The bank was established by Law 632, passed on July 20, 1928. On April 20, 1929, its name was changed to Central Bank of Bolivia, and on July 1, 1929, the bank officially began operations. According to Law No.632, July 11th of 1928, the Central Bank of Bolivia was born with the following faculties:

• make loans and rediscounts to commercial banks;
• receive deposits from the public, associated banks and the state;
• officiate as a clearing house for checks;
• buy and sell minted gold and gold bars, transfers by cable and telegraph, money orders and checks payable at sight;
• buy, sell and discount money orders paid overseas and letters of foreign exchange proceeding from transactions of imports and exports;
• buy, sell and discount bank acceptances, money orders and commercial payments;
• obtain money from loans within the country or from overseas;
• officiate as the financial broker of the state;
• maintain the monopoly of money issuing;

The historical records of the creation of the Central Bank of Bolivia go back to the Mint House of Potosí, founded in 1572, which had the monopoly of issuing silver coins during the colonial period, a right that was preserved until 1867, when it was authorized to issue banknotes for the Bolivian Bank. In 1911 the Bank of the Bolivian Nation was established, as a mixed bank with a state participation of 78.4%, while the private shares, both national and foreign, reached 21.6%. This bank was organized on the base of the Bank of Bolivia and London, which was a bank of private capital. The banking reform of 1913 granted the Bank of the Bolivian Nation the monopoly of issuing, ratified by the Law of January 1st of 1914, and the right to issue up to 150% of its capital.

The monetary system of the Republic of Bolivia in 1825, was the same as the one of the colony, it was bi-metallic. Even though gold coins were minted between 1831 and 1857, they barely reached 8% of the total minted, in the year of largest issue. In this sense, despite the consecutive monetary laws (1848, 1863, 1869, 1871 and 1872) which determined the minting and fine content of gold and silver coins, in practice, since 1858, no more gold coins were issued, so that the valid monetary standard was based on silver.

Due to the permanent depreciation of silver, because of the international process of changing the bi-metallic standard gold-silver to the gold standard, which began in the1870’s, there was a debate in Bolivia to adopt the gold standard in 1890. Nonetheless, the silver standard was changed for the gold standard only by 1895. Through the Law of November 26th, 1895, it was recognized „means of payment character of the pound sterling, for amounts exceeding two thousand bolivianos, at the valid exchange rate in London, in respect of the value of silver in the same market”.

Subsequently, through the law of November 30th of 1904, the exchange value of the pound sterling was determined at Bs. 12.50, the payment of 50% of customs duties in gold at the previous exchange rate, free export of silver coins, and the prohibition of their import. Finally, through the law of December 5th of 1908, it was acknowledged that English and Peruvian pounds sterling fulfilled two functions of money: unity of account and means of payment, at an exchange rate of 12.50 Bs/£, although it was also arranged to mint smaller coins of silver and nickel. The silver coins were minted until 1909, but in decreasing quantities. With the purpose of financing the definitive introduction of the gold standard, the external credit from J. P. Morgan for £500,000 was used to constitute the necessary reserves.

Theoretically, the main characteristics of the gold standard were:

• the national monetary unit was defined by its weight in gold, and the Central Bank bought and sold gold at a fixed price;
• banknotes were convertible to gold;
• exchange rates were set based on the fine content of gold in the national currency;
• free import and export of gold;

Therefore, the means of circulation in each country depended on the international movements of gold, in other words, on the international reserves in each country. However, there were differences with respect to the composition of the reserves and the domestic circulation. Only England, Germany, France, and the United States had gold reserves and gold coins. Other countries had reserves in gold, and the domestic means of payment were made of gold, silver, fiduciary coins and paper. There were countries with reserves mainly in foreign currencies, and a monetary supply made of gold and silver coins, and banknotes. In Latin America there were reserves only in foreign currencies, and the domestic circulation was divided among gold, silver and banknotes.

In the case of Bolivia, the adopted gold standard worked in respect of the link between the monetary supply and the level of reserves of the Bank of the Bolivian Nation, an institution created in 1911, and to which in 1914 was granted the exclusivity of issuing money. This monetary system had other deficiencies:

• the laws of 1904 and 1908 did not define the national monetary unit, the Bolivian boliviano, in terms of its fine content of gold;
• therefore, the currency rate fixed, at Bs. 12.50, was not based on its fine content of gold, because it did not exist. The effect was a permanent fluctuation of the exchange rate, although until 1912 the variations were not significant;
• the free exchange rate was suspended in 1914;

The obligation of handing over foreign exchange was the second mechanism that assured the Central Bank of Bolivia the necessary amount for its management. It emerged on May 19th of 1932 with the Law of Exchange Rate Control. This disposition established two essential aspects. First, it concentrated in the Central Bank of Bolivia the obligatory sales of 65% of the exchange generated by the exporters. Second, it gave the Bank authority to fix the exchange rate but removed its function as exchange distributor, by creating the Board of Control of Money Transfers, through which foreign exchange was distributed. On this Board were representatives of mining entrepreneurs, importers, industrialists, and the Bank.

However, a later regulation changed the content of the law, suspending the obligatory handing over of exchange, and determining that the exporters should hand over their exchange to the Central Bank of Bolivia after deducting their expenses overseas.

Although, the measure was revised, the important thing was that a definitive change was initiated in the orientation of economic policy in the government of President Daniel Salamanca, who was one of the most noted liberals in Bolivia. „The great theorist of political and economic liberalism, who challenged, in 1915, the project of obligatory sale of overseas drafts [to the government]”, abandoned liberal orthodoxy and gave way to interventionism.

The growing necessity of foreign exchange pressured the government to implement more active dispositions. In effect, in December of 1932, the government expropriated a part of the reserves of gold of the Central Bank, the Mercantile Bank, the National Bank of Bolivia and, also of the Association of the Mining Industrialists, to a total value of £470,58897, a measure that motivated protests and execution of legal actions on behalf of those affected, including the Central Bank of Bolivia, to impede the measure but without any success. However, the Central Bank of Bolivia in protest resolved to suspend advances of loans conceded to the government.

It is important to note that the fixing of the exchange rate and the shortage of foreign exchange determined the appearance of a parallel exchange rate in 1932.

Useful links

Currency of Bolivia:

Bolivian boliviano

List of Central Banks:

Central Banks

Official website of Central Bank of Bolivia:

www.bcb.gob.bo

The Cultural Foundation of the Central Bank of Bolivia:

www.culturabcb.org.bo