It was worthwhile in the Julian Revolution of July 9, 1925, to begin a founding process for an issuing national bank. The country's crisis which was caused by -- in the opinion of Lius N. Dillon -- inconvertibility of paper money, issues without financial backing, inflation, speculation, and credit abuse, the drop in the balance of payments, the lack of official control over banks, banking anarchy and rivalry -- all of these causes should have been faced, and the money should have been put on a sound basis and the exchange rate more regulated. The Central Bank of Ecuador would be the institution called upon to fullfill these purposes, within a mishmash of reforms of the Ecuadorian economy advocated by the military and civilians congregated around Julian ideas.

Nevertheless, considering the related aspects, a type of exchange and monetary regimen extremely sensible in a small and open economy as that of Ecuador's, the proposition should have matured, while the inertia of social sectors who were not interested in this type should have been overcome. An intermediate step was taken on June 26, 1926, when the Central Mint of Issue and Amortization was created. This was an institution that was in charge of officially recognizing the total amount of means of payment and to authorize provisionally the circulation of banknotes.

On October 18, 1926, President Isidro Ayora gave instructions for the banks authorized to issue banknotes to deliver to the National Issuing Mint determined quantities of gold and silver that, in total, added up to 10,600,000 sucres.

Meanwhile, the mission presided over by E.W. Kemmerer prepared an extensive set of modernizing economic measures. This famous professor from Princeton University came preceded by an immense fame for similar works carried out in other South American countries.

On February 11, 1927, the Kemmerer Mission presented for consideration to the government the Organic Law of the Central Bank of ecuador, accompanied by an explanation of reasons. An incorporated company authorized to issue money would appear. It would also rediscount to a fixed rate, would serve as the governmental and associated bank depositary, administer the exchange market, and would function as a fiscal agent. Due to the fact that the functions of the new institution were "intimiately linked to the sovereign rights of the government and the public interest," the government was called to participate in its administration.

On March 12, 1927, President Isidro Ayora decreed the Organic Law of the Central Bank of Ecuador (Official Register No. 283). The preparation of the founding of the new institution was in charge of an Organizing Commission, named by Ayora himself. On June 3 of the same year the statutes were approved. After overcoming sevral operating difficulties between the Central Mint of Issue and the new institution, finally on August 10, 1927, The Central Bank of Ecuador opened its door. On August 25, 1927, the Main Guayaquil Branch was inaugurated.

Stabilizing and unifying money were the initial objectives of the new institution. To attain objectives of the new institution. To attain them, the Issuing Institute took advantage of the "gold exchange system," which was a monetary system in which the price of the Sucre was fixed in terms of gold. The basic obligation of the monetary authority consisted of maintaining this price fixed at 0.300933 grams of fine gold, that is to say, a fifth of the fine gold content in the American Dollar of that time. This forced convertibility coincided with an economic crisis called The Great Depression (1929) that made a new moratorium of payments to be decreed on February 8, 1932.

As of then, the traditional politics of deficit spending and credit (now of the Central Bank itself) that had already financed the Ecuadorian economy between 1915 and 1925, came into force again. The instability of prices driven by fiscal spending and expansive monetary politics forced the government to refer to another consultant, Manuel Gomez Morin, to reform the Law of the Central Bank and the related monetary norm. In the vision of this Mexican expert, monetary authority should channel credit towards sectors of the economy which were considered critical in the process of development.

Along with Victor Emilio Estrada, a prominent banker from Guayaquil, they both assigned the Central Bank of Ecuador the fundamental operation of determining the types of loans offered by the private sector banks to the productive sector by means of changing hte rate of discount (1937). The difficulties of carrying out the recommendation of the Gomez Morin Commission were immense. Nevertheless, from then on, the relations between the Government and the Bank were seen as deeply changed.

After the Second World War ended, a new turn of inflation, along with serious balance of payments made the appearance of foreign technicians necessary once more. In 1948, the Director of the Issuing Institute, Guillermo Perez Chiriboga, called Robert Triffin, expert in the Federal Reserve System of the United States. This Harvard consultant proposed to replace the Organic Law of the Central Bank with the Law of Monetary Regulations and the Law of International Exchanges. In this way new concepts were authorized: a Director of the Central Bank of Ecuador in which the Government participated (which indicated its part in the design of monetary policy); the power to devalue money; the carrying out of anticiclical politics; authorization of the Issuing Institute to confer loans to the State and the productive sector; and finally, a system that permitted itself to assume new functions. The final purpose was planned to stabilize prices and preserve a solvent financial situation.

For more than three decades this monetary system successfully faced innumerable disturbances. Nevertheless, the severity of the foreign debt crisis unraveled in 1981. The adjustments that were necessary to submit to an unbalanced economy, fiscal pressures, an overflowing inflation, and above all, the necessity of ordering again the entire economy to retake a more appropriate growth route, made a new change necessary. With this proposition, in May 1992, the Law of Moneary Order and the Bank of the State was issued. Because of this law, the Central Bank of Ecuador was empowered to intervene in the financial sytem by means of open market operations. With this powerful politial instrument, it has been possible to control an unprededented inflation in Ecuadorian monetary history. Additionally, the necessity of establishing new austerity measures for the public sector made it infringe on the power of granting credit to the Public Treasury. Finally, with the purpose of warding off the interests of the banking system's customers, the Central Bank of Ecuador was authorized to operate as a last resort loan agent, within strict financial parameters. It was clear, at present, that the main commitment of an issuing institution is to oversee the stability of prices and external viability.

(Translated from Spanish by James S. Cameron)

Source: www.bce.fin.ec/historia1.html