Debtor Default, Political Power, and Contract Enforcement

The greatest obstacle to financing cochineal production in colonial Oaxaca stemmed from the difficulty of enforcing contracts, ensuring timely repayment of loans. That the repartimiento was operated by colonial officials possessing judicial power to help in the collection of debts served to reduce, but not eradicate, this risk. Indigenous borrowers were often delinquent in closing their debts. In part, default was the inevitable result of the high level of crop failure owing to the extreme vulnerability of cochineal to inclement weather. An unexpected frost, not uncommon in the Oaxacan highlands where much of the dyestuff was produced, or even excessive wind and rain might be sufficient to destroy the entire harvest of cochineal insects fattening in the cactus grove.²⁸

Much more problematic, however, was the propensity of debtors to evade their creditors. When the Spanish officials or their assistants ventured to the indigenous villages at harvest time, they often faced great difficulties collecting the dyestuff owed to them. Sources rarely reveal why producers reneged on their debts. But that this was common is indisputable, if for no other reason than because of the multitude of surviving archival cases regarding such debts.²⁹ Certainly default reflected producer poverty, but simple foot dragging, trying to escape payment of debts, was undoubtedly common. The alcaldes mayores typically served five-year terms, at the end of which any debtors who had succeeded in not paying were likely to escape their obligations altogether.³⁰

Regardless of the reason, the difficulty of enforcing contracts in rural colonial Mexico was the primary reason that the repartimiento came into existence. The repartimiento was operated by magistrates vested with judicial power, which they could use to facilitate the enforcement of contracts. These powers enabled officials to collect their own debts at reasonable cost. Had it not been for this ability, the officials would not have made many of these loans and the quantities of cochineal produced would have been much lower.

In 1752, in response to a questionnaire circulated by the Viceroy, the alcaldes mayores of Oaxaca's districts provided detailed reports on the operation of the repartimiento. Virtually all of the respondents commented on the extraordinary difficulty faced in the collection of debts. For instance, Don Nicolas de Mimiaga, the magistrate of the district encompassing Chichicapa y Zimatlán, noted the frequent need to refinance cochineal producers who could not pay on time, providing them additional repartimiento funds in the hope that they would cancel their entire debts in the following harvest. Despite all his efforts, he noted, inevitably some debtors fled, others died, and still others were simply insolvent. In summary, he exclaimed that “one gives thanks to God when the money is collected in two years.”³¹

Refinancing was rational when officials believed that default was the result of crop failure. The alcalde mayor could also arrest those who failed to pay their debts promptly, throwing them into the local jail in the hopes that incarceration would encourage them to fulfill contracted obligations.³²

Obviously such an approach was counter-productive unless the official truly believed the debtor to be deceitfully evading payment. In other cases the magistrates might embargo the belongings of the debtor in hopes of recovering his due. For example, when repartimiento debts were not cancelled promptly the alcalde mayor might seize draught animals, perhaps even beasts sold previously through the system. This occurred to Felipe Morales, an Indian widower from Santa Maria de la Asunción de Tlacolula, who issued a complaint that the district magistrate had arrested him and seized his property for nonpayment of a cochineal debt. The official, in turn, had sold some of Morales's cattle on credit to other villagers through the repartimiento, deducting the value of the cattle from Morales's debt.³³

Greater problems might arise when the Spanish official encountered large numbers of recalcitrant debtors. This occurred in the 1780s in the Oaxacan valley town of Ayoquesco when the producers tried to avoid paying their cochineal debts altogether by escaping to the hills whenever the magistrate's debt collectors arrived in town. For obvious reasons of efficiency, the collectors had customarily come to the village at certain religious holidays when most of the indigenous villagers were present. Some debtors, however, began avoiding the village at these times, so that they could evade fulfilling their obligations. This evasion grew more complicated, however, when the collectors began making surprise, unannounced trips to the village. The local priests, the source in this case, complained to the Crown that the debtors had responded by avoiding the village altogether, causing them to miss repeatedly their religious duties.³⁴

Although we do not know to what degree the official succeeded in collecting his debts from the villagers of Ayoquesco, the importance of judicial power in facilitating the enforcement of debts becomes clear from a different case involving an outgoing alcalde mayor of the cochineal rich district of Nexapa. The official, Don Faustino Manero, reached an agreement in March, 1765 with the newly appointed official, Don Gabriel Gutierres de Ruvalcava, in which the latter agreed to postpone for several months his occupancy of the post so that the former could collect the many cochineal repartimiento debts that remained outstanding. Manero paid Gutierres the very substantial sum of 10,000 pesos. It is clear that Manero believed that the office's judicial power would be instrumental in enabling his collection of debts.³⁵

The effectiveness of incarceration is reflected in a case from the 1780s in which the alcalde mayor of the northern Oaxacan district of Teotitlán del Camino contracted for cochineal with indigenous producer Bernardo Antonio. The official, as was customary, advanced Antonio money to be repaid in cochineal at harvest time. Several seasons passed, however, and Antonio failed to meet his obligations. Finally, the district magistrate ordered Antonio's arrest for noncompliance and this order motivated Antonio to pay the official most, but not all, of the cochineal he owed to him. In the end, Antonio took six years to pay, rather than one season, and did so in 18 separate partial payments. Had the magistrate not attempted to take Antonio into custody, it is likely that he would not have collected his debt at all. The official's ability to employ judicial power for his own business dealings gave him a degree of security that a private merchant would have lacked. It certainly was no guarantee, however, that he would collect all of his debts.³⁶

When called to answer why they had failed to fulfill their obligations and deliver cochineal at harvest, producers rarely admitted more than that they had lost their harvests. This was certainly common, but also clear is that debtors sometimes found it beneficial to delay payment. Cochineal repartimiento loans never accrued interest; instead creditors built their interest charges into the advance price, loaning less than the market price for cochineal. One advantage to this for creditors was that it reduced the complexity (and the transaction costs) of maintaining their portfolios. In addition, as the implicit rate on these loans always exceeded the Church's legal rate of 5 percent, this practice insulated the officials from charges of usury.³⁷

The consequence, however, was that debtors paid no financial penalty for paying late, although creditors sometimes made additional credit contingent on the cancellation of earlier obligations, and thus the officials bore most of the financial risk.³⁸ The magistrates had a real incentive to monitor borrowers as best they could, especially because loans were almost always extended in coin and there was the very real risk that indigenous producers might spend their loans on immediate consumption rather than to finance production. But the sheer number of small loans in the typical official's portfolio coupled with the relative isolation of many of the villages meant that creditors could rarely keep track of most of their borrowers' actions, nor was it economically feasible to even try in most cases.³⁹

As the foregoing cases illustrate, and these are but a small sampling of the rich archival evidence, enforcing contracts for even the judicially empowered Spanish officials was challenging. One might be inclined, however, to dismiss these cases as merely anecdotal, not necessarily reflecting the normal conditions under which these creditors operated. Although district magistrates regularly commented on the poor debt repayment of the Indians, complaints could reflect the exaggerated bias of creditors towards their clientele. That these cases are not extraordinary, however, is suggested more globally by the surviving account ledgers of Francisco Rojas y Rocha who served as magistrate of the district of Teposcolula in the 1780s. Analysis of his cochineal repartimientos reveal that in February 1784, 70 percent of his outstanding loans were overdue; they had not been repaid a full year after they were extended. Of his total portfolio, 44 percent of the repartimientos had been extended more than two years earlier.⁴⁰

Twenty percent of his outstanding debts were from advances made more than three years earlier.⁴¹ Perhaps this official's experiences were extreme, but the difficulty that he faced in collecting his debts was not unusual. One can only imagine how difficult a collection merchants without judicial power would have faced.

One of the primary reasons that the repartimiento is conventionally seen as a coercive system is because it was operated by officials of the Crown who sometimes employed violent means in the enforcement of contracts.⁴²

As one author succinctly states: the Spanish officials “succeeded because their political power allowed them to use coercion, rather than market forces, to get the local population, especially the Indian peasantry, to comply with their demands. Colonialism was thus an essential feature of commercial exchange, for market forces alone would not have resulted in the transfer of profits away from the peasants on the scale desired by the merchant class.”⁴³ Another scholar notes: “What characterizes this system … is that it operates through a mechanism of political coercion. The alcalde-merchant has extra-economic authority: judicial and political. The producer is obliged to buy from him … and to sell to him … at the rates … that he dictates … because of the control that he exercises.”⁴⁴

These scholars are correct to identify the importance of the official's judicial power. But, they overstate its significance. Although the magistrates were usually able to force debtors to repay their repartimiento obligations, their coercive capacity was not adequate to coerce whole populations to produce a major export product unwillingly. Historians have convincingly demonstrated that the late colonial Spanish state was weak (both absolutely and comparatively), especially outside of the colonies' major cities, ports, and mines.⁴⁵

It seems likely that the officials would have enjoyed adequate power from their offices to collect most debts entered into willfully, although even this was not without significant effort; it seems unlikely that they could (with the help of several assistants) have forced thousands to produce and consume against their interests and desires. This latter point is magnified when one considers that during much of the eighteenth century, the Crown frowned upon and even attempted to abolish the repartimiento.⁴⁶ In short, a weak crown only sometimes willing to support the repartimiento at all would have been inadequate to back effectively a system as coercive as historians have painted the repartimiento.

But, again, the political power of the magistrates was critical, because it enabled them to collect difficult debts. To enforce contracts and collect repartimiento debts the district magistrates did use the power of their offices. The magistrates sometimes hauled recalcitrant debtors to jail, or seized their property in lieu of overdue cochineal debts. The officials' legal muscle gave them a decisive edge over private merchants and enabled them to provide credit in this highly risky environment. As the evidence has shown, however, even their judicial power was no guarantee that they could easily collect all of the cochineal repartimiento debts owed to them.

Without the institution of repartimiento, Spanish-Indian trade would have been limited to commerce “al contado,” in cash. High levels of debtor delay and default made credit provision so risky that private merchants never posed serious competition to the officials, largely choosing to avoid the extension of funds to poor rural folks. As was frequently echoed in the colonial era, only the alcaldes mayores could safely extend credit widely to the indigenous population because only they had the judicial power to collect the debts. In fact, the 1751 legalization by Royal Cedula of the repartimiento was justified on the premise that without the officials' administration of such loans, Indians would be deprived of financing altogether because “neither a merchant nor any other person can risk making such loans, nor wait such long terms with a collection so difficult and costly.”⁴⁷

Private merchants did sometimes loan funds to cochineal producers, but only to those with whom the merchants enjoyed some additional relationship, such as employer, which gave them both greater leverage to collect their debts and better information as to the producers' creditworthiness.⁴⁸

The example discussed previously regarding the payment made by the magistrate of the district of Nexapa to delay the end of his tenure makes clear how critical the authority of the post was in enforcing contracts. The official, Don Faustino Manero, clearly believed that as a private merchant he would not be able to collect many of his debts, demonstrating how important the repartimiento was to this commerce.⁴⁹

Although they avoided loaning funds to the Indians directly, Mexico's richest and most powerful merchants, the merchants of the Mexico City Consulado (merchant guild), found a way to overcome this obstacle by allying themselves with the Spanish magistrates, putting up tens of thousands of pesos per year to finance the magistrates' repartimiento trade.⁵⁰

The Mexico City merchants became partners with the officials because the latter could utilize the power of their offices to enforce contracts, to ensure (to the best of their ability) that debtors repaid the loans in a timely fashion. Formal legal proceedings would have been too costly and time consuming for the collection of small debts, and so private merchants largely shied away from the provision of credit to the poor. Because they lacked any mechanism to cheaply enforce contracts, merchants avoided the business of extending loans to poor rural Mexicans. These loans were perceived to be too risky. The repartimiento, however, was operated by officials who personally were vested with Crown authority to enforce contracts. The repartimiento, then, was an economic institution that served to make possible the extension of loans under otherwise excessively risky conditions. Even with judicial power, the loans were risky.

Because of their unique ability to enforce contracts, the alcaldes mayores enjoyed a virtual monopoly on the extension of credit to the cochineal producers, a factor that explains the magistrates' centrality in the cochineal trade. During the late colonial period, however, modernizing reformers increasingly painted the officials' repartimientos as monopolistic barriers to free commerce, a depiction that modern historians have largely embraced. The most prominent colonial critic of the repartimiento was José de Gálvez who in 1765 was sent by the Crown to Mexico with the task of modernizing the bureaucracy and liberating trade. For Gálvez, the magistrates were guilty of “excessively enrich[ing] themselves with their monopolies.”⁵¹

In fact, the magistrates did, at times, attempt to exclude competition from the cochineal producing districts of Oaxaca, but such efforts were not likely designed to protect monopoly conditions.⁵²

Prohibiting competition, probably unsuccessful in most cases, was instead part of the magistrates' efforts to guarantee compliance with contracts. The greatest risk posed by other merchants was not that the latter would undersell the alcalde mayor; few were even willing to extend credit to the indigenous producers. Instead, the competition, mainly peddlers, threatened to purchase freshly harvested cochineal from the Indians that the latter were required to deliver to the officials in cancellation of their repartimiento advances. Peddlers enticed Indian producers to sell them their finished dye and claim insolvency when the official came to collect.

Normally, producers were reluctant to cheat the alcalde mayor and divert their cochineal to the “open market.” In some years, however, the market price of cochineal rose to such high levels that reneging on their obligations grew especially tempting. In such years, some indigenous producers seemed willing to risk the wrath of the Spanish officials, selling their output to the traveling merchants and claiming later that they had lost their harvests. According to the 1769 report of the district magistrate of Villa Alta, Don José Molina y Sandoval, indigenous producers were much more likely to default when market prices rose substantially above the repartimiento price. In that very year, Molina had arrived at harvest time to collect the cochineal owed to him, but producers claimed that they had lost their cochineal and could not repay him until the following harvest. Whereas some probably had told the truth, others, according to Molina, had taken advantage of the currently elevated price of 24 reales (3 pesos) to sell their output at the regional markets, knowing that prices would probably be lower by the following harvest when they would repay the official.⁵³

By evading payment the indigenous producers were acting rationally, if not honestly, by choosing to sell their dyestuff in the “open market” at market prices, and to deliver cochineal to the magistrate only when the price had returned to more normal levels. The exclusionary tactics of the alcaldes mayores were designed to prevent such reneging of debts. The large size of their districts, the shrewdness of the peddlers, and the complicity of the producers undoubtedly made exclusion an impossible task.

It is worth noting that the alcaldes mayores also purchased cochineal in the “open market,” paying market prices in coin for already harvested cochineal, prices that were sometimes greatly in excess of the fixed repartimiento credit price.⁵⁴

In the repartimiento, however, the officials endured considerable risk and so they naturally obtained the dyestuff at a discount.

Convinced that the magistrates impeded trade and that the abolition of the repartimiento would expand commerce accordingly, José Gálvez's master plan of reform, the Real Ordenanza de Intendentes, was finally introduced in 1786. The most important, and controversial, piece of legislation was Article Twelve, which abolished the practice of repartimientos.⁵⁵

The authors of Article Twelve envisioned that with the end of repartimientos Indians would be “free to trade wherever and with whomever it suits them.”⁵⁶

And, according to Gálvez, “plentiful were the subjects dealing in the same goods and items as those that the alcaldes mayores provided.”⁵⁷ The reality, however, was different. Consistent with the argument put forth in this article, the end of the repartimiento spelled the virtual termination of credit in the countryside. Eight years after the implementation of Article Twelve, the frustrated Viceroy of New Spain affirmed that the “greatest blow that the internal commerce of this Kingdom has suffered in these times has been the lack of available financing which the Indians need.”⁵⁸ The Viceroy attributed the credit crunch to Article Twelve having “been interpreted in a most rigorous fashion, prohibiting all sales on credit,” when the King had intended that the prohibition only apply to the justices, not to other merchants.⁵⁹ Last, the Viceroy counseled, “this shackle removed, the Kingdom will be fomented in general and especially the hapless poor.”⁶⁰ The Viceroy saw the restoration of the repartimientos (ideally in the hands of private merchants) as the key to resurrecting Mexico's depressed rural economy. In fact, as the Viceroy knew perfectly well, there had been some resurgence of the repartimiento owing to some Crown officials audaciously breaking the law and issuing loans to the Indians. Clearly side-stepping the question of their legality, the Viceroy optimistically noted that the Indians had “already started to breathe owing to some repartimientos that have been made in recent years.”⁶¹

The abolition of the repartimiento, among other factors, contributed to the decline of cochineal production after 1786. Reformers had expected private merchants to supply credit to the Indians in the absence of the alcaldes mayores' repartimientos. Without the security to collect debts safely and cheaply, however, private capital refused to fill the void. With the abolition of this institutional arrangement, enforcement of contracts became too difficult and costly.

Loan Size and Cross-Cultural Trade

One of the central purposes of economic institutions, according to the New Institutional Economists, is to reduce the costs of doing business, as institutions “determine transaction and transformation costs and hence the profitability and feasibility of engaging in economic activity.”⁶²

The ability of the repartimiento to minimize transaction costs was especially critical given the large number of small loans that were necessary to finance cochineal production. This potential obstacle was all the more profound owing to the linguistic and cultural divide that separated Spanish lender from indigenous borrower. Peculiar characteristics of the repartimiento served to reduce these impediments, lower transaction costs, and lessen perceived uncertainty and risk.

Throughout the province of Oaxaca, tens of thousands of indigenous producers cultivated cochineal in backyard cactus groves. Although total production was substantial, few produced more than a couple of pounds per year. This necessitated the annual extension of thousands of small loans, few of which amounted to much by themselves. The districts in which the Spanish officials operated ranged from several that had populations under 10,000 in 1790 to Villa Alta, the province's largest district, with a population of nearly 60,000 indigenous people spread over an enormous area.⁶³

The magistrates' assistants, known as tenientes, lieutenants, ventured out to the Indian villages of their districts and distributed money to the cochineal producers against cochineal to be delivered at harvest time. From the perspective of the creditors, typical loans were small; analysis of surviving ledgers shows an average loan to an individual producer was nine pesos for the future delivery of six pounds of cochineal.⁶⁴ From the perspective of the indigenous recipients, however, nine pesos was a substantial sum. It equaled the wages of roughly 36 to 48 days' labor in a Spanish enterprise, given the typical colonial wage rate of 1.5 to 2 reales per day (8 reales = 1 peso).

The small size of most loans required that the alcaldes mayores assemble a large number of clients, if the business were to be worth his while. But, the need to provide so many small loans also meant that the official faced the danger of seeing much of his potential gain erased by a multitude of transaction costs. One of the more unusual characteristics of the cochineal repartimiento addressed this problem and reduced transaction costs to a more tolerable level. With few exceptions, during the entire period 1750 to 1821, repartimiento loans were provided at the stable rate of 12 reales (1.5 pesos) advanced for each pound of cochineal due at harvest time.⁶⁵

This rate remained stable despite a market price that fluctuated with changing market conditions. One consequence of this loan rate stability was that the implicit interest rate fluctuated with little relation to changing risk or availability of funds. Rather the return realized by creditors (discounting differences in ability to collect) depended on the difference between 1.5 pesos and the market price per pound. In some years the magistrates could sell the cochineal collected in the repartimiento for much more than in other years.

The stability of the cochineal repartimiento price seems odd at first glance. This apparent oddity, however, makes sense when one interprets the repartimiento as an institution adapted to the specific conditions of this colonial trade. First, the need to make thousands of small unsecured loans meant that the officials benefited by avoiding the need to negotiate each and every loan. In addition, “loan contracts” were verbal, not written, and so both parties benefited from the clarity provided by stable terms. In the cochineal repartimiento virtually every single loan had identical terms, terms universally recognized and accepted. Producers understood that they were required to deliver one pound of dyestuff for each 12 reales advanced to them. Had the Spanish district magistrates needed to haggle over the terms with each of his thousands of clients, the cost of transacting would have been prohibitive. The beauty of the repartimiento was that the parties only needed to establish a loan amount, not the terms of the loan. By keeping his transaction costs down, the alcalde mayor could operate his business more profitably. Although the fluctuating market price meant that some of the official's loans were less profitable than others, keeping transaction costs low probably more than compensated him for charging lower implicit interest on some of the transactions.

But price stability in the repartimiento was even more critical in reducing the uncertainty inherent in cross-cultural trade. Trade between Spaniards and Indians involved exchange between people of two different cultures and languages, and this introduced uncertainties into what was already a very risky business. Spaniards and Indians in colonial Mexico were predisposed not to trust the “unpredictable” behavior of the “other.” This cross cultural uncertainty was magnified in the repartimiento because this system entailed the provision of credit; the parties to the transaction needed to trust one another for the duration of the loan.⁶⁶

Writing about cross-cultural trade, Philip Curtin has suggested that “problems in cross-cultural understanding in general have meant that cross-trade has almost always been carried out through special institutional arrangements to help guarantee the mutual security of the two sides.”⁶⁷

The standardization of the repartimiento reduced both uncertainty and the potential for conflict. The terms of the repartimiento came to be universally recognized and viewed as legitimate, and this reduced the likelihood of the terms being disputed. The language employed by both sides of the contract is illustrative; in 1808, for example, Juan José Benítes, an indigenous cochineal producer from the town of San Mateo Sindihui in the Mixteca Alta, noted that the loan rate of 12 reales per pound of cochineal “has always been customary.”⁶⁸ In 1798 the magistrate of the district of Miahuatlán claimed that the standard rate of 12 reales per pound was “stipulated and agreed upon by immemorial custom.”⁶⁹ In eighteenth-century Oaxaca, these terms came to be seen as legitimate, even though they seem peculiar to the modern eye.

In several years the market price of cochineal dipped too low to allow the Spanish official to profitably advance 12 reales per pound. Several cases exist in which Indian producers accustomed to receiving 12 reales accepted (presumably out of need) a lower rate. The indigenous producers of Nexapa took cochineal repartimientos at ten reales per pound in 1798 because their district magistrate refused them the customary 12 insisting that the price of dye was too depressed. At harvest time, however, the producers demanded an additional two reales per pound because, as they argued, the market price had rebounded.⁷⁰

In still another case dating from 1779, the Indians of the district of Teotitlán del Camino reluctantly accepted advances of nine reales per pound because the district magistrate, Don Luis Frejomil, refused to give them more owing to the “guerilla,” the war.⁷¹ But when the harvest arrived, the producers balked, and refused to pay at any rate lower than 12 per pound. As the conflict escalated, the Real Audiencia (Mexico's highest court) interceded and forced the Spanish official to accept the “customary” rate of 12 reales per pound.⁷² This standard rate, then, was not only viewed as legitimate by the Indians but even helped them to defend their interests. Everyone knew what the customary contract stipulated; it was simple and universally recognized.

Of course, these last two cases were extreme. It was actually unusual for the repartimiento terms to deviate from the standard rate. The stability of the repartimiento terms reduced the degree of uncertainty that was inherent in these cross-cultural transactions, and in doing so lowered the potential for conflict in most years. Standardization was further beneficial in that it reduced transaction costs incurred by the magistrate. The official made thousands of very small loans over the course of a typical season. Had he been forced to negotiate the terms of each and every verbal contract, his administrative costs would have grown prohibitive. The constant rate made such costly transacting unnecessary. The fact that the official earned more in some years and less in others was probably a small price to pay for the greater simplicity of the system.