Bulmer-Thomas V., Coatsworth J., Cortes-Conde R. The Cambridge Economic History of Latin America: Volume 2, The Long Twentieth Century

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202 Alan Dye

mortgage market that would increase the value of the title. In fact, formal-

ization of titles was complemented by long-run expectations of a full range

of complementary institutions and policies.

The Brazilian interior offers a contrasting example of landowner skep-

ticism and resistance to titling reform. Like the western United States,

issues of squatters’ rights had strong political salience. For centuries, set-

tlers migrating inland from coastal settlements claimed lands (posses)by

squatting. Initially, the interior was very sparsely inhabited; squatters’ vast

claims often encompassed several square leagues. Informal institutions grew

up locally that identiﬁed owners and supported local land transfers; but

though these practices were self-enforcing among locals, they were opaque

to outsiders. As westward migration continued, and particularly as coffee

exports from Brazil took off before mid-century, competition for interior

lands intensiﬁed. Newcomer squatters, unaware or unwilling to respect

prior claims, encroached upon lands that were already occupied. As the

demand for land increased, violent conﬂicts over disputed lands became a

serious social and political problem. At the root of the problem was legal

uncertainty. The main colonial law governing transfers of Crown lands cre-

ated the institution of the sesmaria,bywhich property rights to Crown lands

were purchased on the condition that they were put into “beneﬁcial use.”

Yet, prior to the coffee boom, land values were so low that enforcement of

the law was neglected. The sesmaria, which fell into disuse because of the

superiority of the squatting option, was abolished in 1823.For more than

twenty-ﬁve years, squatting was the only institution in effect for acquiring

unoccupied Crown lands, and no formal law governed it.

In the 1840s, the Brazilian government tried to address the legal issue.

The Council of State submitted a proposal for legal reform to the Chamber

of Deputies in 1843.Ithad three main objectives. First, it proposed to settle

land disputes by conducting surveys and formalizing titles after undertak-

ing a judicial review to verify the validity of claims. Second, to generate

government revenues, squatting on the remaining unoccupied public lands

would be abolished, and Crown lands would be sold. On claimed lands,

titles issued to preexisting posses were to have size limits, and portions of

posses exceeding those limits would be reclaimed as public domain. Third,

Crown lands were to be priced sufﬁciently high to slow the rate of new land

acquisition.

The proposed reform law, however, met with such outrage and opposi-

tion from squatters that all efforts toward reform were blocked for years.

A land law was ﬁnally approved in 1850 only by accommodating squat-

ters’ demands and compromising its effectiveness. The new law required

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The Institutional Framework 203

registry of claims but no survey or judicial review; as a consequence, it did

not provide a mechanism for resolving disputes. Though nominally it abol-

ished squatting and required purchase of public lands, the provision was

not enforced. Squatters in effect continued to have de facto free access to

public lands, and claim sizes remained unconstrained. The law was ineffec-

tive at settling disputes and generating government revenues. The federalist

constitution of 1891 surrendered jurisdiction of public land policy to the

states where regional landowners dominated land policies. Recent work by

Alston, Libecap, and Mueller shows that uncertainty over the application

of the beneﬁcial use principle continues to invite violence in land disputes

in the Amazon region today.

Central to the land problems in Brazil and Mexico were the government’s

poor credibility and doubtful ability to enforce formal property rights in

sparsely populated rural areas where land values were low but rising. Exam-

ination of settlement in other countries shows that the outcomes, either

in the security of titles or in their distributive effects, were not always the

same. Colombia’s settlement history is known for the nineteenth-century

Antioque

no migration of smallholder settlers from Medell

ın along the cen-

tral cordillera into Caldas and Quind

ıo. The lands into which these set-

tlers went were also claimed by heirs of large land grantees, who had long

abandoned the rugged lands as worthless. As squatters (called colonos in

Colombian folklore) settled the mountainous slopes and planted food crops

and coffee, grant holders tried to reclaim their lands. In the meantime, new

towns had proliferated, where courts in the new municipios ruled most often

in favor of the settlers’ claims, consistent with the perceived local public

interest, though usually requiring moderate compensation to grant hold-

ers. Elsewhere in Colombia, land claims were concentrated, and property

rights were “murky” and unveriﬁable. Nevertheless, the political demands of

a large rural middle class occupying some of the best coffee lands, proud

of its colono heritage, appears to have had an effect on the enforcement

of the “occupation and use” provision of traditional Hispanic land law. A

1926 ruling by the Supreme Court permitted squatting on private, unused

land unless the claimant could produce the original c

edula or title by which

the land had left the national patrimony. The impossibility of this require-

ment led to widespread evictions and rural unrest for years, but eventually

it led to the Land Law of 1936, which enforced squatters’ rights and set

the standard of documentary proof of land claims so as to favor squatters.

As a mechanism to increase the predictability of enforcement, to prevent

it from being discarded by local judiciaries, the law created a special land

court, with circuit judges on horseback, to adjudicate disputes between

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204 Alan Dye

landowners and squatters. In the long run, however, the law had the unin-

tended consequence of encouraging large land claimants to ﬁrm up their

property claims by eliminating tenancies in their best lands (which invited

squatting) and converting them to cattle-raising. This was responsible for

a land use pattern that a 1949 World Bank mission declared “unusual,” in

which the rich, ﬂat lands in the high Andean plateaus were underutilized

as pasturage whereas the neighboring steep rocky slopes were occupied by

smallholders planting maize, causing serious erosion.

The frontier settlement of Argentina brings these issues into greater relief.

Unlike Brazil or Colombia, both public and private claims to new lands on

the expanding frontier in the Argentine pampas were made more effective

by an initially unambiguous deﬁnition of formal property rights. In the

province of Buenos Aires, the process of frontier expansion was in the ﬁrst

instance a military operation that preceded settlement. Private settlers did

not wander out into the frontier in advance of government because of the

threat of hostile indigenous tribes. Instead, private interests pressured for

military campaigns to pacify the frontier to convert it into grazing land. This

was the principal reason for the rise of the caudillo dictator, Juan Manuel

de Rosas. Military successes added vast tracts to the public domain, for

which formal property rights were quickly deﬁned and transferred to pri-

vate hands, either by lease or sale, to raise government revenues and defray

military and other government costs. Like Brazil, population on the fron-

tier was sparse so that public lands were privatized in vast tracts. But, unlike

Brazil, formalization of private property rights proceeded with greater regu-

larity from the outset. The credibility of the government to make its claims

to the public domain effective was a function of the public goods it provided

in military services to pacify and defend frontier lands. Despite conﬁsca-

tions by Rosas that were nulliﬁed later, most property rights in land were

well deﬁned. Over time, this facilitated development of active land and

mortgage markets. Mortgage credit, in turn, was instrumental in, though

not solely responsible for, the extraordinary expansion of the Argentine

economy during its belle

epoque of export-led growth prior to World War I.

The thesis that latifundismo,orthe holding of vast expanses of land in

economically unproductive “semifeudal” institutional arrangements, has

been the main cause of Latin American underdevelopment has been largely

abandoned by scholars who have examined the economic behavior of the

landed classes and the institutional underpinnings of land markets. In

Mexico, for example, research on the hacienda has revealed that landowners

did not possess semifeudal, precapitalist mentalities, as convention once

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The Institutional Framework 205

depicted them. Rather, they operated their enterprises as rational busi-

nessmen. The hacienda economy in Mexico expanded and receded with

export demand and the development of the modern transportation net-

work. When it receded, land markets facilitated the transfer of land use to

villages and peasants. Similarly, the thesis of latifundismo in the plantation

economies has been shown to be inaccurate. The rise of the “colossal” Cuban

sugar centrales in the early twentieth century, which had been portrayed as

aproduct of onerous semifeudal cane growers’ contracts imposed by for-

eign capitalists, were, instead, the product of modernization – the adoption

of new large-scale processing technology and managerial techniques. The

cane growers’ contracts that were criticized were indeed burdensome – they

unloaded considerable risk onto cane growers who were less capable than

mill owners of absorbing it. However, the terms of the contracts were fully

explained by the transaction costs of supplying cane to the mill using the

new milling technologies. Furthermore, the legal environment did not pre-

vent cane growers from abandoning their contracts if the terms were too

harsh. Yet, despite the terms, cane growers’ contracts were coveted and con-

tributed income streams responsible for the growth of a rural middle class

in Cuba.

This new understanding of the functioning of property rights in land and

markets in Latin America may displace, but it does not undo, the proposi-

tion that the unequal wealth distribution is central to chronic social, eco-

nomic, and political problems in Latin American countries. For example,

in Buenos Aires, as land-intensive ranching gave way to the expansion of

the wheat economy after 1890, wheat farmers characteristically leased land

from estancias.Asleaseholders, they had no access to mortgages and no

alternative means to secure long-term credit. Adelman contrasts the extent

of agricultural mechanization in the wheat economies of Buenos Aires

and western Canada. In the latter region, most farmers owned their land

and mortgaged it to obtain long-term credit for improvements, including

high rates of mechanization. He offers some evidence showing a relation-

ship between low rates of farm ownership and low rates of investment in

mechanical technology. Taylor, who has explored the relationship econo-

metrically, ﬁnds evidence that is not inconsistent with this relationship,

although statistically it is difﬁcult to verify or refute.

Jeremy Adelman, Frontier Development: Land, Labour, and Capital on the Wheatlands of Argentina

and Canada, 1890–1914 (Oxford, 1994); Alan M. Taylor, “Latifundia as Malefactor in Economic

Development? Scale, Tenancy, and Agriculture on the Pampas, 1880–1914,” Research in Economic

History 17 (1997): 261–300.

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206 Alan Dye

The prevalence of farm ownership is traced to the slow privatization

of public lands in western Canada under a Jeffersonian-style homestead

policy with size limits of 160 to 320 acres. By contrast, Buenos Aires had

disposed of virtually all of its public domain in sales campaigns without

effective size limits prior to the rise of the wheat economy. In Canada,

the preservation of public domain and the continued option of home-

steading put an opportunity-cost cap on market prices for acquiring new

farmland, making farm ownership for new settlers a continued possibility.

However, in Buenos Aires, with no remaining public domain, land prices

were driven up by speculation over future export-led expansion, and farm-

ers found the costs of leasing land more attractive. Meanwhile, research

has shown that the landed and commercial elite, operating through their

control of political institutions, produced legislation that loosened mort-

gage credit so as to fuel the wave of land speculation. Related to this,

the Argentine government’s chronic struggle since independence to estab-

lish solid ﬁscal institutions underlay both the rapid disposal of the public

domain – to raise revenues – and the inﬂationary ﬁnance that fueled land

speculation.

CONCLUSIONS

The post-1930 political crises and the postwar cycling of populism and

military takeovers have sometimes been associated with the rise of a new

era of statism in Latin America. Yet the political instability, constitutional

revisionism, and centralist corporatism of the ﬁrst era reﬂect persistent insti-

tutional patterns that can be traced far back to the colonial institutional

legacy, persistent inequality, elite control of government, unpredictable or

biased judiciaries, uncertain property-rights enforcement, high political

risk, and economic barriers that have blocked the participation of poten-

tial entrepreneurs. The root causes of these problems are difﬁcult to sort

through. The long view of history points to the existence ofa self-reinforcing

institutional process that repeatedly restored political power to a conserva-

tive elite determined to preserve a preexisting and highly skewed distribu-

tion of property rights. But doubts may be raised about the simplicity and

deterministic predictions of the Engerman-Sokoloff reinforcement mecha-

nism. The problems described here in enforcing property rights in land are

paralleled in other studies of credit markets, ﬁscal institutions, and other

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The Institutional Framework 207

key sectors or policy areas.

Government’s ability to act depended on the

credibility and expected longevity of enforcement. The instability of polit-

ical regimes damaged credibility because individuals expected wide policy

swings and reversals and unpredictable or inequitable rulings on prop-

erty rights. Investors, trying to anticipate long-run effects, were deterred

by political risk. When reformers tried genuinely to attack these prob-

lems, they ran up against unanticipated barriers as systems of interactive

formal and informal institutions persisted, each constrained by its func-

tional relationship with others. Institutions have had powerful inﬂuence,

yet, by deﬁnition, they are humanly devised and humanly alterable. Alter-

ability suggests manipulability for policy aims. This fact lends hope to the

prospect of positive reform. However, if those efforts are to be undertaken

with greater conﬁdence about the outcomes, scholars need to obtain a bet-

ter understanding of the complexity, uniqueness, and latent crises in each

national system.

As examples, with regard to banking, see Noel Maurer, The Power and The Money: The Mexican

Financial System, 1876–1932 (Stanford, CA, 2003); in regard to monetary and ﬁscal institutions, see

several contributions from Michael D. Bordo and Roberto Cort

es Conde, eds., Transferring Wealth

and Power from the Old to the New World: Monetary and Fiscal Institutions in the 17th Through the

19th Centuries (Cambridge, 2001); and Gerardo della Paolera and Alan M. Taylor, Straining at the

Anchor: The Argentine Currency Board and the Search for Macroeconomic Stability, 1880–1935 (Chicago,

2001).

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FISCAL AND MONETARY REGIMES

roberto cort

es conde

MODERNIZATION FROM THE END OF THE

NINETEENTH CENTURY TO WORLD WAR I

Throughout Latin America, the formation of national states in the last

decades of the nineteenth century went together with the growth of their

economies. Wars and political conﬂicts ended, isolation was mostly over-

come thanks to new transportation technologies, and central governments

became stronger. This process coincided with the modernization of political

and economic institutions and included the creation of new ﬁscal and mon-

etary institutions. Public ﬁnances and tax administration were reordered.

Anachronistic taxes on production and local trade were dropped, and states

ﬁnanced themselves increasingly through indirect taxes such as duties on

foreign trade (especially on imported consumer goods). This became possi-

ble because Latin American economies were oriented toward foreign mar-

kets. Enjoying control of rising customs revenues, central governments con-

solidated their power. In years when peace prevailed, the role of the armed

forces diminished and war expenditures declined. Thus, expenditures grew

on items related to economic development, such as subsidies, public works

investment, railways, and education. Administrations still suffered the con-

sequences of prior wars in the form of high debt burdens. There were

efforts to tap foreign capital markets and to create domestic ones although

those efforts suffered from widespread suspicion about the governments’

This article was part of a research project supported by a grant from the Inter-American Development

Bank (BID-UdeSA ATN/SF-6885 –RG) with the collaboration of Marcela Harriague as researcher

and Marcelo Barbieri as research assistant.

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210 Roberto Cort

es Conde

arbitrary procedures. Governments proceeded to monetize their debts

through private or mixed banks established during the economic boom. In

other cases, treasuries issued money directly.

By the last decades of the nineteenth century, silver coins were used

as a means of payment (the peso of eight reales of colonial days, a silver

ounce of twenty-seven grams), together with notes convertible into metallic

coins issued by banks and, sometimes, government forced-circulation paper

money. When issues of convertible bank notes exceeded money demand,

specie outﬂows occurred, which ﬁnally led to inconvertibility generally fol-

lowed by larger money issues and depreciation. In several countries, and at

different times, this led to periods of high inﬂation. In response, countries

strove to reach monetary and ﬁscal stability in order to go back to convert-

ibility and, by the end of the century and because of silver depreciation, to

adopt the gold standard.

This chapter is organized in the following way: The ﬁrst section examines

the period from 1880 to World War I and is divided in two subsections,

“Consolidation of Nation-States: (1880–1900)” and “The Great Expansion:

(1900–1914).” The second section analyzes the period “Between the Wars:

(1914–1945),” which is also subdivided in two subperiods, “the 1914–1930

period” and the “1930–1945 period.” The last section of the chapter “From

World War II to the 1980s” studies “Growth with Inﬂationary Financing:

1945–1960” and “Growth and Stabilization Efforts: 1960–1980.” The ﬁnal

section draws conclusions.

the consolidation of nation-states: 1880–1900

After about 1850, efforts were made to eliminate customs duties and taxes

on the circulation of domestic goods (alcabalas), which had kept markets

segmented. External customs had already become the primary source of

revenue. Tax-collecting powers were granted at various governmental lev-

els, with more decentralized (federalist) systems prevailing in the larger

countries (Argentina, Brazil, and Mexico).

Although the currency regime inherited from Spain was bimetallic (gold

and silver), silver coins were the main currency. In some countries, banks

that issued convertible notes were created, and laws aimed at organizing

the ﬁnancial system passed. In others, the treasury issued money directly.

After 1870, silver depreciation affected mainly producing countries such

as Mexico, Bolivia, and Chile. Unlike the Hispanic American countries,

Brazil adopted the gold standard early on, in 1846, establishing a gold/silver

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Fiscal and Monetary Regimes 211

rate of 1:15.625.

Because gold was not used for everyday transactions, banks

issued notes that circulated among the public. The Bank of Brazil, founded

in 1853, enjoyed a monopoly on issuing money. In Chile, because of the fall

in copper prices that affected government income in 1878, the forced cir-

culation of paper money was decreed. This lasted until 1925.InColombia,

by 1860,treasury notes had forced circulation. In 1881, the National Bank

was founded with the right to emit bank notes and the privileges of a

state bank. In Bolivia, the silver peso had been the general currency since

colonial times; it was the old peso of eight reales, coined in Potos

ı and even-

tually known as the boliviano.InPeru, silver pesos predominated initially,

although the boliviano also circulated. The 1863 monetary law established

the sol, divided into 100 cents, with a weight of twenty-ﬁve grams of silver.

Peru also changed from the bimetallic to the silver standard (gold remaining

as commodity currency). In the interior of Argentina, silver coins circu-

lated, while in the province of Buenos Aires, government paper money was

common.

The consolidation of the central government took place in Mexico during

the presidencies of Porﬁrio D

ıaz, who governed the country autocratically

from 1876 to 1910 (with just one cosmetic interruption in 1880–4). Revenue

rose in nominal terms, but expenditure increased even more. There were

two reasons for this imbalance. The most important was silver depreciation.

The state received revenues from taxes paid in silver exports, the price of

which fell sharply beginning in the 1880s. Meanwhile, the foreign debt had

to be paid in gold. The second factor feeding the ﬁscal imbalance was the

ıaz government’s ambitious public works and railroad-building programs,

which facilitated its political consolidation.

In Brazil, with the establishment of the republican regime in 1889,a

federalist decentralization took place that led to an increase in the power

of states to collect export taxes. The 1891 Constitution introduced a more

decentralized ﬁscal system. This was important during the coffee export

boom. Because Brazil had an almost monopolistic position in the inter-

national market, it could transfer the burden of export taxes to foreign

consumers, thus avoiding internal political resistance. Coffee taxes, fur-

thermore, became the main ﬁscal resource for the state of S

ao Paulo. By

1907, central government outlays had dropped by 66 percent, whereas

those of the states had risen by 25 percent and municipal expenses by

9 percent. Another important change had to do with the monetary and

Carlos Manuel Pel

aez and Wilson Suzigan, Historia monetaria do Brasil (Rio de Janeiro, 1976), 67.