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  • Native Capital: Financial Institutions and Economic Development in São Paulo, Brazil, 1850–1920
  • Aldo Musacchio
Anne G. Hanley . Native Capital: Financial Institutions and Economic Development in São Paulo, Brazil, 1850–1920. Stanford, Calif.: Stanford University Press, 2005. xviii + 286 pp. ISBN 0-8047-5072-6, $55.00 (paper).

Anne Hanley presents a lucid and impressive narrative of the evolution of financial markets in São Paulo, Brazil. She traces the evolution of the banking sector and São Paulo stock exchange from the end of the Empire (Brazil was an empire with a constitutional monarchy between 1822 and 1889) through the first three decades of the Republic (1889–1920) and the contemporaneous evolution of capital markets from their early "personalistic" stage to "maturity" in the early twentieth century. Her use of the history of financial markets to explain how planters transformed coffee wealth into industrial development is important because Brazilian economic and business historiography has too often skipped the finance and development link, assuming industrialization to be a natural transition from the coffee trade.

Hanley begins with the period of financial repression during Brazil's more than half a century as an empire. Commercial and financial regulation in the form of the Commerce Code of 1850 and joint-stock company laws of 1849, 1860, and 1882 "probably discouraged more business formation than they encouraged," according to Hanley (chapters 2 and 3, especially p. 188). Stock markets, she explains, did not develop during the Empire mainly because joint stock companies required government approval until 1882, and shareholders were not granted full limited liability until 1890. On the contrary, the commercial banking system was too small, too focused on short-term credit, and too heavily reliant on relational lending to promote industrialization. [End Page 827]

The declaration of the Republic in 1889 replaced the financial conservatism of the Empire with "exuberance." The effects of republican reforms on the financial system are discussed in chapters 4, 5, and 6. Laws facilitating chartering, strengthening limited liability, and encouraging the creation of universal banks were among the most important passed by the republican government in 1890. In their wake, brokers formally instituted a stock exchange, investors rushed to establish hundreds of corporations, and the number of banks more than doubled. Hanley emphasizes that the stock exchange played a crucial role in economic development by enabling entrepreneurs who lacked connections with banks to access capital.

This book is well researched, and its analysis of institutional change and financial development is thorough. Most of the quantitative and qualitative data are from newspapers, almanacs, laws, and company documents. Among Hanley's most original contributions are her description of the evolution of the stock exchange, detailed study of the rise and decline of universal banks between 1890 and 1906, examination of the banking panic of 1900 and its effects on financial intermediation, and provocative discussion of the transition from relational to more impersonal lending practices. São Paulo's failed experiment with universal banking—only three universal banks were chartered, all of which fared poorly in the face of the recessionary environment of the late 1890s—is illuminated by Hanley in chapter 5. Exposure to long-term loans and limitations on the transfer of funds between investment and commercial banking activities rapidly drove these banks out of business.

The relatively more successful development of commercial banking during the republic is described in chapter 6. Hanley's description of the panic of 1900 is probably the most thorough in the historiography to date. Her clever analysis of the data, in this instance to illustrate why foreign banks were better positioned to endure the panic, is very much in evidence in this part of the book. The large numbers of new firms and banks that emerged after the panic altered the personalistic nature of the lending business. The number of bank-company interlocks decreased dramatically after 1906.

If the book has a fault, it is assigning too much importance to native capital in financing industrialization. Hanley argues that domestic banks controlled a larger share of the market than foreign banks and that the majority of industrial and utility firms were financed with domestic capital. Given her acknowledgment...

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