Exchange Control in Peru

December 6, 1948

LIMA, PERU—“Let observation with extensive view, survey mankind from China to Peru.” So wrote Samuel Johnson in the eighteenth century, and his advice is still good today, especially to a student of the world currency chaos. In China he can see what happens when inflation runs wild and when it takes many millions of the monetary unit to buy as much as one American dollar. And in Peru he can see what happens when an attempt is made to prevent the effects of inflation not by stopping its cause—the increase of money and credit—but by the strangulating device of exchange control.

This is not to imply that there is anything unique about inflation and exchange control in Peru. What is most instructive about Peruvian inflation and exchange control is precisely its typicality.

In a small country like this—with a relatively simple economy almost wholly dependent on foreign trade, a country that must import or die and export or die—the effects of exchange control stand out in startling relief. It has been the subject of daily battles carried on in clamorous headlines between the two leading Lima newspapers. All over its front page, with charts, statistics, and letters from exporters, La Prensa demands the abolition of exchange control while El Comercio, supporting the importers, demands that “the dollar must be held at 6.50 soles.”

The Peruvian crisis is instructive above all for the light it throws on the so-called world dollar shortage. European beneficiaries of the Marshall Plan have convinced American officialdom that their dollar shortage is the result of the destruction and dislocation of the war. But Latin American experience serves to remind us that any nation can have a dollar shortage and that an overvalued currency supported by exchange control is the certain way to get it.

The official rate for the sol is 6.50 to the dollar. This official rate has been retained in spite of mounting internal inflation. In August this year the total money supply in Peru was about five times the supply in 1940. Yet the 1947 physical output of Peru was in most products below 1940. The result is reflected in a rise in living costs by this September to 379 percent of the 1934–36 level and in wholesale prices to 437 percent of that level.

Even these figures understate the rise. For since January this year government authorities have been calculating the index number on the basis of official price ceilings and not on actual prices prevailing in the free or black market. In the legal free market here the sol has been selling around fifteen to the dollar. Until this September, however, exporters, with the exception of exporters of gold bars, were required to turn over to the government all their dollar exchange receipts at the official 6.50. By a decree of Sept. 6 exporters were required to turn over to the government after export taxes only 65 percent of their dollar receipts at the 6.50 rate. They were allowed to keep “exchange certificates” for the remaining 35 percent which they could use for imports or sell in the open market for about fifteen soles to the dollar. Even with this partial relief exporters have been squeezed between mounting domestic costs and the requirement to sell most of their dollars to the government, in effect at 40 cents apiece.

The result has been inevitable. In spite of a record world price for most of Peru’s exports—consisting chiefly of cotton, sugar, petroleum, copper, lead, zinc, silver, and gold and record exports measured in soles, many of Peru’s chief exports have been declining in actual quantities. Because of this and the abnormal incentive given to imports by the overvalued sol (i.e., by the privilege of buying the dollar at 40 cents), Peru has managed in 1947 to achieve the first unfavorable balance of trade in its history.

Exchange control has intensified the very dollar shortage it was designed to cure. It has been dislocating and strangling Peruvian production. This is the background of the present agitation for return to a free-exchange system.