In the early 19th century, several new countries were born in Latin America. Many of these began to borrow in their own name from the capital markets, especially in London, and many found themselves bankrupt. Brazil was among the first group but not among the second, avoiding a fate that plagued much of the continent in that century. However, Brazil was not without its fiscal and monetary issues, as it did resort to excessive issuance of paper money, a habit that did not begin with independence but with the last few years of the colonial period. At the center of this story was the country’s royal-chartered national bank, the Banco do Brasil.
Progress in Brazilian nationhood and finance alike came when João VI, King of Portugal, moved the royal court to Brazil after a French invasion of the Iberian Peninsula. He elevated the colonial status of Brazil to kingdom and ended colonial controls on industry and trade. The king had good reason to do this as the government needed money after the loss of mainland Portugal to French occupation.
In Brazil, the state often relied on short-term borrowing to finance its deficits. The few longer-term state loans funded projects ranging from establishing a gunpowder factory to encouraging Swiss immigration to Brazil but all of these loans were small. In search of funds, the government turned to seigniorage, the profit made from creating money. The potential to raise funds by printing paper money is obvious but the government also attempted this with precious metal coins.
Looking for local sources of income to make up for the loss of Portuguese tax revenues, the government purchased Spanish silver coins and ‘overstamped’ these with a higher denomination value in Portuguese reís than was merited based on the silver content of the coins. This earned the state a small return but was not the full extent of the country’s monetary inventiveness.
In October 1808, João VI commissioned a national bank for Brazil, the Banco do Brasil. The bank was given a monopoly on printing paper money, managed the government debt and precious metal reserves, and was also permitted to make loans and mortgages and accept deposits from private customers. In return for these privileges, the bank would provide credit to the government. The state provided most of the initial capital since private share offerings were unsuccessful. It would, however, extract great returns from the bank through its lending capacity.
During the last years of colonial Brazilian history, the government borrowed from the bank often, forcing it to increase banknote issuance. The ratio of paper banknotes to reserves increased from 75% in 1810 to 305% by 1813. The borrowing went on, often encouraged by various crises, such as an 1817 revolt in Pernambuco, in northeastern Brazil. The military response to the disorder was financed by printing banknotes and currency issuances were not matched by proportional increases in precious metal reserves.
Nevertheless, the bank was increasingly successful in raising private capital after 1816. Shares in the Banco do Brasil were the first securities introduced in the capital markets of Rio de Janeiro, predating even domestically issued Brazilian government bonds which only saw their first public offering in 1828. By 1818, the capitalization of the bank doubled to 2,400 contos (each conto was equal to 1,000 milréis, each 1,000 réis).
The French were long since defeated in Europe and João VI returned to Portugal in 1821. Movement of the royal court drained the bank of reserves and depleted the Treasury. The Banco do Brasil was forced to honor withdrawals almost exclusively with paper rather than precious metal specie. The king’s son, Dom Pedro I, was declared emperor of the now independent country in 1822.
By now, the Banco do Brasil was in mixed condition at best. Shortly after independence, the bank had only 200 contos in precious metal reserves backing over 8,800 contos in paper money. Despite this, the bank continued to successfully sell shares into the market and its equity capitalization rose to 3,600 contos.
The public finances were also on a mixed trajectory after independence. They certainly improved in one sense. Brazil was now able to borrow in its own name, especially in London where the sovereign bond markets flourished with new issuers. Most of these were the recently ‘liberated’ South American countries like Colombia, Argentina, and Brazil. Like the others, the latter made quick use of this market.
As part of its agreement with Portugal over independence, Brazil inherited responsibility for £1.4 million in Portuguese debt already raised in London. Brazil also incurred its own debts in the British capital, more than £4 million worth, bringing the total foreign debt to more than £5 million by 1831. This was in addition to a domestic debt of 18 million milréis in long-term borrowings and 38.5 million milréis in short-term borrowings (56,500 contos combined).
The first of these post-independence loans went to purchase warships and cover government obligations for the first few months after independence. Over this first decade of independence, most borrowing funded military endeavors. Take for example a £3 million loan raised in London at 75% of face value. Most of this money was originally intended to repay debt to the Banco do Brasil and retire the paper currency that funded this debt, but rebellion in Brazil’s northeast and the Cisplatine War with Argentina created more urgent needs for funds.
Though it was now able to borrow more money than it ever had before, the public finances also worsened in the 1820s. War with Argentina and national and regional uprisings placed more demands from the government on the Banco do Brasil, causing it to print more money. The value of the Brazilian currency, the milréis, depreciated against other currencies. Whereas in 1824, one milréis was worth about forty-eight British pence, it was worth just twenty-five pence by 1829. The public hoarded precious metals and in some regions, lower value copper coins replaced the other forms of money in circulation and even Banco do Brasil banknotes. The monetary system was showing more than mere signs of strain.
In 1827, Brazil’s parliament rejected new issuances of paper money to finance deficits and, two years later, the legislators opted against renewing the Banco do Brasil’s charter. This was in part due to the campaigning of liberal and regional groups concerned with the centralized power of the bank and the undue support it provided the authoritarian monarchy. Opponents thought the Banco do Brasil propped up a rotten system and was home to its own fraud and abuse. In 1829, the bank’s paper notes lost 40% of their value against copper coins and the exchange rate with sterling stood at a new low, just twenty pence per milréis.
There was revolution in Brazil in 1831 and the emperor, Pedro I, left for Portugal. The Banco do Brasil liquidated over a number of years and was wound down by 1839. The state Treasury took over the power to issue banknotes in 1829 and, soon after, banknote issuance played a large role in financing government deficits once more.
Though Brazil may have avoided bankruptcy in its early history it was not without its problems. The country’s poor fiscal situation strained its monetary system, causing depreciation of money that ultimately complemented taxation as a regular means of financing the state. The government resorted to printing money as a means of financing deficits before Brazil even became an independent country.
When governments finance deficits by creating money, the ability to continue running these deficits becomes less a question of the usual ratios of debt to gross domestic product or debt service costs as a percentage of government revenues. Rather, it becomes a question of for how long people will put up with such a ‘solution’. By the late 1820s and early 1830s, the public wanted no more of this, or at least enough people sought its end that the Brazilian parliament terminated the Banco do Brasil’s ability to print notes. However, this freeze did not last long.
More from the Tontine Coffee-House
Read about the 1820s emerging market bond bust which left Brazil the only South American government with performing bonds in London. Seigniorage also funded the United States’s independence. Lastly, consider subscribing to this blog’s newsletter here.
1. Cardoso, José Luís. “A New Contribution to the History of Banco Do Brasil (1808‑1829): Chronicle of a Foretold Failure.” Revista Brasileira De História, vol. 30, no. 59, 2010, pp. 165–189.
2. Maria Teresa Ribeiro, De Oliveira. “Economic Policies and Bankruptcy Institutions: Brazil in a Period of Transition from Colony to an Independent Nation.” 2006.
3. Mettenheim, Kurt. Federal Banking in Brazil: Policies and Competitive Advantages. Pickering & Chatto, 2010.
4. Mettenheim, Kurt. Monetary Statecraft in Brazil: 1808-2014. Taylor & Francis, 2015.
5. Summerhill, William R. Inglorious Revolution Political Institutions, Sovereign Debt, and Financial Underdevelopment in Imperial Brazil. Yale University Press, 2015.