Few countries have been visited by such great extremes of fortune as Peru, at one time reckoned among the richest in the world and at another accounted so poor as to be bordering on bankruptcy. The history of Peruvian finances is a record of alternate prodigality and economy, of expensive experiments, abounding resourcefulness, and, through all its phases, of unlimited faith and resolute optimism. When, with the proclamation of independence, Peru threw off the yoke of Spain, its revenues did not exceed two million dollars. In order to maintain the struggle it was necessary to raise a loan, especially as a large share of the national income was still under the control of the royalists. This loan, which was made in London in 1822 for the sum of one million two hundred thousand pounds sterling at six per cent interest (three years’ interest was deducted from the principal, of which only a part was handed over in cash, the rest being delivered in weapons and ammunition of war), was supplemented three years later by a second loan for a smaller amount at the same rate of interest. Added to this debt were large sums in recognition of the assistance rendered by Chile and Colombia in the war of Independence, all of which contributed to bring the foreign debt of Peru up to about four million pounds sterling at the very outset of the national career as a republic. The total value of the exports at that time did not amount to two million pounds sterling, and the custom house receipts were less than two hundred thousand pounds sterling, the remainder of the revenue being chiefly derived from a contribution levied in place of the tax which Spain had imposed on the Indians.

Within fifteen years after the inauguration of the republic, the custom house receipts had more than doubled, and a few years later the production of guano began to yield such enormous returns that the country appeared to be once more prepared to hold its own among the most prosperous nations of the world. In 1850, the loans of 1822 and 1825 were cancelled by means of a new loan in London for three million eight hundred thousand pounds sterling, and in the same year the internal debt was consolidated in bonds bearing three per cent interest, to the amount of a million pounds sterling. Including the debt to Chile and the floating debt, Peru then owed only about six million pounds sterling, while the revenue from guano alone was a million pounds sterling a year. But, as has been shown elsewhere, the rapid acquisition of wealth from the guano trade brought with it the temptation to reckless expenditure, to which the unsettled politics of the country contributed in great measure. The internal debt increased four million pounds sterling in five years, and each succeeding estimate of the budget showed heavier expenditures for the government service. At the same time, many improvements were inaugurated which necessitated the outlay of large sums.

During General Castilla’s administration, the Peruvian monetary system,—which had become demoralized after the Peru-Bolivian Confederation by the circulation, at par, of Bolivian silver money of a lower standard than the national currency,—was reformed through the conversion of all inferior Bolivian coins in exchange for those of Peru, up to the amount of ten million dollars and the prohibition of any future use of the depreciated coin. The new law established the decimal system and the double standard of gold and silver, the silver sol, worth a dollar, being recognized as the monetary unit; though the gold coinage of that period lasted only a few years, being abolished in a later administration. In order to carry out the currency reform, and to consolidate the foreign debt, Peru borrowed, in 1862, in London, five and a half million pounds sterling, at four and a half per cent interest and eight per cent yearly amortization, the loan being issued at ninety-three per cent. All the government revenues and also the receipts from guano sales in England and Belgium were pledged as a guarantee of this loan. The seizure of the Chincha Islands by Spanish men-of-war in 1864 made it obligatory for Peru to build a navy strong enough to drive back the invaders, and, with this object in view, a new loan of ten million pounds sterling was made in London. The ironclads Huascar and Independencia were built with the proceeds, part of which were further employed in the construction of the railway from Mollendo to Arequipa.

A few far-seeing statesmen early recognized the necessity for establishing a more satisfactory economic régime than that which governed Peru at this time, and, during the administration of the Dictator Prado, his Finance Minister, Don Manuel Pardo, inaugurated a new fiscal system. By means of taxation on certain luxuries and the levying of an export duty of three per cent on the chief national products, the government receipts were considerably increased, and it was hoped that, as the system developed, it would create an important revenue aside from that produced by guano, which, it was realized, was an uncertain quantity and mortgaged almost to the limit of its financial value. Unfortunately, the succeeding administration did not pursue the same policy, and new loans were made, which brought the foreign debt up to thirty-three million pounds sterling, the government being obliged to pay for the use of this loan two million seven hundred thousand pounds sterling annually. The entire yearly revenue from guano was not more than two million pounds sterling, and the national credit went down under the strain of the tremendous obligations imposed on it.

When President Manuel Pardo was called to the chief executive office in 1872, he made a heroic effort to improve the financial condition, which was one of internal as well as external disorder. The budget of 1873 for ordinary expenses had been raised to nearly twenty-two million sols (at forty pence), and a heavy debt of more than that amount was found to be owing by the custom house and other government offices for credits recognized and ordered to be paid during the previous period of prosperity. Nine million sols were still due on railroad construction, and a suspension of this important work was threatened. Added to these discouraging features of the situation was the rapid increase in the production of nitrate, which was becoming a formidable rival to guano, being prepared and exported free, while the latter was exported for the account of the State and was the source from which three-fourths of the funds for the national expenditure were derived. President Pardo reduced the estimate of the home budget to seventeen million sols, as it had stood in 1871 and sought, by the only available means, to raise extraordinary funds sufficient to prevent the disaster of a suspension of the much-needed railroad construction. But the remedy was applied too late, and all his efforts were defeated by circumstances which would not have arisen under normal conditions. The president was obliged to borrow large sums from the banks, which, under the laws then in force, might issue notes payable to bearer at sight for three times the amount of currency they had in hand. The merchants, led by the fictitious prosperity founded on a flattering but burdensome credit, had given far too great expansion to their trade, and now that they were unable longer to use drafts corresponding to the value of guano when making foreign payments, they were obliged to export coin, which was done until the supply was exhausted, only the banknotes remaining in circulation. As the government was not in a position to meet its obligations to the banks, which, in turn, were unable any longer to convert their notes into currency, a commercial panic followed, in 1875, with the long list of business failures that accompany such a dire event. The government came to the rescue by granting the banks a moratorium, which would enable them to get the necessary cash to resume the payment of their obligations in currency; but the government was unable to give any financial assistance and the required coin for payments in cash was not forthcoming at the expiration of the moratorium. President Prado, who succeeded President Manuel Pardo in 1877, arranged a new loan with the banks, in consideration of which the state assumed the responsibility of the entire emission of banknotes,—fixing the maximum at eighteen million sols,—thus converting them into government notes, and establishing the use of paper money. The war with Chile followed in 1879, and proved the culminating disaster. But, if the consequences of this war were deplorable from an economic standpoint, the conditions which they brought about tried the mettle of the nation and proved its strength. Plunged from wealth into poverty within a few years, with its commerce paralyzed, its industries at a standstill, nearly all the private wealth as well as the national fortune swept away, Peru bent under the crushing weight of accumulated evils. But, like tempered steel, the national spirit could bend without being broken; and with every lightening of the load the inherent strength of the people has shown itself, until, to-day, its optimistic character is as dominant as ever.

As soon as the war with Chile was ended by the treaty of Ancón in 1884, Peru turned to the problem of restoring the national finances, and a few years later the contract elsewhere referred to was arranged, whereby the Peruvian Corporation assumed the foreign debt and agreed to complete the construction of projected railways, in return for certain concessions and privileges. The country began at once to recuperate, though slowly at first, as might be supposed, the question of politics absorbing much attention. Patriotic and capable leaders came forward, however, to meet the occasion with judgment and foresight. One of the most important reforms effected was the adoption of the gold standard, which has done a great deal to attract foreign capital and to inspire confidence abroad. The government notes that had been issued to meet the needs of war, became so depreciated in value that they were little used and finally they were practically withdrawn from circulation by the announcement that their acceptance was optional; immediately the old coins—the silver sols—began to reappear, imported from other Spanish-American republics, especially Central American, where they formed at that time the circulating medium; the government reopened the mint, and Peruvian silver was coined into sols; at this juncture the depreciation of silver arose, and the question of establishing a gold standard was debated. The idea of adopting a gold standard grew in favor when a second fall in silver occurred in 1886, adversely affecting the finances of all countries that used the silver standard exclusively. President Pierola gave a strong impulse to the proposed measure and Congress finally sanctioned its adoption in 1897. The legal equivalent of the Peruvian libra, or pound, was fixed at ten sols, which at once solved the problem of the value of sols in circulation, amounting to about twelve million. Then the free coinage of silver was suspended and reimportation of silver sols was prohibited, though it was a legal tender in Peru. Congress also passed a law by which custom house duties had to be paid in gold, at the rate of one pound sterling for every ten sols, which established the equivalent between the English sovereign and the silver sols at the rate of one to ten. In December, 1897, a law was passed to authorize the coinage of the libra, of the same weight and fineness as the English sovereign, and ordering it to be received by the state as the equivalent of ten sols. In 1901, it was declared by law that the monetary unit in Peru was the Peruvian libra and that silver sols were a legal tender up to the sum of only ten sols; and, two years later, all the banks came to an agreement to keep their accounts and to perform all their operations in the new legal money of Peru, the gold libra. The success and facility with which this important monetary reform was accomplished does credit to the genius of the financiers who projected and carried it through.

The fiscal reports of the last ten years show that Peru has made wonderful progress in the rehabilitation of the national finances and the establishment of a system of revenue and expenditure which ensures permanent and solid advancement. A very important share of the credit for this financial progress is due to the newly elected President of Peru, His Excellency Don Augusto Leguia, who, as Finance Minister in the cabinets of President Candamo and President Pardo, gave signal proofs of his superior financial and administrative gifts. Probably no other country can show such a rapid increase of revenues due to the administrative labors of one of its ministers as can Peru, whose fiscal receipts were raised from twelve million to thirty million sols annually during his term of office as Minister of Finance. The loan of six million sols, recently contracted for the purpose of acquiring naval elements, the creation of the bank of deposits and consignments and other financial undertakings of great importance to the country have been effected through his initiative and energy.

Every year shows an increase in the receipts and a decrease of expenditures under the present government. In all departments of the fiscal system, reforms have been inaugurated with a view to strengthening the national finances; the National Company of Collections, a joint stock company that was formed at the close of the war with Chile to organize a system of taxation and to take charge of the collections shows by its latest report that the receipts from taxes increased more than a hundred thousand sols from the last half-year of 1906 to the same semester of 1907, the collection from July to December, 1907, amounting to two million one hundred and fifty thousand sols. The interest on the internal debt of thirty-three million sols has been paid to date; and the claim of the Guano Consignee Company of the United States has been paid by an issue of fifteen million sols in bonds of the public debt. The prosperity that has become apparent in all branches of trade is indicated by the profits shown in the Peruvian Corporation’s report for 1907, amounting to more than two million sols. The banking institutions, which have been closely identified with the financial fortunes of the government, have been particularly successful in their negotiations during the past year. The bank of London and Peru has had its securities quoted on the Paris Bourse, and has established a bank of issue in Bolivia with a capital of two hundred thousand pounds; the Banco Italiano and the Banco Popular have increased their capital, besides adding large sums to their reserve funds; the German Bank has installed branches in Callao, Arequipa, and Trujillo within the past two years; and the savings banks and insurance companies have enlarged the scope of their activities.

Commerce has felt the stimulus of progressive government, and commercial enterprise has flourished notably within the past five years. In 1902 the imports amounted in value to three and a half million pounds, the exports to three and three-quarter millions; in 1906, the value of the national imports reached five million pounds sterling and the exports amounted to six million pounds sterling in value. The first half of 1907 showed less trade returns than the corresponding semester of the preceding year, but the commercial reports for the first half of the year 1908 give an increase of one hundred and sixty-five thousand pounds sterling over the total returns for the same period of 1907.

The only export duties charged in Peru are: a three per cent ad valorem tax on gold in bullion or dust; a charge of forty cents per dozen on “Panamá” hats exported from Paita; and a duty of twenty cents a kilogram, gross, or twenty-four cents a kilogram, net, equivalent to about four per cent ad valorem, on Pará rubber and caoutchouc. The import duties are more numerous; wines and liquors, tea, coffee, butter, cheese, and a few other products pay a duty of sixty-five per cent, and there is a long list of articles on which a duty of from ten to twenty per cent is charged; but all machinery which is used directly to favor industrial development is entered free of duty, as are also books and utensils for the purpose of public instruction.

Foreign merchants have established themselves in all the larger towns of Peru, and in the coast region they have built up very important enterprises. The English merchants devote themselves especially to the wholesale import and export trade, in which they have strong competitors among the Germans. The French have change of a great deal of the retail business, particularly in articles of luxury; and the Italians are the principal purveyors of foreign wines, table delicacies, etc. The Peruvian merchant has a share in all the trade and Peruvian salesmen travel throughout the country selling to the merchants of the interior the goods imported by the larger establishments of Lima and Callao. The North Americans have established few business houses, but they control a large share of the mining enterprises, and are financially interested in the construction of railways and other public works of the country. Some of the largest commercial and industrial establishments of the United States send their agents to Peru. But North American trade is still in the infancy of its development so far as the South American market is concerned, few shippers in the United States knowing much about the geography of the great southern continent. When, as has frequently occurred, merchandise ordered for Lima is sent to Mollendo as the nearest port, and goods for Arequipa are unloaded at Callao by the shipper’s orders, it becomes apparent that the knowledge concerning commercial routes south of the equator is decidedly limited among those exporters who are already in the field, to say nothing of those who have not yet entered it. But there is a growing interest among merchants of the United States in the trade of South America, and every year shows an increase in the correspondence directed to the Peruvian Consulate at New York seeking information on this subject. The Consul-General, Hon. Eduardo Higginson, brings large experience in the foreign service of his country to the particular task which occupies him in the great metropolis,—the promotion of commercial relations between the two countries. The offices of the consulate are fitted up with all the requisites of a consular bureau, and in its library may be found literature relating to the industrial and commercial conditions of Peru.

It is impossible that the reciprocity of trade between Peru and the United States should show any marked improvement until better facilities can be secured for rapid and cheap transportation. But this is to be accomplished by the inauguration of the new National Steamship Line, which, next year, will cover the distance between Callao and Panamá in four days, and, later, by the completion of the Panamá Canal. From 1902 to 1905 the imports from the United States were increased by twenty per cent, while the exports to that country remained stationary, and in 1905 declined, owing to the special privileges granted by the northern republic to Cuban sugars, with which Peru was unable to compete; in the same period, the shipments have more than doubled from Peru to Great Britain, where Peruvian sugars enter on equal terms with those of other countries.

The National Assembly of Commerce is an institution of increasing importance in Peru. Though recently organized, in 1905, it has already done much to foster trade and to promote the commercial relations of the country on a broad scale. When Secretary Root visited Lima, he was made an honorary member of this organization, which works as a kind of auxiliary of the Chambers of Commerce, as one of its founders described it in his address to Mr. Root on that occasion, “to carry into practice the formation of a world wide legislation which shall mark the courses in which the inexhaustible current of industrial products ought to run.” In most of the larger cities, chambers of commerce have been established to promote not only the direct interests of trade, but also the development of the national industries, with the success of which the trade of the country is closely identified.

The encouragement and promotion of manufacturing industry is especially desirable, and this field of enterprise offers exceptional opportunities for investment. Like all other South American countries, Peru imports many articles which could be profitably made at home and for which it furnishes a large share of the raw material. But, until comparatively recent years, few factories of importance existed in Peru, and most of these date from the period when the fall in silver and the consequent depreciation of the national currency made the importation of foreign manufactured articles enormously expensive, and encouraged the establishment of home enterprises to compete for this trade. During the period of the viceroyalty, the home government prohibited manufacturing in the colonies, in order to protect the commerce of the mother country; and in the earlier days of the republic the conditions were not favorable to the development of this branch of industry.

The most important manufacturing enterprises are in the hands of the Peruvians themselves, though Italians and other foreign colonists have established large factories within the past few years. The manufacture of cotton and woollen goods by the primitive process used among the Indians to-day has been in vogue from time immemorial, but not until nearly half a century ago, in 1861, were the first modern looms introduced, for the woollen factory of Lucre, near Cuzco, which was founded by Dr. Garmendia in 1860. The most modern establishment for the manufacture of woollen goods is that of Marangani, also in the neighborhood of Cuzco, founded in 1897, with Peruvian capital amounting to five thousand pounds, which has since been increased to thirty thousand pounds. The factory is now owned by the heirs of the founder, the largest shareholder, Don J. W. Rodriguez del Carpio, being also the manager of the enterprise. English, German, and Belgian machinery of the most modern manufacture is used, the factory is lighted by electricity, as are also the houses of the operatives. All the employés are native workmen, and the managers of the various sections are also Peruvians, except in one section, of which an Italian expert has charge. The company provides free instruction for the children of employés, as well as free medical attendance when required. Cashmeres, flannels, and fine cloths are manufactured from native wool, chiefly that of the sheep, though some alpaca is used. Only the dyes are imported, everything else used in the factory being of native origin, and the dyes are chiefly made from woods found in the Montaña. The Marangani establishment has direct communication with Cuzco by telephone, and with all the cities of the republic by telegraph. It is one of the most progressive and up-to-date enterprises in South America. The largest cloth factory in Peru is that of Santa Catalina, in Lima, which produces about a quarter of a million yards of cashmere and cloths for the army, besides various knitted goods. It gives work to between seven and eight thousand employés and its business is increasing annually. There are only four or five woollen factories in the republic, Arequipa having one of the larger ones, and Lima another.

The manufacture of cotton goods has progressed with remarkable success since the establishment of the first cotton factory in 1874. Five large and flourishing mills of this kind are now located in the environs of Lima, besides several in other cities, of which the most important are those of Arequipa and Ica. From these factories, Peru and Bolivia are supplied with cotton materials, duck, drills, etc., and since their advent, the importation of cotton cloth from Germany and England has notably diminished. The annual output of Peruvian cotton factories is about twenty-five million yards, the consumption of clean raw cotton being from two to three thousand tons annually. The capital employed is estimated at between four and five million sols. The Victoria cotton factory of Lima is one of the most modern establishments of its kind in Peru, and a visit to the various departments inspires one with admiration for the systematic and orderly appearance of the place, as well as the quality of the work done, which is equal to the best turned out from similar factories in Europe and North America.

The silk industry is still in the experimental stage, so far as the making of fabrics is concerned, though Lima has a practical school of sericulture and the Department of Abancay is giving especial attention to this branch of industry. The making of Panamá hats occupies a considerable number of the population in Catacaos, Eten, and Moyobamba, though there are no large establishments having charge of their manufacture exclusively. For the preparation of cereal and other food stuffs, several mills and factories have been opened in Lima and Callao. The flour mills of the Santa Rosa Company and the biscuit factories, fruit-preserving works, chocolate factories, etc., of these and other cities employ modern machinery and are successful enterprises. Lima, Callao, Arequipa, and Cuzco have large breweries and cigar factories, the latter being also an industrial feature of the towns of Trujillo and Piura.

Trujillo has, in addition to its other factories, extensive works for the elaboration of cocaine. This drug has grown greatly in demand within recent years, and is now prepared in twenty-five Peruvian factories, some of them located in the region of the coca trees. The factory of Monzon is among the most important of these enterprises. Peru produces enough cocaine to meet the world’s demand, the annual output approaching a hundred tons. It is remarkable that so few of the medicinal plants and dyewoods of Peru are elaborated in native establishments. Sulphuric acid could be produced at low cost, and there is a promising field for the manufacture of dyes. Among the minor manufactures are paper, matches, leather, cotton seed oil, lumber, ceramics, and similar useful articles of universal necessity or artistic value.

The Santa Rosa works, inaugurated by the Associated Electric Companies of Peru, or, as the syndicate is sometimes called, the “Electric Trust,” is a manufacturing industry of the greatest importance. It is established for the purpose of generating electricity for the entire service of electric lighting and the system of railroads and street cars in Lima, Callao, and Chorillos. The capital employed in this gigantic enterprise is more than ten million dollars gold, and it is owned and controlled by Peruvians. The offices of the company are located at Santa Rosa, in the outskirts of Lima, and the central generating station is in Chosica. This immense establishment is, to-day, capable of providing fourteen thousand horse-power in motor force. Nearly all the electric material for the enterprise was purchased in the United States. The Associated Electric Companies represent the first appearance of the modern “trust” in the Andean republic of the Pacific.