Brazilian Banking and Crisis in the First Republic
The history of banking within Brazil and the history of the first Republic of Brazil are deeply intertwined. It can be said that the history of banking during the first Republic is a story of crisis, first speculative, then self inflicted, then a function of the international trade system Brazil found itself within. In the early years of the Republic, large scale collapses and crashes characterised both the Brazilian banking sector and the wider economy of Brazil. All of this culminated in an attempted national economic policy in 1905 that proved to be a bitter failure for Brazil in general, but signaled a change in the relationship between banking and the Republic. Effective, small scale interventions by the Brazilian government became massive intervention in the Brazilian banking industry. The banking industry then became the tool of intervention for the government across the Brazilian economy. Rather then being a laissez-faire and generally weak government, the Republic was a highly interventionist and reasonably effective institution crippled by structural economic problems, an inability to deal with a large disenfranchised population, slow industrialisation and poor management of public finances.
In the years before the first Republic, Brazilian banking was still in its naissance. The first true Brazilian bank, the Banco do Brasil, was founded in 1808 by John VI of Portugal. It was also bankrupted for the first time when 1821 when John returned to Portugal with his assets.[1] Brazilian banks would suffer reasonably frequent bankruptcies, with the national Banco do Brasil having to be reorganised due to bankruptcy (and halting the issuing of debt by the Brazilian government) three more times before 1905, at one point becoming the Banco da Republica.[2] Through the early independence period, banking and national economics as a whole developed slowly. Major change would start to appear with the arrival of international lenders, able to provide credit for the massive infrastructure projects that dominated the later part of the century. The British ‘Companies Act of 1858-62’ allowed the incorporation of banks in the UK and started the push of British banking corporations into South America.[3] Brazil was no exception to this expansion, and British banks arrived, willing to act as the first real international financiers of the region. First with the establishment of the London and Brazilian Bank in 1862 then the English Bank of Rio de Janerio in 1863, British banking arrived in Brazil.[4] This expansion brought the knowledge of global banking methods to Brazil, and kickstarted the growth of local Brazilian banks.[5]
Brazilian demographics had seen major demographic shifts in the period leading up to the 1888 revolution and the abolition of slavery. In 1818, free and freed people represented only 41% of the Brazilian population, but by 1874 that number had grown to 84%.[6] This new, free population gave hope for major Brazilian growth, but Brazil failed to meet international and national expectations. This was partly do to the fact that Brazil functioned mostly as a group of weakly connected autonomous regions, with a hierarchical system of separate oligarchies dominating regular life, and little interconnectivity through the nation.[7] By the late 1880s, it was clear that the relationship was about to change. Within the 1870s, German banks had attempted entrance to Brazil, but had largely failed.[8] In 1887 however, Germans were able to make a deal with local elites and the Brasilianische Bank Fur Deutschland got a foothold.[9]
The arrival of the Republic and full emancipation to Brazil prompted a massive speculative boom from 1888 – 1890.[10] The era featured rampant monetary and banking expansion, which eventually lead to an equally spectacular collapse in 1891-92 known as Encilhamento.[11] Brazilian expectations collapsed, and the hope for a Brazilian miracle evaporated for much of a decade. Part of the reason for this was that a major portion of the Brazilian population did not turn to productive industrial jobs or farm estates, but instead was forced into subsistence farming and low skill labour on relatively small farms and plantations.[12] During these years, the strict Brazilian social hierarchy helped prevent a large-scale transition from slave style labour to an urban role for the poorest parts of the Brazilian population.
Brazil thus never made the expected turn into an industrial powerhouse like it was hoped, but massive growth in the consumption of Brazilian agricultural products from other newly industrial economies provided an option for Brazilian expansion. Brazilian exports became the new hope of Brazil, even during the crisis years,[13] and international creditors expanded into Brazil with an eye to the export business, with the London and River Plate Bank in 1891 targeting loans to Brazilian exporters. [14] Brazil, with a weak ability to service its own debt (as Brazilian banks had gone under, including the national bank, during the crisis), languished outside of the export industry for the rest of the 1890s while the government consolidated national power.[15]
By 1898, the national government of Brazil had reorganised itself. From 1888 to 1898 it had been acting to support the export industry, the core of the two most politically powerful regions, Sao Paulo and Minas Gerais.[16] Competition for government power was fierce, and this competition among the Brazilian political and industrial class drove major changes in the way that someone could acquire capital or enter the political elite, with informal networks becoming far less important.[17] Government interventions on the small scale had been reasonably effective and were competitively perused, with the oligarch class spending huge amounts of money on political influence to attract these interventions. [18] In late 1898, burdened by high national debt, a crippled national bank and calls from international investors, the Republican government decided to implement a national fiscal policy to try and reform their country.[19]
In 1898 the government adopted a new metalist policy, and then in 1900 increased the gold tariff. The policy was a disaster, with 17 banks going bankrupt and the Banco da Republica do Brasil itself having to suspend payments to avoid bankruptcy.[20] A capital crunch, where companies were no longer able to acquire needed loans immediately followed, unemployment rose, and export income fell by 20% annually from 1901 to 1904[21] A fall like this was crippling not only to the Brazilian economy, but to the Brazilian government. The government, while effective when it could act, was chronically underfunded and made between one and two thirds of its income from trade tariffs.[22] The government was forced to reorganise the banking system with a range of reforms in 1905-1906, including reforming the Banco do Brasil and depositing the government funds there to stabilize it. The Banco do Brasil was still not a true national bank however, lacking major features of the national banks such as being a lender of last resort.[23]
After the 1905-06 reorganisation, Brazil was able to renegotiate its position in international trade, and modernise its banking system. Its banking system became a dominated by narrowly defined and undiversified organisations with short-term commercial focus.[24] Unlike the large, international corporate banks that were emerging in this era, Brasil became beholden to more local and regional institutions as the consolidations of the last decade was forced back. On the more positive side, the widely varying number of players in the Brazilian national economy meant that even more then before, Brazil became a place where entrepreneurship and financial investment could be obtained through the stock and bond markets, and not through personal connections.[25] This shift, which had started before 1905 but was driven forward by the crash, helped build income mobility and allowed the population significantly more options for advancement, especially compared other Latin American countries like Mexico.[26]
The interlinked control of the government and ownership of the most powerful industries in Brazil by the southern states of Sao Paulo, Rio Grande do Sul and Minas Gerais compounded to create a nation where only a portion of the country was joining the industrial revolution. Outside the urban work centers of the south, a notable portion of the population, especially former slaves, had been forced into subsistence agriculture as a survival strategy.[27] The industrialists of the south instead turned to immigration to attract the workers to fuel their boom, and 4.2 million people migrated to Brazil between 1881 and 1942, which made at minimum 15% of the yearly population increases.[28] From 1880 to 1920, the vast majority of these immigrants moved to these three southern states, another measure of their dominance. Government interventions and infrastructure projects became more concentrated in these states as their economy grew, increasing their dominance in a constant cycle of intervention and growth.
The government of Brazil during the first Republic, especially after 1905, became a major player in the banking industry. In 1905, 46% of banking within brazil was dominated by international banks but as the country recovered from the collapse, this changed. By 1907, only 29% was internationally controlled.[29] This rise was partly due to the small, private banks but it was even more to do with the government either subsiding those small banks or directly using the Banco do Brasil. The Banco do Brasil was the favored tool for government interventions, and more and more private banks became government subsidised entities. By 1930, 30% of Brazilian banking was private domestic banks, 20% was international banks, 22% was controlled by state-subsidised institutions and 28% was controlled by the Banco do Brasil itself.[30]
Characterisations of the government as particularly liberal or loose at the reigns are shown to be false through this analysis. By 1930, half of all banking was government controlled or subsidised. From 1906 to 1930, the Banco do Brasil saw total growth of 6743%[31] and the slow consolidation of banks into the 1920s was driven by government subsidies and other interventions.[32] Both the banking and export sectors saw major growth through the Republic, and government was an active and major part of the Brazilian economic identity during the era.
The export boom in within Brazil never managed to compete with the growth displayed by industrial nations during the period. While the growth of the period has been characterised as simply unequal, in reality the raw GDP growth numbers of allowed Brazil to fall behind other nations. In 1880, the Brazilian economy was about 22% of the size of the British economy per capita, and about 38% of the German when measured in real GDP. In the following decades, every ten years that gap would widen and by 1910 Brazil was only 17% of the British per capita economy, and 23% of the German.[33] In the southern states, per capita real income grew at an average annual rate of 2.5% for 33 years, from 1898 to 1930.[34] Outside this region, real income declined at an average rate of 0.3% annually.[35] The total wage growth of 1.4 percent annually was not enough to activate the large population of the rural poor within the country, and also wasn’t enough to allow brazil to create a large middle class, like many of the emergent global powers, like Brittan or Germany. Incidents like the loss of almost half of it’s exports between 1901 and 1904 during the metalist crash doubtless did not help this, but even during the growth years Brazil was losing ground.
The first world war brought another economic crisis to Brazil, with mass disruption of its markets and the change in the global flow of goods and capital.[36] This crisis forced a movement away from the gold standard in order to maintain a measure of trade, but the crisis forced Brazil to start thinking seriously about how it would develop domestic markets for goods and domestic industrial capacity.[37] Within the government, a major debate developed about the desirability of industrialization, and where it should fit as a goal for the country. When it was first raised, the debate was won firmly by the camp against industrialisation and diversification. The powerful export industrialists of the south saw little benefit to be gained from the rapid and government driven industrialisation that was desired by a faction of the public, particularly in the north. The banking sector, which was dominated by small banks with narrow focus also failed to drive the desired industrialisation.[38] Support for industrialisation lagged all the way into the 1920s, when global economic booms and great amounts of available foreign capital kickstarted industrial growth in Brazil. [39]
Neither the government nor the banks were idle in the period leading up to this. The state continued to be a highly interventionalist actor, and continued to be effective on the small scale it operated with.[40] Small banks grew and consolidated, and support for industrialisation grew as the private industry became more able to tolerate the risk and financial burden associated. [41] International tolerance for the Brazilian unwillingness to spend government money to help with these internationally backed projects faded quickly, and pressure was applied in the early 1920s[42] The government, however, remained largely unwilling to launch wide reaching industrialisation projects.
The reasoning for not expanding the scale of the mostly effective government interventions was simple. The government did not have enough money, and as it took a large portion of it’s revenues from international trade, it was exceptionally vulnerable to international crashes.[43] The problem was well known, debated, and understood, but proved far harder to fix. Several schemes had been attempted from applying single taxes in exchange for interventions within a region,[44] to simply spending itself into debt.[45] Financing Brazilian government debt after these attempts was a major British industry within south America for years.[46] In 1924, Brazil attempted to introduce an income tax, but by 1930 it provided less then 3% of government expenditures.[47] The Republican government, for all that it was effective when it did intervene, was utterly unable to manage its expenditures compared to its income, and expenditures exceeded revenues for 30 of the 41 years of the first Republic.[48] States were better about finacial management, and managed to remain mostly solvent, perhaps due to a lack of international creditors willing to allow them to go into debt.[49] The government was rarely even able to grow the real GDP faster then the debt, which would have reduced the comparative load. From 1889 to 1930, the federal government was forced to spend between 16 and 53% of yearly revenue on repaying debt and interest, usually averaging around 22%. In 1900, 1916, 1917 and 1920 the government was forced to spend more then 35% of all income on this servicing, the latter years due to international credit crunches related to the first world war.[50]
Active changes to banking policy during the latter years of the Republic were few, even as the international banking environment changed. While Brazilian domestic banks, backed by the weight of the government slowly pushed foreign banks out, the establishment of proper national banks, new banking regulations and innovations in finacial theory were all changing the world of international banking.[51] Particularly in America, the way banks were running changed, but this change did not come to Brazil. Still, efforts were made to adapt to new international circumstances and when the café-com-leite alliance finally broke in 1929, new banking regulations were quickly put in place.[52]
Banking and the government of Brazil during the first Republic were deeply intertwined. Crisis and collapses within Brazil characterise the changes of the era, and the economic boom of Brazil was limited to a very small portion of the country. The massive population of slaves freed in 1888 and the fifty years preceding that in many ways never joined the Brazilian economy, remaining subsistence farmers that used the barter more then they touched the controlled economy of the nation. The first Republic of Brazil, rather then being an inattentive laissez-faire oligarchy, was a highly interventionist government plagued by poor long term finacial management and was deeply intertwined with both the failures and successes of the Brazilian economy.
Bibliography
Briones, I., and A. Villela. "European bank penetration during the first wave of globalisation: Lessons from Brazil and Chile, 1878-1913." European Review of Economic History 10, no. 3 (2006): 329-59.
Cameron, Rondo, and V. I. Bovykin. International banking, 1870-1914. New York: Oxford University Press, 1992.
Hebe Maria Mattos De Castro. "Beyond Masters and Slaves: Subsistence Agriculture as a Survival Strategy in Brazil during the Second Half of the Nineteenth Century." The Hispanic American Historical Review 68, no. 3 (1988): 461-89.
Musacchio, Alado, and Read, Ian. "Bankers, Industrialists, and Their Cliques: Elite Networks in Mexico and Brazil during Early Industrialization." Enterprise & Society 8, no. 4 (2007): 842-80. http://www.jstor.org/stable/23700772
Topik, Steven. "State Enterprise in a Liberal Regime: The Banco Do Brasil, 1905-1930." Journal of Interamerican Studies and World Affairs 22, no. 4 (1980): 401-22.
Triner, Gail D. Banking and economic development: Brazil, 1889-1930. New York, NY: Palgrave, 2007.
Triner, Gail D. "Banks, Regions, and Nation in Brazil, 1889-1930." Latin American Perspectives 26, no. 1 (1999): 129-50. http://www.jstor.org/stable/2634041.
[1] Steven Topik, "State Enterprise in a Liberal Regime: The Banco Do Brasil, 1905-1930," Journal of Interamerican Studies and World Affairs 22, no. 4 (1980), 412
[2] Gail D. Triner, Banking and economic development: Brazil, 1889-1930 (New York, NY: Palgrave, 2007), 47.
[3] I. Briones and A. Villela, "European bank penetration during the first wave of globalisation: Lessons from Brazil and Chile, 1878-1913," European Review of Economic History 10, no. 3 (2006), 333.
[4] Ibid, 334.
[5] Triner, Banking and economic development, 17.
[6] Hebe Maria Mattos de Castro, “Beyond Masters and Slaves: Subsistence Agriculture as a Survival Strategy in Brazil during the second half of the Nineteenth Century”, The Hispanic American Historical Review, Vol. 68, No. 3 (Aug. 1988), 461.
[7] Gail D. Triner, “Banks, Regions and Nation in Brazil, 1889-1930”, Latin American Perspectives, Vol. 26, no. 1 Creating Markets in Latin America 1750-1998 (Jan. 1999), 129.
[8] Briones and Villenla, European bank penetration, 334.
[9] Ibid.
[10] Triner, Banking and economic development, 12.
[11] Triner, Banking and economic development, 13.
[12] Mattos De Castro, Beyond Masters and Slaves, 462.
[13] Triner, Banking and economic development, 16.
[14] Briones and Villenla, European bank penetration, 337.
[15] Triner, Banking and economic development, 40.
[16] Triner, Banking and economic development, 18
[17] Aldo Musacchio and Ian Read, "Bankers, Industrialists, and Their Cliques: Elite Networks in Mexico and Brazil during Early Industrialization.", Enterprise & Society, Vol. 8, no. 4 (2007), 842.
[18] Triner, Banking and economic development, 19
[19] Rondo Cameron and V. I. Bovykin, International banking, 1870-1914 (New York: Oxford University Press, 1992), 362.
[20] Ibid.
[21] Cameron and Bovykin, International Banking 1870-1914, 362.
[22] Triner, Banking and economic development, 31.
[23] Cameron and Bovykin, International Banking 1870-1914, 363.
[24] Triner, Banking and economic development, 25.
[25] Musacchio and Read, Bankers, Industrialists, and their Cliques, 844.
[26] Musacchio and Read, Bankers, Industrialists, and their Cliques, 845.
[27] Mattos De Castro, Beyond Masters and Slaves, 462.
[28] Triner, Banking and economic development, 21.
[29] Triner, Banking and economic development, 210.
[30] Ibid.
[31] Triner, Banking and economic development, 208.
[32] Triner, Banking and economic development, 174.
[33] Briones and Villenla, European bank penetration, 7.
[34] Triner, Banking and economic development, 21.
[35] Triner, Banking and economic development, 22.
[36] Triner, Banking and economic development, 23.
[37] Triner, Banking and economic development, 23.
[38] Ibid.
[39] Triner, Banking and economic development, 24-25.
[40] Triner, Banks, Regions and Nation in Brazil, 129
[41] Triner, Banking and economic development, 24.
[42] Triner, Banking and economic development, 55.
[43] Triner, Banking and economic development, 31.
[44] Triner, Banking and economic development, 117.
[45] Cameron and Bovykin, International Banking 1870-1914, 353.
[46] Ibid.
[47] Triner, Banking and economic development, 31.
[48] Ibid.
[49] Triner, Banking and economic development, 219.
[50] Triner, Banking and economic development, 218-219.
[51] Cameron and Bovykin, International Banking 1870-1914, 247.
[52] Triner, Banking and economic development, 93.