Early banking legislation

During colonial times and the first years of independence the church was the most important single provider of credit in Mexico in part because of its vast holdings of property. Once divested of its lands by the Reforms of the 1850s, it was no longer able to carry out these operations on such a scale and other sources of credit were needed. However, providing such credit was made more difficult by the fact that Mexico did not have a banking law that defined the legal obligations of banks, their creditors and their debtors. Commercial houses (casas de comercio) made loans to hacendados and to the government at exorbitant rates at times, and some casas funded their operations by circulating liabilities called vales. Vales evolved into bearer notes that were redeemable for some type of commodity money (usually gold or silver coin) on demand. Bankruptcies among casas seem to have been a common phenomenon. Therefore if the public was to have any faith in banks, it was likely that they either would have to own considerable amount of land or would have to have connections with well-known foreign firms.

In May 1854 the Mexican Congress adopted a Code of Commerce as its first serious attempt to regulate financial institutions. However, the 1857 Constitution did not in fact mention banking and as Article 117 stated that those powers that were not expressly granted to the federal officers were reserved to the states this would have enabled state legislatures to pass their own laws. Chihuahua was the only state, outside of the Federal District, where the legislature took advantage of this constitutional right before the federal power decided to assume it because in Chihuahua the expansion in the economy had caused the need for, and provided the basis for, the establishment of such institutions and the issue of banknotes.

The powers conceded by the 1857 constitution placed the faction which controlled the state government in a favourable position, as it could grant lucrative concessions to its own favourites. In the concessions granted by the Chihuahuan legislature can be seen signs of the political infighting between the Terrazas and other families in the first decades of the Porfiriato.

In the absence of a strong regulatory system any issuer would need to inspire confidence, and it is noticeable that the first two concessionaires, Enrique Müller and Francisco Macmanus, had experience (having held the concession for the Chihuahuan mint and already offering banking facilities through their respective business houses), vast assets, and foreign nationality. Macmanus' notes were reported in 1883 as being the equivalent of America's silver certificates^{"the stability and unencumbered wealth of the Macmanus Scott estates of assets makes these bills absolutely par with silver and far more valuable as a financial agent for facilitating commercial transactions" El Paso Daily Times, 22 April 1883}.

The earliest concessions were quite basic, merely permitting the issue of a certain amount of currency. The first, in 1875, for the Banco de Chihuahua, made no mention of any upper limit or guarantees, whilst the second, for the Banco de Santa Eulalia, only referred in passing to a guarantee. By 1882, however, the drafters had developed their skills and the concessions were demanding guarantees, the right to appoint supervisors and the obligation to provide credit facilities for the state government.

All these banknotes were of voluntary acceptance, and it was a constant problem that they were not readily accepted outside the state. The first notes were payable on sight in legal tender (en moneda corriente), i.e. copper coin, or in silver, either at a discount of 8% or at the daily exchange rate. The copper coinage was already debased and the discount on silver indicated the premium that this metal carried. Banknotes could be cashed in the branch of the bank that issued them or, at a discount, in another branch of the same bank, the discount representing the cost of shipping the notes back to the original branch and also an insurance premium against the fact that they might prove to be counterfeit. Because of this banknotes from out-of-state branches were overprinted with the name of the branch at which they were issued.

Within a few years of the original concessions notes issued in Chihuahua had to bear some indication that they had been registered by the Administrador de Rentas^{he Administracíon General de Rentas became the Tesorería General del Estado in the constitutional changes of 24 September 1887}. Some Banco Minero Chihuahuense notes carry the signature of the Administrador Ramón Cuellar over a bar overprint bearing his title: more common is a circular seal, in red or black, over either the year date or a five figure numeral. Since the year date 1881 is known the seal must have been in use by that year, though the requirement is first mentioned in the Banco Minero concession of 1882.

Later notes also carry revenue seals which were dated by fiscal year and so comprise two consecutive year dates^{The Mexican fiscal year ended on 30 June}. The designs changed for each fiscal year and there were denominations for ½c, 1c, 2c and 5c. Unissued notes invariably lack such seals, which must have been applied just before the notes were put into circulation.

Between 1875 and 1883 the Chihuahuan legislature granted concessions to six banks: the Banco de Santa Eulalia, Banco Mejicano, Banco de Hidalgo de Parral, Banco Minero Chihuahuense, Banco Minero de la Candemeña and Banco de Chihuahua though only the first four began operations.

1884 Commerce Act (Código de Comercio)

In the second half of 1883 the federal government proposed to reform Article 72 of the Constitution to make mining, commerce and banking its exclusive preserve. As a constitutional amendment had to be approved by both Houses and a majority of the states legislatures, the authorities in Chihuahua had time to add to the existing local concessions and to grant new ones.

By this time, the wording of a grant had reached a fairly standard format, and covered the amount of currency permitted, the manner of acceptance and redemption (in Mexican silver at the daily rate (en pesos de plata del cuño mexicano al cambio del dia)), the need to register any issue with the Administrator de Rentas, guarantees to the satisfaction of the executive branch by means of mortgages over property, the need to hold at least 33% of the value of the notes in circulation in hard cash in the bank, the fact that the bank would be subject to Mexican law and could not claim the privileges enjoyed by foreigners, and a time limit within which to start operating.

In 1884 a worldwide crisis affected the Mexican economy and there was a panic as holders of paper currency tried to convert banknotes into landholdings, jewellery, coins, and domestic deposits of foreign exchange.

In the same year, in the wake of a serious financial crisis prompted by the federal government’s overissuance of railroad subsidy promises, the federal authorities engineered the merger of the two largest Mexico City banks into the Banco Nacional de México. The explicit intention was to model the Banco Nacional de México on the early Bank of England, granting it a monopoly over the issue of paper money in return for providing credit to the federal government and the rest of the banking system in times of trouble. It was agreed that in return for the bank providing a current account of eight million pesos the government would require banks already in existence to obtain a federal charter and federal offices could only accept El Banco Nacional de México notes.

For better or for worse, the Banco Nacional de México never played the role intended for it. Political opposition to the proposed monopoly over paper money soon crystallized around the local branch of the Banco de Londres, Mexico y Sud America, which enjoyed extensive connections with many prominent Porfirian financiers and politicians. The resulting legal and political battles lasted 13 years, and the law giving the Banco Nacional de México its privileges never went into effect.

The Mexican government passed its Código de Comercio on 15 April 1884. Chapter XII referred to “Los Bancos”. Articles 954 to 955 stated that in future federal authorisation would be needed to establish any bank (bancos de emisión, circulación, descuento, depósitos, hipotecarios, agrícolas, de minería o con cualquier otro objeto de comercio). Articles 957 and 958 laid down that they would have to be limited companies (sociedades anónimas) with at least five founder members, and a minimum share capital of $500,000, with at least half fully paid up. Only banks conforming to the law could issue notes payable to the bearer on sight: note issue could not exceed paid-in capital: fixed cash reserves were required, and all banknotes other than those of El Banco Nacional de México were taxed at 5% of their value. A final article stated that existing banks could not continue operating unless they subjected themselves to the Act within six months.

The Act naturally affected the local banks in Chihuahua and they petitioned their local legislature: on 9 July this authorised the state executive to lobby on the banks' behalf^{Periódico Oficial, 19 July 1884}. On 18 July Rafael Dondé and Alfonso Lancaster Jones, for the state of Chihuahua, petitioned the Secretaría de Hacienda to declare the banks included in the Código de Comercio in force (i.e. that they could continue operating according to the laws of the state). In addition Luis Terrazas, Tomás Macmanus and Enrique Creel, representing the banks themselves, petitioned President Díaz that the period granted for withdrawing notes in circulation (six months from 20 June) be extended by an extra eighteen months^{This was granted: on 7 August 1884 the government gave the Banco Mexicano, Banco Minero Chihuahuense and Banco de Santa Eulalia an extension of eighteen months to collect in their notes}.

On 23 March 1886 the Secretario de Hacienda, Manuel Dublán, signed an agreement with Carlos Pacheco, representing the banks of Chihuahua, José del Collado, a director of the Banco Nacional de México, and Ramón Uzandizaga, manager of the Chihuahua branch. In it they recognized that the Chihuahuan banks had been established by concessions from the state Congress, at a time when federal control was unclear, and so the Secretaría de Hacienda confirmed the concessions for a further 25 years, under the following terms:
1. the Banco de Santa Eulalia could issue up to $100,000 in notes of various denominations payable in copper at par or in silver at a 8% discount or at par in hard currency (pagaderos en cobre a la par o en plata con 8% de descuento o pagaderos a la par en pesos fuertes)
2. the Banco Mexicano (now called the Banco de Chihuahua) could issue up to $300,000, on the same terms
3, The Banco Minero Chihuahuense could issue up to $200,000 on the same terms^{AHBANAMEX, Actas del Consejo de Administración, 23 March 1886, folios 246-250}.

The Chihuahuan opposition, coupled with that of the Banco de Londres, Mexico y Sud America, led to the new banking law of 3 June 1886 which permitted the establishment of banks of issue in the states.

While the national banking system that developed provided badly needed financial assets, it exhibited some difficulties. For example, banknotes issued by local banks circulated at a discount that increased with the distance from the bank that issued them. Also, local bank notes were so frequently used as payment - especially where notes of El Banco Nacional de México were scarce - that local business might well have come to a halt if the government enforced the provision that only notes of El Banco Nacional de Mexico were acceptable as means of payment of funds due to the government. Local notes were in fact accepted as long as El Banco Nacional de Mexico would go along with the practice but the accumulation of local bank notes clearly gave El Banco Nacional de Mexico the ability to affect practices by local banks and influence monetary conditions in areas where it did not have an office.