Freeing the Peso

After a quarter-century of trying to set its foreign exchange rates by complex official decrees, Chile chucked the philosophy of government control over the value of the peso and went back to the supply-and-demand free rate.

Chile's experience with controls started out in 1931 as a Depression attempt to subsidize business by giving varying values to the peso (which had been traded freely at eight to the dollar). Depending on their utility, as evaluated by the bureaucracy, various imports got various rates; e.g., whisky was made proportionately more costly to import than milk. Export rates, too, were adjusted to let commodities--in theory at least--meet foreign competition; there was a "copper dollar," a "wine dollar," a "nitrate dollar" and a "sulphur dollar." Soon the government was in the satisfying business of creaming off a profit from exchange transactions.

The system cost heavily in corruption aimed at getting favorable rates. Investment was discouraged, because the government's cut worked out as a heavy tax. Worse, controls failed to keep the exchange from slipping. Under pressure from internal inflation, the scale of official rates dropped steadily to as low as 300; the limited free market that the law permitted hit a peak of more than 800 last August. U.S. Economic Consultants Klein & Saks, hired then by Chile to cure its economic fevers, made freeing the peso a high-priority recommendation.

Before taking the stern measure, Finance Minister Oscar Herrera made a couple of prudent hedges. One was a flat ban on importing certain luxuries, to prevent a possibly perilous outrush of dollars for goods not really needed. Another was an agreement with the International Monetary Fund, the U.S. Treasury and eight U.S. banks for a $75 million stabilization fund to meet possible dollar runs. The free rate is expected to settle around 500, then begin the hard climb back.

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