Few countries have suffered sustained inflation rates lasting for more than 100 years, often in the double-digit and occasionally triple-digit ranges, but that has been a fact of economic life in Chile.
For a country that has persistently succumbed to the temptations of paper money excesses, Chile was slow to accept the idea that paper could circulate as money. Paper money was rarely observed in circulation before 1860, and Chileans were known for an abhorrence of paper money that only began to soften after 1850. From the colonial period until 1879 Chile remained on a bimetallic standard.
In 1879 Chile began its long inflationary career when Chilean banks stopped redeeming bank notes in specie, turning Chilean bank notes into inconvertible paper money. A fall in export prices precipitated the crisis and the War of the Pacific (1879–1882) pitted Chile against Peru and Bolivia for control of the nitrate mines in the Atacama Desert.
During the nineteenth century countries on a bimetallic or gold standard often suspended convertibility during war, but Chile never permanently returned to convertibility, although abortive efforts were made in 1887, 1895 through 1898, and 1925 through 1931. Although success in the War of the Pacific gave Chile control over the nitrate mines, Chile’s exports continued to fall. Between 1878 and 1915, Chile’s share of the world’s copper production declined from 44 percent to less than 5 percent. The decline in export earnings, coupled with heavy foreign debt and internal inflation, crippled Chile’s effort to reassert monetary order.
Between 1879 and 1904 inflation registered an average annual rate of 2 percent, a modest inflation rate but significant in light of the worldwide trend of deflation during that period. Annual inflation averaged 7 percent between 1904 and 1931. By 1914 prices were growing 10 percent a year. From 1931 until 1955, despite the depression decade, price increases averaged 20 percent. In 1931 inflation stood at 8.5 percent, rose to 15.1 percent by 1940, and crested at 47.8 percent in 1952.
From the 1950s through the 1960s annual inflation rates fluctuated in the 20 to 40 percent range. In 1971 inflation, repressed by wage and price controls, fell to 20 percent, but in 1972 inflation soared to 178 percent. As inflation accelerated in 1973 General Pinochet led a military coup that overthrew the democratically elected socialist president, Salvador Allende, and established a military dictatorship noted for brutality and violations of human rights.
As inflation accelerated in the 1970s, rising to 374 percent in 1974, the right-wing military dictatorship used its power to enforce a strict monetarist anti-inflation policy, relying upon restricted monetary growth rather than price controls to tame inflation. Monetarists argue that inflation is solely a function of excessive monetary growth rate, and the optimal economic policy is a constant, predictable 3 to 5 percent annual growth rate in the money supply. The Chicago school of economics, a leader in monetarist economic theory, had become influential in Chilean universities, and the Chilean war against inflation became a test case of the monetarists’ anti-inflation policy.
Despite the strict monetarists’ diet of slow money growth, inflation subsided slowly in Chile. By 1981 the inflation rate stood at a hefty 35.1 percent, but it fell below the 10 percent level the following year. A major economic slowdown in 1982 led the government to ease up on its unforgiving monetary policy and inflation began to creep up. Toward the end of the decade inflation was in the 30 percent range. Chile began the 1990s faced with an inflation problem of moderate proportions by its own historical standards.
