Interwar central banks’ quest for profitability: the case of the Central Bank of Chile, 1925-1933

This article explores how profit-seeking behavior among central banks shaped their adherence to the gold exchange standard during the interwar period, focusing on the case of Chile. Existing literature has emphasized ideology, credibility, and political considerations to explain monetary orthodoxy. However, it has largely overlooked the role of financial incentives embedded in the structure of the gold exchange regime. Drawing on new archival evidence, particularly the minutes of the Central Bank of Chile’s Board of Directors, we show that the institution actively managed its foreign reserves to maximize returns by placing them in correspondent banks in London and New York. This proactive strategy was encouraged by institutional design and shareholder expectations but created vulnerabilities by reducing reserve liquidity and increasing exposure to currency and counterparty risk. These fragilities became evident during the sterling crisis of 1931, when Chile incurred severe losses and was unable to act as a lender of last resort, leading to its abandonment of the gold standard in 1932. The Chilean case reflects broader practices among European and Latin American central banks, revealing how profitability considerations shaped monetary behavior and contributed to systemic fragility.