Banking and Economic Development: Brazil, 1889-1930

Published by EH.NET (July 2001)

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Gail D. Triner, Banking and Economic Development: Brazil, 1889-1930. New York: Palgrave, 2000. xv + 333 pp. $59.95 (cloth), ISBN: 0-312-23399-X.

Reviewed for EH.NET by Aldo Musacchio, Stanford University.

Gail Triner’s work on Brazilian banking has changed the approach to the study of financial institutions and credit intermediation in Brazil. Economic historians of Brazil have devoted little attention to the role of banking in Brazilian development. Triner’s book emphasizes the relationship between banks and the formation of the nation-state. Her argument is that banking played two roles in the economic development of Brazil between 1889 and 1930. On the one hand, it promoted regional integration and aided industry; on the other hand, it was relevant to furthering the political goals and economic interests of the nation-state.

Triner (Assistant Professor of History at Rutgers University) argues that the Gerschenkronian model of the role of banking in economic development is useful but insufficient. First, in Brazil the influence of banking on industrialization worked through a very complicated system of short-term loans with burdensome collateralization, benefiting industrialization unevenly and mainly focusing on credit to the coffee trade. Second, the construction of the banking system was a response to pressures of state building. Thus she argues that the political model has to be included to complement the Gerschenkronian view. In Brazil the relationship between the banks and the government before 1930 set the stage for the interventionism and inflationary policies of the following decades.

According to Triner, the Brazilian banking system went through three stages before its consolidation. First, between 1889 and 1906 the expansion of the banking system was disrupted by economic recession. Banks became an integral part of the financial system, but the economic recovery was very slow. Second, between 1906 and World War I the banking system was reorganized and consolidated. In 1906, Brazil adopted the gold standard and the government rechartered the government-controlled Banco do Brasil. This changed the Brazilian banking system’s role in the economy, mainly because the stable macroeconomic conditions allowed banks to integrate into the economy and the government-controlled bank began to create a national network of branches. Finally, between World War I and 1930 ruptures with the international market created an increasing reliance on domestic sources of capital, thus strengthening the role of banks. This period was characterized by interventionism and expansionary monetary policies promoted by the central government. State governments also increased their participation in the economy by augmenting their control over state banks.

Other interesting findings of Triner are that “the connection between banking and industrialization was indirect. Bank credit did not directly finance the construction of industrial plant and equipment. Because banks were commercial in nature, they extended only short-term credit with personal or commercial collateral” (p. 104). She shows that banking growth was correlated to industrial and total growth, but with no clear causality. In particular, private banks seemed to have a stronger relationship with industry. Nevertheless, the banking system remained relatively small. Thus its relevance, according to Triner, was more noteworthy for developing a national market and determining the participation of the public sector in the economy.

The data compiled for Triner’s book is probably the most important existing database on financial markets in Brazil for the period 1889 to 1930. She has compiled annual balance sheet information and stock market prices for at least thirty-six banks mainly from 1906 to 1930. Brazilian banks had to publish balance sheets monthly in the national press, but they could do it in the newspaper of their preference, thus the information tends to be scattered among several newspapers in different archives and libraries of Brazil.

A large part of the book is devoted to the role of the government-controlled Banco do Brasil in consolidating the national market. As the government increased its participation in determining monetary policy, it needed a stronger role for the banking sector in monetary issues. The Banco do Brasil created a network of national branches that promoted national market integration and allowed the government to increase its intervention at the national level. This argument is relevant for Latin American historiography because it was traditionally thought that before 1930 Brazil had a very regional nature and with little state intervention. Since the publication of Steven Topik’s The Political Economy of the Brazilian State, 1889-1930 (Austin, University of Texas, 1987), the role of the central government in Brazil has been rethought. Now, we know that the federal government was interventionist and less liberal than previously thought. Triner adds to this literature by arguing that banks played an important role in aiding the federal government in its interventionist efforts, with the positive side effect of creating a national banking system that reduced regional separation and developed a depersonalized credit system.

Nevertheless, the book leaves a few unanswered questions. For instance, if banks did not play an important role in economic development, how was the capital formation financed in Brazil between 1889-1930? Were there any investment banks? Were there any other investment syndicates that provided the bulk of long-term capital? What was the role of foreign banks in the industrialization of Brazil?

Also, for Triner the process of economic development in Brazil begins in 1906, once the gold standard is adopted and the government recharters Banco do Brasil. But classical works in Brazilian economic history (Maria B?rbara Levy, Hist?ria da Bolsa de Valores de Rio de Janeiro, Rio de Janeiro, IBMEC, 1977 and Wilson Suzigan, Ind?stria Brasileira: Origem e Desenvolvimento, S?o Paulo, Editora Brasiliense, 1986) show that capital formation was very important in the 1890s. Triner does not study the 1890s deeply because her best data and archival information begin at the turn of the century, once the initial spurt in investment was over. Then it could be the case that banks had participated in the initial financing of major investments and that after 1906 they played the role of short-term lenders once the major capital investments were set up and working.

The study of interregional interest rate convergence is innovative for Brazilian economic historiography. Unfortunately, Triner’s approach is not fully convincing. Even though the theoretical set up of the test is clear — she wants to measure whether the interest rates of other states converged to those of Rio de Janeiro — the implementation is rather confusing. In the first place she measures convergence with respect to two different rates of Banco do Brasil in Rio, which makes the interpretation confusing because she sometimes uses one rate instead of the other to say that there was national convergence. The rate she chooses for the interpretation is selected on an ad hoc basis and when she talks about the results of the test in general she just generalizes and talks about “convergence.” Moreover, she only includes banks of four out of twenty states of Brazil in her “national” test! The states used are: Rio Grande do Sul, Minas Gerais, S?o Paulo, and Rio de Janeiro. Those states were (and still are) the most industrialized states of Brazil, with the highest income per capita, and the highest levels of urbanization. Then, obviously there is a sample selection bias that could have been corrected by including banks from other states in the North and Northeast of Brazil in the test. The problem is that the federalized nature of Brazilian banking, just like in the United States, complicates the study of banks in historical perspective, data for state banks is scattered in state archives or lost. This explains why most of the banks included in Triner’s database are from the four states included in her test. Nevertheless, Triner’s book should explicitly acknowledge that the study is mainly about “Banking and Economic Development in the South of Brazil.”

Aldo Musacchio is a graduate student of history at Stanford University. His dissertation is on the role of the stock exchange and corporate laws in the early industrialization of Brazil. Other works in progress are (with Zephyr Frank) “Brazil in the International Rubber Trade (1850-1950)” and (with Ian Read) “Bankers, Industrialists and Their Cliques: Elite Networks in Mexico and Brazil, 1890-1915.”

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