Brazil today and tomorrow

Brazilian Currency

In common with other young countries whose gold reserves are insufficient to back the paper currency used to carry on the ordinary business of life within her borders, Brazil has been and still is faced with difficulties in regard to exchange, i. e., the gold value of her paper and its relation to the face value of that paper. Exchange in Brazil is the measure of the paper milreis (one thousand reis) with English money: this standard is the official one as a result of the preponderance of English finance.

The par value of the Brazilian milreis is twenty-seven pence (fifty-four cents), but at the end of 1916 it was worth 12 pence, rose to 18 in early 1920, and later sank below 8 pence. In 1889 the milreis was actually above par by a fraction of a penny, but later on great fluctuations took place, almost invariably as the result of the issue of large quantities of paper money, which, unbacked by gold, are regarded as of diminishing value in comparison with the gold-backed currency of other countries.

The present rate of exchange, which is a recovery from the first panicky drop of paper here, as in many other parts of the world on the outbreak of the European War, is below a rate which the efforts of Brazilian financial men succeeded in preserving for eight years by the establishment of the Caixa de Conversão; continuance of exchange at a lowered level is probably partly the result of the issue of extensive amounts of inconvertible paper into circulation for budgetary purposes since the middle of 1914, and partly on account of the heavy demand for bills of exchange on London, which began to have their effect from the time of the Balkan trouble of 1913. The drop would without doubt have been much sharper were it not for three causes of strength: the first is the unprecedentedly large trade balance in favour of Brazil in 1915, amounting to nearly £28,000,000 ($140,000,000); the second is the Funding Loan which the Federal Government succeeded in making with its European creditors in the latter part of 1914 and which prevented the outflow of other large sums in gold; and, third, the strong gold reserves of the Caixa de Conversão. It is true that these reserves have been drawn upon until they now stand at less than one-fifth of their level at the beginning of 1913, but without that stream of gold and its strengthening effect on circulation it is reasonable to suppose that exchange would have suffered to a greater extent.

The Caixa de Conversão, which I will henceforth call the Conversion Office, is Brazil’s concrete effort to fix a rate of exchange; it was excellent in conception and performed its function admirably until unforeseen world conditions overpowered its operation. After the establishment of a Republic in Brazil large issues of paper were for the first time put into circulation, with the accompaniment of successive falls in exchange; the proclamation of the overthrow of the Empire found Brazil with not more than 199,000 contos in paper, but eight years later the amount had risen to nearly 790,000 and Brazil was obliged to suspend interest on her debt to Europe. A Funding Loan of ten million pounds sterling was arranged with Rothschild’s, which had the effect of checking the fall in the value of the milreis, then (1897–98) down to eight pence or nine pence, and even touching the threatening level of six pence; the arrangement included destruction of the debased paper in considerable quantities, and as this work was accomplished exchange steadily rose until in another ten years’ time, 1908, outstanding inconvertible paper amounted to less than 650,000 contos, and the value of the milreis was sixteen pence. But by this time the Conversion Office was in operation, thanks largely to the efforts of President Affonso Penna; this office in 1906 began receiving deposits of gold and issuing against them convertible paper bills having the fixed exchange value of fifteen pence; these bills always equalling the amount of gold in the Conversion Office had the value of actual gold; they differ in appearance from the ordinary paper currency, and as they always command a five per cent premium there was created a tendency to hoard them—a tendency which cannot occur in the case of the bills of the similar Conversion Office of Argentina, which exactly resemble the ordinary bank bills.

By the end of 1909 the unbacked, inconvertible paper currency of Brazil was about 628,000 contos, while the convertible bills of the Conversion Office amounted to over 225,000 contos, with an equivalent amount of gold on deposit there; in 1910 it was found possible to raise the official value of the milreis to the point that the money market indicated, sixteen pence, and at this rate of exchange all the paper in the country stood until the outbreak of the European War. At the same time that the exchange rate was officially raised a rule was put into operation by which all foreign coins were received by the Conversion Office at rates based on their mint value, excepting English sterling which was still accepted at its exchange value.

It is likely that had neither the Balkan nor the great European wars happened Brazil might have been able to raise again the official value of the milreis farther towards par; at the end of 1912 and beginning of 1913 the gold-backed paper amounted to over 406,000 contos of reis, and the unbacked was only 607,000 contos. In spite of the accumulation of heavy debts Brazil was in such a flourishing condition that she was able to show convertible currency amounting to two-thirds of the value of the inconvertible, as against one-sixth in 1907–8. Today, with eighty per cent of the gold of the early 1914 highwater mark gone from the Caixa, the convertible currency is but one-tenth of the inconvertible, a matter for regret, but things are undoubtedly in a much better condition than had the Conversion Office not existed. Suspension of conversion was ordered when deposits were reduced to £5,005,000.

Since the middle of 1914 the Brazilian Government has been obliged to issue nearly 400,000 contos of new inconvertible paper; it has not actually added more than about 100,000 contos to the total paper currency, since at the same time a shrinkage in the convertible element has been proceeding. An emergency issue of 250,000 contos was made in the autumn of 1914 and another 150,000 was authorized in August, 1915. During the same period of stress the internal floating debt was added to by the issue of Treasury Bills to the nominal value of about 250,000 contos: a curious and instructive situation arose from the employment of these special Bills.

The Government, called upon for currency by national banks which were embarrassed by lack of paper owing to the financial crise, lent them sums from the emergency issue, charging two and a half per cent interest. Next, pressed for payment by creditors many of whom were merchants supplying the various governmental departments, and the emergency issue being insufficient for the purpose in all cases, recourse was had to Treasury bills; as these are not legal tender the merchants were not altogether pleased, and in some cases refused to accept the bills and had to wait longer.

The creditor who did accept them found himself with paper in his possession which could not be passed over the counter or paid into a checking account at his bank, and his only recourse was to sell the bills for what they would fetch, bearing the loss between their face value and market price. Although the bills bear interest at five and six per cent, almost the only buyers were the banks which had borrowed money of the Emergency issue, for in the meantime the Government agreed to accept the Bills as repayment of these sums, in a “curso libre,” or (limited) legal tender.^[17] The price of the Treasury bills was always below par, and the writer saw them quoted in Brazilian newspapers as low as seventy-six. Buying at this or higher prices the bankers were able to present them to the Government at their face value in payment for currency advances, and were thus in the fortunate position of making profits on borrowed money. Promptly labelled “sabinas” in this country where everything has a nickname, the Treasury Bills roused a storm of discussion in the press. Totals of bonds (apolicies) and paper money issued from August 1915 to October 1916 amounted to nearly 550,000 contos.

In late 1916, the total currency of the Republic stood as regards paper money at 1,551,122:650$500, over a million contos being inconvertible. It may be useful here to explain the manner in which Brazilian money is counted. It is, like the Spanish from which most American systems are derived, very simple, based as it is on the decimal plan. The theoretical single rei or real does not exist, the smallest coin now consisting of the nickel one hundred reis.^[18]

There is also a coin of two hundred reis, which pays a car fare or buys the Jornal do Commercio, and 400 reis, and a silver 500 reis. The silver milreis is what it says it is, one thousand reis, and any sum reckoned in milreis and below a thousand of them is written with the figures first, followed by the “dollar” sign; thus four hundred milreis is written 400$000.

One thousand milreis (a million reis) is a conto, the colon sign being written immediately after it. Six contos is written 6:000$000. The present exchange value of the conto is a little over fifty pounds sterling.

The following figures, extracted from reckonings made by the Brazilian Review, show some of the variations in paper currency:

After the establishment of the Conversion Office a new element, convertible paper, was added:

Issues of paper money during war years greatly increased this currency, but against it the Government held, in 1921, nearly 63 million contos of gold, in the Treasury and Conversion Office. Besides this amount of paper there is the coin circulation of nickel, and of silver in half-milreis, milreis, and multiples.

It is an excellent coinage, of good design, well made and convenient, that minted since the Republic bearing republican devices, the date of inauguration of the new administrative plan, etc. But now and again a handful of change contains a coin bearing the bearded head of Dom Pedro II, for it is but twenty-seven years since the Empire was ended. A curious superstition exists among some Brazilians with regard to these coins; received, they are never passed on, but carefully put away in some drawer: “it is not good to spend the Emperor,” they will tell you, handling his image with kindliness.

The six million pounds sterling below which the gold reserves of the Conversion Office have not been allowed to sink, and to which it has been possible to add little, back the large amounts of convertible paper, and, although a greatly shrunken sum, it has its effect in steadying exchange: another factor in preventing farther breaks, in spite of the seventy per cent increase in inconvertible paper, is the earnestness with which the Federal Government and the people of Brazil are insisting upon a vigorous solution of the problem of the foreign debt. Individuals in Brazil show themselves no less interested than officials: letters bearing upon the situation are constantly printed in the public press, many personal sacrifices have been made of percentages of salaries by legislators, officials and civil servants, and it is clear that the ablest heads in Brazil are trying to find a way in which Brazil can meet her obligations. This sincerity of purpose may not create gold, but it does strengthen public credit and helps in a more or less direct manner in restoring confidence which is certainly not without its effect upon exchange.

More than once a fall of exchange in Brazil has, by an anomaly, actually saved industries from something near bankruptcy. This is readily understood when it is realized that exporters of such products as rubber and coffee, cacao and hides, selling in the markets of London, Paris, Hamburg or New York, are paid in gold, while they pay their day labourers in paper. To the Brazilian interior it is of little interest that the bankers of Rio say that it takes another milreis paper to purchase a gold pound sterling; the country markets do not reflect such nuances, unless, indeed, a fall should be heavy and continued in which case it must in course of time react upon the whole country. But a temporary depression does not affect the amount of black beans or mandioca that can be bought with a milreis, and neither the rubber collector of the Upper Amazon or the more sophisticated worker upon a fazenda of coffee or cattle will demand a rise in wages because exchange goes down for a time. To the exporter the fraction of a milreis makes all the difference between prosperity and ruin, and both rubber and coffee have benefited thus by temporary low rates of exchange; the present crisis has certainly been smoothed to the agriculturist, the producer and exporter, of Brazil, by the fall in exchange since the middle of 1914, the paper receipts of the country showing marked inflation due to the larger number of milreis bought by the foreign gold paid for these products. Low prices received abroad for coffee and rubber are thus compensated, and when, as has happened since the war began, prices have been better than had been predicted. It is not to be wondered at that there is a feeling of prosperity in Brazil and that money is abundant among certain classes in spite of administrative difficulties.

The people who really suffer from fallen exchange are, besides the governments owing sums abroad which must be paid in gold, the importing houses which have bought in gold and must sell in depreciated paper, and which cannot always adjust paper prices to fit the monetary market; the transportation companies, too, whose rates are fixed now find themselves with paper in hand of a lowered value abroad; it is true that their obligations to employees are paid in paper, but since most carrying companies are owned or leased in Europe, and dividends must be paid in gold, earnings are very much reduced when large quantities of additional paper are needed to buy bills on London. Every railway, port company, street-car line and lighting and power company which derives its capital from outside Brazil has seen its dividends cut down during the last two years even if earnings have been larger and expenses reduced.

Large foreign debts have of course a depressing effect upon exchange in the long run, but at the time when the loans have been made there has almost always been a rise corresponding to the influx of gold; this effect was a marked cause of wild ups and downs of exchange in the palmiest days of the present century. I have frequently asked bankers in Brazil if they would like to see an absolutely stable rate of exchange: more than once the answer has been Yes, and the examples of the stabilized countries of the world quoted as showing that real financial strength can only be obtained with a firmly gold-backed currency. But even the most conservative banker will admit that variations in exchange have been the cause of large earnings on the part of financial houses in Brazil, and it is certain that fluctuation is not only the source of many fortunes, but that it materially lends itself to the promotion of the gambling spirit that helps both to make and to undo a young country; it is a spirit prevalent in many parts of Latin America and perhaps particularly in Brazil where such spectacular turns of Fortune’s wheel have been seen from time to time in different parts of the country.

Investment in Brazil

Investment in Brazil from other countries has been of three chief kinds: blood, brains, and money. The investment in blood came during the sixteenth, seventeenth and eighteenth centuries almost exclusively from Portugal—with a forcibly introduced negro element from Africa at the same time—while during the nineteenth century colonies were introduced of a remarkably wide variety of peoples; the investment in brains came so far as technical skill is concerned almost directly as a result of the great investment of the third element, money, which began soon after the erection of the monarchy in Brazil in 1808, flowed steadily for eighty years, and increased to a golden torrent after the establishment of the republic in 1889.

Nearly the whole of the investment of manhood, skill, and gold came from Europe. Brazil’s debt to other parts of the world is small. The African slave contributed more towards the opening-up of Brazil than any other race, and it is almost impossible to conceive of a flourishing Brazil without him during at least the first three centuries after Portuguese possession; the Asiatic only came here in noticeable numbers since the beginning of the present century, and the Oriental is not a strong element. North America has done remarkably little for Brazil. With the exception of a few technically skilled individuals, and the ill-fated little colonies which sought a home here after the Civil War in the United States there has been practically no investment in personality until within the last few years, when branches of American businesses have sent resident employees to Brazil: investment in money is still in its infancy so far as Government or State loans^[19] are concerned, development work in railways, docks, harbours, or city improvements, and it is only within the last few years that North American money has made timid entry into Brazil for the establishment of industries. The opening of branches of North American financial establishments in Brazil dates only from 1915, and the capital so far employed is insignificant in comparison with that of the powerful European banks, established in South America for a couple of generations.

No Brazilian securities were, up to the end of 1916, listed upon the New York Stock Exchange, for the simple reason that there were practically no North American investments in South American securities; but since the war, changes in the world’s finance have induced a lively interest.

The British investment in Brazilian securities, apart from many enterprises and businesses of a private nature, were reckoned at the commencement of 1916 at £226,719,052, or the equivalent of about $1,133,595,000. The French investment is estimated at Fr. 1,500,000,000 or some $300,000,000, and that of Belgium, with considerable railway interests, at about half this sum; Germany and Portugal also hold a certain quantity of Brazilian securities.

The following are the most important securities represented by the British investment in Brazil; the list shows that it was this money, more than any other element, which contributed to the opening-up of Brazil in the nineteenth century, giving her railways, public utilities, and helping to operate a number of industries. There was no philanthropy about this stream of bright pounds sterling. South American investments were expected to return a better rate of interest than did similar securities in Great Britain, and frequently results justified the hope. The average return on British investments in South America, which altogether total about £1,050,000,000 (say $5,250,000,000) in 1913 was four and seven-tenths per cent; this average dropped to three and one-half in the first year of the European War, a showing which very many profit-earning corporations in other regions of the world would have been glad to equal in that critical time.

At the same time the British share in the total foreign debts of the Federal, State and Municipal governments are estimated at about £150,000,000 out of aggregate obligations of some £180,000,000. These debts are treated in more detail on another page.

There are very many enterprises carried on with British capital which do not figure upon the Stock Exchange, or are branches of businesses which do not differentiate the capital employed in Brazil. Included in one or other of these classes are the shoe factories belonging to Clarke (Glasgow) in São Paulo; the cotton-spinning mills of Coats, also heir of Scotch skill; several cotton cloth mills, as the Carioca in Rio, and others in Petropolis and Campos; sugar factories in Pernambuco, etc. Included also in money investments should be counted the eight and a half million pounds of paid-up capital of the three British banks, the British Bank of South America, the London and Brazilian and the London and River Plate, which total with their branches to twenty-four establishments. It is impossible to say what part of the huge shipping investment serving Brazil should be included, but it is a highly important element and quite the greatest developing factor in Brazilian commerce; the Royal Mail is the great popular passenger and freight line, while Lamport & Holt, Booth, Harrison, the Prince, Johnson, and other smaller lines do a big Brazilian business.

Among firms doing energetic work and with large capital invested are the two great coal firms, Wilson’s and Cory’s, with their depots for Welsh coal, their fleets of lighters, repair equipment, salvage departments and stevedoring; old-established commercial firms such as Stevenson’s and Duder’s in Bahia, chiefly occupied with cacao export—the latter in addition to other activities maintains a fleet of modern whaling boats, and a factory for refining whale-oil; there are the “dry goods” stores of Sloper’s series; the new house of Mappin; the Brack firm in Pernambuco; all these and a score of other classes are not only commercial developers but in a greater or smaller degree employers of Brazilian labour. There are British cattle breeders, sugar and cotton growers, owners of coffee and cacao estates, operators of ironworks, foundries, schools, bookshops, oil-depots, and many other enterprises. The total British investment of money in Brazil cannot be under £300,000,000.

The external debts of the Brazilian States and Municipalities have varied very little since 1913–14. Loans became difficult to obtain from the beginning of Balkan troubles, while since the outbreak of the great European War there have been no additions to cash advances and in only a few cases has there been substantial reduction of debts. On the contrary, most debtor States and cities found it necessary to make funding arrangements by which specie payments were suspended for a number of years—measures which gave temporary relief, but seriously increase the amount of money to be paid annually when the funding period comes to an end.

Certain states, as São Paulo, Rio de Janeiro, Paraná (paid up until the autumn of 1917), Espirito Santo, and the Federal District, have made gallant efforts to avoid piling up debt in this way, and by severe economy have continued to pay interest on their foreign obligations. The sacrifice has not been small, for with depressed exchange it has taken an unusually large number of paper milreis to buy sterling, and at a time when it has not been easy to collect even paper revenues. The effort is all the more creditable.

With the worst part of the 1921 crisis past, state finances have been materially eased by calls for Brazilian products at enhanced prices, and there is a perceptible restoration of confidence, at the end of 1922. In some districts the post-war boom proved an undisguised blessing, bringing profits that could not have been looked for under normal conditions: coffee, hides, rubber, cacao, frozen meat, sugar and manganese, have all brought stimulated prices, and many home industries, such as coal mining and cotton spinning and weaving, have been greatly encouraged.

In round numbers the external debts of the separate states of the Brazilian Union appear to amount to about forty-seven million pounds, with the municipalities adding another twelve or thirteen million pounds.

The British interest in these loans is largely dominant, but important sums of French money have also been invested. Brazil’s direct debt to France includes £10,400,000 for three loans with which the Bahia, Goyaz, and Corumbá railways were constructed; there are also state debts, that of the State of Pará being held by Meyer Frères of Paris, while the Société Marseillaise holds the bonds of the big Amazonas debt. Part of São Paulo’s debt is owed to the Société Générale, and the State of Espirito Santo owes nearly two million pounds to the Banque Française et Italienne, as well as large sums about which a dispute rages, advanced by the French Hypothecary Bank established at the port of Victoria.

There is a good deal of French money sunk in the Madeira-Mamoré railway, one of the Farquhar undertakings which cost the equivalent of more than six million pounds sterling, fifteen hundred livres, is said to need much reconstruction already (opened to traffic in 1912), and does no more than pay its way. French bondholders also hold part of Minas Geraes debt, and of that of Rio de Janeiro. French engineers, operating with French money, built several of the existing railways, notably the Auxiliaire de Chemins de Fer au Brésil with 1,400 miles of track; it was a French firm, the Compagnie Française de Rio Grande do Sul, formed in Paris in 1906, which put one hundred and fifty million francs into the port works of that southerly city, opened to shipping in November, 1916. French companies also began the port works of Pernambuco, checked by money paralysis after 1914, and constructed the new harbour facilities of Bahia.