Deutsch 1994 - Bridging The Archipelago

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Bridging the Archipelago:
Cities and Regional Economies in Brazil, 1870 - 1920
A Dissertation
Presented to the Faculty of the Graduate School
of
Yale University
in Candidacy for the Degree of
Doctor of Philosophy
by
Ruthanne Mary Deutsch
November, 1994
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UMI Number: 9522647
Copyright 1994 by
Deutsch, Ruthanne Mary
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ABSTRACT
Bridging the Archipelago: Cities and Regional Economies in Brazil, 1870-1920
Ruthanne Mary Deutsch
Yale University
1994
This dissertation explores the origins of the regional inequality which
emerged in Brazil during the second half of the 19th century. The first chapter of
the dissertation surveys the literature on regional linkages and regional growth.
Models of regional balance and regional imbalance are compared and contrasted,
and a discussion of the institutional context of urbanization, finance, and the role
of the state serves to complement the economic models and resolve some of their
seeming contradictions. Chapter Two charts out the economic topology of the
regional islands which made up the economic archipelago of 19th century Brazil.
Analysis of demographic and industrial data demonstrates the concentration of
industry in the urban centers of the Southeast. Rank-size analysis of the 1920
census data reveals the emergence of an integrated urban network in the Southeast
of Brazil which contrasts starkly with the relative lack of urbanization in the
Northeast. Chapter Three illustrates the growth in interregional trade which led to
the increasing connection of these regional "islands" over the course of Brazil’s
First Republic. The pattern of urban hierarchies is seen to be consistent with a
system of national and regional entrepots posited by the mercantile or metropolitan
model of regional development. The chapter also examines the relationship of the
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regional entrep6ts to their respective hinterlands, and compares and contrasts the
nature of intra-regional integration between town and country in the Southeast and
the Northeast. Chapter Four explores the geography of Brazilian Finance. The
period of speculative boom and bust during the early years of the First Republic
known as the Encilhamento is seen to have restructured the role played by the
nation’s financial markets in their financing of infrastructure and other
"integrative" activities. The conclusion of the dissertation places the regional
economic changes within the context of the transition from. Empire to Republic,
with particular attention to the impact of Republican fiscal federalism on the
divergence in regional economic performance.
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(c) Copyright bv Ruthanne Marv Deutsch 1994
ALL RIGHTS RESERVED
TABLE O F CONTENTS
ACKNOWLEDGEMENTS.................................................................................... ix
INTROD UCTIO N...................................................................................................1
CHAPTER ONE. REGIONAL TIES AND REGIONAL G R O W T H 13

1.1 Introduction
1.2 Theories of Regional Balance and Imbalance
(i) Regional Balance Models
(ii) Regional Imbalance Models
(iii) Implications of Regional Growth Models
1.3 Institutional Context: Cities, Finance, and the State
(i) Cities and Regional Development
(ii) Geography of Finance
(iii) Implications of the Institutional Context
CHAPTER TWO. CHARTING THE ARCHIPELAGO: REGIONAL

PATTERNS IN
URBAN-INDUSTRIAL DEVELOPMENT......................................................... 81
n . 1 Introduction
H.2 Beginnings of a Growth Pole
(i) Population Movements
(ii) Spatial Contours of Industrialization
D.3 Urban Systems and Rank-Size Distributions of Brazilian Cities
(i) The Data
(ii) The Rank-Size Model of Urban-System Integration
(iii) Empirical Results
n .4 Conclusion
CHAPTER THREE. BRIDGING THE ARCHIPELAGO:

TRADE BETWEEN CITIES ............................................................................ 121
IE. 1 Introduction
m .2 Cities and Trade
(i) The Hierarchy of Port Cities
(ii) Rio de Janeiro as National Metropolis
(iii) Radiating Development: Railroads and Intra-Regional Trade
IH. 3 Town and Country
(i) The Agricultural Base
(ii) Sugar and Coffee: Urban/Agrarian Structure
of Pernambuco and Sao Paulo
in
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DI.4 Conclusion: Some Thoughts on the Limits of Export-Led
Growth and Staple Theories
CHAPTER FOUR. FINANCING DEVELOPMENT: NATIONAL BANKING

AND REGIONAL ECONOMIES ..................................................................... 179
IV. 1 Introduction
IV.2 Banking in the Empire
(i) Form and Function
(ii) Contemporary Views
IV.3 The Encilhamento and Transformation of the Banking Sector
(i) Origins of the Crisis
(ii) Results of the Crisis
IV.4 The Development of Banking in the First Republic
(i) The Political Economy of Banking Reform
During the Republican Transition
(ii) Regional Differences in Banking
IV.5 Conclusion
CONCLUSION....................................................................................................253
TABLES AND FIGURES ..................................................................................276
SELECTED BIBLIOGRAPHY..........................................................................338
iv
LIST O F TABLES
Table 2.1. Population Share and Density by Region and State, Brazil: 1872 - 192£F
Table 2.2. Net Internal and Net International Migration Compared Through
Global Survival Method for the States of Brazil,
1872 - 1890 .......................................................................................................... 278
Table 2.3. Global Intercensal Survival Estimates of Net Internal Migration by

Regions for Native Bom Brazilians Expressed as a Percent of Population in the
Initial Census
Years, 1872 - 1920 ............................................................................................. 279
Table 2.4. Estimated Geographical Distribution of Brazilian Cotton Mills, 1866,

1875, 1881, 1885 ................................................................................................ 280
Table 2.5. Industrialization Indicators, by region, Brazil, 1907 and 1920, (Values
in 1907 C o n to s).................................................................................................... 281
Table 2.6. Locational Gini Coefficient For Major Industry Groups, Brazil, 192(282
Table 2.7. Composition of Capital and Worker-Management Ratios, Brazilian

Industries, 1920 .................................................................................................. 283
Table 2.8. Summary of States with Leading Industries, by Industry Group, Brazil,
1920 ..................................................................................................................... 284
Table 2.9. Comparison of Urbanization Rates by Regions,

Brazil, 1920 ........................................................................................................ 285
Table 2.10. Comparison of Population Distribution by Region,

Brazil, 1920 ........................................................................................................ 285
Table 2.11. Top Ten Urban Areas in Brazil, 1920 ........................................... 286
Table 2.12. OLS Regression Results, Rank-Size Distributions,
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Brazil and Regions ............................................................................................... 287
Table 3.1. Top Ten Ports of Brazil, and Cities Served, by Population Ranking,
Brazil, 1912 ..........................................................................................................288
Table 3.2. Summary Data on Shipping Arrivals, Top Six Ports in Terms of
Arriving Tonnage, Brazil, 1902 - 1908 ............................................................. 289
Table 3.3. Foreign Trade, in Current Prices and as Percent of GNP, Brazil:
1875 - 1919 ........................................................................................................... 290
Table 3.4. International Imports and Exports by Region and Selected States,
Brazil, 1872 - 1917 ............................................................................................. 291
Table 3.5. Principal Exports, by Major Ports, Brazil,

1902 - 1908 ........................................................................................................... 293
Table 3.6. Merchandise Account Balance, Brazil, By Region and Selected Ports,
1872 - 1917 ........................................................................................................... 294
Table 3.7. Principal Imports, by Major Ports, Brazil,

1902 - 1908 ........................................................................................................... 295
Table 3.8. Value Share of Principal Imports, for Brazil’s Top Six Ports, 1902 -
1908 ..................................................................................................................... 296
Table 3.9 (a-c). Summary of Rio de Janeiro’s Coastal Trade, (1878, 1886, 189097
Table 3.10 (a-c). Principal Imports and Exports via Rio de Janeiro’s Coastal
Trade (1878, 1886, 1 8 9 0 )................................................................................... 300
Table 3.11. Summary of Santos’ Coastal Trade, 1907 - 1915 ........................ 303
Table 3.12. Principal Imports and Exports via Santos’ Coastal Trade: 1914/19BS4
Table 3.13. Coastal Trade of Rio de Janeiro and Sao Paulo (1881-1888) . . . 305
Table 3.14. Rio de Janeiro’s Coastal Trade Balance with Santos and Belem do
Para, 1878, 1890, and 19 1 1 .................................................................................. 305
Table 3.15. Entries of Selected Commodities into Rio de Janeiro by Coastal

Trade, 1875 - 1914 ............................................................................................. 306
Table 3.16. Regional Distribution of Brazilian Rail Network,

1907 ..................................................................................................................... 306
Table 3.17. Brazilian Rail Network in 1906 ..................................................... 307
Table 3.18. Agricultural Indicators, by Region, Brazil, 1920 ........................ 308
Table 3.19. Major Agricultural Crops, Total Value and Production

by Region, Brazil, 1920 ..................................................................................... 309
Table 3.20. Average Yields on "Good Land" by Region,

Brazil, 1920 ....................................................................................................... 310
Table 4.1. Brazilian Banks Founded c. 1850 .................................................. 311
Table 4.2. Foreign Banks in Brazil by Incorporation Date and Value of Capital312
Table 4.3. Brazil: 1846-1888, Timetable of Banking and Currency Reforms 313
Table 4.4. Brazilian Paper Money and Bank Notes in Circulation (1859/1864) 314
Table 4.5. Survey Questions from 1883 Brazilian Parliamentary Inquiry,

Commission on Money and Banking.................................................................... 315
Table 4.6. Some Macro-economic Indicators, Brazil 1870 - 1913 ................ 316
Table 4.7. Brazil: 1888-1890; Timetable of Banking and

Currency Reforms................................................................................................. 318
Table 4.8: Volume of Transactions on the Rio Exchange, March 1888 - March
1894 .................................................................................................................... 320
Table 4.9. Brazil: Money Supply in Circulation as of September

30, 1890 ............................................................................................................... 321
Table 4.10. Wileman’s Listing of Brazilian Banks, 1909 ................................ 322
Table 4.11. Brazilian Banking Sector, 1913/1914, by Region and Nationality 323
Table 4.12. Percent of Total Assets/Liabilities held by Domestic Banks in Brazil,

by Region, 1913/1914 ......................................................................................... 324
Table 4.13. Brazil: 1891 - 1921; Timetable of Banking and Currency

R eform s.......................................... 325
vu
LIST O F FIGURES
Figure 1.1. Map of Brazil in 1910, with railroads.................................................326
Figure 2.1. Percentage Distribution of Brazilian Population, by Region, 1872 -

1920 .................................................................................................................... 327
Figure 2.2. Indicators of Brazilian Capital Formation,

1901 - 1913 .......................................................................................................... 328
Figure 2.3. Map of Cotton Growing and Manufacturing Areas

in Brazil, 1910...................................................................................................... 329
Figure 2.4 Rank-Size Distribution of Brazilian Municipalities,

Brazil, Northeast, and Southeast, 1920 ............................................................. 330
Figure 3.1. Real Value of Brazilian Exports, 1875 - 1919 ............................ 331
Figure 3.2. Percentage of Major Exports, Brazil 1875 - 1914 ...................... 332
Figure 3.3. Coffee Entries to the Ports of Rio and Santos, 1885 - 1915 . . . 333
Figure 3.4. International Trade Balance, Rio and Sao Paulo, 1870 - 1913 . 334
Figure 4.1. Contemporary View of the Encilhamento...................................... 335
Figure 4.2 Contemporary View of the Encilhamento.......................................336
Figure 4.3 Contemporary View of the Encilhamento.......................................337
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ACKNOWLEDGEMENTS
I first began working on this dissertation over eight years ago. During
these years I have lived on three different continents and in at least ten different
cities. For me, this dissertation helps to bridge my own archipelago, of all the life
experiences I ’ve accumulated along the way. The family, friends, and colleagues
who provided encouragement and support throughout the past eight years are so
many that if I were to thank them each individually, these acknowledgements might
well become as long as the dissertation itself. You all know who you are -- you’re
taking the time to read this! Consider the below selected acknowledgements, and
know that if not for the love and support from all those I don’t have the space to
mention, I could never have gotten this monkey off my back.
First thanks go to the Yale University Council on International and Area
Studies for funding a year of research in Brazil and the Amherst College Copeland
Colloquium for providing me the space and financial support to digest what I’d dug
up. While in Brazil, research assistance from the staff and use of the collections
of the Fundagao Casa de Rui Barbosa and the Biblioteca de Ministerio da Fazenda
proved invaluable. Years later, I saw my tax dollars being made good use of on a
daily basis in the Library of Congress —the staff is incredibly proficient, the
ix
collection extensive, and the atmosphere inspirational. I regret the recent budget
cuts which have shortened the hours of public access, and hope that resources can
be found to restore full service.
My grandfather, Frederick Deutsch, provided both financial support and
persistent encouragement, without which I would not have finished this
dissertation. William N. Parker, the chair of my committee, has served as a
model scholar and a true friend throughout this process. David F. Weiman blazed
the trail for me in my explorations of economic geography. And, Carol E. Heim
has been a constant source of intellectual support, providing careful criticism,
thoughtful questions, and peerless aid in arriving at an integrated vision of my
work.
Finally, I would like to dedicate this dissertation to the memory of two
people, each of whom, in their own way, encouraged me to find my voice. First,
to Hugh G. Aitken, a fine mentor in every way, who always believed in my
capacity as a scholar and my potential to contribute to the field of economic
history. And last, but far from least, to the memory of my grandmother, Nadja
Tarasuck Deutsch, whose near parting words to me were, "Don’t let them take
away your spirit."
INTRODUCTION
The Brazilian economy underwent a series of dramatic transformations
during the second half of the 19th century: slavery was abolished in 1888 and (an
at least partially) successful transition to a free labor regime effected; the first spurt
of import-substituting industrialization occurred; and the profile of Brazil’s major
exports shifted dramatically, with coffee, rubber and cocoa taking the place of
sugar and cotton as the country’s leading exports. During this age of the
telegraph, steamship, and railroad, Brazil, like other Latin American countries,
became increasingly linked to the world economy as a producer of primary
exports. Thousands of kilometers of railroad tracks and telegraph lines were laid;
streams of European and Asian immigrants poured into the country; and inflows of
foreign portfolio and direct investment skyrocketed.1
These changes were not unique to Brazil, but were occurring within many regions o f recent
settlement, as part o f the general transformation o f the world economy during the second
half o f the 19th century. See, for example, A.K. Caimcross, Home and Foreign
Investment. 1870-1913 (Cambridge, 1953), chs. 7-8; Diaz-Alejandro, "Argentina, Australia
and Brazil Before 1929," in Argentina: Studies in Comparative Development. 1870 -
1965. (London: Macmillan, 1985); Edelstein, Michael, Overseas Investment in the Age o f
High Imperialism. (New York: Columbia University Press, 1982); Marcello de Cecco,
Money and Empire: The International Gold Standard. 1890 - 1914. ch. 2, (New Jersey,
Rowman and Littlefield, 1975); and A.K. Kenwood and A.L. Lougheed, The Growth of
the International Economy. 1820-1990. (London, 1992), ch. 3, "International Migration,
1820-1913)," p. 44-59.
- 1-
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Political changes accompanied and underpinned these economic movements.
During the years 1865 - 1870 a prolonged war with Paraguay served to consolidate
Brazil’s south-western frontier and laid the groundwork for the development of an
integrated urban network in the southern half of the country.2 In 1889, the
Empire was abolished and a Republican government peacefully installed. With the
establishment of a federal system, Brazilian states gained significant control over
economic policy. State governments were free to set their own export taxes and
determine the level of subsidies to immigration and infrastructure investment.3
Economic development was far from homogeneous across the country’s
wide-ranging geographic expanse. Population and major urban centers clung to the
Atlantic coast; primary product exports were subject to regionally-specific climatic
conditions; immigrants, both external and internal, exhibited clear preferences for
certain regions over others; industrial production became increasingly spatially
concentrated; and urbanization occurred at different rates and in different
hierarchical patterns throughout the country.
Rui Guilherme Granziera, A Guerra do Paraguai e o Capitalismo no Brasil: Moeda e Vida

Urbana na Economia Brasileira. (Sao Paulo: Editora Hucitec, Universidade Estadual de
Campinas, 1979) offers a detailed examination o f this process.
"Free" within the limits of their tributary base and international financial standing. With
the exception o f the states o f Sao Paulo, Rio Grande do Sul, and to some extent Minas
Gerais, all other Brazilian states required the guarantee of the Federal Government for their
flotations o f international debt. (Steven Topik, "State Interventionism in a Liberal Regime:
Brazil, 1889 - 1930," Hispanic American Historical Review. 60(4), 1980, p. 595.)
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A radical shift in the regional profile of the Brazilian economy was the
consequence of this uneven development during the second half of the 19th
century. Around 1870, the quality of life and the level of economic development
in the Northeast rivaled, if it did not surpass that of the Southeast.4 Anecdotal
accounts from travelers are confirmed by the available economic, demographic,
and social indicators from the 1872 census. However, over the next half-century
the relative position of the Northeast declined dramatically. By the time of the
first comprehensive national census in 1920 the political and economic dominance
of the Southeast of Brazil was fully entrenched. And, unlike other regional shifts
in Brazilian economic history, including the Northeastern sugar boom of the 17th
century, the gold boom in Minas Gerais during the 18th century, which "left
behind, besides splendid architecture, little but institutional arrangements inimical
to development"5, or the Amazon rubber boom of the early 20th century, the
concentration of population, income and economic activity in the Southeast of
As documented in various travelers’ accounts including William Scully, Brazil: Its

Provinces and Chief Cities: the Manners and Customs o f the People: Agricultural.
Commercial, and Other Statistics. Taken from the Latest Official Documents: With a
Variety o f Useful and Entertaining Knowledge. Both for the Merchant and the Emigrant.
(London: Murray & Co., 1866), Henry Koster, Travels in Brazil: in the years from 1809
to 1815. Philadelphia: M . Carey and Son, 1817), and Oscar Canstatt, Brasil, a Terra e a
Gente (1871'). Tm s. by Eduardo de Lima Castro, (Rio de Janeiro: Irmaos Pongetti:
1954).
Carlos F. Diaz Alejandro, "Argentina, Australia and Brazil Before 1929", in Argentina,
o p .cit.. p. 95.
-4 -
Brazil has proved regenerative and doggedly persistent since it first began over 100
years ago.6
This unprecedented persistence of the economic advantage of the Southeast
suggests that a “reciprocating system of economic growth" emerged in the region
which was independent of the performance of any single primary product. In other
words, a national growth pole was established and a cumulative causation process
initiated, in which the Southeastern region became the urban-industrial center of
the country. How and why this process occurred in the Southeast, but not in the
Northeast, forms the guiding question for this dissertation. It will be shown that,
contrary to traditional interpretations of Brazilian regional inequality which rely
solely upon divergent international export performance, the skewed pattern of
regional development which emerged in 19th century Brazil was also conditioned
by the development of interregional trade and the emergence of Rio de Janeiro as a
national metropolis.
Today, development indicators in the Northeast and the Southeast seem to
come from two separate countries.7 The 1994 UNDP Human Development
Report lists Brazil as one of four nations at risk of civil unrest due to the width of
the income gap between rich and poor regions. The report highlights the
discrepancy in living standards between the more prosperous Southeast and the
6 Figure 1.1 provides a map o f Brazil in 1910.

“j
Indeed Brazil has been labeled "Belindia” — a composite o f Belgium and India — reflecting
the vastly different patterns o f development o f the Southeast and the Northeast o f the
country.
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impoverished Northeast, where life expectancy is 17 years shorter, adult literacy
33 percent lower and average incomes 40 percent lower.8 Thus, more than one
hundred years after the shift of Brazil’s economic center to the Southeast occurred,
nearly two-thirds of the households in the Northeast are living in absolute poverty,
as opposed to less than 20% in the Southeast and infant-mortality rates in the
Northeast are more than twice those of the Southeast (exceeding 100 per 1000 live
births). Social indicators mirror gross discrepancies in economic development:
the Southeast accounted for approximately two-thirds of GDP, and nearly 70% of
industrial activity, as compared to a 12% GDP share for the Northeast, with less
than 10% of the industrial activity.9
The Brazilian case provides a clear-cut example of divergence in regional
development. Previous explanations of this pattern of unequal regional growth
have focussed primarily on the ties of the various regional economies to the world
market —primary export performance, immigration flows, capital flows -- in
determining relative regional economic performance.10 These analyses have
8 U N D P, The Human Development Report. (Carey, NC: Oxford University Press, 1994),
p. 99.
9 "Poverty in Brazil, 1960 - 1990: Literature Review and Analysis o f Recent Findings",
unpublished report prepared by Ruthanne Deutsch for the W orld Bank, September, 1989.
10 Earlier analyses include: Nathaniel Leff, "Economic Development and Regional Inequality:
Origins o f the Brazilian Case," Quarterly Journal o f Economics. May 1972, pp. 243-262;
David Denslow, "As exportagoes e a origen do padrad de industrializagao regional do
Brasil," in DimensSes do Desenvolvimento Brasileiro. pp. 21-63, (Edited by W erner Baer
et. al., Rio de Janeiro: Ed. Campus, 1978; Wilson Cano, Raizes da Concentracao
Industrial em Sao Paulo. (Sao Paulo: DIFEL, 1970; Mircea Buescu, Brasil: Disparidade
de Renda no Passado. (Rio de Janeiro: APEC, 1979); and Antonio Barros de Castro, Sete
(continued...)
overlooked the importance both of the increased interregional linkages which
occurred during the second half of the 19th century, the divergent patterns of intra-
regional urbanization and the concentration of the national banking sector in the
Southeast. This gap in the economic historiography exists despite the existence of
historical evidence documenting interregional trade and factor flows, census data
on industrial activity and population, and numerous histories on the development of
Brazilian banking. This dissertation argues that the growth of interregional trade
among the regions of Brazil between 1870 and 1913 in fact contributed to the
regional inequality which emerged during this period. The dissertation further
argues that the extent and nature and development legacy of this increase in
interregional trade was shaped by the national and regional urban and financial
systems which emerged over the course of the First Republic. The institutional
context, while in part responding to economic realities, was not a mere reflection
of underlying events in the real economy. Partially exogenous to economic events,
the growth of cities and the skewed regional development of the Brazilian financial
system were products of the changing political constellation, and particularly,
changes in government investment, fiscal policy, and financial regulations.
Chapter One explores the economic literature on regional growth and
uneven development, setting the analytical ground for the subsequent discussion of
the Brazilian case. The surveyed models of regional growth provide the theoretical
^ (...c o n tin u e d )
Ensaios sobre a Economia Brasileira. 3rd. E d ., (Rio de Janeiro: Forense Universitaria,
1977).
-7 -
scaffolding wMch will be used to construct an economic history of the origins of
Brazilian regional inequality. Of particular interest will be understanding the
various economic strands which contributed to the initiation of a cumulative
causation process in the Southeast of Brazil.
Models of regional balance and regional imbalance are reviewed, and it is
found that with the exception of the neo-classical growth model based upon perfect
competition, the other approaches surveyed admit the possibility that increased
economic interaction between two regions can provoke divergence in the pattern of
regional development. Models encountered in schools of economic thought ranging
from Post-Keynesianism to the recent endogenous growth literature tell stories
which argue for the historical advantage of a head start. These models conclude
that as economic linkages increase, the development gap widens between rich and
poor regions.
This first chapter examines in some detail the roles attributed to cities, and
to financial markets, in contributing to regional growth (or its absence). The
existence of a system of cities, engaged in inter-city trade, is argued to be the
engine for a dynamic and reciprocating process of regional economic growth. The
discussion of the geography of finance points out the tendency for national
financial systems to become centralized, their links with systems of cities, and the
key role played by government in determining the shape and scope of financial
development.
-8 -
Urban and economic historians of Brazil’s First Republic (1889 - 1930)
have frequently argued that by the end of the First Republic, "in spite of the
general increase of commerce among the regions of Brazil, the country was still
not articulated as a unique economic organism, nor was it made up of an integrated
urban network". Instead, it continued to be made up of poorly unified fragments
which formed a so-called "economic archipelago", in which each regional "island"
presented its own capital and urban organization."11
Chapter Two charts out the economic topology of these islands. The
chapter first presents the basic economic and demographic data which verify the
shift in the relative economic positions of the Northeastern and Southeastern
regions of Brazil during the second half of the 19th century. Analysis of data from
the 1907 and 1920 industrial census demonstrates the concentration of industry in
urban centers of the Southeast. Regional differences in the role of cities and the
nature of urban economic activities are then explored through an examination of
sectoral employment patterns for cities in the Northeast and the Southeast. The
more dynamic nature of economic growth in the Southeast is confirmed through the
predominance of patents registered by inventors from Rio de Janeiro and Sao
Paulo, the two principal cities of the region. The chapter concludes with rank-size
analysis of the 1920 census data, demonstrating the emergence of an integrated
11 Geiger, Pedro Pinchas, Evolucao da Rede Urbana Brasileira. Centro Brasileiro de

Pesquisas Educacionais. Ministerio da Educagao e Cultura. Brasilia, 1963, p. 86
(translation mine). This view is foreshadowed by J.F . Normano, Brazil: A Study of
Economic Types. (Chapel Hill: The University o f North Carolina Press, 1935), pp. 13 -
15.
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urban network in the Southeast of Brazil in contrast to a relative absence of smaller
and medium-sized cities in the Northeast. The rank-size analysis of urban systems
further suggests the national entrepot role played by Rio de Janeiro, Brazil’s capital
city.
Chapter Three illustrates the growth in interregional trade which led to the
increasing connection of these regional "islands" during Brazil’s First Republic
while at the same time increasing the income gap between North and South Brazil.
The combined circumstances of declining international demand for Brazilian sugar
and cotton, high import duties on these goods, and an emergent urban-industrial
center in the Southeast, led to the substitution of domestic for international markets
for Northeastern exports. The chapter analyzes the metropolitan functions of major
port-cities using archival data on international and interregional trade and shipping
movements. The pattern of urban hierarchies described in the previous chapter is
seen to be consistent with the underlying hierarchy of trading centers, and
specifically, with a system of national and regional entrepots posited by the
mercantile or metropolitan model of urban development discussed in Chapter One.
The final section of the chapter examines the relationship of the regional entrepots
to their respective hinterlands, and the nature of intra-regional integration between
town and country. The preservation of sugar-cane monoculture in the Northeast,
with an agricultural hinterland characterized by land concentration and excess
labor, is shown to have depended upon the emergence of a (protected) domestic
market for Northeastern products in the Southeast, and government promotion of
-1 0 -
capital-intensive methods for sugar processing. The economic dependence of the
region upon traditional agricultural exports continued throughout the First
Republic, despite the declining economic importance of these exports. The
Northeast thus fell into a low-level equilibrium trap, with a declining export base
artificially preserved through protective tariffs and government subsidies,
effectively thwarting any possibilities of economic diversification.
In contrast, the Southeastern region benefitted from a booming agricultural
export, coffee, and the region’s dynamic agricultural hinterland was home to an
interconnected network of small and medium-sized cities, which stimulated a
process of economic diversification and growth.
Taken together, the evidence and arguments presented in Chapters Two and
Three demonstrate: (i) the relative economic stagnation of the Northeast of Brazil;
(ii) the emergence of an urban network in the Southeast of Brazil; and (iii) the
advent of the Rio de Janeiro/Sao Paulo nexus as a national growth pole and
financial-commercial center for the economy. The failure of the Northeastern
economy to diversify is shown to result from the preservation of its traditional
exports through the growth of interregional trade and the subsidized modernization
of sugar processing.
Chapter Four explores the geography of finance as it evolved over the
second half of the 19th century, with particular attention to the early years of the
First Republic. During this period (1888-1893), the confluence of political and
economic changes resulted in a financial crisis known as the Encilhamento. It is
-11-
argued that this period of speculative boom and bust served to restructure the role
played by the nation’s financial markets in their financing of infrastructure and
other "integrative" activities. The evolution of Brazil’s financial system under the
First Republic is shown to be consistent with the previous examination of
urbanization and trade patterns. Thus, Rio de Janeiro, Brazil’s largest city in the
First Republic, was a true metropolis, serving as political capital, commercial
center, and financial center for the country. Similarly, the spread of banking into
the interior of the Southeastern region reflected the region’s more intensive urban
development, and proved a dynamizing force in filling in the wake of coffee’s
moving frontier with a dense network of small towns and urban centers.
The fifth and concluding chapter of the dissertation summarizes the previous
arguments, and places the regional economic changes of Brazil’s First Republic
within the context of the political changes of the time. The transition from Empire
to Republic was accompanied by a series of political and fiscal reforms, and a
move from a centralist to a federalist system. This decentralization of political
power is interpreted as a response to the shift in the economic center of the country
from the Northeast to the Center-South. It is argued that the advent of the First
Republic decentralized the system of patronage and clientelism which had
characterized Brazilian politics throughout the second half of the 19th century.
The decentralization of political and fiscal authority served to fuel the growth of
the regional divide between the Southeast and the Northeast. The impact of fiscal
federalism on central, state, and municipal governments patterns of revenue and
expenditure is examined, as are regional differences in the use of government
revenues. The dissertation concludes with a discussion of the role of the State as
an arbiter of regional interests during Brazil’s First Republic. The fiscal and
economic policies pursued by the Republican government are shown to have aided
the sugar oligarchy in preserving its traditional way of life, at the cost of
condemning the region to a seemingly lasting poverty.
C H A PTER O N E: R EG IO N A L TIES AND REG IO N A L G RO W TH
1.1 Introduction
What makes one region rich and another poor? Is economic growth
necessarily uneven? What is the appropriate unit of analysis for understanding
economic growth -- world-economy, nation, region, city, firm? Does industry
necessarily concentrate and is industrialization essential for regional development?
These questions have entertained and entangled economists for many years, and
will continue to do so for many more. This is not surprising, given the political
immediacy of income inequality among nations, and the growing interdependency
of economic actors in a spatially shrinking global economy. Over the years, a
wide range of models has been proposed by economists to explain the causes of
regional growth, and the assumptions which underpin these models are often in
conflict. This chapter surveys the literature, providing a broad overview of the
major schools of thought which address questions of regional growth. The salient
features of each approach are presented. Emphasis is given to the models’ main
conclusions on the effects of interregional trade and factor flows: Do movements
of goods, labor, and capital between regions ameliorate or exacerbate differences
in regional economic performance? Following this survey of the literature, I
-13-
-1 4 -
explore two related areas which will prove pertinent in the subsequent analysis of
regional development in 19th century Brazil -- (i) the function of the city in
creating the conditions for regional development, and (ii) the geography of finance.
The discussion highlights the role of the state in shaping patterns of urban and
financial development.
While regional scientists, geographers, and historians have long debated
methodologies and criteria for defining and delimiting regions, I shall not dwell on
this matter here.1 As has been aptly noted by Nicholas Kaldor:
there is ... no unique way of defining what constitutes a ’region’ —

there are innumerable ways; the most that one can say is that some
ways of drawing such boundary lines are more sensible than others;
and given the fact that this is so, the exact demarcation of a ’region’
may not make too much difference to the subsequent analysis.2
In other words, the delineation of a region is a complex task, and we often settle
for second-best. While regions are often delimited by existing political boundaries,
these sometimes obscure the true economic relationships. Several political units
can make up one region —e.g. the various states that make up the American
manufacturing belt together with, arguably, Toronto and its hinterland. And, some
definitions of economic space go beyond existing geographical considerations,
delimiting the relevant region by the sphere of decisions and operations, comprised
This debate is well outlined in Manuel Correia de Andrade’s, Espaco. Polarizacao e

Desenvolvimento: Uma Introducao a Economia Regional (Sao Paulo: Editdra Atlas,
1987), pp. 37 - 46.
Nicholas Kaldor, "The Case for Regional Policies", Scottish Journal o f Political Economy.
November 1970, p. 338.
R ep ro d u ced with p erm ission o f the copyright ow ner. Further reproduction prohibited w ithout perm ission.
-1 5 -
of flows of information, factors of production, and commodities, "created" by
actors in an economy. Or, finally, regions can be delineated by the existence of a
common market —for labor, or capital, etc....3 Thus, there is a certain flexibility
to the drawing of regional boundaries -- be they political borders, geo-climatic
zones, or free-trading areas. The choice will invariably depend on the nature of
the question to be answered, and on the availability of the data. I would insist,
however, against defining a region as a geographic space characterized by a
homogeneous resource base, as has been argued by some.4 Regions are usually
made up of both urban and rural areas, and certainly for the Brazilian case, the
relations between cities and their hinterlands are key elements which influence the
nature of regional development. Furthermore, an economic resource is not
ahistorical —the very process of economic development constantly redefines the
nature of economic resources, and the changing contribution and relevance of
diverse natural and human resources to a region’s economy.
A further caveat is the need to distinguish clearly between regions and
nation-states. Nations are most often comprised of one or more regions which
See, for example, Gavin W right’s discussion o f the Southern regional economy, as
delimited by the existence o f a common labor market, in Old South. New South:
Revolutions in the Southern Economy since the Civil War. (New York: Basic Books,
1986).
See, for example, the definition put forth by H em y W. Broude, in "The Significance of
Regional Studies for the Elaboration o f National Economic History", in Journal o f
Economic History. December 1960, p. 589 where he claims that it is "homogeneity, first
defined and then spatially delimited, which determines the region". While homogeneity
may characterize some regions, it most certainly does not characterize economically
successful ones.
-1 6 -
share common political institutions, a common taxing and spending authority, and
a common currency. Regions, when not region/nations (such as the city-state of
Singapore, for example), therefore, comprise part of a larger political whole (or
sometimes more than one, if the region straddles national borders), and therefore
lack autonomy over instruments of macroeconomic policy.5 Political decisions are
made at the national level which have direct economic effects at the regional level.
These political decisions result in the formation of national economic policies
which do not have a uniform impact across regions.6 Thus, any analysis of
regional development must incoxporate political-economic considerations and
analyze the regional impact of political decisions made at the national level, and
needs to question the neutrality of national economic policies.
Finally, it has been argued that "the mobility of both labor and capital
within countries (regions) tends to be considerably greater than between countries
(regions)...,"7 although the former is usually overestimated by economists and the
latter underestimated. This is not always the case. As will be discussed in
Chapter Two, for 19th century Brazil, international flows of labor in the form of
5 And, o f course, nation-states can band together to form regions which cut across national
boundaries -- witness the European Community, NAFTA, Mercosul, etc.
6 A similar argument has been made on international lines in describing the difficulties which
primary product export-based economies experienced in adhering to the gold standard of
the 19th century, as well as the variable applicability o f the "rules o f the game" to
developed and less-developed countries. (Robert Triffin, "The myth and realities o f the so-
called gold standard", in Our International Monetary System: Yesterday. Today and
Tomorrow. (New York, Random House, 1968, c h .l.).
7 Kaldor, "Regional Policies ... ", op.cit.. p. 338.
-1 7 -
immigration from Europe and Japan to the Southeast of the country far outweighed
interregional flows from the Northeast, suggesting that at least some regional
boundaries were less permeable than the national border.8
The economic literature on regional growth can be traced back to the mid-
18th century, when the French economist Cantillon wrote on the importance of
cities for the promotion of trade and industry.9 Adam Smith and later Alfred
Marshall both stressed the importance of the division of labor and the role of cities
in creating the conditions for its extension and expansion.10 And Marx also paid
some heed to questions of urban growth, the antagonism of city and country, and
the tendency for the centralization of capital.11 However, only in the past half-
century have "regional science", "location theory", ” urban economics", and
Celso Furtado in The Economic Growth o f Brazil: A Survey from Colonial to Modem
Times. Translated by Ricardo de Aguiar and Eric Drysdale. Berkeley and Los Angeles:
University o f California Press, 1971, (Chapter 4, "The Economy o f Transition to Paid
Labor", and Nathaniel H . Leff, in Underdevelopment and Development in Brazil, v o l.l..
Economic Structure and Change. 1822-1947. (London: George Allen & Unwin, 1982),
Chapter 5, "Slavery, European Immigration and the Elastic Supply o f Labor".
Richard Cantillon, Essai sur la Nature du Commerce en General. Edited with an English
Translation and other material by Henry Higgs, C.B. Reprint o f French edition o f 1755.
(New York: Augustus M. Kelley, Booksellers, Reprint o f Economic Classics Series,
1964). See especially pp. 9 - 19, Chapters "O f Villages", "O f Market Towns", "Of
Cities", and "O f Capital Cities".
Adam Smith, The Wealth o f Nations. Books I-H[, W ith an Introduction by Andrew
Skinner, Penguin Classics (London: Penguin Books, L td., 1987) Book II, Chapter IV,
"How the Commerce o f the Towns Contributed to the Improvement o f the Country", pp.
507-520; and Alfred Marshall, Industry and Trade: A Study o f Industrial Technique and
Business Organization: and o f their Influences on the Condition o f Various Classes and
Nations. (London: Macmillan and Co., Ltd, 1919), pp. 283-288.
A summary of the Marxian literature can be found in Edel, et. al. "Uneven Regional
Development: An Introduction to the Issue", Review o f Radical Political Economy. 1978,
Vol. 10, Fall, Special Issue on Uneven Regional Development.
-1 8 -
"regional economics", emerged as distinct schools of thought, reflecting the
ongoing fragmentation of social sciences into disconnected disciplines, but
nonetheless providing useful elements for the brave economic historian ready to
synthesize and reintegrate. And, in the words of Walter Isard, one of the founders
of regional economics,
The study of regional, interregional, and spatial interaction can

provide insights for understanding not only national but all economic
development. Put even more strongly a well-balanced economic
history must explicitly consider spatial processes and the evolving
web of interregional relationships.12
The theoretical literature underpinning regional economics can be
distinguished by its explicit attention to spatial issues, and in particular, their
modification of general equilibrium theory’s basic premise of markets (and
countries, in international trade theory), as "dimensionless points within which
factors of production can be instantly and costlessly moved from one activity to
another".13 In regional models, economic transactions do not take place on the
head of a pin, but rather, friction enters into the exchange process. There is a cost
to transactions and location becomes an important factor in the economic decisions
W. Isard, "Notes on the Use o f Regional Science Methods in Economic History", Journal
o f Economic History. 20(4) December, 1960, pp. 597-600. Classic texts o f this approach
include Isard’s "Interregional and regional input-output analysis: a model o f space-
economy", Review o f Economics and Statistics. Vol. 33, 1951, pp. 218-318, A. Losch,
The Economics o f Location. (New Haven: Yale University Press, 1954), (first published
in German 1944) and W. Isard, Location and Space-economv. A General Theory Relating
to Industrial Location. Market Areas. Land Use. Trade, and Urban Structure. (Cambridge:
M IT Press, 1956).
Paul Krug man, Geography and Trade. (Leuven and Cambridge: Leuven University Press
and MIT Press, 1991), p. 2.
-1 9 -
of individuals and firms. If elements of increasing returns to scale are added,
history assumes critical importance, and these models can provide convincing
explanations for observed patterns of regional inequality.14
1.2 Theories of Regional Balance and Imbalance
No one "literature" exists on regional economic growth, and, with some
comparison of apples and oranges, the discussion below harvests ideas from a
wide range of economic and economic geographic theory: neo-classical; central
place/monopolistic competition; Keynesian; growth pole; neo-Marxist; and finally,
models derived from the "new" economic growth literature. At the risk of gross
oversimplification, these theories can be grouped into two camps: theories of
regional balance and theories of regional imbalance.15 Regional balance theories
hold that flows of labor, goods, and capital between regions with divergent rates of
growth and productivity serve to equalize economic performance, through
correcting an initial non-optimal distribution of resources. Theoretical
Interestingly, widely variant theoretical approaches exist which combine these three
elements: explicit incorporation o f space, a temporal dimension, and recognition o f
external scale economies, all end up telling the same story regarding regional concentration
o f economic production and a process o f cumulative causation wherein the initial advantage
o f one region is reinforced over time. See, for example, Krug man, Geography and Trade.
op.cit.. Kaldor, "Case for Regional Policies'1, op.cit.. and Frangois Perroux, "The pole of
development’s new place in a general theory o f economic activity", in Benjamin Higgins
and Donald J. Savoie, eds., Regional Economic Development: Essays in Honour of
Francois Perroux. (Boston: Unwin Hyman, 1988), for three very different routes to the
same conclusion.
Stuart Holland, in Capital Versus the Regions. (London: Macmillan, 1976) first used this
terminology.
-2 0 -
underpinnings of tMs approach include classical and neo-classical equilibrium-based
models of economic growth and "central-place" models of location theory.16
The contrasting views, broadly classified as theories of regional imbalance,
hold that the growth process, by definition, is uneven, and that regional linkages
will exacerbate existing patterns of regional inequality as opposed to ameliorating
them. Processes of cumulative causation reinforce the advantage of the head start,
and forces which might serve to equalize economic performance in two regions
(spread effects) are neutralized and overcome by disequilibrating mechanisms
(backwash effects). Proponents of regional imbalance come from a wide range of
theoretical backgrounds, including: Keynesian and post-Keynesian theory, radical
economics, growth pole theory, and most recently, the new economic growth, or
endogenous growth, school.17
This divergence of positions should not be surprising, as the literature on
regional growth reflects the fierce debates and overall confusion in macroeconomic
F o r summary presentations o f various regional growth theories, see Michael Chisholm,

Regions in Recession and Resurgence. (London: Unwin Hyman, 1990), Chapters 3 and 4;
J.S .L . McCombie, "A synoptic view o f regional growth and unemployment: I - the
neoclassical theory", Urban Studies. 1988, 25, pp. 276 - 281 and "A synoptic view o f
regional growth and unemployment: II - the post-Keynesian theory", Urban Studies. 1988,
25, pp. 399-415; and Holland, Capital Versus the Regions, op.cit.. (Chapters 1 and 2).
Proponents o f regional imbalance include G. Myrdal, Economic Theory and

Underdeveloped Regions. (London: Methuen, 1964) Kaldor, "Regional Policies ... ",
o p .cit.. Edel, et. al., "Uneven Regional Development ..." , o p.cit.. Albert Hirschman, The
Strategy o f Economic Development. (New Haven: Yale University Press, 1958), and
Krug man, Geography and Trade, op.cit.
-2 1 -
theoiy which characterized the 1970’s and 1980’s.18 And, as the overall
economic growth literature has evolved, so has the work on regional growth. With
the emergence of endogenous growth models, mainstream economists have brought
mathematical rigor to many of the phenomena already described by previous
scholars. Models based on individual optimizing behavior within an equilibrium
framework have been developed which allow for multiple equilibria, monopolistic
competition, increasing returns to scale, and a strong role for history and chance.
These models can account for divergent regional development reaching the same
conclusions which had been put forth by more institutionally-based approaches
years earlier. In the areas of international trade, development, economic growth,
and economic geography, the mainstream of the profession has progressed from
"models based on perfect competition, ... to price-taking with external increasing
returns, and finishes with explicit models of imperfect competition.1,19
W illiam D. Nordhaus, "Macroconfusion: the dilemmas o f economic policy", in Tobin J.

(ed). Macroeconomics. Prices, and Quantities: Essays in Memories o f Arthur M . Okun.
(Oxford: Basil Blackwell, 1983).
The two-fold path o f empirical and theoretical analyses in the evolution o f these models is
eloquently chronicled in Paul Romer, "The Origins o f Endogenous Growth", Journal o f
Economic Perspectives. Volume 8, No. 1, Winter 1994, pp. 3-22. (quote from p. 19). For
an explication o f various endogenous growth models, see Xavier Sala-i-Martin, "Lecture
Notes on Economic Growth (II): Five Prototype Models o f Endogenous Growth", NBER
Working Paper Series. Working Paper No. 3563, December 1990.
-2 2 -
i) Regional balance models
The quintessential example of a regional "self-balance" model can be found
in the neo-classical paradigm. Set in a general equilibrium framework, in which
full general equilibrium requires factor price equalization and full employment of
factors, regional disparities are viewed as temporary phenomenon. For, in
equilibrium, incomes may only differ between regions as a result of differing
endowments of factors or tastes (e.g. a higher skilled labor force, more fertile soil,
or compensating differentials for amenities) and no unemployment can persist.
Thus:
Regional problems are given no prominence in this scheme of

things. Chronic disequilibrium, manifest in persistently high levels
of unemployment, should not occur. If it does, then the
interpretation emphasizes the failure of capital and/or labor to adjust
adequately, so that a ’regional’ problem is perceived to be no more
than the spatial manifestation of an adjustment failure by the factors
of production.... 20
In this framework, therefore, flows of factors between regions serve to
adjust for initial misallocation of resources, and hence reduce regional differences
in productivity, growth, and factor returns.21 Also implied is that low-wage, low
Michael Chisholm, Regions in Recession and Resurgence, op.cit.. p. 32.
Note that the regional version o f the neo-classical trade paradigm provides greater
maneuverability than the international trade theories o f Heckscher-Ohlin and Samuelson
(which can demonstrate factor-price-equalization in the absence o f factor mobility). Factor
mobility provides a further equalizing force in trade between two regions, while the
international theories must depend upon more rigid assumptions about similarities in
technology, tastes, and factor endowments. In fact, in the absence o f factor mobility, if the
factor endowments o f two trading partners are sufficiently different, such that there is no
overlap in the commodities produced, factor-price-equalization will not hold. (See entry by
(continued...)
-2 3 -
productivity regions should experience faster growth rates of capital, the capital-
labor ratio, and productivity, as the optimal regional allocation of resources is
approached, and growth rates approach the steady state. Furthermore, the growth
rate is exogenously determined by the population growth rate and the rate of
technological change.22
The neo-classical paradigm has shown little predictive accuracy in a world
where differences in regional growth rates have proven persistent. Williamson, in
an empirical investigation of regional inequality and national development, found a
consistent pattern in which regional income disparities become greater as
development proceeds from a low base, reach a peak and then, in the advanced
(high income) nations, diminish. His general hypothesis fits a stages of growth
model in which geographical polarization characterizes the initial stages of
development, and then gives way to the spread of economic growth across the
national domain.23
"71
(...continued)
Carl U hr on Heckscher-Ohlin trade theory in The New Palgrave: A Dictionary o f
Economics. Edited by John Eatwell, Murray Milgate and Peter Newman, in four volumes,
(London: Macmillan Press Limited, 1987)., Vol. 2 pp. 621-626.
22 McCombie, "Synoptic View o f Regional Growth and Unemployment: I - The Neo-

Classical Theory", op.cit.. p. 267. See also Thomas J. Courchene and James R. Melvin,
"A neoclassical approach to regional economics", in Higgins and Savoie, eds., Regional
Economic Development, op.cit.. pp. 169 - 189, for a detailed discussion o f the neoclassical
model, and the need to relax standard assumptions regarding identical preferences and/or
factor endowments in order to develop a meaningful model o f interregional interactions.
23 Jefferey G. Williamson, "Regional Inequalities and the Process o f National Development:

A Description o f the Patterns", Economic Development and Cultural Change. Volume 13,
July 1965, pp. 1-84.
-2 4 -
Williamson’s work may be valid for the time period analyzed (generally,
regional income disparities, measured in relative terms as the ratio of regional
income per capita over national income per capita became less marked over the
period 1930 to 1950). However, subsequent evidence has served to contradict his
hypothesis. The U.K. has experienced a widening of regional income differentials
over the 1970’s and first half of the 1980’s, and the Commission of the European
Communities has compiled evidence that up to 1979 the trend was for regional
income disparities to diminish in several European countries but that since then the
differentials have widened.24 Political debate over the signing of the Maastricht
treaty reveals contemporary concern that European unification would further
exacerbate existing income differentials.
In sum, there is at best conflicting evidence concerning the likelihood of
regional disparities to equalize over time. Although there appear to be some
equilibrating tendencies to interregional flows of labor and capital, they take place
largely over the long-term. Evidence for recent years suggests that, contrary to
neo-classical theory, regional convergence is by no means the rule in advanced
countries.25 There has certainly been no tendency for convergence in Brazilian
regional growth rates, or income levels, which, as demonstrated below, in Chapter
As cited in Chisholm, Regions in recession and resurgence, o p.cit.. p. 80.
See, Dadweel L. Ray and R. Lynn Rittenoure, "Recent Regional Growth Patterns: More
Inequality", Economic Development Quarterly. 1, no. 3 (August 1987): 240-248.
-2 5 -
Two, first began to diverge at the end of the 19th century.26 A century later, per
capita income levels in the Southeast are some four times higher than those
measured in the Northeast.27
Departures from neo-classical theory in the 1930’s explicitly drew attention
to the spatial implications of monopolistic and imperfect competition. These
models illuminated how the costs of overcoming space demonstrate fundamentally
why the real economy does not function as the perfect competition model
prescribes. Concurrently, in the spatial realm, Christaller published his study of
central places, elaborating a system of nested spatial monopolies, and several major
works on industrial location theory appeared in English for the first time.28
These breakthroughs provided the theoretical basis for the development of attempts
to model economic equilibrium in space, in which the prevailing principle was
profit maximization for firms (under increasing returns to scale, thus with
conditions of imperfect competition), given the need to minimize transport costs for
inputs and final products.29 Assumptions of classical location theory under which
Estimates o f per capita income for the Northeast fall from 4.3 pounds sterling in 1872 to
3.3 pounds sterling in 1900. In contrast, estimates in the Southeast (excluding the capital
city o f Rio de Janeiro), increase from 3.1 pounds sterling in 1872 to 9.9 in 1900. (Buescu,
Brasil: Disparidades de Renda no Passado. op.cit.. p. 52.
UNDP, Human Development Report 1994. op.cit.. p. 99.
For a summary presentation o f the major contributions in these areas, see Chisholm,
Regions in Recession and Recurrence, op.cit.. pp. 32-40.
W. Isard, Location and Space-economv— op.cit.. the model is formalized in Chapter Ten,
pp. 221 - 253.
-2 6 -
this modelling was done included: homogeneity of geographic space; the existence
of a transport surface and constant costs of transportation in any direction; and,
finally, uniform and homogeneous distribution of transport facilities, agricultural
population, tastes and scales of preferences, industrial raw materials, technical
knowledge, and availability of production opportunities. Given this framework,
activities are allocated in "space" by means of purely market forces.30
This "regional science", thus provided an analytical framework which
sought to explain observed spatial concentrations of economic activity. However,
the initial assumptions of the model were severely limiting, and, within a general
equilibrium framework, factor flows were still viewed as essentially equalizing.
Limits of factor flows were established by the scope of the market, which in turn
was the result of the increasing returns to scale assumption. The intent of these
models, furthermore, was not necessarily to explain differences in regional growth,
but more to explain the underlying economic justification for the observed
allocation of resources in space. The dynamic element was thus not adequately
addressed, understandably, as modelling a system of simultaneous equations, in
time and space, was a nearly impossible task during the 1950’s and 60’s, when this
approach was at its apogee. It seemed that "...technique had tended to become an
end in itself, and ... limits of technique inhibited both theory and analysis".31
30
Niles M . Hansen, "Development Pole Theory in a Regional Context", p. 121, in David L.
McKee, et. al., Regional Economics: Theory and Practice (New York: The Free Press,
1970).
Holland, Capital versus the Regions, op.cit.. p. 2.
-2 7 -
To summarize the above, theories of regional ’self-balance’ hold that
uneven regional development is the result of a combination of impediments to
attaining equilibrium (limits to the perfect mobility of goods and factors) on the
one hand, and the character of that equilibrium (imperfect competition) on the
other. Expected returns to factors determine the direction of interregional factor
flows, which tend to, especially over the long term, diminish disparities in regional
income.
(ii) Regional imbalance models
Until the past decade, theories of regional "imbalance" have been largely
located outside the realm of mainstream economic theory -- derived from post-
Keynesian models of export-based growth and cumulative causation, neo-marxist
views of uneven development, and the growth pole school originated by Frangois
Perroux. However, the emergence of the endogenous economic growth literature
in the 1980s has provided rigorous and equilibrium-based models which explain
persistent and widening disparities in regional rates of growth and productivity,
often formalizing many ideas which have been present in non-mainstream
approaches for decades.
Although differing in assumptions concerning economic structure and
behavior, and analytical methodology, all of the regional imbalance theories share
the view that interregional factor flows do not necessarily ameliorate regional
differences in income and productivity. Rather, they argue, under varying
-2 8 -
assumptions concerning the nature of markets and technological change, that
increased economic interaction between two regions can often contribute to
widening the gap. In the words of the originator of the concept of "circular and
cumulative causation," Gunnar Myrdal, the "play of the market forces works
towards inequality."32
If one article had to stand alone as the exemplar of the post-Keynesian
approach to regional growth, it would be Nicholas Kaldor’s 1970 article on the
case for regional policies. Here, Kaldor elaborates upon Myrdal’s principle of
cumulative causation and develops an argument based upon Verdoom’s Law and
"efficiency wages" which explains how both "comparative success and comparative
failure have self-reinforcing effects in terms of industrial development".33
The basic argument runs as follows: Increasing returns to scale exist, not
simply in terms of advantages of large scale production, but also through external
economies, or the "cumulative advantages accruing from the growth of industry
itself'. These external economies are closely related to urbanization, which will be
addressed in more detail in the following section. One of their consequences is a
strong positive association between the growth of productivity and efficiency and
the rate of growth in the scale of activities.34 The result is that as regional ties
32 Myrdal, Economic Theory and Underdeveloped Regions, o p.cit.. see especially pp. 11 -49.
33 Kaldor, "Case for Regional Policies", op.cit.. p. 343.
34 This relationship was formally derived by Verdoom, and hence has come to be known as
"Verdoom’s Law". McCombie, "A Synoptic View - II", op.cit.. p. 413, presents a
(continued...)
-2 9 -
grow stronger, it is likely that the "region which is initially more developed
industrially may gain from progressive opening of trade at the expense of the less
developed region whose development will be inhibited by it."35
Why? The more developed region will be able to supply the less developed
region at more favorable terms. Adjustment takes place not through changes in
prices (as stipulated in neo-classical theory), but through changes in supply. As
exports expand from the more industrialized region, the Hicksian multiplier enters
into play, with expansion in export industries contributing to further growth in
residentiary activities and higher rates of growth and productivity. And, due to the
downward stickiness of money wages, these higher rates of productivity are not
reflected in nominal wage increases. The result, the efficiency wage, or the ratio
of money wages and productivity growth rates, will tend to decline in regions and
in sectors where productivity rises faster than average. Subsequently, the initial
competitive advantage of the early industrializer is enhanced, as the comparative
costs of production fall over time relative to slow growing areas.36
•^(...continued)
formalized version o f the model, including a derivation o f the Verdoom coefficient, which
captures the relationship between growth o f productivity and increasing scale o f activities.
In recent years, empirical work has confirmed the workings o f Verdoom ’s law in several
countries. See, for example, M .M .G . Fase and P. J. Van den Heuvel, "Productivity and
Growth: Verdoom ’s Law Revisited”, Economic Letters. 28(2), 1988, pp. 135-139 and
Robert Boyer and Pascal Petit, "Kaldor’s Growth Theories: Past, Present and Prospects",
CEPREMAP Discussion Paper No. 8905, 1987.
35 Kaldor, "Case for Regional Policies", op.cit.. p. 340.
36 Kaldor, "Case for Regional Policies", op.cit.. pp. 341-343. Note that recent work by Bill
Gibson ("Class Conflict and the Informal Sector II: The Foreign Exchange Constrained
(continued...)
-3 0 -
The premise that a region must industrialize in order to develop lies at the
heart of Kaldor’s model. Douglass North, in his article "Location Theory and
Economic Growth", explicitly argues against this industry-centric approach to
economic growth. His starting point for regional economic development is not an
industrial sector exhibiting increasing returns to scale, but rather an export staple.
Shared with Kaldor, however, is the contention that the export multiplier has an
important role to play in regional development. He further discusses (and
documents, using historical data from the American Northwest) a process wherein
a region gains a comparative advantage in an export staple, and generates related
external economies in complementary sectors. At heart though, North’s vision of
the long-run fits more within the regional balance camp:
As a region’s income grows, indigenous savings will tend to spill

over into new kinds of activities. At first, these activities satisfy
local demand, but ultimately some of them will become export
industries. This movement is reinforced by the tendency for transfer
costs to become less significant. As a result, the export bases of
regions tend to become more diversified , and they tend to lose their
identity as regions. Ultimately, we may expect with long-run factor
mobility more equalization of per-capita income and a wider
dispersion of production."37
■^(.. .continued)
Economy", Paper presented at Economic History and Economic Development Workshop,
University o f Massachusetts, Amherst, September 1992) suggests that under certain
conditions an informal sector o f a less developed region can outperform the equivalent
formal producers o f goods in a more advanced region, thus questioning the persistence o f a
headstart for the early (and formal) industrializer.
37
North, "Location Theory and Regional Economic Growth", Journal o f Political Economy.
63, June 1955, p. 258.
-3 1 -
For North, regional growth is inextricably and unicausally wed to the success of
the export base. If the demand for the major exports falls, and new exports do not
emerge to take their place, then regional stagnation is inevitable. It is in this sense
that the export-based growth can be classified as part of the regional imbalance
school, and has been used to explain divergence in regional growth rates. North’s
approach is in fact a variant of the staple theory of economic growth.38
North’s argument hinges on the assumption that the export activity will
have substantial "spill-over effects", or "linkages" to residentiary activities. Like
the related literature on the staple theory, North delineates "good" staples versus
"bad" staples, according to their likelihood in inducing backward and forward
linkages (farm equipment, financial intermediaries, processing, storage, marketing,
transport, etc.). Recent scholarship in this area has demonstrated that the nature of
linkages which emerge derives also from the institutional setting of staple
cultivation rather than being solely and "naturally” determined from the
agricultural and technological demands of the staple crop.39 Thus, the nature of
markets for land, labor and for credit, together with the technical properties of the
For more on the staple theory see Robert E. Baldwin, "Patterns o f Development in Newly
Settled Regions," Manchester School. 24 (May, 1956), 161-179; Albert O. Hirschman, "A
Generalized Linkage Approach to Development with Special reference to Staples," in
Essays on Economic Development and Cultural Change. Maiming Nash, ed., 1977; and
Watkins, Melville H ., "A Staple Theory of Economic G rowth,", The Canadian Journal o f
Economics and Political Science. 29 (May 1963), 141-58.
39
David F. Weiman, "Staple Crops and Slave Plantations: Alternative Perspectives on
Regional Development in the Antebellum Cotton South", in Lou Ferleger, ed., Agriculture
and National Development: Views on the Nineteenth Century (Ames: Iowa State
University Press, 1990), pp. 119-61.
i
I
-3 2 -
primary output, determine the potential for future development. In this scenario, it
is not that coffee was a "good" staple, and sugar a "bad” staple which explains the
relative stagnation of the Northeast of Brazil, but rather that the coffee-growing
region of the Southeast was home to institutions more conducive to development,
such as relatively free labor markets and modernized credit establishments. As is
argued in more detail in Chapter Three, while the relative success of coffee on the
world market certainly provided an inflow of export revenues which offered
potential resources for development, strong export revenues are a necessary but not
sufficient condition. If we are interested in explaining sustainable development,
and not simply economic growth, the counter-example of the 19th century rubber-
economy of the Amazon region reveals the case of an export-boom which lacked
the supportive institutional environment, and whose glory came and went like a
shooting star.40
Unlike the export-based staple approach, growth pole theories delegate a
critical role to propulsive industries, or sectors, in explaining the emergence of
leading regions —or growth poles. These models, originated by Francois Perroux
in the 1950’s, share an industry-centric approach with the cumulative causation
school. The basic dynamic of the model, begins with a leading or propulsive
Barbara Weinstein’s, The Amazon Rubber Boom. (Stanford: Stanford University Press,
1983) provides an economic history o f the region. Bradford Barham and Oliver Coomes’s
"Wild Rubber: Industrial Organization and the Microeconomics o f Extraction during the
Amazon Rubber Boom, 1860 - 1920", (J. Lat. Amer. Stud.. 26 (1994), 37 - 72), provides
a detailed examination o f the varying nature o f labor and credit markets throughout
Amazonia.
-3 3 -
enterprise (firme motrice), influenced in part by the Schumpeterian vision of
innovation.41 This sizeable employer, due to its clear profitability and advantage
over other industries, attracts new investors, and, through a series of backward and
forward linkages a growth pole emerges. The analogy of a magnetic pole captures
the key concept of the agglomeration economies which develop around the initial
propulsive sector. Success breeds success as backward and forward linkages enter
into play: a new firm locates, employment and population increase, output of local
suppliers expands, the pool of labor grows, local demand increases, the service
sector expands, the town’s financial base is enlarged, infrastructure is improved,
and more firms locate to the town, thus starting the process all over again.42
Critical to Perroux’s vision is the concept of economic space —a complex
"field of forces”, in which as many different sub-spaces exist as there are
"structures of abstract relation which define an object". Space is thus "created" by
actors in an economy, and is defined by their sphere of decision and operations, a
formulation which transcends simple geographic, or to use Perroux’s terminology,
In fact, it has been argued that Perroux "took the whole o f the Schumpeterian system and
put it into space." ( B. Higgins, "Francois Perroux", in Higgins and Savoie, ed., Essays in
Honor o f Francois Perroux. op.cit.. p. 40).
The growth pole is inherently a-geographic, as the engine o f growth emerges from the
industrial and market characteristics o f the firme motrice, as opposed to the natural
endowments of the surrounding environment. Note that the staple theories and the growth
pole theories differ only insofar as the initial start, or unmoved mover, for growth pole
theorists is an industrial sector, while the staple theorists envision a similar process of
economic linkages emanating from a successful agricultural export.
-3 4 -
"banal" space.43 Witliin this perspective, growth poles become decidedly more
complex than urban centers, and spread effects are generated not only within
geographic space, but across interregional and international boundaries, through
"transmission lines” established by the ties of economic actors.44
Within this framework, the concept of economic dominance conveys a type
of leadership rather than exploitation. It is technologically inherent in the process
of modem industrial growth that some regions and sectors emerge as dominant,
exercising influence over other areas and influencing their growth in the same way
that electro-magnetic fields are composed of poles and peripheries.45 However,
what Perroux conceives of as domination does not negatively affect the
development of outlying regions. In fact, in his earlier book, Le Capitalisme,
Perroux argued that the logic of pure domination and pure profit leads the capitalist
system to function "for the benefit of the masses". In other words, the initial
investments by dominant firms and dominant regions would generate income,
expand effective demand, and create new markets for the increased production by
43 Francois Perroux, "Economic space, theory and applications", Quarterly Journal o f

Economics. Vol. 64, 1950, pp. 89-104.
44 Higgins, "Francois Perroux", op.cit.. p. 44. Note that this conception o f space based on
economic relationships rather than geographic proximity holds much in common to that o f
the "market region" put forth by Duncan, et.al., in M etropolis and Region. (Baltimore:
Johns Hopkins Press, 1960), where the economic hinterland o f a regional metropolis is
formed on the basis o f economic ties, (such as markets for goods, labor, or credit) and can
often lie beyond the "natural" hinterland formed by geographic frontiers. (See esp. pp. 36-
45).
45 Note that the automaticity o f this early advantage depends on the appropriate institutional
context, which for Perroux is an industrialized one. Pre-industrial economic activity would
not generate the same set o f forces.
-3 5 -
less developed regions. Growth-poles thus are viewed as "the decision-making
centers of the world capitalist system."46 For Perroux, "growth does not appear
everywhere and all at once, it appears in points or development poles, with
variable intensities; it spreads along diverse channels and with varying terminal
effects for the whole economy."47 Imbalance is thus intrinsic to development,
and yet, the way forward for the less developed areas. The normative prescription
is therefore not to equalize growth, but rather to promote spatial "trickle-down".
For, if the dominant development poles continue to grow, their supply and input
regions will also benefit.
The development or growth pole approach assumes that growth takes place
within the framework of a capitalist economy —albeit perfect competition is not
assumed. That is, there is little discussion of "external spheres", or those areas
beyond the economic frontiers of capitalist relations and it is thus assumed that all
resources are available, subject to a sufficient change in price.48 In a marxian or
Karen R. Polenske, "Growth pole theory and strategy reconsidered: domination, linkages,
and distribution", in Higgins, Essays in Honor o f Francois Perroux. op.cit.. p. 96. This
concept is similar to M yrdal’s "spread effects", the positive impact on less developed
regions o f growth in the early industrializer. However, M yrdal, unlike Perroux, argues
that "backwash effects", in which the more advanced region is able to attract resources
from the less advantaged region, outweigh .the spread effects. Furthermore, the relative
strength o f these effects, in Myrdal’s framework, is itself conditioned by the region’s level
o f development, with backwash effects being stronger, the less developed the region.
(Economic Theory and Under-developed Regions, o p.cit.. pp. 27-38.
Francois Perroux, ’La notion de pole de croissance’, Economie appliquee. Nos. 1-2 (1955),
as quoted in Hansen, "Development Pole Theoty in a Regional Context", op.cit.. p. 122.
The following discussion on external spheres and the boundary question is greatly indebted
to Carol E. Heim, "External Spheres and the Theory o f Capitalist Development", in Social
(continued...)
-3 6 -
neo-marxian theoretical framework, where capitalism is viewed as an historically
specific mode of production as opposed to the prototypical economic system, the
incorporation of "non-capitalist" elements into the circuit of capital has been
viewed as an essential element of the dynamic of capital accumulation, and hence
economic growth. As such, uneven regional development emerges as minimally a
symptom, and at the extreme, a condition, of the process of expansion of the
capitalist mode of production.
The concept of the shifting frontiers of the capitalist economy —and the
absorption (or creation) over time of new resources, markets, technologies, and
realms —into a network of capitalist firms and wage-labor relations propelled by a
dynamic of capital accumulation has obvious relevance for this discussion of
regional growth. The quest for new products and new markets, and the ongoing
process of capitalist expansion, undoubtedly have a spatial dimension. The
changing boundaries of capitalism can thus be taken literally to mean the shifting
geographic dimensions of the capitalist economy. While such an inteipretation of
the boundary question would be misleading, as much of the historical expansion of
capitalism has resulted from the opening up of new investment opportunities within
/to _______________
^...continued)
Concept. Vol. 3, No. 2, December, 1986, pp. 3-42 and Carol E. Heim, "Boundary
Changes and Accumulation in Advanced Economies: Spatial, Technological, and Social
Frontiers", unpublished manuscript. (Amherst: University o f Massachusetts, January,
1994).
-3 7 -
existing geographic frontiers,49 the spatial dimension cannot be overlooked in
understanding the process of capital accumulation.
There is a long tradition of underconsumption theories within the Marxist
tradition which concern themselves with the creation of effective demand for
growing production. One means of market creation has been the geographical
expansion of the capitalist system -- both within national boundaries to incorporate
resources previously unresponsive to the price system, or across national frontiers.
It has been argued, within this framework, that location theory thus ties
imperialism clearly into the dynamic of capitalist accumulation.50
In addition to expansion of markets and the generation of effective demand,
other necessary conditions of capitalist accumulation include generation of a
reserve army of unemployment, provision of the requisite means of production,
and reproduction of the social means of production.51 Their result is the uneven
geographic development of capitalism, as the spatial configurations of the economic
Some examples o f this phenomena might include expansion o f technological frontiers

through the creation o f new products (e.g. demand for environmentally sound cleaning
products), and expansion o f social frontiers through the absorption o f new entrants into the
labor force (e.g. the entry o f women into the labor force since WWII).
Frank J. B. Stilwell, "Spatial Aspects o f Capitalist Development", in Review o f Radical

Political Economy. Volume 10, No. 3, Fall 1978, Special Issue on Uneven Regional
Development, pp. 1 8 - 2 6 .
Ib id .. p. 21.
-3 8 -
landscape are "indelibly and irreversibly carved out according to the dictates of
capitalism. 52
Dependency theory, a variant of marxist analysis, is perhaps most relevant
to.the discussion at hand. Within this school, it is argued that the incorporation of
"peripheral" regions into a capitalist system, through a combination of investment,
trade, and population flows with the center, has provided one means whereby the
conditions of capitalist accumulation within the center are fulfilled.53
Dependency theorists have focussed on the effect that this widening of
boundaries of the capitalist system has had on development within the regions
"external" to capitalism, which are brought into a capitalist world economy as a
result of expansion from the center. The dependent development school holds,
contrary to Perroux and his disciples, that the process of capitalist expansion is in
fact detrimental to the development of the "penetrated" region, as surplus value is
transferred from the periphery to the core.
The spatial implications o f the Marxian model have been best conceptualized by David
Harvey, in The Limits to Capital. (Chicago: University o f Chicago Press, 1982). See
especially Chapter 12: "The Production o f Spatial Configurations: The Geographical
M obilities o f Capital and Labor", pp. 373-411.
The literature on dependent development is extensive. For surveys o f this literature, see
Edel, et.al., "Uneven Regional Development: An Introduction to the Issue", op.cit.: Sheila
Dow, Financial Markets and Regional Economic Development: The Canadian Experience.
(Aldershot, England: Avebury, 1990), Chapter One; and Chisholm, Regions in Recession
and Resurgence, pp. 46 - 53. Classic presentations o f dependency theory can be found in
A .G. Frank, "The Development o f Underdevelopment", Monthly Review. September,
1966; ; F.H . Cardoso and E. Falleto, Dependencia v desarollo en America Latina: ensavo
de interpretacion sociologica. (Mexico: Siglo Ventiuno, 1969); and Immanuel Wallerstein,
The Modem World System. (New York: Academic Press, 1976), amongst others.
-3 9 -
Dependency theory emphasizes more than cumulative causation theory the
dependence of peripheral regions on natural resource production and of central
regions on manufacturing (thus contradicting North’s view that an agriculturally-
based economy can provide a viable entry-point for future development).
Differences in returns to investment are thus explained in relation to different
production patterns; underlying these patterns is the power relationship they entail.
Returns on primary production are highly variable, determined by patterns of
demand set in the center. The dependent pattern of trade and investment follows
from the different characteristics of primary and secondary production. And, as
historically wealth resides in the center, peripheral regions are dependent upon
capital inflows to finance investment. These flows are erratic, tending to reinforce
downturns in the trade cycle, and furthermore, are usually invested in export-
related sectors rather than residentiary activities, thus further reinforcing the cycle
of dependency.
Although dependent economies provide the center with access to cheap raw
materials, and demand for capital and final product exports which are essential for
its continued growth, their own resulting economic structure is essentially warped.
For dependency theorists, therefore, economic isolation from more-developed
regions is a necessary condition for breaking the cycle of dependency, as flows of
-4 0 -
goods, labor, and capital only serve to reinforce the structural conditions which
lead to the "development of underdevelopment".54
Dependency theorists, underconsumptionists, and advocates of unequal
exchange, all posit an unbalanced relationship between more advanced, or
capitalist, regions, and the less developed regions which are drawn into the
capitalist sphere whereby the process of development is furthered within the core
and impeded in the periphery.55 While much of this literature has focussed on
economic ties between more-developed and less-developed nations, the theoiy is
applicable to interregional analysis as well, and appears in the historical political
literature under the rubric of "internal colonialism".56
W ork by economic historians o f Latin America and Africa has spotlighted the importance
o f the region’s forced "delinking" from the world economy during the Great Depression as
a major factor in the subsequent spurt in import-substituting industrial growth. See Carlos
F. Diaz Alejandro, "Latin America in the 1930s," in Rosemary Thorp, ed., Latin America
in the 1930s: The Role o f the Periphery in W orld Crisis. (New York: St. M artin’s Press,
1984), pp. 17-49. See also Gervase Clarence-Smith, "The Effects o f the Great Depression
on Industrialisation in Equatorial and Central Africa," in Ian Brown, ed., The Economies
o f Africa and Asia in the Inter-war Depression. (London and New York: Routledge,
1989).
In its most simplistic formulation, dependency theorists have described nations "exploiting"
nations in a parallel to the capitalist/worker exploitation. However, more careful analyses
which take into account local class structure, and the internal forces within peripheral
regions which support the "dependent" development pattern reveal the danger o f such
approaches.
Proponents o f the applicability o f the dependency school to regional development in Brazil

include Andre Gunder Frank, Capitalism and Underdevelopment in Latin America:
Historical Studies o f Chile and Brazil. New York and London, Monthly Review Press,
1967. Part HI, "Capitalist Development o f Underdevelopment in Brazil", J.F . Normano,
Brazil: A Study o f Economic Types. (Chapel Hill: University o f North Carolina Press,
1935), and Jacques Lambert, Os Dois Brasis. (Rio de Janeiro: Ministerio da Educacao e
Cultura, n.d.). On internal colonialism, see Donald J. Harris, "Economic Growth and
Equity: Complements or Opposites?" Review o f Black Political Economy. 21(3), Winter
1993, pp. 65-72.
-4 1 -
A final contributor to the theories of regional "imbalance" is the literature
on endogenous growth. These growth models share the individual optimizing
methodology and equilibrium framework of the neo-classical paradigm. However,
in contrast to earlier neo-classical growth theory where the long-run growth rate
was exogenously determined by population growth and the productivity growth
rate, in this "new growth" framework, changes in the returns to investment
determine the long-run growth rate. Furthermore, in contrast to the neoclassical
result, where poorer regions tend to grow faster to their steady state level of
income, in this paradigm, assuming that a region starts off with a smaller capital
endowment and a lower level of productivity, this "low growth" region, will
remain "low growth" forever.57
Several variants of endogenous growth models have been derived which
explicitly address issues of trade and uneven development. In one model (with
only two goods), when trade between a less developed and a more developed
region occurs, the poorer region specializes in the low-technology good and the
richer region in the high-technology good. Since the production of high technology
is assumed to lead to more rapid learning by doing, the effect of free trade is to
increase growth in the richer region but decrease it in the poorer region. In
Sala-i-Martin, “Five Prototype Modeis o f Endogenous Growth", op.cit.. p. 9.
-4 2 -
another variant to this approach, economic opening of a poorer region to a richer
region discourages investments in human capital.53
Paul Krugman has brought the tools of the new growth literature to bear on
an explicit examination of spatial economics in his book, Geography and Trade.
The result of his labor is a compelling set of models illuminating the emergence of
core and periphery regions within a country, the spatial concentration of specific
industries within a region, and a series of musings concerning the role of national
boundaries in determining patterns of regional development and industrial location.
In Krugman’s model, the occurrence of cumulative causation, or a key role for
history, depends on three parameters: sufficiently strong economies of scale,
sufficiently low costs of transportation (which otherwise act as natural tariff
barriers, blocking the advantage of metropolitan industries), and finally, a
sufficiently large share of "footloose" production, not tied down by proximity to
natural resources.59
Another variant of the endogenous growth models can be found in
Grossman and Helpman’s 1993 framework where the "existence of local or
national technological externalities introduces an important role for history in the
determination of dynamic comparative advantages". In this model, knowledge and
technological spill-overs can induce "a self-perpetuating process whereby an initial
Ib id .. p. 21, p. 29.
Krugman, Geography and Trade, o p.cit.. see especially Chapter One, "Center and
Periphery," pp. 1-34.
-4 3 -
lead, however generated, is sustained indefinitely into the future, regardless of a
country’s relative factor endowments."60 The same authors have also modelled
several cases where delinking, or closing off trade, would actually increase a
country’s (or region’s) long run growth rate. They demonstrate that countries with
a comparative advantage in primary products may be induced by trade to specialize
in activities that make use of their relatively abundant resources (natural
endowments, low-skilled labor, etc.), and in so doing fail to generate the
endogenous innovations and subsequent increase in economic growth stimulated by
human capital intensive activities.61
(iiil Implications of Regional Growth Models
In summary, it has been shown that a wide range of explanations exists for
the observed phenomenon of persistent disparities in regional economic growth.
Some argue that the persistence of regional inequality is based upon enduring
market failure, and particularly, inadequate factor mobility between regions.
Others hold that increasing linkages between regions serves to worsen disparities in
income rather than to restore a lost equilibrium (or create a new one). The
60 Gene M. Grossman and Elhanan Helpman, "Endogenous Innovation in the Theory of

Growth", Journal o f Economic Perspectives. Volume 8, No. 1, W inter 1994, pp. 23 - 24,
and Innovation and Growth in the Global Economy. (Cambridge: M IT Press, 1991),
Chapter 9, "Trade and Growth,", pp. 237-250.
61 Grossman and Helpman, "Endogenous Innovation...", op.cit.. p. 41. Note that the authors
are careful not to equate output growth rates with economic welfare, and argue that trade
increases wages in the low human capital region which specializes in traditional exports,
even though it has an adverse impact on its long-run growth rate.
-4 4 -
models differ in their assumptions regarding the nature of the growth process:
Growth is determined by exogenous growth rates of population and technological
change in the neo-classical framework, by external demand factors in the
cumulative causation and staple export-based models, by Schumpeterian innovation
in growth pole theory, and by returns to investment in the endogenous growth
literature.
Taken together, the models presented above yield a panoply of assertions
regarding the role of different factors in contributing to uneven regional
development; sometimes contradictory, sometimes self-reinforcing. It will prove
useful to bear these propositions in mind during the subsequent treatment of the
Brazilian case. Accordingly, the general conclusions which can be drawn from the
theoretical literature on regional ties and regional growth are summarized below.
These issues can be broken down into two groups: measurable variables
which are essentially descriptive of the workings of the regional economy over
time, and whose causal interpretations vary according to the theory used; and the
institutional context within which these economic activities occur. While this
separation is analytically artificial, in that economic performance and institutional
context are mutually dependent upon one another, it simplifies the discussion.
Accordingly, a brief overview of the conclusions of the various schools of regional
growth regarding economic indicators concludes this section of the chapter (and is
summarized in Table 1.1), while the third and final section of the chapter addresses
in more detail the institutional issues.
R e p r o d u c e d w ith p e r m issio n o f th e co p y rig h t o w n er . F u rth er rep ro d u ctio n p roh ib ited w ith o u t p e r m issio n .
-4 5 -
Economic Indicators
Growth rates. Neo-classical models posit that poorer regions should
observe faster rates of growth and productivity than more wealthy regions, as
equilibrium is restored. Growth pole theory asserts that economic dominance by a
development pole benefits the entire hierarchy of regions, but that growth in the
center pole will outpace growth in the satellite regions. Radical economists outline
the development of underdevelopment in peripheral regions, and new growth
theorists also describe the relative stagnation of poorer regions who open ties with
richer regions. In short, the debate around convergence of growth rates lies at the
heart of the schism between theories of regional balance and imbalance.
Exports. The composition of exports, their relative share of total regional
output, their demand characteristics, and the nature of the linkages which they
generate are all elements which economists have pointed to as determinants of
regional growth and development. No case study of regional development can
ignore export performance, and in fact, more historical and empirical work is
needed in order to unravel some of the contradictions in the theoretical literature.
Under export-based/staple theory approaches, demand for exports is one
source of the exogenous demand which plays a crucial role in fostering economic
growth, as it does in the post-Keynesian models. North and other staple theorists
trace out the linkages to residentiary activity which export growth generates. Post-
Keynesians, while taking the export multiplier as one element of growth, focus
more on export composition and the advantages which accrue to the early
-4 6 -
industrializer —in terms of relatively less expensive exports and lower efficiency
wages. In this framework, therefore, the contribution of export growth to regional
development is conditioned by a certain level of industrial development and the
region’s temporal positioning with respect to its competitors.
The dependency school, treating primary commodity exports, argues that
successful performance in the commercial export sector in fact distorts the growth
of the region at hand. Export booms skew the structure of the economy in such a
way that foreign capitalists and local elites benefit at the expense of an increasingly
impoverished local population.
These various approaches can perhaps be reconciled by seeing successful
export performance as a necessary, but not sufficient, condition for regional
economic development. Sources of finance, control over marketing and
distribution, the institutional context in terms of the markets for labor and capital,
all play a role in determining the nature of the export multiplier, and the potential
for growth in exports to promote local development, as does the sectoral
composition of exports. While, however, it is possible for a region to suffer
economic decline over the long run as a result of an externally controlled or poorly
managed export boom (cf. the "dutch disease"), it is unlikely that a region will
thrive economically in the absence of a strong export base.62
See W. M. Cordon, "Booming Sector and Dutch Disease Economics: Survey and
Consolidation", Oxford Economic Papers. November 1984.
R e p r o d u c e d with p e r m issio n o f th e co p y rig h t o w n e r . F u rth er rep ro d u ctio n p roh ib ited w ith o u t p e r m issio n .
-4 7 -
Wages and other Factor Prices. Neo-classical theories hold that over the
long run, and under certain rigorous assumptions regarding factor endowments,
tastes, and technologies, factor-price equalization will occur between any two
regions which engage in trade and/or factor flows. That is, differences in relative
returns to factors cannot persist over time. Either increased demand for relatively
competitive goods raises factor prices in the exporting region, or factors flow to
the region where returns are higher, lowering factor prices in the high-paying
region.
For endogenous growth models, factor-price equalization can, but does not
necessarily, hold. Post-keynesians argue that differences in efficiency wages (the
ratio of wages to productivity), are the relevant variable for measuring a region’s
industrial competitiveness. Due to increasing returns to scale, and equalization of
wages across regions, efficiency wages fall in the more advanced regions, thus
increasing their competitiveness and furthering the process of cumulative causation.
Finally, radical economists assert that differences in wage rates lie at the heart of
"unequal exchange" between rich and poor countries, persist over time, and
augment income disparities between rich and poor regions.63
Transport Costs. Changes in transport costs, costs of access to information,
or in short, the economic price of "distance", affect the regional distribution of
economic activity, and the advantages of concentration, although economists debate
63 A. Emmanuel, Unequal Exchange: A Study o f the Imperialism o f Trade. (New York:

Monthly Review Press, 1974).
-4 8 -
the effect of the narrowing of the cost of distance. Growth pole theorists argue
that technological improvements which in effect serve to bring geographically
distant regions closer together will lead to a more diffuse pattern of regional
growth, while Krugman’s core-periphery model predicts the opposite; i.e., that
falling transport costs, ceteris paribus, induce a greater concentration of
"footloose" economic activities in the core region. The 19th century Brazilian
case, as we shall see, suggests that decline in transport costs is consistent with
increased geographic concentration of industrial activity.
Timing. Under neo-classical models, history does not matter —gains from
trade and regional development can take place independent of the stage of
economic development that one region enters into contact with another. Timing
enters into the process only insofar as there are diminishing returns to factors over
the long-run. Growth-pole theory, as well, does not award a central role to
history, but rather argues for the functional necessity of an economic center, and
goes so far as to suggest that this can be created through state intervention. Other
theories of regional imbalance hold that timing is an essential element and that the
region which industrializes first will take and maintain the lead in relative regional
development. Under cumulative causation theory, Verdoom’s Law will hold, with
growth and productivity growing at faster rates than in less industrialized regions.
In Krugman’s core-periphery model, new firms will choose to locate in areas
where a manufacturing concentration already exists (under certain conditions of
population share, transport costs, and increasing returns); and the dependency
R e p r o d u c e d w ith p e r m issio n o f th e co p y r ig h t o w n er . F u rth er rep ro d u ctio n p roh ib ited w ith o u t p e r m issio n .

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school holds that early industrializing regions have the economic power to actively
exploit less developed regions, and can unduly influence their subsequent growth —
through directed foreign investment, uneven exchange, and direct political and
military control. In the wide range of these models of regional imbalance,
therefore, the sheer accident of having gotten there first bestows an absolute
benefit on the early industrializer, guaranteeing the historical advantage of a head
start.
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Table 1.1 Summary Indicators for Regional Growth Theories
In d icato r/ Neo-classical Post- G row th Endogenous

T heory Keynesian Pole R adical G row th
Growth Convergence Increasing No Increasing Increasing

rates over time, divergence in convergence, divergence divergence in
poorer growth rates but poorer in growth growth rates
regions have over time. regions can rates over over time,
faster rates o f match growth time. given certain
growth. rates in center assumptions
as growth on specific
"trickles out". factor returns.
Exports Any linkage Industrial No particular Emphasis on Effects o f

conducive to exports o f importance primary trade depend
growth. early starter given to product on specifics
Export-based have a exports — in exports o f the model.
and staple positive general locks No particular
theories multiplier. satellite economy importance
assign Agricultural regions’ ties into pat given to
propulsive exports do with the tern o f de exports.
role to export not have same center are pendent de
sector effect. beneficial. velopment.
Factor Factor-price Regional Scarce factors N o factor- Factor-price

Prices equalization differences in are less costly price equalization
holds. efficiency in center due equalization. does not
wages to relative Differences necessarily
reinforce avail-ability. in returns to hold.
initial No factor- factors rein
advantages. price force depen
equalization dency via
as economic unequal
space is not exchange.
homogeneous.
Table 1.1 continued on next page.
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Indicato r/ Neo-classical Post- G row th Endogenous

T heory Keynesian Pole R adical G row th
Transport Ceteris Early-starter Cheaper Transport Ceteris

Costs paribus a benefits more transport innovations naribus.
reduction in from leads to a facilitate ties falling
transport reduction in more diffuse between transport costs
costs leads to transport pattern o f core and lead to a
greater trade costs — regional periphery, to greater
and increased development - the concentration
diminishes regional - in effect the detriment o f o f "footloose"
regional inequality. "pole" can the economic
inequality. spread out. periphery. activities in
the core
region.
Timing History Early Timing is not Capitalist Ceteris

doesn’t industrializers particularly core expands naribus. new
matter. have the relevant. to and investment
advantage, exploits will take
which widens periphery. place in
over time. The more region where
enduring the industrial
ties, the activity is
more detri already
mental to the concentrated.
periphery.
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1.3 Institutional Context; Cities. Finance, and the State
Three issues —urbanization, financial concentration, and government
intervention —together comprise a closely woven nexus which shaped the character
of regional linkages and underpinned the pattern of regional development in 19th
century Brazil. The strong economic performance of the Southeast of Brazil
cannot be understood independent of its highly developed urban network and
metropole position within the country, relative availability of financial capital, and
political dominance. And, these institutional factors were mutually reinforcing:
the government created banks, banks financed cities, cities created demand
conditions for diversified agriculture, which in turn fed into industrial growth.
Simultaneously, the location of the political and financial capital of the country in
Rio de Janeiro, the capital city, led to flows of tax revenue and correspondent bank
reserves to this city which ranked first in the nation’s metropolitan hierarchy. This
flow of funds allowed Rio to retain its role as the nation’s leading importer, despite
the gradual disappearance of its export base. And, commercial ties with the rest of
the country, as the city’s merchants provided a reexport function for other states,
provided further profit and spinoffs for the growth of local industry.
Conversely, the relative stagnation of Brazil’s North and Northeastern
regions is only in part due to the failure of these regions to weather crises in
international demand for their major exports. The lack of urbanization and
corresponding limited local market opportunities, a paucity of financial capital, and
federal and state government subsidies which preserved a failing export sector all
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combined to preserve a decadent regional economy rather than stimulating the
diversification which is a fundamental prerequisite of healthy economic growth.
Given the central roles that urbanization, financial markets, and government
intervention will be shown to play in Brazilian regional development, these three
topics are examined in turn in this final section of the chapter.
(II Cities and Regional Development
Although the role of cities in the regional growth process is not explicitly
addressed in the literature on regional growth surveyed above, there are intimations
as to the importance of urban concentration. At the most basic level, cities are the
places where many intraregional and most interregional linkages occur. Flows of
goods and factors do not move across amorphous regional forms, but rather are
channeled and directed through existing commercial networks, headquartered in
cities. Furthermore, the reliance of various approaches upon agglomeration
economies suggests that cities fulfill a critical function in the process of economic
growth in general and the growth of their home regions in particular. Dense
populations provide concentrated pools of demand, skills, information, and
innovative ideas. External economies in production allow firms to benefit from
proximity to other firms. Increasing returns to scale in production, particularly in
producer goods, justify industrial concentration of secondary industries. And, as
Kaldor has argued, "the fact that in all known historical cases the development of

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manufacturing industries was closely associated with urbanization must have deep-
seated causes...."64
This section sets out to elaborate some of these "deep-seated causes", which
lie at the root of the conjunction of urbanization, manufacturing growth, and
regional dominance. In so doing, the following three questions will be answered:
(i) What do cities do? (ii) Can cities exist and thrive in isolation from other cities?
and (iii) Can a region develop in the absence of a healthy urban network?
The emergence of trade is seen as fundamental to the division of labor and
specialization and cities have historically been places of trade and commerce.65
In addition to their role as centers of exchange, cities have traditionally been the
breeding grounds of industrial innovations and activities. It has been argued that
"the growth of the modem city and the march of the industrial revolution are joint
products of a single cultural strand —specialization." 66 Manufacturing has
indeed been a predominantly urban enterprise —with the bulk of industrial activity
concentrated in and around urban place, in most countries, and since the dawn of
Kaldor, "Case for Regional Policies", op.cit.. p. 340.
A classic interpretation o f European economic history and the advent o f capitalism is based
on the emergence o f urban towns in medieval Europe and the corresponding growth o f
markets, opportunities for specialization, and benefits o f an exchange economy. See Henri
Pirenne, Economic and Social History o f Medieval Europe. (New York: Harcourt Brace,
1937).
Eric E. Lampard, "The History o f Cities in the Economically Advanced Areas”, Economic
Development and Cultural Change. Volume HI, No. 2, January 1955, 81 - 136, p. 91.
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industxialization.67 A variety of explanations exist for this concentration of
economic activity in urban areas. I now turn to an examination of their differing
interpretations of the dynamic role that cities play in the economic growth process
in general and regional development in particular.
Central place and location theories are perhaps the most mechanistic in
ascribing to urban concentrations a series of functions which emerge as a rational
part of economic and geographic development, and in determining the location of
these places through wholly market factors (transport costs, input and output
prices, etc.,). For geographers such as Christaller and Losch, and their economic
followers such as Isard, the analytical frame focusses on the spatially efficient
allocation of resources —with urban concentrations arising as a rational response to
agglomeration economies. In essence, cities emerge as a result of economic
decisions made within a space-economy consisting of resources spread out evenly
across an homogeneous plane -- and do not themselves influence the nature of
economic growth, (or the character of those resources which are included in the
economy) which is itself predetermined by the existing technology.
Other approaches focus on the commercial and exchange functions of cities,
and urban areas are conceived of as metropoles and nodes of regional economies.
This is not to deny the importance o f protoindustrialization, or "the putting-out system," in

early modem Europe. In fact, these activities were located within riding distance of towns
and cities, as the merchants who initiated the process, provided the capital and materials,
and commercialized the final product, were urban residents. Here in fact we have an early
example o f the city transforming the country, treated further below in the discussion o f the
work o f Jane Jacobs.
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These models trace out both the industries which develop as a result of these
functions as well as the dynamizing role which cities play in regional development
due to this "control of exchange".68 The emphasis is on the entrepot role played
by cities and their importance as clearing-houses for the regional economy —of
goods, labor, and financial capital. As in the central place approach, a hierarchy
exists to urban systems within a regional economy -- with more "dominant" cities
or metropolises specializing in more narrowly-bounded activities but extending
their reach over a greater geographic area, (such as wholesale trade of a specific
commodity) while lower-rung cities observe less specialization of function and a
smaller geographic scope of economic activity.
In these commercial/mercantile models of urbanization, cities are much
more than industrial centers, and indeed, for the case of the American
manufacturing belt, it has been demonstrated that the surge of urbanization
occurred prior to the emergence of increasing returns to scale technologies.
Evidence indicates that American metropolises (populations over 1,000,000), did
not in fact have an advantage in national market industries, but rather their
industrial growth in these industries merely kept pace with national growth. In
fact, exchange-related and local consumer manufactures, as well as the
68 David F. Weiman, "Urban Growth on the Periphery o f the Antebellum Cotton Belt:
Atlanta, 1847-1860", Journal o f Economic History. 48(2) (June, 1988) pp.259-272; Allan
R. Pred, Urban Growth and Citv-Svstems in the United States. 1840-1860 (Cambridge,
M ass., 1980); James E. Vance, Jr., The Merchant’s World: The Geography of
Wholesaling. (Englewood Cliffs, 1970); and David Ralph Meyer, "A Dynamic Model of
the Integration o f Frontier Urban Places into the United States System o f Cities," Economic
Geography. 56 (January 1980).
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intermediate goods which these industries require, characterize the manufacturing
profile of nineteenth century metropolises, more than a preponderance of national
market firms. Cities can thus be said to create their own markets, exercising a
much more dynamic role than that of providing an efficient site for the
concentration of production of a wider region, which central place theorists would
assert.69
Burghardt’s model of "gateway" cities can be seen as an attempt to
synthesize the central place and mercantile approaches in a dynamic framework.
He postulates that gateway cities develop on the boundary lines between areas of
differing intensities or types of production. He further argues that the future
development of the city will depend on the productivity of the "tributary area", or
hinterland. If the surrounding region is productive enough to develop its own
network of cities, then the initial gateway will revert to a more typical central
place. Gateway cities are distinguished by an emphasis on long distance trade, a
predominance of wholesaling activities, less emphasis on manufacturing, and a fan
shaped hinterland. Central places, in contrast, witness a greater proportion of
retail-based local trade, are home to proportionately more manufacturing activity,
and serve a bowl-shaped hinterland.70
David R. Meyer, "The Rise o f the Industrial Metropolis: The Myth and the R eality,"
Social Forces. March 1990, 68(3): 731 -752, and Duncan, et.al., Metropolis and Region.
op. c it.. pp. 159-184.
A .F. Burghardt, "A Hypothesis About Gateway Cities", Annals o f the Association o f
American Geographers. 61 (June 1971), pp. 269-285.
R e p r o d u c e d w ith p e r m issio n o f th e co p y rig h t o w n e r . F u rth er rep ro d u ctio n p roh ib ited w ith o u t p e r m issio n .
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Finally, authors have focussed on the importance of cities in developing
"new work" and in providing the breeding ground for economic innovation and
technological change which is arguably the essence of economic growth.'1
Indeed, Marshall himself pointed out the dynamic and innovative role of urban
areas, with the whole urban district offering a continuing opportunity for further
adaptation and specialization:
Good work is rightly appreciated, inventions and improvements in

machinery, in processes and the general organization of business
have their merits promptly discussed; if one man starts a new idea,
it is taken up by others and combined with suggestions of their own:
and thus becomes the source of further new ideas. And presently
subsidiary trades grow up in the neighborhood, supplying it with
implements and materials, organizing its traffic, and in many ways
conducing to the economy of its materials.... The mysteries of the
trade ... are as it were in the air, and children may learn them
unconsciously.72
The strongest contemporary advocate of the integral role cities play in the
process of economic growth is Jane Jacobs. In a series of books and articles,
Jacobs has argued that cities, and to some extent their surrounding regions, are in
fact the only relevant unit of analysis for understanding economic development.
She goes further to argue that regional economic decline can be unicausally
explained by the absence of a healthy and thriving city.73 In Jacobs’ view, cities
See Grossman and Helpman , "Endogenous Innovation", op.cit.. for a discussion o f

technology as the engine o f growth.
A. Marshall, Industry and Trade, op.cit.. pp. 284-287.
Jane Jacobs, The Economy o f Cities. (New York: Vintage Books, 1970) and Cities and
the Wealth o f Nations: Principles o f Economic Life. (New York: Vintage Books, 1985).

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are places where "new work" gets done, and have been so since pre-historic
times.74 Consistent with growth pole theory, she argues that cities provide the
context for innovation and thus foment economic growth and development (which
is viewed as the process by which new work is added to old work, in an ongoing
pattern of specialization and expansion). Jacobs takes her argument so far as to
challenge what she terms the "dogma of agricultural primacy", asserting that "city
economies invent the things that are to become city imports from the rural world,
and then they reinvent the rural world to supply those imports."75
Jacobs argues against the fallacy of mistaking the results of city economic
development for the preconditions of urban growth (as the traditional agricultural
surplus models do), and provides a hypothetical scenario supported by
archeological evidence to substantiate her claim that animal husbandry, seed
selection, and crop plantings emerged first in urban settlements, and then were
relocated to "rural" areas due to space and cost constraints. A solution to this
"chicken and egg" dilemma certainly lies outside the scope of this work.
H er vision is intrinsically ahistorical -- the nature o f adding new work, through innovation,
import replacing, and the ensuing economic growth and development, does not change --
what changes is only the type o f work. Thus, cities in pre-historic times provided the
breeding ground for animal husbandry, and in the 20th century for silicon chips, but the
sociological processes conditioning these innovations are innately the same. Others
maintain that the role o f cities in regional development changes in historical time. Carol
Heim, in "Structural Changes: Regional and U rban1', Chapter 2 o f Volume ITT: The
Twentieth Century, in The Cambridge Economic History o f the United States, eds. Stanley
Engerman and Robert Galman, (Cambridge: Cambridge University Press, forthcoming)
argues, for example, that regional economies would be the relevant units for understanding
U .S. national economic growth in the 19th century, while the systems of cities becomes
primary in the 20th century.
Jacobs, Economy o f Cities, op.cit.. p. 40.

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However, Jacobs’ basic premise of the catalytic role of urban centers, not only in
introducing innovations for manufacturing and commercial functions, but also in
inducing transformation in their surrounding rural environments, should not be
dismissed lightly.76
Cities are made up of innovating, bustling clusters of people, for Jacobs,
and are sites where new work is constantly emerging. Neither historical
performance, city size, nor city origin, is significant in predicting whether or not
successful development will occur. Rather, city growth is based upon the
continuation of a "reciprocating system" of import-replacing and export industries
wherein new industries to serve the local market are constantly emerging, and
eventually, going on to export themselves. This system halts as soon as local
industries fail to begin exporting their own products, or if new local industries do
not arise as older ones take to exporting their own work.77 No matter the origins
of the city -- trading depot, mineral or resource base, administrative capital -- if it
is to thrive this process will occur:
If a city starts as a producing center, merchants there soon add

general depot services. If it begins as a depot, suppliers to the work
of trade itself soon add manufacturing; for trade requires many
goods ... for its own operation.78
William Cronon’s Nature’s Metropolis: Chicago and the Great West. (New York and
London: W.W. Norton & Company, 1991), offers an example o f an attempt to craft a
common history o f city and country, based on the belief that the rural-urban separation of
historians is artificial, and the city-country story is best presented as a unified narrative.
Jacobs, Economy o f Cities, op. cit.. p. 127.
Ibid.. p. 131.
R e p r o d u c e d w ith p e r m issio n o f th e co p y r ig h t o w n e r. F u rth er rep ro d u ctio n p roh ib ited w ith o u t p e r m issio n .

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The process of regenerative urban growth occurs independent of city size --
increasing returns and agglomeration economies are not a factor. Cities grow not
by "preformation", or an enlargement of what is already there, but rather by
"epigenesis", or a gradual process of economic diversification and differentiation.
It follows from this position that "cities radically differ in their growth process
from inert towns and from villages even when they are still as small as towns and
villages."79
Cities, however, cannot thrive in isolation. They need other cities in order
for this reciprocating system of import replacement and export expansion to
continue. Trade is essential to the process of continued economic development --
to provide markets for city exports and sources of imports (and ideas for import-
replacing innovations). Thus, Jacobs’ vision of urban (and economic, by
definition) growth posits a fundamental interdependency between cities.
Furthermore, cities benefit most from trade with cities at more or less the same
level of development. "Backward cities must trade most heavily with other
backward cities. Otherwise the gulf between what they import and what they can
replace with their own production is too great to be bridged."80 In other words,
new cities need markets for the poor imitations they produce of imports from large
and more established cities. If the bulk of a city’s trade is with a far more
Ibid.. p. 129.
Jacobs, Cities and the Wealth o f Nations, op.cit.. p. 141.
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advanced city, then the less developed city and its surrounding region will have
little chance of diversifying beyond the exports which originally interested the
more developed trading partner, due to sheer inability to compete. For Jacobs
therefore, the antidote to being bullied by a more industrially advanced trading
partner, is for a city to find another city its own size to trade with. Thus, regions
containing systems of cities, rather than isolated urban centers, are likely to be
more vibrant economically.
Regions with isolated urban centers, or "supply regions", as Jacobs terms
them, are the same areas pointed to by dependency theorists. Their urban profile
has been characterized by economic geographers as macrocephalous or primate,
with one large city and little other urban activity. This city is usually located at a
port or trading point and oriented toward external markets, which provide the
demand for the region’s primary product exports. The surrounding rural
hinterland, exhibits an atrophied development of lower-rung urban places. The
city itself is little more than a temporary resting place for the goods and actors
engaged in the primary export trade. In the absence of trading partners at an
equivalent level of development, small chance exists for the city to generate its
own internal growth dynamic. Furthermore, the capacity of the supply region’s
city to replace imports is limited by the fact that the city itself has never produced
its own exports, or to use Jacob’s terminology, "earned" its imports. For the city
serves simply as a channel of agricultural products to their destinations abroad in
one direction, and manufactured imports inland in the other.
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Supply regions and their cities are one example Jacobs gives of artificially
created cities, formed when more developed cities send out one of what she terms
the five "forces" of city economic growth —markets, jobs, technology, transplants,
and capital —out to another region, unraveling and distorting the complex
integration required for city development. In the case of supply regions, market
forces embodied by other cities’ demands for primary products create a distorted
structure in the producing region, given the absence of the other four forces.
Another example, less pertinent to the Brazilian case, would be "company towns",
where outside capital sets up a self-sufficient enclave, with no need or reason for
engaging in import-replacement or export-expansion. When the outside capital
dries up, the town fails. In such cases, we see dependency between a supply
region and an urban center, rather than an "interdependency" of a system of urban
centers.81
A debate is revealed in the literature surveyed with one extreme exhorting
the dynamizing role which cities play in stimulating regional development and the
other asserting the dependency of urban areas on the productivity of their
surrounding rural environments. Burghardt’s model of gateway cities, as does
Cronon’s recent history of Chicago and its hinterland, combines the two
81 Pred’s, Urban Growth and City Systems, op.cit.. traces the development o f this
interdependency between the urban centers o f the antebellum United States, and chronicles
the ever-increasing complexity o f urban ties within the North, as compared to the relative
isolation o f Southern urban centers which functioned primarily as providers o f staple
exports. Thus, in the Northeast and Mid-W est, urban centers reinforced one another’s
growth, through a series o f accumulating investment decisions based in part on spatial bias
and access to information.
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approaches. The history of city and country can in fact be told as one unified
narrative. For settlements of new regions, gateway cities perform a resource
mobilization, investment stimulating role, but over time, they become dependent on
the economic performance of their tributary regions (specifically the development
of central places within these tributary regions) for their continued development.
Or, "gateway cities ’set up’ the countryside; and then the countryside ’sets up’ the
central places."82
What is required for a region to develop is thus not just a city per se. but
rather a network of cities dynamically engaged an ongoing process of economic
innovation and in intra-regional trade. If such an interdependent urban network is
lacking, then the region is precariously dependent upon external events —demand
for its primary products, capital inflows, etc. —to propel the process of economic
growth. In addition, if a region is home to an integrated urban network, these
external flows of goods and factors can be utilized more efficiently and
productively.83 If a regional capital is tied to an interdependent network of
smaller cities, towns, and villages, through transport and communication ties, then
the working of Myrdal’s "spread effects" are that much stronger, as increases in
Burghardt, "Gateway Cities", op.cit.. p. 285 and Cronon, Nature’s M etropolis op.cit..
See Kerry A. Odell, "The Integration o f Regional and Interregional Capital Markets:
Evidence from the Pacific Coast, 1883 - 1913," Journal o f Economic History. (June 1989),
49(2): 297-310.
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effective demand in the center, for example, are rapidly transmitted throughout the
hinterland region.
Such regional urban systems represent a grouping of cities, tied together by
transportation networks, and characterized by multi-dimensional flows of goods,
factors of production, and information. As urban systems, by definition they
require extra-city connections to contribute to their effective functioning. Political
entities whose constituencies encompass more than one urban place play an
important role in strengthening the links between cities. More explicitly, the state
is often a key player in the financing of public goods such as transportation and
communication infrastructure, either through direct public investment or the
provision of subsidies for private investment. Infrastructure investments exercise a
strong influence on the contours of regional urban systems, and can serve both to
reinforce traditional patterns of commercial exchange, or open the door to new
possibilities for urban growth and expansion. As shall be demonstrated in Chapter
Three, the Brazilian case offers examples of both cases.84
In the Northeast, government subsidized railroads reinforced the role o f the region as a
primary export supplier, with a series o f small lines connecting the principal port cities to
plantation suppliers. In contrast, the rail network in the Southeast, both privately and
publicly financed, did not exhibit this hub and spoke pattern from plantation to coast, but
afforded inter-urban connections within the interior.
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(ii) Geography o f Finance
Economic theorists have proffered scant attention to the relationship
between financial markets and regional development.85 Writings which do
address the growth and function of financial markets in relation to regional issues
split into the same opposing camps as does the economic growth literature:
Mainstream theorists argue that integrated financial markets contribute to capital
mobility and result in convergence in regional growth rates, while proponents of
cumulative causation and dependency theorists assert that the mobility of financial
capital and natural concentration of financial market functions serve to polarize
regional growth.
In this section, I focus on one facet of the literature on finance and regional
development which proves particularly pertinent to the Brazilian case: the
functions of and locations of financial centers within regional and national
economies, and their intrinsic links to cities and systems of cities. However,
before the connection between urban and financial systems can be adequately
addressed, it is first necessary to review two general debates within the literature
on finance: the relationship between financial systems and real economic growth;
and the role of government in shaping the nature of the development of financial
markets.
Excluding the literature on imperialism, which addresses the relationship between

international financial flows and the growing divide between more and less-developed
countries.
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fa) Finance as Passive Response or Shaping Force?
The shortage of writings on the geography of finance reflects in part the
lack of consensus in economic theory concerning the relation of the financial sector
to the real economy. Are developments in the financial sector cause or
consequence of real economic changes? What is the role of formal credit markets
in stimulating investment? What are the real effects of speculative activities in
financial markets and how do they relate to long-run accumulation and growth?
These questions remain open to debate.86
Undebated in the literature is the crucial importance of financial markets in
the process of economic development and industrialization: without the
development of a cash-economy and its accompanying financial infrastructure a
myriad of economic phenomena would be impossible, including: wage-labor
systems; commercial credit and the facilitation of long-distance trade; consumption-
smoothing over time; and the channeling of savings from various sources into
investment pools. All these phenomena, essential to economic development and
urban-industrial growth, depend on the use of financial instruments, and the
Various attempts to unravel these questions by economists and economic historians include:
Rudolf Hilferding’s Finance Capital: A Study o f the Latest Phase o f Capitalist
Development. Edited and with an Introduction by Tom Bottomore, from translations by
M orris Watnick and Sam Gordon, (London, Boston and Henley: Routledge & Kegan Paul,
1981); Charles Kindleberger’s Manias. Panics, and Crashes: A History o f Financial
Crises. (New York: Basic Books, 1989); Raymond Goldsmith’s Financial Structure and
Development. (New Haven and London: Yale University Press, 1969); and Rondo E.
Cameron’s Banking and Economic Development: Some Lessons o f H istory. (New York:
Oxford University Press, 1972) and Banking in the Early Stages o f Industrialization. (New
York: Oxford University Press, 1967).
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support of financial intermediaries and institutions,87 At a minimum, healthy
financial systems can provide a necessary if not sufficient condition for economic
development. Further, the existence of institutional sources of credit as opposed to
reliance upon internal finance, can serve a redistributive function in the economy,
facilitating the entrance of new agents into industrial activity.88
Open to question, however, is the causal link between financial and
economic development. The history of both developed and developing countries
offers countless numbers of cases where financial market limitations or distortions
have impeded growth in the real economy. Less verifiable by the economic
historian, however, are the instances where financial markets contributed in an
active sense to developments in the real economy, as opposed to reflecting and
resulting from underlying growth processes. This difficulty in tracing causation
stems from the nature of economic development, which, at its most dynamic, is
characterized by simultaneous movement on many fronts and in a multitude of
sectors, as well as by the wide array of possible sources of credit and financial
instruments.
With Goldsmith, I define a financial system to be "the connected universe o f financial

instruments, financial institutions, and financial markets operating in a given place at a
given time, ... the financial superstructure o f the economy", in Raymond W. Goldsmith,
Premodem financial systems: A historical comparative study. (Cambridge: Cambridge
University Press, 1987) p. 2.
This hypothesis has been explored by Stephen H. Haber, in "Industrial Concentration and
the Capital Markets: A Comparative Study o f Brazil, Mexico, and the United States,
1830-1930", Journal o f Economic History. (Sept. 1991), 51(3): 559-580 and "Capital
Immobilities and Industrial Development: A Comparative Study o f Brazil, India, Mexico,
and the United States, 1840-1930," (unpublished manuscript, 1994).
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It is not uncommon for economists to assume a case of "demand creating its
own supply" and to suppose that financial services, unlike physical capital serve as
"a passive, permissive, or facilitating agent, rather than a factor of production."89
We should not overlook the force with which a growing demand for easier credit
and new channels of finance generates the impetus for the establishment of new
institutions and the expansion of the financial system. However, the nature of the
institutions which emerge in response to demand pressures is by no means
predetermined, as revealed by the wide range of institutions and credit instruments
which have been observed over time in structurally similar economies.90 The
special role played by the state in formalizing and legitimating the financial system
suggests that developments in the financial system are often the result of political
decisions, and anything but "passive" in their response to changes in the real
economy.91 Governments determine the legality of financial institutions and
instruments. The influence of government regulations not just on the supply of
financial capital, but in defining what is and what is not legally a financial
Rondo Cameron and Hugh Patrick, Banking in the Early Stages o f Industrialization.
o p .cit.. p. 1.
Comparative studies include recent work by Haber, op.cit.. Raymond W. Goldsmith, The
Financial Development o f India. Japan, and the United States: A Trilateral Institutional.
Statistical, and Analytical Comparison. (New Haven: Yale University Press, 1983), and C.
P. Kindleberger, "The Formation o f Financial Centres: A Study in Comparative Economic
History," Princeton Studies in International Finance. Volume 36, (Princeton: Princeton
University Press, 1974).
Government functions encompass, for example, certification o f the value o f coinage,

enforcement o f contracts, regulation o f interest rates, licensing o f financial institutions, etc.

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instrument, can produce drastic changes in the real economy.92 In the other
direction, "demands" from developments in the real economy are often filtered
through the political process before being met by changes in the type and
availability of financial services.93
(bl The Imprimatur of Government
Financial instruments are almost always defined within a political context.
It follows, therefore, that the evolution of financial systems and the development of
financial markets is more than a simple reflexive response to real economic
changes. Governments must actively intervene (or choose not to), to define the
range of financial instruments, and the permissible range of activities for financial
institutions. Particularly in the earlier stages of development, it is thus possible for
financial improvements to lag behind transformations in the real economy. If
revision of the legal framework and change in the institutional context fails to
accompany real economic development, that development can be dampened, or
reversed. In short, the "fit" at any given time between the demand for financial
Witness the effect o f the abolition of slavery and the loss o f the use o f slaves as collateral
on the land tenure system in the cotton south after the Civil War, (Gerald Jaynes, Branches
Without Roots: Genesis o f the Black Working Class in the American South. 1862 - 1882.
(New York: Oxford University Press, 1986).
This is always the case when the expansion o f financial intermediaries’ functions, or the
addition o f a new financial instrument as legal tender, requires change in the existing
legislation. However, it is also possible for expansion in the financial system, and
"financial deepening" to occur within the confines o f the existing set o f institutions, in
which case none (or limited, such as approving the charter o f new banks) government
intervention would be called for.
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service which emerges from developments in the real economy, and the existing
constellation of options in the financial system, may or may not be adequate.
Accordingly, one could posit a push-pull relationship between real and
financial developments, with the government acting as a mediator in the tempering
and regulation of changing economic (and psychological) forces. Furthermore,
government actions are constrained to fall within the accepted political and
economic ideologies of the age. Various precepts have been laid down by
economists and policy-makers over the centuries to establish the framework within
which governments could justifiably intervene in the economy and its institutional
infrastructure. Often these theories have indicated a set of rules through which
government response to economic changes is predetermined or automatic. For
example, the international gold standard and "sound banking" principles served as
guiding standards of the late 19th century. Often, these rules were imported from
abroad, and did not reflect the underlying real economy of the importing countries.
For dependency theorists, adherence to financial rules of the game which are
determined by the more developed region is yet a further aspect of how increased
economic (and ideological) integration leads to unequal development. Research on
the performance of the gold standard during the 19th century has indeed
demonstrated the difficulties faced by primary-product export economies such as
Brazil in maintaining a fixed exchange rate.94
Robert Triffin, "The M yths and Realities o f the So-caiied Gold Standard,” op.cit.
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(e) The W hvs and W herefores of Financial Centers
It has been argued that the development of financial intermediaries
"accelerates economic growth and improves economic performance to the extent
that it facilitates the migration of funds to the best user, i.e., to the place in the
economic system where the funds will find the highest social return.1,95 Others
have viewed banking in particular and financial services in general as agents of
growth through the role they play in the stimulation of investment demand.96
Both views have singular implications for regional economic development given the
decided historical tendency which exists for the geographical concentration of
banking and financial services. The former implies an inflow of capital to the
region with the more attractive investment opportunities -- which under many
scenarios entails a passing of funds from less developed to more developed
regions.97 The latter suggests that banks can both serve to preserve investment in
a declining region, through continuing to provide access to industrial credit, or, if
located in an emergent growth pole, can further reinforce the process of cumulative
causation. Under this approach, the successful industrialization experience of
Brazil’s capital city, Rio de Janeiro, at the turn of the century, despite the city’s
Goldsmith, Financial Structure and Development, op.cit.. p. 400.
Rondo Cameron, Ed., Banking and Economic Development: Some Lessons o f History.
op.cit.. Introduction, pp. 22-24; and Banking in the Early Stages o f Industrialization.
op.cit.. see especially chapter by R. Tilly, "Germany, 1815-1870".
Although the reverse can also hold — witness the role o f foreign investment in
infrastructure development in the U.S. and Latin America.

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decline as a coffee port, can be attributed to the concentration of financial capital
in this the nation’s political center, and the corresponding availability of funds for
urban improvements and industrial activity.
If financial market development stimulates the mobilization and allocation of
liquid resources, as Goldsmith argues, what are the regional implications of
financial deepening within a context of increasing returns to scale and endogenous
growth? If we understand that increasing linkages between two regions (including
financial linkages) stimulates economic growth in one region while dampening it in
the other, then increasing the mobility of liquid resources would actually be to the
detriment of the less developed region.98 In such a scenario, "progress" in terms
of increased ease of capital mobility, would simply serve to channel funds more
rapidly from the peripheral region to the center, where rates of return to
investment are higher.
Countering this view is the mainstream argument that national financial
markets make regional developments more even, and that financial flows between
regions are a key variable in adjustment to equilibrium. Operation of the price-
specie-flow mechanism between regions ensures equalization of returns on physical
and financial capital, and the existence of "generalized claims," financial
instruments such as government bonds which are traded nationally, serves to
stabilize regional movements of bank reserves. One can observe a flaw in this
98 Although a positive social return at the national level could easily reflect an average of
disparate regional performances, with growth in the center outweighing decline in the
periphery.
R e p r o d u c e d w ith p e r m issio n o f th e co p y r ig h t o w n e r . F u rth er rep ro d u ctio n p roh ib ited w ith o u t p e r m issio n .

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argument given the persistence in regional differences in ability to attract capital,
based on export performance:
Low export growth [often] tends to mean poor investment prospects

regardless of how much savings is available and is thus more likely
to encourage continued outflows of funds than inflows. By the time
the process raises the return on the remaining capital to that of
capital in other regions, there may be very little economic activity
left."
In short, there is no guarantee that increased mobility of liquid resources will lead
to regional economic convergence.
In addition to the allocative effects of increased mobility of financial capital,
there are geographical implications given the nature of the market for financial
services. Historically, financial institutions have located in urban areas, and have
exhibited a hierarchical structure of concentration wherein one or two cities take on
the role of financial centers for the entire nation. In his monograph, "The
Formation of Financial Centers: A Study in Comparative Economic History",
Charles Kindleberger endeavors to "identify the economies inherent in a central
organization of financial markets and banking machinery, and to show why
financial centers tend to be organized hierarchically with a single center as the
keystone to the arch.”100
Sheila C. Dow, Financial Markets and Regional Economic Development, op.cit.. p. 11.
O p.cit.. p. 5.
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If we focus on the spatial dimension of financial development, it becomes
obvious that financial centers are needed not only for inter-temporal smoothing of
savings and investments, but also to
effect payments and to transfer savings between places. Banking

and financial centers perform a medium-of-exchange function and an
interspatial store-of-value function. Single payments between
separate points in a country are made most efficiently through a
center, and both seasonal and long-run surpluses and deficits of
financial savings are best matched in a center.101
Within this logical framework, the geographical concentration of financial
intermediaries (and therefore reserves) is not the result of economic dependency,
or active imperialism by the center, but rather the efficient (and inevitable)
institutional framework that would result from the operation of market forces. In
short, financial flows take place in an institutional context, of banks, stock
markets, credit organizations, etc., which are subject to economies of scale that
favor geographic concentration.102
Yet, if finance is more than a passive agent, then the geographical
concentration of these financial services is likely to yield a correspondingly
condensed stimulus to demand. In other words, although the clustering of financial
Recent work by Stiglitz and others on the economics o f information, and the performance
o f capital markets given the absence o f perfect information (one o f the assumptions o f neo
classical general equilibrium theory), provides further analytical support for the clustering
o f financial institutions and credit sources as a rational response to the nature o f the
transactions involved in the provision o f credit. Joseph Stiglitz, "Asymmetric Information
in Credit Markets and Its Implications for Macro-economics", Oxford Economic Papers. 44
(4), October 1992, pp. 694-724.
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institutions may be due to internal characteristics of the market for finance, the
resulting linkages between access to finance and real investment will increase the
likelihood that the financial center is also an industrial center.103 Furthermore,
given the importance of governments in shaping the nature and extent of financial
development, it is likely that the site of the financial sector will be influenced by
political events in addition to "pure" market forces.104
The location of the financial center(s) and the development or lack thereof
of national and regional financial markets are intrinsically linked to cities and
systems of cities.105 Not merely the fact of urbanization —the concentration of
people in cities -- but also the type of urban system -- the degree of economic
connectedness among cities of different sizes -- conditions the type of financial
"The more decision-making occurs in head offices in the Centre... the more information
problems are likely to arise in terms o f perceptions o f relative yields, and particularly o f
default risks. Long-term expectations o f bank managers, like those o f entrepreneurs, must
rely significantly on group conventions. The more remote the relevant group is from first
hand information, the more unreliable those conventional expectations will be. Not only
will this concentration in banking lead to more mistakes (in retrospect) in investment
financing decisions, but it will tend to encourage industrial concentration." (Dow, op.cit.. p
19). See also Haber’s work, op.cit.. on this point.
The State is often one o f the most important actors in financial markets. Government
revenue collection, transfer, and deposit, and government debt issue typically occupy a
sizeable percentage o f formal financial transactions in developing countries. Thus, the
choice o f locale for the national political and administrative center can heavily influence the
location o f the financial center, as it clearly did in the case o f Brazil’s capital city, Rio de
Janeiro.
David F. Weiman and Kerry A. Odell, "Regional Metropolitan Development and Financial
Market Integration in the New South," unpublished manuscript presented at the Social
Science History Association in New Orleans, 1991, revised January 1992., p. 4. See also
Kerry A. Odell, "The Integration o f Regional and Interregional Capital Markets: Evidence
from the Pacific Coast, 1883-1913," op.cit.
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markets and institutions which develop.106 In other words, the structure of
national and regional financial markets can actually serve as a mirror of the
underlying urban structure. And in the same way that a mirror left in the sun can
reflect light to channel and direct energy, concentrating diffuse sunlight to laser
beam power, so can access to finance form a critical part of the dynamic process
of regenerative growth that occurs in successful city-economies. This reciprocal
stimulus to urban industrial growth can spring from several factors, including the
provision of commercial credit and facilitation of trade expansion, the pooling of
savings from scattered and diverse sources for investments in infrastructure, and
the increased availability of long-term credit for industrial development.
The metropole function, in which cities provide a clearing-house for
regional movements of goods, is equally important for financial flows, as
the storage of fluid capital is much the same as the storage of

merchandise. It can best be done in the metropolitan centers and
from there be taken out for use where and when desired."107
Metropolitan centers serve thus as clearing houses not only for goods and people,
but also for financial capital. Their role as the centers of exchange for the physical
movements of the factors of production provides them with a key advantage in the
provision of financial services —access to information. The confluence of external
economies in the circulation of information, and the inherent information
Weiman and Odell, op.cit.. pp. 4-5.
Gras, An Introduction to Economic History. (New York and London: Harper & Brothers,
1922), as quoted in Weiman and Odeil, op. cit.. p. 6.

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asymmetries in the provision of credit, leads to the clustering of financial activities
in precisely those areas where the real economic action is —creating a virtuous
circle of regenerative growth, and at times, as in the case of Rio de Janeiro during
the First Republic, generating a dynamic services-oriented economy which outlasts
the "real" economic dominance of the region in question.
(iiil Implications o f the Institutional Context
The above discussion on cities, finance, and the role of the state has
revealed the salutary effects which mature development of a system of cities, and
financial deepening can have on regional growth. As already acknowledged, the
separation between economic and institutional factors in determining patterns of
regional growth is quite artificial. In fact, bringing to bear institutional factors can
aid in understanding some of the seeming contradictions among the various models
which were summarized in Table 1.1.
Specifically, recall the range of interpretations regarding the role of exports
in stimulating regional growth. Dependency theorists argue for the crippling
effects of over-reliance upon primary product exports, staple theorists extol the
backward and forward linkages which healthy exports can generate, and the post-
Keynesians argue that exports, if manufactured, can contribute to an
insurmountable lead vis-a-vis less developed regions.
Evidence can be found for all three views within the 19th century Brazilian
experience. The Northeast of Brazil has provided a classic case study for
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dependency theorists, as a region where economic dependence upon a monoculture
agriculture and primary-product exports (first to other countries, and then within
Brazil), stunted regional growth, and thwarted possibilities for economic
diversification.108 However, the Southeast of Brazil was also a primary product
exporter, and in contrast to the Northeast, a boom in coffee did generate positive
linkages, and a diversified regional economy. Furthermore, the coincidence of the
coffee boom with the advent of the technologies conducive to industrial
development, in support of the post-Keynesian view, allowed the Southeast to keep
and maintain its advantage relative to the Northeast of Brazil, as the industrial
center of the country took root in that region.
The divergent development paths of the Northeast and Southeast of Brazil,
despite the fact that they each started from a primary product export base, can be
attributed to differing institutional context. In the Southeast, the status of Rio de
Janeiro as administrative and financial capital, the ability of Brazilian middle-men
to gain control of certain aspects of the coffee trade due to competition between
foreign importers, and the existence of a relatively competitive labor market,
fostered the emergence of a dynamic system of cities which spawned local
commerce and industry in a virtuous circle of growth and diversification. These
factors were lacking in the Northeast. Preservation of the export-base served to
reinforce the region’s role as a "supply-region". And exports alone, without an
108
See Andre Gunder Frank, Capitalism and Underdevelopment in Latin America, op.cit..,
part II.

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underlying system of cities, financial depth, an industrial base, or widespread local
demand, were not sufficient to stimulate dynamic regional development. In the
chapters that follow, I explore in more detail the origins of this regional divide,
and the factors which have contributed to its persistence.
CHAPTER TWO: CHARTING THE ARCHIPELAGO;
REGIONAL PATTERNS IN URBAN-INDUSTRIAL DEVELOPMENT
II. 1 Introduction
In the fifty year period between 1870 and 1920, Brazil underwent a series
of demographic, economic, and political changes which transformed the country.
Population increased three-fold, from about 10 million in 1872 to roughly 30
million in 1920. Cargo-carrying steamships entered into regular service in the
South Atlantic during the 1870’s, halving the cost of transport, regularizing
deliveries, and expanding the range and volume of goods that could be traded.
Underseas cables were built across the Atlantic, connecting Brazil’s port cities with
Europe, and indirectly with the United States, reducing information costs and
facilitating the supply of commercial credit. Installation of telegraph and telegram
capacity, railroads, and eventually, telephones, served not only to strengthen
Brazil’s links with the rest of the world, but to further the ties between the regions
of the vast sub-continent. While population remained clustered along the Atlantic
Coast1 (with the important exception of Minas Gerais), the demographic center of
See Figure 1.1.
- 81 -
-8 2 -
the country shifted from the Northeast to the Center-South region. Throughout the
period the nation remained a demographic and economic archipelago, with both
population and the principal industrial, commercial, and financial activities
concentrated in the principal port cities and state capitals. However, there was a
growing regional divergence in the pattern of urban-industrial growth, which
although stimulated by differences in regional export performance, was propelled
and reinforced by internal market developments.
In this chapter, I demonstrate the relative economic decline of the
Northeastern region of Brazil which occurred during the last quarter of the 19th
century. Analysis of evidence on demographic movements, industrial
concentration, and the evolution of urban systems confirms the emergence of a
growth pole in the Center-South of the country, and the concomitant stagnation of
the Northeast. Demographic and economic growth in the Southeast was not only
more rapid, but distributed more evenly in space via the growing system of cities
and towns which emerged during this period. In contrast, in the sugar-economy of
the Northeast of Brazil, the traditional primate pattern of urban growth continued
to hold sway, with large port cities surrounded by a vast rural hinterland, and little
urbanization within the region’s interior. In short, the more things changed in the
Southeast of the country, the more they stayed the same in the Northeast.

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H I.2 Beginnings o f a Growth Pole
Sometime between the time of the first nation-wide census in Brazil carried
out in 1872, and the dawn of the 20th century, the economic and demographic
center of Brazil travelled South. Figure 2.1 illustrates this shift via the evolution
of the regional distribution of Brazilian population between 1872 and 1920.2 The
regions in Brazil are delimited by existing political boundaries, and are the official
macro-regions observed by the Brazilian Government. The Northeast region
occupied roughly 20% of the Brazilian territory in 1920, and was made up of 9
states (Alagoas, Bahia, Ceara, Maranhao, Paraiba do Norte, Pernambuco, Piaui,
Rio Grande do Norte, and Sergipe). The Southeast accounted for about 12% of
Brazilian acreage, and was made up of 4 states (Espirito Santo, Minas Gerais, Sao
Paulo, and Rio de Janeiro), and the Federal District (city of Rio de Janeiro). The
South, comprising the states of Parana, Santa Catarina, and Rio Grande do Sul,
accounted for 6.3% of Brazilian territory, while the North and Central West
combined covered more than 60% of total acreage in Brazil with their five states
(North —Para, Amazonas, Territorio de Acre, Center West —Matto Grosso,
Goias).
All data in this section, unless otherwise noted, are from the Brazilian National Censuses
carried out in 1872, 1890, 1900, and 1920. G. Mortara, "O Aumento da Populagao do
Brasil entre 1872 e 1940", in "Pesquisas sobre o desenvolvimento da populagao do Brasil",
Estudos de Estatfsticas Teorica e Aplicada, Rio de Janeiro, 1951, presents a methodological
discussion summarizing the quality o f the data and the caveats involved in making
intertemporal comparisons.
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In 1872 the Northeast was home to nearly half of Brazil’s 10 million
inhabitants. By 1920, although population in the Northeast continued to grow in
absolute terms, the region’s percentage share of the now 30 million residents of
Brazil had dropped by more than one-quarter to roughly 37% of the nation’s
population. The Southeast and the South more than made up for the ground lost
by the Northeast, with the Southeastern region’s population more than tripling from
about 4 million in 1872 to nearly 14 million in 1920. The Brazilian South saw the
largest increase in population, in both absolute and relative terms, as the region
became the preferred destination for European immigrants to Brazil. Also gaining
in its share of total national population was the rubber economy of the North. In
fact, all the Brazilian regions with the exception of the Northeast, and the sparsely
populated frontier region of the Center-West witnessed an increase in their share of
a growing demographic pie. The Northeast, once the most populated region of the
country, entered into decline, as the half century between the 1872 and 1920
censuses witnessed a significant shift southwards in the demographic center of the
country (See Table 2.1).
The following discussion focusses on comparing and contrasting Brazil’s
Northeast and Southeast, regions which consistently accounted for the lion’s share
of population over the period of study. While the South, the Amazon region of the
North, and the Center-West all have their distinctive economic histories, and have
been the subject of rich regional studies, their stories lie outside the scope of this
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work.3 This analysis is not meant to serve as a comprehensive account of
Brazilian regional development, but rather to demonstrate the shift of the center of
economic activity and dominance from one region (the Northeast) to another (the
Southeast). This shift did not occur solely as a result of economic and
demographic changes within each region, but rather as a result of each region’s
changing relationship to the rest of Brazil, and to the international economy. In
the following two sections, the Northeast’s role as a net exporter of labor (to the
North of Brazil) during the period in question will be revealed, as will the
concentration of foreign immigration and industrial activity in the Southeast of the
country.
(ft Population M ovements
The Southeast of Brazil became increasingly urbanized over the course of
the 19th century, in contrast to the Northeast which saw a fall in the share of
Regional histories o f the Amazon region include: Barbara Weinstein, The Amazon Rubber
Boom, op.cit. and M aria Lfgia Coelho Prado and Maria Helena Rolim Capelato, "A
Borracha na Economia Brasileira da Primeira Republica", Chapter 3 in H istoria Geral da
Civilizacao Brasileira. ed. Boris Fausto. Part HI: O Brasil Republicano. Volume I.
Estrutura de Poder e Economia Cl889 - 19301. (Sao Paulo: DIFEL, 1985). Political and
economic histories o f the southern region o f Brazil include: Joseph Love, "O Rio Grande
do Sul como Fator de Instabilidade na Republica Velha", Chapter 2.3 in Historia Geral.
m.l. op.cit.. Pedro C. Dutra Fonseca, Rio Grande do Sul: Economia e Conflitos Politicos
na Repiiblica Velha. (Porto Alegre: Mercado Aberto, Serie Documenta 18, 1983), and
Joseph Love, Rio Grande do Sul and Brazilian Regionalism. 1882-1930. (Stanford, Cal.:
Stanford University Press, 1971).

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population residing in the capital cities.4 In 1872, at the time of the first nation
wide census in Brazil, in addition to greater overall share in national population,
the Northeast showed a slightly higher urbanization rate than the Southeast, with
9.2% of the population living in provincial capitals as opposed to 8.8% in the
Southeast. By 1920, the situation had reversed, and in fact, the Northeast
experienced a de-urbanization, with the share of population residing in capital cities
dropping to 7.9%. In contrast, concentration in capital cities grew tremendously in
the Southeast —by 1920 nearly 15 % of the region’s population were residents of
the state capitals. And, as will be shown in the third section of this chapter, urban
development in the Southeast region was much more pervasive than in the
Northeast, with the Southeast being home to a greater number of cities, a wider
spectrum of city size, and a greater number of urban residents overall.
Other evidence of the Northeast’s relative decline can be found in the
comparison of average literacy rates in the two regions. At the time of the 1872
census 15.6% of the Northeastern population was classified as literate, as
compared to 14.7 % in the Southeast. By 1920, reported literacy in the Northeast
had barely increased, with census figures showing 16.9% of the population able to
Prior to 1940, Brazilian censuses did not distinguish between rural and urban populations,
with the exception o f noting the population o f state capitals. Common practice for scholars
has been to use the percentage o f population living in the capital cities as an indicative
(underestim ate o f the extent o f urbanization within each state (and hence, region). In the
third section o f this chapter, additional criteria for defining urban areas will be developed,
allowing a more complete analysis o f urban networks.

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read and write. In contrast, average literacy in the Southeast had nearly doubled,
with 28% of the population counted as literate by 1920.
Much of the Center-South’s relative gain in literacy can be explained by the
clustering of foreign immigration in that region, with literacy rates among foreign-
born roughly twice that of native Brazilians. More than 93 % of the foreign bom
(including those who had assumed Brazilian citizenship —available upon request
after the proclamation of the Republic in 1889) resided in the Southeast and the
South of Brazil by the time of the 1920 census (78% in the Southeast and 16% in
the South). This contrasts with the relative paucity of foreign immigration to the
Northeast, with less than 2% of the some 1.6 m illion foreign bom residing in this
region in 1920.
Variation in regional labor markets and the degree of local governments’
proactive stance in support of immigration played a key role in determining
migration patterns as did differences in climate and perceived cultural differences
between the various regions of Brazil. The absence of foreign immigration to the
Northeast of Brazil has been explained by the region’s poor economic performance
and the corresponding perceived lack of opportunity for personal advancement by
potential immigrants; the relative abundance of agricultural labor in the region, as
modernization of the sugar industry was based upon labor-saving technology; the
lack of political support by planter elites for immigration; and finally, the absence
of available fiscal resources for the provision of immigrant subsidies (an important
pull factor in the Southeast). Even if demand for immigrant labor had existed,

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under the fiscal federalism of the First Republic, there was little budgetary scope
for the regional governments to meet such demands.5 The concentration of
immigrants in the Southern half of the country was further reinforced by the
tendency of immigrants to migrate towards regions where their compatriots had
already settled. Due to these and other factors which lie outside the scope of this
work, the importance and composition of foreign immigration differed by region.
Evidence on average literacy rates suggests that the arrival (or absence) of foreign
immigrants in Brazil clearly altered not just the quantity, but the quality of the pool
of human capital available, thus providing a reinforcing element in the ongoing
process of regional divergence.
In the Northeast, foreign immigration was both less significant in
quantitative terms and more concentrated in urban centers. In 1920, the Census
counted roughly 27,000 foreign-born in the region, less than one percent of the
total regional population. More than four-fifths of these non-native Brazilians were
located in the capital cities, where they exhibited significantly higher literacy rates
than their Brazilian-born counterparts (foreign-born literacy rates of 85 % versus
47% for native-born residents). Census data on professional status confirm that the
bulk of immigration to the Northeastern region was an elite immigration. Foreign
migrants provided businessmen, bankers, and commercial agents to the
metropolitan international export centers, with one-third of the foreign-born
5 F or a synthesis o f the various arguments concerning the absence o f foreign immigration in

the Northeast o f Brasil see Peter L. Eisenberg, "Falta de Imigrantes: Um Aspecto do
Atraso Nordestino", Revista de Historia. (Sao Paulo), 46(94), Abril-Junho, 1973.
-8 9 -
occupying banking and other commercial professions in 1920. Despite their
negligible weight in the total regional population, expatriates accounted for about
one-tenth of the merchants, insurance-agents, and bankers in the Northeast.
The Southeastern region was the recipient of many more immigrants from
abroad, with the 1920 census counting more than one million foreign born out of a
total regional population of 13.6 million, or roughly 10% of the total population.
However, unlike the Northeast, many of these immigrants settled outside of the
state capitals, with only 38% of foreign-born residents located in the capital cities -
- indicative of both the use of immigrant labor on the coffee plantations and the
existence of a dense urban network outside of the capital cities. Immigrants
accounted for a sizeable percentage of the industrial labor force. In 1907 foreign-
born workers accounted for more than one-quarter of the industrial workers in the
Federal District, and in the major industries accounted for almost half of the work
force.6 Thus, in contrast to the Northeastern region, foreign immigrants to the
Southeast occupied a wide range of economic occupations, with less than 10
percent of the foreign-born in commercial or banking professions. Like the
Northeast, however, immigrants played an important role in the commercial sector,
accounting for more than 40 percent of the Southeast’s merchants and bankers.7
6 Diretoria Geral da Estatistica, Boletim Comemorativo da Exposicao Nacional. 1908 (Rio de

Janeiro: Tipografia da Estatistica, 1908).
7 Eugene W. Ridings, "Class Sector Unity in an Export Economy: The Case o f 19th
Century Brazil", Hispanic American Historical Review. 58 (3), 1978, 432-450, chronicles
the importance o f immigrant leadership in the commercial associations o f 19th century
(continued...)
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Contrary to assertions made that international immigration in some sense
"substituted" for internal population movements, and the view that there was
limited mobility of labor between regions in Brazil, research by Graham and
Buarque de Hollanda Filho using intercensus survival estimates in Brazil has
revealed that internal migration, particularly from the Northeast to the North of the
country, was in fact fairly significant.8 The growing regional divide in economic
performance which emerged during the second half of the 19th century in fact
owed much to divergent migration patterns. Interregional migration from the
Northeast to the North served to channel labor from a declining export economy to
a (briefly) booming one. In the South and Southeast, foreign immigration was the
dominant source of new population arrivals, while in the North and Northeast,
movements of native-born Brazilians across state borders were the major sources of
regional demographic change. Thus, interregional migration did occur, but
primarily in the Northern half of the country. Northeastern laborers did not
migrate southwards due to the availability of economic opportunities closer to
home and the high costs of passage down the coast.
7
'(...continued)
Brazil.
8 All data on internal immigration patterns has been drawn from the comprehensive study
done by Douglas H. Graham & Sergio Buarque de Hollanda Filho, Migration. Regional
and Urban Growth and Development in Brazil: A Selective Analysis o f the Historical
Record -- 1872 - 1970. Sao Paulo: Institute de Pesquisas Economicas, Universidade de
Sao Paulo, 1971.
-9 1 -
Interestingly, the only group whose migration did not benefit from paid
passage by either the public or private sector was Northeastern immigrants to the
Southeast of Brazil. State governments of the Southeast, particularly Sao Paulo,
provided funds to cover immigrant passage from Europe, the establishment of state
recruiting agencies in Europe, and public provision of immigrant hostels and
employment agencies. Rubber concerns from the Amazon region actively recruited
within the Northeast, offering paid passage to workers willing to go tap rubber,
and during the years prior to abolition when the interregional slave trade resulted
in the transfer of more than half of the Northeastern slave population to the ever
more prosperous Southeast, the cost of passage was included in the slave’s
purchasing price.9
Table 2.2 illustrates the extent of movements of domestic and foreign-born
populations for the Northeast and Southeast during the three intercensus periods
1872 - 1890, 1890 - 1900, and 1900 - 1920. The Northeast served consistently as
a region of out-migration, first supplying migrants to the North, later to the South,
and still later to the Central West frontier regions. The Southeast, with the
In addition to having to pay their own passage costs, potential northeastern migrants to the
southeast faced higher costs than did the slaves shipped south earlier in the century.
Special low-quality accommodations were available for slaves shipped from the
northeastern ports to Rio de Janeiro; the charge for their transportation was approximately
half the level o f that for free passengers. (Nathaniel Leff, "Economic Development and
Regional Inequality: Origins o f the Brazilian Case", Quarterly Journal o f Economics.
(May, 1972) 86(2): 243-262. On state subsidies to immigration in the Southeast, see
Thomas Holloway, Immigrants on the Land: Coffee and society in Sao Paulo. 1886-1934.
(Chapel Hill: The University o f North Carolina Press, 1980). For description o f labor
recruitment in the Northeast by Amazon rubber concerns see Barham and Coomes, "Wild
Rubber ..." , o p .cit.. pp. 47-48.
-9 2 -
exception of Sao Paulo was at first of minor, then later of major importance in also
exporting population to the moving frontiers of the South and West. Sao Paulo
and Parana grew as centers of in-migration during this period (see also Table 2.3).
In short, while less significant overall than foreign migration, inter-regional labor
mobility did play an important role in domestic labor markets. The Northeast was
the principal domestic supplier of labor for the rest of the country, and the primary
source of labor for the Amazon rubber boom.10 For the South and Southeast,
however, inflows of foreign workers dwarfed movements of the local population.
In addition to augmenting the industrial labor supply, immigrants, at least in
southern and south-eastern Brazil, played an important role in expanding the
market for manufactured goods. The expansion of a wage labor force within the
coffee economy, in contrast to the relative self-sufficiency of the sugar plantations
in the Northeast, contributed to a growing demand for local manufactured
goods.11 Immigrant workers were not only paid wages and allowed to sell their
produce, but they aimed at maximizing their incomes rather than self-sufficiency.
Additionally, immigrants, as opposed to slaves, or agricultural laborers in the
Northeast, had traditional consumer preferences, market incentives and the
disposable income to purchase many of their necessities —clothing, basic
10 See Barham and Coomes, "Wild R ubber...", op.cit.. pp. 47-48 on immigration from the
Northeastern state o f Ceara to the Amazon region.
11 Regional differences in the transition to free labor are discussed in Chapter Three, Section
4(ii) "Sugar and Coffee: Urban/Agrarian Structure o f Pernambuco and Sao Paulo," which
highlights the limited growth in market demand offered by the labor market conditions of
the Northeastern sugar economy.
-9 3 -
household goods, furniture, building materials, beer, etc.12 The locational
characteristics of the Brazilian firms which produced these goods are analyzed
below, and the shift in the industrial center to the Southeast of the country
confirmed.
(ill Spatial Contours o f Industrialization
During the second half of the 19th century the geographical distribution of
industrial activity evidenced a shift in concentration from the Northeast to the
Southeast of Brazil. Table 2.4 demonstrates this shift for the cotton textile
industry, which was the dominant industrial sector in 19th and early 20th century
Brazil.13 In 1866 two-thirds of Brazilian cotton mills were located in the
Northeast; by 1885 the number of cotton textile mills had increased more than five
fold (from 9 to 45), and the Northeastern region was home to less than one-third of
these establishments.
By 1907, when the first industrial census was taken in Brazil by the Centro
Industrial do Brasil, the concentration of industrial activity in the Southeast of the
country had become marked. Within the textile industry, three-quarters of total
Warren Dean, "Economy", pp. 217 - 255, in Leslie Bethell, ed., Brazil: Empire and
Republic. 1822 - 1930. Cambridge History o f Latin America. Cambridge University Press,
1989, pp. 245-246.
By 1907 the textile industry accounted for over forty percent o f the total capital invested,
more than one-fifth of the value o f total production and employed more than one-third o f
the industrial work force in Brazil. (Centro Industrial do Brasil, O Brasil: Suas Riauezas
Naturais: suas industrias. (Rio de Janeiro: M. Orosco, 1908-1909), Vol. 2.
-9 4 -
production came from the Southeast. And, of a total industrial output valued at
US$207 million equivalent14, more than two-thirds originated in the Southeast.
The Southeast of Brazil employed the majority of workers in the nation’s industrial
sector, through a greater number of smaller firms. (See Table 2.5).
The abolition of slavery in 1888 had the combined effects of augmenting the
pool of circulating capital and increasing the availability of low-skilled labor and
off-farm demand. Together with the acceleration of capital accumulation in the
coffee-producing region due to booming exports and the region’s near monopoly of
world production; the sporadic liberation of capital in periods of overproduction
when further expansion of coffee groves was prohibited; the skills and expertise
brought by foreign immigrants; and a growing local demand, the conditions were
ripe for expansion of local industry.
Between the time of the 1907 industrial census and the industrial census
included in the general national census of 1920, industrialization in Brazil was well
underway.15 Total industrial output increased by more than 200 percent, from
At the 1907 exchange rate, as presented in Appendix 1 o f Public and Private Operations of
Railways in Brazil, by Julian Smith Duncan, (New York: Faculty o f Political Science,
Colombia University, 1932).
The exact timing o f Brazil’s first industrialization surge is heavily debated in the literature.
The two opposing views are best laid out in F. Versiani, "Industrial Development in an
Export Economy, the Brazilian Experience before 1914," Journal o f Development
Economics 7: 3 (September, 1980), pp. 307-329 and Albert Fishlow in "Origins and
Consequences o f Import Substitution in Brazil," in Essays in Honor of Raul Prebish. L.E.
Di Marco, ed. (New York: Academic Press, 1972). Versiani argues that the first
industrial surge took place during the 1880’s principally as a result o f changes in tariff
policy at the end o f the empire. Fishlow’s opposing argument presents import data on
industrial inputs to demonstrate that industrialization in Brazil only took off after the
(continued...)

-9 5 -
slightly over US$200 million equivalent in 1907 to US$628 million equivalent in
1920.16 The number of firms mushroomed, growing from slightly under 3000 to
more than 13,000 in 1920, while the industrial work force more than doubled from
approximately 136,000 in 1907 to 276,000 in 1920. In general, industry became
more capital intensive (as measured by the capital-output ratio), and output per
worker increased. Estimates of industrial capital formation support the census
data, and reveal the extraordinarily high levels of capital formation observed in
Brazil, principally during the period 1901 - 1913. As Figure 2.2 illustrates, all
three measures (cement consumption, steel consumption, and the index for
importation of capital goods), increased dramatically during the period 1901
through 1913.17
The census data provide mixed evidence concerning the cumulative
causation hypothesis when examined at the regional level. Returning to Table 2.5,
^(...co n tin u ed )
promulgation o f the First Republic and asserts the sanguinary effects on industrial
investment caused by the financial tumult known as the Encilhamento. There seems to be
some consensus, however, that industrialization during Brazil’s First Republic took place in
three distinct stages: 1880’s through 1897/1900, characterized by wide expansion and
financial speculation; 1900 - 1914, with an initial stagnation brought on by austere financial
policies followed by an expansion until 1914; and 1914 - 1918, which due to the First
W orld War, witnessed the initiation o f import-substitution industrialization in Brazil.
16 Figures on industrial production are taken from a comparative table published in the 1920
census, where the 1907 data excludes sugar mills and salt refineries. As such, the growth
in the value o f industrial production is slightly exaggerated, and regional estimates are
skewed to the extent that these activities were concentrated in the Northeast. (In particular,
increases in production for the Northeast are probably over-estimated).
17 Data for Figure 2.2 come from Villela and Suzigan, Politica do Govemo e Crescimento da
Economia Brasileira. 1889 - 1945. op.cit.. Table HI.5, p. 131. Figures for steel
consumption are exclusive o f imports o f railroad tracks.

-9 6 -
we see that industrial concentration in the Southeast continued to deepen through to
1920, with the share of total output increasing (from 61.4% in 1907 to 68.0% in
1920) and the share of total capital also increasing slightly (from 64.7 % to
66.5%). However, the Northeast, although losing ground in its share of national
production, was not immune to the process of industrial expansion and
technological advance. The region witnessed the addition of more than 2000 new
firms, a doubling of the total industrial work force, an overall drop in average firm
size from 91 workers to 24 workers per firm, a 23% increase in the capital-output
ratio, and a 48% increase in output per worker.
In the Southeast, a similar, and for the most part, more intensive process
was underway: More than 5,800 new firms were added to the industrial census
between 1907 and 1920, and the work force grew by nearly 100,000 laborers (an
increase of 124%). While the capital-output ratio increased more than that of the
Northeast (a 42% increase compared to the 23% increase in the Northeast), the
average value of output per worker did not show as great a relative increase (34%
as opposed to 48% in the Northeast). Interestingly, some convergence occurred in
average firm size and capital intensity, with both regions employing on average 24
workers per firm by 1920, and the average amount of capital invested per worker
levelling out at about 4 contos (approximately US$1000 equivalent), in each
region.18
18 Note that a decline in the average number o f workers per establishment may represent a
retreat to handcraft production rather than a capital intensification. The data presented
(continued...)
-9 7 -
The existing census data, clearly illustrate the concentration of industrial
activity in the Southeast of Brazil. As industry expanded in both regions, the
census data do not clearly indicate which region observed the faster growth.
Growth rates for the value of industrial output in the Southeast between 1907 and
1920 of 235% fell below the 256% growth observed in the Northeast. On the
other hand, the value of the capital stock in the Southeast increased 118% as
compared to the 74% increase in the Northeast. Therefore, taking account of the
lack of strict comparability between the two data sets which produces a significant
upward bias in growth estimates for the Northeastern region (due to the inclusion
of the sugar industry in 1920), the case for more rapid growth in the Southeast is
strengthened. A more detailed look at the sectoral distribution of industrial
activity, and analysis of the locational concentration by sector of industry, sheds
further light on regional differences in manufacturing.
In order to determine the extent of industrial clustering an examination was
made of locational Gini coefficients for the major industrial groups delineated in
the 1920 census. For each of the locational units in the sample (in this case, states
of Brazil), I calculate the share of total national industrial employment as well as
^(...co n tin u ed )
above mask the overall lack o f technological advance in Brazil -- although large,
industrialized concerns did exist (predominantly in the Southeast, companies with 500 or
more workers accounted for 36.4 per cent o f the work force in the state o f Sao Paulo, and
35.7% in the Federal District), they shared the manufacturing stage with a great number of
small, handcraft, establishments. At the time o f the 1920 census, the average worker
applied just 1.1 horsepower to his or her job. Moreover, 10 percent o f the factory work
force was employed in firms with no more than four workers. (Dean, "Economy", op.cit..
pp. 246-7).

-9 8 -
the state’s share of national employment in that particular industrial group. The
states are then ranked by the ratio of these two numbers (which is known in the
literature as the location quotient). Finally, I run down the ranking, keeping a
cumulative total of both the sum of total employment share and the sum of
employment share in the industry. This cumulative sum (usually measured with
respect to income share) is known as the locational Gini coefficient. The
interpretation of the locational Gini coefficient is as follows: An industry that is
not localized at all, but whose geographic distribution reflects that of the overall
distribution of employment, would have an index of 0; one that is concentrated
almost entirely in a region with small overall employment would have an index
close to 1 -- e.g. the only place in the country where a certain good was
manufactured, and nothing else was manufactured in that place.19
Table 2.6 provides information on the locational Ginis for the major
industrial groups delineated in the 1920 census. The industrial groups are
presented in order of their degree of concentration. The third column of the table
indicates the four states for each industrial group which evidenced the highest
relative concentration in the industry (as measured by the location quotient, or ratio
of employment share in the industry to share of total national employment). For
each of these states, the percentage share of national employment in the industry is
indicated in parentheses.
19 See Paul Krugman’s Geography and Trade op.cit.. p. 54-59. The formula for the Gini
coefficient can be found in The New Palgrave: A Dictionary o f Economics, o p .cit.. Vol.
3, p. 531.

-9 9 -
The first type of question to be asked of Table 2.6 is what sort of industries
are highly localized? The evidence presented suggests that localized industries in
Brazil at the time of the 1920 census were more likely to be "high-technology"
industries, use highly-skilled workers and/or be dependent upon locationally
specific agricultural inputs. Those industrial groups which were relatively less
concentrated included soap, ceramics, textiles, and foodstuffs -- basic consumer
goods industries which had simple technologies and did not demand highly skilled
labor, known in the literature as "footloose" industries. At the other end of the
spectrum we see the fuel and lighting industry, scientific and artistic products
(including photographic equipment and musical instruments), hides and leather
products, and wood and paper products.20
With the exception of the foodstuff industry, all industry groups have a gini
coefficient greater than .5, i.e., are relatively concentrated. The aggregation of
specific activities into overall groups no doubt contributes to the observed
concentration, as the greater overall industrial activity in the Southeast for the
aggregate group may distort the count of specific activities which are more widely
dispersed than the group’s average.21
20 See Table 2.7 for data on capital-output ratios, composition o f capital, and ratio o f
unskilled laborers to managers for each industrial group, which with the major exception o f
the cotton textile industry, arguably the only sector serving a domestic mass market,
corroborate the above statement.
21 Krugman, Geography and Trade, op.cit.. Appendix D, mentions the same problem o f
aggregation. The prevalence o f concentration is consistent with his findings for the United
States, which for 106 three-digit industrial groups surveyed found 64 to be relatively
concentrated.
R e p r o d u c e d with p e r m issio n o f th e co p y r ig h t o w n e r . F u rth er rep ro d u ctio n p roh ib ited w ith o u t p e r m issio n .

-1 0 0 -
The third column of Table 2.6 lists the four states where the location
quotient for each industrial group is highest. Surprising at first glance is the
number of states with low total employment which exhibit high indices of industrial
concentration (as revealed by the high ranking in terms of location quotients
combined with the low share of total employment in the industry). This
phenomenon can be explained by both the relative diversity of production in the
industrial centers of the Southeast as well as the limited role of manufacturing
outside of the Southeast and urban centers of the Northeast. In these marginal
areas (such as the North and Northwest) which have an extremely small share of
total industrial employment, each firm counts extremely heavily when calculating
the location quotient. One furniture manufacturing firm in the Territory of Acre,
for example, counts as a big fish in a small pond when calculating the location
quotient for Acre.
The Federal District and Sao Paulo, the largest employers in the country,
also were home to the greatest number of highly concentrated industries —five
each.22 These industries appear to be more capital (physical or human) intensive
(fuel and lighting, metal and metal products, science, arts, etc.), serve entrepot
functions (shipbuilding, metals and metal products) and/or are early manifestations
of mass market production (ceramics, clothing and footwear).23 Table 2.8
As measured by both a Gini coefficient for the industry greater than .5 and a state location
quotient for the industry in the top four.
Indicators o f capital intensity by industry group are shown in Table 2.7.
-101-
presents a summary of those states which do show a correlation between industrial
concentration and employment share. I thus attempt to exclude those states with
overall low levels of employment and thus artificially high location quotients.
Included in Table 2.8 are those states which had a greater than 10% share of
industry employment and were present in the top four states in terms of location
quotients. Of the seven states which match this criteria, only one is in the
Northeast —Pernambuco. Thus, when the sample is limited to states with a
minimum share of total national employment (to avoid the big fish in the small
pond phenomenon), the depiction of industrial concentration in the southern half of
Brazil becomes even more stark.
The Southeast of Brazil, in addition to dominating in the number of firms
and total industrial output, was also the center of industrial innovation, as
evidenced by the distribution of patent activity. Of the 222 patents awarded in
1890, only 8 were awarded to inventors from the Northeast, 107 to residents of the
Federal District, 26 to paulistas (residents of Sao Paulo), 9 to residents of other
Southeast and Southern states (Rio de Janeiro, Minas Gerais, and Rio Grande do
Sul); and the remaining 72 were awarded to foreigners. Similar patterns were
observed throughout the 1890’s. Consistently, more than 60% of patents were
awarded to inventors from the South and Southeast of Brazil, with most of the
remaining awards going to foreigners, and never more than 5 % of the awards
-102-
going to the Northeast.24 This evidence on the coincidence of industrial activity
and the advent of "new work", provides support to the endogenous growth and
innovation models discussed in the previous chapter.
Figure 2.3, providing a mapping of cotton growing and manufacturing areas
in 1910, illustrates the divergent spatial patterns of cotton manufacture (generally
indicative of overall industrial activity) observed in the Northeast and Southeast of
Brazil. The Northeast, despite its extensive acreage devoted to cotton growing
(cotton lands are marked by the dashed lines in the map), had relatively few cotton
mill towns, most of which clung to the coast. In contrast, the Southeastern region
(spanning Minas Gerais down to Sao Paulo), contained not only more mills, but
observed a more even spatial distribution of these concerns throughout the region’s
interior. Of the five cotton mill towns labelled by the map-maker as "large", three
of them were in the Southeast. In the Northeast, the two large cotton mill towns
were also the principal port cities of the region -- Bahia and Recife. In the
Southeast, large urban/industrial centers emerged distinct from the hierarchy of
port cities —neither Sao Paulo nor Petropolis (in the state of Rio de Janeiro), two
of the three "large cotton-mill towns", are port cities.
The evidence so-far examined thus confirms that the spurt of industrial
activity which occurred in Brazil at the turn of the century did not occur evenly
Relatorios o f the Ministerio da Industria, Viagao, e Obras Publicas, 1891, 1892, and 1895.
The patent listings, unfortunately, did not provide residence information disaggregated
beneath the state level, so it is not possible to determine whether innovation occurred in the
state capitals, smaller cities, or rural areas.

-1 0 3 -
throughout the country. While there was some industrial expansion in the
Northeast, the real boom in manufacturing took place in the Southeast of Brazil.
Industries which represented the technological frontier of the time chose to locate
in this region, there was more patenting, and a greater penetration across space of
industrial concerns.
The literature on cities and economic development reviewed in Chapter One
suggests that industrialization and innovation is more likely to occur in urban
centers. If so, the spatial contours of urbanization should underpin the uneven
regional distribution of industrial activity. Fundamental to these models is the
conceptualization of cities, as places where external human capital, or
agglomeration economies, generate knowledge spill-overs and a dynamic learning
environment where the positive externalities of firm-level innovations are quickly
realized, and built upon, by others.
In the following section, rank-size analysis of Brazilian cities during the
First Republic reveals the divergence in the pattern of urban development of the
Center-South and Northeast of Brazil. The emergence of a network of cities of
various sizes, related in an evenly distributed hierarchical pattern in the Southeast
of the country is contrasted with the relative absence of small and medium sized
cities in the Northeast of Brazil. And, it is precisely in these small and medium
sized cities where much of the commercial and industrial activity took place.

-1 0 4 -
n.3 Urban Systems and Rank-Size Distributions o f Brazilian Cities
The existing literature on historical urbanization patterns in Brazil falls into
two broad camps: Macro studies which cover the period post-1940, the year in
which the Brazilian census-takers first distinguished between urban and rural areas;
and more heuristic historical case studies for the period prior to 1940, for which
the census data distinguished urban areas only insofar as they provided separate
tables on populations living in the provincial/state capitals.25
The received wisdom, as reflected in the standard economic history texts,
asserts that the Southern and Southeastern regions of Brazil witnessed a spurt of
urbanization during the second half of the 19th century and the early 20th century,
encompassing an increase in the number of cities as well as the size of existing
cities, which far surpassed urban developments in the Northeast of Brazil. A
reclassification of Brazilian census data allows me to examine some elements of
these differences in regional urban development for the census period 1919/1920.
Examples o f the macro studies include: Geiger, Pedro Pinchas. Evolucao da Rede Urbana
Brasileira. o p .cit.. and W erner Baer, Pedro Pinchas Geiger & Colaboradores.
"Industrializaqao, Urbanizaqao e a Persistencia das Desigualdades Regionais do Brasil”,
Revista Brasileira de Geografia. No 38, no. 2, 1976, pp. 3 - 129; Historical case studies
include: Afonso Arinos de Melo Franco, Desenvolvimento da Civilizacao Material no
Brasil. Second Edition. Rio de Janeiro: Conselho Federal de Cultura, 1971); Gadiel
Perruci, "A Cidade do Recife (1889-1930): O Crescimento Urbano, O Comercio e A
Industria", in A Cidade e a H istoria. Volume I, Anais do VII Simposio Nacional dos
Professores Universitarios de Historia, 7th, Belo Horizonte, Brazil, 1973, pp. 577 - 600,
Elizabeth Kuznesof, "The Role o f the Merchants in the Economic Development o f Sao
Paulo: 1765-1850," Hispanic American Historical Review. 60(4): 571-593 (November,
1980), Richard M orse, From Community to Metropolis: A Biography o f Sao Paulo.
(Gainesville: University o f Florida Press, 1958), and Paul Singer, Desenvolvimento
Economico e Evolucao Urbana. (Sao Paulo, Companhia Editora Nacional, 1964).

-1 0 5 -
My criteria to distinguish between urban and non-urban areas take account
of the functional distribution of employment within municipalities, as well as
population size. I thus come up with a listing of urban areas in Brazil, working
with the raw data from the 1920 census. Analysis of this group of cities allows
me to confirm the stylized fact of extensive urbanization in the southern half of
Brazil, and to demonstrate the emergence of a densely woven network of small and
medium-sized cities, which (as documented in the next two chapters) witnessed an
ever-increasing and diversified set of intra-regional commercial and financial ties.
Analysis of the reclassified census data also confirms that the stagnating
Northeastern region continued to be characterized by relatively low rates of
urbanization and limited integration between the small and medium sized urban
areas in the region. These findings serve as a contribution to the literature on
regional economic history and urban development in Brazil, as this is the first time
a rank-size analysis for urban areas has been applied nation-wide to pre-1940
census data.
(i) The Data
The basic data set used in this analysis consists of population estimates by
municipality, collected during the 1920 census. The 1920 census counted heads in
19 states and one territory, comprising 1,304 municipalities, reaching a total
number of more than 30 million inhabitants. Municipalities in Brazil correspond
roughly to counties in the United States, in that they represent administrative
-1 0 6 -
partitions which cover the state’s entire territory. Municipalities were chosen as
the unit of analysis, as opposed to parocbias (the equivalent of church parishes),
districts, or vilas, since they were the smallest locational unit where data on
occupational distribution (used to differentiate urban areas) were also available.
"Urban” municipalities have been defined as those municipalities with at least
10,000 inhabitants and 20 % of the male labor force employed outside of
agriculture, more than half of whom are employed in either industry, commerce,
or the transport sector.26
Undoubtedly, urbanization rates calculated as the percentage of the
population living in "urban" municipalities overestimate the magnitude of
urbanization in Brazil (to the extent that these municipalities include rural
areas).27 The alternative, an urbanization rate based on the percentage of
The question o f "where to draw the line" is not a trivial one, to be sure, but also not a
central one for this exercise whose primary focus is interregional comparisons. It was
answered through plotting the data and observing where natural break-points occurred, as
well as testing the consistency o f the criteria against known urban areas which had been
chronicled in historical case studies. Again, I chose to err on the side o f overestimating
the number o f urban areas, ensuring that areas which historical accounts had identified as
urban were included in the sample, and readjusting the criteria down if necessary to include
them. As the primary purpose o f this study is a comparison in regional differences in
urbanization, as opposed to a definitive analysis o f pre-1940 urbanization in Brazil, this
should not affect the results to the extent that census data were collected in a consistent
manner throughout the country.
Which one can assume that to be the case, given the procedure o f the subsequent 1940
census, which specified cities to be the center o f the municipality (not specified in the 1920
census). This classification for cities therefore had a political-administrative connotation
(and presumably included municipal centers from municipalities my criteria classified as
"non-urban”. Municipalities are divided into districts; each o f these has a center which is
called a vila. Cities and vilas were considered urban centers. Either criteria is subject to
wide size variation, as Brazilian municipalities, as well as their centers, run the gamut in
terms o f size dimensions, population, etc. In Amazonia, for instance, some municipalities
have areas larger than other Brazilian states.

-1 0 7 -
population living in the capital cities, underestimates the degree of urbanization and
is singularly disappointing in the information it excludes concerning the nature of
urban systems development. Taking together, these two measures provide a
bounded estimate for urbanization patterns. The extent to which these two
estimates of urbanization differ affords an entry-point to a discussion of regionally-
based urban systems.
Urbanization in Brazil jumps from 11.3% when measured as the share of
population residing in the state capitals, to slightly over 37 % when measured by
the "urban" municipality criteria (See Table 2.9).28 Of the 1,304 total
municipalities registered in the 1920 Brazilian Census, 295, or 22.5 percent of all
municipalities were classified as urban. While all the five regions in Brazil show
an increase in the share of population residing in urban areas under my
classification of urban areas, the difference between the two estimates is most
significant for the Southern region, which moves from a ranking of third when
urbanization is measured by the percentage of population residing in state capitals,
This estimate seems feasible (although slightly high, as expected), when contrasted with
estimates o f urbanization in the United States o f 40.2% in 1900, 46.3% in 1910, and
51.4% in 1920, as found in the United States Historical Statistics. Series A57-72, p. 12.
(My assumption being that Brazil’s urban pattern o f 1920 should be in the same ball park
as the U .S. at the turn o f the century). Also included in Table 1 are intermediate measures
o f urbanization rates. These estimates are also consistent with urban estimates done by
M aria Jose Santos found in "Apendice B: Aspectos Demograficos," o f Villela and
Suzigan, eds., Polftica do Govemo e Crescimento da Economia Brasileira: 1889-1945.
(Rio de Janeiro: IPEA/INPES, 1973). Santos takes as urban classification criteria
municipal centers (county seats) with population greater than 20,000. She rinds
urbanization rates o f 15.6% in the North, 10.1% in the Northeast, 45% in the Southeast,
and 14.6% in the South in 1920 -- lower in the Northeast, the same in the Southeast, and
lower in the South — than my estimates. Regional differences are thus exacerbated when
administrative, rather than occupational, criteria are used. (See pp. 295-304).

-1 0 8 -
io the first ranking region in terms of percentage of the population residing in
"urban" municipalities (54.0%), reflecting the large number of "urban"
municipalities besides the state capitals in that region which witnessed the heaviest
inflow of foreign immigrants during the First Republic. The Southeastern region
also observes a sizeable increase, jumping from 14.7% of the population in state
capitals to 45.1% in "urban" municipalities. The North (21.7% to 36.8%) and
Northeast (8.1 % to 21.7%) show an increase in population residing in urban
localities under the "urban" measure as well, although the increase is not as
substantial as that observed in the southern half of the country.29 An initial
comparison of the two estimates of urbanization thus confirms that the highest rates
of urbanization occur in the Southern and Southeastern regions of Brazil. The
greater relative importance of urbanization in the southern half of Brazil is further
revealed by the large share of total urban population accounted for by these regions
as compared to their share of total population (Table 2.10).
Table 2.11 lists the largest 10 cities in Brazil (and incidentally, the only
cities with more than 100,000 inhabitants). Comparisons of national, regional, and
state rankings reveal a semi-nested pattern of urban hierarchy in the country,
wherein the Southeast of Brazil is home to the top two cities —Rio de Janeiro
(1,158,000 inhabitants) and Sao Paulo (579,000 inhabitants), which in turn occupy
the top two places in their regional ranking and first place in their respective
29
Santos (op.cit.. p. 303) found a similar regional distribution o f urban inhabitants, using as
her criteria county seats with over 20,000 inhabitants (North, 4.9% , Northeast, 25%,
South, 11.3% , and Southeast, 59%).

-1 0 9 -
states. Next come the two largest cities in the Northeast, Bahia (283,000
inhabitants) and Pernambuco (239,000 inhabitants), and following that the largest
cities in the North and the South (Belem de Para with 236,000 inhabitants and
Porto Alegre with 179,000).
The remainder of the largest ten cities are all located within the Southeast
of Brazil: Campos, in Rio de Janeiro state with 176,000 inhabitants, Juiz de Fora,
in Minas Gerais, with 118,000 inhabitants, and Campinas and Santos in Sao Paulo
state, with 116,000 and 103,000 inhabitants respectively. Thus, the Southeast of
Brazil clearly dominates within the national urban hierarchy, with the largest six
cities of the region placing within the nation’s top ten.
Preliminary examination of the data does suggest the existence of a national
urban network. With the exception of the Center-West frontier region, which was
thinly populated relative to the rest of the country30, each of the regions of Brazil
is represented in the ranking of the top ten cities, indicating the existence of a
national urban system composed of regional metropolises and their surrounding
hinterlands. The use of rank-size distributions of urban places as a tool for
measuring the extent of integration of this national urban system, as well as that of
the separate regional systems, is discussed in the following section.
And in this analysis has been included with the Southeast region, as research on trade and
transportation ties (presented in Chapter 3) demonstrates that the Center-West states and
territories were part o f the Southeast regional trading network.

(ii) The Rank-Size M odel of Urban-Svstem Integration
Following Pred’s classic study, Urban Growth and Citv-svstems in the
United States, an urban system, or system of cities, can be defined as:
a ... set of urban units [historically, cities; today presumably metropolitan

areas] that are interdependent, or bound together by economic interactions,
in such a way that any significant change in the economic activities,
occupational structure, total income, or population of one member unit will
directly or indirectly bring about some modification in the economic
activities, occupational structure, total income, or population of one or
more of the other members of the set.31
The existence of an urban system implies therefore that cities are dependent upon
each other, in an "organized complexity". Also implicit in the concept is
differentiation, i.e., "cities must vary sufficiently in their specializations and
functions not to be faithful replicas of each other."32 Finally, an urban system
requires closure, i.e., the system must have boundaries, wherein enters the concept
of region.33 As discussed in the previous chapter, economists and economic
geographers have long debated the appropriate criteria for drawing regional
boundaries, be they political-administrative borders; geo-climactic zones; areas in
Alan Pred, Urban Growth and Citv-svstems in the United States, op.cit.. p. 2.
Jan de Vries, European Urbanization. 1500 - 1800. (Harvard Studies in Urban Histoiy)
(Cambridge: Harvard University Press, 1984), p. 82.
Cesar A. Vapnarsky, "On Rank-Size Distributions o f Cities: An Ecological Approach",

Economic Development and Cultural Change. Volume 17, No. 4, (1969), pp. 584 -594,
specifically addresses this issue o f closure, and in particular, argues that the pattern o f
multiple or regional primacy reflects the continuing low closure o f sub-systems (that is,
their high interaction with, or dependency on, external systems).
w ith p e r m issio n o f th e co p y rig h t o w n er . F u rth er rep ro d u ctio n p roh ib ited w ith o u t p e r m issio n .
-111-
which factors of production can flow freely; or combinations of the above. The
urban-systems approach provides, therefore, another criterion: a region is the
bounded area composed of an integrated system of cities. In addition to allowing
an appraisal of the extent of urban systems integration, therefore, the following
analysis also allows for an examination of the extent to which the political-
administrative classification of Brazilian regions is consistent with an approach
based on urban systems.
A common technique for appraising the extent of city-systems integration
has been the analysis of rank-size distributions for urban areas.34 The essential
idea behind an analysis of rank-size distributions is that integrated urban systems
can be characterized by a predictable relationship between city size and ranking,
since an ordered hierarchy of urban functions emerges as a result of interrelations
between cities of different sizes. The guiding principle underlying the systematic
relationship between cities of different sizes is functional -- e.g. an ordered
spectrum of cities of different sizes complement one another, with the largest cities
See, for example, Benjamin W ard, "City Structure and Interdependence", Regional Science
Association: Papers. Volume 10, Zurich Congress, 1962, pp. 207 - 221; Cesar A.
Vapnarsky, "On Rank-Size Distributions of Cities: An Ecological Approach", o p.cit.:
H arry W. Richardson, "Theory and Distribution o f City Sizes: Review and Prospects", in
L.S. Bourne and J.W . Simmons, Eds., Systems o f Cities: Readings on Structure. Growth
and Policy. (New York: Oxford University Press, 1978); Brian J. L. Berry, "City Size
Distributions and Economic Development", in Economic Development and Cultural
Change. Volume 9, No. 4, Part 1, July 1964, pp. 573 - 588; Brian J.L . Berry, "City Size
and Economic Development: Conceptual Synthesis and Policy Problems, with Special
Reference to South and Southeast Asia", Chapter 5 in Leo Jakobson and Ved Prakash,
Urbanization and National Development. (Beverly Hills: Sage Publications, Inc., 1971);
and J. R. Lasuen, A. Lorca, and J. Orca, "City Size Distribution and Economic Growth",
Ekistics. 24(141), August 1967, pp. 22i-226.

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performing centralized, metropolitan, or wholesale functions, and the cities located
lower down in the size ordering providing more location specific, distributional, or
retail functions. An ordered ranking with no gaps or kinks implies an integrated
system, wherein all the size-contingent functions are fulfilled, information is most
efficiently collected and processed, and the possibilities of cities interacting with
one another in an "organized complexity" maximized.35 If we accept Jacobs’
observation that cities grow best when they are able to trade with cities of more or
less the same size, then the potential conduciveness of an even rank-size
distribution to future regional development becomes apparent. No town or city is
odd-man out, but rather, urban centers have within their reach appropriate trading
partners.
Empirical observations for a myriad of regions across the world at various
points in time have supported the idea that systems of cities do indeed exhibit a
predictable relationship in population sizes. Studies of rank-size distributions have
produced three basic models of city-size distributions: log-normalcy, primacy, or
convexity. The first two, express the tendency for cities to arrive at a hierarchical
pattern of population sizes, with one largest city and a descending order of sizes
See James E. Vance Jr., The Merchant’s World: The Geography o f Wholesaling, o p.cit..
David Meyer, "A Dynamic Model o f the Integration o f Frontier Urban P laces...,1' op.cit..
and David F. Weiman, "The Contours o f Urban Growth in the Lower South: 1820-1930",
unpublished manuscript, January 1991.

-1 1 3 -
down to the last village or hamlet.36 For log-normal distributions, there are no
"odd-men out", knowledge of a city’s size and the total number of cities in the
region is sufficient to predict its rank, and conversely, knowledge of the city’s rank
is sufficient to predict its size. Primate distributions represent macrocephalous, or
"big-headed", urban systems —the largest city in the region is thus larger than
would be predicted by the ordering of the small- and medium-sized cities. The
third type, a convex distribution, is indicative of a distribution in which settlements
below the size of the largest settlement in the system being examined are generally
larger than the rank-size rule would predict, either due to a pooling together of
information on several urban systems into one distribution, or a low-level of
system integration.37
A series of explanations related to level of economic development, place in
the world economy, (and of course, how measurements were made) have been put
forth to interpret variations in rank-size distributions. In general, primate systems
are seen to be representative of under-developed economies wherein integrating
economic forces are somehow stymied, either due to colonially-enforced urban
structures, inadequate infrastructure, or tied labor systems wherein labor mobility
Walter D. Harris, J r., The Growth o f Latin American Cities. (Athens: Ohio University
Press, 1971), Chapter Five: "Urban Systems in a Regional Context: The Central
American Case", p. 140. ,
G regoiy A. Johnson, "Rank-Size Convexity and System Integration: A View from

Archaeology", Economic Geography. Volume 56, Number 3, July 1980, pp. 234 - 241.

-1 1 4 -
(one of the principle balancing forces) is impeded.38 However, primate systems
can also result when the largest city serves metropolitan functions not only for the
cities within its own region, but also for cities beyond the borders of its local
urban system. International financial centers such as London, New York, or
Tokyo fit this description. Convex systems, or flat rank-size distributions, have
been found to result from problems in scale, or, have also been interpreted as
"immature" pre-modem systems by Smith, where the absence of trade and
transportation ties among the urban centers precludes the emergence of an evenly
distributed hierarchical ranking of cities.39
Figure 2.4 offers a graphical representation of the rank-size distribution for
urban municipalities in Brazil as a whole, and also graphs the distributions for the
regional urban systems of the Northeast and Southeast. All three distributions
seem to present the same general pattern. There is a clear break in the graph
(drawn on logarithmic scale) observed for cities with populations larger than
This pattern has in feet been considered prototypical for Latin American countries, and
arguably a reflection o f a dependent economy dedicated to primaiy-exports. For more on
size distribution o f Latin American Cities, see Richard M. Morse, "Latin American Cities:
Aspects o f Function and Structure”, in Comparative Studies o f Society and History. (1962)
4(5): 473-493, and W. D. Harris, The Growth o f Latin American Cities. (Athens, Ohio
University Press, 1971).
Discussions o f economic interpretations o f varying shapes o f the rank-size distribution can

be found in: Stephen A. Kowalewki, "The Evolution o f Primate Urban Systems", in
Comparative Urban Research. Volume IX, No. 1, 1982, pp. 60 - 77; Gregory A. Johnson,
"Rank-size Convexity and System Integration: A View from Archaeology", op.cit.: and
Carol A. Smith, "M odem and Premodem Urban Primacy", Comparative Urban Research.
Volume IX, Number 1, 1982, pp. 79 - 96, and "Theories and Measures o f Urban Primacy:
A Critique", Chapter 6 in Michael Timberlake, ed., Urbanization in the World Economy.
(Orlando: Academic Press, Inc., 1985).

-1 1 5 -
100,000 , while below this the relationship between city population and rank seems
to be relatively linear. Graphical analysis thus indicates that the nation as a whole,
as did both the Northeast and the Southeast regions, witnessed a pattern of urban
primacy —unsurprising in an economy still dominated by export-led growth.
However, further analysis reveals that the degree of primacy differed between the
Northeast and the Southeast, with higher primacy observed in the Southeast, and
the largest cities in the Northeast actually smaller than would be predicted by the
relationship between the region’s smaller and medium-sized cities.
A simple and intuitive index of urban primacy can be calculated by
measuring the extent to which the size of the largest city in the region exceeds that
which would be predicted by the linear relationship between the small- and
medium-sized urban centers. The ratio of the actual size of the largest city to the
predicted city size defines the index. A regression of the rank-size relationship
over all cities excluding the two largest cities is used to extrapolate the size of the
top-ranked city which would be congruent with the number and size of the smaller
cities in the region.40 The urban primacy index, when measured for Brazil as a
whole, and then the Northeast and Southeast regions, yields results which are at
first glance surprising, but upon further reflection consistent with the country’s
economic and urban history.
I am indebted to David Weiman for introducing me to this methodology, which is further

detailed in his "The Contours o f Urban Growth in the Lower South...", op.cit.. pp. 10-11.
-1 1 6 -
Specifically, the ratio of the actual to the predicted size of the largest city is
1.07 for Brazil as a whole, 1.68 for the Southeast region, and 0.84 for the
Northeast. Thus, while the size of the capital city, Rio de Janeiro, is more or less
that which would be predicted by the size and number of other cities in Brazil as a
whole, it is too large relative to the size and number of cities within the Southeast
region. In contrast, Bahia, the largest city in the Northeast, is too small relative to
the top city size predicted by the size and number of urban centers in the Northeast
region. These findings suggest that Rio de Janeiro served as an entrepot for the
entire nation, and indeed that the capital city might have performed higher-order
metropolitan functions for the Northeast which were not encountered within the
region. This inteipretation would account for the convex distribution of the
Northeast (Rio de Janeiro should actually be included within the boundaries of that
urban system), the primate distribution of the Southeast (the largest city was
actually serving metropolitan functions which extended beyond the region’s
borders), and the log-normalcy of the rank-size distribution for the entire country
(at least for the largest cities, there is a functional division based upon a hierarchy
of city sizes). Chapter Three’s discussion of regional trade patterns and Chapter
Four’s treatment of the evolution of national banking and financial market
developments provide evidence to back-up this interpretation, documenting the
close economic relationships observed between the major port cities throughout the
country, the metropolitan dominance of Rio de Janeiro, and the relative paucity of
-1 1 7 -
economic ties between cities within the Northeast, as compared to the strong
economic links among Southeastern urban centers.
The primacy index, on its own, tells us little about the relationship between
the smaller and medium sized urban centers -- within and across regions. In
order to explore the relationship between small and medium-sized cities,
examination of the full distribution is called for. Accordingly, ordinary least
squares regressions were run utilizing spline functions (to allow for kinks in the
slope in the curve).41 In order to examine the distinct nature of regional urban
systems, separate rank-size regressions were run for the Southeast and Northeast
regions, in addition to the regression for the entire national sample.42
The following equation was estimated:
LnP = + /32lnRp +j83Max(0,lnRp-lnr100j000) + /34Max(0,lnRp-lnR20000)
where LnP is the natural log of the population and InRp is the natural log of the
rank of the city with population P. This specification allows the slope of the rank-
41 The results o f an F test comparing the spline function estimates with the restricted single
slope model all strongly reject the null hypothesis that the slope o f the rank-size distribution
for Brazil, o r for either the Northeast or Southeast regions, is consistent across the various
cit-size ranges.
42 In order to further test the validity o f segmenting the sample, a regression o f size on
regional rank was run for the mid-section o f the Brazilian samples (100,000 > P >
10,000), using first dummy terms for the regional intercepts, and second, regional dummies
for both intercept and slope terms. In the second regression, all coefficients on regional
slope dummies were highly significant, and an F test comparing the two equations rejected
the null hypothesis that the restricted model (e.g. variation in intercept but no variation in
slope) was superior.

-1 1 8 -
size distribution to take on three distinct values -- one for the distribution of cities
with populations greater than 100,000 (j32), one for cities with populations varying
in size between 20,000 and 100,000 082+ 183), and one for cities with populations
less than 20,000 082+/83+j34). Regression results are presented in Table 2.12.
The samples for Brazil as a whole and the sub-sample for the Southeast both
yielded extremely good fits of the rank-size model under this specification, with
high R 2’ s and coefficients significant at the one percent level. However, the
Northeastern sample did not yield significant coefficients for the slope of the mid
sized cities in the distribution. (Although the F-test for significance of all
coefficients did not reject the spline specification). This absence of a log-linear
relationship between rank and population among the mid-sized cities of the
Northeast is indicative of the lack of economic integration of these cities. More or
less equal-sized, the smaller port towns, or the urban centers in the interior of the
Northeast, were more linked to the regional and national capitals than they were to
one another (as shall be demonstrated in Chapter Three). Thus, the gaps along the
city size distribution were not filled in, and the functional hierarchy of a range of
city sizes did not occur.
Another interesting result from the regression analysis is the difference in
the slope of the Southeast rank-size curve for the urban areas with populations
between 20,000 and 100,000. With a slope of -.78, as compared to -.55 for Brazil
as a whole, and (a not statistically significant) -.60 for the Northeast, there is a
much steeper curve. The steepness of the curve is indicative of a wider range of
-1 1 9 -
city sizes, a denser hierarchy of urban functions, and thus, a more integrated urban
system.
H .4 Conclusion
In summary, by 1920, the economic and demographic center of Brazil had
clearly moved from the North to the Southeast. And, unlike previous instances of
regional shifts in Brazilian economic history, this one proved long lasting. One
key to interpreting the enduring regional dominance of the Southeast can be found
by the regional imbalance literature reviewed in Chapter One. Proponents of
regional imbalance argue that industrialization is by nature a process which
increases regional inequity, as cumulative causation processes strengthen and
reinforce the early starter’s initial advantage, transforming a slight lead into an
insurmountable distance, and condemning the lagging region to a peripheral
economic role. The Brazilian case seems to offer evidence in support of this view,
for the Southeast’s lead, gained coincident with the advent of industrialization for
the country, proved more durable than earlier advantages won by other regions
which were unaccompanied by the growth of domestic industry.
Chapter One also discussed the relevance of urban development to industrial
activity and regional economic development. It was argued that the existence of a
network of cities, and intra-regional trade among these cities, provided a strong
stimulus to regional development. The rank-size analysis undertaken in the present
chapter has provided an overview of regional differences in Brazil’s urban

-120-
development, which lie at the heart of differences in regional economic
performance. The Southeast was shown to be characterized by a wider range of
city sizes, and a more even size distribution of cities than the Northeast. It was
also shown that Rio de Janeiro was a city in some sense "too big" for the Southeast
region, and this information, combined with the relative smallness of the largest
cities in the Northeast, suggests that Rio de Janeiro served as a metropolitan center
for Brazil during the First Republic.
Rank-size distributions are a blunt instrument for analyzing urban systems.
The analysis in this chapter should be seen as the starting point for more detailed
analysis of inter- and intra-regional trade and transportation patterns which is
undertaken in the following chapter. Bearing in mind these underlying differences
in urban structure, it shall be demonstrated that trade between regions in and of
itself is not sufficient to lead to convergence in economic growth rates. The
regional metropolises were certainly connected, but within each region, how did
each metropolis relate to its urban hinterland? Were the cities dependent upon
each other in an "organized complexity", or did events in the capital city pass
unnoticed and unfelt by those in the interior? The rank-size analysis above
suggests that in the Southeast, such an interconnectedness of small- and medium
sized cities did occur, while this process of dynamic inter-city trade was absent in
the Northeast. Chapter Three thus examines not only the interconnectedness
among the various regions in Brazil, but contrasts the distinctive nature of
metropole-hinterland ties within the Southeast and the Northeast.

CHAPTER THREE
BRIDGING THE ARCHTPFJ.AGO; TRADE BETW EEN CITIES
1TI.1 Introduction
Trade between regions and nations does not take place across homogeneous
planes. Since the days of medieval fairs, towns have been the points where supply
meets demand. Urban centers are the loci of information and resources where
most pricing decisions are made, and the bulk of trade occurs. Cities play a
crucial role in organizing the exchange of goods and services, furnishing both
physical facilities (ports, warehouses, transport nodes), and financial and human
capital (banks, insurance, concentrations of merchants), and serving as focal points
for the flow of goods between regions. Furthermore, the nature of intercity trade
both reflects and conditions each city’s own economic development, and the
economic development of their surrounding regional economies. The composition
and volume of a city’s traded goods reveal processes of import substitution, with
the results of urban industry and labor substituting for previously imported goods,
as well as the generation of new exports.
Examination of trade flows can thus demonstrate the metropolitan role
played by the city, either as a channel for the agricultural goods which are sought
- 121 -
-122-
after by populations in different urban areas or as a reexport center for
manufactures and agricultural goods to other cities and regional economies.
Such an examination of the patterns of inter- and intra-regional trade among
the cities of Brazil fleshes out the skeleton of the urban hierarchies described by
the rank-size distributions in the previous chapter. Subsequent analysis of
transportation networks, and the economic dynamics of the hinterlands of the
Southeast and the Northeast completes the picture of the metropolitan role played
by Brazilian cities, and their place within the regional economies of Brazil’s First
Republic.
m .2 Cities and Trade
In this section I review international and interregional trade patterns for
Brazil’s system of regional economies covering the period 1875 through 1920. An
initial examination of shipping movements in the principal ports of Brazil
establishes the symmetry between the urban hierarchy observed in the previous
section, and the importance of these cities as trading centers. The existence of
large deficits in the merchandise account for ports such as Rio de Janeiro and
Recife indicates their importance as re-export centers for their respective regional
economies.
Examination of data on interregional movements of goods will demonstrate
that such flows of merchandise grew in volume, value, and relative importance
over the course of the period under study, particularly for the Northeast region
-1 2 3 -
which was characterized by a dwindling international export base. We see here the
effect of domestic demand for the traditional Northeastern exports taking the place
of international demand. In this North-South trade, the national entrepot role
played by the city of Rio de Janeiro will be demonstrated through an analysis of
the composition and direction of interregional flows of goods. This discussion of
cities and trade will conclude with a discussion of the network of railroads built
during the First Republic, and the ways in which railroads fostered intra-regional
trade and urban development in the Southeast of Brazil, while reenforcing existing
urban and economic patterns in the Northeast.
(0 The Hierarchy o f Port Cities
The relationship between cities and trade is strikingly revealed in Table 3.1,
which lists the top 10 ports of Brazil in terms of tonnage shipped (international and
national), side-by-side with their population ranking. The ranking of the first five
ports in terms of tonnage shipped reflects perfectly the rankings of their cities’
population. Thus, the size ranking of Brazil’s major cities is in fact a mirror of
the hierarchy of trading patterns —the cities with the greatest population were in
fact those served by the most dynamic ports.
The port of Rio de Janeiro, the capital city, far surpassed the other ports in
terms of tonnage shipped, and in roughly the same ratio which the population of
this city exceeded that of the next ranked city, Sao Paulo. Averaged over the
period 1902 through 1908, arrivals in Rio accounted for nearly twice the share of

-1 2 4 -
those in Santos (Sao Paulo’s principal port) —or more than one-quarter of the total
arrivals in the country.
Foreign carriers dominated in Rio de Janeiro and Santos, the principal ports
of the nation and of the Southeastern region. For city ports further down the urban
hierarchy, Brazilian carriers account for a growing percentage of tonnage shipped.
This is clearly illustrated in Table 3.2, where it is shown that despite the overall
dominance of Rio de Janeiro and Santos in terms of absolute tonnage carried by
Brazilian vessels (together they account for nearly one-fifth of total shipping), the
Brazilian carriers are relatively unimportant in these large international ports, as
compared to their weight in other regional entrepots (Bahia, 20%; Recife, 28%;
Belem, 36%; Rio Grande do Sul, 51.8%, and a nation-wide average of 38.8%).
This suggests that Rio de Janeiro and Santos functioned as international receiving
centers and redistributing points for the rest of the country, consistent with the
metropolitan model of urban development.
Being the center of international and national commerce for Brazil during
the last quarter of the 19th century and first quarter of the 20th century implied
undergoing a tremendous expansion in commercial activity. Total tonnage shipped
in Brazil, in both the transatlantic and coastal trades, grew from 2,883 tons
arriving in 1870/71 to nearly seven times this amount at 19,495 tons of arrivals in
1915.1 Also indicative of this expansion is the growth in the real value of
1 Tonnage shipped from Brazil grew almost as fast, from 2,934 tons in 1870/71 to 19,472 in
1915. (Institute Brasileiro de Geografia e Estatistica, Anuario Estatfstico do Brasil. Ano V
- 1939-1940, Rio de Janeiro: Conselho Nacional de Estatistica, Servicjo Grafico), pp. 1340

-1 2 5 -
Brazilian exports, which more than quadrupled (See Figure 3.1). The real value of
imports also grew over this period, although not as rapidly, in part due to declining
terms of trade caused by a falling exchange rate. In current prices the overall
merchandise account for Brazil ran a consistent surplus over this same period.2
As illustrated in Figure 3.2, coffee accounted for the lion’s share of
Brazilian exports in the period under study.3 The Southeast was clearly the
leading region in the country’s international trade, consistently accounting for more
them fifty percent of the total value of combined international imports and exports
during the period under study (Table 3.4). A simplistic interpretation of the
dominance of the Southeastern ports in the international trade of Brazil would rely
heavily on the importance of growing coffee exports. Indeed, no account of the
economic history of the First Republic can ignore the impact of the tremendous
expansion of coffee production in the Southeast of Brazil. However, a closer look
at the trade statistics demonstrates that international (and interregional) commerce
was significantly more complex than a straightforward concentration of coffee
exports and manufactured goods imports to serve the expanding coffee-based
- 1341).
Current values for imports and exports are presented in Table 3.2. Real values for exports
charted in Figure 3.1 are calculated by using the export deflator from Raymond
Goldsmith’s Desenvolvimento Financeiro Sob um Seculo de Inflacao.. Tables 2.7, 3.3, and
4.7.
3 The source o f Figure 3.2 is Anuario Estatfstico do Brasil, op.cit.. p. 1379. Value share is
measured as a percent o f total exports valued in current prices. Further information on
export composition is presented in Table 3.5. Note that sugar and cotton, the major
agricultural products o f the Northeast, do not even count among the top five valued
exports.

-1 2 6 -
economy in the Southeast. This was particularly true for the port of Rio de
Janeiro, which beginning in 1883, due to the emergence of Santos as the nation’s
principal coffee-exporting port, ran an almost persistent annual deficit on the
merchandise account. However, failure to balance its trade account did not
prevent Rio de Janeiro from being the nation’s preeminent port. Reexportation of
international imports and Rio’s role as a transhipment node for Brazilian goods for
a growing national market came to account for a significant portion of the port’s
activity. Thus, while coffee may have been both absolutely and relatively
important for the Southeast, the size, location and natural conditions of Rio de
Janeiro and its role as a national entrepot guaranteed that its "sideline" trades were
of great weight to the rest of the country.
Nowhere is the archipelagic nature of Brazilian economic development so
apparent as in its export base. Geographically fragmented, with the principal
exports scattered across the major regions, not only were exports concentrated by
region, but, within these regions, there was little diversification of the export base.
Coffee and rubber far outweighed other exports in total earnings for Brazil,
accounting for nearly 80% of total exports during the period 1902 through 1908,
with the next ranking export, cocoa, valuing only 3.1 % of total exports. Table 3.5
enumerates the top five earning export commodities in Brazil over the period 1902
through 1908, their share in total exports, the percentage of each commodity
exported from its principal exporting localities, and that commodity’s weight in the
port’s total exports. We observe a concentration of coffee exports from Rio de
-1 2 7 -
Janeiro and Santos, the port of Sao Paulo (95.2% of total coffee exports), rubber
exports from the Northern ports of Manaus and Belem (91.9% of total rubber
exports), cocoa and tobacco exports from the Northeast (specifically Bahia, with
83.9% of cocoa exports and 90.1 percent of tobacco exports respectively), and, in
a less concentrated fashion, exports of herva mate, also known as Paraguayan tea,
from the South (with 34.3% of mate departing from Parana’s principal port of
Paranagua, and an additional 10% leaving from the port of Sao Francisco in Santa
Catarina). Interestingly, sugar cane and cotton, accounting for more than 40% of
the value of total agricultural production in the Northeastern region, do not even
rank in the top ten export products for Brazil.4 As we shall see below, however,
they account for a substantial share of products traded interregionally, within
Brazil’s nascent national market.
While the overall merchandise account for Brazil ran a surplus during the
period in question, several Brazilian states averaged deficits on their merchandise
accounts, with the most significant deficits run by Rio de Janeiro, Pernambuco,
and Rio Grande do Sul (Table 3.6). These locationally specific trade account
deficits are a natural result of the limited diffusion of Brazil’s export base
combined with a relatively even dispersion of Brazilian imports. Balancing
mechanisms clearly existed within regions, and to some extent, between regions, so
Estatfsticas Economicas e Financeiras. op.cit.. Table 13, pp. 22 - 23.

-1 2 8 -
that weak international export performance was not reflected in a fall in
international imports of Brazil’s major trading cities.
In comparison to Brazil’s export structure, we see that imports are
significantly more diversified, and relative to Brazil’s exports, more evenly
distributed by region. No single import accounts for an absolute majority of total
imports, nor of any single port’s importation, in stark contrast to the distribution of
exports. As could be expected in light of the regional distribution of industrial
production examined in the previous chapter, imports of industrial inputs are
indeed concentrated in the Southeast, with the two ports of Rio de Janeiro and
Santos accounting for roughly 60% of total iron and steel manufactures, nearly two
thirds of the machinery and tools, and about 70% of the coal imports arriving in
Brazil between 1902 and 1908. Imports of consumer goods, in contrast, such as
foodstuffs and cotton textile goods, were more or less distributed in line with the
distribution of population. (Table 3.7) These differences in the regional structure
of imports are further corroborated by the information on value-share of principal
imports by port, presented in Table 3.8. Here, we confirm that industrial imports
in general accounted for a greater percentage of total imports in the major ports of
the Southeastern and Southern regions, than they did in the North and Northeast.
Only part of the explanation for the ability of many of Brazil’s major port
cities to ran persistent international trade deficits is provided via information on the
regional structure of international imports and exports. The very existence of
imbalances in these accounts harks to the need to examine other flows of goods or

-1 2 9 -
capital which would have balanced the merchandise accounts. I therefore turn now
to the specific case of Rio de Janeiro, the principal importing city of the country,
and the port with the largest merchandise account deficit. Examining information
on interregional flows of goods, I demonstrate the trade account side of Rio de
Janeiro’s role as a national metropolis. In the next chapter, information on capital
account flows will help to complete the overall picture.
(if) Rio de Janeiro as National M etropolis
Contemporary accounts confirm the entrepot role played by Rio de Janeiro,
observing that the port,
... is with no contest, the primary commercial port of South

America; and due to its hydrographic conditions, a port offering the
most ease of access on the globe. Located in the vast Guanabara
Bay, it offers secure anchorage, completely protected from the
strong ocean winds, with steamers or sail-ships of any size or
tonnage able to enter at any hour of the day or night. Whether on
the coast of the bay, or on the many islands within it, a tremendous
number of small harbors and points of embarkation are found.
The port of Rio de Janeiro is the point of convergence or departure for the
entire national coastal navigation; even for the shipping companies of the
extreme North, whose itineraries are determined in contracts with the
Federal Government or States, or at the disposition of their respective
statutes, it is not unusual for them to set sail for the port of the Republic’s
Capital.5
A striking feature which arises from the data presented above on
international trade is the ability of Rio de Janeiro to maintain a high import share
Centro Industrial do Brasil, Brasil, suas riquezas op. c it.. Volume m , Industria de
Transportes, Industria Fabril, p. 125.

-1 3 0 -
throughout the period despite a substantial drop in the capital city’s export share;
and, correspondingly, the sluggishness of the increase in Sao Paulo’s import share
despite the state’s staggering growth in exports. By 1919, Sao Paulo accounted
for nearly half of total exports yet only about one-quarter of Brazil’s imports. In
contrast, at the dawn of the Republic Rio de Janeiro was both import- and export-
center, accounting for 55% of imports and 50% of exports. The decline in Rio’s
export share is largely explained by the shifting of coffee production (and the
export base) from the Paraiba Valley, the geographical hinterland of Rio de
Janeiro, to the interior of Sao Paulo and Southwestern Minas Gerais, brought on
both by the natural exhaustion of the soil in the Paraiba Valley due to extensive
farming techniques, and the expansion of Sao Paulo’s hinterland as the region
experienced a boom in railroad construction. This shift in the location of coffee
production, which had been largely completed by the dawn of the First Republic,
is evidenced by data on coffee arrivals to the ports of Rio de Janeiro and Santos,
shown in Figure 3.3.
While coffee production and exports thus shifted to Sao Paulo, imports did
not follow. It is precisely this lag in the regional adjustment of the merchandise
accounts which suggests that Rio de Janeiro was indeed an entrepot for the
domestic market —balancing trade account deficits by reexporting international
exports to other states and/or running compensating surpluses on the services and
capital accounts of the balance of payments. Both mechanisms point to the
political and economic importance of the Federal Capital —first as a commercial
-1 3 1 -
center for the rest of the country, and the second as its administrative and financial
capital.
The economic and financial impact of Rio de Janeiro’s administrative role
as Brazil’s capital city, during both the Empire and the Republic, should not be
overlooked. The city was the seat of power, had the best access to information,
(and federal subsidies), and was home to the Government’s bankers (all discussed
in Chapter Four). Furthermore, the fiscal impact of serving as the nation’s capital
was significant. "By far the major recipient of federal largesse was the Federal
District.... Rio de Janeiro frequently absorbed two-thirds of the union
expenditures, often twice as much as it contributed to revenues."6 Clearly, in
addition to the merchandise account surpluses run with the other regions of Brazil,
to be discussed below, these capital movements and fiscal flows allowed Rio de
Janeiro to sustain recurrent international trade deficits.
The closeness of economic integration between the two principal port cities
in the Southeastern region of Brazil can be seen by the almost perfect symmetry
between the commercial balances of Rio de Janeiro and Sao Paulo, as charted in
Figure 3.4. It appears that there was a functional division between the two cities,
in which Santos operated largely as a through-station and exporting center for
coffee, while Rio retained the entrepot functions for the region, evidenced by Rio
de Janeiro’s more diversified trade structure.
Steven Topik, "The State’s Contribution to the Development o f Brazil’s Internal Economy,
1850 - 1930," Hispanic American Historical Review. 65(2), 1985, p. 216.

-1 3 2 -
Analysis of interregional trade patterns confirms that Rio de Janeiro and
Santos evolved in a manner consistent with Burghardt’s model of the development
of gateway cities, which was reviewed in Chapter One. Over time, Sao Paulo
emerged as a central place in its own right, with the expansion of coffee
plantations further south and west. This meant that Rio de Janeiro’s effective
hinterland, or to use Burghardt’s term, tributary area, shrank. Due to transport
nodality and the concentration of financial capital, however, Rio did remain one
rung above Sao Paulo in the urban hierarchy. However, as Burghardt also
suggests, as Sao Paulo evolved from a gateway city to a central place in its own
right, Rio in turn reoriented towards another hinterland, turning northwards as Sao
Paulo became increasingly competitive in Southern markets.
Detailed information on commercial movements in the port of Rio de
Janeiro allows me to examine the extent and nature of this hypothesized shift in
Rio’s functional role within Brazil’s internal market. Collected by the Rio customs
officials7, data on interregional flows of goods show Rio’s imports and exports to
the rest of Brazil, distinguishing between native Brazilian and foreign products.
Information on value and destination or precedence allows a picture to be
constructed not only of the share of the interregional trade in the total commercial
Harry A. Franck, in Working North from Patagonia. Being the Narrative o f a Journey
Earned on the Wav, through Southern and Eastern South America. (New York: Garden
City Publishing Company, Inc., 1921, pp. 254-55), provides a poetic account o f the
pervasiveness o f corruption amongst Rio de Janeiro customs officials. We can assume that
all trade flows, both interregional and international are undercounted, and probably, given
that Brazilians had more expertise in duties evasion, that interregional flows are probably
undercounted to a greater extent.

-1 3 3 -
movement of the port, but also the principal trading partners of the capital city.
Comparison of these flows between 1878 and 1890 will provide an understanding
of the extent to which Rio de Janeiro’s internal entrepot functions compensated for
falling coffee revenues, or not, during the initial years of the city’s declining
export performance.
In 1878, the port of Rio de Janeiro ran an overall trade deficit on its coastal
trade with the rest of the Brazil, but, by the end of the decade, this had turned to a
trade surplus. The capital city consistently ran a trade surplus with the Northeast
of Brazil, to which it exported the bulk of national goods, and over time, reduced
its deficit and turned a surplus with Sao Paulo and the rest of Brazil’s Southeastern
region (Tables 3.9/a-c).
Exports of foreign goods took on an increasing weight over the long
decade, by 1890 accounting for more than half of coastal trade exports. These
goods, largely processed foodstuffs and industrial inputs, and consumer
manufactures, were directed principally to the Southeast, and to some extent the
South, unlike the exports of Brazilian goods (largely raw materials). A closer look
at the composition of Rio’s coastal trade is provided in Table 3.10/a-c, which
traces the principal imports and exports8, noting the regional origin or destination
for each commodity. We see that in 1878 coffee dominated not only the
international trade of Rio, but the interregional trade as well, with coffee, largely
Chosen as those whose total value exceeded one thousand contos.
-1 3 4 -
from Sao Paulo, accounting for more than half of the Brazilian goods entering
Rio’s harbor. In turn, this coffee was reexported abroad, and to the rest of Brazil,
being the most important single Brazilian export in Rio de Janeiro’s coastal trade.
Coffee’s dominance held through 1886, but by 1890, the year after the
proclamation of the Republican Government, coffee no longer appears on the list
of principal exports or imports for the port of Rio de Janeiro. Instead, we see a
growing list of imports from the Northeast -- aguardente, the single malt liquor
made from sugar cane, leading the pack, followed closely by peanuts, rice, and
sugar. Like the world today, where industrialized countries trade industrial
products with each other, we see a heavy trade in cotton cloth and gear and tackle
between Rio and points South, working in both directions, as well as the exporting
of these more industrialized goods to the North and Northeast. Rio also furnished
the Northeast with foreign goods, principal among them beef jerky from the La
Plata region and cotton cloth -- and, in this year of political upheaval, foreign
coin.9
In general, to the extent possible with the limited data available, we see that
Rio did in effect turn increasingly northwards in her coastal trade: In 1878 the two
Northern regions of Brazil accounted for less than 10% of total Brazilian imports
into the capital city and under 40% of her exports; by 1890 Rio was importing
44.3% of her goods from the North and Northeast, and sending 55.6% of her
To be further addressed in Chapter Four.

-1 3 5 -
exports up the coast. It seems therefore, that there was a shift in the direction of
Rio’s hinterland towards the North, accompanying the city’s decline as a center of
the coffee trade during the last decade of the twentieth century.
While Rio de Janeiro appears to have run a merchandise account surplus in
her coastal trade, Santos, the principal coffee-exporting port of Sao Paulo, ran a
steady trade deficit over the period 1907 - 1915 (Tables 3.11 and 3.12). Importing
mainly foodstuffs and raw materials from the Northeast, and manufactured goods
from Rio de Janeiro, Sao Paulo spread the wealth of coffee revenues throughout
the rest of Brazil. It seems that Rio de Janeiro did not exercise a monopolistic
position as intermediary between the Northeast and Sao Paulo by this time, but
rather that there was some direct trade between Santos and the Northeast.10 The
evolution of the coastal trade balances of Rio de Janeiro and Santos during the
18S0’s is summarized in Table 3.13. While the capital city ran a consistent
surplus, over the course of the decade, the difference between exports and imports
shrank. Similarly, while Sao Paulo experienced an on-going merchandise deficit
vis-a-vis the rest of Brazil, this deficit diminished over time. Again suggesting the
slippage of Rio’s lead over Sao Paulo, which in fact disappeared by the end of the
First Republic in 1930. However, other flows allowed Rio de Janeiro to continue
10 The fact that goods were shipped directly between the Northeast and points south o f the
capital city, without physically stopping in the capital city, does not, o f course, rule out the
possibility o f commercial interests from Rio controlling the trade. In fact the Companhia
Doca de Santos, a privately owned concern which implemented the port works and
administered Sao Paulo’s principal port, was owned and run by Brazilian entrepreneurs of
French descent, based in Rio de Janeiro. (Richard Graham, Britain and the Onset of
Modernization in Brazil. (Cambridge: Cambridge University Press, 1968), p. 93.
-1 3 6 -
to increase imports from other points in Brazil over the course of the decade,
despite a decline in interregional exports. Table 3.14 presents evidence on the
evolution of Rio’s commercial balance with two ports -- Santos and Belem do Para
(located in the North). In constant 1901 prices, we see the growth of Rio’s exports
northward and the decline in the capital city’s exports to Santos between 1878 and
1911.
The scarcity of historical trade data presents a challenge to the researcher
wishing to document the increasing importance of interregional trade during
Brazil’s First Republic. In addition to the information already presented, data on
the arrivals of certain commodities, by quantity, into the port of Rio de Janeiro are
shown in Table 3.15. Here we find confirmation of the increasing importance of
interregional flows, and particularly, the growth in trade with the Northeast of
Brazil. All the commodities showed an appreciable increase in amounts arriving in
the capital city, and the imports arriving from the Northeast —cotton, salt, and
sugar —showed the largest average increases for the periods in which data were
available.
The domestic market played an increasingly important role in substituting
for the loss of overseas markets to the Northeast. Over the period 1897 to 1906,
sugar exports to the rest of Brazil accounted for 70 percent of total Pernambuco

-1 3 7 -
sugar exports, two-thirds of which went to Rio de Janeiro and Sao Paulo.11 By
1921-23, Brazil itself consumed more than three-quarters of its cotton harvest.12
This picture of interregional trade movements, albeit incomplete, has served
to demonstrate the growing importance of interregional trade during Brazil’s First
Republic, as well as the entrepot role played by Rio de Janeiro (and its shifting
character over the course of the period under study). It has been shown that the
growth of interregional trade served to preserve the traditional export base of the
Northeast, as domestic demand for the traditional exports of sugar and cotton
substituted for the declining international demand for these products. In essence,
interregional trade preserved the traditional export-based economies of the
Northeast, while stimulating commercial and industrial development in the
Southeast. A brief look at the development of railroads completes this examination
of inter- and intra-regional trade patterns during Brazil’s First Republic, and
demonstrates the dynamic role which railroads played in the commercial and urban
development of the Southeast.
Centro Industrial do Brazil, O Brasil: suas riquezas naturais Vol. 2, Industria

Agricola, (Rio de Janeiro: M. Orosco & Co., 1908), p. 141.
Dean, "Economy", o p .cit.. p. 231.

(iii) R adiating Development: R ailroads an d In tra-resio n al T rade
The emergence of the Sao Paulo-Santos nexus as an industrial center and
serious competitor with Rio de Janeiro for the role of national metropolis during
the First Republic was predicated upon the construction of a rail network.
Independent of the motivations for financing this infrastructure, which were based
largely upon the (realizable) expectations of tapping into coffee profits, the impact
of construction of the rail network on patterns of inter and intra-regional trade and
urban/industrial growth was wide-ranging.
In the 1860s Sao Paulo still had neither rail connection with its port city of
Santos nor a network reaching its interior hinterland: "Coffee shipment was
therefore slow, costly, and cumbersome since, as had been the case with sugar,
haulage by animal was necessary.... It was axiomatic in the 1860s that to plant
coffee more than seventy-five or a hundred miles inland from Sao Paulo was
foolhardy, for shipment would have consumed all profits, however fine the
yield."13 In 1854, more than 85% of the coffee produced in the state of Sao
Paulo did not pass through the port of Santos, but rather, was shipped via Rio de
Janeiro.14
Richard Morse, From Community to Metropolis: A Biography o f Sao Paulo. Brazil. (New
York: Octagon Books, 1974), p. 138.
Singer, Desenvolvimento E conom ico op.cit.. p. 29.
-1 3 9 -
The technical competence of British engineers combined with needed capital
inputs allowed the 2,400 foot coastal escarpment, or Serra to be conquered through
a series of inclined planes, graded at one foot in ten, and stationary engines for
lowering and hauling up the trains. In February, 1867, the 85-mile line from the
seaport of Santos to the Sao Paulo suburb of Jundax was opened to traffic, and, like
Dorothy opening her door to technicolor after landing in Oz, the ruby red coffee
lands of the vast hinterland of western Sao Paulo and the interior of Minas Gerais
lay glittering in sight, ready to be conquered.15 Within eight years of the
conquest of the Serra, the four major arteries connecting Sao Paulo to its
hinterland were in operation.16 With the construction of the Southeastern rail
network Sao Paulo came to occupy a privileged position with respect to Brazil’s
growing internal market, in part explaining its eventual ascendancy over Rio de
Janeiro (after 1910) as the industrial center of the country. The hinterland of Rio
de Janeiro and Sao Paulo was divided into two parts: The Rio market was made
up of eastern Minas Gerais, the state of Rio de Janeiro, Espirito Santo, and
possibly Bahia. The Sao Paulo hinterland comprised the interior of Sao Paulo
For details on the construction and financing o f the Santos-Jundaf line see Richard Graham,
Britain and the Onset o f Modernization in Brazil: 1850 - 1914. op.cit.. Chapter Two:
"Coffee and Rails."
Morse, From Community to Metropolis, op.cit.. p. 166.
-1 4 0 -
state, the south of Minas, and the southern states of Parana, Santa Catarina, and
Rio Grande do Sul.17
As Figure 1.1 clearly illustrates, the Southeast of Brazil was characterized
by a densely woven network of railroad lines. While trunk lines served to connect
port cities to the agricultural interior, branch lines were thickly interwoven
throughout the region, and most significantly, there were internal trunk lines
connecting the regional capitals. In contrast, the rail system in the Northeast was
characterized by essentially linear patterns, connecting port cities to the interior
with little interweaving throughout the region, and contributing to "dendritic", or
tree-like marketing systems.18
While railroads in the Southeast served to link coastal cities not only to
their respective agricultural hinterlands, but to each other, the rail network of the
Northeastern region was limited to lines which connected the capital cities to the
sugar plantations of the interior, or shorter lines, owned and run by central sugar
mills which linked these factories to their suppliers of cane, and in turn, fed from
the mills directly to the trunk lines. The distribution of rail lines paralleled the
distribution of cities, lacking a network of mid-length railways. The construction
of railways, limited by the hilly topography of the region, reflected the sugar-cane
Caio Prado J r ., Evolucao Polftica do Brasil e Outros Estudos. (Sao Paulo: Editora
Brasiliense, 1961), "A Cidade de Sao Paulo: Geografia e Historia".
E. A. Johnson, The Organization o f Space in Developing Countries. (Cambridge: Harvard

University Press, 1970), p. 85.

-1 4 1 -
monoculture, and as one famous scholar of the region, raised in a sugar-growing
area, remembered:
.... I felt that the (usina’s) railroad stigmatized the land through
which it passed... the land was a slave to the steel.... that double
strand of steel falling and rising through the hills and dales, carrying
so much cane to be processed so far away, gave the damming
impression that it was sucking away the life and richness of the
land 19
In the Northeast, railroads drained the wealth from the land, carrying cane away
from small estates who previously processed their own sugar and contributing to
the increased concentration of wealth and landholdings in the ongoing
modernization of the sugar industry. In the Southeast, railroads furthered the
process of small town development and commercial growth within the hinterland.
A brief look at the regional distribution of the railroad network confirms the
relative density of railroad lines (in both per capita and geographical terms) in the
South and Southeast of Brazil, suggesting that the existence of a more extensive
regional transportation network played a key role in the relative internal
interdependence observed in these two regions. The Southeast alone accounted for
nearly two-thirds of the track laid in 1907, and together with the South of Brazil,
contained more than 80% of the Brazilian rail network. In contrast, the Northeast
and Northern regions were home to slightly more than one-fifth of the rail
network. And, even when the geographically vast frontier region of the Center-
Gileno de Carli, Aspectos de Economia Acucareira. (Rio de Janeiro, Irmaos

Pongetti, Editores, 1942), p. 3.
R e p r o d u c e d w ith p e r m is s io n o f th e c o p y r ig h t o w n e r . F u rth er rep ro d u ctio n p roh ib ited w ith o u t p e r m issio n .

-1 4 2 -
west is included within the Southeastern region, the density of the rail network
exceeds that of either the North or the Northeast (Table 3.16).
Railways in the southern half of Brazil were generally more profitable than
those in the North and Northeast. As shown in Table 3.17, the southern half of
the country accounted for roughly three-quarters of the track in operation, but
more than 90% of the total receipts. The regional average operating ratio, (ratio
of expenditures to receipts per concern, weighted by the concern’s share of total
regional rail) for the South/Southeast at 81.9% in 1906, compared to an operating
ratio of 90.9 percent for the North and Northeast.20 Average receipts per
company were 1074 contos in the South/Southeast as compared to 620 contos in
the North/Northeast. Each kilometer of rail earned, on average, three times more
in the south of Brazil than it did in the Northeast.
Neither half of Brazil held the monopoly of profitable railways —in both
north and south there were profits to be made by railroads, and also investments
which did not turn out so well. The range of performance was greater in the
North/Northeast (as measured by the minimum and maximum operating ratios for
the regions), where more money was made, and lost, on railroads. The most
profitable line in the Southeast was the Paulista railroad, the first railroad in Brazil
to be constructed entirely by Brazilian capital. The Paulista, by 1906, had 1,056
kilometers in service and 118 stations of various classes and scores of additional
The higher the operating ratio, the less profitable the railway.
-1 4 3 -
stops connecting Sao Paulo city to the areas north and west within the state.
During 1906 the privately owned and operated Paulista earned roughly 27,000
contos, less than ten percent of which was generated from the tickets bought by
nearly one million passengers that year. The bulk of the Paulista revenues came
from the transport of merchandise, and of the 984,000 tons of goods transported in
1905, 591,000 tons were coffee.21 Thus, while coffee was clearly dominant in
both revenue and tonnage for the Paulista, the railway was actively engaged in the
transport of passengers and other merchandise.22
In contrast, the railway in the Northeast which was the most profitable (i.e.
had the lowest operating ratio), was a 47 kilometer stretch in Pernambuco state,
connecting the towns of Ribeirao and Bom Destino, and "serving the usinas of
Cocahu and Riberao". Of the 136 contos earned by the railway in the first half of
1906, 11.5 contos, or about eight percent, was generated from passenger receipts
(7,711 passengers were transported). The remaining 124.5 contos of revenue came
from the transport of goods —of which 114 contos, or more than four-fifths of
The data in Table 3.17 and for this discussion of individual railways comes from the entry
on railroads in the Centro Industrial do Brasil’s 1909 survey o f industry and agriculture in
Brazil. (O Brasil, suas riauezas op.cit.). While the listing o f railroads provides
kilometers in traffic and expenditures and revenue for each line, the information available
on composition o f traffic is not consistent for all companies listed. Hence, it was not
possible to calculate regional averages on the composition o f goods carried, passengers
transported, etc.
Details on the Paulista railway are from Centro Industrial do Brasil, O Brasil op.cit..
Volume HI, Industria, p. 56.

- 144-
total revenues, was earned by the transport of raw sugar, sugar cane liquor, and
processed sugar.23
Compare now the least profitable lines in the two regions. In the
South/Southeast the Estrada de Ferro Dona Thereza Christina, with 116,340
kilometers of rail in the southern state of Santa Catarina, operated at a loss with
expenditures 2.6 times its annual receipts of 112 contos. The railroad, with 7
stations and eight additional stops, transported 8,644 passengers in 1906, who paid
in 20% of total earnings, while portage of goods (unspecified) accounted for the
remaining revenues.24 In the Northeast, the Estrada de Ferro Paulo Alfonso, with
115,853 kilometers in the state of Alagoas, 3 stations, and 5 additional stops,
averaged expenses more than four times its total revenue of 25 contos in 1906.
The railroad provided transportation for a mere 1,313 passengers, yielding 11 % of
total revenues, the rest of which was earned from transporting cotton, leather
goods, and sugar cane liquor.25 Thus, at both ends of the spectrum, the most
profitable and least profitable railroads in the South/Southeast performed better
overall, had more stops and more diversified traffic, and earned more
proportionally from passengers than did their Northeastern counterparts.
The history of government subsidization for railroad development, and the
evolution of the various mixes between federal government, state government, and
23 Ibid., p. 51.
24 Ibid., p. 60.
25 Ibid., p. 52.

-1 4 5 -
private sector ownership and operation, deserves, and has received, a dissertation
of its own.26 The overall trend was for publicly owned trains to serve internal
producers, while private lines concentrated on export markets. The majority of
privately owned lines were located in the South and Southeast. In 1920, Sao Paulo
was home to nearly 7,000,000 kilometers of railroads, the bulk of which were
constructed after the advent of the Republic. Of these, only 580,000 kilometers,
or less than 10% of the total, relied on interest guarantees from the federal
government; the majority of railways either were constructed with interest
guarantees from the state government, or received no public support
whatsoever.27 Over time, even those railroads built to carry coffee came to
devote significant carriage to non-export commodities. In 1910, 20 percent of all
rail cargo was intended for export; by 1920 the export share had fallen by almost a
half.28
Although the North and Northeast received less, in absolute terms of total
federal support, that support was proportionately more significant given the low
regional incomes. Taking as a measure the percentage of federal rail capital in
26 Julian Smith Duncan, Public and Private Operation o f Railways in Brazil, op.cit.. p. 173.
27
Paul Singer, Desenvolvimento Economico. op.cit.. p. 55.
28
Topik, "Brazil’s Internal Econom y...", op.cit.. pp. 222-223, Duncan, op.cit.. pp. 87, 108.
Between 1862 and 1919, o f the total government spending for railroad subsidies and
construction o f nearly 2 million contos (the largest government expenditure), two-thirds
were spent in the South and Southeast o f Brazil. (Diccionario Historico e Geografico do
Brasil, o p .cit.. p. 753.) Unfortunately, comparable data on rail cargo are not available by
region, although the line by line descriptions for 1906 in the survey o f the Centro Industrial
do Brasil indicate much greater diversification o f cargo on the part o f railroads in the South
and Southeast o f Brazil.
-1 4 6 -
each region, divided by the percentage of each region’s contribution to the federal
budget, we see that the Northeast received 2.8 times its contribution, the North,
4.8 times, the South, 1.6 times, and the Southeast, only 60%.29
The impetus for the construction of the regional rail network in the South
and Southeast arose from the coffee trade, and to a lesser extent, government
strategic considerations. In turn, the fall in intra-regional transport costs had
salutary effects on the development of other activities within the regional economy.
It has been argued that the growth of the domestic rail network contributed
significantly to a fall in the price of domestic goods, allowing foodstuffs produced
in the interior to become competitive with international goods for the first time,
contributing to the fall in food imports observed above.30 Furthermore, as
indicated above, cars built to transport coffee to the coastal cities did not return
empty to the interior, but carried with them passengers (including many European
immigrants) and imported goods. Railroads in the Southeast of Brazil, on average,
carried more passengers, and made more stops per kilometer of track, than did the
railroads in the Northeast. A diversified agriculture and a network of small towns
and cities was nourished by a densely woven network of intra-regional railroads, in
contrast to the sugar monoculture of the Northeast.
Calculations for 1930. Topik, "Brazil’s Internal Economy op.cit.. p. 222.
Perruci, o p .cit.. pp. 44-45.

-1 4 7 -
As noted by a contemporary observer, while the coffee trade was indeed
controlled in the capital city and the port city of Santos, a bustling internal
commerce developed within the hinterland. Writing in about 1909, Pierre Denis
described how cities of the interior
are not and have never been coffee markets. The only markets for
coffee are Sao Paulo and Santos and the businessmen of Sao Paulo
and the comissarios of Santos are in direct contact with the planters.
The cities of the interior do not serve as points of concentration for
the harvested crop, but they do control the distribution o f imported
merchandise in the agricultural districts.... Each city has stores for
hardware, cloth, and groceries from which the depots o f Fazendas
are provisioned. They live also from the money trade. Planters find
credit at small local banks, which are maintained by more poweifiil
banks situated in Sao Paulo.*1
Railroads brought to Sao Paulo’s cities of the interior not only their new immigrant
populations, but the goods which stocked the shelves of local stores. They were
the veins through which coursed the blood of local commerce and urbanization.
Extended ever further in search of more fertile coffee lands, or to protect Brazil’s
boundaries, they provided the cheap transportation necessary to enable viable
market production for the domestic economy, in the hollow of coffee’s moving
frontier.
This process of dynamic frontier expansion and ongoing economic
diversification in the Southeast, is contrasted with the rootedness of a monocultural
agriculture in the Northeast. In the following section, I examine the set of
economic and social relationships affecting the interdependence of town and
31
Pierre Denis, Le Bresil. 1909, p. 110 (italics mine).

-1 4 8 -
country within specific regions. In so doing, I shed further light on the differing
degree of urban network integration in the Northeast and Southeast of Brazil
demonstrated in the first section of this chapter.
n i.3 Town and Country
Undertaking an investigation of the urban economy presupposes the
examination of a vaster area, within which one looks at the division of labor
between agriculture and the other productive sectors which are located in the city.
This economic metabolism between countryside and city leads any scholar of urban
systems to embrace a sphere of analysis larger than the city itself. This realm is
composed of the urban centers and their tributary regions —which are defined as
the economic hinterland of the city. The hinterland of an urban nucleus, therefore,
is made up of all those agricultural areas which cede to the city part of their
surplus and consume, in some measure, goods or services of the city.32
Economic development can be described as a process in which the set of
relations between town and country becomes increasingly complex, and of
increased interdependence between rural and urban economies as the penetration of
market forces into the "interior" leads to the monetization of economic activity, the
mobilization of savings and labor, and the decline of subsistence activity. Paul
32 This conceptual framework o f city and hinterland is further elaborated in Paul Singer’s
Desenvolvimento Economico e Evolucao Urbana. op.cit.. pp. 7 - 10. See also Duncan,
et.al, Metropolis and Region, op.cit.. pp. 37 — 38, also discuss the concept o f hinterland,
the interaction between market and resources, and the possibilities o f an urban area’s
hinterland locating beyond the confines o f spatial contiguity.

- 149-
Singer has argued that this transformation from a subsistence-based economy took
place in 19th century Brazil, principally in the Southern and Southeastern regions,
as part of a two-stage process. In the first stage, an increase in production for the
external market led to a shift from the consumption of local informal manufactures
in favor of imported products; the second stage, which he argues began in 1890
and continues to the present day, consists of a substitution of imports, and to a
smaller extent, local informal manufactures, by national industrial products.33
Singer’s argument contains two premises, central to an understanding of industrial
development and urbanization in Brazil: The first is that most of "manufactured"
goods of the 19th century were provided through the informal sector, produced
mainly within the context of plantation-based enclave economies. The second
premise is that the introduction of "industrialized" manufactures occurred first
through an expansion of demand, and the subsequent importation of consumer
goods from abroad. Thus, an external market sector developed in addition to the
local subsistence economy. He further argues that local industry replaced imported
industrial goods, rather than the informal manufactures present in the domestic
market. In other words, there was not a complete transformation of the local
economy (in a uniform fashion across Brazil) but rather an expansion of market
activities to new spheres with a continued maintenance of locally-based enclave
activities. As we shall see below in a comparison of the hinterlands of Sao Paulo
Singer, o p .cit.. p.42

-1 5 0 -
and Recife, the phenomenon of the "moving frontier", and the continuing
incorporation of new land and other resources into a market sphere, is fundamental
to an understanding of the urbanization and industrial development which took
place in the Southeast of Brazil (and did not take place in the Northeast).
The interior, the sertao in Portuguese, has been called the "invisible scene
of Brazilian development.... the enigmatic hinterland of Brazil." Going on, J. F.
Normano highlights the importance of the transformation of the sertao for Brazil’s
future economic development, and the potential consuming power of the interior:
The adjustment of the sertao to the money economy is the

preliminary condition for the creating of a large domestic market.
Money economy requires organized cheap transportation; without it
the sertanejo is not connected with the market and continues to live
in a self-supplying household. Economically here lies the future of
the country.34
Today, the sertao exists primarily in Brazil’s Northeast, and in fact is often used
synonymously as a term for the region. When Normano was writing in the
1930’s, the sertao was a nationwide phenomenon. The origins of the sertao’s
eventual disappearance in the southern half of Brazil can be traced to the dynamic
expansion of coffee production during the First Republic, and the "moving
frontier" which left in its wake small towns and cities populated by European
immigrants. The story of how this transformation occurred in Sao Paulo, and
why it didn’t occur in Pernambuco, takes up the rest of this chapter.
J.F . Normano, Economic Types o f Brazil, op.cit.. p. 69.

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To set the stage for the two case comparison, I first provide an overview of
the regional profile of agricultural production during Brazil’s First Republic.
Afterwards, I turn to a discussion of the urban hinterlands of Sao Paulo and Recife
—using these counterexamples as a means of construing the divergent economic
and institutional development of the Southeast and Northeast of Brazil along the
lines of two tensions or counterpoints. The chapter concludes with some thoughts
on the limitations of staple-based theories in explaining Brazil’s history of
divergent regional development.
(i) The Agricultural Base
The growth of the Brazilian economy, at least until the end of the 1920’s,
was primarily dependent upon the expansion of exports of agricultural products.
Agriculture represented more than 80 per cent of total value added by industry and
agriculture, and although largely produced for export at the beginning of the
period, was increasingly consumed domestically over the course of the First
Republic.35 The tenuous nature of the ties between agricultural development and
urban/industrial growth has been the subject of debate in the Brazilian literature,
with the limitations of the "semi-feudal" nature of Brazilian agriculture in
contributing to processes of urban/industrial development often becried.36 It has
35 Exports represented 68% in 1907 and 36% in 1919, reflecting the growing importance of
the Southeast as a consumer o f Brazilian agricultural production. (Villela and Suzigan,
op.cit.. Apendice A, "Apendice Methodologico".)
36 For a summary o f this debate and survey o f contributing authors, see Antonio Barros de
Castro, Sete Ensaios Sobre a Economia Brasileira. o p.cit.. Chapter 2, "Agricultura e
Desenvolvimento no Brasil" (Agriculture and Development in Brazil).

-1 5 2 -
been frequently and persuasively argued that Brazilian agriculture did not
experience its "revolution", liberating supplies of labor for industry, providing a
market for locally produced manufacturer, and adequately supplying urban-
industrial centers with raw materials and foodstuffs, until well into the second half
of the twentieth century. As we’ve already seen, this did not hamper early
industrialization in Brazil, for several reasons. First, as W.A. Lewis has noted,
open economies are not confined to the agricultural primacy model, as "the
opportunity to trade is also an opportunity to industrialize". Trade increases
national income, the domestic market for manufactures, and immigration can
provide an industrial labor force.37 Furthermore, one can argue as did Jacobs,
that economic growth and change originates in urban areas, and that rather than
conditioning urban/industrial developments, agricultural transformations reflect
them. Independent of whether the chicken or the egg came first, it is clear that the
species would not survive if either failed to fulfil its function. In this section,
therefore, I provide a glimpse of the agricultural "base" in the Northeastern and
Southeastern regions, providing the general context for the more detailed analysis
of socio-economic/institutional developments in the specific hinterlands of
Pernambuco and Recife which follows.
While the dynamic process of coffee expansion in the Southeast in response
to increase in world demand for coffee and inflows of foreign investment to
W. A. Lewis, Evolution o f the International Economic Order, op.cit.. p. 10.

-1 5 3 -
finance infrastructure development for the region opened up new lands and
witnessed the symbiotic development of urban horticultural production along with
King Coffee, conditions in the Northeast were dramatically different. The
combined effects of a decline in the world market demand for sugar, the
government-subsidized introduction of new technology in sugar processing (but not
production) dependent upon economies of scale, the absence of foreign
immigration, and the availability of a reservoir of landless rural poor resulted in an
monoculturally-based agriculture, where large sugar plantations and subsistence
plots accounted for the bulk of regional production.38
Examining data from the 1920 census we see that farms in the Northeast
were on average somewhat larger, worth less (due both to a lower price of land
and limited investment in agricultural inputs), and land was slightly less evenly
distributed (Table 3.18). Further data on agricultural production corroborates the
Studies o f transformation in the coffee region include: Stanley Stein, Vassouras: A

Brazilian Coffee Countv. 1850 - 1900. (Princeton: Princeton University Press, 1985);
Richard Graham, Britain and the Onset o f Modernization in Brazil. 1850 - 1914. Chapter
2: "Coffee and Rails", ((Cambridge: Cambridge University Press, 1968); Warren Dean,
Rio Claro: A Brazilian Plantation System. 1820 - 1920. (Stanford: Stanford University
Press, 1976); Em ilia Viotti da Costa, Da Senzala a Colonia. (Sao Paulo: DBFEL, 1966);
and Boris Fausto, "Expansao do Cafe e Polrtica Cafeeira", in HGCB, op.cit.. Volume 3.
Book 2. Chapter 1. Sources on the sugar economy o f the Northeast include: David
Denslow, "Sugar Production in Northeastern Brazil and Cuba: 1858 - 1908," Ph.D .
Dissertation, Yale University, 1974, Gileno De Carli, O Processo Historico da Usina em
Pernambuco. (Rio de Janeiro: Irmaos Pongetti Editores, 1941), J. H . Galloway, "The Last
Years o f Slavery on the Sugar Plantations o f Northeastern Brazil", HAHR, November, 19,
pp. 596-605, Gadiel Perruci, A Repiiblica das Usinas: U m Estudo de Historia Social e
Economica do Nordeste: 1889 - 1930. (Rio de Janeiro: Paz e Terra, 1978), and Jaime
Reis, "From bangue to usina: social aspects of growth and modernization in the sugar
industry o f Pernambuco, Brazil, 1850 - 1920," pp. 369 - 396 in Kenneth Duncan and Ian
Rutledge, Land and Labour in Latin America: Essays on the Development o f Agrarian
Capitalism in the Nineteenth and Twentieth Centuries. (Cambridge: Cambridge University
Press), 1977.
R e p r o d u c e d w ith p e r m is s io n o f th e co p y r ig h t o w n e r . F u rth er re p ro d u ctio n p roh ib ited w ith o u t p e r m issio n .

-1 5 4 -
relative diversification of agriculture in the South and Southeastern regions of
Brazil. With the exception of manioc (a staple of the rural poor in the Northeast),
foodstuffs were produced principally in the southern regions of the country (Table
3.19). Interestingly, com was the second highest valued agricultural crop in 1920,
falling behind slightly behind coffee (whose production was also concentrated in
the Southeast). Cotton and sugar, the next two crops ranked in terms of value of
production, were worth roughly half the value of the domestic com production,
and both crops, while principally grown in the Northeast, also saw significant
production in the Southeast. In fact, the Northeast was only clearly the primary
producer of cocoa, ranked thirteenth in value of production for 1920. In sum,
therefore, the Southeast and South of Brazil were not only the leading producers of
the main export of the First Republic, coffee, but also of domestic foodstuffs (with
the exception of manioc), and accounted for significant shares of production of
other staple exports with the exception of cocoa.
Findings on average yields of production dispute the argument that the
regional dominance of the Southeast in foodstuff production was based on the use
of different technology, or indeed, the occurrence of an "agricultural revolution."
Indeed, the technological backwardness of Brazilian agriculture during the First
Republic has been characterized as extreme.39 As can be seen in Table 3.20,
average yields in the two regions were not strikingly different for the majority of
Dean, "Economy", op.cit.. p. 241.

-1 5 5 -
crops (with the exception again of manioc where Northeastern yields were more
than 20 quintales per hectare greater than those in the Southeast), suggesting that
there were no significant differences in the adoption of new production technology
(for foodstuffs at least) or other agricultural improvements. The expansion of food
crop production in the Southeast therefore did not emerge from endogenous
changes within the agricultural sector and the sudden creation of a marketable
surplus due to improved technology, but rather, it can be surmised, was demand-
driven, as immigration from within and without Brazil increased the numbers of
people living in urban areas, and as new land was brought into production in
response to an expanding internal market. In fact, if any agricultural revolution
must be called upon to furnish the impetus for industrialization in the Southeast of
Brazil, one would have to say that it was events in the countryside in southern
Germany and Italy over the second half of the century —and the expulsion of the
peasantry in southern Europe —which provided, through the arrival of immigrants,
the demand, know-how, and labor for the initiation of an industrialization process
in the southern half of Brazil. And, as we saw in the first section of this chapter,
the Southeast of Brazil underwent a period of rapid urbanization during the period
1890 through 1920, resulting in a regional urban network which was both dense
and extensive. These cities most certainly depended upon the rural economy for
their supplies of foodstuffs and industrial raw materials.40
40 The value-share o f foodstuff imports declined significantly during the first years o f the 20th
century, reflecting the expansion o f domestic production. In 1901 foodstuffs accounted for
more than forty percent of total imports, a share which had nearly halved by 1913.
-1 5 6 -
Furthermore, as Jacobs has argued, "city economies invent the things that
are to become city imports from the rural world, and then they reinvent the rural
world to supply these imports.1,41 The symbiotic relationship between the city
and the countryside should not be overlooked. While coffee provided the dynamic
impulse for expansion, as shall be discussed below, farmers in the Southeast were
not confined to a single crop. Urban demand fed into the diversification of
agriculture.
(ii) Sugar and Coffee; Urban/Agrarian Structure o f Pernambuco and Sao
Paulo
Compare Warren Dean’s description of Rio Claro, the Sao Paulo
municipality located in the interior of the coffee region, c. 1900:
The plantation work force and the sizeable town proletariat provided
a clientele for a large service sector: government offices, hospitals,
a theater, cinemas and churches. In turn, the town marketed the
subsistence surplus of the smallholders. The town market and
slaughterhouse sold produce, and local brokers and merchants with
processing machinery dealt in small quantities of coffee, com, rice,
dairy products, and cane brandy. The accumulation of commercial
and small-scale industrial undertakings engendered a relatively large
urban middle class, whose ambitions and consumption patterns
further diversified employment.42
with Bainbridge Cowell’s description of Recife’s sugar-producing interior, the zona

da mata, again c. 1900:
(Anuario Estatfstico do Brasil, op.cit.. pp. 1359-1360).
Jacobs, Economy o f Cities, op.cit.. p. 40.
Warren Dean, Rio Claro. o p .cit.. p. 162.
-1 5 7 -
... sugar mills preempted the functions of towns, since the usina
managers dealt directly with Recife in regard to bank credit,
marketing of the export crop, and the supply of imported goods that
were sold by the company store. Wage laborers, furthermore, lived
in workers’ housing attached to the mill.43
and note the starkness of the contrast between urban development in the two
regions. A vibrant, rural-based, urbanization occurs in the dynamic Southeast
while the enclave-economy structure of the sugar-producing Northeast had, by the
1880s contributed to its fate as "Brazil’s region of perennial poverty."44 Regional
differences in relative labor scarcity, the availability of (and perceived need for)
new lands, and the levels of demand and commercialization for the major export
crops, lie at the heart of the divergent urban development observed in the
Northeast and Southeast of Brazil. Each of these issues is addressed in turn below.
Labor Scarcity
While the Pernambuco sugar planter "did not vigorously resist the gradual
abolition of slavery because cheap free labor was readily available"45, the coffee
planter of Sao Paulo "continued irresolute to the last".46 And yet, despite
himself, due to the scarcity of workers for the coffee plantations, the coffee
fazendeiro was forced to implement a free labor system, including the evolution of
43 Bainbridge Cowell, Jr., "Cityward Migration in the Nineteenth Century: The Case o f
Recife, Brazil," Journal o f Interamerican Studies and World Affairs. Volume 17, No. 1,
February 1975, p. 55.
44 Ibid., p. 51.
45 Eisenberg, The Sugar Industry inPernambuco, op.cit. p. 180.
46 Dean, Rio Claro. op.cit.. p. 156.

-1 5 8 -
a standard labor contract with terms of payment sufficiently beneficial to
discourage debt servitude.47
Writing of Rio Claro, Dean describes the change in the regional economy
wrought by the transition to free labor:
The transformation of the labor regime on the plantations led to a

diversification of the economy of the state. A much wider range of
goods was needed to satisfy consumer demand, and the nature of the
Brazilian commodity-exporting economy was such that imports could
not keep pace with it. Some of the immigrants abandoned plantation
work to apply their skills more fully in craft occupations. Small-
scale factories multiplied all over the interior of Sao Paulo. Rio
Claro’s town center became quite remarkably industrialized.48
In contrast, modernization of sugar processing technology in the Northeast
was accompanied by increased land concentration, more exaggerated sugar
monoculture, and immiseration of the agricultural work force. Small-scale
plantation based sugar-mills, or engenhos gave way to usinas, capital-intensive
central mills which depended upon economies of scale. As Alan Dye has
demonstrated was the case of the Cuban sugar industry at the turn of the century,
regional differences in the relations of production, and specifically, the distribution
of cane-growing lands, corresponded with regional differences in scale and the
It has been argued that the labor market conditions which necessitated the use o f money
wages in Sao Paulo "stimulated a capitalistic outlook, rather than vice-versa." See Warren
Dean, "The Planter as Entrepreneur: The Case o f Sao Paulo,", Hispanic American
Historical Review. 46(2), May 1966, p. 145.
Warren Dean, Rio Ciaro. op.cit.. p. 161.
-1 5 9 -
relative capital-intensity of sugar processing.49 The average horsepower capacity
of Northeastern usinas was 1.4 times that of usinas in the South and Southeast.50
The relations of production between planters and workers, and indeed usinas and
their planter-suppliers, reverted to traditional ties, based on dependent relations and
non-mediated by market forces:
As a result of the transition from engenho to usina, the smaller

share-croppers who supplied usinas became known as parceiros, and
they paid up to one-half their cane as rent. The larger share
croppers, known as rendeiros, paid lower percentages which
decreased as their production increased, but they were also obliged
to provide a minimum quantity of cane and were financially
responsible if they failed to do so. In one sense, modernization
broadened the sharecropping system to include the senhores de
engenho, now known as fomecedores, who supplied the central mill
or usina with cane. The planter could become as dependent upon
the usina owner, who financed their crop and bought their cane, as
were their own sharecroppers upon them.51
The relative bargaining power of larger landowners and potential usina proprietors
compared to smaller planters and sharecroppers, together with the availability of
subsidized government financing for technological improvements, provided an
attractive environment for the spread of the large sugar mills. By the end of the
first World War, 60 usinas produced more than half of the sugar in Pernambuco.
Alan Dye, "Cane Contracting and Renegotiation: A Fixed Effects Analysis o f the
Adoption o f New Technologies in the Cuban Sugar Industry, 1899 - 1929," Explorations in
Economic H istory. 31, 141-175 (1994).
Centro Industrial do Brasil, O Brasil op.cit.. Volume Three, pp. 1-141. 75 Usinas
were counted in the Northeast, and 53 in the Southeast, with an average horsepower o f 225
for the Northeast and 161 for the Southeast. Individual information was not given for the
smaller mills.
Eisenberg, op.cit.. p. 194.
-1 6 0 -
In the meantime, the number of small-scale mills, or bangues, had fallen from
1800 in 1888 to 900 in the early 1920s.52 Technological changes prolonged and
reinforced the concentration of political and economic power in the hands of the
sugar barons, at the price of a falling standard of living for the agricultural work
force. In the words of one scholar, usinas "brought labour-saving innovations to
what was practically the only source of monetary activity in a region suffering
from economic stagnation."53
The mechanization of sugar processing thus liberated large supplies of
labor, and the "land hunger" of the usinas led to the forcible eviction of small
planters and subsistence farmers from the best sugar producing lands. By 1920,
forty-one usinas in Pernambuco had absorbed over four hundred engenhos.54
However, this "industrial reserve army" created in the Northeast did not result in
an industrial take-off, despite the region’s added advantage of being the country’s
major supplier of cotton, Brazil’s principal industrial raw material. (See Figure 2.3
which maps out the cotton producing versus the cotton manufacturing areas.)
Cheap industrial inputs in and of themselves are not sufficient conditions for
industrial take-off, and the absence of internal demand in the Northeast for local
manufactures limited the extent of the region’s industrial growth. In 1911 a rural
daylaborer in Pernambuco received anaverage salary of 1.025 mil-reis, a usina
52 Reis, "From bangue to usina...,", op.cit.. p. 371.
53 Ibid., p. 384.
54 Ibid.. p. 371.
-1 6 1 -
employee, 1.260. In Sao Paulo, during the same year, the wages were,
respectively, 2.300 and 2.600.55 While the typical usina worker in Pernambuco
lived in company housing "akin to slave quarters", received a pittance of a wage,
and had no right to the production of subsistence crops, the immigrant "colono" on
the Sao Paulo coffee plantation, in addition to his higher salary, had cash income
from the marketing of subsistence crops (planted in between the young coffee trees
in the four years before they reached maturity), and made a vast variety of
purchases both at the company store on the fazenda and in town (as nearly half of
the yearly salary advances were in cash).56 Finally, while studies of immigrant
colonos have chronicled the rising standard of living of this group over the first
decades of the twentieth century, sugar workers in the Northeast saw their already
low incomes fall even further. The sharpest drop in estimated per capita income
occurred between 1890 and 1900, the years when the usinas appeared and were
spreading rapidly.57
Thus,the demand for local manufactures, which was concentrated among the
lower classes, was limited by the extent of income concentration and labor
exploitation observed in Pernambuco. Upper classes throughout Brazil still
preferred imported consumer items, and the port-city of Recife served its function
Robert M. Levine, A Velha Usina: Pernambuco na Federacao Brasileira. 1889 - 1937.

(Rio de Janeiro: Editora Paz e Terra, 1980), p. 62.
Dean, Rio Claro. op.cit.. p. 176.
Reis, op.cit.. pp. 383-384.
-1 6 2 -
in making these goods available to the Pernambuco elite. However, the demand
within the sertao never took off, as the modernization of the sugar industry
initiated a process of land concentration, rural unemployment, and, ironically,
regional food shortages.58 The low income per capita and limited bargaining
power of agricultural laborers and small planters in the Northeast contributed both
to the attractiveness of modernization of sugar processing and to the limited
investment in the manufacture of consumer goods.59 Substantial elite out
migration and cases such as the moving of headquarters of Casas Pemambucanas,
a successful manufacturing and wholesale firm, to the Southeast, illustrate the
perceived lack of opportunities for development within the region, and also belie
the myth of the lack of homegrown entrepreneurial ability -- in effect an inter
regional "brain-drain" occurred.60
While elites moved between regions, agricultural workers didn’t. As
discussed in Chapter Two, due to a combination of high costs of coastal
transportation and the active recruitment of Northeastern workers for the
(temporarily) booming Amazon, North-South migration flows were not significant.
58 Levine, A Velha Usina. op.cit.. pp. 73 - 75.
59 Cf. Dye, "Cane Contracting and Renegotiation, ..." , op.cit. for development o f the causal
argument between institutional factors and adoption o f new technologies in the sugar
industiy. To grossly summarize Dye’s argument, the more control exercised by the large
mill owners, the more attractive the application o f modem sugar technology.
60 "Many o f the graduates o f Recife’s law school, degree in hand, permanently left the
Northeast in search o f professional or marital opportunities in the developing South"
(Cowell, op.cit.. p. 51). The case o f Casas Pemambucanos is detailed in Levine, op.cit..
pp. 70 - 71.
-1 6 3 -
Cultural biases on the part of Southeastern planters against native Brazilian workers
worked against subsidizing domestic passages. Instead, state subsidies to
immigration in Sao Paulo, provided a solution to that region’s agricultural labor
shortage. Nonetheless, the inflow of labor was not sufficient to glut the markets.
Planters competed for a highly mobile immigrant labor force, not only through
offering higher wages, but also by increasing the amount of land that the
immigrants could use for their own farming. The city of Sao Paulo became, more
than a entrepot for agricultural or industrial products, the hub of a bustling labor
market. The Immigrants’ Hospice, constructed in 1888, was the center of a
continuous movement of fazendeiros in search of labor and workers seeking
employment. Recent arrivals in Sao Paulo, within weeks, obtained work in
fazendas hundreds of kilometers from the capital city.61 The average immigrant
family worked on two or three coffee plantations during its first years in Brazil,
before eventually settling down permanently. This high labor mobility constituted
one of Berry’s "many forces" which through entropy maximization lead to the
hierarchical ordering of city size observed in the region. In contrast, labor
movements in Pernambuco were unidirectional —workers were expelled from the
countryside to "vegetate at the margins of the capital city", or tied to sugar
production via a system of debt peonage.
Singer, Desenvolvimento Economico. op.cit.. p. 37.

-1 6 4 -
Land Availability
Central to the differing patterns of regional agricultural and urban
development in Pernambuco and Sao Paulo was the relative availability of lands
suitable for the production of each region’s principle exports, given the prevailing
production techniques. Suitability of agricultural lands was conditioned not only
by the land’s innate natural characteristics (e.g. soil type, rainfall, etc.), but by the
land’s accessibility to transport infrastructure and the consequent costs of moving
the product to market. The construction of railroads, together with the extension
of fertile, rainfed lands well into the interior of the Southeast thus played a pivotal
role in increasing the supply of coffee lands.
Another way of increasing land supply, or better, increasing the production
of existing lands, is through land-substituting technological improvements —crop
rotations, fertilization, etc.. Both Southeastern and Northeastern planters during
the First Republic were striking in their lack of adoption of such intensive farming
techniques, and agricultural yields were relatively constant throughout the period.
Expansion of production was brought about by bringing new lands under
cultivation and/or through improvements in processing of the final product. The
implications of such extensive farming practices proved radically different in the
two regions, given both the characteristics of the staple crops, and the relative
availability of new lands.
In Sao Paulo, the "moving frontier" characterized the expansion of coffee
production, as it was "very well known that trees upwards of 30 or 35 years of age

-165-
are as a rule of very little further value to the grande lavoura (grand
production)".62 As a consequence, when the prime production years of a fazenda
had passed,
the planter families moved on. Reinvestment was made further

inland, or better yet in Sao Paulo, in banking, trade, and real estate.
Rio Claro was just a square on a vast checker-board. The
immigrants who did not get land or repatriate accompanied the
advance, and spawned a second generation of colonos. The rest
joined the proletariat of the towns.63
Brazilian land policy, the domain of the federal government throughout most of the
19th century (which passed to the state governments with the advent of the
Republic in 1889), provided for the award of title by the state for vast tracts of
land with little concern for how the lands were originally obtained. Lax
government land policy thus facilitated the ongoing spread of coffee fazendas
within Sao Paulo’s hinterland, dispossessing local subsistence communities and
native populations.64
The sugar producing region of Pernambuco, in contrast, did not benefit
from vast tracts of unoccupied or untitled (by elites) land, having been the home to
an export-based economy since the 17th century. And, unlike coffee, where the
Laeme, Report on Brazil and Java, op.cit.. p. 296.
Dean, Rio Claro. op.cit.. p. 192.
Warren Dean, "Latifundia and Land Policy in Nineteenth-Century Brazil," Hispanic

American Historical Review. November 1971, pp. 606 - 624. Consider for example the
case o f Jose Teodoro de Souza who, "emigrating from Minas Gerais to Sao Paulo in 1856,
staked out five posses in the region o f Campos Novos de Paranapanema containing eight
hundred square leagues (13,360 square miles!) with the help o f a fellow migrant who was
the political boss o f Botucatu." (p. 622).

-1 6 6 -
coffee planter was obliged to reinvest in new estates if he did not want to see his
real worth decline, "sugar cultivation allowed the landowners to remain on the
same property for generations without any need to improve the land or agricultural
technique. n65
The scarcity of fertile lands not controlled by the sugar elite had the
additional effect of discouraging immigration to P ernambuco:
As long as the lands in the coastal area, nearest the consumption

centers, most populous, and best endowed with transportation, are
locked up by large land-owners who do not use them, nor cede them
for fanning ... as long as we do not guarantee the immigrant the
easy acquisition of the land surplus ... we will never see the
European exodus headed for Brazil,"
warned one provincial president of Pernambuco. Another advised:
In this province, where the public lands are imbedded within the
private domain and occupy small areas, it is difficult to think about
creating colonies, due to the need to resort to expensive and
somewhat risky purchases of the [privately] worked lands.
If instead Pernambuco enjoyed ... "the great expanses of public lands which allow
the creation of important colonies" in Rio Grande do Sul, Santa Catarina, and
Parana, the immigrants would also come.66
Export Demand
Between 1890 and 1910, coffee exports earned an annual average return
between 400,000 and 500,000 contos, while sugar exports earned less than 50,000
Dean, "Planter as Entrepreneur", op.cit.. p. 146.
Eisenfaerg, op. c it.. pp. 208 - 210.
R e p r o d u c e d w ith p e r m is s io n o f th e co p y r ig h t o w n e r . F u rth er re p ro d u ctio n p roh ib ited w ith o u t p e r m issio n .

-1 6 7 -
contos. Not only did Brazil occupy a near monopolistic position on the world
market as a coffee exporter, competition between German and United States
interests in marketing and exporting the crop, and the relative disinterest of the
British (they drank tea after all) allowed the Brazilian nationals in the Southeast
substantially more control over the commercialization of their product than was
common for a typical Latin American exporter during the 19th century. "The
Paulista market was never the private sphere of influence of a single country or a
single financial combine.67
The success of Brazilian coffee exports on the world market meant that
money was available -- coffee was above all a commercial crop. The commercial
spirit was so rampant that a Dutch observer, writing in 1886, noted that the
distinction between a fazenda and a sitio (small farm) in the coffee-producing zone
of Santos did not reflect differences in size of the land holdings, but rather, the
value of the coffee crop: "Plantations, however extensive, where the crop does not
exceed 2,000 or 2,500 arrobas and where the coffee has to be prepared on other
fazendas, for a fixed payment, are always regarded as sitios."68 The
identification of the commercial spirit with Sao Paulo was so complete that
Normano, in his 1936 study of Brazil’s "Economic Types", expanded the
geographic frontiers of the phrase paulista, or resident of Sao Paulo:
Dean, "The Planter as Entrepreneur", op.cit., p. 148.
Laeme, op.cit.. p. 276.

-1 6 8 -
Even a modern senhor de engenho in Bahia, the modem fazendeiro

in Minas Gerais, or owner of a cattle raising fazenda in Rio Grande
do Sul are economically paulistas. They follow the spirit of the
time, the new methods and ways of economy. And, on the other
hand, a Portuguese shopowner in Sao Paulo, cautious and diligent,
never taking any credit, avoiding banks, is not a paulista. The
geographical boundary of the paulista is the economic Brazil™
In contrast, the Northeast had
neither commercial class, nor industrial class; nor urban

corporations, in the most extensive area of the agricultural
latifundia, only the great rural seignioralties exist. Outside of them,
everything is primitive, shapeless, fragmentary. The great
dominions are like solar foci: towns, industries, commerce,
everything fades before their dazzling light.70
The declining competitiveness of Brazilian sugar on the world market, hastened by
the introduction of beet sugar in Europe and the imposition of tariff barriers by the
United States which gave precedence to Caribbean exporters, did little to stimulate
the "paulista" spirit in the Northeast of Brazil. Over time, due to the imposition of
high internal tariffs on sugar, the domestic market of Southern Brazil became an
attractive alternative to the United States and England. The tariff on sugar was
$220 a ton until 1905, when it was reduced to $54 a ton to avoid European
retaliation.
The south Brazilian market was so attractive that northeastern

producers were unable to resist the temptation to exploit it and
formed a cartel in which each producer agreed to dump 20% of his
sugar on the world market in order to raise domestic prices.
Domestic prices rose so much that European beet sugar began
Normano, op.cit.. pp. 75 -76.
ibid.. p. 71.
R e p r o d u c e d w ith p e r m is s io n o f th e c o p y r ig h t o w n e r . F u rth er rep ro d u ctio n p roh ib ited w ith o u t p e r m issio n .

-169-
entering Brazil in spite of the $54 tariff, and the government had to
double the duty in March, 1908. As a result, coarse brown sugar
sold for $156 a ton in Rio de Janeiro compared to $43 a ton in
London.71
Sugar from Pernambuco (accounting for approximately one-third of total Brazilian
production), was largely consumed in the Southeast. Government tariffs allowed
Northeastern sugar planters to retain their share of the domestic market, and thus,
survive.72
The structural role of the Northeast did not change. There was no internal
transformation. The region went from being a primary product export-economy
that served world markets, to a primary product export-economy that supplied a
less dynamic domestic market. Although functionally similar to the South of
Brazil in its role as an exporter of agricultural products to the Southeast, extreme
land concentration and the immiseration of the agricultural work force limited the
possibilities for the Northeast’s urban and industrial development. And, contrary
to neo-classical theories of regional convergence, increased regional trade did not
bring about a narrowing of regional differences. A protected domestic market for
sugar blanketed Northeastern sugar planters from external competition, and served
David A. Denslow, Jr., "Sugar Production in Northeastern Brazil and Cuba,1858 - 1908",
Ph.D . Dissertation, Yale University, 1974, p. 28.
Furthermore, the conquest o f the Southeast market by the Northeast producers was made
possible only by the fact that coffee was so much more profitable and lands were not
devoted to its production. Thus, despite the high price o f purchased sugar given the tariff
barriers, growing coffee was so lucrative that it still paid farmers to specialize incoffee.
(Perruci, Republica das Usinas. op.cit.. p. 110).

-1 7 0 -
to reinforce and preserve divergent patterns of regional development, prolonging
the status-quo and delaying needed diversification of the monocultural economy.
III.4 Conclusion: Some Thoughts on the lim its o f Staple Theories o f
Economic firowth
Staple theory, as traditionally postulated, argues that the development of a
region is conditioned by the region’s geo-climactic make-up which in turn limits
the choice of principal staple crop.73 The resulting staple, due to its natural
characteristics, e.g. planting season, processing demands, ease of transport, etc.,
engenders a series of backwards and forwards economic linkages which determine
the nature of growth and extent of development for the region’s economy.
Common in the staple theory literature is the juxtaposition of "good" staples versus
"bad" staples, with good staples grown on small farms, under free labor regimes,
and subject to competitive marketing conditions; while bad staples are the product
of plantation-based, bound labor systems, marketed to a monopolistic colonial
power.
On the surface, the Brazilian case of divergent regional development seems
the textbook example in support of staple theories of economic growth. Coffee
was the "good" staple, with booming exports generating a series of backwards and
forward linkages into both industry and commerce, providing needed revenues for
73 The staple need not be an agricultural product, witness the fur trade in the Canadian case,
set forth by Harold A. Innis in The Fur Trade in Canada: an Introduction to Canadian
Economic H istory. (New Haven: Yale University Press, 1930).
-1 7 1 -
the capital accumulation that conditions industrialization, raising incomes in the
agricultural sector, stimulating improvements in transportation infrastructure, etc.
In contrast, sugar, the "bad" staple, failed to compete on world markets and
limped along domestically only due to the support of high protective tariffs,
immiserized the agricultural work force, and, in general, was unable to engender
the set of conditions necessary for urban/industrial growth.74
Such naive reasoning begs many important questions. The specific
constellation of economic, political, and institutional factors that contributed to the
divergent pattern of development observed in the Northeast and the Southeast of
Brazil cannot be reduced to the simple choice of a staple export. And, even if it
could, the choice of the staple was neither pre-determined, nor geographically
bound. The preservation of the Northeastern sugar-economy was a direct result of
active government intervention, without which the region’s economic (and political)
history might have been significantly rewritten.
Brazil, in fact, provides a unique testing ground for refining traditional
staple theory analysis. Both sugar and coffee were farmed extensively and grown
Hirschman, in "A Generalized Linkage Approach,”, op.cit.. reviews the traditional

dichotomizing that has proved an integral part o f the staple literature, and demonstrates
how, depending on the country context, a "good” staple in one country, can serve as a
"bad" staple in another.

-1 7 2 -
on vast tracts of land, undermining the normal model which contrasts the linkage
effects of plantation versus homestead crops. As Richard Morse has aptly noted,
More homogeneous regions, on the other hand, require sharper

differentiation of variant subtypes than staple theory, as currently
formulated, seems to deliver. The fact, for example, that the
northeast sugar zone and southern coffee zone of Brazil both loosely
fit the "plantation" model scarcely removes the need for a strategy
of analysis that will explain why and how the coffee economy
produced higher levels and wider dispersion of characteristically
urban activities."75
In other words, the type of land tenure arrangement (which in most of the
literature is itself pre-determined by the characteristics of the staple crop), cannot
be pointed to as the culprit. In the Southeast of Brazil, plantation agriculture
paved the way for a bustling interaction between town and country76, while the
same tenure system in the Northeast yielded the polarized latifundia/minifundia mix
characteristic of poverty-stricken rural areas observable throughout the developing
world to this day.
Richard M . Morse, "The Development o f Urban Systems in the Americas in the Nineteenth
Century", Journal o f Interamerican Studies and World Affairs. Volume 17, N o. 1,
February 1975, p. 21.
As in the case o f the expansion o f the U.S. Cotton South during the antebellum years, it
has been argued that the fazenda, o r plantation system in Southeast Brazil was a necessary
vehicle for the opening o f new coffee lands and the ongoing "moving frontier", as
fazendeiros were able to mount the large sums o f capital needed for the initial investment
in opening new lands (and exploit the squatters that did the clearing for them). (Dean, Rio
Claro. op.cit.. pp. 15-23.) Interestingly, slavery was not a precondition for expanding
geographic frontiers o f coffee production, as has been argued for the Cotton South
(Weiman, "Staple...", op.cit.. p.42), due to the existence o f a marginal class o f subsistence
farmers who acted as advance-men for moving frontier. This dynamic o f slash and bum
agriculture, deforestation, and frontier advancement, and insecure land tenure for iow-
income strata, characterizes the Northern and Western economic frontiers o f today’s Brazil.

-1 7 3 -
Also undermining the explanatory power of the staple theory for the
Brazilian case is the ubiquitousness of sugar-cane production across the entire
country. Although traditionally associated with the Northeast, that region
accounted for 43% of the nation’s sugar production in 1920, while the Southeastern
region actually grew more cane, with a 48% share of total production.77 That
nearly half of the nation’s sugar-cane production was located in the more
developed Southeast, particularly the Campos region of Rio de Janeiro state, calls
into question a causal linkage between sugar-cane agriculture and stalled urban
development. As we saw in the first section of this chapter, Rio de Janeiro was
one of the most urbanized states of Brazil during the period under question, with
an estimated urbanization rate of 58.8% in 1920.78 Thus, neither the agricultural
characteristics of the staple crop nor the technological properties of sugar
manufacturing and refining served as limiting constraints for urbanization. Rather,
local market conditions determined the type of processing technology which was
adopted and whether or not the staple crop was conducive to off-farm
developments. In the Southeast, sugar was a subsidiary crop, produced entirely for
local consumption, and as such competed with coffee plantations for both land and
labor. While the hollow of the moving frontier —exhausted coffee lands —could
be and was turned over to sugar production, local labor markets were still tight.
77 However, as discussed above, the Northeast far surpassed the Southeast in terms o f sugar
produced by usinas, the large-scale sugar mills, accounting for 80% o f total production in
1920. (Calculated from 1920 Census).
73 Using the definition o f urban municipalities described in the first section o f this chapter.

-1 7 4 -
As such, agricultural wages of sugar workers varied significantly in the two
regions —and sugar-cane agriculture did not produce the same skewed demand
structure observed in the Northeast.
While it could also be argued that the drive for state subsidies for
mechanization and substitution of labor in the manufacturing and refining process
was driven by sugar planters in the Southeast and that the application of such
techniques to the labor-surplus Northeast was a case of the application of
"inappropriate technology". However, data on the scale of sugar mills and relative
capital intensity of sugar processing in the two regions do not support this point.
If the Northeast invested in inappropriate technology, it was not driven by labor
market conditions in the Southeast, but rather by a desire to increase profits for
large-scale sugar producers (and the ability of this group to win state support and
dispossess small-scale farmers).
While staple theorists have frequently argued that the nature of production
for plantation crops is such that labor supplies and capital which could otherwise
be directed to industrial investments are drained to the agricultural sector79 we
have seen evidence to the contrary in Northeast Brazil. As discussed above,
modernization of sugar-cane processing and the increasing concentration of land
tenure in the Northeast of Brazil contributed to a rural exodus from the zona da
Studies o f the Cotton South have argued that cotton culture limited the potential for
manufacturing by increasing the wages o f rural workers — due both to the longer periods
o f peak labor demands for the staple, and through skewing the relative wages o f women
and children. (David F. Weiman, "Staple Crops and Slave Plantations...," op.cit.

-1 7 5 -
mata, which has even been described by one author as the creation of "an
industrial reserve army" .80 And, the modernization of the sugar industry had
backward and forward linkages for other local industries, stimulating investments
in packaging and equipment, as well as improvements in energy infrastructure.
Yet, these stimuli to industry were insufficient in the absence of an adequate
demand for local manufactures —and herein lies the crux of the difference between
the two regions.
Although the coffee planters in the Southeast of Brazil, due to the inflows
of European immigration, benefitted from a relatively elastic supply of labor,
enabling them to practice extensive fanning techniques, reap the bulk of the profits
during the upswings of the coffee cycle, and shift the burden of coffee downswings
to the salaried classes,81 they still were players in a competitive labor market. As
Dean and others have chronicled in locality-based studies of coffee areas, planters
bid for immigrant (and other) workers, offering packages of benefits that were
comprised of a variety of types of remuneration, including: a wage component,
subsistence plots, housing, transport costs, the assumption of debt from previous
Singer, Desenvolvimento econom ico op.cit.. p. 308.
Celso Furtado, The Economic Growth o f Brazil. Chapter 28, "Employment and Income",
pp. 182-184.
-1 7 6 -
postings, etc.. Furthermore, their labor force was sufficiently mobile enough to
walk away after a year if they could find preferable employment elsewhere.82
The functioning of this labor market depended on two factors, neither of
which were available in the Northeast, nor were they conditioned by the innate
characteristics of the regional staple: the presence of immigrant laborers who
demanded a certain minimum level of compensation, and financial liquidity so that
money-wages could be paid. While it cannot be denied that the relative success of
coffee on world markets contributed to both factors in the Southeast, it is also the
case that little was done by sugar-planters in the Northeast to introduce these
changes, and it could be argued, that they were actively fought against.
While immigration policy in the Southeast and South of Brazil was
primarily aimed at providing labor for the coffee plantations, it also provided large
tracts of state lands to be sold in small parcels to immigrant, or "colono" families.
And this promise of self-sufficient small husbandry proved the draw for European
immigrants to the region. The Northeastern planters proved completely unwilling
to parcel out any lands for immigrant colonies, and indeed, saw no need, as they
had a more than adequate local labor supply.
Caught in a low-level equilibrium trap, confined by a history of three
centuries of settlement, the Northeastern sugar economy did not share the
dynamism of the coffee regions of the Southeast —there was no moving frontier,
82
See Jan De Vries, The Economy o f Europe in An Age o f Crisis, o p.cit.. for a similar
argument concerning the role o f competitive labor markets in leading to different types o f
land tenure arrangements in England and Eastern Europe.
-1 7 7 -
but rather a digging in and redrawing of existing boundaries -- concentrating
wealth in increasingly fewer hands, and preserving a way of life for the traditional
elite.
In conclusion, it is intriguing to reflect upon the role played by timing in
shaping Brazil’s regional differences. If, in the 17th century, coffee had been
Brazil’s primary export crop, enjoying a monopoly position on the world market,
what type of development would it have yielded? With the colonial structure of
government, land policy and taxation, 17th century limits to infrastructure and
transportation, and the small range of available financial and marketing
mechanisms, there was only so much that could have been done. The flows of
financial and human capital to the Southeast of Brazil which accompanied the
coffee boom of the late 19th century were intractable given the existing
technologies of the 17th century.
If coffee had boomed in 1680 rather than 1880, would the Southeast of
Brazil have looked so different from the Northeast? And, continuing, imagine that
Brazil was the world’s only producer of sugar during the end of the 19th century.
And that expansion of sugar production was accompanied by all the 19th century
had to offer in terms of transport, finance, and marketing — would Brazil’s urban-
industrial center then have been in the Northeast?
Historical musings, perhaps, but they do point to the limits of geo-climatic
explanations for regional differences. The Northeast, with its history of three
centuries of settlement, and the accompanying legacy of vested interests, witnessed

-1 7 8 -
the success of an elite who fought to defend a decadent sugar-economy, with dire
consequences for the economic development of the region which remain entrenched
to this day.

CHAPTER FOUR
FINANCING DEVELOPMENT:
NATIONAL BANKING AND REGIONAL ECONOMIES
TV. 1: Introduction
Banking and financial markets in Brazil during the second half of the 19th
century evolved from primitive forms of credit into the building blocks of a
national banking system. This banking system, in turn, became consolidated
during the First Republic. The estimated value of M2 grew 25-fold from 56
million mil-reis in 1849 to roughly 1,400 million mil-reis in 1913. The growth of
the money supply accompanied the growth of gross domestic product, with the
share of M2 in GDP more or less constant between the dawn of the Republic in
1889 (19.6%) and 1913 (21.02). Over the course of the First Republic financial
markets became markedly more sophisticated, as the use of checks and bank
deposits became increasingly common place. Indicative of this phenomenon,
termed "financial deepening," is the tripling of the share of banking deposits in M2
from 14% in 1849 to roughly half of the total money supply in 1913.1
Goldsmith, Desenvolvimento Financeiro sob um Seculo de Inflacao. op.cit.. p. 48 and p.

82.
-179-

-1 8 0 -
Much of the theoretical literature reviewed in Chapter One suggests that this
financial deepening would not be neutral with respect to regional development:
intensification of banking and financial activities could exacerbate and reinforce the
geographic polarization of economic activity, both through innate economies of
scale in financial markets leading to financial concentration, and through the
second-tier effects of differential access to banking and credit. In this chapter, an
appraisal of the evolution of banking developments, buttressed by a discussion of
the government policies which shaped the evolution of financial markets, verifies
the skewed regional effects of the evolution of financial markets for the 19th
century Brazilian case.
On a national level, correspondent relationships between commercial houses
and banks in the various regions facilitated the growing interregional commerce
and provided one mechanism for capital flight from the stagnant Northeast. Within
the Southeast of Brazil, the growth of domestic branch banking provided the means
for the mobilization of savings and the reallocation of coffee profits into other
sectors of the economy, financing the broad-based urban growth observed in the
previous chapter. The absence of regional banking networks in the Northeast of
Brazil was yet another reflection and reinforcement of the perceived lack of
economic opportunities in the region, characterized by a skewed income
distribution, limited local demand (and deposit base), and government-supported
sugar-cane monoculture.
-1 8 1 -
The Brazilian experience during the First Republic thus reveals that the
spread of branch banking and the growing importance of external financing in
Brazil’s industrialization process occurred in precisely those regions which
experienced the greatest urbanization.2 As will be shown, the banking system
which evolved over the second half of the 19th century was primarily urban-based.
Regional case studies have illustrated the ways in which means of payment
provided through the banking system (letters of credit, checks, etc.) circulated
mainly within urban settings, stimulating the growth of city economies as funds
were channeled to investments in public services, intermediary functions, and local
industry.3
In this chapter I: (i) provide evidence for the increasing importance of
banking activities as a share of total economic activities during Brazil’s First
Republic; (ii) analyze the spectrum of views on banking and currency policy held
by Brazilian policy-makers and sectoral and regional advocates; and (iii)
demonstrate the intensified regional concentration of money and credit in the
Confirming for the Brazilian case that "cities and systems o f cities are inextricably linked to
finance and finance markets". Weiman and Odell, Financial Market Integration, op.cit.. p.
4.
Financing o f the coffee trade, also realized by the banks, reached the fazendeiro only to a
limited extent, due to the stringent conditions attached to agricultural credit. (Flavio
Azevedo Marques de Saes, Credito e Bancos no Desenvolvimento da Economia Paulista.
1850 - 1930. Serie Ensaios Economicos, (Sao Paulo: Institute de Pesquisas Econo micas,
1986), p. 185; and Gabriel Perruci, A Republica das Usinas. (Rio de Janeiro: Paz e Terra,
1978), pp. 77-79. While the precise dating o f these banking innovations is impeded by the
limits o f available data, researchers agree that the use o f checks, and the opening o f lines
o f credit accounts for the provision o f industrial credit were well established in the urban
centers by the turn o f the century.

-1 8 2 -
Southeast (particularly the capital city of Rio de Janeiro) and functional divergence
in standard bank practices by region which accompanied the growth of banking and
other financial activities over the course of the First Republic. The financial
deepening which occurred during the half-century between 1870 and 1920 was
unequivocally concentrated in the Southeast of Brazil. As such, that region
benefitted from access to a wider variety of sources of credit, and greater ease of
reallocation of funds than did the rest of the country.
The chapter opens with an examination of the range and extent of banking
activities during the second half of the Brazilian Empire (1850 - 1888),
documenting the regional distribution of banks and assets held by banks, the
evolution of banking and currency policy during this period, and the alternatives to
formal banking activities which existed at the local level. Towards the end of the
Empire, the growth and transformation of the Brazilian economy, the imminent
abolition of slavery, and the markedness of regional differences in the availability
of money and credit generated a political inquiry by the Parliament into the nature
and problems of banking and currency. This inquiry provided a forum for an
array of regional voices on the need for banking and currency reform —distinctive
in the homogeneity of their views despite the growing divergence in their
respective regional economies. A critical reading of responses to this inquiry in
the second section of this chapter enriches our understanding of regional
differences in capital markets, and illuminates the banking and financial policy

-1 8 3 -
issues which would most absorb Brazilian policy-makers during the Republican
transition.
The chapter’s third section consists of an appraisal of the Encilhamento and
its catalytic role in the transformation of the Brazilian banking sector. This period
of intense financial speculation which spanned the last years of the Empire and the
early years of the Republic has proved one of the most controversial events in the
economic and financial history of Brazil. Here, I argue that the Encilhamento
served as a mechanism for the adjustment of the financial sector to transformations
in the real economy, including the switch to wage labor in the Southeastern
agricultural sector, the growth of industrial production for a mass market, and the
large-scale investments in infrastructure and transformation which were serving to
link the Southeast to the rest of Brazil, and the port cities to the interior. Its result
was an increased concentration of banking activities and the growing importance of
external financing mechanisms in the Southeast of the country. Its most enduring
legacy was the entrenchment of the capital city Rio de Janeiro as the nation’s
financial center well into the twentieth century.
The fourth part of the chapter examines more closely the evolution of
banking during Brazil’s First Republic. The distinctive nature of banking in the
Northeast and Southeast regions of Brazil is demonstrated, as differences in both
the quantity and quality of banking services are explored. An analysis of the
extent of branch banking, based on data gathered from contemporary almanacs and
government sources, documents the correspondence of the evolution and extent of
-1 8 4 -
the banking sector with the urban hierarchy elaborated in the Chapter Three. Far
from mere coincidence, the role that banks played in the urbanization of the
Southeastern interior is explored based on evidence from secondary sources. The
chapter concludes with an appraisal of Rio de Janeiro’s role as capital city and the
nation’s financial center throughout the period under study —a role which persisted
despite the city’s declining share in total national exports and the shift of Brazil’s
industrial center from the Federal Capital to Sao Paulo.
IY.2 Banking in the Empire
(il Form and Function
During the second half of the 19th century, the foundations of a national
banking system were laid in Brazil. In the wake of banks that were predominantly
banks of issue, institutions undertaking deposit, credit, and exchange functions all
emerged for the first time in mid-century. Brazilian bankers began to make
connections abroad, private initiatives in banking and finance outpaced the ability
(or willingness) of the Imperial Government to control them, and the first foreign
banks appeared in the country. In addition to commercial and mortgage banking
functions, domestic banks in Brazil played an important (and oscillating) role in the
creation of the money supply (through either officially authorized note issues, or
informally accepted vouchers and IOUs).
The first private banks in Brazil, which emerged during the period 1839 -
1853, helped shape the development of the major port cities scattered throughout
-1 8 5 -
the country, while primarily meeting the credit demands of merchant importers.
Private banks facilitated domestic economic activity by supplementing the official
money supply through the emission of vales —short-term IOUs or vouchers.4
These vouchers paid annual interest, at rates of 1-2 % per year which were low
enough to guarantee their rare redemption. Although the Government forbade the
issue of IOU’s payable at sight -- fearing the possibility of their being mistaken for
paper money -- in practice they functioned as such.5 The vouchers circulated
freely, and almost never returned to be cashed for Treasury bills at the bank’s
counters. The only limit to their circulation was the geographical radius of their
acceptance (usually confined to the hinterland of the city in which they were
issued) and their uselessness for paying taxes.6
Founded in the main by importing merchants wearied of weathering
exchange crises and enduring long-term delays in receipt of payment for their
wares, the banks’ emission of vales was furthered as a means for facilitating
These early (and mostly short-lived) banks included the Banco de Ceara, Banco
Commercial do Rio de Janeiro, Banco Comercial da Bahia, Banco Comercial do Maranhao,
Banco Comercial do Para, and the Banco de Pernambuco, and the Visconde de Maua’s
Bank o f Brazil. In addition to their emission o f vales (which some banks issued payable on
sight despite federal regulations, such as the Banco Comercial do Maranhao) these first
Brazilian banks also discounted commercial paper, and held deposits and letters o f credit.
(An overview o f major activities by institution is contained in Ribeiro, History o f Brazilian
Banking and Financial Development. Translated by George Reed, (Sao Paulo: Editora Pro-
Service, Ltda., 1967), pp. 73-75 and summarized in Table 4.1.)
History o f Brazilian Banking, op.cit.. p. 73.
Maria Barbara Levy, "The Banking System and Foreign Capital in Brazil, Chapter 16 in
Rondo Cameron and V .I. Bovykin, International Banking. 1870 - 1914. (New York and
Oxford: Oxford University Press, 1991), p. 352. and Rui Guilherme Granziera, A Guerra
do Paraguai e o Capitaiismo no Brasil, op.cit.. pp. 35-38.
-1 8 6 -
prompt payment to these tradesmen, accustomed in the past to planters’ (and their
comissarios’, or factors’) delays of up to a year in the honoring of debts.
Although the immediate motivation of the issue for these vales was therefore the
needs of merchants, this form of quasi-money provided much needed liquidity to
the expanding urban economies.7
Bom to meet the needs of importing merchants, the first Brazilian banks
functioned within the geographical limits of the port cities, and concentrated on the
provision of commercial credit. In addition to their narrow sectoral focus, their
total contribution to the economy, in quantitative terms, was quite limited in
comparison to the experience of other countries. By accepting deposits and other
responsibilities, they had mobilized some 20.5 thousand contos and had loaned to
government and private individuals some 35.9 thousand contos, or roughly 8% of
estimated GDP, as compared to a ratio of 15.5% for Japan during the period 1878-
82, prior to the Meiji take-off.8 Despite the predominantly rural base of Brazil’s
economy, the banks did not provide agricultural credit, nor did they provide
financing for the local industries which emerged during this period.9
7 Granziera, A Guerra do P arag u ay op.cit.. pp. 36 - 37.

o
The paid-up capital o f private Brazilian banks (some, like the two in Rio with no official
connections) was 16.9 thousand contos in 1853. The value o f their IO U ’s in circulation
was upwards o f 5.6 thousand contos. (History o f Brazilian Banking, op.cit.. p. 75; GDP
estimates from Raymond W. Goldsmith, Brasil 1850 - 1914: Desenvolvimento Financeiro
Sob um Seculo de Inflacao. (Sao Paulo: Editora Harper & Row do Brasil Ltda. and Banco
Bamerindus do Brasil, 1986), p. 22.) Statistics on Japan from Banking in the Early Stages
o f Industrialization, op. cit.. "Japan, 1868-1914", by Hugh T. Patrick, p. 275.
q
Granziera, A Guerra do Paraguay o p.cit.. p. 37.
-1 8 7 -
Comprised of Treasuiy notes, metal coins (of various nationalities and
denominations), and banknotes yet to be retired from circulation, the official
currency during this period was far from homogeneous. A description of just the
coins circulating at the beginning of the 19th century takes up more than 5 pages of
a famous monetary history of Brazil.10 With the exception of the Sao Paulo
region after 1870, however, circulation of currency was largely confined to the
coastal cities, the domain of the money economy. Further inland, a moeda da
terra, or the money of the land, functioned as a medium of exchange, as cattle,
salt, other agricultural products, and even slaves, were used in the payment of
debts. Within the urban places of the interior, illegal currencies developed,
meeting the needs of the local market.11 And given the abundance of forms of
the circulating medium, forgeries and counterfeits were commonplace.
Although some transformations did occur in the banking sector over the
next forty years —in particular the entry of foreign banks and the growth of
locally-based banks within the interior of the Southeast —by the fall of the Empire
the relative importance of banking activities in Brazil was still quite moderate, both
J. P. Calogeras, A Polftica Monetaria do Brasil. Sao Paulo: Companhia Editors Nacional,

1960.
For example, the barrusques, which circulated in the mining town of Diamantina, Minas
Gerais. These notes were "script issued by the tradesman, manufacturers, and charitable
institutions, to make up, it was said for the shortage o f money in circulation. The Bishop’s
barrusques were issued by the charity fund o f the diocese and given out by him. The name
o f the script came from a french financier, Barrusque, who introduced it to Diamantinas.
(Cited and noted in The Diary o f Helena Morlev. Elizabeth Bishop, Translator, (New
York: Farrer, Straus, and Cudahy, 1957), p. 10).
-1 8 8 -
in function and extent. In June of 1888, there were 32 banks in Brazil, resulting in
a banking density of 0.043 hanking agencies in place for each ten thousand
inhabitants. This constituted an extremely low level of banking development as
compared to other countries: England in 1750 had a density of 0.0625, in 1785 it
had reached 0.21, and in 1830, 0.77. Prussia, in 1861 had a density of 0.34;
France in 1870, 0.12; and Japan in 1884, 0.32.12
Thus, the domestic hanking sector offered only a faint response to the
significant structural changes which took place in the Brazilian economy over the
second half of the 19th century. With the abolition of the international slave traffic
in 1850, and the formalization of the Commercial Code, available funds for
commerce and industry and ease of commercial transactions both increased
dramatically. Funds previously utilized in the financing of the international slave
trade were liberated at the same time that the ease of doing business at home
increased.13
Infrastructure improvements in the 1850’s and 60’s, documented in the
preceding chapter, contributed to an expansion of exports with accompanying
growth of the demand for commercial credit. While the capriciousness of domestic
banking regulations, and the extent of their resources limited the involvement of
Brazilian banks in these economic changes, foreign banks were key participants in
12 F or more on this concept, see Rondo Cameron, Banking in the Early Stases of
Industrialization, o p .cit.. pp. 297-298.
13 Richard Graham, "1850-1870", in Bethell, ed., Brazil: Empire and Republic, op.cit.. p,

-1 8 9 -
the ongoing transformation of the agro-export complex. These banks not only
played an active role in financing infrastructure developments which served to
integrate the real economy, but their system of branches and internal
communication apparatus, as well as near monopoly of exchange operations,
served to integrate national financial markets. Given the economic system of
"provinces that were primarily export-economies, together with a powerful
importing center, the supply of metallic or fiduciary funds needed to adapt itself to
the seasonal needs of diverse cultures." But, for this to be realized at a low
enough cost, it was necessary to make use of a network which captured quantity
and price information on the various harvests, allocated the existing supply of
exchange, and, moreover, did so in such as way as to increase the circulation
within the provinces, e.g. guaranteeing the most efficient turnover. Together with
their relative monopoly of foreign exchange, this information network was an
important element for the performance of foreign, primarily English, hanks in
Brazil.14
Foreign banks in Brazil operated through the provision of commercial
credit, the mobilization of overseas funds via underwriting of bond issues to
finance investment in Brazil, and direct investment in infrastructure and enterprises
within Brazil. Their financing of transportation and other infrastructure literally
Granziera, A Guerra do raraguai . . . . op.cit.. p. 85.

-1 9 0 -
paved the way not only for expansion of the export economy, but also for
urbanization, and to some extent, industrialization.15
The foreign banks were notorious for their adherence to sound banking
principles, revealed by their reluctance to make long-term loans to agricultural or
domestic concerns. In a period characterized by the growing demand on the part
of Brazilian planters for credit, these banks were steadfast in their refusal to loan
to agriculture. British hanking principles, emphasizing high cash reserves and the
need for self-liquidating loans, were introduced. Discounts were confined to paper
with not more than three months to run, requiring two signatories and a guarantee
from a third party. The renewal of bills beyond their normal tenure was
prohibited. " Under no circumstances were advances to be made against growing
crops, and if goods were pledged as security, no advance was to exceed two-thirds
of their market value..."16 Due to their strong position in foreign exchange
markets based upon their ability to draw upon the reserve base of home offices,
foreign banks were frequently the targets of complaints by local commercial
In fact, the trolley cars built in Rio de Janeiro became known as bond.es, (and still are to
this day), after the instrument which provided their financing. For more discussion on the
role o f British banks in infrastructure investment, see Richard Graham’s Britain and the
Modernization o f Brazil, o p .cit.: "Half the discounts and advances o f the Sao Paulo
branch o f the London and Brazilian Bank went to the Mogyana railroad company, while the
Sao Paulo Railway depended heavily on the English Bank o f Rio de Janeiro. The London
and Brazilian Bank also lent large sums to the textile industry during the early years o f the
twentieth century, and one o f the main businesses o f the branch at Sao Paulo was to
provide loans to promising manufacturing firms (p. 136). Table 4 .2 provides a
summary listing o f the foreign banks operating in Brazil during the period under study.
D avid Joslin, A Century o f Banking in Latin America. (London: Oxford University Press,
1963), p. 68 (emphasis mine).

-1 9 1 -
groups, who charged them with manipulating foreign exchange markets and
benefitting from the speculative activities which ensued.
If neither domestic nor foreign banks were providing credit to agriculture
during the Empire, what, if any, were the sources of agricultural credit? Prior to
the emergence of locally-based banks in the interior of the coffee-growing region,
private sources and coffee-factors, or comissarios, provided credit to agriculture.
Most financial histories have focussed on the importance of comissarios, and their
firms, the casas comissarios, termed by one observer "regional banks" in the
provision of non-bank financing.17 However, private forms of credit —loans
within or between families from one planter to another -- were not uncommon.
These informal sources of credit often occupied large shares of planters’ portfolios.
For example, the accounts of Martinho Prado, a prominent coffee fazendeiro in
Sao Paulo, reveal that most of Martinho’s non-fazenda income came from interest
on loans granted to other fazendeiros.18 Anecdotal evidence suggests that there
were significant regional differences in the importance of cash liquidity,
unsurprising given the relative monetization of the Southeast compared to the
17 "The commercial houses, dispensing credit to various fazendeiros o f the interior, using
different norms per region in accordance with the needs o f each region and the degree o f
confidence, acted like true "regional banks", serving in this way diverse nuclei o r centers
o f production, in line with the clientele, the rating, and specific individuals. As quoted in
Saes, Credito e Bancos— o p .cit.. pp. 62-63.
18 Darrell E. Levi, The Prados o f Sao Paulo Brazil: An Elite Family and Social Change.
1840 - 1930. (Athens & London: The University o f Georgia Press, 1987), pp. 70 - 71 and
Appendix B. Over the course o f his career as a planter-capitalist, Prado assumed the role
o f both debtor and creditor, and, at the apex o f his economic power non-fazenda income,
composed largely o f interest on loans to other planters, accounted for one-quarter o f his
total earnings.

-1 9 2 -
Northeast. For example, in contrast to this relatively monetized paulista planter,
senhores de engenho, or sugar-cane planters and mill-owners in Pernambuco, held
a much smaller share of their total assets in financial form.19
Planters with close ties to comissarios had little need for cash. Factors
commonly advanced credit against the future market-value of crops, or sometimes
slaves, oftentimes with little or no exchange of actual money, as these commercial
agents acted as intermediaries for planters in the urban areas, serving as agents for
marketing the crops, undertaking orders for imported goods and transferring values
from debit to credit accounts when crops were sold.20 Comissarios were attached
to merchant houses, which although sometimes formed by large planters, were for
the most part in the hands of Portuguese or Brazilian merchants. These tradesmen
had built up their capital through the import trade. The typical casa comissaria of
the 19th century was a family enterprise, headquartered in a port city, and
operating in an highly competitive environment. In the capital city of Rio de
Janeiro, at the end of the Empire, there were more than 2,000 such merchant
houses in operation. In contrast, the principal Northeastern port of Recife never
See Peter Eisenberg, The Sugar Industry in P ernam buco op.cit.. Table 16, p. 68,
which summarizes an analysis o f 57 wills by senhores de engenho dated between 1859 and
1910 and finds that less than one fifth o f total assets passed down to legatees were in the
form o f debts held, cash, or bonds.
Eulalia Maria Lahmeyer Lobo, "O Encilhamento1', Revista Brasileira de Mercado de

Cagitais, M aio/Agosto 1976, 2 (5), p. 264.

-1 9 3 -
saw more than one hundred such establishments, even during economic booms.21
With the advent of paid labor systems the need for liquid assets in the
coffee-growing regions of Sao Paulo increased.22 Rural credit, available on a
short-term basis (loans for no more than six months, which could be rolled over,
with interest rates ranging from 12 to 18 percent per annum), served to fuel land-
clearing and other agricultural investments. The blossoming of a local banking
sector, despite conservative national policies and limited expansion of the country’s
money supply, provided the growing coffee economy with the means of payment
necessary as it made its transition to a wage labor system.
As Antonio Saes chronicles in his detailed study of the evolution of paulista
banking and credit, even before the Encilhamento and the nationwide
Joseph Sweigart, Coffee Factorage and the Emergence o f a Brazilian Capital Market. 1850 -
1888. South American and Latin American Economic History Series, (New York and
London: Garland Publishing, Inc., 1988), Edgard Carone, A Repdblica Velha (Tnstituicoes
e Classes Socials'). Sao Paulo, 1970, p. 36, and Eisenberg, op.cit.. p. 65. Note that in
Recife, with about 1,500 to 2,000 sugar plantations in the province, an average
correspondent might service up to seventy accounts.
The transition to free labor did not occur overnight after the declaration o f Abolition (May
13, 1888). Thomas Holloway has estimated that by the beginning o f 1887 a minimum of
one-fifth o f the rural labor force in Sao Paulo was made up o f free workers. (Thomas
Holloway, "Condigoes do Mercado de Trabalho e Organizaqao do Trabalho nas Plantaqoes
na Economia Cafeeira de Sao Paulo, 1885-1915: Uma analise preliminar". Estudos
Economicos. 2 (6), 1972, pp. 152-154. Similarly, in his "The Last Years o f Slavery on
the Sugar Plantations o f Northeastern Brazil," op.cit.. J.H . Galloway chronicles the
predominance o f non-slave labor regimes in the Northeast, prior to abolition. The
difference in the work force in the two regions was that in Sao Paulo money wages were
being paid, while the "free" labor system in the Northeast was, similar to the postbellum
U .S. South, based on various forms o f share-tenancy arrangements. Furthermore, as
Gerald Jaynes has demonstrated in his Branches Without Roots: Genesis o f the Black
Working Class in the American South. 1862 - 1882. op.cit.. the choice o f labor
arrangements is not independent from the array o f credit options available to landholders —
and share-tenancy can in fact be viewed as a way in which planters can extract credit from
workers -- in effect forcing them to provide labor in advance o f remuneration.

-1 9 4 -
transformation of banking functions, regionally-based banks in Sao Paulo were
mobilizing local savings. Examining the evolution of the balance sheet of the Sao
Paulo branch of the Banco do Brasil, Saes observes that the rhythm of banking
expansion did not rigidly accompany the expansion of the money supply. He also
finds that the resources utilized by Sao Paulo banks for loans and discounting
operations found increasing origin within the regional economy (bank deposits and
bills of credit), and were decreasingly dependent upon resources from the
headquarters of the Bank of Brazil located in the financial capital, Rio de Janeiro.
In 1872 deposits accounted for only 1.5% of loans discounted; in 1875 deposits
and letters of credit reached 22% of loans and discounted bills; and finally, by
December of 1879 corresponded to 88%. During this same period, the share of
transfers from headquarters steadily declined, clearly indicating the growing
autonomy of banking in Sao Paulo. Banking developments within the Sao Paulo
region thus suggest that strong local demand conditions can more than compensate
for restrictive monetary policy in stimulating the development of local credit
markets, warning us against attributing unicausal significance to changes in state
policy as determinant of developments in the financial sector.23
Privilege of note issue —whether the currency would be printed by the
Treasury, public banks, private banks, or some combination thereof —provided the
Saes, o p .cit.. pp. 75 - 82. Contrasted with the Bank o f Brazil branch in the state capital o f
Sao Paulo and other state banks which developed, is the balance sheet o f the Banco
Mercantile do Santos, evidencing the financial dependence o f the port city o f Santos on the
Rio exchange, while the interior became increasingly autonomous (pp. 84-85).

-1 9 5 -
central polemic regarding banking policy during the second half of the 19th century
and through the First Republic. Table 4.3 provides a chronology of major changes
in banking and monetary policy up through 1888 and illustrates the constant
shifting of this privilege from private banks, to public banks, to Treasury, and
back again.
To summarize, the first half of the period witnessed a series of marked
institutional changes during the 1850’s and 60’s, characterized by a constant
shifting of the privilege of note issue. This period of relative chaos in the financial
sector came to a close in 1866 when the progressive withdrawal of banknotes from
circulation began to be substituted by Treasury issue. From 1866 until the Ouro
Preto’s administration during the last year of the Empire in 1888, the Treasury was
the only agency authorized to issue paper money. The war with Paraguay (1865-
70), which called forth a more pro-active role for government in the country’s
economic and financial life, as wartime needs for infrastructure, supplies, and
munitions were commissioned and financed by the state, conditioned this policy as
much as any theoretical views on the part of Government policy-makers.24
Although periodic currency crises occurred, (as in 1875), and difficulties of
Ribeiro and Guimaraes, History o f Brazilian Banking, op.cit.. p. 81, and Granzieira, in A
Guerra do Paraguai... o p .cit.. pp. 99 - 147, argues that the increase in Government paper
issue during the Paraguayan W ar, financed by growth in internal debt, or apolices, allowed
for the monetization o f the interior o f Sao Paulo, the transfer o f commercial capital from
the Rio finance markets to the expanding frontier, and the continued concentration o f
financial activities in the Rio praga. In brief, Sao Paulo’s expanding economy became
home to the bulk o f the Government paper issue, while the market for apolices
concentrated in the capital city.

-1 9 6 -
maintaining the exchange rate at par arose, it was not until the end of the 1880!s
that policies returning to plurality of issue were again pursued.25
Some indication of the variation in sources of paper money, and the
regional concentration of its production, is provided in Table 4.4. Here, we see
the supply of paper money and bank notes in circulation for the years 1859 and
1864. More than two-thirds of the notes were printed in Rio de Janeiro —75% in
1859 and 65 % in 1864 -- counting Government paper, Bank of Brazil
headquarters, and Rio-based banks. Private banks, particularly in the Northeast,
continued to play a significant role in the supply of money, and in the year before
the Paraguayan War and the return to government privilege of issue, the
percentage of government notes in the overall money supply reached its nadir
(roughly one-third).
(ii) Contemporary Views
The Brazilian banking system during the latter half of the 19th century was
thus underdeveloped and regionally concentrated. With limited exceptions in Sao
Normano, in his Economic Types, o p.cit.. refers to the period 1875 - 1889 as
"characterized by the stability o f paper money issue, growth o f foreign trade, importation
o f foreign capital, building o f railroads, increasing revenues, improving budgets and
improving foreign exchange. The eighties - the end o f the empire - was the most brilliant
period, when the Brazilian credit stood very high" (p. 177). A Dutch chronicler o f the
coffee trade noted that "The formerly chaotic currency o f Brazil has become more regular
and systematic since 1870. Instead o f the various Portuguese and foreign coins, there is
now a national currency for the whole empire The unit is the real, (singular o f reis) which
in point o f fact does not exist. The Brazilians reckon by reis. The copper, nickel, and
silver coins are regarded exclusively as change and are exceedingly scarce. All payments
are made in paper." (Laeme, Brazil and Java, op.cit.. p. 209).

-1 9 7 -
Paulo’s coffee growing areas, existing financial institutions were unable to provide
counter-cyclical balance to decline in exports or to downturns in the real economy.
Neither did they aid in transforming the structure of the economy through the
extension of credit to industry or agriculture. Dominated by commercial interests,
domestic and foreign banks concentrated largely in the provision of commercial
credit and in foreign exchange markets, while financial agents such as sugar or
coffee factors were the primary sources of financing for harvests and the marketing
of crops. In the rare instances when banks did offer credit to production, it was
usually provided through the intermediation of such factors, rather than directly to
the final borrower. In short, the provision of financial capital to productive
activities was largely predicated on personal ties, as opposed to the channeling of
funds through formal financial institutions (banks, stock exchanges, etc.).
Towards the end of the Empire, during a period of relative financial
stability and fiscal well-being, a nation-wide parliamentary inquiry undertook to
survey elites from around the country regarding the state of currency and banking
in Brazil.26 The responses to this survey, offered by a variety of interest groups
and associations, afford an exemplary, and previously unexploited, primary source
regarding the development of Brazilian banking and capital markets at the end of
the Empire. Analysis of the inquiry results allow me to compare and contrast the
positions of regional elites, predominantly commercial, regarding Brazilian banking
26 Brasil, Commissao Parlamentar de Inquerito, Informacoes aoresentadas pela Commissao

Parlamentar de Inquerito ao Corpo Legislative) na Terceira Sesao da Decima oitava
Legislatura. Rio de Janeiro, 1883. (Hereafter CPI).
-1 9 8 -
and monetary policy.27 In addition to demonstrating the full spectrum of
understanding and incorporation of 19th century European and U.S. doctrines on
currency and banking, the survey responses provide a rich source of information
regarding similarities and differences in hanking development by region.
The inquiry raised fifteen questions, listed in Table 4.5, covering broad
macro-policy issues and detailed questions regarding the range of financial
instruments, and operations of local banks. Specific points concerning the
functioning of the existing banking system were also included, such as the
availability of mortgages or other types of agricultural credit, the role of the
English banks, and the use of checking. The inquiry thus spanned a wide range of
issues regarding money and banking, and the range of responses reveals the limits
of the contemporary theoretical debate and reflects regional differences in the
nature of capital markets.
The hegemony of Rio de Janeiro, and the greater weight accorded by the
Parliamentary Commission to the views of denizens of the federal capital, is
evidenced without even reading the survey results, through a simple count of the
number of respondents and pages. Of the ten separate group or individual
responses, half were from Rio de Janeiro. No groups from the southernmost
The respondents to the survey on money and banking were: (i) From Rio de Janeiro —
Committee o f the Commission; Association Commercial; Pedro Ferreira Vianna
(merchant/importer); Miguel de Reno (fazendeiro); Antonio Maria de Miranda Castro; (ii)
From the Northeast: Praga do Commercio do Recife; Associagao Commercial da Bahia (2
separate responses); Junta dos Corretores da Praga do Recife; and (iii) the Commissao
Auxiiiar na Provmcia de S. Pauio.

-1 9 9 -
region of the country -- Rio Grande do Sul, Santa Catarina, and Parana -- were
represented, and only one response came from Sao Paulo. If pages of response are
tallied, we find that the carioca (citizens of Rio de Janeiro) respondents were much
more prolific, on average, than those from other regions, with Rio responses
accounting for more than three-quarters of the pages received on this matter, and
the average response more than three times as long as that of other regional
contributors.28
The survey, by virtue of being focussed on what were then cutting-edge
financial instruments -- such as real estate paper, and the use of bank cheques, --
self-selected lengthier responses from Rio de Janeiro, the locus of most of these
innovations. Consider the wry remarks of respondents from the major commercial
cities of the Northeast, Bahia and Recife, to the inquiry’s avid interest in the
functioning of mortgage lending institutions and the market for real estate paper —
the Recife respondents who "heard talk" of the existence of mortgage bonds in Rio
de Janeiro but didn’t have them in Recife, and the Bahia group who couldn’t
respond to that question "not even a little".29
Rio respondents filled 71 pages with their answers, as opposed to the 22 pages o f responses
received from other provinces, averaging 14.2 pages per response as compared to 4.4
pages. Note also that the Inquiry had a number o f sub-commissions. In addition to the
Commission on Money and Banking, the subject o f our analysis, other topics surveyed
included trade, transport, infrastructure, and customs duties. The dominance o f responses
from the Court city characterized all the topics surveyed, but was most pronounced in the
topic at hand.
CPI, p. 193 and p. 203.
-2 0 0 -
Representatives from the Brokers’ Assembly of Recife felt compelled, in
fact, to provide an introductory statement critiquing the Rio-centered approach of
the inquiry, calling for attention to the "special conditions of the Recife market and
how it differs from those of the South, which seem not to have been heeded by the
questionnaire ... which has in sight the Court of the Empire and the Province of
Rio de Janeiro". Their statement details eloquently the interconnectedness of the
various economic and financial difficulties besetting their province and region:
"lack of adequate means of transport and communication", "absence of banks and
bank loans", "lack of industrial or agricultural technologies", etc.. The question
"is complex ... and simple measures employed to resolve one or some of the
impediments to commerce and agriculture become fruitless, maybe even yielding
negative effects, due to the tight linkages which exist between some obstacles and
others..."30
Although the group of brokers from Recife was the only one to assert so
forcefully the need for a multisectoral approach, other respondents were aware of
the linkages, or lack thereof, between the existing banking network and the needs
of the productive economy —particularly the agricultural sector.
Many survey respondents called attention to the limitations of the existing
banking network, with its predominantly commercial agenda, for meeting the needs
of banking in the interior, and specifically, in providing agricultural credit.
30
CPI, p. 191. Note that the term broker in this context refers to middlemen in various
fields: insurance, shipping, finance, customs, etc.
-2 0 1 -
Respondents from throughout the country highlighted the discrepancy between
Brazil’s current system of "large-scale banks, established only in the large coastal
cities, in a thinly populated country, with imperfect means of communication and
transport, sustained by slave labor", and argued, as did representatives of Recife’s
commercial association, that they were "destined to shipwreck".31
From the North and South of Brazil alike came an understanding of the
special needs of the agricultural sector, and the limitations of the existing banking
network, which according to one carioca respondent, had
neglected completely banking operations with other [regional]

markets or the interior of Brazil, when these operations could have
been beneficial at that time and for the development of national
progress; ... the tendency has been prejudicial to legitimate
commerce, favoring capital from the Rio de Janeiro market oriented
towards the pernicious operations of speculation; immobilizing
[funds] in the purchase of apolices and company stocks, and in the
enormous loans to the government; and also, constantly engaging in
foreign exchange operations, with generally negative results..."32
Banks of the interior, in contrast, "should not limit themselves to commercial
transactions, ... the banks of the interior should use their capital to ... increase the
true wealth, which is no other than the production of the land, of which money is
no other thing than the signal."33 And yet, many agreed that the formation of a
banking network in the interior, and the provision of agricultural credit could not
and should not occur solely as the result of state promotion.
31 Ibid.. response o f Praga Commercial do Recife, p. 483.
32 I M i , p. 67.
33 Ibid.. p. 65.
-2 0 2 -
For these laissez-faire thinkers, state support was not sufficient, or even
indicated, for the expansion of an enterprise so consummately defined by profit-
making. As one respondent tersely replied to the survey’s ninth question regarding
the expansion of the range of banking functions:
If we asked the hanks this question, they would respond with

complete commercial laconicism: If this was possible, it would
already have been done, because no one better than we seeks to give
good employment to the money which is entrusted to us.34
And, the respondents agreed that the appropriate demand conditions were the
missing element impeding the extension of the banking network to the interior and
the service of agriculture. Several respondents envisioned a Jeffersonian yeoman
farmer as the ideal banking client, with one citing the U.S. Banking system, with
its "agricultural banks in all the cities and villages of the Republic" as the "most
extensive and intelligent" banking system of the day.35 As the Commercial
Association of Sao Paulo argued, extending long-term credit when banks were
subject to short-term runs on their deposits given their urban/commercial
constituencies was the "road to failure." Instead, the development of long-term
credit was predicated upon the pre-existence of a "more advanced rural culture",
where loans to agriculture, based upon local deposits, could succeed.36 Implicit
in this vision of Jeffersonian yeomanry and a more advanced rural culture seems to
34 IbicL, p- 26.
35 Ibid.. p. 66 (emphasis mine).
36 Ibid.. p. 503 (emphasis mine).
-2 0 3 -
be the assumption of a diversified agricultural base, serving both internal and
external markets, which would lower the risks of cohort default, and also reduce
foreign exchange liabilities.
The more advanced rural culture envisioned by the group from Sao Paulo
was expanded upon by a survey respondent from Rio de Janeiro. Following a long
discourse on the different types of agricultural credit available in various European
countries, he argued that in order to develop a system of agricultural credit which
would yield positive results, "it is indispensable that the farmer be intelligent and
economic." He went on to argue that the farmers should form cooperatives,
approved by the banks to provide collateral and guarantees for the provision of the
cheap, long-term credit which was essential to agricultural development, but
unavailable in the current urban-based commercial banking system.37
As we have seen in the previous chapter, this more advanced rural culture,
evidenced by a competitive labor market and the intricate weaving of rural and
urban functions throughout the interior, did in fact evolve in the Southeast of
Brazil over the course of the First Republic. While still protean at the time of this
1883 inquiry, within one generation, the hinterland of the Southeast had developed
sufficiently to engender the type of interior-based local banks envisioned by the
survey respondents. Furthermore, building on a base of local deposits, these
interior banks had furthered the dynamic process of urbanization and economic
37
Ib id .. p. 85 (italics mine). Such institutional developments did eventually occur, but not
until the turn o f the century, and were located principally in the interior o f Sao Paulo, as
chronicled by Saes, Banking and Credit, op. c it.. pp. 123 - 130.
-2 0 4 -
diversification that characterized the filling out of the hollow of the moving frontier
discussed in the previous chapter.
However, at the time of the parliamentary inquiry, this process was more
vision than reality. One consequence of the limited development of the banking
sector —astutely depicted by observers as urban-centered in the large port cities
and focused primarily on transactions involving international commerce -- was the
high propensity to retain savings in the form of cash, or hoarding, rather than
reliance upon banking deposits and the use of bank-checks as a means of payment.
Hoarding, in turn, limited the banks’ ability to expand their sphere of operations
and diminished the deposit base on which the banking multiplier could potentially
work to expand the money supply. As one survey respondent from the Northeast
explained, "commercial transactions are generally carried out with cash, not due to
the lack of credit, but due to the lack of intermediaries or agents who would put
this credit in action, expanding its sphere of circulation."38 Even in Rio de
Janeiro, the most developed financial center, cash payments and hoarding were the
rule. According to The Economist of 1890, the use of checks was quite rare, and
most people customarily stored their money in large quantities, rather than deposit
savings in banks:
Small businessmen, the tavern-keepers, for example, in Rio de

Janeiro, only exceptionally deposit in the [banking] establishments.
Ordinarily they prefer to keep their money with them until payment
time, meeting their debts with sums accumulated at home over the
38 Jbid., p. 191.
-2 0 5 -
course of six to nine months. The same happens with the salaried
classes. Agriculturalists amass large sums ... and this money takes
months, or years, to reach the banks. Customs receipts, instead of
being deposited in the banks, ... accumulate in large quantities and
are forwarded periodically to the capital by steamships.39
In other words, the lack of clearing houses and an effective national banking
system created the need for cash rather than credit exchanges, at both the intra-
and inter-regional levels.
This reliance upon cash to resolve transactions was evidenced not only at
the individual level, but also by the periodic need for cash remittances from Rio de
Janeiro to the northern provinces and the interior states at harvest times, as well as
from regional entrepots such as Recife and Salvador to their respective hinterlands.
None of the survey respondents denied the existence of shortages of cash and
periodic increases in the cost of credit in the major financial markets of the port
cities, when "the numeraire is exported to the interior".40 However, most
participants in the inquiry agreed that these liquidity crises did not result from a
shortage of money per se. but rather from a lack of confidence in the inconvertible
paper which made up most of the existing money supply. Exacerbating the
situation was the impossibility of a viable expansion of both the scope and depth of
As quoted in Franco, Reforma Monetaria e Instabilidade Durante a Transicao Republicana.

(Rio de Janeiro: BNDES, 1983), p. 29.
A phenomenon which was exacerbated by the Imperial Government’s procedures for

collection and forwarding o f customs duties to Rio de Janeiro as mentioned by The
Economist and complained about by survey respondents from the Northeast as we shall see
below.
-2 0 6 -
the banking system when the existing monetary base was so unstable and the
propensity to hold savings in the form of bank deposits so weak.
Survey respondents were in general laissez-faire in their views on the need
for state interference in the creation of new banks, arguing that "the Government
should not directly promote the multiplication of new banks." Instead, the state
could "help indirectly through putting an end to the financial evils resulting from
the curso forgado of the paper money. "41 However, respondents in the Northeast
were not indifferent to the impact of a centralized fiscal system and the impact of
government mechanisms for revenue collection on developments in the banking
sector. For example, the cited policy of forwarding customs receipts via steamship
rather than bank-tiansfer was cited by several Northeastern survey respondents as
cause rather than consequence of limited banking development in that region. As
one representative of the Bahia Commercial Association argued, periodic liquidity
crises in their province’s capital city of Salvador were due not only to remittances
of currency during harvest time to neighboring Sergipe, a satellite state, but also to
the system adopted by the Government of "not applying the balances of revenues
collected in the provinces within the provincial capital markets, but preferring to
run the risk of remissions of the numeraire to Rio de Janeiro"42 As another
Bahian went on to argue:
Ib id .. p. 481.
Ibid.. p. 204.
-2 0 7 -
If the General government, ceding a bit its centralized system, so

deadly to the provinces, were to authorize the application in
exchange of part of the provincial revenue that is remitted to the
Court in money form, there would be no danger in this, because
there exist here banks and firms, which by their recognized credit,
offer perfect guarantee.43
In the view of some Northeastern respondents, therefore, the state, in its role as
user of financial services, had discriminated against the financial institutions in
their region, by "hoarding" customs revenues in cash until they could be shipped to
Rio de Janeiro, thus limiting the total quantity of funds which were available to be
moved through the regional capital markets (and the consequent working of the
banking multiplier at the regional level).
There was general agreement among survey respondents about the
efficiency of their financial markets in the service of international trade. A
uniform national exchange rate pertained throughout the countries, with no
opportunities for sustainable profits in interregional financial arbitrage. Many
mentioned the installation of a nationwide telegraph network in the 1870s as having
facilitated the flow of information in foreign exchange markets. Survey
respondents corroborated the integration of the international financial markets,
without exception confirming the workings of arbitrage in maintaining a uniform
level of the international exchange rate in the major regional markets despite
significant variations in harvest times and subsequent flows of goods. However,
there was less consensus about the existence of, or suitability of, a unified national
43 Ibid.. p. 231.

-2 0 8 -
banking system to serve the needs of the domestic market. For example, the
following respondent from Rio de Janeiro was far from sanguine about the
appropriateness of an integrated national financial system, favoring instead
regionally-based banking (note the prescient plug for the federalist system which
was to arrive before the end of the decade):
Brazil, taking into consideration its economic configuration, does not

represent a homogeneous aggregate, which could be subordinated to
a determined order of elements. Completely disaggregated by the
absence of significant commercial relations between many of its
provinces, Brazil contains various centers which are entirely
independent, with their own life and interests, incapable of fusion
and incompatible with an organization based upon the principle of
political homogeneity.
Foci of specific productions44, the various regions of the country

have their own natural course of operation serving the other
consumers of their products; and while those of the south, with their
coffee, do not have their consuming markets in the northern
provinces; and those respectively of their sugar, their rubber, and so
many other types of production, the homocentricity attributed to
whatever type of banking organization, is an unrealizable aspiration
without foundation.45
In this respondent’s view, banking networks should be limited to the formalization
of existing commercial ties, and given the weakness of such ties at the interregional
level at the time of the survey (as confirmed by the evidence presented in the
preceding chapter), he argues for regional banking as opposed to a nationwide
network of branches and agencies.
These are the author’s words, which I hesitate to translate non-literally given that they
have greater resonance than more commonly used terms such as commodities, crops, etc..
The author’s words evoke not only the output, but the way in which it was produced.
Ibid.. p. 438.
-2 0 9 -
Across the board, survey respondents stated that the problems confronting
existing banks, and any future expansion of the sector, could not be addressed
without a successful resolution of the monetary problem -- i.e., the failure of
Brazil to maintain a fully convertible currency, and the subsequent depreciation in
value of the mil-reis.46 Most respondents distinguished between the three types of
money: inconvertible paper money (fiduciary notes or fiat money), bank-notes
(convertible paper), and precious metals or species.47 In the words of the
merchants of Recife, "of what there is [fiat money], there is too much, so much
that it depreciates daily, of gold and convertible paper, there is not only scarcity,
but an absolute shortage."48 Survey respondents were unanimous in their support
of return to full convertibility and maintenance of gold parity, arguing that the
inconvertible currency functioned as the "great wall of China, impeding the entry
of foreign capital" and that "it is an illusion to assume that the State can increase
fiduciary circulation by multiplying the number of notes ... only children believe
that you can increase an object by dividing it into pieces."49
Summaiy data on the evolution o f Brazil's exchange rate, and other macroeconomic
indicators, are provided in Table 4.6.
And thanks to the meticulously detailed and lengthy report o f one Rio correspondent, we
know that o f a total money supply o f 220,000 contos de reis, 188,000, or 85% , was in the
form o f Treasury notes, while 9,000 contos was in precious metals, and the remaining
23,000 in banknotes from the Bank o f Brazil (21,700), Bank o f Bahia (1,100), and Bank o f
Maranhao (200) (CPI, p. 61).
Ibid.. p. 480.
Ibid.. p. 63 and p. 23.

-2 1 0 -
While all concurred on the need to return to full convertibility -- viewed as
the key to economic stability and a more "elastic" currency which naturally
adjusted to the needs of commerce —less consensus could be found in survey
participants’ suggestions for redemption of the Treasury notes then circulating,
valued at 220,000 contos, or roughly 15 % of GDP. They did agree for the most
part, however, on the inability of the Government to finance redemption from the
imperial budget. One after another, survey respondents bemoaned the precarious
state of public finances, and argued, as did the merchants from Recife, that "the
budget surplus was non-existent, and even if it [did exist] it should be used for real
investment in the material development of the country."50 The solution for
redemption proposed by most respondents approximated a Catch-22 situation, in
that banks of emission were deemed the most appropriate (and only possible)
instrument for redeeming the existing supply of inconvertible treasury notes —a
precondition for restoring convertibility; and yet as the Sao Paulo Commercial
Association argued, it was impossible to create a "bank of confidence without first
redeeming the paper money".51
A variety of solutions were offered to get around the horns of this dilemma,
spanning the creation of a Central Bank modeled on the Bank of France suggested
by the merchants of Recife, government financed redemption paid for by an
Summary fiscal data, on the fiscal deficit, and consolidated external and internal debt, are
provided in Table 4.6, Columns C, D, and E.
Ib id .. p. 500.

-211-
extemal loan advocated by the Commercial Association of Sao Paulo; and by some
members of the Rio de Janeiro group, the creation of a private bank with
monopoly note-issue privilege, fiscalized by the State who would subscribe to bank
stocks offering payment of apdlices.52 However, it was not until the end of 1888,
when Brazil’s international reserve situation changed dramatically, the exchange
rate appreciated above par, metal reserves flowed into the country, and the
incipient commercial boom was impeded by the limited maneuverability of banks
to increase their activities due to public hoarding, that the return to full
convertibility at par became both a viable option and a more pressing necessity.
The ensuing banking reform, promulgated by the last Finance Minister of the
Empire, Ouro Preto, was given political legitimacy by the outcries of planters who
had suffered a decline in financial capital due to the unindemnified abolition of
slavery. Its passage by Congress was predicated on the uniquely favorable
situation of the Brazilian balance of payments which arrived like a Deus ex
maquina to break the Gordian knot of the metallistas convertibility dilemma. Its
result was a series of political and financial chain reactions including one of the
most infamous financial crises in Brazilian history, the Encilhamento.
Ibid.. p. 481, p. 500, p. 68 and pp. 75-76.
-2 1 2 -
IV.3 The Encilhamento and Transformation o f the Banking Sector
Few topics in Brazilian economic history have generated such vituperative
debate as this speculative financial crisis which bridged the close of the Empire and
the early years of the Republic. It is as if the frenzy of the 19th century
speculators has possessed the writings of historians and economists, feeding fire
with fire. Literally translated from the Portuguese, encilhamento means the
tightening of the cinch on a horse; the colloquial meaning describes the moment of
time at the race track when jockeys are mounted in the box, and gamblers scurry
to place their bets before the start of the race. The term encilhamento was first
used to describe the activities of the Rio stock market in January of 1890, by the
established financial paper, the Jomal do Commercio.53
This period of popular speculation in the financial markets has been
described as an "epidemic,1,54 a "disastrous movement,"55 "frenetic
speculation,"56 a "house of cards waiting to fall,"57 "an unbridled game of the
M aria Barbara Levy, "O Encilhamento", p. 191. In Economica Brasileira: Um a Visao

Historica. Edited by Paulo Neuhaus, pp. 191-255. Rio de Janeiro: Ed. Campus, 1980.
Gilberto Freyre, Ordem e Progresso. (Rio de Janeiro: Jose Olympio, 1959), II, p. 388.
Roberto Haddock Lobo, Historia Economica e Administrativa do Brasil. Rio de Janeiro,

Atlas, 1963, p. 171.
NIcia Vilela Luz, A Luta pela Industrializacao do Brasil (1808-19301. Sao Paulo, DIFEL,
1961, p. 98.
Caio Prado J r ., op.cit.. p. 220.

-2 1 3 -
exchange,"58 and a "genial creation of the masses."59 Aurelio Buarque de
Holanda, Brazil’s Webster, defines the figurative sense of the word encilhamento
as "an extraordinary movement of stock market speculation that occurred during
the first years of the Republic."60 The drawings from the contemporary journals,
attached in Figures 4.1, 4.2 and 4.3, reveal the astonishment of the Brazilian press
at the levels of popular involvement in the financial speculation, as well as their
evident skepticism concerning the likely success of such unfettered and democratic
financial endeavors. In the words of the Visconde de Taunay, the 19th century
man of letters who chronicled the frenzy in his novel, O encilhamento,:
The crush was terrible, filled with elbowing and equality; all of the
social classes mixed up, confused, entangled: senators,
congressmen, doctors of note, or without clinic, lawyers, esteemed
or despised, famous judges, soldiers, a world of unknowns, others
unhappily too well known, men coming from all points of Brasil,
some even of the old exchanges of Europe, shrewd, active, acting
sometimes ingratiating, sometimes imperious like nobles, displaced
from their habitual climes, all affected by business, ready for all
transactions had and still to be had; recent arrivals from the States
with the still timid and rustified countenance of provincials, and the
gestures of those who take badly to shocks, other already veterans of
that new type of game, braggarts, boasters, laughing loud, telling
stories ,...61
Jose Pires do Rio, "Ainda e tempo", Jomal do Commercio. Rio de Janeiro, 19 mar. 1889,
p. 1.
Affonso d ’Escragnolle Taunay, Historia do cafe no Brasil. Rio de Janeiro, Dep. Nacional
do Cafe, 1939/43, 15v.
Ferreira, Aurelio Buarque de Holanda, Novo dicionario da lingua portuguesa. Rio de

Janeiro, Nova Fronteira, 1975, p. 523.
Taunay, Alfredo d Escragnolle, visconde de, O encilhamento: cenas contemporaneas da

Bolsa do Rio de Janeiro em 1890. 1891 e 1892. Belo Horizonte, Ed. Itatiaia, 1971, p. 18

-2 1 4 -
The result of the Encilhamento and the changes in policy which gave it impetus,
independent of the gains or losses suffered by individual speculators, was a
democratization of finance. The "masses" became involved in the purchase of
stocks and bonds, for banks, transport, and industry, in manners hithertofore
unseen in Brazil.
Coincident with the advent of the Republic, the storekeeper who once
hoarded his cash under the mattress, or in a safe behind the counter, became the
proud owner of shares in a bank, or a railroad, or maybe a cotton textile firm.
While his foray into the world of high finance may have been fleeting, and likely
to result in the loss of his store, the combined result of his decision to invest in
"the market," and that of thousands like him, meant that previously hoarded capital
was brought into circulation, and, as the crisis moved from boom to bust,
concentrated sufficiently to allow for industrial expansion.
In the discussion that follows I address first the series of policy changes
which, together with the unique conjuncture of politico-economic factors observed
during the regime transition, brought about the financial crisis. I then analyze the
nature of the speculative activities, examining the sectoral distribution of
movements in the Rio stock exchange and the transformation made by many firms
during this period from internal to external financing mechanisms. In particular,
my analysis will address the ramifications of the increased mobilization of savings,
(Grandes textos de literatura, 4).
-2 1 5 -
including the use of external financing mechanisms for firms and a higher tendency
on the part of the public to invest their savings in non-govemmental financial
assets. Though many of the banks bom during the period of speculation (1888 -
1993) were short-lived, they nonetheless played a crucial role in reallocating
financial capital; and unlike their imperial predecessors, did not shy from investing
in infrastructure and productive activities. I argue that the wave of bank formation
and stock trading known as the Encilhamento in fact contributed to financing the
integration of the domestic economy.62
fi) Origins of the Crisis
Starting with the Banking Law of 1888, promulgated by Ouro Preto, the
last Finance Minister of the Empire, and continuing through the return of the
privilege of note issue to the state in 1896, the Brazilian banking sector and money
supply were characterized by pure chaos.63 A wide array of banking policies and
currency regimes was promulgated during this period, some of such short duration
My analysis o f the Encilhamento differs from the standard treatments o f this stock market
crisis in that it devotes less attention to ascertaining the timing o f the stock market
speculation in respect to the timing o f the spurt in industrial activity, or in attempting to
delineate the exact nature o f the causality between the stock market boom and industrial
growth. Rather, I focus on the changing sectoral composition o f investment which was a
result o f the stock market boom -- shifts between holdings o f government debt and private
stocks and bonds, the growth o f a market for agricultural mortgages, and the tremendous
increase in tradeable assets which financed investments in infrastructure. I argue that these
innovations in the financial sphere opened new pathways for the flow o f capital to dynamic
sectors o f the economy.
The major events in the realm o f banking and monetary policy during the tenures o f Ouro
Preto and Barbosa are summarized in Table 4.7.

-2 1 6 -
that their legal lifespan was exceeded by the limits of technology and
implementation delays in the printing of new banknotes. The menu of policies
embraced both the orthodox and heterodox canons of the day, including:
government monopoly of issue, plurality of issue, private sector monopoly, and
various mixes of government and private sector note issue. Banknotes fully
convertible to gold, banknotes issued on the basis of apolices, inconvertible
banknotes, regionally limited banknotes and treasury notes all made their way into
the money supply during this period of financial market transformation.
This multitude of changes in Brazilian banking during the first years of
republican rule reveals the scrambling of policy-makers to respond to the country’s
underlying structural and political transformations. The fact that sixteen different
finance ministers held office between 1889 and 1902 illustrates further the political
uncertainty and financial chaos of the time. Notwithstanding the erratic course of
banking policy, or the divergent theoretical grounds upon which each Minister of
Finance justified his new course of action, the result was a wide-ranging yet
unswerving spiral towards central banking and the use of fiat money. The path
was far from smooth, given the ideological adherence of many Brazilian policy
makers to the gold standard. However, for more heterodox thinkers, such as Ruy
Barbosa, the first Republican Minister of Finance, the demands of the internal
market for increased liquidity often competed against the necessities of external
finance and the economic orthodoxy which was the price of access to foreign
capital.

-2 1 7 -
As Celso Furtado has noted, Brazilian policy-makers and earlier economic
historians have persisted in labelling chronic conditions as abnormal:
The historian recording economic concepts in Brazil can only be

surprised at the monotonous insistence with which everything
occurring in the country’s economy - inconvertibility of currency,
deficits, and issuance of paper money - was labeled aberrant and
abnormal. However, that century-old abnormality never became the
subject of a systematic study. In fact, no serious effort was ever
made to understand that abnormality, which in the ultimate analysis
was the very reality of the Brazilian economic environment. All
efforts were spent in a task that historic experience has shown to be
in vain: that of subjecting the economic system to the monetary
rules prevailing in Europe. This strenuous effort at mimicry, arising
from an unshakable faith in the principles of a doctrine with no basis
in reality, was to continue for the first three decades of the twentieth
century.64
Attempts at maintenance of the gold standard and a convertible currency were
made all but impossible by the chronic scarcity of the country’s metal reserves.
Brazil, due to its role in the world economy as a primary-product exporter, did not
avail itself of sufficient precious metals to export and thus preserve gold parity in
situations where the balance of payments ran a deficit. Thus, at moments of
adverse shocks to the economy, either due to the drop in export demand, a
negative supply shock, or a fall in the supply of international capital, the exchange
rate would then fall below par, and convertibility would be immediately suspended.
Under these conditions adhesion to the gold standard, although desirable according
to the economic orthodoxy of the day, condemned the country to a Scylla and
Charybdis course between "the insurmountable barrier of a balance of payments
Celso Furtado, Economic Growth of Brazii. op.cit.. pp. 176-177.
-2 1 8 -
permanently in deficit, and ... the reluctance of the government to follow a
deflationary strategy until its final consequences." What remained was an attitude
on the part of the treasury to simply wait out balance-of-payments downturns until
the exchange rate, through the natural operation of market forces (not unaffected
by speculation on the part of foreign banks, or the government’s agent-bank), once
again returned to par, at which point convertibility would be resumed.65
Although shortages of foreign exchange, and balance-of-payments crises
characterized the Brazilian economy throughout most of the First Republic, the
second half of 1888 through the end of 1889 presented a unique economic
conjuncture for Brazil. The balance of payments was in surplus and the exchange
rate, reaching parity in October of 1888, remained at or over par for the next 15
months, an exceptional occurrence due to the large inflows of foreign capital66
(the current account was in deficit due to large service payments, although the
trade account was in surplus). The capital city of Rio de Janeiro was more liquid
than it had been in years,67 and money was "easy and abundant".68
65 Franco, Reforma M onetaria. op. c it.. p. 35.
66 Composed o f borrowing by the Imperial Government, a loan for nearly 20,000 Lbs.
Sterling was contracted with the Rothschilds in the early months o f 1889, and direct foreign
investment, which peaked for Brazil as it did for the rest o f Latin at roughly 12 million
Lbs. Sterling.
67 The value o f precious metals imported by the port o f Rio de Janeiro increased to more than
20,000 contos in 1888, as compared to roughly 7,000 contos verified in the 18 month
period June 1886 through December 1887, and less than 4,000 contos in the 12 months
between June o f 1885 and 1886. O f a total o f more than 21,000 contos o f reserves
exported by Rio by cabotagem in 1887, roughly two-thirds went to the North o f the
Empire, 10 percent to the "South” (including Sao Paulo) and the rest abroad. (Franco,
op.cit.. p. 58).

-2 1 9 -
Healthy external accounts were paired with severe internal structural
transformations, epitomized by the abolition of slavery on May 13, 1888. In
Manias. Panics and Crashes: A History of Financial Crises.69 Charles
Kindleberger argues that financial crises emerge as the result of
some exogenous, outside shock to the macroeconomic system. ... It

may be the outbreak or end of a war, a bumper harvest or crop
failure, the widespread adoption of an invention with pervasive
effects - canals, railroads, the automobile - some political event or
surprising financial success, or a debt conversion that precipitously
lowers interest rates. But whatever the source of the displacement,
if it is sufficiently large and pervasive, it will alter the economic
outlook by changing profit opportunities in at least one important
sector of the economy.70
The anomalous strength of Brazil’s balance-of-payments situation, the abolition of
slavery in 1888, the initiation of the aid-to-agriculture program (discussed in more
detail below), the return to plurality of note-issue privilege, the promulgation of
the Republican Government in 1889 and its accompanying overhaul of the state’s
financial, fiscal, and administrative apparatus as it introduced a federalist form of
government —each of these events would independently qualify as a displacement
in the context of Kindleberger’s theoretical framework. The question then is not
what started the Encilhamento, given the convergence of so many structural
Retrospecto Commercial do Jornal do Commercio, 1888, p. 9.
Revised Edition, (New York: Basic Books, Inc., 1989).
Ibid.. pp. 17-18. Kindleberger relies heavily on the work o f Minsky, in particular, "The
Financial Instability Hypothesis: Capitalistic Processes and the Behavior o f the Economy,"
in C. P. Kindleberger and J.P. Laffargue, eds., Financial Crises: Theory. History and
Policy (Cambridge: Cambridge University Press, 1982), pp. 13-29.

-2 2 0 -
changes. The issue is rather to identify the extent to which the period of financial
panic resulted in a reorientation or transformation of existing financial markets, an
accumulation of capital (through the winners and losers of the speculative activity),
and a readjustment, or refitting of the financial systems to the new political and
economic reality of the Brazilian republic.
From this perspective, it is worth examining two specific policy changes
which contributed to increased liquidity in urban areas, the transformation of
agriculture within the Southeast of Brazil, and a shift in the structure of private
investment portfolios: the Aid to Agriculture loans initiated by Ouro Preto, the
last Finance Minister of the Empire, and continued during the first republican
administration; and the initiation of note issue on the basis of apolices, or titles of
government debt. These policies had the combined effect of increasing the supply
of financial capital (as agricultural loans were channelled through the banking
sector), and increasing investors’ effective demand for private sector stocks and
bonds. The stock market boom was the means through which the policies
produced their results.
The administrations of both Ouro Preto and Rui Barbosa passed legislation
intended to increase the supply of agricultural credit, using the banking sector as
conduit. Beginning in May, 1888, over 80,000 contos were loaned interest-free by
the Federal Government to a select group of private banks, with the funds intended
to be lent on to the agricultural sector at subsidized interest rates. The agricultural
loans were continued under the new republican government through the middle of

-2 2 1 -
1890. Upon the completion of this lending program, over 41,300 contos had been
advanced to banks, of which slightly over half had been authorized by the
Republican administration.
The credit, channeled through the urban-based hanking sector, speeded the
transformation of agriculture in the Southeastern region71, as debt-ridden coffee
planters in the exhausted Paraiba Valley failed to qualify for loans that their
paulista and mineiro competitors easily were awarded. In addition to providing
needed credit to overcome the temporary costs of the transition to free labor for
the more dynamic coffee growing sector and hastening the decline of the older
coffee regions, the aid to agriculture program fueled the liquidity of banks in urban
areas and the ensuing financial boom.72
The rationale for channeling the loans through the banking sector was that
private banks had closer links to agricultural interests (than did government
agencies), greater access to information, and would be in a superior position to
allocate the needed credit. In principal, the government authorized the sum of
As w ill be discussed below, most o f the aid to agriculture loans were concentrated in the
Southeast o f Brazil.
Although the abolition o f slaveiy on May 13, 1888 increased the demand for currency,
w ith salaries to ex-slaves accounted for one-quarter o f total money in circulation in 1888,
in large part the transformation to free labor in Brazil had been a gradual one, wrought
over the several decades preceding the formal abolition o f slavery. This is particularly the
case in the newer and more dynamic coffee economies o f Sao Paulo and Minas Gerais as
well as the declining sugar economy o f the Northeast, which had sold South the majority o f
its slave holdings over the second half o f the 19th century, after abolition o f the
international slave trade in 1850. Most affected by formal abolition were the coffee
planters in the Paraiba Valley, whose declining advantage from soil exhaustion was
compounded by their loss o f slave capital to use as collateral after abolition. Caio Prado
J r., H istdria Economica do Brasil, p. 219.

-2 2 2 -
100,000 contos to be given to the banks, interest free, in support of the aid to
agriculture program between 1888 and 1890.73 In return, the banks were
supposed to match the seed capital from the government and loan out twice that
amount to agriculture at the low rate of 6% annual interest (market rates averaged
8 - 10 %).
Republican contemporaries have been supported by some economic
historians in their argument that little of the funds ended up in the hands of
planters. As one senhor de engenho observed in Recife, "the aid is only to
commerce, upon which agriculture continues to depend. "74 First, less than half
of the funds formally committed were eventually distributed to the banks.75
Second, when the funds did reach the banks, they were channeled via long-term
credit to comissarios rather than lent directly to planters. Often, no cash reached
the planters’ hands. An accounting entry in the bank’s balance sheet repaid the
short-term debt and established a mortgage in its place. For the banks, the end
result was cash and a mortgage on agricultural lands, instead of a past-due short-
Carone, o p .cit.. p. 101.
As quoted in Eisenberg, Sugar Industry in Pernambuco, op.cit.. p. 82.
O f the 100,000 contos committed, 47,250 were actually distributed. (Villela and Suzigan,
Folfticado govemo e crescimento da economia brasileira. op.cit.. p. 103).
-223-
tenn obligation. The banks were free to lend out this cash in the cities, and did so
-- to comissarios, other merchants, and manufacturers.76
That the loans to agriculture resulted in an increase in liquidity in urban
areas does not rule out the possibility that they had a real effect in the agricultural
sector. The operation of the banking multiplier implies that the same capital can
be recycled and put to a variety of uses. It is possible that contemporaries’
complaints about the scarcity of agricultural credit were more a reflection of the
selective nature of the lending program, which reinforced the reallocation of
resources from the Paraiba Valley to more dynamic agricultural investments, and
in the Northeast, favored large-scale usina owners rather than the smaller sugar
millers. In this sense, the loans did not constitute, as had perhaps been hoped (and
advertised) a simple indemnization to ex-slave holders, but rather the instrument
which permitted "agriculture with a fighting chance" to make it through a period of
crisis.77
In brief, the Aid to Agriculture program shifted out the supply of funds
available for financial transactions, by increasing liquidity in urban areas, and
Levy, "O Encilhamento", op.cit.. p. 199, and Topik, "Brazil’s Republican Revolution:
The Bourgeoisie in Power?" Unpublished manuscript presented at the University o f
California Economic History Conference, U .C .L . A ., May, 1985, p. 15.
The real effect o f the agricultural lending program on production lies outside the scope o f
this work. Franco, Reforma Monetaria. op.cit. pp. 77 - 91, offers a detailed analysis o f
the Aid to Agriculture program, including examination o f bank balance sheets. What is
unquestioned is the resulting increase in urban liquidity due to the quantity o f funds
channeled through the private banks en route to the agricultural sector, and the profitability
o f such operations for the banks.

-2 2 4 -
augmented the attractiveness of the hanking sector as an investment choice. The
contemporaneous banking reforms which allowed private hanks to issue notes on
the basis of apolices, or titles of government debt, contributed to a shift in the
structure of investors’ portfolios, and an increased demand for non-governmental
financial assets.
During the last years of the empire, a frequently voiced complaint was the
lack of funds for private productive investment, with many arguing that the
imperial treasury acted an "omnipotent competitor" for capital. In the words of
one Pernambuco resident, the government bonds were "a gnawing cancer ... a true
whirlpool sucking in all the available capital in Brazil. "7S There seemed to be a
widely-held belief in the tendency for government debt to "crowd out" domestic
investments. Returning to the survey analyzed in the first section of this chapter,
we find the following:
The greatest enemy of national industry is our own Government,

whose printing of apolices absorbs the available capital, that could
well be used to develop industry, enabling it [industry] to better
itself through improved production machinery.79
It is outside the scope of this chapter to subject these claims of crowding out to
critical scrutiny —clearly, to the extent that public spending financed by the sale of
bonds paid for physical infrastructure or other public goods necessary for trade and
As quoted in Eisenberg, Sugar Industry in Pernambuco, op. c it.. p. 70.
CPI, op.cit.. p. 207, submitted by the Commercial Association o f Bahia.

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industrialization, the vilification of credit-starved capitalists does not apply.80
What holds independent of the contemporary claims regarding the dampening effect
of government debt on industrial growth is that when the banking sector cornered
the market for apolices, other investors were indeed induced to switch to other
types of assets.
Historians of the Encilhamento, relying upon anecdotal evidence from the
contemporary press, have argued that during the early years of the First Republic
when banks were enabled to issue banknotes, using apolices as their basis of issue,
they liberated private capital for investment purposes, as the majority of apolices
were bought from private investors to be held in bank portfolios.81 In 1880,
private investors held more than 45 % of the titles of government debt in circulation
(valued at more than 350,000 contos). Banks accounted for slightly over 12% of
the apolices, provincial governments held 11%, and associations, societies, and
companies held slightly over 7%.82 In contrast, by 1890 the banking sector held
more than half of the circulating titles of domestic debt.83
Or, if the economy is not at full employment; o r if credit markets are highly segmented.
See Carol E . H eim and Philip M irowski, "Interest Rates and Crowding-Out During
Britain’s Industrial Revolution," Journal o f Economic H istory. 74(1), March 1987, pp.
117-139.
As Barbara Levy argues in her article "O Encilhamento" fop.cit.l. the natural conservatism
o f planters’ investment strategies was thwarted as supplies o f Government debt disappeared
from the market, and planters began instead to invest in private companies’ stocks and
bonds, (p. 214).
RM F, 1880, Tabella No. 10.
Franco, Reforma Monetaria. op.cit.. p. 94.

-2 2 6 -
To summarize the arguments above, both substitution and income effects
were at work to fuel the financial speculation. Portfolio substitution effects
increased the demand of non-institutional investors for non-government financial
assets due to the shift in the distribution of the internal debt between banks and
private interests. Liquidity effects, due to funds generated through the Aid to
Agriculture program and expansion of the internal debt, fueled the increased
demand for other financial assets and allowed for the reallocation of funds to
productive sectors of the economy.
If structural changes in the supply and demand for financial assets were the
fuel for the financial crisis, a third element —institutional changes introduced in
the operation of the stock market -- passed together with Ruy Barbosa’s Banking
Reform of January 17th, 1890 —were the flame that ignited the fire. Overnight,
the regulations governing the formation of joint stock companies were revised,
greatly facilitating the process of incorporation. Perhaps more importantly, margin
purchasing on the stock exchange was allowed —with a contribution of only 10
percent of the declared value of the stock sufficient for purchase. The result of all
these changes was the financial circus described at the beginning of this section,
and depicted vividly in the contemporary accounts and caricatures.
(iil Results of the Crisis
My discussion of the results of the Encilhamento will focus on three
elements: (i) the change in the role of private banking, and particularly, the

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mobilization of savings and the reorientation of banking practices as Brazilian
banks became dynamic investors in the local economy; (ii) the prevalence of
"integrative" sectors (defined below) in the stocks and bonds traded during the
boom; and (iii) the transformation of the debt structure of existing manufacturing
firms from internal to external financing. These events transformed the way in
which Brazilian financial markets worked, allowing them to play a key role in
financing of the integration of the national economy.
Banking stocks were by far the most actively traded on Rio de Janeiro’s
Bolsa de Valores, or stock exchange, during the Encilhamento. Estimates of the
increase in registered capital of banking corporations in Rio de Janeiro corroborate
the boom in the sector observed during this period of rapid policy shifts. Up until
May of 1888, banking corporations had 118.5 thousand contos of registered
capital. Between May of 1888 and the proclamation of the Republic in November
1889, new banks were founded with a total capital of 324,000 contos, nearly
tripling the existing capitalization of the sector. Then, within the first 11 months
of the Republic, till 20 October 1890, capitalization of new banks reached 385,550
contos. Thus, out of a total capital of 828,050 contos for existing banks in 1890,
almost half had been declared in less than one year of the Republic, and only 14%
was registered prior to abolition of slavery and the banking reform of Ouro
Preto.84
Many o f these new banks were short-lived. Ribeiro asserts that out o f the list o f 57 banks
formed in Rio de Janeiro, only two survived: the Banco do Brasil (again metamorphosed),

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In the words of one historian of the period, the hanking system of Rio de
Janeiro, linked to the export trade and to agriculture, "suffered a revolution," as its
functions came to include discounting, mortgage lending, loans on value of
agricultural crops, industrial loans for civil construction and railroads, ports,
harbors, etc., purchase and sale of lands for settlement, sanitation, irrigation
projects, and mining endeavors. The issuing banks created by Rui Barbosa during
the January 1890 Banking Reform could grant unoccupied lands for colonization,
industry, road construction; and the enterprises which they founded were free from
domestic taxes and customs duties. Also springing up at this time were local
savings banks, such as the Banco de Credito Popular, which lent to workers and
small-scale farmers against future guarantee of salary or anticipation of harvest,
and the Caixa de Penhores Nacional, or National Lending Window, which was also
destined to furnish cheap credit to lower income groups.85
In Sao Paulo, the first years of the Republic also witnessed significant
changes in the banking sector. In addition to the increase in the number of
domestic banks, a new type of bank emerged —the small local bank headquartered
in the municipalities of the interior. The activities of these banks were restricted to
their immediate vicinity, given their restricted deposit and capital base. Of the
and the Banco do Comdrcio, formed mid-century. "The others disappeared as quickly as
they arose, often without ever raising more than an insignificant part o f their declared
capital." (Ribeiro, History of Brazilian Banking, op.cit.. pp. 117-118).
Lobo, Historia do Rio de Janeiro (Do Capital Comercial A o ....t. op.cit.. p. 454.

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eight banks of this type formed between 1890 and 1895, only two existed by the
end of the 1920’s.86
In brief, banking, especially in the Southeast, became "popularized", at
least for a brief moment. While it is unfortunately difficult to ascertain, at the
national level, the "dishoarding" effect brought about by the creation of this new
wave of institutions, Saes’ detailed case history of hanking and credit in Sao Paulo
provides an indication of this phenomenon for the major coffee-growing region of
the country.*7 And, at the national level, it is probable that the temporary
blossoming of small banks and savings institutions, oriented to the working class,
provided a means of mobilizing the savings of this echelon of urban society, as
they were often the original shareholders of these institutions. A subject of future
research would be to understand what happened when these institutions failed (and
not all of them did, as will be discussed below). For as long as they were extant,
their shares of capital circulated on the exchange, and their existence thus served to
encourage the circulation of previously hoarded funds.
While banking stocks were indubitably the most heavily traded on the Rio
exchange during the Encilhamento —due to the profitable opportunities available to
Flavio Azevedo Marques de Saes, "A Questao do Credito Na Economia Paulista da

Primeira Republica," in H istoria Economica: Ensaios. Antonio Barreto ed. (Sao Paulo:
Institute de Pesquisas Economica, Distribuido Exclusivo Livraria Nobel, 1983), pp. 126-
127.
Saes, Credito e Bancos. o p .cit.. provides time series in the statistical appendices on the
growth o f the value o f banking deposits per capita in Sao Paulo during the last decade o f
the 19th century.
-2 3 0 -
banks via the provision of interest-free loans to agriculture and expanded
possibilities of note-issue discussed above — a sectoral analysis of the other stocks
which experienced the most active trading reveals an underlying transformation of
the real economy. Insurance, railroads, shipping, trolley cars and public works
were the areas that attracted investors during the Encilhamento, far more than
traditional manufacturing concerns. Together with banks, these service and
transport sectors share a common function -- that of facilitating economic
integration, through lowering the costs of moving capital, goods, and people.
It appears that the early years of the Republic witnessed an increased
interest in the financing of sectors whose function was to facilitate economic
linkages within local and national markets, as opposed to directly productive
investments. Examining the sectoral distribution of the volume of transactions, we
see that banks accounted for, on average, the greatest share of transactions
(60.7%), followed by railroads (10.6%), shipping companies (8.3%), trolley cars
(5.0%), and public works (11.3%). The total of other stocks, embracing industry,
construction, mining, other services, and land settlement, averaged only 11.2% of
total transactions during the seven year period tallied, and it was not until 1894
that this entire group of sectors came to account for even one quarter of total
transactions on the Rio Exchange (see Table 4.8).
This examination of the sectoral distribution of trading activities during the
Encilhamento suggests that it is a red herring to limit attempts to directly link the
stock market speculation to the contemporaneous increases in industrial output, as
-2 3 1 -
previous researchers have done. Rather, the low estimates of GDP growth during
the 1890s axe consistent with a period in which long term investments were
initiated in public transportation and infrastructure, and in which commercial
services were transformed to better serve an emerging local market. While these
types of investments did not have immediate payoffs in terms of output growth,
they provided the structural underpinnings for the sustained development and
process of regenerative urban growth observed in the Southeast of Brazil.
What trading activity that did occur within the industrial sector served
mainly to transform the financing mechanisms of existing concerns, rather than
encourage the birth of new firms. An examination of the historical evidence
suggests that many of the incorporations during the 1890s did not reflect the
formation of new enterprises, but rather a change in the form of ownership of
existing concerns. The manufacturing boom observed by Fishlow in his classic
article on Brazilian import substitution in which he argues that the first industrial
spurt occurred during the Encilhamento, can at least in part be explained by a
change-over of financing arrangements of pre-existing companies, as manufacturing
concerns took advantage of the change in joint-stock laws and the financial
euphoria of the time.88 Barbara Levy cites as evidence the "new" listings of
traditional cotton textile companies such as Alianga, Brasil Industrial, Confian^a
Industrial, and Metropolitana e Carioca, which prior to the Encilhamento, had
88 Government Decree N o.434 o f 4/7/1891, which codified and extended limited liability
privileges originally set forth in Decree No. 8821 o f December 30th, 1882 and allowed the
constitution o f joint stock companies without any prior authorization from the Government.

-2 3 2 -
preserved their status as regional or family firms.89 Further evidence for this
shift to external financing can be found in the listing of joint stock companies in
Wileman’s Brazilian Yearbook of 1909. Of the 44 manufacturing concerns
incorporated in Rio de Janeiro during the period 1880 through 1893, 26 (roughly
60%), had written as their objective to "carry on," "continue," or "take over and
carry on," "acquire," and/or "develop," an existing business.90
The Encilhamento, therefore, served more as a vehicle for the mass
mobilization of savings, and a conduit for the financing of "integrative" activities
than as a direct stimulus of new industrial undertakings. The groups that benefitted
the most from the financial crisis were the middle-men -- financial and commercial
elites, principally in the Southeast of Brazil, but to some extent in the capital cities
of the Northeast as well. As shall be demonstrated in the following section, the
effects of the Encilhamento were not felt evenly throughout the country. The
evolution of banking followed a bumpy course towards the establishment of a
central bank, the bulk of investments in transport and infrastructure were made in
the Southeast of the country, and the capital city of Rio de Janeiro emerged
triumphant as the nation’s financial and commercial center, despite its earlier loss
of position as Brazil’s principal port for coffee exports.
Barbara Levy, "O Encilhamento", o p.cit.. p. 232.
Wileman, Brazilian Yearbook. 1909, pp. 684 - 728.

-233-
IV .4 The Development nf B anking D uring th e F irst R epublic
It is unquestionable that the First Republic witnessed an expansion of
banking activities -- the number of registered banks grew from an estimated 32 in
1888 to more than 100 in 1921. Bank deposits as a percentage of M2 grew from
under 20% at the dawn of the Republic to more than half of the total money supply
by the Republic’s close in 1930. Banking instruments played an ever increasing
role as a means of payment, as both individuals and institutions demonstrated an
increasing willingness to hold less cash.91 Money supply growth kept pace with
the growth of gross domestic product, as the share of paper money as a proportion
of GDP proved relatively constant over the period as a whole, (Table 4.6, Column
F), averaging about 15%, but ranging between a low of 10.4% in 1889, directly
after the abolition of slavery, and a high of 17.8% in 1894 upon the culmination of
five years of heterodox policies. Over the nearly half-century examined, the
relative stability of this estimate seems initially surprising. However, the
progressive falling off in complaints about liquidity crises over the course of the
First Republic suggests that developments in the banking sector were better able to
adjust to periodic shortages than they had been under the Empire. The emergence
of alternative payment mechanisms, the rising circulation of bank-notes, and the
increased use of short-term credit and banks checks served to reduce the periodic
91 Recent research by Gail Triner has documented the dishoarding which occurred over the
course o f the First Republic, or the increased willingness o f the public and the banks to
hold less cash. She documents fairly continuous declines in the currency and reserve ratios
over the period 1906 to 1930. See, "Brazilian Banking and Economic Development:
1906-1930", unpublished Ph.D. Dissertation, Columbia University, March 1994.

-2 3 4 -
liquidity crises —particularly in the Southeast where more financial deepening
occurred.
In this chapter’s fourth and final part, I explore how the evolution of
banking during the First Republic did not take place evenly across the regions of
Brazil, examining first the centralizing effects of the changes in financial policy
introduced during the first years of Republic, and second, regional differences in
banking development.
fi) The Political Economy of Banking Reform During the Republican
Transition
As discussed in Chapter One, there are inherent centripetal tendencies in the
evolution of banking and financial markets. Economies of scale exist in the
management of funds, and the concentration of financial agents and institutions
within a financial center facilitates the dissemination of information and lowers the
cost of credit through reducing risk and uncertainty. In the words of Charles
Kindleberger:
Banking and financial centers perform a medium-of-exchange

function and an interspatial store-of-value function (and also
accumulate commissions/wealth in the process). Single payments
between separate points in a country are made most efficiently
through a center, and both seasonal and long-run surpluses and
deficits of financial savings are best matched in a center.
Furthermore, the specialized functions of international payments and
foreign lending or borrowing are typically best performed at one
-2 3 5 -
central place that is also the specialized center for domestic

interregional payments.92
These factors provide a functional economic justification for the existence of a
financial center. In this section I explore the political factors which, together with
the trade and urbanization patterns discussed in Chapter Three, help determine the
location of the financial center (as well as the key players within it). An overview
of the evolution of banking regulations during the period of regime transition
highlights the tensions between political and economic forces in shaping policy,
and in determining the final shape of the banking system which emerged after
months of chaos.
An examination of changes in banking policy during the brief tenure of Ruy
Barbosa as Finance Minister (November 15, 1889 till early in 1991) illuminates the
conflict between two factions. The first, an array of political and economic forces
in favor of monopoly of the privilege of issue and the creation of a strong central
bank. These groups were opposed to a second group of interests supportive of the
liberalization of note issue and other banking functions, who often used the
decentralized ethos of the Republic to justify their position. It was not uncommon
for the same actors to take positions on either side of the issue, depending on
whether or not they were personally benefitting from the constellation of policies
of the moment. Shifts in policy were more often representative of the reallocation
of banking privileges within a small group of the Rio financial elite or of political
Q<7
Charles P. Kindleberger, The Formation o f Financial Centers, op.cit.. p. 6.
-2 3 6 -
compromises made at the regional level than of genuine transformation of the
banking sector. In fact, political factors dominated financial policy choices, and a
continuum of uncertainty, rather than any one clearly defined and executed shift in
policy, characterized Brazilian financial markets during the period of republican
transition. Nonetheless, this erratic spiral of policy shifts moved inexorably
towards the formation of a central bank and reliance upon fiat money —the
foundations of modem banking.93 The financial center of the First Republic
remained the city of Rio de Janeiro, as Imperial Court gave way to Federal
Capital, and the imperial commercial elite became the bankers of the new
Government.
It is impossible to do full justice to the panoply of financial policy events
which characterized this period of political transition and structural transformation.
Thus, in the following discussion I focus on two issues which serve to illuminate
aspects of the political economy of banking reform: (i) the distribution of funds
under the aid to agriculture program and (ii) the concern of both Ouro Preto,
under the Empire, and Rui Barbosa, under the Republic, to placate the commercial
elite of Rio de Janeiro through the award of note issue privilege. Continuity rather
than change is seen to characterize the willingness of the central government (first
Empire than federal republic), to provide support to financial elite of the capital
city.
93 This discussion o f policy changes during the first year o f the Republic draws heavily upon
Franco, Reforma M onetaria. op.cit.. The chronology o f policy change is detailed in Table
4.7.

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Monopoly privilege and concentration in Rio de Janeiro characterized the
government loans made to banks in aid to agriculture. "Two banks received over
one-half of the government funds even though they had realized less than 20% of
their official capital and had combined reserves of a mere 268 contos (compared to
the 40,000 they were to receive from the government.)"94 Banks were formed
on a speculative basis, specifically to take advantage of this new opportunity. Of
the 40 banks functioning at the end of 1889, fourteen had been founded in the
previous year. Bank stocks were bought on margin so that little capital was
realized and few reserves set aside. The realized capital of these banks equalled
29% of their nominal capital. In comparison, other companies on the exchange
held a realized capital of 60%.95
Examining the regional distribution of agricultural loans, we find that out of
19 different government loans made to banks between June and October of 1889,
valuing 80,000 contos, only 9 loans were made to banks located outside of Rio.
These were loans valued at only 18,000 contos, or less than one-quarter of the total
funds. Additionally, of these 18,000 contos, 11,500 contos was distributed within
the South and Southeast region, outside of Rio de Janeiro. Thus, only 8% of the
total funds were lent to banks who had dealings in the Northeast. While Rio-based
banks may have done some lending to Northeastern planters, or more precisely
Topik, "Brazil’s Republican Revolution", op.cit.. p. 14.
Liberato de Castro Carreira, Historia Financeira e Orcamentaria do Imperio do Brasil

desde a Sua Fundacao. (Rio de Janeiro: Imprensa Nacional, 1889), p. 767.
-2 3 8 -
comissarios with Northeastern clients, the evidence suggests that the agricultural
loans were concentrated in the Southeast. Access to the portals of power, and as
we shall see below, the pockets of policy-makers, thus seemed to be a key factor
in determining the allocation of government subsidies to the banking sector.
Complaints of Northeastern planters of the continued scarcity of agricultural
credit despite the institution of the aid program support this view. Under the Ouro
Preto regime, the aid to agriculture funds for the Northeast were channelled
through the commercial firm, Pereiro Cameiro & Cia, located in Recife. The
limited size and reduced terms of the loans led one senhor de engenho to call them
"ridiculous ... impossible for the greater number of our planters," and another
regretted that "the aid is only to commerce, upon which agriculture continues to
depend." In researching his regional case study of the sugar economy of
Pernambuco, Eisenberg failed to find any records documenting how the aid to
agricultural funds were actually loaned in this province, suggesting that the terms
imposed and the accompanying political chaos of the regime transition prevented
distribution.96
This picture of funds being meted out by the Banco do Brazil to a regional
commercial establishment, and never arriving in the agricultural sector, stands in
stark contrast to the performance of the aid to agriculture program in the Southeast
96 "Six percent loans against property, equipment, harvests, stocks, and securities were
authorized by the commercial house. However, the Banco do Brasil, the source o f the
funds, did not permit loans larger than ten contos per borrower for periods longer than two
years; moreover the delinquent borrower incurred a penalty interest o f 9 percent, plus
expenses." Eisenberg, Sugar Industry in Pernambuco, op.cit.. p. 82.
-2 3 9 -
of Brazil. Here, as demonstrated by Franco, credit financed through the
Government program, and channeled through privately owned Rio-based banks, did
arrive in the hands of coffee planters in the dynamic coffee growing regions of Sao
Paulo and Minas Gerais, and played an important role in facilitating the transition
to free wage labor.97
Political allegiances had much to do with the selection of banks or
commercial establishments charged with distribution of the aid to agricultural funds
as well as with the allocation of the privilege of note issue. Under the Ouro Preto
administration, most of the banks that received government funds for agriculture
loans were speculative enterprises created precisely to take advantage of the
government funds.98 During Ruy Barbosa’s tenure, the bank that received the
privilege of acting as the issuing bank for the center of the country from Parana to
Espirito Santo, was the Banco dos Estados Unidos do Brasil, created 16 days after
the banking reform law was passed, promoted by what the contemporary press
referred to as a "gang of speculators", and founded by the man who helped
Barbosa to draft the legislation —Francisco de Paulo Mayrink.99
97 See note 77.
98 "The two major recipients o f treasury loans, the Banco de Credito Real do Brasil and the
Banco da Lavoura e do Commercio do Brasil, which were to receive almost half o f the
government funds (40,000 contos) had only realized 7,740 contos o f their official capital o f
40,000 contos and had combined reserves o f only 268 contos. The Banco Lorena received
the concession for aid to agriculture before the public even knew the bank existed." In
contrast, the Banco do Brasil, the only lending institution with some past experience in
lending to agriculture, received only 2,000 contos over the sum granted in the 1888
legislation. (Topik and Schulz,op. cit.. p.14.)
99 Ibid., pp. 22-23.

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While the specific mechanics of note issue were limited by the economic
exigencies of the time (including the need for one bank to have sufficient reserves
on hand to intervene in foreign exchange markets, in the case of convertible
currency), which bankers were favored with this privilege changed with the
political wind. Quro Preto has been described as "bound" to the Comde de
Figueiredo, the president of the Banco National, his favored bank of issue, while
Barbosa was known as "prisoner” of Mayrink, the co-author of the January 1891
Banking Reform, president of the Banco de Estados Unidos do Brasil, and later
president of the Banco da Republica. Allegations of bribery and corruption under
both administrations suggest that each finance minister had struck his own faustian
bargain with his banker of choice. Both these bankers were "great men," with
links to many sectors in the Brazilian economy. And, interestingly, both men,
although based in Rio and identified primarily as bankers, were engaged in
commercial and productive activities not only in the Federal Capital but throughout
the country. Figueiredo was known to have made his fortune in the provisioning
of foodstuffs to the Northeast during the great drought of 1878/79, while
Mayrink’s holdings included railroads in the South of Brazil and commercial
houses in the Northeast.100
My interpretation of the political economy of banking reform during the
First Republic supports the argument of Steven Topik, among others, that the
Ibid.. p . 20 & p. 26.
R e p r o d u c e d w ith p e r m issio n o f th e co p y r ig h t o w n er . F urth er rep ro d u ctio n p roh ib ited w ith o u t p e r m issio n .

-2 4 1 -
financial policies pursued by both Ouro Preto and Ruy Barbosa shared a common
motivation of buying the political support of the commercial and financial elite of
the Empire. This interpretation is particularly startling in light of the fact that
birth of the Republic has often been viewed as a victory for federalism and the
pursuit of decentralized economic policies; certainly this is the theme of the
political rhetoric surrounding the creation of Barbosa’s regional banks of issue.
However, policies pursued during the republican transition tied the growth of
Brazil’s nascent financial-industrial complex to a stake firmly planted in the capital
city of Rio de Janeiro. And, despite the democratic rhetoric of the new republican
government, monopoly privilege based on political patronage was reified at this
time as the normal way of doing business.101
Unsurprisingly, the regional concentration within the banking sector at the
dawn of the Republic was mirrored by a regional concentration in the money
supply. An examination of the money supply as of September 30, 1890, shortly
less than one year after the formation of the Republic (see Table 4.9), reveals that
of the nearly 300,000 contos in circulation, 94% were issued in Rio de Janeiro,
less than 3% were issued in the North or Northeast, and almost 20% of the notes
were restricted by law to circulate only in the Rio de Janeiro and Sao Paulo
regions by the Banking Law of January 17, 1890. De facto. Rio-based banks
The pervasiveness o f patron-client ties as a way o f doing politics and business, and its
continuity between Empire and Republic, is discussed in the conclusion to this dissertation.
R e p r o d u c e d with p e r m issio n o f th e co p y rig h t o w n e r . F urth er rep ro d u ctio n p roh ib ited w ith o u t p e r m issio n .
-2 4 2 -
controlled all but 5% of the bank notes in circulation, when ownership ties are
taken into account.102
The end result of Ruy Barbosa’s tenure as Minister of Finance, thus,
despite the federalist rhetoric of the reform of January 17th, was an extreme
concentration of banking within the Southeast of the country, particularly the
capital city of Rio de Janeiro. In less than one year the capital of the country’s
largest bank increased from 33,000 contos to 90,000 contos, and following that, to
200,000 contos.103 Although these figures testify eloquently to the centralization
in banking which took place, the rhetoric of Ruy Barbosa’s banking reform was
redolent with praises of decentralization and increased liberalization of banking.
To explain this seeming conflict between rhetoric and reality, the case has
been made that Ruy Barbosa’s advocacy of regionally based banking (as evidenced
by the structure of the January 17, 1890 banking reform), was based not upon a
"strong theoretical belief in liberal banking principles" but rather "served to give
the various regions of the country earnest money as proof of the decentralized
sentiments of the new government."104 When, in December of 1890, the Banco
Nacional of the Empire was merged with the Banco dos Estados Unidos, the
The Banco dos Estados Unidos do Brasil helped found the Sao Paul bank o f issue, the
Banco Uniao, the Banco Nacional owned one-quarter o f the shares o f another bank o f
issue; and the BEUB also owned all the shares in one o f the northern banks. See Steven
Topik, "Brazil’s Republican Revolution, op.cit.. p. 27.
Franco, Reforma Monetaria. op.cit.. p. 106.
Ibid.. p. 132.
-2 4 3 -
largest issue bank of the Republic, into the Banco da Republica dos Estados Unidos
do Brasil, Barbosa’s accompanying commentary to the legislation noted that the
merger, "was a move towards the true path, towards which all the modem ideas
concerning banks of issue were directed, that is, the march from multiplicity to
unity.,,10S Thus, Rui Barbosa believed, in line with the arguments on the
functional role of financial centers reviewed in Chapter One, that such
concentration was in fact a natural, or inevitable, way for financial markets to
operate. As we shall see below, this government support of financial concentration
of banking functions in the capital city of Rio de Janeiro strengthened the federal
capital’s position as national metropolis, and did little to stimulate the development
of strong regional banking systems within the Northeast of Brazil.
(ii) Regional Differences in Banking
The banking sector at the end of the Empire was both underdeveloped and
highly regionally concentrated. There were 32 hanks in Brazil as of June 30,
1888; 23 of them located in the South and Southeast. The Banco do Brasil
accounted for more than one-quarter of the realized capital and over one-third of
total deposits. As noted earlier, for the nation as a whole, bank density was quite
low—with 0.043 banking agencies in place for each 10,000 inhabitants. However,
if we apply this same measure to the capital, Rio de Janeiro, banking density
Ibid.. p. 129.
-2 4 4 -
increases ten-fold, with 0.443 agencies existing for each 10,000 inhabitants. On
the eve of the Republic, Rio de Janeiro was home to 13 of the Empire’s 32 hanks,
which held more than 80 percent of the total realized capital.106 The First
Republic witnessed tremendous growth in the domestic banking sector, a
popularization (in the widest sense of the word) of the stock market, and in
general, the formalization of credit. These changes did not occur uniformly
throughout the Brazilian economy. The degree of monetization of economic
activity, the development of financial intermediaries, the channeling of domestic
savings through local banks into non-agricultural activities, all were subject to
substantial regional variation. This section will demonstrate North-South
differences in the degree of formalization of credit markets and the extent of
financial intermediaries.
An English observer marveled at the concentration of financial and
economic activities in the capital city of Rio de Janeiro at the beginning of the
1890’s:
If, as we are assured, Rio de Janeiro is the eyes and head of Brazil,
the states south of Rio, including Sao Paulo and Rio Grande do Sul,
may be likened to her body and legs, and the immense northern
states to a fine head of hair or to a broad-brimmed brobdingnagian
hat: it is the southern states which carry her along; the northern
states are mainly decorative.107
Ibid.. pp. 27 - 28.
"Politics and Finance in Brazil", by an Englishman, in The Fortnightly Review, f ITT

(January, 1893), 87. London (as quoted in Normano, Economic Types, o p.cit.. p. 138).

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Similarly, a French traveler observed in 1898 that
All of the movement of the country was, it could be said,

concentrated in the capital. There one could find, it seemed, almost
all of the circulating medium. The provinces did not have their own
life. Those of the south, especially Rio de Janeiro, Minas Gerais,
and Sao Paulo - the most productive, liquidated all their business in
the praga of Rio de Janeiro. They sent their products there, and
there they made their purchases.108
Within the Southeastern region, financial intermediaries found their way into the
interior by the end of the First Republic. But in keeping with the divergent
urbanization patterns observed in Chapter Three, there was no similar spread of
banking into the vast sertao of the Northeast. Overall, regional concentration
continued to characterize banking in Brazil during the period in question. In 1909,
Southeastern banks accounted for two-thirds of the total banks in the country and
more than 80% of banking capital. By 1913/1914, the region accounted for 44 of
the 65 registered banks in the country, and roughly two-thirds of the total assets in
the sector. By 1921, the Southeast’s share of total assets in the sector had grown
to more than three-quarters.109 The overall growth of banking activities, and
particularly the widespread opening of branches of the Bank of Brazil throughout
the country did yield some smoothing in the distribution of money in circulation:
in 1906 the Southeastern region was home to roughly 45 % of the notes in
As quoted in Saes, Credito e Bancos. o p.cit.. p. 84.
Calculated from data presented in tables 4.10, 4.11, and 4.12; data for 1921 from Brazil,
Directoria Geral de Estatistica, Summary o f Some Financial and Economic Statistics. (Rio
de Janeiro: Typographia da Estatistica, 1924), pp. 98-99.

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circulation (convertible and inconvertible), as opposed to it 55% share in 1859, and
its peak share of 90% of the notes issued in 1890.110
Although the vast majority of the multitude of banks incorporated during
the epoch of the Encilhamento (1888-1893) were indeed fly-by-night, a substantial
number did remain. And, the enduring banks were located preponderantly in the
Southeast. As we see in Table 4.10, nearly half of the banks based in Rio de
Janeiro and the rest of the South and Southeast as of 1909 were incorporated
during this period, as compared to only two of the fourteen banks in the North of
the country. Also of note in Table 4.10 is the greater liquidity of the Rio-based
banks relative to the rest of the banks in the region (as indicated by the higher
share of authorized capital which has been realized), and in turn, the relative
financial solidity of Southern and Southeastern hanks as compared to those in the
North and Northeast.
Tables 4.11 and 4.12 provide data on the characteristics of the Brazilian
banking sector during 1913/14. Table 4.11 illustrates the overall concentration of
banks in the Southeast, as evidenced both by the total number of banks, and the
larger size of average assets. Additionally, domestic banks played a more
important role in the Southeast, accounting for more than half of total assets.
Domestic banks tended to be engaged in financing local industry, as compared to
foreign banks which concentrated on exchange operations and channeling flows of
See Tables 4.4 and 4.9; data for 1906 from Bolletim 1908. o p.cit.. pp. 166-167.
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foreign capital for infrastructure investment.111 Thus, the stronger presence of
domestic banks in this region suggests that Southeastern industrialists had greater
access to financial capital than did their counterparts in the Northeast.
Preserved across regions was the different composition of portfolios for
domestic and foreign banks. Principals of sound banking held sway in the
international banking community during this time. Mortgage lending, and long
term constraints on capital were avoided as a rule by the foreign hanks, as the mid-
19th century principles of sound banking described in the first section of this
chapter continued to hold sway well into the twentieth century. A final observation
suggested by the data presented in Tables 4.11 and 4.12 is the differing use of
correspondent ties by the banks in the Northeast and the Southeast. Brazilian
banks in the Northeast were more likely to have deposits in branch and
correspondent banks than to hold funds from other banks (13.46% of total assets
were held as deposits in branch or correspondent banks, as opposed to 1.2% of
liabilities taking the form of deposits from other banks), suggesting that the
financial center was located outside of the region. This phenomenon holds true for
both foreign and domestic banks.
Hurley, Edward M. Ranking and Credit in Argentina. Brazil. Chile, and Peru.
(Washington, DC: GPO, 1914), p. 46. "Practically all o f Brazil’s export and import trade
is financed through foreign banks in Rio de Janeiro, Santos, S. Paulo, Bahia, Pernambuco,
and other important commercial centers; and the foreign banks act as influential agencies in
the investment o f foreign capital Issues o f Federal, State, and municipal bonds, as well
as industrial and railway bonds, are offered through the London offices o f the British banks
in South America, which are exceptionally situated to give their clients at home information
upon Latin American investments."
-2 4 8 -
Thus, the Southeast was home to a greater number of banks, and a more
diversified banking structure. Foreign and domestic banks were headquartered
there, with the foreign banks principally involved in the export trade and the
channeling of direct foreign investment, while domestic hanks served to channel
local savings to domestic market investments. In the Northeast, foreign banks held
a greater share of a smaller regional market. The banks in the Northeast had as
their principal function connecting the region to the rest of Brazil, and the rest of
the world, rather than serving local interests in the development of the regional
economy.
A study of the Almanack Laemmert in 1922, reveals the widespread use of
branch banking within the Southeast, compared to its virtual non-existence in the
Northeast. Foreign banks, and the Banco do Brasil, were the only banks in the
Northeast which had ties to other states in the Northeast, and outside of the region.
All of the regional banks of the Northeast were located in the major cities, with no
branch agencies listed throughout the interior. In contrast, in the Southeastern
region, the Almanack reveals a proliferation of branch banking, with local banks in
Rio de Janeiro, Sao Paulo, Minas Gerais, and Rio Grande do Sul, having dozens
of branches and agencies, spread out through the interior as well as to the regional
trading centers such as the states’ capitals and Rio de Janeiro.
In Minas Gerais, a rough count of the number of banks and agencies listed
in the Almanack yields 51 different buildings, for 17 independent institutions, or
roughly 3 branches per bank. In Rio Grande do Sul, also in the South, the

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corresponding ratio was more than four to one, for the 80 odd different listings of
banks and banking houses. In contrast, the Northeastern States of Bahia and
Pernambuco listed the minimum number of branches or agencies: of the 21
entities listed in Bahia, 16 of them were different institutions; and in Pernambuco,
there were 13 total "banks", twelve of which were independent institution.
Furthermore, in both Pernambuco and Bahia, more than half of the listed hanks
were foreign banks, or Brazilian hanks headquartered in Rio de Janeiro.112
It wasn’t until 1920 that the nascent national banking system was supported
by formal government structure, with the promulgation of a series of decrees and
institutional changes within the Bank of Brazil which served to normalize and
provide a formal regulatory framework for the existing banking structure (and
allowed for the expansion of branch banking): In 1920, the Inspetoria Geral dos
Bancos (General Inspectorate of Banks) was created, within the Ministry of
Finance, and by the same decree, norms for the installation and functioning of
national and foreign credit institutions. In 1921 the Carteira de Redescontos, or
Rediscount Desk of the Bank of Brazil was installed, with an overall ceiling for
operations of 100 thousand contos. Also established at this time, was a clearing
112 In Rio de Janeiro and Sao Paulo, individual listings were not made for each
bank and banking house. Additionally data were only available for the
capital cities, rather than for the entire state. However, in addition to the
total figures available on number of banks, there were several
advertisements, particularly in the Federal District section of the Almanak,
which demonstrated the intraregional linkages within Southern and
Southeastern financial markets. From Almanak Laemmert. Volumes 1 through 4,
Rio de Janeiro, Typographia do Almanak Laemmert, 1926.

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house for checks, as a section of the Bank of Brazil, an institution which had been
sought after since the mid-19th centuiy.113 The Carteira, despite its potential for
the redistribution of funds, did not ameliorate the regional concentration of
banking. The Federal District received 62 percent of the rediscounts and Sao
Paulo gained another 15 percent.114
As Steven Topik has persuasively argued in his study of the political
economy of the Brazilian State during the First Republic, the development of
financial institutions was more a side effect of the successive republican
administrations’ state financial policy than its primary aim. State interventions in
the financial sector, with the exception of the administration of Rui Barbosa during
the first year of the Republic, were "motivated more by concern over the foreign
credit rating, the value of exchange, and commercial credit, than by the desire for
state control [or promotion] of capital markets.... The aim of state policy was more
to straighten out public finances than to stimulate banks..."115 Unsurprisingly,
therefore, the banking system at the end of the Republic remained relatively
underdeveloped, regionally concentrated, and conservative in practice. The growth
and innovation in financial markets that did occur was concentrated in the
Southeast of the country, where the flow of funds into the banking sector during
See Table 4.13 and Ribeiro, H istory o f Banking, o p .cit.. p. 126-127.
Steven Topik, Political Economy o f the Brazilian State, op.cit.. p. 46.
Ib id .. p. 50.
-2 5 1 -
the republican transition served to support the transition to free labor, and finance
urban infrastructure and integrative activities.
IV.5 Conclusion
In the words of the famous economic historian, N.S.B. Gras, criteria for
fully developed metropolis would include the following:
The population of the metropolis would be large, as compared with

the population of other cities in the district. ... And there would be a
lack of any marked dependence on a neighboring center for trade
and transportation.... If statistics proved that its loans to the
surrounding area were large (especially its discounts of commercial
paper), then it would be classed as a fiilly developed (in function)
metropolitan center.... [TJhat city is a full-fledged metropolis when
most kind of products of the district concentrate in it for trade as
well as transit; when these products are paid for by wares that
radiate from it; and when the necessary financial transactions
involved in this exchange are provided by it.116
The evidence presented in this and the preceding chapters has demonstrated that
Rio de Janeiro did indeed serve as a national metropolis during Brazil’s First
Republic. The capital city was headquarters of the Bank of Brazil, and its
forerunners as the Government’s Central Bank, home to the National Stock
Exchange, and the hub of a trade and transportation network which spanned the
entire country. While Sao Paulo grew in its own right as a regional metropolis,
providing the focal point for the goods and labor flows surrounding the booming
coffee trade, and emerging over time as the industrial center of the country, Rio de
Gras, An Introduction to Economic History, op.cit.. p. 294.
-2 5 2 -
Janeiro remained one rung above Sao Paulo in the urban hierarchy. The continued
metropolitan dominance of the capital city was due to several factors: its larger
population (twice the size of Sao Paulo); its innate geographic advantages (one of
the best natural harbors in the world); and, has been presented above, its
continuing influence as the financial center for the country. The capital city’s
position as the seat of government and political power was an important attribute in
a political-economic system based upon patron-client ties. We have seen the role
of personal connections in the allocation of banking privileges during the
Republican transition. The following, and concluding chapter, turns to a more
complete discussion of the role of patronage, the political-economy of the First
Republic, and the effect of fiscal federalism on the country’s growing regional
divide.
CONCLUSION
The economic changes witnessed by Brazil over the half century between
1870 and 1920 did not occur in isolation from social and political transformations.
During the 1870’s and 1880’s Brazil, along with the rest of Latin America,
underwent a series of political reforms which accompanied the sub-continent’s
increasing involvement in the world economy. These measures included an
electoral reform in 1881, the abolition of slavery in 1888, and, at the provincial
level in the Southeast, government support to subsidized European immigration.
Outside of Government, progressive ideas gained increasing currency. Republican
parties formed in various provinces (the most active in Sao Paulo), to advocate
change. While specifics of the Republican platforms differed region by region,
members of the party throughout Brazil shared a commitment to provincial
autonomy. To varying degrees, they supported a bicameral system of government,
universal male suffrage, freedom of conscience, work, the press, and education,
separation of church from state, abolition of the privileges and titles of nobility,
-253-

guarantees of private property, and abolition of the system of conscription for the
National Guard. "Of all these issues, the most important was federation."1
When the change of Government from Empire to Republic did occur, it
happened matter of factly, and with no great outcry. On November 15, 1889, the
people watched, "stupefied, like dumb beasts," as soldiers marched through the
streets of Rio de Janeiro, and in a bloodless coup, installed Marshall Deodoro
Fonseca as the leader of Brazil’s First Republic.2 The extent to which the change
in Government represented a bourgeois revolution or a redistribution of political
power to emergent urban-industrial interests, is questionable. It can be, and has
been convincingly argued that the advent of the Republic signified a joumee des
dupes for members of the military and urban professional classes who had fought
for change.3 Rather than promulgating modernization, and actively pursuing a
developmental agenda, "the federal Republic, though in theory based on the ideal
of democratic representation, was in practice no more than an instrument of the
regional oligarchies. "4
Emilia Viotti da Costa, "1870-1889", o p .cit.. p. 207.
The famous phrase o f Aristedes Lobo, a contemporary journalist and eyewitness to the
coup, as quoted in Jose M urilho de Carvalho, Os Bestializados: O Rio de Janeiro e a
Republica aue Nao Foi. (Sao Paulo, Companhia das Letras, 1987), p. 9.
Emflia Viotti da Costa, "1870 - 1889", o p .cit.. p. 213).
Boris Fausto, "Society and Politics", pp. 257 - 307 in Bethell, Brazil: Empire and
Republic op.cit.. p. 279.
-254-
with p e r m issio n o f th e co p y r ig h t o w n e r . F u rth er rep ro d u ctio n p roh ib ited w ith o u t p e r m issio n .

-2 5 5 -
The likelihood of class conflict was diminished by the strength of patron-
client ties. "Capitalism in Brazil developed within the web of patronage and the
tension between the patronage system and the free enterprise ideas increasingly
asserted by business did not disappear with the Empire."5 As Richard Graham’s
recent history of patronage and politics in Brazil illustrates in depth, "no waning
of the patronage system accompanied the change of regime in 1889 Planter-
businessmen in both places and both times [imperial sugar mill owners of the
Northeast and republican coffee entrepreneurs in Sao Paulo] sought to use the
instruments of patronage to their own purpose, and neither group wished to
damage such useful levers."6
The pervasiveness of patron-client ties as an organizing basis of Brazilian
society and politics in the 19th and early 20th centuries, together with the
coincidence of economic interests among large-scale landowners and members of
the commercial and business elites, call into question the validity of sectorally-
based interest group conflict as a guiding principle for the analysis of political
change in Brazil. Scholars have pointed to the surprising convergence of political
interests between big business and landowners, noting the role of commercial
associations as political advocates for agricultural interests. In an economy
dominated by agriculture, produced either for export or for the domestic market,
da Costa, "1870-1889", op.cit.. p. 178.
Richard Graham, Patronage and Politics in Nineteenth Century Brazil. (Stanford: Stanford

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"members of the business elite recognized clearly that their well-being depended on
the prosperity of agriculture".7
Elites in 19th century Brazil were often multisectoral —the planter
oligarchy and the business elite were in many cases one and the same. The most
wealthy and largest-scale planters diversified into commercial, financial, or even
industrial areas —not just in the Southeast, but also in the rest of the country.
And non-native Brazilians who were dominant in commercial and industrial
concerns, over the generations, inter-married with the agricultural elite. Thus, a
commonality of interests amongst those who wielded the greatest economic (and
political) power, held sway. Those conflicts of interest that did exist between
business and agriculture were most commonly felt by the lower strata —small-scale
planters with few financial reserves subject to the tyranny of commerciantes, local
shopkeepers unable to enforce payment from their planter customers, etc. Large-
scale planters, or members of the group known as grande lavoura, diversified into
commercial and industrial activities, and this diversification of the elite attenuated
the likelihood of sectorally-based class conflict.8
7 Eugene W. Ridings, "Class Sector Unity in an Export Economy: The Case o f 19th
Century Brazil", Hispanic American Historical Review. 58 (3), 1978, p. 436.
8 Analyses o f the economic diversification o f the Brazilian elite (through intermarriage o f

different sectoral interests or actual diversification) during the late Empire and the early
years o f the First Republic are abundant. Specific case studies include Darrell Levi’s, The
Prados o f Brazil, op.cit.. the biography o f a leading Sao Paulo family; Chapter Four in
Eisenberg’s Sugar Industry in Pernambuco, op.cit.: Chapter Five, "The M erger o f
Emerging Elites," in Warren Dean’s The Industrialization o f Sao Paulo, op.cit.. and also
the same author’s "The Planter as Entrepreneur", op.cit.. Antonio Saes, in his Credito e
Bancos no Desenvolvimento da Economia Paulista. op.cit.. Chapter Three, chronicles the
role o f planters in the development o f Sao Paulo’s banking sector and the eventual

-2 5 7 -
Some historians, such as Wilson Sodre and June Hahner, have argued that
the first four years of the Republic, when the Federal Government was under direct
military control prior to the election of the paulista president Rodrigues Alves in
1894, offered a fleeting moment of political power to urban reform groups,
predominantly based in Rio de Janeiro, known as Jacobins.9 However, sectoral
review of the pattern of federal government spending10, and analysis of the
financial policies pursued by the transitional government presented in the previous
chapter refute even this limited claim. The new republican government did not
actively concern itself with modernist, developmental measures (although such
policies were often the inadvertent outcomes of state action motivated by other
concerns).11 Rather, particularly in the formative years, the overarching
emergence, only in the 1920’s, o f a class o f bankers with a political agenda distinct from
that o f the planter elite. Other political historians o f the First Republic have pointed
towards the emergence o f separate political interests on the part o f industrialists and
financial groups as a challenge to the planter oligarchy only in the 1920s, and the gradual
unravelling o f the convergence o f interests amongst planters and the business elite as one o f
the causes o f the end o f the First Republic in 1930.
Hahner, J.E ., "Jacobinos versus Gallegos, Urban Radicals versus Portuguese Immigrants in
Rio de Janeiro in the 1890s," J. o f Interamerican Studies and W orld Affairs. 18 (1976):
125-154, and Sodre, H istoria da burguesia brasileira. (Rio de Janeiro: Civilizaijao
Brasileira, 1964).
Richard Graham, "Government Expenditures and Political Change in Brazil, 1880 - 1899:
Who Got W hat?", Journal o f Interamerican Studies and W orld Affairs. Vol. 19, No. 3,
August 1977, pp. 339-367.
This argument provides the central thesis o f Steven Topik’s The Political Economy o f the
Brazilian State. 1889 - 1930. op.cit.. Topik argues that the need to resolve (and stifle the
emergence of) conflicting interests o f fractions o f the ruling class, and foreign investors
gradually led to far greater state participation than any o f the founders o f the Republic
originally desired. He concludes that the structure o f the economy and o f society — not the
intentions o f the actors nor overt belief in the need for a developmental state -- best
explains the state’s weighty economic presence during Brazil’s First Republic.

-2 5 8 -
preoccupation of the new federal leadership was to secure political stability through
garnering the support of the traditional regional elites. The continued protection of
the Northeastern sugar industiy, and the parallels between the banking reforms of
Ouro Preto, the last finance minister of the Empire, and Rui Barbosa, the first to
hold that post during the Republic, exemplify this phenomenon.
If the Republican "revolution" in Brazil did not in fact represent a lasting
redistribution of political power from the planter oligarchy to the urban reformers,
and there were no clear winners and losers in terms of sectoral interests, why then
did the change in government occur? The primacy of federalism as a plank in the
Republican party platforms of the 1870’s and 1880’s suggests one answer to this
question. The change in Brazil’s political system from Empire to Republic can be
viewed as a reshuffling of political power to reflect underlying economic
conditions. The federalist system promulgated in the new Republican constitution
of 1891 allowed for significant regional autonomy —at both the political and fiscal
levels. The change in the rules of government was one which readjusted the
political fit of the national government to be consistent with the shift in the
economic center of the country to the Center-South, while at the same time,
through a pyramidal structure of patron-client ties, rising from local oligarchs,
protected and preserved the interests of regional elites.
In this concluding chapter, I explore the impact of the transition from
Empire to Republic on the regional distribution of political power and fiscal
resources. In a patronage-based system, where political authority provided the
-2 5 9 -
means through which economic favors were bestowed, access to the positions of
power was as important as control of the state’s purse-strings. I first summarize the
workings of the political and fiscal system in place during the last years of the
Empire, and document the failure of the imperial system to adjust to the emerging
economic dominance of Sao Paulo and the Center-South. Subsequently, the
regional redistribution of political power (as measured by representation in the
federal government), and access to fiscal resources (through an analysis of central
and state taxation privileges and expenditure patterns), is reviewed. Finally, I
highlight critical junctures in the political choices made by national and regional
leaders during Brazil’s First Republic, demonstrating the ways in which decisions
made at both the national and state levels served to perpetuate the privileges of
existing regional elites, and thus reinforced the growing divide in the relative
economic development of the Northeast and the Southeast.
Beyond the Seams o f Centralization
The political system of the Empire has been characterized by a leading
Brazilian historian as "extremely centralized, oligarchical, and unrepresentative, ...
[and] not flexible enough to adjust to the changes in the economic and social
structure [which occurred] during the second half of the 19th century."12 Under
the Empire, even after the electoral reform of 1881, less than one percent of the
12 da Costa, "1870 - 1889", op.cit., p. 171. Note that this section draws heavily upon the
arguments presented in this definitive piece on the political transition from Empire to
Republic.
-2 6 0 -
population participated in the last elections for the Chamber of Deputies in
1886.13 Furthermore, political power was centralized at the national level. The
emperor enjoyed the privileges of the Moderating Power, an invention of the
French publicist Benjamin Constant, which included the right to choose and
dismiss the prime minister independent of parliament, to disband the Chamber of
Deputies, and to call for new elections. "This meant that if the Chamber denied
confidence to a cabinet the emperor could keep the Cabinet and dismiss the
Chamber, calling for new elections." The emperor was also privileged with the
authority to appoint the members of the Council of State and to choose each
senator from among the three candidates who received the most votes in any
senatorial election.14
The number of representatives per province was originally more or less
proportional to the total population (including slaves), and this demographic
concentration was in turn correspondent to economic importance and political
power. This coincidence between economic weight and political representation at
the national level had clearly ruptured by the final years of the Empire. Minas
Gerais, the most populated province, continued to have the largest number of
representatives and the majority of the provinces had increased their representation,
Joseph L. Love, "Political Participation in Brazil, 1881 - 1969", Luso-Brazilian Review,

7:2 (December, 1974), p. 7.
da Costa, "1870 - 1889", op.cit., p. 171.

-2 6 1 -
with the striking exception of Sao Paulo, despite the fact that coffee production had
made it the richest province in the country.15
The economic growth which occurred during the last decades of the Empire
generated imbalance between political and economic power. Provinces, as they
had throughout the imperial period, competed for government subsidies and credit.
However, the pressure to expand the infrastructure, with the advent of the new
transportation and communication technologies, and the increase in demand for
Brazilian exports brought about by European and American industrialization, made
the provinces more aware of, and unsatisfied with, their dependence upon the
central government.16
Skewed political representation was mirrored by skewed distribution of
central Government resources. Provinces had limited access to independent
sources of revenue and were economically dependent upon the central government.
The provinces received only 16.7% of all revenue in 1868, the municipalities a
scant 2.5%, and the Court, 80%. Examining the relative size of national, state,
and municipal revenues in 1889, the last year of the Empire, we see that the
Ibid., p. 174. "Taking into account provincial resources, Sao Paulo, Para, and Rio
Grande do Sul were clearly underrepresented at the end o f the Empire." In 1883 Sao
Paulo had four senators while Minas had ten, Bahia seven, and Pernambuco six each.
Each Paulista senator represented more than 300,000 inhabitants, compared to 180,000 per
senator from Pernambuco, and 80,000 from Amazonas. The same skewed representation
was observed in the Chamber o f Deputies. By 1889, only 3 out o f 69 senators came from
Sao Paulo (with a fourth seat vacant). The few Paulistas who did achieve positions o f
power, such as seats on the Council o f State, were from the declining Parafba Valley,
rather than the dynamic western part o f the province. (Ibid., p. 208).
da Costa, op.cit., p. 169.
-2 6 2 -
Imperial Government accounted for the lion’s share of total revenue collected --
having control of the principal duties on imports and exports. Provinces, unable
to borrow internationally, were limited to the revenue that could be collected from
local taxes, and accounted for under one-fifth of the total revenue collected in
1889, with municipalities contributing only 5 per cent of total government
revenue.17 Collections from Sao Paulo accounted for 12.9% of the central
government revenue during 1890, the last budgetary year of the Empire, while the
state received under 3% of Government expenditures.18
An essay written towards the end of the Empire by a French sociologist,
Louis Couty, comparing the economic development of the province of Sao Paulo to
that of the Argentine province of Buenos Aires, outlines the federalist position of
the day. He argues that Buenos Aires province, containing the "capital city and
the entrepot for the country," is located near the seat of power, and reaps the
benefits of being the political and financial center of the country -- such as having
the provincial bank serve as the principal lender to Government. In contrast, "Sao
Paulo is distant from Rio de Janeiro, and [the province’s] leaders often complain
that other regions of the Empire are more privileged."19
Goldsmith, Desenvolvimento Financeiro..., op.cit.. p. 71.
Topik, Political Economy o f the Brazilian State, op.cit.. p. 127.
Louis Couty, O Brasil em 1884: Esbocjos Sociologicos, (Rio de Janeiro: Senado

Federal/FCRB/MEC, 1984)., p. 154.
-2 6 3 -
Couty goes on to assert Sao Paulo’s overwhelming superiority to Buenos
Aires, arguing that the Brazilian province had succeeded in constructing railroads,
promoting immigration, and installing diverse industries, "without any help from
Government, but from its own resources."20 And yet, the leadership of Sao
Paulo, particularly in the dynamic coffee-growing regions of the western part of
the province, "felt that they did not have a fair representation in the government
and they began to see federation as the only adequate form of political
organization" .21
The central authority of the Imperial government extended down to the
provincial level. Provincial presidents were appointed by the Court, rather than
elected locally. This meant that whenever the Imperial Cabinet changed, so did the
provincial presidents. And, given the paulistas underrepresentation at the Court,
they had limited voice in the choice of their provincial president. More often than
not, politicians from other provinces served as presidents of Sao Paulo. Given the
supreme importance of political patronage for the provision of employment and the
award of economic privilege, this outside control of the highest provincial post,
with all the political power that accompanied it, surely rankled the paulista elite.22
The centralization of political appointments, including the provincial
presidencies, helped to instill a common national ethos amongst government
-2 6 4 -
bureaucrats. The spirit of regionalism did not permeate government during the
Monarchy, as it came to during the Republic. "The statesmen of the time were
national men, even though they retained traces of their lands of origin, ... they did
not play a regional game in public life."23
Interestingly, the call for provincial autonomy came from North and South
alike, with seemingly conflicting agendas which were only resolved much later.
Politicians from Sao Paulo complained about the Imperial Government’s limited
attention to infrastructure development, and support to immigration, arguing for
more progressive policies which would support the continued expansion of the
export-based coffee economy. Leaders ffom the Northeast were more concerned
with the divvying up of the traditional pie and support for the declining sugar
industry. Their complaints concerning the skewed allocation of agricultural credit,
for example, were reviewed in Chapter Four, as were their grievances concerning
the centralized nature of customs administration, and the concomitant lack of
backward linkages into regional financial development. By the last years of the
Republic,
Everywhere, for different reasons, there was an increasing

awareness that centralization was a source of favoritism and an
obstacle to development and progress. Federalism became the
banner of all those who felt constrained by the government and
resented the political oligarchies that perpetuated themselves in
23 Francisco Iglesias, Polftica Economica do Govemo Provincial, (Rio de Janeiro: Instituto

Nacional do Livro, 1958), p. 39. See also Jose Murilho de Carvalho, "Political Elites and
State Building: The Case o f 19th Century Brazil", Comparative Studies in Society and
H istory. 24:3 (July, 1982), pp. 378-379, for an analysis o f the role o f the unified elite in
consolidating the political power o f Brazil’s dominant ciasses.
-2 6 5 -
power through a system of patronage and clientele and through the

monopoly of positions in the Senate and the Council of State.24
But, the Republic did not bring the end of patronage, it just decentralized it. The
result was the increasing divergence of government policy in Northeast and
Southeast —a developmental state emerged in support of the expanding coffee
economy, while the Northeastern elites formed a state government firmly opposed
to economic diversification and committed to protecting the sugar industry.
The end of the Empire, rectified the inability of the imperial government to
accept and integrate a local and regional leadership, increasingly more active and
articulated, into the system of national politics.25 One of the first acts of the new
Republican government was to give the (now locally elected) state presidents the
right to "create jobs, fill them, ... and set their salaries."26 I now turn to an
examination of how this decentralization was effected, an appraisal of its impact on
the access to political power and fiscal resources for the regions of Brazil.
Patronage Decentralized and the Impact o f Fiscal Federalism
"For paulistas, politics was a forum to benefit their businesses; for almost
all the others, politics was their business." So writes Simon Schwartzman in his
study of the relationship of Sao Paulo to the Brazilian state, and its relative
Simon Schwartzman, Sao Paulo e o Estado Nacional, (Sao Paulo: DIFEL, 1975).
Graham, Patronage and Politics, o p .cit.. p. 268.

-2 6 6 -
marginality in national politics during the First Republic.27 In contrast to their
counterparts from Minas Gerais, who profited handsomely from the largess of the
federal government, and Pernambuco, who took whatever they could get, Sao
Paulo’s political leaders were not especially interested in federal patronage and
public works projects. Counting the number of years that natives of each Brazilian
state occupied ministerial posts during the First Republic, during the two periods
1889 - 1910, Joseph Love finds that Sao Paulo, the center of "hegemonic
federalism" (as termed by another scholar of Brazilian politics) did not dominate
politically, despite its position as the leading coffee producer and industrial
center.28
Under the fiscal federalism of the First Republic, Sao Paulo could afford to
be marginal. The constitution of 1891 "formalized the federalist system while at
the same time giving expression to the distinction of power between the most
[economically] powerful and the weakest states."29 State governments were
Schwartzman, Sao Paulo e o Estado Nacional, op.cit.. p. 124.
Love, "Political Participation...”, op.cit., p.22. The term "hegemonic federalism" comes
from Raymundo Faoro, Os Donos de Poder (Porto Alegre: Editora Globo, 1958). Sao
Paulo’s political role in the First Republic, although marginal relative to its national
economic position, was nonetheless important relative to many other states in Brazil.
Paulistas either held control over the presidency, or jointly determined with Minas Gerais
who would be president, for the bulk o f the Republic, in a system which came to be known
the politico, do cafe com leite. Furthermore, although underrepresented in ministerial
postings, the state still held more positions than Pernambuco, the leader o f the Northeast,
which between 1890 and 1930 placed only a handful o f its representatives in high federal
posts. This lack o f representation was much more costly for Pernambuco, given its
supplicant role in relationship to the federal government.
Fausto, "Society and Politics", op.cit., p. 271-272.

-2 6 7 -
granted control over the privilege of export taxation, (the Federal Government
retained import taxation privilege) and the right to borrow freely on international
markets. Sao Paulo’s first state budget under the new federal system represented a
three-fold increase over receipts of the previous years (in constant terms at 1912
values), and at the same time rose from the equivalent of less than five percent to
nearly one-fifth of total federal revenues.30
In general, the fiscal reforms of the change of Government represented a
transfer of resources from the federal to the state and municipal governments, of
an increasingly growing revenue pie.31 Comparing 1868/69 as a base year in the
Empire against 1910 for the Republic, Carvalho found the imperial government in
the former year collected 80.8% of total revenues, the provinces received 16.7%;
and the municipalities, 2.5%. In contrast, by 1910 the comparable figures were
59.9% for the federal government, 21.5% for the states, and 18.6% for the
municipalities.32 By 1919, of total revenue collected, the federal government
retained 52%, the states 31%, and the municipalities 18%.33
Joseph L. Love, Sao Paulo in the Brazilian Federation, 1889 - 1937, (Stanford: Stanford
Total federal revenues grew in real terms nearly ten-fold between 1880 and 1920, with
their growth outpaced by state and municipal revenues. (Calculated from time series on
federal revenues, together with price indices, found in Joseph L. Love, Sao Paulo in the
Brazilian Federation, o p .cit.. pp. 302-303.
Orlando M. Carvalho, Politica do municipio (Ensaio historico), (Rio de Janeiro, 1946), p.

165. For both Empire and Republic the total for municipalities is biassed upward, because
it includes the Federal District.
DGE, Resumo de Estatisticas Economicas e Financeiras, op.cit.. pp. 164-168.
-2 6 8 -
More was spent at the municipal level in the Southeast than in the
Northeast, reflecting the higher degree of urbanization (evidenced by the larger
size of the capital cities and the greater reach of an urban hinterland). In 1900,
municipal-level expenditures accounted for less than one-quarter of state
expenditures in the Northeast. In contrast, in the Southeast, expenditures at the
municipal level were over 90% of the value of state-level expenditures (again
exaggerated due to the inclusion of the Federal District). Equally revealing of
underlying differences in urban patterns are regional differences in the share of
municipal spending going to state capitals —50.5 % in the Northeast as compared
to 28.6% (excluding Federal District), in the Southeast.34 Thus, the relative
evenness of the rank-size distribution of urban centers in the Southeast was also
revealed by the relatively even distribution of the region’s expenditures. There
was more local level government spending than in the Northeast, and what there
was did not concentrate in the capital cities, but was spread throughout the interior.
Taken together with the political reforms which increased the scope and
function of local authority, at both the state and municipal level,35 the Republic
strengthened the power of the coroneis, or local oligarchs. Due to the nature of
the moving frontier in Sao Paulo, the constant stream of immigrants pouring in,
Specifics o f the political and administrative reforms are detailed in Fausto, "Society and
Politics1', op.cit., pp. 266-272. M ost important were the power to directly elect state
presidents and municipal authorities, as well as a decentralization o f certain taxation
authorities, both de jure, and de facto, as shall be discussed further on.

-2 6 9 -
and the ability of a fiscally strong state to raise its own militia, the power of local
oligarchs was frequently subordinated to the authority of the state government. But
in the Northeast, the coroneis ran the show. The result was a splintering of
political authority, and concomitant lack of stability in that region,
exemplified not only by incessant changes in the state leadership, but in the rise of
social banditry.36
The nature of local politics, in turn, determined the decisions made
regarding the allocation of state funds. While there can be no doubt that the
redistribution of taxation privileges greatly increased the funds directly available to
the export-rich states, giving them a greater pool of resources to work with,
decentralized control of funds also increased in the non-exporting areas, albeit at a
much diminished rate. The state budget of Pernambuco, for example, increased
marginally in real terms, between the last budgetary year of the Empire and first
year of the Republic, but within ten years had doubled in real terms.37 Attempts
to graph the real budget increases of Sao Paulo and Pernambuco demand the use of
a semi-logarithmic scale, as otherwise Sao Paulo’s budget line would shoot off the
map (the ratio of the state budgets was 1.2:1 in 1890, increasing to 7.2:1 in 1920,
with an even larger gap for expenditures given Sao Paulo’s tendency for deficit
Fausto, "Society and Politics", op.cit., pp. 280-284.
Love, Pernambuco in the Brazilian Federation, p. 188.

-2 7 0 -
spending).38 Thus, Pernambuco (and the other Northeastern states), had access to
a far more limited pool of resources than did their export-rich counterparts in the
Southeast. And, with the limited revenue they were able to collect (a gradually
increasing pool of funds whose allocation was decided at the state level for the first
time in their history), they made arguably foolish investment choices in the service
of defending the status-quo.
Fiscal federalism, in fact, served to decentralize the provision of subsidies
to the sugar industry. While the Northeast in general, and Pernambuco in
particular, had been the primary beneficiary of the interest guarantees for the
establishment of central sugar mills provided by the imperial government during
the 1880’s, gaining access to more than half of the total funds awarded.39 With
the Republic, the modernization of the sugar industry became the province of state
governments. And spend they did, from their meager pool of resources, to further
"modernize" the sugar industry, converting from central mills to usinas. Subsidies
to investments in plant and equipment, together with the state provision of low-
interest mortgages, furthered the process of land concentration and labor
marginalization described in Chapter Three. In total, the state governments,
during the first two decades of the republic, made available 15,000 contos in loans,
over five times the contribution made by the imperial and provincial governments
Levine, Pernambuco in the Brazilian Federation, p. 188; and Love, Sao Paulo in the
Brazilian Federation, p. 302.
Eisenberg, Sugar Industry in Pernambuco, op.cit.. pp. 220-222.

-2 7 1 -
to central mills. In real terms, the state loans more than doubled the value of
previous subsidies.40 By 1910 two-thirds of the 60 modernized mills operating in
Pernambuco had received some form of government subsidy. Modernization had
been achieved, albeit partial. For, another 2,000 traditional, small-scale mills
continued to exist along-side the large-scale usinas. They limped along, supplying
the limited local market’s demand for crude sugar and cheap rum. "Full
transformation and reorganization of the sugar industry in Pernambuco was never
completed. "41
While export taxes were decentralized, the Union retained the privilege of
import taxation. Given the relative even geographical distribution of international
imports, and the skewed distribution of overseas exports, it is no surprise that the
fiscal system generated complaints from the states with low exports. The
Pemambucanos of the Republic complained about many of the same issues that had
irked their forefathers during the Empire. Local taxes were spent on the
improvement and beautification of Rio de Janeiro; the Northeast was not
adequately represented in the cabinet; the central government took more in taxation
from Pernambuco than it spent there.1,42 The supplicant position of the Northeast
Eisenberg, Modernization W ithout Change, pp. 116-117, percent o f budget calculated using
data from Levine, Pernambuco in the Brazilian Federation, op.cit.. pp. 188-189.
Ibid., p. 221.
Mello Neto, Jose Antonio Gonsalves de. "Por uma historia do Imperio vista do nordeste,"
Estudos Universitarios, 6(1) (Jan.-March 1966): 51-59.

-2 7 2 -
vis-a-vis the central government is well-captured by the following statement of a
governor of Pernambuco made in 1948:
Difficulty, misery, profound and grave economic disequilibrium

prevails in Pernambuco.... For this reason, I ask the Union for
help.... Under the federal system income is distributed generally,
without considering the particular needs of each state and region; ...
thus a state that exports lives better than one that does not; and the
best taxes - income, sales, and import duties - go to the Union.43
Here, the tributary system reinforces the deleterious effects of what Jacobs
describes as "unearned" imports.44 In the absence of thriving (urban-based)
exports, not only were the intra-regional dynamic growth effects lacking, but the
local revenue base was inadequate. The price paid for the continued importation of
luxury goods by the regional elites, and supplementation by imports of an
inadequate regional food supply, was subsidization to the federal coffers.
The federal government took more out of most states than it returned to
them. The grand beneficiary of Federal taxation policy was the capital city of Rio
de Janeiro. Overall, "Sao Paulo was the leading contributor in a redistribution
scheme that subsidized the territorial unit with the highest per capita income. "4S
Governor Alexandre Jose Barbosa Lima Sobrinho, at a reception for the Brazilian president
in 1948, as quoted in Levine, Pernambuco in the Brazilian Federation, op.cit.. p. 138.
Jacobs, Cities and the Wealth o f Nations, op.cit.. p. 141.
Besides the Federal Capital, there were only four states (out o f twenty) that had a net gain
from federal treasury operations in 1937 -- Matto Grosso, Piauf, Maranhao, and Goias.
Their combined surplus o f federal expenditures over receipts was less than one five-
hundredth o f the surplus o f federal expenditures over revenues in the Federal District.
(Levine, Sao Pauio in the Brazilian Federation, op.cit.. pp. 261-269).
-2 7 3 -
Local economic dynamics created self-reinforcing effects vis-a-vis fiscal
mechanisms. In the Northeast, reliance upon interstate export taxes, owing to the
weakness of the international export revenue base, further hampered domestic
market development.46 Intra-regional rivalries among Northeastern elites also
thwarted needed infrastructure improvements and the consolidation of the regional
rail network through unification of the gauge of track. Strong state support for
integration of the regional economy suffered as stagnant economic performance and
the accompanying scarcity of revenue led to intra-regional infighting and rent-
seeking behavior. Local governments sought to retain dominant positions for their
major port cities. The objective was the control of extra-regional trade rather than
the facilitation of trade with neighboring states.47 Furthermore, regional
divisiveness within the Northeast prevented the region from acting with a unified
voice at the Federal level, which could have increased their share of federal
largesse.48
Intra-regional rivalries were not absent from the political-economy of the
Southeast, but a growing revenue base and a booming economy did much to
dissipate the limiting effect of such infighting on investments in public goods.
State governments in the Southeast not only had a greater revenue base to work
46 Levine, Pernambuco in the Brazilian Federation, o p.cit.. p. 155. Interstate taxes were a
hotly contested issue throughout the course o f the First Republic (see Love, Sao Paulo in
the Brazilian Federation, pp. 195-197 for an overview o f the political debate.
47 Warren Dean, "Economy," op.cit., pp. 223-224.
48 Levine, Pernambuco in the Brazilian Federation, o p.cit.. pp. 136-137.

-2 7 4 -
with, the economy also stimulated private investments in public goods. As
discussed in Chapter Three, many of the railroads in the Southeast were privately
owned and operated. In the state of Sao Paulo, port improvements for the port of
Santos were financed privately by the Rio-based Companhia Doca de Santos, in
contrast to the other port improvements taking place under federal programs
throughout the country. Not only was Sao Paulo able to attract both foreign and
domestic private capital, but a virtuous fiscal circle developed as a result. The
port of Santos was exempted from the two percent duty on all merchandise which
had been designated to maintain federally owned or subsidized ports.49 And, a
relatively strong state government (compared to state governments in the
Northeast), was able to share in the speculative gains of frontier expansion. Sao
Paulo introduced a property transfer tax in 1891, which until 1932 was, after the
export tax, the largest revenue producer in the state.50
Bridging the Archipelago
The federal taxation system thus provided yet another strand which
connected the various regions of Brazil, which, like private capital flows, and
interregional movements of goods, was also centered in the capital city of Rio de
Janeiro. Over the course of the half century between 1870 and 1920, the
Love, Sao Paulo in the Brazilian Federation, op.cit.. pp. 196-199.
Love, Sao Paulo in the Brazilian Federation, o p.cit.. p. 245.

-2 7 5 -
"beautiful city by the bay" emerged as a national metropolis, despite the decline in
coffee production of its immediate hinterland, the Paraiba Valley.
Rio de Janeiro thrived due to the emergence of a domestic market in Brazil,
and an ongoing process of economic integration which served to link the scattered
islands of the vast archipelago. Technological advances, financial innovations, and
infrastructure investments served to shrink the economic distance between the
Northeast and the Southeast. And yet, as the two regions became more
economically linked, as was shown in Chapters Two and Three, the distance
between their patterns of development widened.
Debates in the economic literature on the relationship between regional
trade and regional growth were reviewed in Chapter One. The Brazilian case has
proved to be one which supports the models of regional imbalance. Increased
trade between the Northeast and the Southeast, protected by a high tariff wall,
provided the minimum market necessary for Northeastern sugar elites to preserve
their way of life. While the Southeast of Brazil entered on a vibrant course of
economic diversification and urbanization, the Northeast remained rooted in
monocultural production. Trade with the Southeast did not cause the economic
decine of the Northeast, but did support it.

TABLES ANT) FTOTTRFS
-2 7 7 -
Table 2.1: Population Sharp and Density bv Region and State

Brazil: 1 8 7 2 -1 9 2 0
Year 1872 1920
State/Region Population Population Population Population

Share Density* Share Density*
Northeast 46.6% 2.9 36.7% 6.9
Alagoas 3.4% 5.9 3.2% 16.7
Bahia 13.6% 3.2 10.9% 7.8
Ceara 7.1% 6.9 4.3% 12.7
Maranhao 3.6% 0.8 2.9% 1.9
Paraiba 3.7% 5.0 3.1% 12.9
Pernambuco 8.3% 6.6 7.0% 16.2
Piaui 2.1 0.7 2.0% 2.0
Rio G. do N. 2.3% 4.1 1.8% 9.3
Sergipe 2.3% 6.0 1.6% 12.2
Southeast 40.7% 4.2 44.6% 13.9
Espirito Santo 0.8% 1.8 1.5% 10.2
Fed. District 2.7% 236.2 3.8% 994.8
Minas Gerais 20.8% 3.7 19.2% 10.2
Rio de Janeiro 8.1% 11.9 5.1% 22.6
Sao Paulo 8.3% 2.9 15.0% 15.8
South 7.3% 1.4 11.5% 6.6
North 3.3% 0.1 4.7% 0.5
Center-West 2.5% 0.1 2.2% 0.4
BRAZIL (Total 10.1 1.2 30.6 3.6

Population in Millions)
a Number o f persons per thousand kilometers
Source: Brasil, Diretoria Geral de Estatfstica, Recenseamento ... 1920. V, pt. 1. Quadro
Comparative.

-2 7 8 -
T ab le 2 .2 : N et In te rn a l a n d N et In ternational M igration C om pared T h ro u g h G lobal Survival

M ethod fo r th e States o f B razil 1872 - 1890
State/Region Total N et Internal N et Internal and

Migration M igration — Native IntT M igration o f
Bom Foreign Bom
1872 -1 8 9 0
Northeast -248,196 -247,674 -522
Southeast 246,435 178,888 67,547
South 153,391 156,024 -2,633
North 4,154 3,745 409
Center-West 7,044 7,566 -522
1890 - 1900
Northeast -15,943 -5,819 -10,124
Southeast 524,884 -34,673 559,557
South 58,359 -97,089 155,448
North 111,711 113,380 -1,669
Center-West 18,299 8,370 9,929
1900 -1 9 2 0
Northeast -197,895 -203,466 5,571
Southeast 358,906 -142,148 500,974

South 200,011 121,174 78,837
North 144,854 111,491 33,363
Center-West 58,258 45,320 12,938
Source: Douglas H. Graham & Sergio Buarque de Hollanda Filho, Migration.

Regional and Urban Growth and Development in Brazil: A Selective Analysis o f
the Historical Record — 1872 - 1970. Sao Paulo: Institute de Pesquisas
Economicas, Universidade de Sao Paulo, 1971. This table calculated from state-
level data presented in Appendix IH-A-1, page 98.

-2 7 9 -
Table 2.3: Global Intercensal Survival Estimates of Net T n te m a l Migration bv Regions for
Native Bora B r a z ilia n s Expressed as a Percent of Population in the Initial Census Years
1872 - 1920
Intercensal Period
Region 1872 1890 1900

1890 1900 1920
Northeast -5.26 -0.10 -3.01
Southeast 4.35 -0.57 -1.84
South 21.27 -6.79 8.13
N orth 1.13 23.80 15.80
Center-West 3.43 2.61 11.01
Source: Same as Table 2.2

Table 2.4: Estimated Geographical Distribution of Brazilian Cotton Mills.
1866. 1875. 1881. 1885“
Province 1866 1875 1881 1885
Maranhao — 1 1 1
Pernambuco — 1 1 1
Alagoas 1 1 1 1
Bahia 5 11 12 12
Rio (City/Province) 2 5 11 11
Sao Paulo — 6 9 9
Minas Gerais 1 5 8 13
Rio Grande do Sul -- - 1 —
Total 9 30 44 48
Percent in
Northeast 66.7% 46.7% 34.1% 31.3%
Sources: Estimates for 1866, 1875 and 1885 from Stanley J.

Stein, The Brazilian Cotton Manufacture. Textile Enterprise in an
Underdeveloped Area. 1850 - 1950. Cambridge. Harvard
University Press, 1957, p. 21. Estimates for 1881 from Roberto
C. Simonsen, Brazil’s Industrial Evolution. Sao Paulo, Escola
Livre de Sociologia e Politica, 1939, p. 23.
a Data are incomplete, thus statistics merely indicate the general trend.

-2 8 1 -
Table 2.5: Industrialization Indicators, by region

Brazil. 1907 and 1920
(Values in 1907 Contost
Northeast Southeast
Industrial Indicator
1907 1920 Change 1907 1920 %
+ /-
Value o f Output (contos) 73,954 229,731 211% 410,435 1,202,239 193%

Share o f Total Output 11.1% 13.0% 2.9% 61.4% 68.0% 6.6%
Value o f Capital (contos) 96,405 146,894 34% 375,715 714,447 47%
Share o f Total Capital 16.6% 13.7% (2.9% ) 64.7% 66.5% 1.8%

Number o f Firms 303 2408 2105 1624 7458 5834
Number o f Workers 27,477 57,496 109% 78,756 176,548 124%

Average Firm Size 91 24 (67) 48 24 (24)
Labor Force Partic. Rate 4.5% 6.2% 1.7% 9.0% 12.3% 3.3%
Output Per Worker 2.69 4.00 48% 5.21 6.81 31%

(contos)
Capital Intensity (contos 3.51 2.55 (27%) 4.77 4.05 (15%)

per worker)
Source: Brasil, Diretoria Geral de Estatfstica, Recenseamento ... 1920. V, pt. 1. Data
exclude sugar refineries and salt extraction plants.

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Table 2.6: Locational Gini Coefficient For Maior Industry Groups

B razil. 1920
Locational Top Four States (in terms o f concentration)

Industry Group Gini and Percentage Share o f National Employment
in Industry
Fuel and Lighting .8652 Acre (0.4% ); Amazonas (2% ); Para (5%);
and Federal District (63%)
Science, Letters, the .8025 Parana (9%); Federal District (33%); Sao
Arts, and Luxury Paulo(43%); and Pernambuco (7%)
Goods
Hides and Leather .7451 Goias (2%); Para (5%); Parafba (0.6% ); and
Products Pernambuco (12%)
W ood and Paper .7434 Parana (26%); Santa Catarina (13%);

Products Amazonas (1 %); and Para (4%)
Construction and .7423 Acre (0.2% ); Rio Grande do Norte (3%);

Building Materials Parafba (3%); and Pernambuco (11%)
Shipbuilding and .7026 Rio Grande do Sul (18%); Federal District

Transportation (38%); Alagoas (3% ); and Sao Paulo (28%)
Home Furnishings .6726 Acre (0.06% ); Rio Grande do Sul (16%);

Parafba (0.9% ); and Pernambuco (8%)
Metals and Metal .6183 Federal District (35%); Amazonas (0.4% );

Products Para (2%); and Sao Paulo (39%)
Clothing and .5707 Federal District (38%); Goias (0.2%); Para

Footwear (2%); and Sao Paulo (37 %)
Soap and Chemical .5685 Piauf (1%); Rio de Janeiro (15%); Parana
Products (6%); and Pernambuco (9% )
Ceramics .5373 Piauf (2%); Matto Grosso (0.4%); Goias

(0.2%); and Sao Paulo (50%)
Textile Products .5249 Maranhao (3%); Alagoas (5% ); Sergipe (4% );

and Rio de Janeiro (9%)
Foodstuffs .4557 Minas Gerais (8%); Amazonas (0.6% ); Bahia

(13%); and Rio Grande do Sul (20%)
Source: Brasil, Diretoria Geral de Estatfstica, Recenseamento ... 1920. V, pt. 1.

Methodology for locational gini coefficient drawn from Paul Krugman, Geography
and Trade, pp. 54 -59 and Appendix D op. cit.
R e p r o d u c e d w ith p e r m is s io n o f th e co p y r ig h t o w n e r . F u rth er r e p ro d u ctio n p roh ib ited w ith o u t p e r m issio n .

Table 2.7: Composition of Capital and Worker-Managpment Ratios
Brazilian Industries. 1920
Capital - Percent o f Number o f Day

Output Capital in Laborers per
Industry Ratio Machines and Manager
Tools
Fuel and Lighting 3.913 68% 5
Science, Letters, the

A rts, and Luxury Goods .674 30% 12
H ides and Leather

Products .638 20% 8
Paper and Wood

Products .853 33% 7
Construction and
Building Materials .498 24% 9
Shipbuilding and
Transportation .510 20% 8
H om e Furnishings .496 29% 11
M etals and Metal

Products .648 33% 20
Clothing and Footwear .413 19% 11

Soap and Chemical
Products .636 27% 11
Ceramics .701 26% 10
Textile Products .856 40% 75
Foodstuffs .434 24% 9
Source: Brasil, Diretoria Geral de Estatfstica, Recenseamento ... 1920. V, pt. 1

Table 2.8: Summary of States with Leading Industries,
by Industry Group. Brazil. 1920
State Leading Industries: (Ranked in Top Four by State Share

Location Coefficient and M ore than 10% share o f o f National
National Employment in Industry) Employment
Federal District Fuel and lighting (63%); Science, Arts, etc. (33%); 20.4%
Shipbuilding (38%); Metals and Metal Products
(35%); and Clothing and Footwear (38%).
Sao Paulo Science, Arts, etc. (43%); Shipbuilding (28%); 30.5%

Metals and Metal Products (39%); Clothing and
Footwear (37%); Ceramics (50%)
R io Grande do Shipbuilding (18%); Home Furnishings (16%); 9.0%

Sul Foodstuffs (20%)
Pernambuco Hides and leather products (12%); Construction and 5.7%

Building Materials (11%)
Parana Paper and Wood Products (26%) 2.7%
Santa Catarina Paper and Wood Products (13%) 1.6%
Rio de Janeiro Soap and Chemical Products (15%) 6.1%
Source: Table 2.6 and 1920 Census.

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Table 2.9: Comparison of Urbanisation Rates by Regions

Brazil. 1920
Region State Capitals "Urban” with "Urban" with

over 20,000 over 10,000
Northeast 8.1% 17.6% 21.7%
Southeast* 14.7% 39.8% 45.1%
South 8.5% 44.2% 54.0%
North 21.7% 27.8% 36.8%
BRAZIL 11.3% 31.6% 37.1%
Source: Brazilian Census, 1920. "Urban" municipalities are defined as those

municipalities with at least 20% of male labor force employed outside of
agriculture, more than half of whom are employed in industry, commerce, or
the transport sector.
* Center-West states of Matto Grosso, Goias and the Acre Territory are included
together with Southeast Region
Table 2.10: Comparison of Urban and Total Population Distribution by Region.

Brazil. 1920
Region Share of Urban Population Share of National

Population
Northeast 21.4% 36.7%
Southeast 57.2% 47.0%
South 16.8% 11.5%
North 4.6% 4.7%
Brazil: Total Population 11,376,290 30,627,207
Source: Brazil 1920 Census, Urban areas

defined as noted in Table 2.9, Column 4.
-2 8 6 -
Table 2.11: Top Ten Urban Areas in Brazil. 1920
City, State and Region Population National Regional State

Rank Rank Rank
Federal District, SE 1,157,873 1 1 1
Sao Paulo, Sao Paulo, SE 579,033 2 2 1
Salvador, Bahia, NE 283,422 3 1 1
Recife, Pernambuco, NE 238,843 4 2 1
Belem, Para, N 236,402 5 1 1
P. Alegre, Rio G. Sul, S 179,263 6 1 1
Campos, Rio de Jan., SE 175,850 7 3 1
Juiz de Fora, Min. Ger, SE 118,166 8 4 1
Campinas, Sao Paulo, SE 115,602 9 5 2
Santos, Sao Paulo, SE 102,589 10 6 3
Source: Brazil 1920 Census. SE=Southeast; NE=Northeast; N=North;

S=South.
R e p r o d u c e d w ith p e r m is s io n o f th e co p y rig h t o w n e r . F u rth er r ep ro d u ctio n p roh ib ited w ith o u t p e r m issio n .

-2 8 7 -
Table 2.12: OLS Regression Results. Bank-Size Distributions

Urban Municipalities. Brazil. 1920
Dependent Variable = LnP
Brazil (n=295) Southeast (n=150) Northeast (n=75)

n > 100,000 2 6 2
n < 20,000 113 52 31
02 -0.99 -1.34 -1.14
(0.018)** (0.039)** (0.161)**
03 0.44 0.48 0.54
(0.020)** (0.04)** (0.369)
04 -1.020 -0.89 -0.53
(0.026)** (0.081)** (0.091)**
R2 .994 .986 .952
ESS 0.822 1.499 2.883
02+ 03 -0.55 -0.78 -0.60
02+03 + 04 -1.57 -1.68 -1.13
Source: Same as Table 2.10.

** significant at the 1 percent level

-2 8 8 -
Table 3.1: Top Ten Ports of Brazil, and Cities Served, bv Population Ranking
Brazil. 1912
Ports Tonnage Ranking Population Ranking

Rio de Janeiro 1 1
Santos, Sao Paulo 2 2 (Sao Paulo)
Salvador, Bahia 3 3
Recife, Pernambuco 4 4
Belem, Para 5 5
Manaus, Amazonas 6 9
Vitoria, Espirito Santo 7 20 (but also served as port
for Minas Gerais, with Juiz
de Fora ranking 8 in 1920)
Rio Grande, Rio Grande do 8 11 (Porto Alegre 6)
Sul
Fortaleza, Sergipe 9 8
Maceio, Alagoas 10 10
Source: Geiger, Pedro Pinchas. Evolucao da Rede Urbana Brasileira. op.cit.. p.

87. Data from Anudrio Estatfstico do Brasil de 1912.

Table 3.2: Summary Data on Shipping Arrivals
Tod Six Ports in Terms of Arriving Tonnage
Brazil. 1902 - 1908*
Percent o f Percentage
Port Increase in
Percent Share o f Total Tonnage Total Port
Arriving Tonnage
Port Tonnage No. o f Brazilian- by over 1902-
Vessels Carried Brazilian 1908 Period
Tonnage Vessels
Rio de Janeiro 25.5% 13.2% 12.4% 15.2% 80.1%
Santos 13.7% 6.3% 7.0% 13.8% 118.5%

Bahia 12.2% 5.1% 8.6% 20.0% 64.3%
Recife 9.6% 5.3% 9.4% 28.1% 51.7%
Belem 7.4% 5.5% 10.2% 36.0% 44.8%
Rio G. do Sul 2.4% 2.6% 4.4% 51.8% 31.6%
Brazil (Totals) 13,120,807 17,230 5,090,873 38.8% 64.8%
♦Shipping Data are averaged over the seven-year period 1902 - 1908.
Source: J.P . Wileman, The Brazilian Yearbook. First Issue 1908, pp. 584 - 591 and
Second Issue, 1909, pp. 594 - 600.

-2 9 0 -
Table 3.3: Foreign Trade, in Current Prices and as Percent of GNP

Brazil: 1875 - 1919. (Five Year Averages)
Imports and Exports expressed in Current Prices, ’000,000 cantos
Trade Surplus Exports as

Year Imports (CIF) Exports (FOB) (Deficit) Percent o f GNP
(1) (2) (3) (4)
1875 - 1879 165 196 36 14.1%
1880 - 1884 186 215 30 14.0%
1885 - 1889 198 230 32 13.7%
1890 - 1894 478 547 68 16.6%
1895 - 1899 742 809 67 17.8%
1900 - 1904 493 793 300 19.2%
1905 - 1909 552 814 262 17.3%
1910 - 1914 806 960 154 15.4%
1915 - 1919 911 1,337 426 10.3%
Sources and Notes: Cols. 1 - 3 : Data till 1914 from Brasil. Institute Brasileiro de
Geografia e Estatfstica. Conselho Nacional de Estatfstica. Annuario Estatfstico do Brasil.
Ano V - 1939/40 (hereafter AEB), pp. 1358 - 1359. Note that until 1887 data are for
fiscal year ending June 30th, and starting for 1888 are for the calendar year. D ata from
1915 - 1919 from DGE, Estatisticas Economicas-Financeiras. op. c it.. pp. 46-47; Col. 4:
Column 2 divided by GNP estimates in current prices from Raymond W. Goldsmith,
Desenvolvimento Financeiro Sob um Seculo de Inflacao. pp. 23, 82-83, and 147.
-2 9 1 -
Table 3.4: International Imports and Exports bv Region and Selected States
Brazil. 1872 - 1917
Region/State 1872 -1877 1882 -1887 1893 -1897 1903 -1907 1913 - 1917
IM PO R TS
BRAZIL (’000
contos de reis) 164,372 216,718 453,133 519,659 760,168
N O R TH EA ST 30.1% 29.0% 21.9% 19.0% 15.6%
Bahia 11.6% 11.3% 8.8% 6.2% 4.9%
Pernambuco 13.8% 12.1% 9.0% 8.1% 6.9%
SO U TH EA ST 59.6% 59.3% 61.1% 58.8% 69.0%
Rio de Janeiro 55.8% 51.7% 43.1% 39.4% 41.8%
Sao Paulo 2.8% 7.6% 17.2% 18.6% 26.6%
SO U TH 5.8% 6.6% 8.7% 9.1% 9.3%
Rio G . do Sul 5.3% 5.8% 7.3% 7.1% 7.4%
NORTH 4.6% 5.0% 8.3% 13.1% 6.1%
Para 4.5% 4.2% 6.6% 8.9% 4.1%
EX PO R TS
Region/State 1872 -1877 1882 -1887 1893 -1897 1903 -1907 1913 - 1917
BRAZIL (’000
contos de reis) 199,968 239,454 704,382 733,080 1,021,602
N O R TH EA ST 25.8% 21.9% 12.8% 14.0% 15.3%
Bahia 7.8% 6.8% 5.1% 7.2% 8.6%
Pernambuco 8.9% 7.0% 4.5% 2.6% 2.8%
SOUTHEAST* 61.4% 66.9% 67.3% 54.1% 62.6%
Rio de Janeiro 49.4% 44.3% 27.4% 15.9% 16.7%
Sao Paulo 11.4% 22.0% 35.4% 35.4% 43.5%
SO U TH 6.4% 2.8% 5.5% 5.1% 7.9%

R io G. do Sul 5.2% 1.4% 4.5% 2.7% 4.3%
N O RTH 6.4% 8.3% 14.5% 26.9% 14.0%

Para 6.4% 7.0% 8.5% 12.3% 7.1%

Table 3.4, continued. -292-
D ata are five year averages.
* Southeast region includes Matto Grosso.
Source: Diccionario Historico e Geogranhico e Ethnographico do Brasil. (Rio de

Janeiro, Imprensa Nacional, 1922), (hereafter DHGEB) p. 544.

Table 3.5: Principal Exports bv Major Ports. Brazil. 1902 - 1908
Export Commodity, Principal Exporting Share o f Commodity

by Ranking in Localities and Share in Locality’s Exports
National Exports o f Commodity Exports
Coffee 51.8% Santos 70.0% 99.4%

Rio de Janeiro 25.2% 82.7%
Rubber 26.7% Manaus 49.6% 96.0%

Belem 42.3% 93.6%
Cocoa 3.1& Bahia 83.9% 35.3%
Mate 2.9% Parana 34.3% 94.1%
Santa Catarina 9.7% 90.0%
Tobacco 2.2% Bahia 90.1% 16.7%

Source: Wileman’s Brazilian Yearbook, op.cit.. 1908 - 1909

-2 9 4 -
T ab le 3 .6 : M erchandise Account Balance. B razil,

by Region a n d Selected States. 1872 - 1917
fin contost
Region/State 1872 - 1877 1882 - 1887 1893 - 1897 1903 - 1907 1913 - 1917
S outheast 24,718 31,733 196,683 112,198 116,952
Sao Paulo 18,139 36,159 170,951 177,367 242,280
Rio 6,902 -5,878 -2,540 -81,820 -146,425
N ortheast 2,234 -10,511 -9,107 9,681 38,159

Bahia -3,976 -8,317 -4,321 23,827 50,210
Pernambuco -4,855 -9,514 -9,524 -22,015 -23,176
South 3,276 -7,593 -840 -7,970 9,740
Parana 1,949 2,105 2,397 9,311 21,658
Rio G. do Sul 1,717 -9,125 -1,180 -16,213 -12,161
Sta. Catarina -390 -573 -2,057 -1,068 243
N orth 5,368 9,107 64,513 139,512 96,582
Amazonas -53 1,489 34,470 90,755 55,591

Para 5,421 7,618 30,043 48,757 40,991
BRA ZIL 35,596 22,736 251,249 253,421 261,434
Source: DHGEB, p.544.

-2 9 5 -
Table 3.7: Principal Imports, by Maior Ports. Brazil 1902 - 1908
Principal Imports and Share o f Principal Share o f Port Share o f Commodity in

Total Im ports for Brazil Importing in Total Locality’s Imports
Localities Imports
1. Foodstuffs 29.9% Rio 35.4% 25.2%

Santos 20.8% 32.6%
Belem 10.9% 40.6%
Recife 10.8% 43.6%
Bahia 6.4% 32.7%
2. Clothing and Cotton Rio 38.1% 9.4%

M anufactures 10.4% Santos 10.5% 5.7%
Belem 8.8% 11.4%
Recife 8.5% 12.0%
Bahia 7.5% 13.3%
3. Iron and Steel Rio 39.3% 7.4%

M anufactures 8.0% Santos 20.8% 32.6%
4. Machinery and Tools Rio 42.0% 6.5%

6.5% Santos 22.6% 7.7%
5. Coal 4.8% Rio 57.1% 6.6%

Santos 14.7% 3.7%
Source: Wileman’s Brazilian Yearbook, 1908 and 1909.
-2 9 6 -
Table 3.8: Value Share of Principal Imports, for B ra z il’s T op Six Ports. 1902 - 1908
Import Brazil Rio Santos Rio Grande Bahia Recife Belem

do Sul
Foodstuffs 29.9% 25.2% 32.6% 28.6% 32.7% 43.6% 40.6%
Clothing 10.4% 9.4% 5.7% 7.3% 13.3% 12.0% 11.4%

and Cottons
Iron and 8.0% 7.5% 8.7% 12.3% 7.2% 5.7% 5.7%

Steel Mfcts.
Machinery 6.5% 6.5% 7.7% 8.2% 1.5% 5.4% 3.4%

and Tools
Coal 4.8% 6.6% 3.7% 3.8% 3.9% 4.2% 4.4%
Source: Wileman’s Brazilian Yearbook, 1908 and 1909

-297-
Table 3.9a: Summary of Rio de Janeiro’s Coastal Trade. 1878

(Values in contos de reis)
National Goods Foreign Goods Total Traded Goods
IMPORTS
Total 41,735 419 42,154
North/Neast 9.2% 61.6% 9.7%
Southeast 79.2% 23.8% 78.6%
South 11.6% 14.6% 11.7%
EXPORTS
Total 12,019 19,650 31,669
North/Neast 70.4% 17.6% 37.6%
Southeast 12.5% 59.3% 41.5%
South 17.1% 23.1% 20.8%
TRADE BALANCE
Total (29,716) 19,231 (10,485)
North/Neast 4,617 3,200 7,817
Southeast (31,534) 11,553 (19,981)
South (2,799) 4,478 1,679
Source: Mappas Commercials do Porto do Rio de Janeiro, 1878, 1886, and 1890
(hereafter MCRJ).

-2 9 8 -
Table 3.9b: Summary of Rio de lanrira’s Coastal Trade. 1886/87

(Values in contos de reisi
IMPORTS
Total 13,753 107 20,308
North/Neast 23.2% 82.4% 45.5%
Southeast 31.0% 8.4% 30.8%
South 45.8% 9.2% 23.6%
EXPORTS
Total 11,810 13,857 25,667
North/Neast 57.0% 11.2% 32.3%
Southeast 20.1% 57.7% 40.4%
South 22.9% 31.1% 27.3%
TRADE BALANCE
Total (1,942) 13,749 11,806
North/Neast 3,542 1,466 5,008
Southeast (1,893) 7,981 6,088
South (3,592) 4,302 710
Source: MCRJ.

-2 9 9 -
Table 3.9c: Summary of Rio de Janeiro’s Coastal Trade. 1890

(Values in contos de reis1
IMPORTS
Total 19,974 334 20,308
N orth/Neast 44.2% 53.3% 44.3%
Southeast 17.5% 29.3% 17.7%
South 38.3% 17.4% 38.0%
EXPORTS
Total 10,590 12,668 23,258
North/Neast 61.3% 50.8% 55.6%
Southeast 26.5% 28.3% 27.4%
South 12.3% 20.9% 17.0%
TRADE BALANCE
Total (9,384) 12,334 2,950
North/Neast (2,337) 6,257 3,920
Southeast (700) 3,487 2,787
South (6,347) 2,589 (3,758)
Source: MCRJ.
-3 0 0 -
Table 3.10a: Principal Imports and Exports Via Rio’s Coastal Trade. 1877/78
Value in Share o f Regional Shares

Commodity contos de reis Rio’s Imports
or Exports North/Neast Southeast South
IMPORTS OF BRAZILIAN GOODS
Coffee 21,702 52.0% 2.8% 97.1% 0.1%
Sugar 5,840 14.0% 38.1% 61.3% 0.6%
Flour 3,138 7.5% 1.2% 67.4% 31.4%
Cereals 2,000 4.8% 0.4% 85.6% 14.0%
Wood Products 1,738 4.2% 1.9% 48.2% 49.9%
Vegetables 1,173 2.8% 0.8% 30.5% 68.7%
Aguardente 1,130 2.7% 10.8% 83.7% 5.5%
Cotton 1,080 2.6% 11.8% 88.1% 0.1%
EXPORTS OF BRAZILIAN GOODS
Coffee 3,665 30.5% 78.5% 0.2% 21.3%
Flour 2,643 22.0% 99.9% — 0.1%
Tobacco 1,463 12.2% 71.8% 4.9% 23.3%
Varied Products 1,277 10.6% 31.2% 42.1% 26.8%
EXPORTS OF FOREIGN GOODS
Varied Products 3,193 16.3% 41.7% 34.0% 24.2%
Cotton 2,396 12.2% 5.0% 76.9% 18.1%
Vegetables and 2,323 11.8% 32.3% 30.9% 36.8%

Cereals
Linen 1,834 9.3% 4.5% 90.5% 5.0%
Wool 1,741 8.9% 2.5% 65.5% 32.0%
Iron and Steel 1,472 7.5% 8.4% 75.2% 16.4%
Meat, Fish and 1,433 7.3% 21.2% 63.6% 15.3%

Cooking Oils
Source: MCRJ.

-3 0 1 -
Table 3.10b: Principal Imports and Exports Via Rio’s Coastal Trade. 1886/87

Commodity contos de reis R io’s Imports
or Exports North/Neast Southeast South
IMPORTS O F BRAZILIAN GOODS
Coffee 3,762 27.4% 10.2% 89.8% 0.0%
Prepared Meats 2,748 20.0% 2.5% 0.2% 97.3%
Sugar 1,367 9.9% 97.0% 2.6% 0.4%
Coffee 3,746 31.7% 72.6% 0.0% 22.9%
Varied Products 1,464 9.6% 87.9% 11.0% 1.1%
Prepared Meats 1,139 10.6% 33.9% 49.4% 16.7%
EXPORTS OF FOREIGN GOODS
Cotton 3,995 28.8% 1.5% 69.9% 28.6%
Fish, Meat, and 1,747 12.6% 47.6 39.2% 13.2%

Fats
Vegetables and 1,302 9.4% 3.0% 30.5% 66.5%

Grains
Iron and Steel 793 5.7% 5.6% 69.0% 25.4%
Source: MCRJ

-302-
Table 3.10c: Principal Imports and Exports Via Rio’s Coastal Trade. 1890

Commodity contos de reis R io’s Imports
o r Exports North/Neast Southeast South
Aguardente 4,136 20.7% 97.4% 0.0% 2.5%
Cotton Cloth 3,479 17.4% 15.6% 84.3% 0.1%
Cotton 1,779 8.9% 4.2% 1.9% 93.9%

Peanuts 1,655 8.3% 100.0% — —
Gear and Tackle 1,332 6.7% 7.7% 8.6% 83.7%

Rice 1,123 5.6% 87.8% 2.0% 10.2%
Sugar 1,056 5.3% 1.2% 0.6% 98.2%
Aguardente 3,592 33.9% 73.9% 25.9% 0.2%
Cotton Cloth 1,940 18.3% 28.1% 51.1% 20.8%

Gear and Tackle 1,142 10.8% 45.0% 28.9% 26.1%
EXPORTS O F FOREIGN GOODS
Beef Jerky 4,396 34.7% 88.2% 10.3% 1.5%
Gold Currency 1,711 13.5% 62.3% 37.6% 0.1%
Cotton Cloth 1,099 8.7% 17.6% 31.0% 51.4%
Source: MCRJ.

-3 0 3 -
Table 3.11: Summary of Santo’s Coastal Trade. 1907 - 1915. (contos)
Total Exports* Total Imports Trade Balance
1907 18,857 21,822 (2,965)
1908 13,207 18,583 (5,376)
1909 17,985 25,912 (7,977)
1910 n.a. 25,038 n.a.
1911 21,753 24,568 (2,855)
1912 23,018 35,333 (12,315)
1913 29,074 33,947 (4,873)

1914 27,527 35,726 (8,199)
1915 51,925 48,325 (3,600)
Average Regional North/Northeast 28.3 % North/Northeast 49.9 %

Shares Southeast — 25.6% S outheast— 17.8%
S o u th — 46.1% S o u th - 32.3%
* Includes National and Foreign Goods, on average, national goods accounted for
more than 90 % o f exports and more than 99% o f imports.
Source: Sao Paulo (Estado). Secretaria da Agricultura, Comercio e Obras

Pdblicas. Diretoria de Estatfstica, Industria e Comercio. Comercio de Cabotagem
pelo porto de Santos: 1907 - 1930. Sao Paulo: Typologia Brasileira, 1931.

-3 0 4 -
Table 3.12: Principal Imports and Exports Via Santo’s Coastal Trade. 1914/1915

Commodity contos de reis Santo’s
Imports or North/Neast Southeast South
Exports
Processed 34,019 40.5% 81.7% 11.4% 6.9%

Foodstuffs
Manufactures 15,455 18.4% 25.2% 53.6% 21.2%
Manufactures 29,456 81.0% 26.3% 29.4% 44.3%
Processed 2,047 5.6% 43.5% 15.2% 41.3%

Foodstuffs
EXPORTS O F FOREIGN GOODS
Manufactures 3,346 80.0% 11.2% 62.9% 25.3%
Source: Same as Table 3.18.
-3 0 5 -
Table 3.13: Coastal Trade of Rio de Janeiro and Sao Paulo

(1881 - 18881 (In Contos de reis)
Budget Year Rio de Janeiro Sao Paulo
Exports Imports Exports Imports
1881/82 33,517 12,732 2,444 11,170
1882/83 18,834 11,933 1,951 8,155
1883/84 18,629 11,474 2,198 9,662
1884/85 17,283 11,763 1,150 7,373
1885/86 25,894 10,843 881 9,060
1886/87 18,122 18,650 5,014 16,697
1888 22,010 14,747 1,046 4.419
Franco, Table 4. p. 27)

(Note that numbers do not agree with MCRJ figures, which include intra-state
trade).
Table 3.14: Rio de Janeiro’s Coastal Trade Balance

with Santos and Bel&n do Parf. 1878.1890. and 1911. 1901 contos de reis
Trade with Santos Trade with Belem

Year
Imports Exports Imports Exports
1878 3,000 8,686 48 590
1890 378 1,816 52 1,623
1911 3,345 6,666 298 11,378
Source: 1878 and 1890, Mappas Commercials do Porto do Rio de Janeiro..

o p .cit.. 1911, for Santos, Comercio do Cabotagem pelo porto de Santos, op.cit..
for Belem, Joao Lira Tavares, Economia e Financas dos Estados. (Parafba,
Imprensa Oficial, 1914), p. 19.
-3 0 6 -
Table 3.15: Entries of Selected Commodities bv Coastal Trade

Port of Rio de Janeiro. 1875 - 1914
Yearly Flour Beans Salt Rice Cotton Sugar

Averages (sacks) (sacks) (liters) (sacks) (bales) (sacks)
1875 - 1888 50,640 1,784,688 481,716
1879 - 1888 205,429 169,098 7,565,992
1893 - 1902 1,138,765

1897 - 1908 31,194,810
1903 - 1908 437,771 283,649 51,142,024 110,718
1903 - 1914 1,346,719
Percentage
Increase 113.1% 67.7% 575.9% 118.6% 1,647.9% 179.6%
Source: Retrosoecto Commercial do Jom al do Commercio. various years.
Table 3.16: Regional Distribution of Brazilian Rail Network. 1907
Share of Km. of Rail Km. of Rail

Km. of National per 1000 per 100
Region Rail Rail inhabitants Km2 of
Network Land
Southeast? 11,019,954 62.6% 0.35 1.36
South 2,758,715 15.7% 0.52 1.54
Northeast 3,613,952 20.5% 0.22 0.54
North 212,596 1.2% 0.01 0.31
a Includes Center-West states of Goias and Matto Grosso.

Source: CIB, Volume 3, p. 86.
-3 0 7 -
Table 3.17: Brazilian Rail Network in 1906
North/Northeast South/Southeast
% Kilometers of Rail 26.7% 73.3%
(Total=12,141,140)
% Receipts 9.1% 97.2%
(Total = 170,548.7 contos)
Regional Operating Ratio* 90.9% 81.9%
Number of Concerns 25 29
Average Length of Rail 129,457 58,405
Average Receipts/Km. of 0.005 0.017
Rail
Average Receipts/Concern 620.1 1074.4
Minimum Extension of Rail 45 28
Maximum Extension of Rail 452,310 :1,318,724
Minimum Operating Ratio 27% 31%
Maximum Operating Ratio 413% 262%
Operating Ratio is defined as the ratio of expenditures to receipts, per

concern. Regional operating ratio is the weighted average, by region, of
operating ratios, using each concern’s share of the regional rail network as
the weight.
Source: Centro Industrial do Brasil, O Brasil op.cit.. Volume III,
Indiistria Fabril, pp. 1 - 141. (Note that figures do not agree precisely
with Table 3.16 as this Table is based only on rail lines for which
information was available on receipts and expenditures. Table 3.16
includes rail not yet in operation).

Table 3.18: Agricultural Indicators, bv Region
Brazil. 1920
Indicator All Brazil Northeast Southeast

Number of
Establishments 648,153 25.0% 37.5%
Total Hectares 175,104,675 20.6% 26.1%
Value (contos)8 10,568,008,691 16.3% 52.3%
Average Farm
Size (Hectares) 270 223 188
Average Value
(contos) 16,305 10,655 22,701
Average Value
per Hectare 60 48 121
Gini Coefficient
(by Farm Size) .64 .56 .53
Source: Brazil, Directoria Geral de Estatistica, Recenseamento do

Brasil. 1920. Svnopse do Censo da Agricultura.
■Value includes value of land, land improvements, and
agricultural machinery and tools.
-3 0 9 -
Table 3.19: M aior Agricultural Crops. Total Value and Production bv Region
Brazil. 1920
Foodstuffs
Rice Beans Com Wheat Manioc
Brazilian Production
(1000 metric tons) 831 725 5,000 87 2,899
Value of Production®
(’000 contos) (5)319,132 (6)232,555 (2)947,219 (12)67,933 (9) 114,462
Regional Share of Production
Northeast 8% 16% 8% 0% 46%
Southeast 66% 56% 55% 0% 18%
South 16% 22% 33% 100% 22%
North & Northwest 10% 6% 4% 0% 14%
Staple Exports
Cotton Tobacco Sugar Coffee Cacao
Cane
Brazilian Production
(1000 metric tons) 332 74 13,986 788 67
Value of Production®
(’000 contos) (3*86,992 (8)29,949 (4)417,310 (1),025,669 (13jSl,053
Regional Share of Production
Northeast 63% 50% 43% 6% 89%
Southeast 34% 21% 48% 93% 2%
South 1% 24% 5% 1% 0%
North & Northwest 2% 5% 4% 0% 9%
a Numbers in parentheses denote rank in order of value of production.
Source: Brasil, Diretoria Geral de Estatistica. Resumo de Varias Estatfsticas

Economico-Financeiras. (Rio de Janeiro: Typographia da Estatfstica, 1924),
Tables 12, 13, and 15.

-3 1 0 -
Table 3.20: Average Yields on "Good Land" hv Region.

Brazil. 1920
Crop Northeast Southeast
Foodstuffs
Rice 20.5 19.8
Beans 14.8 15.4
Corn 18.2 20.3
Manioc 233.9 205.0
Export Crops
Cotton 14.1 12.5
Tobacco 10.4 10.5
Sugar 780.0 775.0
Coffee 9.9 10.3
Cacao 6.3 5.0
Source: Diretoria Geral de Estatistica, Estatistica Economicas-

Financeiras. op.cit.. Table 16, pp. 28 - 31.

-311-
Table 4.1: Brazilian Banks Founded c. 1850

(values in contos)
Bank Founding Initial Comments

Date Capital
Banco tie Ceara 1836 60 Closed in 1839.
Banco Commercial do Rio 1838 2,000 Capital o f 5,000 contos and 1,600 contos in
de Janeiro circulation in 1853; discounting o f bills
including Treasury bills (of 10.6 thousand
contos in 1853)
Banco Commercial da 1847 2,000 Issued relatively most vales, (including those
Bahia payable at sight regardless of legal provisions);
discounted 4.8 thousand contos in commercial
paper in 1853.
Banco Commercial do 1846 400 Capital o f 800 contos by 1854. Began by

Maranhao issuing IOUs in sight, but after Government
statute kept within the law; maximum issued
was 338 contos in 1854; same year discounted
848 contos o f commercial paper.
Banco Commercial do Para 1847 400 Issued vales up to a maximum o f half o f its
capital.
Banco de Pernambuco 151 1000 Capital o f 1700 contos by 1855. Maximum

issue of vales in 1855, with 850 contos;
discounted 2.46 thousand contos o f commercial
paper in a single year.
M aua or Second Bank of 1851 10,000 Maximum lOU’s issued was 1.9 thousand
Brazil contos in 1853. Deposits and letters at a
premium summed to some 6,500 contos, and in
1854 it discounted more than 9,000 contos of
commercial paper.
Sources: Benedito Ribeiro and Mdrio Mazzei Guimaraes, History

of Brazilian Banking and Financial Development. Translated by
George Reed. (Sao Paulo: Editdra Pro-Service, Ltda., 1967), pp.
73 - 76; J.F. Normano, Brazil: A Study of Economic Types.
op.cit.. p. 172.

-3 1 2 -
Table 4.2; Foreign Banks in Brazil by Incorporation Date and Capital
Date Name Nationality Capital

1862 London and Brazilian Bank* British 1901: 13,333 contos
1921: £ 1.25 million
1863 British Bank o f South America1 British 1901: 8,888 contos

1921: £ 1.0 million
1888 Brasilianische Bank fur Deutschland German 1901: 10,000 contos

1920: 15,000 contos
1891 London and River Plate Bank British 1901: 3,500 contos
1920: 3,500 contos
1897 Banque Franqaise du Bresil French 1901: 10,000 contos

1910: Ceased operation
1900 Banque Beige de Prets Fonciers Belgian 1909: Ceased operation
1906 Banco Allianqa Portuguese 1908: Ceased operation
1907 Banque du Credit Foncier du Bresil French 1909: 100,000 francs
1907 Banco Espariol del Rio de la Plata Argentina 1918: 800 contos
1910 Banque Francaise et Itallienne pour French 1913: 25 million francs

1’Amerique du Sudc 1926: 15,000 contos
1911 Banque Bresilienne Italo-Belge Belgian 1913: 20 million francs
1911 Deutsche-Sudamerikanische Bank German 1920: 2,205 contos

1926: 7,500 contos
1912 Banco Allemao Transatlantico German 1913: 3,000 contos

1920: 3,675 contos
1926: 7,350 contos
1912 Banque Franqaise pour le Bresil et French 1913: 15 million francs

l’Amerique du Sud
1912 Banco Nacional Ultramarino Portuguese 1920: 3,000 contos
1913 Credit Foncier du Bresil et de l’Amerique French

du Sud
Source: Steven Topik, Capital Estrangeiro e o Estado no Sistema Bancario Brasileiro. 1889 - 1931.
(Rio de Janeiro, 1979), as cited in Levy, "The Banking System and Foreign Capital in Brazil", op.cit..
pp. 369 - 70.
Notes: * The London and Brazilian Bank joined the London and River Plate in 1923 to form the British
Bank o f South America; b The British Bank of South America was first called the Brazilian and
Portuguese Bank. In 1886 it became the English Bank of Rio de Janeiro and in 1891 the British Bank
of South America. In 1920 the Anglo-South American Bank bought it. c The Banque Franqaise et
Italienne absorbed the Banco Commercial Italo-Brazileiro and the Banco-Suizo Americano in 1910.

-3 1 3 -
Table 4.3
Brazil: 1846 - 1888: Timetable of Banking and Currency Reforms
Date Event
1846 Reduction of milreis parity from 43 d. to 27 d. and redefinition of legal tender
on this basis; plurality of issue of vales.
1853 Founding of Third Bank of Brazil (merger of Maud’s Bank of Brazil and the
Banco Commercial do Rio de Janeiro. Monopoly of issue awarded to Bank of
Brazil
1857- Brazil’s "wildcat banking" period: return to plurality of issue; concessions
1859 awarded to banks throughout Brazil with no consistent basis; several small banks
in the provinces also illegally issued bank notes
1860 Attempt to force newly organized hanks to give up the issue of bank notes
through increased regulation.
1862 Merger between the Banco do Brasil and Banco Commercial e Agricola,
together with the purchase of the issue privilege from the Banco Rural e
Hypothecario, reestablished unit of the issue of bank notes in Rio de Janeiro.
1864 Banking Crisis —failure of many private bankers in Rio, and dealt severe blows
to Bank of Brazil.
1866 Bank of Brazil lost power to issue currency
1866 - Regime of purely governmental paper money in force.
1888
1875 Bankruptcy of Maud —last crisis of the Empire.
1888 Banking Reform of November 24 -- return to plurality of issue.
Source: Ribeiro, History of Brazilian Banking, op.cit.. and Normano,

Economic Types, op.cit.

-3 1 4 -
Table 4.4; Paper Money and Bank Notes in Circulation <1859/64')
December, 1859 February, 1864

Government Paper Money 40,700.6 30,094.4
HQ, Rio de Janeiro 21,889.8 25,416.9
Para Branch 1,520.0 1,253.9
Maranhao " 770.0 1,919.7
Banks of Pernambuco " 6,927.6 8,534.8
Brazil: „ ,. „
Bahia 4,719.2 4,937.4
Sao Paulo " 2,793.2 4,491.8
Ouro Preto “ 1,648.7 1,759.8
Rio Grande do Sul 1,186.6 380.0
Commercial e Agricola and
Branches 7,247.9 48.9
Rural e Hypothecario 1,926.0 18.7
Banco da Bahia 2,999.9 3,113.2
Banco de Pernambuco 1,466.0 950.0
Banco do Maranhao 680.0 376.0
Banco do Rio Grande do Sul 1.0 0.0
Total 95,873.1 84,295.4
Summary
Government Paper 40,700.7 30,094.4
Banco do Brasil —HQ 21,889.8 25,416.9
Banco do Brasil -- Branches 18,972.1 24,277.3
Rio Banks (Agricola and Rural) 9,163.9 67.6
Provincial Banks 5,146.7 4,439.2
Total 95,873.1 84,295.4
Source: Granziera, A Guerra de Paraguay, op.cit.. p. 164.
-3 1 5 -
Table 4.5: Survey Questions From 1883 Parliamentary Inquiry

Commission on Money and Banking
1. Is there a shortage o r glut o f money? Is it possible to set upper limits for the supply o f money?
2. Are the shortages of the numeraire which occur from time to time in Rio de Janeiro the result o f an overall
shortage o f money, o r are they caused by difficulties in remissions o f money from other places in the Empire?
Are there other factors at work?
3. Could banks, whether in the North o r South o f the Empire, through the establishment of branches and
agencies, facilitate commercial transactions and through this, remissions of the numeraire?
4. Would it be useful to create banks, branches, o r agencies to facilitate remissions to Rio de Janeiro from the
province o f Minas Gerais, the most populous o f the Empire, and where such institutions are completely lacking?
Isn’t the lack o f such institutions one o f the most striking causes for the periodic shortages of the numeraire
necessary for transactions in the praija o f Rio de Janeiro?
5. Should the redemption o f paper money be gradual, and undertaken with the resources of the Treasury, this
is, with budgetary surpluses, o r does it make sense to redeem notes through credit operations, which permit the
creation of a bank o f circulation with branches in fhe provinces, responsible for the redemption o f paper money?
In this case how would such a bank be organized?
6. What determines the exchange rate? What causes it to fall, and what influence does inconvertible paper
money have on it?
7. Does the exchange rate vary from province to province? If so, in what proportion?
8. Is there basis to the vague and constant complaints that the two English Banks in Rio de Janeiro compete for
a fall in the exchange rate?
9. Should banks o f desposits and discounts enlarge the sphere o f their operations and create branches o r
agencies towards the end o f facilitating remission, serving commerce, agriculture, and industry?
10. Why have mortgage bonds encountered difficulty in their circulation, and in situating themselves in the
markets as income-earning assets? Why do they circulate under par?
11. Does the structure o f mortgage banks offer the necessary guarantees, o r does it present problems which
should be remedied?
12. Should the Bank of Brazil expand its long-term credit operations, providing mortgages to other agents
besides coffee planters, and even to other sectors, such as industry and livestock, for example?
13. What is the motivation for the repugnance of capitalists and banks for loans, under mortage, for real estate?
14. Why do banks and capitalists refuse to advance money under guarantee of national commodities, not only
for local consumption, but for export?
15. For what reasons has commerce not generally adopted banking or bankers’ checks as a means o f payment?
Source: CPI, op.cit.
-31 6 -
Table 4.6: Some Macroeconomic Indicators,

Brazil, 1870 -1913
A B C D E F G
1870 22.1 6 -4 n .a . n .a. 0.163 1170

1871 24.0 40 1 n .a . n.a. 0.166 1135
1872 25.0 56 11 n .a. n.a. 0.152 1210
1873 26.1 37 -19 n .a . n.a. 0.147 1245
1874 25.8 41 -21 n .a. n.a. 0.142 1280
1875 27.2 11 -26 n.a. n.a. 0.137 1308
1876 25.3 39 -37 n .a . n .a. 0.134 1338
1877 24.6 23 -42 n .a. n.a. 0.152 1367
1878 22.9 41 -70 n.a. n.a. 0.150 1442
1879 21.4 49 -30 n.a. n .a. 0.142 1517
1880 22.1 51 -10 n.a. n.a. 0.141 1500
1881 21.9 28 -9 n .a. n.a. 0.140 1506
1882 21.2 7 -23 n .a. n.a. 0.136 1546
1883 21.6 15 -22 n .a. n.a. 0.137 1523
1884 20.7 48 -37 n .a. n.a. 0.129 1610
1885 18.6 -3 -27 n .a. n.a. 0.132 1616
1886 18.7 56 -6 n .a. n.a. 0.121 1650
1887 22.4 22 -3 n .a . n.a. n.a. 1656
1888 25.3 19 3 n .a. n.a. 0.127 1604
1889 26.4 41 -25 0.146 n.a. 0.104 1878
1890 22.6 25 -25 0.153 0.257 0.142 2096
1891 14.9 25 8 0.163 0.181 0.173 2959
1892 12.0 91 -52 0.169 0.155 0.161 3475
1893 11.6 121 -41 0.169 0.150 0.177 3561
1894 10.1 80 -108 0.170 0.133 0.178 3996
1895 9.9 82 -37 0.206 0.127 0.162 4175
1896 9.1 12 -23 0.219 0.149 0.167 4250
1897 7.7 92 -76 0.238 0.141 0.172 4517
1898 7.2 50 -344 0.243 0.130 0.158 4900
1899 7.4 97 25 0.253 0.129 0.149 4910
1900 9.5 301 -126 0.217 0.112 0.146 4560
1901 11.4 412 -30 0.275 0.142 0.169 4013
1902 12.0 265 46 0.306 0.149 0.177 3810
1903 12.0 256 52 0.342 0.143 0.171 3932
1904 12.2 264 -21 0.268 0.132 0.154 4372
1905 15.9 230 26 0.305 0.139 0.163 4088
1906 16.2 300 8 0.251 0.127 0.160 4366
1907 15.2 216 14 0.232 0.111 0.149 4963
1908 15.2 139 -70 0.258 0.113 0.149 4818
1909 15.2 424 -68 0.244 0.106 0.162 5262
1910 16.2 226 -99 0.224 0.102 0.159 5791
1911 16.1 210 -118 0.228 0.099 0.158 6204
1912 16.2 168 -174 0.203 0.098 0.146 6849
1913 16.1 -26 -109 0.235 0.109 0.135 6631
(A) Average Annual Exchange Rate, Pence per Mil-reis (IBGE, Annuirio Estatfstico do
Brasil, 1939-40, pp. 1353-1354).
R e p r o d u c e d w ith p e r m issio n o f th e co p y rig h t o w n e r . F urth er rep ro d u ctio n p roh ib ited w ith o u t p e r m issio n .
(B) Total Exports - Total Imports, valued in 1000 contos de reis (IBGE, p. 1358). Up
until 1886 data are based on harvest year, beginning in June. Figures for 1886 represent
three semesters June 1886 through December 1887, figures for 1887 represent only one
semester. From 1888 on figures represent calendar year.
Table 4.6. continued....
(C) Federal Government Receipts - Expenditures, valued in 1000 contos de reis (IBGE, p.
1410). Dates are the same as (B).
(D) Consolidated External Debt/GDP, Debt figures from IBGE, p. 1424; GDP estimates in
current prices, from Goldsmith, Brasil 1850-1984. Desenvolvimento Financieiro Sob um
Seculo de Inflacao. BNDES, 1986, pp. 22-24, 82-84.
(E) Outstanding Issue of Long-Term Federal Bonds/GDP, Bond Figures from Winston
Fritsch, External Constraints on Economic Policy in Brazil, 1889-1930, manuscript, p.
307, GDP figures as in (D).
(F) Supply of Paper Money/GDP, Money Supply data from Oliver Onody, A Inflacao
Brasileira. Rio de Janeiro, 1960, pp. 27-28, GDP figures as above.
(G) GDP at current prices, valued in 1000 contos, from Goldsmith, op. cit..
R e p r o d u c e d w ith p e r m is s io n o f th e co p y r ig h t o w n e r. F u rth er re p ro d u ctio n p roh ib ited w ith o u t p e r m issio n .

-3 1 8 -
Table 4.7
Date Event
5/13/88 Abolition of Slavery
8/3/88 Accord signed between Treasury and Bank of Brazil to establish Aid to
Agriculture program. Initial loans restricted to provinces of RJ, SP, MG,
and ES. Later agreements added Northeastern states (October 9, 1888)
11/24/88 - Banking Reform of November 24 —returned to plurality' of issue, based on
6/89 a compromise position of gold and government bonds which failed to be
profitable for either.
7/6/89 Banking Reform of Ouro Preto - New regulation to law of 11/24/88 which
raised ceilings for individual banks on metallic emissions, thus enabling the
build-up of sufficient reserves to compensate for exchange risks and the rise
of the Banco Nacional do Brasil.
8/27/89 Issue by Treasury of 109,000 contos ouro of apdlices to finance loans to
agriculture program.
11/15/89 Proclamation of the Republican Government.
12/27/89 Three month deadline set for existing banks of issue to reach their ceilings.
1/17/90 Banking Reform of Rui Barbosa, establishing three regional banks of issue
in Rio de Janeiro, Bahia, and Rio Grande do Sul. Note issue on the basis of
apdlices up to 450,000 contos, convertible only after exchange rate had
stabilized at parity for at least a year. Banking reform accompanied by new
corporate and real estate legislation, including the Lei de Sociedades
Andnimas, which stipulated that only 10% of a company’s total capital need
be deposited before stocks could be listed on the exchange and publicly
subscribed.
1/31/90 Regulation to January reform, providing for the establishment of fourth bank
of issue in Sao Paulo and divided North/Northeastern region into three sub-
regions, each with own bank; total ceiling on issue reduced to 200,000
contos —100 for central bank and the second 100 divided between three
remaining macro regions.
2/24/90 Opening of Banco dos Estados Unidos do Brasil (BEUB) —central region
bank of issue.
3/7/90 Bowing to political pressure, right to issue ceded to Banco Nacional and
Banco do Brasil. Note issue allowed up to double the value of 25,000
contos in metallic reserves to be deposited in Treasury —first time
inconvertible notes backed by metallic reserves.

-3 1 9 -
Date Event
5/31/90 End of Aid to Agriculture Loan Program —of 41,300 contos advanced to
banks, 21,000 authorized by Republican administration.
8/30/90 Note-issue privilege on the basis of metallic reserves extended to BEUB.
9/25/90 All other issuing banks given right to issue convertible notes based on
metallic reserves, total ceilings on authorized emissions raised.
10/13- Change in law governing joint stock companies -- minimum capital
18/90 requirement raised from 10% to 30%; entry fees for stockbrokers increased
from 30 contos to 70 contos.
11/17/90 Baring Crisis
12/7/90 Fusion of Banco Nacional (of the Empire) with Banco dos Estados Unidos,
into Banco da Republica dos Estados Unidos do Brasil; authorized for
inconvertible issue up to three times the value of gold deposited.
1/18/91 End of Ruy Barbosa’s Tenure as Minister of Finance
Sources: Normano, Economic Types of Brazil, op.cit.. Franco, Reforma

Monetiria .... op.cit.. and ; Levy, "O Encilhamento," op.cit.

-3 2 0 -
Table 4.8: Volume of Transactions on the Rio Exchange

March 1888 - March 1894
Sector 3/88 3/89 3/90 3/91 3/92 3/93 3/94

Total
Transactions 45,555 27,865 36,919 105,615 58,085 27,191 18,013
Banks 49.5% 48.3% 61.5% 56.7% 83.9% 67.3% 57.8%
Railroads 19.9% 20.0% 17.1% 7.2% 4.5% 3.3% 2.4%
Trolley Cars 9.0% 4.0% 4.4% 4.1% 6.0% 18.7% 12.0%
Shipping 13.0% 14.4% 1.0% 5.1% 0.0% 0.0% 1.4%
Public Works 0.0% 0.0% 1.6% 21.0% 3.2% 1.8% 1.3%
AllOther
Sectors 8.6% 13.3% 14.4% 5.9% 2.4% 8.9% 25.0%
(Mfcting,
Mining, Civil
Construction,
etc.)
Source: Lobo, op.cit.. O Encilhamento. pp. 240 - 245 (Tabelas 1.2

- 1.7).

Table 4.9: Brazil, Money Supply in Circulation as of September 30, 1890
(In Contos de Reis)
1. Treasury Notes 170,781
2. Bank Notes Issued before the Ouro Preto Cabinet

Banco do Brasil (central branch) 11,047
Banco do Brasil (affiliates) 290
Banco da Bahia 904
Banco do Maranhao 155
3. Bank notes issued during the Ouro Preto Cabinet (5/89 - 11/89)
(convertible into gold)
Banco Nacional do Brasil 320
Banco de Sao Paulo 42
4. Bank Notes Issued in Accord with the Decree of 1/17/90

Banco dos Estados Unidos doBrasil 49,999
Banco Uniao de Sao Paulo 5,800
Banco Emissor do Sul 3,000
Banco Emissor da Bahia 5,500
Banco Emissor do Norte 1,000
5. Bank Notes Issued in Accord with the Decree of 3/8/90
Banco do Brasil 21,299
Banco Nacional doBrasil 28,554
Total 298,692
Percentage Issued in Rio de Janeiro 94.41 %

Percentage Issued in North and Northeast* 2.63 %
Percentage Limited by Law to Circulate
in Rio de Janeiro and S.Paulo 18.68%
*This assumes that all issuances of branch Bank of Brasil were made
in the Northeast.
Source: Relatdrio de Ministdrio da Fazenda, 1891, pp. 74-80; quoted in

Franco, op. cit.. p. 125.

-3 2 2 -
Table 4.10: Wileman’s Listing nf Banks. 1909

(Excluding Bank of Brazil and Branches!
Location No. of No. of Banks Percent of

Banks Incorporated Authorized
during Authorized Realized Capital
1888 - 1893 Capital Capital Which is
(contos) (contos) Realized
Rio de
Janeiro 19 10 169,858 119,404 70.3 %
Other
Southern and
Southeastern 9 4 58,359 36,657 62.8%
Northern and
Northeastern 14 2 46,156 27,853 60.3%
Total 42 16 274,373 183,914 67.0%
Share RJ 45.2% 62.5% 61.9% 64.9%
Share Other
S/SE 21.4% 25% 21.3% 19.9%
Share N/NE 33.3% 12.5% 16.8% 15.1%
Source: Wileman’s Brazilian Yearbook, 1909.

-3 2 3 -
Table 4.11; The Brazilian Banking Sector. 1913/1914.

bv Region and Nationality of Bank
% Distribution of % Distribution of
Average Assets Liabilities
Assets
No. of (in Mortgag Deposits Local Deposits
Region Banks contos) es in Deposit from
Branch s Branch or
or Corres.
Corres. Banks
Banks
Southeast 44 68,352 3.17% 9.50% 20.73% 10.32%
Domestic 21 75,575 6.01% 9.27% 22.02% 9.18%
Foreign 23 61,758 0.00% 9.76% 18.18% 11.60%
% Domestic
Within Region 47.7% 52.8%
Northeast 21 14,717 2.28% 8.03% 20.68% 5.18%

Domestic 11 10,529 9.54% 13.43% 13.47% 1.22%
Foreign 10 19,324 0.00% 9.18% 25.49% 7.82%
% Domestic
Within Region 52.4% 37.5%
All Brazil 65 51,024 3.90% 9.37% 20.73% 9.87%

Domestic 32 51,602 6.02% 9.06% 22.37% 8.64%
Foreign 33 48,899 0.00% 9.69% 18.98% 11.19%
% Domestic 49.2% 64.8%
Within Brazil
Source: Brazil. Ministdrio da Fazenda. Relatdrio 1914.
(Figures are two-year averages).

-3 2 4 -
Table 4.12: Percent of Total Assefc/Tlabilities held bv domestic Banks in Brazil,

bv Region, two year averages for 1913/14
Northeast Southeast
Percent of Banks 52.4% 47.7%
Assets
Discounted Bills of Exchange 52.0 69.1
Loans in Current Account 38.4 56.5
Bills Receivable 23.7 23.3
Collateral 17.8 54.7
Deposited Funds 55.3 40.0
Funds Deposited in Branches & 28.5 51.5
Correspondent Banks
Mortgages 100.0 100.0
Cash on Hand 23.4 49.9
Misc. 32.4 67.6
Total Assets 37.5 52.8
Liabilities
Short-term Deposits 24.9 65.0
Long-term Deposits 27.5 47.4
Third-party Funds 39.4 47.3
Deposits from Branch and 9.4 46.9
Correspondent Banks
Mortgaged Funds 0.0 100.0
Miscellaneous 36.2 45.0
Total Liabilities 37.5 52.8
Source: Brazil. Ministdrio da Fazenda. Relatdrio 1914.

(Figures are two-year averages).
R e p r o d u c e d w ith p e r m is s io n o f th e co p y rig h t o w n e r . F u rth er re p ro d u ctio n p roh ib ited w ith o u t p e r m issio n .

Table 4.12
Date Event
1891 Bank of Brazil abandons emissions, transferring whole of this activity to
Banco da Republica dos Estados Unidos do Brasil
1893 Merging of Bank of Brazil with Banco da Republica dos Estados Unidos do
Brasil, forming new Banco d Republica do Brasil which retains monopoly of
note-issue privilege.
1896 Transferral of note-issue privilege exclusively to the Treasury
1898 Signing of Funding Loan with Rothschilds: Payment of interest of alll
foreign loans of federal government and interest garantees made not in
money but in new titles of debt; amortization postponed until 1911.
Customs receipts were mortgaged to creditors; federal government banned
from contracting new loans till June of 1901 (external and internal) and
obliged to retire from circulation a quantity of paper money equal to the
value of the loan (sterling —), at an exchange rate of 18d per mil-reis.
Also, note-issue by local governments or private institutions formally
declared illegal.
1900 Liquidation of the Banco da Republica and initiation of a series of bank
closures (including: Banco Rural e Hipotecdrio, Banco Comercial do Rio de
Janeiro, Banco de Depdsitos e Descontos, Banco de Crddito Mdvel, Banco
Franco-Brasileiro, Banco Intermedidrio, and Banco Italia-Brasile).
1905 Creation of the Fourth Bank of Brazil (operations begin 1906): Government
Bank of deposits and discounts.
1910 Establishment of the Caixa de Conversao —Conversion Fund, which would
emit notes convertible to gold, initially at 15 pence per mil riis.
1920 Creation of General Banking Inspectorate, as well as a series of norms and
regulations for national and foreign banks.
1921 Opening of Rediscount Desk in Bank of Brazil; establishment of clearing
house department for bank checks.
Sources: Franco, Reforma Monet&ia.... op.cit.. and Ribeiro, History of

Brazilian Banking, op.cit.

-3 2 6 -
Figure 1.1: Map of Brazil. 1910
BRASIL
O M A N IU fiA m C RO W 00
D * M IG U EL CALMON DU PIN E A IM
•UPttlKO 0* M C A 1 0 6 M M W U t» ,l/
E » c * U d .|:JO O O O O O '
lOI^
ttL E C O P Y
-3 2 7 -
Figure 2.1
Braz 1872 - 1920

R e g io n a l 0 rs tr " i b u t i o rt e r f P o p u l a t i o n
34
32
30
23
26 -
24
22
20
ia
i6
14
12
10
8
6
1872 189Q 1920
C en su s Y ea rs
N o rth ea st S o u th e a st V//A S o u t h ISA<1 N o r t h K \1 N o r th w est
Figure 2.1: Percentage Distribution of Brazilian Population
Source: Brazil Census, 1920.

-3 2 8 -
Figure 2.2
360
340
320
300
280
260
240
220
200
180
140
100
80
60
1901-02 1907-09
□ C em ent C1Q00O + S te el C1000 t} o K Im p ts C1939=1Q03
Figure 2.2: Indicators of Capital Formation in Industry (1901 - 1913).
Source: Villela and Suzigan, op.cit.. Table II.5, p. 131.
R e p r o d u c e d w ith p e r m is s io n o f th e c o p y r ig h t o w n e r . F u rth er re p ro d u ctio n p roh ib ited w ith o u t p e r m issio n .

-3 2 9 -
Figure 2,3: Map of Cotton Growing and Manufacturing Areas In Brazil. 1910
PA R A
CE A R A
PA R A H TB A
P IA U H T
M ATTA G R O SSO G OTAZ
M IN A S G E R A E S
•"SJ—
PARA NA
COTTON GROWING ✓ MANUFACTURE

IN BRAZIL,
S ta.C A T H A R IN A
r>~ — a <rgrtgl»'. -
rrrT"K *rt* **-
R«0 GRANOC m SUL
-3 3 0 -
Figure 2.4
R a n k - S i z e D istrib u tio n s — Brazil

Urban Municipalities, 1920
1 00 00 00 0
0 0 0 0 0 0
Population
100000
10000
10 100 1000
Rank
Brazil —t— Northeast —i— Southesat
-3 3 1 -
Figure 3.1
ReaI Value o f Brazi I Ian Exports

1875 - 1S19, C 1 8 9 5 / 3 3 = 1DO^
210
200
190
170
160
150
140
130
120
100
SO
SO
70
50
18 7^-79 I | 189^-99
1890-94 1 9 0 0 -0 4
F iv e Y ear A v era g es
□ R eal E xp ort In d ex
Source: AEB, op.cit.. p. 1379.

-3 3 2 -
Figure 3.2
Percentage o f Major Exports

B r a z il, 1 0 7 5 -1 9 1 4
80
70 -
GO
50 -
40
30
20 -
10
1883 1895 1899 19033 1907
T ear
C o ffe e S ugar R u bber
Figure 3.2: Percentage Share of Major Exports, Brazil: 1875 - 1914 (from AEB, pp.
1358-1359)
-3 3 3 -
Figure 3.3: Coffee Entries to the Ports of Rio and Santos. 1885 - 1915
Percent o f Coffee A r r I v a I s
Rio and S a rrto s. 1885-1915
0. 8
0 .7
0.G
0 .5
0 .4
0. 3
0. 2
0.1
1885 1891 1894 1897 1900 1903 1906 1912
□ % R io +• % S a n to s
Coffee Entries to the Ports of Rio and Santos, 1885 - 1915.
Years in Figure 3.3 represent harvest years, thus arrivals for 1885
correspond to port arrivals between July of 1885 and June of 1886.
Data are taken from Brasil. Departamento Nacional do Cafe,
"Anudrio Estatfstico 1938" (5. Edition, revised, Rio de Janeiro,
1938), p. 264, as cited in Thomas H. Holloway Vida e Morte do
Convenio de Taubatd: A Primeira Valorizacao do Cafe. (Rio de
Janeiro, Editora Paz e Terra, 1978), p. 101.

-3 3 4 -
Figure 3.4: International Trade Balance. Rin and Sao Paulo. 1870 - 1913
n te r n a tio n a l Trade Balance

Rio and Sao P a u lo , 1875 - 1913
300
20Q
-2 0 0
-300
1882-87 1893-97
Y ear
R io d e J a n e i r o Sao P a u lo
Source: See Table 3.11

Figure 4.1
O “ E N C IL H A M E N T O ” V IS T O P E L A IM P R E N S A B R A S IL E IR A
ItK V IS T A I I j I j I 'S T K A I I A (If 3 (Ic (H itu liio <lo 1 SK!I
s v ii»
<~ ^ > e s d e ' n i e t n & e i p e t i pi n o i ' t e , o jp u iM i- ,

co c n t r p t v p t t s c t h i p t , e m n o s r o t s c r t p t o r i o , ]
llV ftn d o C O n i t i c j o PL p P i C p n P t pic* ( p f M t t t e -
tiboL b v n ' i c p e v i P L . Q i-piw ple spinf&o, m p i s . ..
a n t e s e t s s i n t ^ . . ...., •— -
-336-
Figure 4.2
O “ E N C IL H A M E N T O ” V IS T O P E L A IM P R E N S A B R A S IL E IR A
K K V IS T A IIA ,IT S T K A D A <lc .1 tic n u t u h r o <I<* IS S i)

-3 3 7 -
Figure 4.3
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Cities and Regional Economies in Brazil, 1870 - 1920

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This dissertation explores the origins of the regional inequality which

Analysis of demographic and industrial data demonstrates the concentration of

First Republic. The pattern of urban hierarchies is seen to be consistent with a

system of national and regional entrepots posited by the mercantile or metropolitan

nation’s financial markets in their financing of infrastructure and other

"integrative" activities. The conclusion of the dissertation places the regional

with particular attention to the impact of Republican fiscal federalism on the

divergence in regional economic performance.

ALL RIGHTS RESERVED

INTROD UCTIO N...................................................................................................1

CHAPTER ONE. REGIONAL TIES AND REGIONAL G R O W T H 13

CHAPTER TWO. CHARTING THE ARCHIPELAGO: REGIONAL

CHAPTER THREE. BRIDGING THE ARCHIPELAGO:

CHAPTER FOUR. FINANCING DEVELOPMENT: NATIONAL BANKING

TABLES AND FIGURES ..................................................................................276

Table 2.3. Global Intercensal Survival Estimates of Net Internal Migration by

Table 2.4. Estimated Geographical Distribution of Brazilian Cotton Mills, 1866,

Table 2.7. Composition of Capital and Worker-Management Ratios, Brazilian

Table 2.9. Comparison of Urbanization Rates by Regions,

Table 2.10. Comparison of Population Distribution by Region,

Table 2.12. OLS Regression Results, Rank-Size Distributions,

Table 3.5. Principal Exports, by Major Ports, Brazil,

Table 3.7. Principal Imports, by Major Ports, Brazil,

Table 3.15. Entries of Selected Commodities into Rio de Janeiro by Coastal

Table 3.16. Regional Distribution of Brazilian Rail Network,

Table 3.18. Agricultural Indicators, by Region, Brazil, 1920 ........................ 308

Table 3.19. Major Agricultural Crops, Total Value and Production

Table 3.20. Average Yields on "Good Land" by Region,

Table 4.1. Brazilian Banks Founded c. 1850 .................................................. 311

Table 4.5. Survey Questions from 1883 Brazilian Parliamentary Inquiry,

Table 4.7. Brazil: 1888-1890; Timetable of Banking and

Table 4.9. Brazil: Money Supply in Circulation as of September

Table 4.10. Wileman’s Listing of Brazilian Banks, 1909 ................................ 322

Table 4.12. Percent of Total Assets/Liabilities held by Domestic Banks in Brazil,

Table 4.13. Brazil: 1891 - 1921; Timetable of Banking and Currency

Figure 1.1. Map of Brazil in 1910, with railroads.................................................326

Figure 2.1. Percentage Distribution of Brazilian Population, by Region, 1872 -

Figure 2.2. Indicators of Brazilian Capital Formation,

Figure 2.3. Map of Cotton Growing and Manufacturing Areas

Figure 2.4 Rank-Size Distribution of Brazilian Municipalities,

Figure 4.1. Contemporary View of the Encilhamento...................................... 335

Figure 4.2 Contemporary View of the Encilhamento.......................................336

Figure 4.3 Contemporary View of the Encilhamento.......................................337

mention, I could never have gotten this monkey off my back.

First thanks go to the Yale University Council on International and Area

be found to restore full service.

My grandfather, Frederick Deutsch, provided both financial support and

persistent encouragement, without which I would not have finished this

dissertation. William N. Parker, the chair of my committee, has served as a

the trail for me in my explorations of economic geography. And, Carol E. Heim

has been a constant source of intellectual support, providing careful criticism,

thoughtful questions, and peerless aid in arriving at an integrated vision of my

Finally, I would like to dedicate this dissertation to the memory of two

to Hugh G. Aitken, a fine mentor in every way, who always believed in my