Central Bank Autonomy in Mexico / Volume V: Institutional Autonomy
Author: Eduardo Turrent
Date: 2015-11-13T06:00:00+00:00
Publisher: Banco de México

Central Bank Autonomy in Mexico

A Historical Overview

Volume I

The Central Banking System in the World

Agustín Carstens

Governor

Roberto del Cueto Legaspi
Manuel Ramos Francia
Manuel Sánchez González
José Julián Sidaoui Dib
Deputy Governors

BANCO DE MÉXICO

EDUARDO TURRENT
Project supervision

AÍDA GARCÍA DIMAS
Historical research and project coordination

ANTONIETA CRUZ
Editorial coordination

ANTONIETA CRUZ
GERMÁN GÓMEZ
Iconographic research

NOSTRA EDICIONES
Editing, design, and prepress

SANDRA FERRER ALARCÓN
Graphic and editorial design

LUCERO VÁZQUEZ TÉLLEZ
ROSALINDA RESÉNDIZ PADRÓN
Graphic design

GREGORY DECHANT
Translation

MARÍA ESPERANZA ZOREDA LEE
Translation oversight

LIDIA CASTRO RAMÍREZ
Text transcription

LUIS EKIRO
GERARDO PEÑA TORRES
Banco de México images 2012

We would like to thank the following institutions for their support:
Sistema de la Reserva Federal
Banco Central de Chile
Centro de Estudios Monetarios
Latinoamericanos, CEMLA

Banco de México:
Oficina de Acervo Numismático
Subgerencia de Coordinación de Archivos
Subgerencia de Numismática y Comercialización

The reproduction of the images of banknotes used to illustrate the present work has been authorized by the Secretaría de Hacienda y Crédito Público (official authorization UBA/DGABM/1339/2005, dated November 2005).

First edition, 2012

All rights reserved

BANCO DE MÉXICO
Avenida Cinco de Mayo 2
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Delegación Cuauhtémoc
06059, México, D.F.

IEBN: 484-132-000005-28

Printed in China

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Institutional Autonomy

Market-oriented Reforms

In December 1982, when President Miguel de la Madrid was sworn in, Mexico was in the throes of a severe economic crisis. To complicate matters, the state of economic crisis was accompanied by political ferment and strong social pressures. Miguel de la Madrid has stated in his memoirs that the economic crisis had two causes.[1] The first involved the structural imbalances and problems which had been developing for decades. The second was the “twelve years of poor economic management” during which the foundations of macroeconomic stability had been severely eroded. One of the main consequences of the expansionist and destabilizing monetary policies applied in the two previous six-year administrations was a burdensome foreign debt.

It was clearly necessary to change the direction of the country’s economic strategy and implement a major fiscal adjustment given that the deficit to GDP ratio had grown extremely out or proportion. Unfortunately, this fiscal adjustment was not enough and the authorities had to resort, to a great extent, to inflationary financing.

An important part of this reorientation was a stabilization program aimed at combating inflation, which had reached harmfully high levels. But at the same time it was necessary to address other pressing problems. If stabilization were to be successful it would have to be accompanied by efforts to clean up the public finances. A careful examination revealed, however, that there was a basic structural component to the fiscal deficit: the large number of public companies and entities operating in the red. Thus, the efforts to put the public finances on solider ground were accompanied by a privatization program which began to be implemented by the De la Madrid government in 1985. Another item on the administration’s agenda, which could not be postponed, was the renegotiation of the foreign debt, public and private, whose obligations the country was unable to meet in its present form. Another very important aspect of the structural reform that took place under De la Madrid involved free trade, with Mexico’s adhesion to GATT.

By necessity and by conviction, the task of structural reform was continued and even intensified during the six-year administration of Carlos Salinas de Gortari. During De la Madrid’s presidency the external debt had been restructured twice as a result of negotiations, but the definitive renegotiation of the debt, with acquittances, did not take place until the following administration, when Pedro Aspe was Secretary of Finance. The privatization program begun under De la Madrid also continued with renewed vigor during the Salinas years. In fact, the most complicated privatizations were carried out in the period from 1988 to 1993. Another important structural reform, carried out with such success by the Secretariat of Industry and Commerce of the Salinas administration, was the deregulation program. The Secretariat of Industry and Commerce also played an important role in the crowning achievement of these years: the North American Free Trade Agreement (NAFTA), signed toward the end of 1993 by the governments of Mexico, the United States, and Canada. It seemed like the perfect end to the party, ushering in an era of progress and prosperity. Unfortunately, things did not quite work out that way, as the country faced a huge balance of payments and exchange crisis at the end of 1994.

The fight against inflation was the priority at the beginning of the six-year administration of Miguel de la Madrid. A decision that was doubtless of enormous help in this effort was the appointment of Miguel Mancera to head Banco de México. His appointment lent credibility to the central bank’s actions in the area of monetary policy and helped to achieve important —though ultimately unsustainable— progress. The main tools of the De la Madrid administration in its stabilizing efforts were fiscal and monetary policy. Exchange policy did not always help to bring down inflation. The gradual devaluation of the peso was used to weaken inflationary trends, but there was strong and at times successful pressure to devaluate more rapidly, on the grounds that the peso was overvalued or that it was necessary to prevent it from becoming overvalued. The government also sought to protect jobs but tried to ensure that its wage policy was not in contradiction with the economic stabilization it was seeking to achieve. One policy that seemed at the time to work against the efforts to rein in inflation was the adjustment of public sector prices and tariffs. The De la Madrid administration had inherited prices and tariffs at a level well below international standards. Bringing them up to date was essential if the public finances were to be restored, but the changes were neither welcomed nor well understood by public opinion at the time.

The difficult stabilizing efforts of the De la Madrid government produced their first positive results in 1983 and 1984. Inflation dropped from 100% to 80% in 1983, and then down to 59% in 1984, but this positive trend could not be sustained. At least three factors contributed to undermining the stabilization program. The first and least important was the hesitation in the economic cabinet about just how rapid the adjustment of public expenditure should be. These doubts led to a certain weakening of fiscal discipline. But this was not the main cause of the derailment. The earthquakes that devastated Mexico City in September of 1985 constituted a severe blow to the stabilization program. The government emergency programs required for victims of the catastrophe took a serious toll on the public finances. But the country’s bad luck did not stop there. In 1986 some 70% of Mexican exports were oil products, just at a time when international oil prices suddenly dropped by half. The effect on the budget and the balance of payments was equivalent to a doubling of the foreign debt. To absorb the shock, a rapid devaluation was agreed upon, among other measures. Strongly affecting prices, this measure led to inflation of approximately 160% in 1987.

The earthquakes that devastated Mexico City in September 1985 and the sharp drop in international oil prices during 1986 were very damaging to Mexico and put the stabilization efforts that had begun in 1983 on hold.

Even in these very unfavorable circumstances, De la Madrid decided to persevere in the structural reform programs initiated during his administration. An important component of these reforms was the program to privatize public entities. The purposes of the program were the following: a) to strengthen the public finances; b) to eliminate unjustified social or economic expenses and subsidies; c) to assign general productive tasks to the private sector; and d) to improve the efficiency of the public sector by reducing the size and streamlining the structure of state-owned entities. A fundamental part of this last objective involved privatizing any state-owned companies that generated large and frequent losses. In operational terms, there were four types of action: liquidations, mergers, transfers, and sales to the private sector. Working within this framework, between 1983 and 1988 the government performed 595 operations through the Secretariat of Finance: 291 liquidations or shutdowns; 72 mergers; 25 transfers; and 204 sales to the private sector.[2] One merit of the program was that it broke the deep-rooted statist taboo in Mexico that public companies were untouchable because they somehow incarnated the national sovereignty itself.

The other major structural reform of the De la Madrid years was the opening of Mexico to international trade through its joining the General Agreement on Tariffs and Trade, or GATT. During the presidency of José López Portillo there had been an attempt to take this step which the President, finally unconvinced, refused to support. In the following administration, the possibility was probably considered by the economic cabinet, though there is no public record of their deliberations. Mexico’s application to join GATT was submitted in November 1985, on the basis of a protocol which had existed since 1979. The negotiations that then took place to reach an agreement on definitive adhesion were carried out mainly with the government of the United States. One analyst has pointed out how paradoxical it was that, although Mexico was seeking “to enter GATT in order to be fully integrated into the multilateral trade system,” the negotiations took place mainly with its northern neighbor.[3] In the agreement that was finally signed and went into effect in July of 1986, Mexico received the treatment normally given to developing nations.

Why was Mexico’s entry into GATT desirable? Through this reform, the government of Miguel de la Madrid broke with a protectionist tradition that had existed in Mexico for centuries. The President acted with great courage and determination, unafraid of the doomsday scenarios that predicted mass bankruptcies as a result of Mexico’s opening itself up to foreign trade. None of this happened, of course, but it is worth reflecting on the motivations for this important structural change. The first factor was that the industrialization achieved by Mexico in the course of the previous decades was undergoing a sharp anti-export shift. To this specific phenomenon might be added the traditional evils of protectionism anywhere: higher prices, poor quality, and less variety for the consumer. In the face of the need to export in order to pay off its external debt, the country was forced to reverse the anti-export pattern of its industrial production. In the long term, freer trade would also attract increased direct and indirect foreign investment and lead to a more effective channeling of productive resources.

Two key actors in the renegotiation of Mexico’s foreign debt in 1988-1989: U.S. Secretary of the Treasury Nicholas Brady and Mexican Secretary of Finance Pedro Aspe.

The continuing struggle against inflation was a priority for the government of Carlos Salinas de Gortari. The strategy implemented by his administration, however, had been prepared and first tested at the end of De la Madrid’s term. It took concrete form at the beginning of 1988, with a mechanism known at the time as “The Pact,” which consisted, in technical terms, of a mixed model of stabilization. The orthodox aspect of the strategy was a commitment to restrictive monetary and fiscal policies. The more heterodox aspect involved a wider social pact. As part of this agreement, the government offered to maintain the exchange rate at a level consistent with its anti-inflationary goals. The business sector compromised in the area of prices for goods and services, while labor moderated its wage demands.[4] Thus, with all sectors of society joining in the stabilization effort, inflation was gradually brought down from 159% in 1987 to around 7% in 1994.[5]

Another key achievement of the Salinas years was the definitive renegotiation of the external debt. As we have seen, two renegotiations were carried out under Miguel de la Madrid along traditional lines. At the time, the Mexican thesis of co-responsibility in the creation of the debt still sounded like heresy to the banks, as did the notions that a solution required a sacrifice on the part of creditors in the form of acquittances of the principal —or equivalent adjustments in interest rates or other items— as well as more generous terms. In return, the Mexican government would guarantee that the debts would be paid off in full. The guarantee of payment on the principal was made through Brady bonds, which covered the total balance as they came due. The payment of interest was guaranteed contractually, provisioned for in the government’s budget, and made according to a pre-established schedule.[6]

The successful renegotiation of the external debt was an enormous relief to the members of the Salinas de Gortari administration. With the debt issue settled, they were able to concentrate their reforming efforts on three programs they considered fundamental and crucial: the continuation and conclusion of the program to privatize public companies and entities, the deregulation program, and the further work on trade liberalization, which culminated in the signing of the North American Free Trade Agreement in 1993. We have seen that the privatization policy was set in motion with great political skill and practical success by the administration of Miguel de la Madrid. But there was still much to be done in the field when De la Madrid finished his term. In fact, the most complicated privatizations were still to be carried out. In general terms, the privatization policy of the Salinas administration can be divided into two stages. The first involved the privatization of service, industrial, and commercial companies such as Teléfonos de México, Mexicana de Aviación, the mining enterprises Cananea and Real del Monte, and the passenger transport company Dina Camiones. The second stage involved the privatization of the commercial banks.

The signing of the North American Free Trade Agreement (NAFTA). Standing in the photo are Mexican president Carlos Salinas, U.S. president George H. W. Bush, and Canadian prime minister Brian Mulroney.

At the time, Finance Secretary Pedro Aspe outlined ten principles which were to guide the privatization program of the Salinas administration. The first rule stated that the privatized companies should enter competitive markets and the second that a privatization program could not be carried out successfully without price stability. Third, the program was to be kept under the control of the government; fourth, in certain cases a bankruptcy was preferable to a sale; and fifth, in order to privatize certain public companies it was necessary to restructure them first. Four more principles followed: companies were always to be purchased with cash; creativity needed to be displayed in the use of financing; civil society had to be kept informed; and the revenues from the privatizations were to be handled prudently. Finally, it needed to be explained that a privatization program would always lead to a more effective government.

The privatization of the commercial banks that had been expropriated in 1982 by then President José López Portillo was the final measure of this kind carried out by the administration of Carlos Salinas de Gortari. This program has become sadly celebrated because of the later bankruptcy of the majority of the privatized banks, as a result of the economic crisis that overwhelmed Mexico in later 1994 and early 1995. The program was so important to the administration that a special administrative unite was created to handle it: the “Bank Disincorporation Committee.” This body carried out the privatization of the state-owned banks in strict abidance by concrete rules: a) acting in such a way as to contribute to the establishment of a more balanced, competitive, and efficient financial system; b) guaranteeing that the capital stock of the institutions be diversified and controlled by Mexican investors; c) promoting the decentralization of banking operations; and d) obtaining a fair price for the banks, which were to be sold on the basis of appraisals made with technically sound criteria. Thus, between June and October of 1991, eight banks were privatized, including Bancomer and Banamex. The average price of these privatized entities was around 2.8 times their book value.[7]

Winds of reform and modernization were blowing in Mexico. At the Secretariat of Commerce and Industry there opened up a space for a young civil servant, Arturo Fernández, bursting with innovative ideas for organizing the markets, to put his plans for renewal into effect. Surprisingly, the diagnosis was very simple. For many decades, governmental regulation of the domestic markets had encouraged monopolistic or oligopolistic structures, practices that gave the authorities excessive discretion (which resulted in corruption), and operations without transparency and rendering of accounts. Paradoxically, the theoretical conception of the State which had emerged from the Mexican Revolution had been favorable to these arbitrary, opaque, and monopolistic structures. But the phenomenon also had an intellectual or bureaucratic basis. Before the six-year administration of Carlos Salinas de Gortari, no one in public service or in the academy had demonstrated the insight —if it did indeed exist— to offer a diagnosis of this problem, let alone to explain how it could be remedied. A certain conformity with the status quo that had been working so imperfectly for so many years served as a sort of veil to conceal obvious defects in Mexico’s economy.

Secretary of Finance Pedro Aspe lent his full support to the 1993 reform to grant autonomy to Banco de México.

To some extent, the insight that regulatory defects had immobilized certain sector came from the privatization program. The program had revealed how there was no point in privatizing state-owned companies if they were going to operate thereafter as monopolies protected by regulation. This was particularly the case of the airlines and railways. It was understood even at the planning stage that obstacles to entry into these sectors would need to be eliminated in order to help foster better-quality service at lower prices. The question of market regulation is complicated and inadequate terminology has made an understanding of the issue even more difficult. First of all, the term “deregulation” is imprecise and misleading when applied to what was taking place in this case. The truth is that it was not a question of removing regulations but rather of adjusting these regulations in order to foster greater competition, transparency, and, consequently, benefit to consumers. In Mexico it seemed that market regulation had been arranged without regard to the welfare of the vast majority. Apparently the only factor taken into consideration —perhaps for political reasons— had been the interests of the suppliers of goods and services in regulated markets, alongside the wider but very ill-defined interest of the general public.

The deregulation policies of the Salinas administration were particularly welcome in the road freight transport, passenger transport, port, and railway sectors. In all of these cases the new regulations were designed to eradicate monopolistic practices and allow greater competition. In the road freight transport sector, therefore, a protectionist tradition of more than fifty years was ended by reestablishing, in July of 1989, freedom of transit on federal highways and the right to compete with services. The purpose, of course, was to bring down prices in the market and offer users a wider range of competing choices. The legal framework of the passenger transport industry was amended in March of 1990. Here too, the intention was to remove barriers and open up the sector to greater competition. Reforms designed to modernize the operation of the ports began to be carried out around the middle of 1991. These efforts included the railway sector, in which the naturally monopolistic conditions were to be replaced by possibilities for free competition.[8]

The Deregulation Unit headed by Arturo Fernández succeeded in modifying the regulations of various other sectors of the Mexican economy, including the airlines, customs, telecommunications, and several important branches of the manufacturing industry. In all of these cases, the idea was to foster competition and increase transparency, to the benefit of consumers. Thus, at the beginning of the 1990s, additional reforms were carried out to facilitate the licensing of patents, trademarks, and industrial secrets. In the same spirit, regulatory impediments to the establishment of new salt mining enterprises were removed and similar reforms affected the henequen sector, the match industry, and investment into textile factories. In general, the enactment of the Federal Law of Economic Competition signified an enormous transformation, which included the establishment of the Federal Competition Commission. This body was henceforth responsible for detecting and combating unfair and uncompetitive practices in every branch of the Mexican economy.[9]

As mentioned above, the other great reform of the Carlos Salinas de Gortari administration was the North American Free Trade Agreement (NAFTA), signed at the end of 1993. The idea of such an accord had probably been developing since the first years of the administration. In 1987 the governments of Mexico and the United States had already signed an agreement called the Framework of Principles and Procedures for Consultation Regarding Trade and Investment Relations. Some two years later an Understanding Regarding Trade and Investment Facilitation Talks was signed.[10]

Various reasons led Mexico to seek a free trade agreement with the United States and Canada. One of them, the most general and obvious, was to deal a final blow to the protectionist tradition that had prevailed in Mexico for centuries. In more concrete terms, there was a desire for a broader regulatory framework through which Mexican exports could gain access to the U.S. market. One way of boosting actual and potential exports, not always fully understood, was to facilitate the free importation of raw materials, thereby allowing manufacturers to offer competitive prices and quality in their products destined for foreign markets. Another motivation was the desire to promote investment, particularly foreign investment, in Mexico, by allowing U.S. and Canadian companies to take advantage of the abundant and accessible manpower in a neighboring country.

The vote in the U.S. Congress to decide whether to approve or reject NAFTA was followed with intense interest in Mexico. In spite of fears, President Bill Clinton and his administration had done their lobbying work and the agreement was approved by a narrow enough margin, but one which left no doubts as to the balance of opinion. The treaty went into effect in January of 1994, immediately eliminating approximately half of existing duties on imports. A schedule lasting into the following century was established for the reduction or elimination of the rest of the duties. In other words, the negotiators of NAFTA had prudently agreed that trade liberalization would be gradual. It was necessary to give an opportunity for economic activities that had been protected for decades on both sides of the border to adapt little by little to the more competitive trade environment and increasing availability of imports. Thus, a trilateral (Mexico-United States-Canada) framework had been established through which it was hoped —and indeed it came to pass— that trade would flourish significantly.

Bill Clinton, president of the United States at the time when NAFTA was ratified and autonomy was granted to Banco de México.

The Banco de México Law

The dream of autonomy for Banco de México had been cherished by every expert in central banking and monetary policy who had offered his services to the institution. Such had been the case, of course, of Miguel Mancera, who had joined the central bank as a young economist in 1958 and been associated with it ever since. The conviction had doubtless taken root during his time as a graduate student at Yale University, which he had attended on a scholarship granted by Banco de México itself. Mancera’s later professional career was a continual ascent, as he occupied the positions of director of the Manufacturing Exports Development Fund, international director, assistant director, general assistant director, and finally general director of Banco de México. Pedro Aspe, the Secretary of Finance in the Salinas administration, though he had never been employed by the central bank, had worked at Infratur and was well qualified in the areas of currency, exchange, and banking. He also shared the ideas of many experts in monetary policy and had long been convinced of the advantages of an independent central bank.[11]

The decision to undertake the reform was the responsibility of President Carlos Salinas de Gortari. Surprisingly, there was no direct intervention in the matter by Finance Secretary Aspe or Miguel Mancera, though others outside of Mexico did lobby for the reform. A big step was taken in 1992 when Salinas was invited, as President of Mexico, to the prestigious World Economic Forum in the little Alpine ski resort of Davos, Switzerland. There, Salinas was fortunate enough to meet with other heads of state and several distinguished writers and academics, who reinforced the idea that central bank autonomy was a structural reform from which great benefits could be expected.

It was very fortunate that the idea of granting autonomy to Banco de México came directly from the head of the executive branch. In this way, the program of structural reforms implemented by the Salinas administration could be brilliantly concluded. Both Aspe and Mancera were pleased with the prospect and the general director of Banco de México proceeded to have the documentation drafted to grant autonomy to the central bank. The preparation of these documents was a team effort under the direction of Mancera himself. Several central bank officials were consulted or asked to collaborate. The actually drafting of the proposed bill was entrusted to a group of lawyers with experience in legislative matters: Francisco Borja Martínez, Roberto del Cueto Legaspi, and Javier Arrigunaga Gómez del Campo. Also consulted on several occasions was Chilean economist Andrés Bianchi, who was serving as chairman of the Central Bank of Chile at the time.

A very important part of the work was the consultation and analysis of the organic laws of the central banks of other countries to which autonomy had been granted. The task of tracking down these sources was laborious, but of great interest, and the group eagerly went about gathering the necessary information, which was then reviewed and summarized. In the end, two examples turned out to be of fundamental importance to the task at hand: the Deutsche Bundesbank, the German central bank, and the Central Bank of Chile. The credentials of the Bundesbank were its strength, prestige, and outstanding performance. In the case of the Central Bank of Chile, the framers of its organic law and its first administrators had done an exceptional job, taking advantage of international experience in the field, which was studied with great care.

The contacts with the Chilean economist Andrés Bianchi deserve a special mention. Bianchi and Miguel Mancera had been fellow students in the post-graduate program at Yale and were joined by a solid friendship and reciprocal intellectual admiration. Bianchi was thoroughly familiar with the process whereby his own country had attained autonomy for its central bank. Behind it there was a political evolution that was proper to Chile. The technical, operational, and theoretical details had been incorporated into the legislation governing the Central Bank of Chile, and these were available to be consulted by those preparing to frame legislation that would be similar, to some extent, for the Mexican central bank. Bianchi was always ready to offer his advice through the channels of communication available at the time. The support he offered was of great value to the Mexican project.

Chilean central banker and economist Andrés Bianchi, who acted as a consultant to the group that drafted the bill to grant autonomy to Banco de México.

The legislative process to grant autonomy to Banco de México went through two stages. The first involved incorporating the fundamental elements of the reform in the text of the Mexican Constitution. From a legal and constitutional standpoint, this task was facilitated by the fact that there were already references to the issue of banknotes and minting of coinage in Article 28 of the constitutional charter. The other mention of the subject in Article 28 was in fact obsolete, since it referred to an institution that was in the process of being created when the Constitution was enacted: the single bank of issue. The passage was rendered obsolete by the establishment of Banco de México in 1925. The second stage involved drafting a new law for Banco de México which would be consistent with its new status as an autonomous institution.

The same work group drafted both the constitutional amendment and the new Banco de México legislation. The two drafts were sent to the Secretariat of Finance for review so that sessions for consultation and correction, if necessary, could be organized. Several of the highest-placed officials in the Secretariat of Finance carefully reviewed the documents but almost no objections were made or significant changes suggested. The next step was a similar review by the legal department of the Office of the Presidency. This department was headed by lawyer Rubén Valdez Abascal, with whom, in a series of marathon sessions, general director Mancera carefully reviewed each and every article of both proposals. Valdez Abascal was a shrewd legal scholar with a sharp eye for the slightest loophole in any legal provision. The process of reviewing the drafts with him was not only helpful but highly educational. After passing through this scrutiny, Mancera and his team had even more confidence in the legislation they had framed.

Miguel Mancera Aguayo, General Director of Banco de México (1982-1994) and Governor of the autonomous institution from April 1994 to 1997.

The two drafts submitted for review to the Secretariat of Finance and the legal department of the Office of the Presidency were not exactly the same as the bills finally sent to the Congress. Apart from minor questions of wording, there was one provision which did not survive into the definitive versions. This provision, which was considered highly important at Banco de México, concerned the granting of autonomy to the National Banking and Securities Commission. With this single exception, the definitive bills contained all of the fundamental principles contained in the original drafts.

The legislative reforms of 1993 that gave autonomy to Banco de México rested on particularly solid foundations. First of all, Mexico was the only country in the world where the independence of the central bank was established in the constitution. The “Statement of Purpose” of the constitutional amendment included a detailed account of the damage caused by inflation to economic growth, financial intermediation, savings, agreements and contracts with economic implications, and income distribution in the domestic economy. All of these adverse effects caused by inflation were manifest in the experience of countries that had suffered the scourge. Mexico had also suffered these harmful consequences in periods of uncontrolled price rises. The reduction of inflation was a difficult task and depended on various preconditions, including a healthy fiscal situation. “Without prudent fiscal management there can be no lasting stability.” It was necessary to give society the best possible protection against new episodes of inflation and this required a legislative reform whereby Banco de México was granted a robust independence. “In this way we will gain permanent protection for the Nation against inflationary economic policies.”[12]

The existence of a central bank with the mandate to achieve, above any other end, price stability makes for an institution within the State committed to this objective in the long term. In this sense, the central bank may act as a counterweight to the public administration with regard to acts that may foster inflationary situations. But it may also act as a counterweight to individuals when they are planning to undertake actions leading to rises in prices or costs in the expectation that the authorities will carry out a monetary expansion commensurate with the increases.[13]

How was the autonomy of Banco de México finally formulated in Article 28 of the Constitution? The basic element was contained in a new paragraph added to the text which stipulated as follows: “The State shall have a central bank which will be autonomous in the exercise of its functions and in its management.” There follows immediately a description of the prime objective of Banco de México in its new status: “to ensure the stability of the purchasing power of the domestic currency.” The definition of this prime goal offered a specific criterion by which to evaluate the performance of the central bank: “the stable behavior of the general price level.” If the central bank “were to fulfill several objectives of equal importance, it could justify a failure to achieve some of them by adducing its efforts to fulfill some other end.” Also, in the event of the central bank being assigned several objectives, “it could abruptly change its actions in function of the end which at a given moment it considered most important.” By contrast, with a clearly stipulated prime objective, monetary policy would become more predictable, “facilitating the decisions of participants in the economy.”[14]

Legal scholar Francisco Borja Martínez, a member of the group that drafted the bill which granted autonomy to Banco de México. The legislative process involved two steps: first, the amendment of Article 28 of the Constitution, and second, the enactment of a new law for the central bank.

In this way, the concept having been defined and the prime objective stipulated, what followed was the determination of the preconditions that would have to be satisfied in order to render effective the autonomy of the central bank. A first and fundamental precondition was the central bank’s ability to determine by itself the amount and management of its own lending, “defined in the broadest sense.” To this end it was necessary to incorporate in the text of the constitution the stipulation that no authority could order the central bank to grant financing, “that is, to extend credit by any means or to acquire securities.” It is clear that without this last safeguard, “price stability, the guiding criterion of the action of the central bank, would be placed in serious risk.” The constitutional amendment goes on to consider the conditions under which Banco de México might be allowed to issue regulations concerning financial intermediation and services, “possessing the required authority to carry out this regulation and supervise compliance with it.”

The last session of Banco de México’s board of directors, before it was replaced by the Board of Governors of the autonomous bank. Seated from left to right: Guillermo Prieto Fortún, Guillermo Ortiz, Miguel Mancera, Pedro Aspe, Antonio Ortiz Mena, and Emilio Gutiérrez Moller.

Another determining factor in rendering effective the autonomy that was to be conferred on Banco de México was the procedure approved for appointing and removing the persons responsible for the functioning of the institution. This matter was considered so important that the essential elements of the appointment and dismissal formulas were incorporated in Article 28 of the Constitution. Bank officials were to be nominated by the President and approved by the Senate or, during the recesses of the legislature, by the Permanent Commission. As a way of protecting the central bank’s autonomy, the amendment stipulated that the members of Banco de México’s management board could only be dismissed from their duties for the commission of serious offenses. To reinforce the provision, it was determined that board members would be appointed for relatively long terms, staggered in such a way that any rotation of the personnel of the management board would take place gradually.

Two other important amendments were made to the Constitution in order to secure autonomy for Banco de México. For legal reasons, it was necessary to adapt the new legal status of the institution to the system of labor rights founded on Article 123 of the Constitution. A section was added to Article 123 to the effect that, together with the other entities of the federal public administration that made up the Mexican banking system, Banco de México would handle its labor relations in accord with the stipulations of paragraph B of the article. The amendment to section X of Article 73 of the Constitution dealt with the same issue, stipulating that Congress would be authorized to pass “the regulatory laws of Article 123” required by institutions in the “financial intermediation and services” sector.

The Board of Governors of Banco de México after the institution was granted its autonomy.From left to right: Francisco Gil, Miguel Mancera, Javier Arrigunaga (Secretary), Guillermo Prieto Fortún, Ariel Buira, Guillermo Ortiz (Under Secretary of Finance), Pedro Aspe (Secretary of Finance), and Jesús Marcos.

The Banco de México law was passed in December of 1993. In the “Statement of Purpose” and the chapter headings of the law the fundamental principles of the autonomy to be granted to the institution were outlined. Thus, the first paragraph of Article the First states with precision: “The central bank shall be an entity in public law of an autonomous nature and shall be designated Banco de México.” Another fundamental principle was the distinction incorporated into the law between Banco de México’s function and its objectives. The function was defined as the obligation to “provide the economy with domestic currency.” The main priority, as we have seen above, was “to ensure the stability of the purchasing power” of the domestic currency or, in less technical terms, to make sure that Mexico would live under stable price conditions that would allow to plan, save, build wealth and obtain credits, without incurring in household and firm’s capital shortfalls. The law stated two more of the central bank’s functions: “to promote the sound development of the financial system and the optimal functioning of the system of payments.”

The Constitution had already defined the essential attribute of an autonomous central bank as one with authority to determine by itself the amount and management of its own lending. This principle was to apply to all operations carried out by the central bank, but it had particular importance with regard to loans granted to the federal government. The main cause of inflation in Mexico and other countries had been excessive financing of the fiscal deficit by central banks. For this reason, the new Banco de México Law of 1993 dealt with this subject very carefully. The law stipulated that credit could only be granted to the government in limited amounts through the exercise of the current account run by the central bank. According to Article 12, Section IV, the debtor balance of the Treasury account must not exceed a limit equivalent to 1.5% of government expenditures as detailed in its budget, with certain exceptions related to the servicing of the domestic public debt.

Nevertheless, in order to prevent said financing from leading to excessive monetary expansion, it is also stipulated that if the debtor balance of the account should exceed the set limit, the Bank could issue securities on its behalf. As can be seen, this formula facilitates the management of the Federal Treasury but keeps Central Bank credit from being used as a tool to finance fiscal deficits in an inflationary manner.[15]

In addition to these very important formulas, the law also closed any possible loopholes that would allow for operations whose ultimate purpose was to extend additional credit to the federal government. One such provision, carried over from the 1985 law, was the stipulation that prohibited Banco de México from acquiring government bonds directly from the federal Treasury. The law incorporated other provisions to prevent Banco de México from having frequently to issue securities on the federal government’s behalf. It was also stipulated that federal Treasury checks and other documents made out in favor of third parties could not be redeemed by the central bank.

A very important issue, closely connected to monetary policy —and thus to the central bank’s purpose of “ensuring the stability of the purchasing power of the domestic currency”— was foreign exchange policy. The law stipulated that exchange policy would be determined by a commission on which the central bank would have a say, but whose final decisions would be taken by the federal government, through the votes corresponding to the Secretary of Finance. The great danger was that an exchange rate might be agreed upon which would force the central bank to accumulate large amounts of international reserves through the constant and costly issue of currency. Hence the provision contained in the law, which states:

[S]o that resolutions taken on exchange policy do not impede the Central Bank from fulfilling its prime objective, the Institution may compensate the increase of the monetary base resulting from the acquisition of foreign currencies, carried out in compliance with the instructions of the Exchange Commission, by placing and, where applicable, issuing securities on behalf of the Federal Government.[16]

The other fundamental principle designed to protect the autonomy of Banco de México concerned the makeup, rotation, and functioning of the body entrusted with managing the institution. The Constitution had only defined the procedure for appointing members of the board, stipulating that their terms would be staggered and that they could only be dismissed for serious causes. Certain precisions were incorporated into the law of 1993, which created the Board of Governors and also the positions of Governor and four Deputy Governors. The term of each Governor would be six years, beginning in the middle of the six-year presidential term and ending in the middle of the following six-year term. The terms of the Deputy Governors were to be eight years, with the replacement or reappointment of one Deputy Governor every two years. In this regard, the “Statement of Purpose” stated:

The number of members of the Board of Governors is considered adequate because one less would not provide sufficient viewpoints for the analysis of matters as complex as the ones entrusted to the Central Bank, while one more would render decision-making more difficult. Also, the appointments of Governor and Deputy Governor have traditionally been made in central banks.[17]

Other stipulations concerning the Board of Governors were also crucial. One of them was that decisions were to be taken by vote, with the vote of the Governor equal to the votes of the rest of the members of the board. Also of importance were the eligibility requirements for appointment to the Board of Governors, designed with a view to “achieving a high technical and professional level” in the functioning of this body. Candidates for Governor and Deputy Governor had to be persons of acknowledged competence in monetary matters and to have worked for at least five years “in senior positions in the Mexican financial system or in the departments, agencies, or institutions that exercise authoritative functions in the financial field.” Exceptions could be made in the case of two of the Deputy Governors for “cases of highly distinguished professionals in the fields of economics, finance, or law.” It is important to point out that these stipulations have ensured that the governance of Banco de México is genuinely collegial.

In view of the complexity of monetary phenomena and the importance of taking correct measures in these matters, it is advisable that the substantive actions of the Bank be decided by the Board of Governors. It is also advisable that the most important administrative decisions are taken by the same body.[18]

Foundations of Autonomy

The reasons for proposing that Banco de México be granted autonomy had been stated for years in speeches by the central bank’s general director, Miguel Mancera, and then again in the “Statement of Purpose” of the decree to amend Articles 28, 73, and 123 of the Constitution. The autonomy prevents the federal government from having the incentives to directly or indirectly finance itself with money issuance.[19] If an autonomous central bank contributed to reducing the possibility of inflationary episodes, then the public benefit of such an institutional arrangement was unquestionable. An argument often used by Mancera in his public declarations was that price stability was not an end in itself but rather an indispensable precondition to sustainable economic growth, through which the fruits of progress could be distributed widely throughout the population. By contrast, these ends became unreachable in an inflationary environment. In Mexico’s experience it could be shown that periods of more intense inflation were marked by slower growth and faster shrinking of real income.

The harmful effects of inflation are evident whenever there are continuous and generalized price increases. However, there are other effects that although less clear are no less damaging. For instance, if all prices increase at the same time and in the same proportion, it would seem that it would be enough to index income (salaries, for example) to that growth rate to smooth the effects of inflation. Nevertheless, inflation does not behave in that same ordered and anticipated way; on the contrary, besides having an upward effect on the general price level, it takes place disorderly, in a practically unpredictable and volatile fashion; that is, in an environment of inflation, economic agents cannot distinguish accurately the changes in relative prices (the changes between prices, its magnitude and incidence), the changes in the general price level, which besides prompting a generalized upward trend (as an alleged protection against future inflation) propitiates resources to be allocated every time more erratically, generating more poverty and wasting resources. Summing up, this volatility seriously affects the price system as a mechanism by which to guide the assignment of productive resources. With inflation, the ability to make appropriate investment decisions becomes much more difficult, with the result that the profitability of economic projects is often very different from what was originally expected. In an inflationary environment, the analysis implicit in any investment project of the ratio of revenues to probable costs is enormously complicated or even impossible, if prices are rising rapidly.

In short, inflation makes investment and saving decisions difficult. In the early stages of any inflationary process, real interest rates tend to become negative, causing great harm to savers who have decided to maintain their resources in domestic currency. But this situation of monetary illusion is always transitory. Soon economic agents realize not only that interest rates are negative but also that the risks of maintaining savings in the domestic currency are too high. This is not only because rapidly rising inflation could abruptly cancel out any real yields offered initially by financial investments, but also because of the possibility that a sudden devaluation could wipe out savings in terms of foreign currency. These dangers make savers begin to demand a reward or premium for maintaining their savings in the local currency, and this premium is necessarily transferred to interest rates, resulting in scarcer financing for investment projects or the acquisition of real estate or durable consumer goods.

It also happens in an inflationary context that the real outcome of nominal contracts tends to be different from the intentions of the parties at the moment they were signed. Obviously, the frequency of such unexpected outcomes increases directly in proportion with the intensity of the inflation. The first thing to note is the simple redistribution effect of these cases, which unpredictably and erratically harm or benefit creditors and debtors alike. In such circumstances, economic agents soon realize the distortions caused by inflation and react to protect themselves. One effect is that the terms of contracts are shortened as much as possible, which results in a highly damaging rise in transaction costs.

The effects of inflation on credit intermediation are particularly adverse. An inflationary environment makes lending riskier, as a result of the increased uncertainty involved in investment projects. Another effect is that nominal interest rates tend to go up in proportion with the inflationary component incorporated in them. This inflationary component is the amount debtors must compensate creditors for the deterioration, as a result of inflation, in the nominal value of the loan’s principal. The consequence for the debtor is a greater amortization of the loan, considered in real terms. It is logical that this amortization takes place faster in proportion with the variability of inflation and the relative size of the credit’s inflationary component. As a result, the debtor is squeezed by the concurrent effect of two harmful forces: on the one hand, the application of higher real interest rates than those that would exist in a context of stability and, on the other, an advanced and unplanned amortization of the loans in question.

Banco de México’s Governor Miguel Mancera and his successor in the post, Guillermo Ortiz.

The discouragement of investment projects is an effect of inflation that cannot be measured directly by any economic indicator. By contrast, it can be demonstrated empirically that in inflationary circumstances nominal interest rates contain a premium that tends to increase in direct proportion with inflation’s variability. What can be expected in such circumstances is a reduction in medium- and long-term credit operations. This has been easily proven during inflationary episodes. Thus, “in inflationary times, housing loans and long-term credit in general tends to disappear from the financial system, unless certain ingenious measures are employed which allow loans to be given a kind of real amortization similar to what they would have in times of stability.”[20]

Finally, inflationary times are a breeding ground for the development of other economic distortions. The continual price rises generate uneasiness in the population and protests reach the ears of the authorities, who feel obliged to attempt direct control measures that invariably turn out to be ineffective, if not downright harmful. The truth is that price controls only cause a scarcity of goods and services, the creation of black markets, and, in the long run, diminished supply. Nevertheless, the public outcry is often difficult to ignore. To make matters worse, one of the characteristics of inflation is its tendency to agravate once it has taken root. Thus, since “the adverse consequences of inflation tend to grow more rapidly than inflation itself, it is very easy to reach a critical situation.”[21]

Once the new Organic Law of Banco de México had been passed, the next step was the appointment of the Board of Governors, so that it could begin to operate within a different legal framework. We have seen that Miguel Mancera, who had been general director of the central bank since December 1982, was chosen as Governor. Two observations can be made about the appointment of the first four Deputy Governors. The first point is of an operational nature. In order to establish the staggered rotation of eight-year appointments, with the replacement or reappointment of a Deputy Governor every two years, three of the first four Deputy Governors would have to be appointed for truncated periods of nine months, two years, and four years. The second observation is that all four of the Deputy Governors fully met the qualifications stipulated in the law concerning age, “acknowledged competence in monetary matters,” and having “occupied, for at least five years, senior positions in the Mexican financial system or in the departments, agencies, or institutions that exercise authoritative functions in the financial field” (Article 39, Sections I and II).

To comply with protocol, the Board of Directors of Banco de México integrated in accordance with the Organic Law of 1985 held its final closing session on 12 March 1994. The official appointments of the five members of the Board of Governors, who included Deputy Governors Francisco Gil Díaz, Ariel Buira, Jesús Marcos Yacamán, and Guillermo Prieto Fortún, had been announced by President Salinas de Gortari just the day before. Enlace, the in-house gazette of the central bank, published an illustrated article on this final session. According to the article, both Miguel Mancera and Pedro Aspe spoke at the session. Mancera praised the efforts of the members of the board, adding that their actions would be “recorded in the institution’s archives, which will doubtless constitute a very important source of information for the history of the central bank.” Finance Secretary Pedro Aspe alluded to the importance Banco de México’s newly-won independence would have for the future of Mexico, declaring it had been made possible, in large part, “by the quality of the Bank’s officials and, in a very significant way, by the acknowledged prestige of its General Director, licenciado Miguel Mancera.”[22]

Francisco Gil Díaz, a distinguished public servant who has occupied the following posts: Under Secretary of Revenues, Deputy Governor of Banco de México, and Secretary of Finance.

Although his appointment would last only until December 1994, it is fitting to recall here the figure of Guillermo Prieto Fortún, who was one of the original members of the Board of Governors of Banco de México. Prieto Fortún had earned his undergraduate degree in economics at the Universidad Nacional Autónoma de México. After beginning his public service career in the income tax department of the Secretariat of Finance in 1955, he moved to the Secretariat of Industry and Commerce, where he served on the National Commission for Workers’ Profit-Sharing, and then the Secretariat of Labor and Social Security. An experienced professional, his major career opportunity came in 1976, when he returned to the Secretariat of Finance as general director of the Central Tax Department and later promoted to the position of Under Secretary of Revenues, where he remained for eight years. His appointment as Deputy Governor came after he had served as chairman of the National Banking Commission from 1989 to the beginning of 1994. Ariel Buira, who had completed his undergraduate and postgraduate studies at the University of Manchester in England, had had a distinguished professional career before being appointed Deputy Governor of Banco de México. His association with the central bank went back to 1975, at a particularly brilliant moment in his career, when he was named Alternate and then Executive Director in representation of Mexico and seven other affiliated countries at the International Monetary Fund. Returning to Banco de México, he served as head of the Organisms and Agreements Department from 1985 to the beginning of 1994.[23]

Originally from the northern city of Monterrey, Jesús Marcos Yacamán earned his bachelor’s degree in economics from the Universidad de Nuevo León, before going on to do postgraduate work at Columbia University in New York. His professional career began at his alma mater, at the Center for Economic Research, of which he became director. Marcos Yacamán joined Banco de México in 1976, quickly rising through the ranks. Before his appointment as Deputy Governor he had served successively as assistant manager of Organization and Analysis of the Banking System, head of Financial Information, assistant director and then director of Financial Programming, and director of Economic Research from 1988 to 1994.

The academic background and professional career of Francisco Gil Díaz was no less brilliant. After undergraduate studies at the Instituto Tecnológico Autónomo de México he earned a master’s degree and doctorate in economics at the University of Chicago. After beginning his career at Banco de México he moved on to the Secretariat of Finance, where he became head of the Department of Revenue Policy. Returning to the central bank, he served as director of Economic Research, before moving back to the Secretariat of Finance, as Under Secretary of Revenues.

It is fortunate that at least three of the members of the group that drafted the legislation through which Banco de México was granted its independence have left written testimonies that express their personal views of this important event.[24] Of particular value was an address delivered by the leader of the process, Miguel Mancera, to the Alumni Association of the Instituto Tecnológico Autónomo de México.[25] It was in this address that Mancera used the metaphor of a tripod, which was later to gain a certain celebrity, to describe central bank autonomy. The first leg of the tripod was the authority conferred on Banco de México to determine by itself the amount of primary credit it would extend. A second leg, no less important, was the system for appointing and rotating the members of the Board of Governors to which the management of the central bank was entrusted. The last leg, which was also necessary, though it did not bear quite as much weight, was the freedom that the law guaranteed to the institution in managing its own internal affairs.

Mancera went on to explain to his attentive audience the raison d’être of each of the legs of the tripod. If the central bank did not have exclusive control over primary credit and therefore over the money supply, it would be impossible for it to fulfill its function of ensuring the stability of the purchasing power of the domestic currency.

In this respect, we may recall the very special relationship between the credit of the central bank and the movements of general price levels. This relationship exists because the bank of issue, unlike financial intermediaries, possesses the singular ability to extend unlimited credit without being required to capture corresponding resources. This means the central bank may increase the purchasing power of the economy even if no one produces more. But it is well known that when purchasing power grows more rapidly than production, prices tend to go up. Hence the fact that the proper handling of credit by the central bank is crucial to ensuring the stability of the general price level.[26]

With regard to the second leg of the tripod —the stipulations regulating the Board of Governors— Mancera explained to his audience all of the safeguards that had been incorporated into the law in order to protect the independence of the Board and its members, and to ensure that they possessed a high level of technical qualifications and professional experience. He then went on to the third leg of the tripod. The administrative independence of Banco de México should be interpreted “as a measure to protect the institution against pressures from other authorities.” He posited the hypothetical example of the central bank being forced to act against its will to prevent its operating budget from being severely restricted. Of course, the protection he described was not to be interpreted as an unbridled freedom to manage the institution however the Board might see fit. For this reason, there were specific provisions in the Banco de México Law regarding budgets, audits, and the very important matter of accounting to Congress and the general public.

The autonomy granted to Banco de México, said Mancera, was an effective dike against the possibility of future waves of inflation. It was effective because it was designed not only to address the symptoms of inflation but to prevent its causes. The autonomy of the central bank was an effective vaccine against inflation “because it prevented the abuse of credit by the single bank of issue.” In order to have a permanent and effective policy in the struggle against the forces of inflation, it was clearly desirable to “separate the function of creating money from the other tasks of the State, in which repeated demands are continually made to increase spending.” Following these explanations, Mancera entered boldly into the monetary debate.

In spite of the damage inflicted by inflation, there are those who are willing to tolerate it and even those who recommend it as a means, supposedly, of accelerating economic development. Perhaps some of these proponents adopt such positions out of a lack of sufficient information. Others, possibly in bad faith: let’s not forget the statement attributed to Lenin that the most effective formula for destroying the capitalist system is to corrupt its currency.[27]

Another statement of Miguel Mancera’s views is to be found in a volume that registered his participation in a symposium organized to commemorate the tercentenary of the Bank of England.[28] As part of the program, the organizers asked Mancera to comment on a very thorough essay on the subject of the central bank by the prestigious economist Stanley Fischer, who had left the International Monetary Fund at the time and was back at mit as a professor. Mancera responded to Fischer’s essay by presenting and analyzing the economist’s seven fundamental lessons that could be applied as standards for measuring the autonomy of a modern central bank. Mancera was able to illustrate each of these lessons through Mexico’s recent experience of legislating the independence of its own central bank.

Economist Stanley Fischer, a prestigious member of the faculty of Harvard University and a senior executive at the International Monetary Fund from 1994 to 2001.

Fischer’s first lesson stated that the central bank should have a clearly defined mandate which includes price stability. Mancera explained that in the case of Banco de México maintenance of price stability was the priority of its mandate. He added that a mandate of this kind conferred clarity on the central bank’s operations, as well as protection against being forced, or constrained by circumstances, to apply an expansionist monetary policy. In his essay, Stanley Fischer had referred to this possibility, alluding to the possible acceptance by the central bank of the existence of a short-term Phillips curve. In Mancera’s view, the priority given to price stability diminished the possibility of the central bank’s validating the existence of a stable short-term relationship between greater inflation and less unemployment and still less of its using it for reasons of political expediency. Governor Mancera pointed out that “in some countries, like Mexico, even that short run relationship may not exist, except, unfortunately, when traveling on the curve’s path in a south-east direction,” that is, when greater inflation is accepted in exchange for a transitory drop in unemployment.

Fischer’s second lesson —that “the central bank should publicly announce its intermediate goals”— received a simple and concise response from Mancera, but the third lesson —that “the central bank should be accountable, in two senses; it should be held responsible for meeting its announced goals; and it should be required to explain and justify its policies to the legislature and the public”— required a more detailed explanation. Regarding the disclosure of the intermediate goals of monetary policy, Mancera explained that the Banco de México Law did not require it to disclose this information, but he added that, independent of legal obligations, it was advisable for a central bank to make public all possible information, since such a policy would contribute to reducing uncertainty about future price levels. As for the question of accountability, the general idea was that it was essential to reconcile this imperative with the autonomy of the central bank. Of course, such rendering of accounts was easier when the priority of the central bank was to ensure price stability. In the case of Banco de México, Mancera explained that, in addition to Congress’s authority to summon the Governor to testify at any moment, the institution published several key documents annually: its monetary policy program, two reports on the execution of monetary policy in the course of the preceding semester, and its traditional annual report.

Fischer’s fourth lesson was particularly challenging in the case of the central bank in Mexico, a country that had suffered “acute and prolonged inflation, which was closely linked to large public deficits partially financed with central bank credit.” The lesson formulated from Stanley Fischer’s essays stated that “the government should have the authority to override the Bank’s decisions, but the override decision should carry a lot of costs to the government.” According to Governor Mancera, this authority would be less ominous in countries with a broad social consensus in favor wless, considering the institutional framework of central bank autonomy implemented in Mexico, the mere possibility mentioned by Fischer is inconceivable. Neither the Constitution, nor Banco de México’s Law allow for this possibility or for removing from their posts, in a discretionary way, board members.

Fischer’s fifth lesson stated that “the central bank should be given authority to set interest rates and other monetary policy variables in order to achieve monetary policy goals.” According to Mancera, this prerogative, which constituted in Fischer’s words the “instrument independence” of the central bank, had been guaranteed to Banco de México in both the Constitution and its organic law. As he explained, “the exclusive power vested [in] the central bank to decide on the amount of its credit is indeed an essential feature of central bank autonomy.” This subject was clearly and directly related to Fischer’s sixth lesson, to the effect that “the central bank should not be required to finance the government deficit and should not manage the public debt.” In Mancera’s view, this principle, which derived directly from that of instrument independence, was “essential for the successful pursuit of monetary stability.” He explained that the authority to manage the public debt posed no problem to the central bank as a financial agent. The more delicate question was how much credit the central bank could extend to the government. In this sense the Banco de México Law was very strict:

[Banco de México] may extend credit —but is under no obligation to do so— to the Federal Government, but only up to [a] certain amount, equivalent to 1.5 per cent of total public expenditures approved in the Federal Budget… This is a small amount, roughly equal to one third of one per cent of GDP.

Finally, in response to Fischer’s seventh lesson —that “there cannot be separate responsibility for setting interest rates and the exchange rate so long as the exchange rate floats”— Mancera had to carefully set out the technical aspects of the issue. He explained that the adoption of a fixed exchange rate regime or a band placed effective constraints on monetary policy. Banco de México was in a more or less intermediate zone between fixed parity and a floating exchange rate, since the band in Mexico had become gradually wider since 1992. If the exchange rate remained permanently between the upper and lower limits of the band, this meant a floating rate in practical terms. But if the exchange rate threatened to move outside the limits of the band, because of pressures to reevaluate, the “law provided Banco de México with the power and instruments to sterilize —at [the] government’s expense— an undesired monetary expansion derived from central bank purchases of foreign currency effected to comply with the exchange regime.” This provision was in line, of course, with the central bank’s priority of ensuring price stability.

Governor Mancera concluded his comments by pointing out that price stability was the best contribution a central bank could make to economic development. “A credible commitment to price stability by the central bank contributes to economic efficiency, growth and social equity.” Nevertheless, there was always the danger of those who believe that the Phillips curve can hold in the long term, or that the central bank can set interest rates at its own discretion whenever it wishes. Hence the obligation of the central bank to offer information and educate the public regarding the advantages of price stability and the constraints to which monetary policy is subject: to make clear, in short, what a central bank can and cannot do.

Endnotes

Institutional autonomy

[1] Miguel de la Madrid Hurtado, Cambio de rumbo: Testimonio de una Presidencia, 1982-1988 (Mexico City: Fondo de Cultura Económica, 2004), p. 19.

[2] Pedro Aspe Armella, El camino mexicano de la transformación económica (Mexico City: Fondo de Cultura Económica, 1993), pp. 183 and 184.

[3] Miguel Ángel Olea Sisniega, “Las negociaciones de adhesión de México al GATT,” Foro Internacional, vol. 30, no. 3 (January-March 1990), pp. 497-535.

[4] Aspe Armella, El camino mexicano, pp. 29-37.

[5] Banco de México, Informe Anual 1993, p. 17, and Informe Anual 1994, p.2.

[6] Ibid., p. 113.

[7] Tomás Peñaloza Webb, “Apectos centrales de la banca mexicana, 1982-1990,” Banco Nacional de Comercio Exterior, vol. 42, no. 2 (February 1992), pp. 107-118.

[8] Fernando Clavijo and Susana Valdivieso, Reformas estructurales y políticas macroeconómicas: el caso de México 1982-1999 (eclac, Serie Reformas Económicas, 2000), pp. 35-37.

[9] Ibid., pp. 38-40.

[10] M. Ángeles Villarreal and Marisabel Cid, NAFTA and the Mexican economy (Washington, DC: Congressional Research Service, 2008), pp. 1 and 2.

[11] Interview with Miguel Mancera conducted by Eduardo Turrent (May) 2012.

[12] “Exposición de motivos de la iniciativa de decreto por el que se reforman los artículos 28, 73 y 123 de la Constitución Política de los Estados Unidos Mexicanos, enviada al H. Congreso de la Unión por el Ejecutivo Federal,” in Banco de México, Informe Anual 1993, p. 2.

[13] Ibid., p. 6.

[14] “Decreto por el que se reforman los artículos 28, 73 y 123 de la Constitución Política de los Estados Unidos Mexicanos,” in Banco de México, Informe Anual 1993, pp. 239-241.

[15] “Exposición de motivos de la iniciativa de Ley del Banco de México enviada al H. Congreso de la Unión por el Ejecutivo Federal,” in Banco de México, Informe Anual 1993, p. 243.

[16] Ibid., p. 245.

[17] Ibid., pp. 246-427.

[18] Ibid., p. 248.

[19] “Exposición de motivos de la iniciativa de reforma constitucional para dotar de autonomía al Banco de México,” in Banco de México, Informe Anual 1993, pp. 232-234.

[20] Miguel Mancera Aguayo, “La política monetaria en México,” in Testimonios sobre la actuación de la banca central (Mexico City: Centro de Estudios Monetarios Latinoamericanos, 1993), pp. 133 and 134.

[21] Ibid., p. 134.

[22] “Última reunión de la Junta de Gobierno,” in Enlace (March 1994), pp. 30 and 31.

[23] “Primera Junta de Gobierno,” Enlace (April 1994), “Nombramientos” section.

[24] Javier “Ámbito internacional de la autonomía de los bancos centrales,” in Autonomía del Banco de México y perspectivas de la intermediación financiera (Mexico City: Universidad Nacional Autónoma de México / Corte de Constitucionalidad de Guatemala, 1994), pp. 9-23 and Francisco Borja Martínez, “Reforma constitucional para dotar de la autonomía al Banco de México,” in ibid., pp.25-35.

[25] “Palabras del Lic. Miguel Mancera, Director General del Banco de México, en ocasión del Seminario Política Económica de México para 1994, organizado por la Asociación Nacional de Exalumnos del itam,” pp. 1-6.

[26] Ibid., p. 2.

[27] Ibid., p. 5.

[28] Forrest Capie et al., The Future of Central Banking: The Tercentenary Symposium of the Bank of England (Cambridge: Cambridge University Press, 1994), pp. 315-322.v

Central Bank Autonomy in Mexico

A Historical Overview

The publication consists of 10 volumes:

1. The Central Banking System in the World
With Preface and Foreword

2. Mexican Central Bank Autonomy: Historical Background

3. Concurrent Visions

4. Echoes from Abroad

5. Institutional Autonomy

6. A Difficult Takeoff

7. Unprecedented Stability
With Sources Consulted

Table of Contents

- Institutional Autonomy

- Market-oriented Reforms
- The Banco de México Law
- Foundations of Autonomy
- Endnotes