Peso Off the Peg

As it must to all nations, the postwar problem of living within its means last week caught up with Mexico. Mexico's postwar hoard of $350 million in gold and foreign exchange had dwindled to $114 million. Furthermore, it was a state secret whether this was usable or whether it included the necessary backing for the nation's currency. Overnight, the peso, which for eight years had been exchangeable at 4.85 to the dollar, was cut adrift. In shops, the prices of imported goods which Mexico could no longer afford were boosted from 30 to 50%.

Mexico faced the situation which has already begun to confront most Latin American countries.

Thus ended a boom which began even before Pearl Harbor. During the war it was nourished by U.S. purchases of war materials, and after the war it was sustained by unspent dollar balances. The boom had done great things for Mexico. It had built new roads and had equipped them with so many new cars, new trucks, new buses that the country's faithful little burros were beginning to be pushed aside. It had reared a whole new generation of modern buildings in the capital, including a race course and two new bull rings. It had started new industries. It had put 8,000 tractors in Mexico's fields and 100 new diesel locomotives on her tracks. It had given rich Mexicans nylon stockings, electric refrigerators, radios, and 1,000 other luxuries. It had given Mexico a taste of a whole new way of living.

Mexico had tried to live on a scale to which she had never been accustomed. For months the end of the boom had been in sight. In June 1947, luxury imports were forbidden. But Mexicans still wanted the good things of life. The end might be in sight, but there was no way of stopping the boom mentality until the end had actually come.

The Debacle. Finance Minister Ramon Beteta had denied repeatedly that devaluation was coming. When the change came, the public was caught flatfooted. Some drew their bank savings and went on buying sprees. The foreign credit manager of one bank arrived at his office late to find careless clerks doling out precious dollars at the old rate. In the Calle Isabel la Catolica, flooded by recent rains, money changers stood shin deep in water, clinking handfuls of gold coins and arguing prices. They offered six and seven pesos for a dollar and readily went higher. Anxious travelers and others who urgently needed dollars paid 10, 12, and even 18 to 1.

As usual, in such cases, the collapse was brought about mainly by a flight of capital. Smart money men established bank accounts abroad. The refugee capital is now estimated at $70 to $100 million. Unrestricted dollar purchases reached as high as $1,000,000 daily in June. When, on the three days preceding the devaluation, they reached $2,000,000 daily, the government was forced to act.

By taking the peso off the peg and establishing a natural barrier to unnecessary imports, Finance Minister Beteta did what some of Mexico's sister republics may have to do. Tighter controls would have invited abuse in a country in which political privilege is hard to control. It would have stimulated the already brisk smuggling trade and set up an even more complex bureaucracy than Mexico already has. And it would have created a black market in peso-dollar trading.

By freeing the peso, Beteta hopes to make Mexican exports stronger competitors in the world market, perhaps stimulating Mexico's production. And the favorable position of the dollar would probably revive the lagging tourist industry. But while production might increase, Mexico's ambitious industrial expansion would be slowed down--perhaps a blessing in disguise, since it was getting too hasty to be sound.

Ten Hours for Lunch. What devaluation means to the average Mexican is something else. With devaluation, prices of imported articles go up forthwith. Then up go prices of domestic articles which depend on foreign raw materials. Prices of purely domestic articles follow suit, because even tortilla vendors would like to own a radio.

The average Mexican worker makes 1 peso 25 centavos an hour. At that rate, at pre-devaluation prices, he had to work ten hours to buy lunch for a family of five, 72 hours to pay an average rent in the center of the city, 160 hours to buy a suit of clothes.

Last week, when bus fares in Puebla were raised from 10 to 15 centavos, crowds rioted, overturned buses, set them afire; federal troops were sent to restore order. Extremists on both sides, Sinar-quistas of the right and Communists of the left, will try to take, advantage of public exasperation.

The real test of how devaluation will serve Mexico is whether the government is now able to take the next difficult steps that are required, i.e., balance its budget, tighten credit, soak up idle money by higher taxes. If the government can do this, a new and sounder peso--at perhaps six or seven to the dollar--may be established. If so, Mexico may be one of the first Latin American nations to wring the water out of its economy and get down to sound living.

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