Argentina’s 1914 Bank Run, the 1931 Rediscount Rescue, and Prebisch’s 1935 BCRA Reform

For the first third of the twentieth century, Argentina possessed one of the largest gold reserves and commercial banking systems in the Southern Hemisphere, yet operated without a central bank. Monetary emission was governed by an orthodox currency board, the Caja de Conversión (Conversion Office), which mechanically exchanged paper pesos for physical gold at a fixed parity of 44 gold cents per paper peso, while the state-owned commercial giant Banco de la Nación Argentina (BNA) held government deposits and competed across the Pampas alongside British, German, Italian, and domestic private banks. ^[1]

Two systemic external shocks shattered that rigid gold-standard architecture. First, the outbreak of World War I in August 1914 triggered a devastating depositor run on Buenos Aires private banks—above all the Banco Español del Río de la Plata—forcing Congress to enact an eight-day bank holiday and the emergency Rediscount Law of August 1914 empowering Banco de la Nación to rescue private lenders. Second, the Great Depression of 1929–1934 drained Argentina’s gold reserves and buried Banco de la Nación under hundreds of millions of pesos in frozen advances to commercial banks. Out of that paralysis, British adviser Sir Otto Niemeyer and young Argentine economist Raúl Prebisch forged the landmark laws of March 28, 1935 (Laws 12,155 to 12,160)—creating the Central Bank of the Argentine Republic (Banco Central de la República Argentina, BCRA) and deploying gold revaluation profits through the Instituto Movilizador de Inversiones Bancarias (IMIB) to bail out four crippled Buenos Aires banks: Banco Español, Banco Tornquist, Banco El Hogar Argentino, and Banco Argentino Uruguayo. ^[2]

August 1914: The Run on Banco Español and the Emergency Rediscount Law#

During the Belle Époque agro-export boom of 1900–1912, European capital flooded into Buenos Aires, financing railways, urban real estate, and agricultural land speculation. At the center of private national banking stood the Banco Español del Río de la Plata (founded in 1886), the largest private domestic bank in South America, with an expansive network of more than 50 branches stretching from Mendoza and Rosario to Madrid, Paris, London, and Hamburg. ^[3]

When the Balkan wars tightened European money markets in 1913 and the assassination at Sarajevo plunged Europe into World War I at the end of July 1914, international credit lines froze overnight. Panicked Buenos Aires savers rushed to convert paper pesos into gold at the Caja de Conversión and crowded the counters of private commercial banks to withdraw deposits. Between July and December 1914, aggregate private bank deposits in Argentina fell by more than 20 percent, and the exposed Banco Español del Río de la Plata suffered a catastrophic run that drained roughly 35 percent of its deposit base—nearly 70 million paper pesos (pesos moneda nacional)—bringing the flagship institution to the brink of suspension. ^[4]

Facing a systemic collapse of the payments system, President Victorino de la Plaza pushed a package of emergency laws through the Argentine Congress during the first two weeks of August 1914: ^[5]

• The Eight-Day Bank Holiday and Moratorium: On August 2, 1914, the executive declared an eight-day banking and foreign-exchange holiday, followed by a 30-day domestic debt moratorium and the suspension of gold convertibility at the Caja de Conversión (which remained closed until August 1927).
• The Emergency Rediscount Law (Law No. 9,479 of August 8, 1914): To give the banking system a lender of last resort, Law 9,479 authorized the state-owned Banco de la Nación Argentina to mobilize the gold conversion fund (Fondo de Conversión) and to rediscount commercial bills held by distressed private banks, while also permitting the Caja de Conversión (with executive approval) to issue currency against commercial paper rediscounted by the BNA so long as the gold backing ratio remained above 40 percent.

Using its own liquid cash reserves and the mobilized conversion fund without yet resorting to unbacked note emission at the Caja, Banco de la Nación stepped in decisively as lender of last resort. In the second half of 1914 alone, the BNA extended roughly 36 million paper pesos in emergency rediscount credits to the beleaguered Banco Español del Río de la Plata, alongside liquidity lifelines to the Banco de Italia y Río de la Plata and other commercial institutions. The intervention halted the run and kept Banco Español open, though the bank never fully digested the non-performing real-estate and personal loans accumulated before 1914. ^[6]

1929–1931: Gold Drains, Frozen Loans, and the 1931 Caja Rediscount Rescue#

When world grain and beef prices collapsed after 1928 and Wall Street crashed in October 1929, Argentina’s brief return to the gold standard (August 1927 to December 1929) ended in crisis. President Hipólito Yrigoyen closed the Caja de Conversión to private gold withdrawals on December 16, 1929, preventing a total depletion of reserves, but after General José Félix Uriburu’s September 1930 coup, the provisional government—guided by conservative orthodoxy and a young Undersecretary of Finance named Raúl Prebisch—authorized massive shipments of physical gold from the Caja de Conversión to London and New York during 1930 and 1931 to service sovereign external debt and defend the nation’s credit standing. ^[7]

Under the mechanical rules of the currency board, every gold shipment withdrawn from the Caja destroyed an equivalent amount of domestic paper money, shrinking the monetary base and triggering a brutal credit contraction across the commercial banking system. Worse still, private banks that had lent heavily to agricultural estates, sugar mills, and political insiders—most notably the chronically weak Banco Español del Río de la Plata, the patrician merchant-banking house Ernesto Tornquist y Cía., the mortgage lender Banco El Hogar Argentino, and the Banco Argentino Uruguayo—could no longer collect on their loans. To prevent these banks from failing, Banco de la Nación continuously rolled over and expanded emergency rediscounts and collateralized advances (cauciones), locking up its own balance sheet in illiquid assets.

By April 1931, Banco de la Nación’s liquid cash reserves were nearly exhausted by the twin pressures of gold exports and commercial bank rescues. Recognizing that passive gold-standard deflation threatened to bring down the BNA itself, Raúl Prebisch persuaded Finance Minister Enrique Uriburu on April 25, 1931 to invoke the dormant clause of the 1914 Rediscount Law (Law 9,479 and Law 9,577). For the first time in Argentine history, the Caja de Conversión issued hundreds of millions of paper pesos against commercial paper rediscounted by Banco de la Nación rather than against gold—breaking the link between gold outflows and domestic money contraction, replenishing BNA’s cash vault, and preventing a systemic banking crash in 1931. ^[8]

Sir Otto Niemeyer, Raúl Prebisch, and the March 1935 Banking Laws#

Although the April 1931 rediscount decree and the October 1931 introduction of exchange controls kept the banking system afloat, commercial banks remained crippled by roughly 370 million pesos of frozen assets pledged at Banco de la Nación. In early 1933, the Argentine government invited Sir Otto Niemeyer, a senior director of the Bank of England, to Buenos Aires to draft legislation for a modern central bank. Niemeyer proposed an orthodox reserve bank designed to stabilize the currency and restrain government borrowing, but offered no mechanism to clean up the mountains of dead loans paralyzing Banco de la Nación and the private commercial banks.

When Federico Pinedo became Minister of Finance in late 1933, he entrusted Raúl Prebisch with overhauling Niemeyer’s draft into a comprehensive financial and banking reconstruction plan. Enacted by the Argentine Congress on March 28, 1935 as an integrated package of six statutes (Laws No. 12,155 through 12,160), the Prebisch-Pinedo reform transformed Argentine monetary institutions:

• Creation of the BCRA (Law No. 12,155): Established the Banco Central de la República Argentina (which opened for operations on May 31, 1935 with Prebisch as its founding General Manager) as a mixed public-private entity with a monopoly over note issue, banking supervision, and countercyclical open-market and reserve regulation.
• The Banking Law (Law No. 12,156): Imposed minimum cash reserve ratios, barred commercial banks from holding long-term real estate or industrial equity stakes, and placed all deposit-taking banks under confidential inspection by the BCRA.
• Creation of the IMIB (Law No. 12,157) and Gold Revaluation (Law No. 12,160): Abolished the Caja de Conversión and transferred its remaining gold stocks to the new BCRA at a revalued parity reflecting the post-1929 depreciation of the paper peso (from roughly 2.27 paper pesos per gold peso to nearly 5 paper pesos per gold peso).

The 700-Million-Peso Gold Profit and the IMIB Four-Bank Bailout#

The accounting revaluation of the Caja’s gold reserves under Law 12,160 generated an instant book profit of 701 million paper pesos for the Argentine state. Rather than spending this windfall on public works, Prebisch and Pinedo allocated 390 million pesos (380 million in capital and reserve funds plus 10 million) to capitalize the newly created Instituto Movilizador de Inversiones Bancarias (IMIB)—one of the world’s earliest dedicated state “bad bank” asset-management agencies.

In December 1935, the IMIB executed a sweeping surgical restructuring of the four insolvent Buenos Aires banks whose frozen debts had been strangling Banco de la Nación: the Banco Español del Río de la Plata, Ernesto Tornquist y Cía., Banco El Hogar Argentino, and Banco Argentino Uruguayo. Under Prebisch’s architecture, the IMIB purchased approximately 370 million pesos of frozen loans and illiquid assets held by these four institutions (and their rediscount lines at the BNA) in exchange for cash and promissory notes, freeing Banco de la Nación from decades of bad-debt exposure.

Rather than allowing the four venerable institutions to fail in disorderly bankruptcy, the IMIB merged their healthy retail deposit accounts (roughly 364 million pesos across more than 200,000 depositors) and viable branch networks into a single newly chartered, cleanly capitalized commercial bank: the Nuevo Banco Español del Río de la Plata, while transforming El Hogar Argentino into a specialized mortgage bank and enabling Casa Tornquist to survive as a private investment house. By isolating legacy losses inside the IMIB and equipping the new BCRA with clean balance sheets and countercyclical policy tools, Prebisch’s 1935 reform engineered one of the most celebrated financial recoveries of the interwar era.

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