The Americas 59.1 (2002) 113-114
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The connections between finance and economic development are notoriously complex and depend on a variety of institutional and behavioral considerations, none of which are necessarily stable over time or across countries. Understanding these connections also requires ample data as well as demanding techniques of analysis and manipulation. Such historical work is difficult, but important, since it helps us understand why some countries grow and prosper while others do not. For that reason alone, Gail Triner's study of banking and economic development in Brazil in the First Republic is of fundamental importance.
Triner assumes that in Brazil the evolution of financial markets both shaped and was shaped by an emerging central state. Since the country produced 70 percent of the world's coffee during the First Republic, issues involving exchange rates and monetary regimes were quite important. Until 1906, Brazil was on an inconvertible paper standard (a flexible exchange rate), at which point it went to gold (a fixed exchange rate). It was on gold until World War I, when it suspended convertibility, and did not return to gold until 1927, remaining there until the Great Depression struck. Since being on gold was important—it gave countries a financial "Good Housekeeping Seal of Approval"—you might ask why Brazil never managed to stay there very long. As Triner illustrates, a fixed exchange rate made a big political and economic difference. International investors preferred a fixed exchange rate because it maintained the value of their earnings. Exporters and producers of import substitutes supported inconvertibility and depreciation as a spur to exports and a barrier to imports. The state had its own interests, some of which favored depreciation, while others did not. Out of this shifting mix of actors and interests emerged policies that were explicable, but not necessarily stable or coherent. Triner's argument is thus a major intellectual advance, for it brings the logic of interest group politics to bear on Brazil's shifting exchange rate regimes.
The implications of this story are quite striking. After the speculative excesses of the early Republic were ended by the Encilhamento (1891-1892), greater conservatism prevailed in the banking system. As recovery took hold in the late 1890s, the Brazilian risk premium (a measure of foreign aversion to holding Brazilian debt) began to fall. Lending increased (albeit with shortened maturities), bank deposits grew, the currency appreciated and domestic interest rates consequently came down. The response of the real economy to these developments was impressive. Industrial [End Page 113] production increased at 5.4 percent per year between 1906 and 1930, while agriculture (including coffee), expanded at 3.2 percent annually. Triner concludes "banks broadened the scope of accumulation and allocation of resources" (p. 98), and her econometric evidence suggests that changes in the price level (with which an increased money supply was strongly correlated) raised profits, investment, employment, and hence, production. Triner develops her results in appendices, and the economics is straightforward, although not quite, as she disarmingly suggests, "elementary." In reality, this is a very sophisticated analysis that handles a wide range of issues convincingly.
The final section of the study deals with the emergence of a national money market. Triner concludes that the economies of São Paulo and Rio de Janeiro, or their financial systems at least, were converging, with Minas Gerais and Rio Grande do Sul doing so more slowly. Perhaps financial convergence followed the integration of regional markets, or their common production of a tradable good, like coffee, for the international market. In any event, Triner makes the reason for her focus on Southern Brazil clear enough: that's where the money was.
Based on a major research effort in the financial press, Triner's study will naturally be of interest to students of Brazilian history. But it is also a distinct contribution to the new economic historiography of Latin America. Measured by those rigorous standards...