A global monetary union is called by some economist. They call it because they believe and show through economic models that global financial risk can be lower, and global financial crisis can be less deep. There are cases through economic history where a global unique currency could have avoided deep economic crisis; for instance, the international crisis in 1929 and 2008. The first crisis faced poor dollar monetary supply growth while the second one showed huge dollar monetary supply growth. Both economic policy measures brought economic costs in the World; in 1929, most of countries fell in external debt default because of lacking of Dollars and Pounds in the World; in 2008, countries faced a currency appreciation because huge volume of Dollars and other main currencies in the World. Therefore, both economic polices brought high cost for World society. When an unique global currency is working, the first problem (debt default) can be avoided through monetary supply expansion in the region who asked; this monetary expansion can go through foreign investment, therefore there are money to pay duties. The second problem is avoided because there is no place to currency appreciation, and there are not other currencies. This note shows how the external debt default took place in Colombia between 1931 and 1935 because of international crisis in 1929.
Author: Humberto Bernal,
Economist,
e-mail: zhumber@gmail.com
Twitter: Humberto_Bernal
Colombia has been a good borrower, but she delayed her external debt payments during 1931-1935 because international crisis in 1929. One can take this delay as a Debt Default agreed between local government and foreign lenders. During 1920 and 1928, Colombia faced huge volume of credit from the United States and England; Colombia reached an international debt about US$71 million in 1928 (US$791.2 million at 2012 chained prices) as figure 1 shows.
Figure 1. Public debt* in Colombia 1923-2012
(US$million at 2012 chained prices)
* it does not include debt in financial public sector.
Source: DNP and Central Bank Colombia.
This credit was supported by the good economic performance in Colombia. For instance, the volume of coffee exported went from 1,600 sacks of 60 kilograms in 1920 to 2,569 sacks in 1928; the coffee price went from US$0.22 per pound in 1920 to US$0.27 in 1928. Colombia began to export crude oil in 1926; the volume exported went from 5 million of barrels in 1926 to 18 million in 1928; the crude oil price went from US$3.1 per barrel in 1920 to US$1.2 per barrel in 1928. The volume of bananas exported went from 120,302 tonnes in 1920 to 223,684 tonnes in 1928; the banana price went from US$80 per tonne in 1920 to US$91 per tonne in 1928. The gold exported showed an annual average of 10.3 tonnes between 1920 to 1928; the gold price was around US$21 per troy ounce during this period. Finally, the payment from the United States because of Panama separation took place during 1923 to 1926, and it reached US$25 million. This good economic performance let that Colombia achieved international credit easily. It was not just in Colombia, during 20’s international credit was around the World, Europe countries got international credits to rebuilt their economies after WWI, and developing countries afforded their credit because of primary commodities prices were high.
The economic meltdown in Colombia started in 30’s. Colombia reached her external debt peak in 1935 as figure 2 shows. Colombia faced a low volume of some of their exported products, and faced lower prices also. For instance, the volume of crude oil exported declined to reach 12 million of barrels in 1933; the volume of banana exported declined to reach 136,905 tonnes in 1933. Although the volume of coffee exported increased to 3,281 sacks in 1933, its price showed a deep decline to reach US$0.10 per pound in 1933. The gold exported was the only commodity that showed an increase and its price also, but it was not enough to afford international duties.
Figure 2. Public debt* as a share of GDP 1923-2012
(%)
* it does not include debt in financial public sector.
Source: DNP and Central Bank Colombia.
The socioeconomic indicators in Colombia due to this crisis were so critical. The government saving fell dramatically as figure 3 shows; The unemployment rate increased so much; people did long lines to get a place in public projects where places were few; people were agglomerated in public squares asking for jobs. Colombian GDP growth was -0.9% in 1930 and -1.6% in 1931. People were in critical economic conditions really.
Figure 3. Central public saving as a share of GDP 1923-2012
(%)
Source: DNP and Central Bank Colombia.
Because of lacking of currencies to pay external debt, Colombia fell into external debt default. International reserves declined from US$ 65 million in 1928 to US$ 14 million in 1934; moreover, there were poor economic performance in external sales, negative economic growth and austere local monetary supply. Therefore, Colombia had to call for international debt default. This debt default took place during 1931 to 1935; central government and local governments showed huge external debt and internal debt. Central government had to lead the talks to sort out the total external debt issue. The solution was to broadcast Scrips that showed an interest rate of 4% that were payed after 1935. Therefore, Colombia as many others countries did not pay some of their international duties between 1931 and 1935, the critical point came between 1934 and 1935 when Colombia did not pay any of their international duties, she broadcast just Scrips. The international lenders sent councils to talk to Colombian government about how she will pay her debt duties. There were two councils; one was sent by lenders from the United States; other were sent by British lenders. They make agreements about how to pay this debt after 1935.
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