paulo to the Amazon, is preeminently fitted. By an arrangement with the Japanese government several thousand Japanese colonists have been brought to Brazil to teach the Brazilians how to grow rice that is cheap and of good quality. Equally significant is the development of Brazilian minerals, of which the state of Minas Geraes, just north of Rio de Janeiro, has a rich and varied supply. The iron deposits, among the largest in the world, had lain dormant before the war; but under the stimulus of war and the difficulty of importing metal products, smelting operations and the manufacture of high grade steel products have been undertaken. The mineral which the war has done most to develop in Brazil is manganese. The chief sources of supply prior to the war were Burma and Russia. The Russian supply was cut off during the war; that of Burma has about doubled since 1913. Brazil, meantime, has come forward as the principal source of manganese.

1 According to the latest official figures Brazil has 30,000,000 head of cattle, about the same number as Argentina, but of poorer quality.