Huerta's monetary decrees
Huerta enjoyed the support of the business and banking communities when he assumed the presidency because they believed that he would be able to restore order and financial stability. However, as the war against him spread it grew more costly: as chaos increased normal revenue declined and the nation’s finances deteriorated. During the summer of 1913 banks throughout Mexico raised interest rates and tightened credit, even for the oldest and most established commercial houses, and many of the leading banks stopped paying interest on deposits. Huerta also made what were in effect forced loans on the various banks. Banknotes began to depreciate, gold disappeared from circulation and the banks discontinued specie payments. Towards the latter part of 1913, silver pesos also disappeared from circulation, being hoarded and exported.
In view of the situation on 5 November 1913 Huerta decreed that, for a year, the banknotes of state banks should be legal tender and have compulsory circulation within the limits of their respective states. The decree required the banks of issue to maintain their reserves against notes in the proportion laid down by the 1897 Ley General de Instituciones de Crédito but prohibited the banks from redeeming their notes in metallic coin. The previous suspension of specie payments by the banks of issue was therefore given a legal status.
To help compensate for the shortage of fractional coinage and the disappearance of silver pesos on 19 November Huerta authorised banks to print $1 and $2 notes, previously banned by the Ley General de Instituciones de Crédito. The mere proposal to put such notes into circulation only stimulated the hasty retreat of the remaining silver coins.
Because of the situation in Chihuahua the Banco Minero made a special request to the government that its notes should not be redeemed in Mexico City, because it was so difficult to ship silver to the capital. This news created a new wave of distrust and long queues formed to demand the redemption of state banknotes (in return for those of the Banco Nacional de México and the Banco de Londres y México) at the Banco Central Mexicano and other institutions. On 17 December 1913 Mrs. Edith O'shaughnessyEdith O’shaughnessy, A Diplomat’s Wife in Mexico, 1916 in Mexico City reported:
Yesterday the run on the Banco Nacional and the Banco de Londres y Mexico for the exchange of certain banknotes, no longer good, was enormous. Many shops are hanging out signs that notes of Chihuahua, Coahuila, Queretaro, Guanajuato, etc. will not be accepted from customers. The richer refugees coming in from Chihuahua had hundreds of thousands of such....
With shops and other banks unwilling to be stuck holding Banco Minero notes speculators were out offering to buy them at half their face valueMexican Herald, 17 December 1913. The government declared a bank holiday which was later extended from 22 December to 2 January 1914, then to 15 January and finally to 31 March. Although banks remained open and transacted business, there was a $200 limit on each cheque presented. On 5 January 1914 the Banco de Londres y México posted a notice[text needed] that in view of the shortage of banknotes during the last days it would only pay two hundred pesos weekly to depositers. The measure would be in force for a very short time, since a sufficient amount of paper money would be put into circulationEl Independiente, Año II, núm. 319, 6 January 1914.
On 6 January 1914 Huerta issued a decree creating a Guarantee Fund (Fondo de Garantía de la Circulación Fiduciaria) for the protection of banknote holders against losses from bank failures, and making unlimited tender throughout the Republic the notes of all state banks contributing to this fund. If the assets of any contributing bank which failed should be insufficient to redeem the bank’s outstanding notes in full, the balance would be taken from the Guarantee Fund, and if the Guarantee Fund should not be sufficient to meet the obligation, then the Mexican Government would pay the necessary amount. This obviously amounted to a full government guarantee of the notes of contributing banks. By 25 March all state banks had joined.
Huerta also issued a decree on 7 January 1914 that as the shortage of banknotes was one of the causes of the existing economic crisis, and an increase in the amount of all species in circulation was desirable to ease business transactions the 1897 Ley General was to be modified to allow banks to issue up to three times their cash holdings. The previous limit had been twice their cash holdings. Finally, on 30 March Huerta authorised the banks the issue of 50c notes.
During the first half of 1914, as the Constitutionalist forces extended their area of control, the increasing issues of government and Constitutionalist paper currency forced out of circulation most of the bank notes, which were both hoarded in Mexico and shipped to the United States.
Huerta's bonds
On 30 May 1913 the government had approved the issue of £20m in 6%, ten year, bonds. On 30 March 1914 it authorised the Secretaría de Hacienda y Crédito Público to contract with the various banks of issue to sell these bonds at 90% of their nominal value, authorising the banks to issue notes for the same amount, in order to pay the Tesorería de la Federación.
Thus, when Huerta abandoned the country, most of the banks were in total bankruptcy. The revolution itself was not the principal cause of this banking crisis though naturally the destruction of property and goods was an important factor. It was really the poor administration of the banks over the years and the intervention of Huerta’s government forcing the banks to finance his revolt which caused the bankruptcy of most institutions.