In 1850, Pedro II was in the tenth year of his rule over the Brazilian Empire, a rule that would extend up to November 1889, comprising the Second Reign (1840–89).1 In a way, 1850 marked the beginning of a golden age in the political and economic history of the Empire. On the political front, the last of the major provincial revolts (the Praieira) had been quelled and centralization of power at the hands of the monarch in Rio was firmly established. As for the economy, 1850 saw the promulgation of three pieces of legislation that sought to regulate the markets for the major inputs in the production process. As a result, trade in capital (with the Commercial Code), labor (via the Euzébio de Queiróz Law, marking Brazil’s definitive acceptance of an end to the importation of slaves from Africa), and land (by means of the Land Law) would be henceforth regulated by the state. In a sense, this could be considered Brazil’s first experiment in building an institutional framework adapted to the capitalist system starting to take root in many parts of the globe at the time, even though the Empire itself remained firmly committed to (and dependent on) a non-capitalist form of labor—slavery.2
In order to grease the wheels of an economy that, after years of lethargy, had begun to move forward on the back of ever-increasing coffee exports, Brazil counted on a monetary circulation in 1850 consisting of legal tender Treasury notes, metallic coins, and short-term promissory notes (the so-called vales ) issued by a handful of commercial banks. As this book will document in detail, the nature of money over the rest of the imperial period (i.e., from 1850 to 1889) would change significantly, with the government and the private sector swapping places as the main providers of currency to the economy. Likewise, the banking sector would not be confined to the few vale-issuing banks that were in place in 1850. As time went on, other banks would eventually be allowed to issue their own notes, and, for part of the period, a semi-official Bank of Brazil would be entrusted with responsibilities typically associated with central bank-type institutions. Still, there is no disputing that Brazil’s commercial banking sector would remain underdeveloped to the very end of the imperial period, as indicated both by the high average spread that existed between private banks’ interest rates and the return on bonds issued by the central government (apólices ), and by the high degree of market concentration in the industry.3
This financial underdevelopment immediately brings to mind a perennial question asked by scholars working on the economic history of Brazil, namely, why did the country fail to match the performance of the American economy in the nineteenth century? More specifically, in connection with the topic of the book, could an underdeveloped banking system be part of the reason why Brazil fell behind?
There do not exist as yet reliable estimates of the size and rates of growth of the Brazilian economy in the imperial period. Yet, researchers tend to agree that at the time of Independence, in 1822, output per capita was lower than the one observed in the United States. As the century unfolded, differences in rates of growth in the two continental economies ensured that by the end of the imperial period, in 1889, Brazil had unequivocally lost significant ground relative to America.4 However, not only are the magnitudes involved far from clear in the case of Brazil, but the explanations for this laggard performance are not consensual.
One interpretation that has gained increasing (and belated) traction with academics working on the subject is due to Nathaniel Leff’s pioneering research, in the cliometric tradition, into the roots of Brazilian economic underdevelopment. Writing in the 1960s and 1970s, Leff published a host of academic articles, later brought together in book form. On his account, supply factors linked to the overwhelming predominance of low-productivity family agriculture in the Empire combined with the underprovision of transport infrastructure and other public goods to forestall the division of labor and gains from trade in Brazil for most of the nineteenth century.5
Although financial underdevelopment was not part of Leff’s explanation for Brazil’s laggard performance, it is probably one of the factors that compounded the effects of the other barriers to growth highlighted by his research. After all, an underdeveloped banking sector tended to credit-constrain economic agents, with a negative impact on consumption and investment possibilities. Furthermore, market formation and development—and, hence, the room for Smithian (efficiency) gains—would also tend to be checked if banks were limited in their capacity to provide means of payment (either deposits or fiat money, in the case of banks of issue) to the economy.
The book will not try to engage in a counterfactual exercise of the type “what would have been the aggregate rate of growth of the imperial economy if Brazil’s banking sector had not been so constrained?” Rather, it will attempt to offer a plausible explanation for contemporaries’, predominantly, conservative approach toward the expansion of the banking sector. In other words, it will discuss the reasons why for most of the period the Brazilian government held back monetary growth and bank formation.
This objective will be accomplished by highlighting how this stance was linked to a broader—and equally conservative—view of monetary matters entertained by most individuals involved in policy and debate at the time.
In this respect, the book will seek to answer two larger questions, subsequently broken into four specific ones. The larger questions are as follows:
- 1.What form did monetary and banking policy take in Brazil between 1850 and 1889?
- 2.What were the drivers of the frequent policy shifts in this area?6
As for the more specific questions to be raised by the detailed discussion of monetary and banking policy in the period, they are the following:
- 1.Did the Bank of Brazil perform “proto-central bank” functions from its inception, in 1853, until the mid-1860s? If so, how?
- 2.What was the nature of the three major financial crises to hit the Empire in 1857, 1864, and 1875? How similar were they? Did the government react in the same fashion on the three occasions?
- 3.Was the 1864 (Souto) crisis a direct consequence of government policy taken years earlier (in particular, the 1860 banking law)?
- 4.Did monetary and exchange-rate policy at the time usually meet the interests of the coffee sector, as might be expected, given the latter’s undisputed political clout?
The aim of the book, in short, is to study the evolution of monetary and banking policy in Brazil from 1850 to 1889. Yet, this is not a traditional monetary history of the period, in the sense that its main concern is not to discuss the major trends in monetary aggregates over the period, relating them to the broader economic history of Brazil.7 Rather, the focus will be on the evolving institutionality in the monetary sphere, identifying the rationale behind the policies set by the government, and, eventually, implemented. This will involve giving pride of place to the political dimension of the policymaking process, thus allowing for an examination of the effective constraints under which nineteenth-century Brazilian policymakers were operating.
One of the issues the book will address (see question 4) may be summarized as follows. If monetary and banking policies at the time were characteristically orthodox—taking the form, among other things, of government-imposed restrictions on the banking system, the pursuit of convertibility, and a bias toward an appreciated rate of exchange—what does this suggest about the underlying polity? More specifically, how do these facts square with the perceived hegemony of the planter class (fazendeiros ) during the imperial period, given that for them “soft money”, and a depreciating milréis, would have been desirable?
A set of stylized facts will highlight some of the issues to be addressed in the book and the major interpretations available in the literature. Since the mid-1840s, the Brazilian government flirted with the idea of instituting convertibility of the circulating medium. Concurrently, it sometimes sought to set up a monopoly in the issue of banknotes in an effort to prevent uncontrolled money creation. As the money supply was equated by most contemporaries with the volume of notes and metallic coins in circulation (i.e., bank deposits were not considered part of the money supply) and, additionally, money thus defined was seen as the main determinant of the rate of exchange, authorities were bent on exercising strict control over banks of issue. As a result, banking activity was firmly regulated during most of the imperial period, leading to the underdeveloped banking sector mentioned above and, potentially, to ...