Brazil today and tomorrow

by L. E. Elliott Joyce

CHAPTER VI
FINANCE

Brazilian Currency

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

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

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

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

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

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

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

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