Despite decades of intense interest and research on the economic history of Latin America, we still know relatively little about the history of financial institutions in the region and their workings. Anne Hanley's Native Capital is a major contribution to a small, but growing, literature on the history of financial institutions in Brazil. (Her book should be read alongside Gail Triner's equally important Banking and Economic Development: Brazil, 1889–1930 (New York, 2000).) Hanley concentrates on São Paulo in the late nineteenth and early twentieth centuries, a period that witnessed the rise of the coffee economy in southeastern Brazil, and the rapid emergence of the city of São Paulo as the country's dominant economic centre. By the mid-twentieth century, metropolitan São Paulo had become the industrial heartland of Brazil, replacing Rio de Janeiro as the economic capital of the country. Today, the city has the largest industrial park in the southern hemisphere and a metropolitan population upwards of seventeen million. Hanley's important work reveals the inner workings of the financial institutions and capital markets that had emerged in the city by the early twentieth century, setting the stage for its explosive industrialisation.
For decades, studies of Brazilian industrialisation have traced the linkages between the rise of the coffee economy and the growth of manufacturing. As Hanley points out, this voluminous literature has assumed the transformation of coffee wealth into industrial capital to be a ‘natural’ process. Hanley argues, however, ‘that this transformation occurred as the result of a very real set of institutions that evolved during the coffee boom and early industrialization – the capital markets’ (pp. 5–6). Rather than natural, it was government regulation and legislation that ‘provided crucial mechanisms through which the abundant wealth generated by the coffee boom wound its way into the urban commercial and industrial companies that transformed São Paulo’ (p. 6). The institutions facilitated ‘business formation and expansion through the efficient allocation of capital’ (p. 17). Hanley argues persuasively that the financial institutions that emerged in São Paulo in the late nineteenth century evolved very rapidly from ‘the highly personal to the modern, formal, impersonal intermediaries that historically have so benefited economies’ around the world (p. 19). The major original contribution of the book, however, is not the detailed analysis of these neglected financial institutions, but rather the revelation that local, native capital – rather than foreign capital – played the dominant role.
The core of the book comprises five chapters devoted to the analysis of banks, joint-stock companies and the market for stocks and bonds under the Empire, the rise of the stock market (Bolsa), the failure of universal banking, and commercial banks. Hanley has done prodigious work reconstructing company accounts from newspapers, almanacs, legislation and company records. Each chapter reveals the shift from personal financial arrangements to more formal financial intermediaries, a process pushed forward by the rapid growth of the coffee economy in the late nineteenth century. Early banks concentrated foremost on liquidity and secondarily on economic development. Short-term credit was the rule, with annual interest rates of 8 to 14 per cent. By 1889 (the fall of the Empire and the proclamation of the Republic), São Paulo had developed a small, but important, financial banking sector.
One of the more striking of Hanley's findings is how often the good intentions of the government resulted in legislation that stifled business development. Not until the 1890s did joint-stock companies begin to multiply, and they were mainly banks, railways, urban transport and public utilities (with the first two dominant). Again, Brazilian investors provided most of the capital. Domestic investment outpaced foreign capital by a ratio of four to one. The rising number of joint-stock companies fuelled the growth of the stock market in the 1890s and the first two decades of the twentieth century. This period, especially between 1909 and 1913, ‘was an era of Brazilian entrepreneurship, capital, investment, growth, and diversification. The Bolsa was the locus of growth in urban industrial, commercial, and public utilities sectors … and the proportion of capital formation that took place as a result, made a significant contribution to the modernization of the São Paulo economy’ (pp. 98–9). Hanley follows previous studies in emphasising the key role of the booming coffee economy as the stimulus for this ‘burst of development’ (p. 110).
Amidst these successes, universal banks failed miserably. Hanley argues that these failures demonstrate the limits of the government's ability to use legislation and regulation to foment development. Bank profits were low, ‘far lower than those of commercial banks’ (p. 115). Mortgages provided universal banks with their most important portfolio. Long-term and rural credit predominated over urban and short-term credit in the most important of these banks. These banks, however, failed and by 1906 the city that would become the most dynamic economic centre in Latin America was left without any long-term lending institutions. Commercial banks, on the other hand, did survive and thrive with their reliance on short-term credit. By the 1920s, these commercial banks, as Hanley shows, had made the transition from personal to institutional intermediation of credit. Again, domestic capital dominated in the commercial banking sector, at least initially. This pattern changed dramatically in the aftermath of a series of national financial crises between 1898 and 1906. Foreign banks, with their greater liquidity, survived these crises and ‘became the predominant financial institutions’ after 1906, controlling nearly three-quarters of all deposits. The surviving domestic banks consolidated into fewer and larger institutions. The crises, however, pushed the Brazilian banks to more impersonal intermediation, a process that Hanley calls ‘the silver lining in an otherwise devastating banking crisis’ (p. 186).
Hanley has produced a deeply researched and persuasive analysis of the neglected, but fundamental, financial institutions that are so crucial to understanding economic development. She clearly shows that institutions matter, and that government regulation, however well intentioned, may be ineffective or counter-productive. More importantly, Hanley has demonstrated the key role of native capital in the economic development of the premier industrial and financial centre in Latin America.
