Native Capital: Financial Institutions and Economic Development in S?o Paulo, Brazil, 1850-1920

Published by EH.NET (March 2006)

Anne G. Hanley, Native Capital: Financial Institutions and Economic Development in S?o Paulo, Brazil, 1850-1920. Stanford, CA: Stanford University Press, 2005. xviii + 286 pp. $55 (cloth), ISBN: 0-8047-5072-6.

Reviewed for EH.NET by Gail D. Triner, Department of History, Rutgers University.

Native Capital: Financial Institutions and Economic Development in S?o Paulo, Brazil offers an incisive history of the origins of modern financial institutions in a region that became, by the middle of the twentieth century, one of the largest urban and industrial centers of the “third world.” Anne G. Hanley, Associate Professor of History at Northern Illinois University, has constructed an excellent, detailed history of the organizations and legal structures that fueled an extraordinary period of financial innovation in S?o Paulo. In doing so, she finds dynamic entrepreneurialism bringing Brazilians together to pool their resources in constructive ways to fund explosive growth of financial markets at the end of the nineteenth and beginning of the twentieth centuries.

During the late nineteenth century, while the Brazilian state was organized as an “empire,” slow developments in the forms of joint stock companies, debenture issues, and banking were limited by the scale of financial requirements and by regulation at the national level. However, the expansion of coffee production, which ultimately fueled regional growth, the shift from slave to free (Brazilian and immigrant) labor and increasing demand for industrial capacity, provided incentive for entrepreneurs in S?o Paulo to seek new forms of financial organization.

In January 1890, almost simultaneously, and closely associated, with the introduction of republican government in November 1889, financial reforms opened the way for massive expansion in the forms and scale of corporate finance. Eased legal and capital requirements for limited liability corporations resulted in large numbers of new companies and banks opening their doors. Capital markets for equities and debentures and banks emerged from the reforms. As Hanley adroitly demonstrates, these reforms allowed existing economic elites to expand their activities at the same time that wider groups could participate in the boom, by investing their smaller pools of savings.

The securities exchange for equities and debentures (the Bolsa de Valores) suffered a rapid crash in 1891, but re-emerged strongly after a national debt re-scheduling in 1898 and additional reforms in 1905. Then, its “vigor disappeared after 1913” (p. 111) in the light of disruptions that World War I created in Brazil’s trading and financial networks. Hanley emphasizes the surviving companies and banks, rather than the many bankruptcies, acquisitions and liquidations. Without explicit quantification, it is difficult to determine the most common outcome for the companies newly formed during the 1890s. It is possible that opportunity for financial dynamism (with many regulatory loopholes) supported both real growth and widespread failures simultaneously.

In analyzing banking, Hanley makes a useful distinction between commercial and universal banks. The sample of universal banks is small (n=3), reflecting their inability to gain a foothold in the prevailing business environment. The few universal banks pursued long-term finance through mortgage and construction lending; they tried to raise long-term funding with mortgage-backed notes. The discussion of their failure raises more questions than it answers. Low profitability may have been the proximate cause of their demise. But, the theoretical discussion, leading to expectations of beneficial success, and findings of problems with asset valuation, suggest deeply seated business or regulatory problems that deserve attention. Commercial banks fared better: more of them served the S?o Paulo economy and they survived longer than universal banks. Although deprived of easy branch banking and long-term facilities, the liquidity and secure collateral that characterized commercial banks’ conservative portfolios served them well.

The causes and effects of the crises of 1891 and 1913/14, debt rescheduling of 1898, bank reforms and failures of 1900; the role (and feasible alternatives) of national monetary policy, and the relationship of S?o Paulo’s with the national economy receive cursory attention in Native Capital. But, given the importance of S?o Paulo for the economy and politics of Brazil, detailed questions relating the macroeconomic setting, the dynamics of national policy decisions and the trajectory of paulista business development arise. As examples, the specific “macroeconomic instability” that contributed to the failure of universal banks, as distinct from commercial banks (p. 148), the relationships between debt re-financing in 1898, bank failures of 1900-01, banking reform of 1905 (Chapter 6), and the formation of business enterprises could benefit from more exploration. Perhaps most importantly, reconciling the beneficial linkages of vastly expanded coffee production that Hanley refers to throughout the book, with seriously depressed world coffee prices from the mid-1890s through much of the first decade of the twentieth century and public sector support for coffee (with price supports and monetary reforms in 1905) may go a long way towards identifying the ways in which paulista entrepreneurs could apply their innovative dynamism.

Native Capital carefully describes the development of financial institutions and markets within S?o Paulo at the turn of the twentieth century, and it convincingly demonstrates a period of intense dynamism. However, the introduction’s claim that “the financial institutions so neglected in the Brazilian literature were precisely what made S?o Paulo’s development so successful” (p. 19) has broader implications on two interrelated counts that deserve attention. First, the implicit counterfactual — the possibility of other sources for successful development — is not the subject of empirical or analytical exploration. This concern taps into a very long-standing debate in financial theory and history about the causal relationship between finance and economic development; that it remains unresolved here only demonstrates its continued difficulty.

Second, and of more immediate concern for Hanley’s research, the relationship between these findings of financial and economic dynamism during this period and long-term development in S?o Paulo come into question. The period of financial dynamism was short-lived. After the early spectacular growth of the Bolsa, and especially after 1913, the story became very different. By the 1990s, when S?o Paulo boasted one of the largest, most modern industrial sectors in the developing world, its Bolsa listed only three-and-a-half times the number of companies that it had in 1917 (p. 189). While some aspects of early industrial structure saw their impetus in S?o Paulo during the decades surrounding the turn of the twentieth century, the volume of industrial growth can be traced to the post-World War II years. Therefore, if Brazilian financial markets remained moribund through much of the twentieth century after World War I (as seems to have been the case), can the financial dynamism of the earlier period really explain the success of S?o Paulo’s long-term development? What prevented sustained institutional dynamism? Attention to these questions provides an interesting challenge for future research.

Finally, the title of this book deserves more attention than it receives. Brazilian capital and money markets relied on Brazilian capital for their formation. This finding taps into one of the fundamental debates underlying Latin American economic history, the question of “dependency.” While Hanley alludes to the debate, an explicit discussion of the implications she draws for the finding of “native” capital would help both Latin Americanists with vested interests in varying sides of the debate and non-Latin-Americanists. From an empirical perspective, a useful subsequent question is whether, or how, the access that Brazilians had to international capital during the years of domestic financial innovation affected the dynamism of the S?o Paulo market.

Native Capital is very well-written. The prose is clear, and free of unexplained financial or theoretical jargon. The quantitative methods of the book rely on accounting principles that allow Hanley to explicate clearly the underlying businesses of financial institutions. The text situates the S?o Paulo case in the larger context of comparative financial history. The discursive footnotes are informative. Hanley is fully convincing on her theme of the extraordinary surge of entrepreneurialism in S?o Paulo during the late nineteenth and early twentieth centuries. Native Capital provides an important case study for very important questions in Brazilian and financial history. That the book raises provocative questions is a measure of its success.

Gail D. Triner, Associate Professor of History at Rutgers University, is author of Banking and Economic Development: Brazil, 1889-1930 (New York: Palgrave Press 2000) and a variety of articles on Brazilian economic and financial history, most recently, with Kirsten Wandschneider, “The Baring Crisis and the Brazilian Encilhamento, 1889-1891: An Early Example of Contagion among Emerging Capital Markets?” Financial History Review, Vol. 12, no.2, October 2005.