The general manager of Banco de la República, Leonardo Villar Gómez, when referring to the institution’s centenary, stressed that “it is an entity whose contributions to the country have always been linked to the trust it generates.”
Confidence is fundamental for the good development of the economy, uncertainty, your worst enemy. The work of the Banco de la República has been vital so that the Colombian economy has not suffered acute inflationary processes and has overcome financial crises by changing them deeply.. The motto of our central bank for this celebration is “Building trust”, and the country should be grateful for it.
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On July 23, 1923, the Banco de la República became the country’s central bank.. The start of its activities was carried out in a hasty manner due to the bankruptcy of Banco López and the fear of contagion to other banks. President Pedro Nel Ospina declared civic holidays on Thursday the 19th and Saturday the 21st and, in this way, gave enough time to start the operations of the new entity.
In three days the statutes were drawn up, the deed of creation was prepared and the requirements set forth in Law 25 of that year were met. Faced with the doubts of the authorities and bankers, Edwin Walter Kemmerer pointed out: “Your house is burning and you must pour water on it immediately, or it will be destroyed. There is no time to be wasted arguing over whether to dump the water with a tin bucket or a galvanized iron one. Pour water on it and pour it on soon.”
The quick action of the Banco de la República restored confidence in the financial system and started an institution that in its centenary is recognized for its solidity and technical capacity to fulfill the functions under its responsibility. Kemmerer, known as the “Doctor of the Currency”, was an American citizen who dedicated part of his life to a successful work as a financial consultant for numerous countries as dissimilar in size and development as China, Poland or Mexico.
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The National Congress in 1922 authorized the establishment of a mission of experts in economic and financial affairs in order to promote the foundation of a bank of issue. The revision of the institutional framework of the currency and the banking sector was essential given the credits that the American banks had given to the country and the presence of Kemmerer, who led the mission and reassured the foreign bankers.
For this reason, the economic policy recommendations of Kemmerer and his technicians covered a wide spectrum of issues such as the creation of the Banking Superintendency (today Financial) and the Comptroller General of the Republic, which also celebrate their 100th anniversaryand the strengthening of the national budget and revenue collection.
The Banco de la República underwent various reforms over the yearshighlighting that of 1951, which granted him broad powers in the reduction of credit and the power to create promotion quotas in favor of the private sector.
With the creation of the Monetary Board, the Banco de la República went into the background as it was a simple executor of the decisions of the government agency. This institutional arrangement was very critical, since it had an inflationary bias with recurring loans to the government to cover the fiscal deficit and the use of emission resources with preferential rates to finance broad sectors of productive activity.
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“The Bank’s performance in the face of the global financial crisis unleashed in 2008 and the covid-19 pandemic has been highlighted by its excellent management.”
The foregoing led to the recognition of Colombia as an example of “high and stable inflation” since consensus will be generated on the need to introduce structural reforms to the Bank of the Republic, which materialized in the National Constituent Assembly of 1991.
The political forces represented in the Constituent Assembly quickly agreed on the goodness of comprehensively reforming the Banco de la República and converting it into an independent central bank with financial, technical and administrative autonomyfollowing the experience of what is coming in other parts of the world.
This independence from the other branches of public power, especially the executive, seeks that the monetary authority can set long-term policiesunlike the interests of the governments in power that by law see the issuance of the central bank as leverage for their short-term programs.
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The Constituent Assembly establishes as the objective of the central bank to preserve the purchasing power of the currencyrecognizing the important benefits for society and the proper functioning of the economy of having low and stable inflation. It prohibited it from giving credit to the private sector and required the unanimity of the Board of Directors to finance the government, which has not happened in the history of the independent central bank. In this way, it put a stop to the factors that drove the explosion in previous decades.
The Bank’s Board of Directors was appointed as the monetary, exchange and credit authority, made up of the general manager, the Minister of Finance and Public Credit and five exclusive members with four-year fixed terms. The President of the Republic can only change two of them during his presidential term. The Board has distinguished itself for being made up of very outstanding professionals, far from politics and with extensive experience in managing the economy and the financial sector..
Evolution of total annual consumer inflation and its target in Colombia between 1992 and 2023.
Bank of the Republic
If Banco de la República is evaluated by the result of inflation, it must be remembered that in 1990 it was at a level of 32.4 percent. With the new institutional framework, inflation was reduced and came to be for several years within the long-term target range (2 to 4 percent) set by the Board of Directors.. The real inflationary outbreak has been treated with increases in intervention interest rates that have been transmitted to the economy. The latest inflation results and agent expectations show a break in the upward trend and the Bank’s Board has expressed confidence that in 2024 inflation will approach the long-term goal of 3 percent.
The institutional consolidation of Banco de la República has not been without difficulties. The so-called ‘end-of-the-century crisis’ put the new institution to the test and the Board was criticized for defending the exchange rate and the high interest rates of interventions used at that juncture. Paradoxically, the lesson of the crisis was the convenience of flexible management of the exchange rate and the use of the interest rate as a fundamental instrument of monetary policy in what would be known after inflation as the objective.
The Bank’s actions in response to the global financial crisis triggered by the bankruptcy of Lehman Brothers in 2008 and the covid-19 pandemic that led to the closure of the economy in all countries, has been highlighted by the excellent management that allowed the recovery of the economy without lasting scars in the growth and stability of the financial sector.
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Other functions of the Banco de la República during these hundred years should be highlighted. Perhaps the most remembered is the activity carried out in the different cities of the country through its network of libraries and museums, in which the country’s cultural heritage is magnificently exhibited.. The Bank’s work as guardian of cultural heritage began in the thirties with the purchase of pre-Columbian pieces, among which was found the Poporo Quimbaya.
To this piece were added others of immense work that today are part of the Bank’s collection and that are exhibited in the different museums of the entity, highlighting, of course, the Gold Museum in Bogotá, which is visited by thousands of people annually. With the support of the general manager Miguel Urrutia Montoya, the collections were also nourished by important works of art, which was consolidated with the donation of the personal collection of the master Fernando Botero.
At the end of the 1990s, and given that the main function of the bank’s branches of distributing cash began to be carried out through other mechanisms, the Bank’s presence was maintained with emphasis on cultural activity with new libraries and exhibition halls that are permanently visited by citizens.
Mention should also be made of the commendable work of the Bank in economic research. The academic work carried out is a necessary and indispensable input in the economic analysis of the country. This work has been strengthened with research centers at the regional level on various topics such as regional economy, labor market and competitiveness and industry.
Its high technical quality is internationally recognized; the current co-director Roberto Steiner points out that the main asset of Banco de la República is having a highly qualified staff. “Since its inception, the Bank has attached enormous importance to the training of its employees in various areas of knowledge. The Bank’s scholarship program, to which the institution’s staff and external professionals have access, has resulted in enormous benefits for the country”.
Other functions such as the manufacture of coins and bills and the development of the payment system are also fundamental in building trust among Colombians in the central bank. The modern cash center allows an efficient distribution of cash throughout the country and our banknotes, manufactured there, are small works of art with sophisticated security features to prevent counterfeiting.
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The announcement that the Bank will be up and running with immediate payments will undoubtedly revolutionize digital payments and transfers in the countryfacilitating financial inclusion, so necessary for the economy.
The Banco de la República celebrates its 100th anniversary and the challenges of the future are enormous. Digital development and the study of the issuance of digital currencies in the world will surely transform the way of executing monetary and exchange policy, and carrying out transactions in the economy.
We Colombians can rest assured that we have an autonomous and technical institution to deal with them.
GERARDO HERNANDEZ CORREA
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