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Episode 15 - De Mexico

A trip into the past and across two continents. Two history sections on today’s episode. One from the Centralverse’s connection to the Nobel prizes. And the other from Banxico, the Central Bank of Mexico.

Intro

Welcome to The Bankster Podcast. I’m your host, Alexander Bagehot, and this is Episode 15 - De Mexico. Every episode we dive into the intricate world of central banking! I use one or two pieces of news from the Federal Reserve or monetary policy from around the world to summarize, translate, and explain a few points from the Centralverse. Now the Centralverse is the deep, the fascinating, the ever changing, and the incredibly consequential world of central bankers and the economies they attempt to support.

This past week I had the opportunity to travel to Mexico, or Mexico as it’s called by my fellow gringos. I tasted cow tongue tacos (surprisingly delicious) in the hills of the state of Mexico, found my new favorite sweet - churros filled with strawberries and cream in the colonial district of Coyoacan, took a day trip up to the Cervantino festival (a month long celebration of Don Quixote) in the old city of Guanajuato, and saw a folkloric ballet in the Palacio de Bellas Artes (a magnificent performing arts center at the cultural center of the country’s capital). But one of the great highlights of the trip was a visit to El Banco de México, Mexico’s central bank, known by its nickname - Banxico.

The bank is found in the center of Mexico City just around the corner from the Palacio de Bellas Artes and the Zocalo, which is the vast plaza where the newest James Bond movie begins. It’s an impressive stone building and has a rich history, part of which we will talk about today in the second half of the podcast. But first we are going to review some big news from Switzerland that has been coming out one day at a time over the past two weeks or so.

News

Can you guess what the news will be about based on what I just mentioned? Well, if not, Freakonomics rebroadcasted an excellent podcast episode last week that originally aired a year ago. Stephen Dubner begins the episode this way: “Let me ask you a couple questions. Have you just had your hair cut? Do you have a certain date circled on your calendar? Are you going to bed extra early the night before that date in case you get an early morning phone call from Stockholm? If so: you must be expecting a Nobel Prize. That’s right: it’s Nobel time of year.” It is an excellent episode and I encourage everyone to check it out. They describe the incredibly fascinating process by which the Nobel prize winners are chosen each year. Or at least they do the best they can. They speak with a member of the Prize Committee for the prize in Economics in memory of Alfred Nobel. And yes that is kind of a clunky title - partly because an award in Economics was not officially designated by the will of Alfred Nobel. It would be another 73 years before the prize was created and adopted into the family of Nobel prizes.

I wanted to mention the Nobel prize in Economics today not because this year’s winner worked on Monetary Policy, (the two winners this year actually won the award “for their contributions to contract theory” - which is not the focus of this podcast!) I’m mentioning the Nobel because of a special connection that a Central Bank has to this prize, the most prestigious award in Economics in the world.

The official name of the award is, “The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel”. And the Sveriges Riksbank is the name of the Central Bank of Sweden, the first and at nearly 350 years old, the oldest central bank in the world.

On it’s 300th birthday, in 1968, the Riksbank created the award by making a large donation to the Nobel Foundation to be used to fund the prize money awarded to the recipients of the Nobel in Economic Sciences (this year’s winners split $900,000 reward). The process for choosing the winner (or winners) each year is the same as for the Nobel prizes in Physics and Chemistry. The Royal Academy of Sciences selects the winner and the prize money is the same as the other Nobel prizes.

Although the prize was created by a Central Bank, monetary policy research has only directly been referenced twice in connection with the reason for the award. Once in 1976 to Milton Friedman for his work in Monetary Policy History and another to Robert Mundell for his analysis on monetary policy under different exchange rates.

On a future episode of The Bankster Podcast we will dive deeper into the work of these two economists, especially Milton Friedman’s history book, it is one of the most important ever written in the Centralverse. But for today, now you know a little bit more about the Nobel prize in economics and that Riksbank, the Central Bank of Sweden, was pivotal in the creation of the Nobel Prize in Economic Sciences. And now it’s time to wind the clock back a hundred years to the beginning of a Central Bank back here on this side of the Atlantic Ocean.

De Mexico

Banxico, the common name for the Central Bank of Mexico, was created near the end of the Mexican Revolution. A few of the key factors that led to the beginning of the Revolution were poor economic conditions including high inflation and confusion caused by different banks each printing their own currency. Nearly every country’s road to a central bank involves confusion and chaos caused by multiple currencies in circulation. To add to this mess, during the revolution, the government had forced private banks to make loans to the government to fuel the war making machine. This caused such high inflation that the value of money quickly lost most of its pre-revolution value.

In 1917, near the end of the revolution, the newly formed government wrote into their new constitution a provision for a Central Bank (Article 28 to be exact). They declared that the Bank of Mexico would be the only bank to handle government debt and that all taxes were to be collected and deposited with them. This would effectively end the use of the other currencies.

However, because of some lingering political and revolutionary issues (we’ll leave it at that for this episode) the constitution was not ratified until 1925. Then on September 1st of that year, Banxico opened its doors. The leadership of the bank would be government positions that served at the direction and pleasure of the president. This is often one of the first stepping stones in the journey to a modern central banks.

Over the following decades the bank grew and expanded and became more familiar with its role in the economy. This economy went through periods of wealth and healthy growth, like the 1950’s and 60’s. However, if you are a long time listener to the podcast you can probably predict what happened next - Yep, when the leaders of the central bank work directly for the leadership of the politically elected government short term fixes that are damaging in the long run frequently win out. And that is exactly what happened at Banxico.

The 1980’s was a brutal decade for the Mexican economy. The Peso lost an incredible amount of its value, going from 19 Pesos per US Dollar to 70 Pesos per US Dollar. And the inflation rate reached an annual rate of 100%. In 1982, in an effort to take back control of the runaway economy the government nationalized all of the banks in the country, which means the government took control of the banks. It take nearly a full decade, 1991, before the banks were once again turned over to private control. Shortly thereafter big news came to the central bank.

The most important step in the right direction for Banxico arrived at the end of the year 1993. But really quick before I mention what the step was, remember that Banxico was created as part of the constitution of the country. Therefore, in order to make any major structural changes to the organization they had to pass a constitutional amendment. And this they did in 1993.

The amendment brought three changes, or “pillars” (as their website describes them) to the focus of the central bank. (1) “its main priority [was now] to foster the currency’s purchasing power.” Which means that the central bank is to prevent inflation and deflation. (2) The leadership of the bank would be as follows (and as I describe how this works think in your mind about what you’ve learned about the Federal Reserve and other central banks leadership, all of them have similarities, yet all are slightly unique). At Banxico the governing committee would consist of one Governor, who serves for six years, and four Deputy Governors who serve for eight years. Each of the five is appointed by the president, but cannot be removed by the president. Also, the Governor’s six year term is staggered with that of the President of Mexico’s term. This means that the Governor serves for three years with one president and three years with the next (Mexican presidents are only allowed one term). And finally, the most important of the pillars, (3) official legal autonomy, or independence, from the government.

And thus began a new and brighter chapter in the history of Banxico. It didn’t mean the end of troubles. In fact, they decided to let the peso float freely with foreign currencies. This caused serious problems for the economy. The government ended up needing a loan from the US government and from the IMF. However, the strength of the central bank held and even when fiscal problems at the government level arose, there wasn't a worry that the central bank would print into inflation to cover the government’s debts.

In more recent times Banxico has taken two other significant steps: they announced an official inflation target and opened their doors to more transparency. In future episodes we will cover more specificis about the nearly 100 year history of this important institution in the Centralverse. But for today, we’ll call that a nice overview of the history of Banxico!

Conclusion

If you haven’t already, you really should sign up for the show notes. Every episode I send out an email summary of all the key points and takeaways from the show, as well as links to more information. In the show notes to today’s episode, I’ll include links to the three main sources I used while creating this episode: An excellent documentary about the history of Banxico called, El Banco de Mexico: The Path to Independence, it’s in Spanish but has English subtitles; an article on the Central Bank’s website, and finally a link and a few pictures from the wonderful Interactive Museum of the Economy (the MIDE), which is right behind Banxico.

As always, send in your comments and questions about the Centralverse or the Bankster Podcast in general via email (alexander@thebanksterpodcast.com) or Twitter or Facebook. Don’t forget to leave a review of the podcast in the app that you’re using right now. It only takes a few minutes and it genuinely helps others to find the show.

Today’s episode was written, edited, and produced by me, Alexander Bagehot. I dedicate this episode to my family in Mexico, thanks for a wonderful trip. And to everybody else, thanks for listening. I’m Alexander Bagehot, and I’ll see you next time on The Bankster Podcast!

 

 

 

 

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