The Central Bank of Chile was created by decree law No. 486, 21 August 1925, under the government of President Arturo Alessandri Palma. This initiative arose as one of four projects presented that year by the Kemmerer mission. That mission, which was hired by the government of the time to restructure Chile’s monetary and financial system, was headed by Edwin Walter Kemmerer, professor of economics at the University of Princeton. The projects included the monetary law, which sought to stabilize the value of Chile’s currency and the gold standard as the basis of the country’s monetary unit, the creation of the Central Bank of Chile, the passing of the general banking law and the general budget law.

The same dispositions established in decree law No. 486 authorized the creation of an organizing commission for the Central Bank of Chile, whose express purpose was to develop the institutions necessary to ensure the functioning and management of this body, and bring it into being. Thus, the Central Bank of Chile opened its doors to the public on Monday, 11 January 1926.

The institution began activities with a nominal capital of 150 million Chilean peso, of which about 13% was contributed by the State, 40% by Chilean and foreign commercial banks operating in Chile and the remaining 47% by the public, through a share subscription.

Ten people made up the new institution’s board of directors. The President of the Republic had the right to name three, Chilean commercial banks two, foreign banks one, representative associations three, and the shareholding public one. This same board was empowered to appoint the governor and vice-governor of the Bank, with the first officers being Ismael Tocornal Tocornal and Francisco Garces Gana, respectively. One fundamental aspect implicit in the functioning of the Central Bank of Chile, which resulted from how the board of directors had been constituted, was its ability to function autonomously and independently. From the legal point of view, this meant providing the institution with its own legal status, independent of the Government.

Despite this, the Central Bank of Chile remained subject to the general supervision of the Superintendent of Banks, created by the General Banking Law (Ley General de Bancos), whose original text was approved by decree law No. 559, 26 September 1925.

In this context, the objectives of the Central Bank of Chile were essentially of a monetary nature. In the first place, the Bank was to watch over the stability of the value of Chile’s currency under a fully convertible gold standard regime and, in the second place, it was to regulate currency according to the needs of the monetary market, for which the basic constitutional law assigned the Central Bank of Chile a monopoly on issuing bank notes.

Finally, the law required that the Central Bank of Chile permanently hold a gold reserve equivalent to no less than 50% of total emission. If it were to fall below this limit, it would have to pay a fine to the state proportional to the deficit.

The first basic constitutional law of the Central Bank of Chile was in force until July 1953, when the decree with the force of law (Decreto con fuerza de Ley) No. 106 was approved, giving rise to the second basic constitutional law of the Bank. This new law treated the Central Bank of Chile as an autonomous institution of indefinite duration, whose fundamental objective was to “encourage the orderly and progressive development of the national economy through credit and monetary policy, avoiding any inflationary or depressive tendencies, and thus permitting the maximum use of the country’s productive resources.”

At this stage, then, the Central Bank of Chile began to play a more active role in developing the national economy, giving priority to the full employment of productive resources, without leaving aside its specifically monetary functions.

In this sense, the new legal text empowered the Central Bank of Chile to grant credits to the State and other state bodies. Despite the authority granted to it to carry out these operations, the bank nonetheless was required to discount bills of exchange withdrawn by the Caja Autonoma de Amortizacion de la Deuda Publica (the body responsible for paying off public debt) and charged to the national treasury (Tesorero General de la Republica), in order to regularize state revenues.

Moreover, on this occasion, the presence of four parliamentarian representatives on the board of the Central Bank of Chile was ratified, and these were included during the period covered by the previous basic constitutional law.

The Central Bank of Chile’s third basic constitutional law came into effect on 30 March 1960, through the decree with the force of law No. 247. This new law maintained the same objective assigned to the Central Bank of Chile in its previous legislation, but introduced several important modifications. Among others, it changed the composition and the form of appointing board members; it created the Executive Committee, consisting of the Bank governor, the vice-governor and the general manager, responsible for implementing the agreements reached by the board of directors and managing the institution; and it expanded the Bank’s powers in terms of controlling credit and setting the reserve requirements and its different forms.

Similarly, through the decree with the force of law No. 250, 30 March 1960, the Central Bank of Chile merged with the Foreign Exchange Commission (Comision de Cambios Internacionales), thus empowering the Central Bank of Chile’s executive committee to dictate the general rules governing foreign trade and foreign exchange operations.

The Central Bank of Chile’s fourth basic constitutional law came into force on 28 June 1975, through decree law No. 1,078. The most relevant aspects of this law include the following:

1. The Monetary Council was created, as a body of ministerial rank, responsible for establishing policy governing monetary, credit, capital market, foreign trade and customs, foreign exchange, and saving operations, in line with the rules established by the Executive (national presidency).
2. The Central Bank of Chile became an autonomous institution under public law, which can only carry out those operations for which it has been expressly empowered, but which does not form part of the State administration, so in the case of any matters not covered by its basic constitutional law, the Bank and its personnel were to be ruled by private sector regulations
3. The objective of the Central Bank of Chile was to ensure the orderly and progressive development of the national economy, through policies governing monetary, credit, capital markets, foreign trade and foreign exchange, saving and other operations, as referred to by law.
4. The Central Bank of Chile was provided with its own capital, which ceased to be divided into Class A (State), B (Chilean banks), C (foreign banks’ branches) and D (public) shares, with an expropriation procedure established in the case of classes B, C, and D shares in the case of these not being acquired by the Central Bank of Chile through agreement with their owners.
5. The Central Bank of Chile was expressly empowered to grant credits to the State by virtue of special laws, but in any case it was established that the credits granted during a calendar year could not exceed the maximum of fiscal borrowing from the Bank established by the Monetary Council for that same year.

Finally, the basic constitutional law was amended by Article 27, DL No. 3001, 27 December 1979, which established that in no case would the Central Bank of Chile be allowed to acquire for itself discount promissory notes from the General Treasury or other notes of credit issued directly by the State, and nor would it be able to provide credit directly to bodies or companies from the private or public sectors, with the exception of financial institutions.

To meet its objectives, the Central Bank of Chile has a series of operating functions and attributes regarding the following areas: the issue of bank notes and coins, the regulation of the amount of money in circulation and credit, the regulation of the financial system and the capital market, faculties to preserve financial system stability, functions as part of its role as fiscal agent, attributes in terms of international questions, attributes regarding foreign currency operations and statistical functions.

The essential characteristics of these functions and attributes are described below:

1. Emission: The Central Bank of Chile has the sole authorities to issue bank notes and coins. Bank notes and coins issued by the Central Bank of Chile are the sole, legally recognized medium for payment, enjoying unlimited circulation, and legal validity throughout the country.
2. Regulation of the amount of money in circulation and credit: The Central Bank of Chile can open lines of credit, provide refinancing and discount or rediscount negotiable documents in Chilean or foreign currency, for banking companies and financial firms; set reserve rates that, in proportion to deposits and obligations, must be met by these bodies and savings and credit cooperatives; cede documents from its lending portfolio or investment to banks and finance companies or acquire from same documents for its lending or investment portfolios, and finally, carry out actions on the open market.
3. Regulation of the financial system and the capital market: The Central Bank of Chile is empowered to regulate the deposit of the public’s funds by banking or finance companies and savings and credit cooperatives; to set the maximum interest rates that can be paid by these bodies on demand deposits; decide the rules and limitations on banks and finance companies in terms of guarantees and warranties in foreign currency; establish the ratios between asset and liability operations on the part of banking firms, finance companies and savings and credit cooperatives; regulate the functioning of compensatory bodies; and authorize indexing systems to be used in credit operations involving Chilean currency by banks, finance companies and savings and credit cooperatives. In credit operations using Chilean currency that does not form part of these bodies, any kind of indexing system may be agreed upon, without the approval of the Central Bank of Chile.
4. Faculties to ensure the stability of the finance system: These attributes include two essential elements: the first is providing banks and finance companies in the case of urgency and for a period of no more than 90 days, when these face a temporary liquidity problem, with operations that fall within the function of lender of last resort that corresponds to Central Bank of Chiles; and second, grant credits or acquire assets from these same bodies when a contract has been proposed or these have been declared in bankruptcy.
5. Bank functions as fiscal agent: The Central Bank of Chile, upon the request of the finance minister, may act as fiscal agent in the contracting of external and domestic credits and in those operations compatible with the institution's goals.
6. Attributes in international issues: The Bank has the faculty to participate and operate with foreign or international financial bodies; contract all kinds of credits abroad; issue securities and place them abroad; grant credits to international or foreign states, Central Bank of Chiles, banks and financial institutions, when the purpose of these credits is to meet Bank objectives; and maintain, manage and dispose of its foreign currency reserves in the country or abroad.
7. Faculties in terms of foreign exchange operations: The Central Bank of Chile is empowered to formulate and manage foreign exchange policies. Nonetheless, foreign trade policies correspond to the President of the Republic, and shall be implemented through the different ministries and the national customs service. The Central Bank of Chile nonetheless maintains information systems on foreign trade operations with regard to their foreign exchange implications (returns and export liquidation, import coverage).
8. Statistical functions: The Central Bank of Chile must publish opportunely the main national macroeconomic figures, including those of a monetary and foreign exchange nature, the balance of payments and national accounts.

Useful links

Currency of Chile:

Chilean peso

List of Central Banks:

Central Banks

Official website of Central Bank of Chile:

www.bcentral.cl

Ministry of Finance of Chile:

www.hacienda.gov.cl