Money Doctors and Latin American Central Banks at the Onset of the Great Depression

Abstract

AbstractMany of today's central banks in Latin America were established in the interwar period. During the 1920s, most of them were designed under the influence of money doctors. The main mandate of these new institutions was to cope with inflation and provide exchange stability. This article analyses how these central banks responded to the onset of the Great Depression. I show that, in accordance with the requirements of the monetary regime, central banks initially acted to prevent capital outflows and to protect their gold reserves. This led to a credit drop to the private sector. Additional credit was made available once governments decided to intervene more actively in the economy, thereby disregarding the advice of money doctors. The central banks that were founded in the 1930s, and the reforms introduced to those already operating, were conceived to face the effects of the crisis.