The six million pounds sterling below which the gold reserves of the Conversion Office have not been allowed to sink, and to which it has been possible to add little, back the large amounts of convertible paper, and, although a greatly shrunken sum, it has its effect in steadying exchange: another factor in preventing farther breaks, in spite of the seventy per cent increase in inconvertible paper, is the earnestness with which the Federal Government and the people of Brazil are insisting upon a vigorous solution of the problem of the foreign debt. Individuals in Brazil show themselves no less interested than officials: letters bearing upon the situation are constantly printed in the public press, many personal sacrifices have been made of percentages of salaries by legislators, officials and civil servants, and it is clear that the ablest heads in Brazil are trying to find a way in which Brazil can meet her obligations. This sincerity of purpose may not create gold, but it does strengthen public credit and helps in a more or less direct manner in restoring confidence which is certainly not without its effect upon exchange.
More than once a fall of exchange in Brazil has, by an anomaly, actually saved industries from something near bankruptcy. This is readily understood when it is realized that exporters of such products as rubber and coffee, cacao and hides, selling in the markets of London, Paris, Hamburg or New York, are paid in gold, while they pay their day labourers in paper. To the Brazilian interior it is of little interest that the bankers of Rio say that it takes another milreis paper to purchase a gold pound sterling; the country markets do not reflect such nuances, unless, indeed, a fall should be heavy and continued in which case it must in course of time react upon the whole country. But a temporary depression does not affect the amount of black beans or mandioca that can be bought with a milreis, and neither the rubber collector of the Upper Amazon or the more sophisticated worker upon a fazenda of coffee or cattle will demand a rise in wages because exchange goes down for a time. To the exporter the fraction of a milreis makes all the difference between prosperity and ruin, and both rubber and coffee have benefited thus by temporary low rates of exchange; the present crisis has certainly been smoothed to the agriculturist, the producer and exporter, of Brazil, by the fall in exchange since the middle of 1914, the paper receipts of the country showing marked inflation due to the larger number of milreis bought by the foreign gold paid for these products. Low prices received abroad for coffee and rubber are thus compensated, and when, as has happened since the war began, prices have been better than had been predicted. It is not to be wondered at that there is a feeling of prosperity in Brazil and that money is abundant among certain classes in spite of administrative difficulties.
The people who really suffer from fallen exchange are, besides the governments owing sums abroad which must be paid in gold, the importing houses which have bought in gold and must sell in depreciated paper, and which cannot always adjust paper prices to fit the monetary market; the transportation companies, too, whose rates are fixed now find themselves with paper in hand of a lowered value abroad; it is true that their obligations to employees are paid in paper, but since most carrying companies are owned or leased in Europe, and dividends must be paid in gold, earnings are very much reduced when large quantities of additional paper are needed to buy bills on London. Every railway, port company, street-car line and lighting and power company which derives its capital from outside Brazil has seen its dividends cut down during the last two years even if earnings have been larger and expenses reduced.
Ministry of War, Rio de Janeiro
Avenida Nazareth Belem (Pará)
Large foreign debts have of course a depressing effect upon exchange in the long run, but at the time when the loans have been made there has almost always been a rise corresponding to the influx of gold; this effect was a marked cause of wild ups and downs of exchange in the palmiest days of the present century. I have frequently asked bankers in Brazil if they would like to see an absolutely stable rate of exchange: more than once the answer has been Yes, and the examples of the stabilized countries of the world quoted as showing that real financial strength can only be obtained with a firmly gold-backed currency. But even the most conservative banker will admit that variations in exchange have been the cause of large earnings on the part of financial houses in Brazil, and it is certain that fluctuation is not only the source of many fortunes, but that it materially lends itself to the promotion of the gambling spirit that helps both to make and to undo a young country; it is a spirit prevalent in many parts of Latin America and perhaps particularly in Brazil where such spectacular turns of Fortune’s wheel have been seen from time to time in different parts of the country.
Investment in Brazil
Investment in Brazil from other countries has been of three chief kinds: blood, brains, and money. The investment in blood came during the sixteenth, seventeenth and eighteenth centuries almost exclusively from Portugal—with a forcibly introduced negro element from Africa at the same time—while during the nineteenth century colonies were introduced of a remarkably wide variety of peoples; the investment in brains came so far as technical skill is concerned almost directly as a result of the great investment of the third element, money, which began soon after the erection of the monarchy in Brazil in 1808, flowed steadily for eighty years, and increased to a golden torrent after the establishment of the republic in 1889.
Nearly the whole of the investment of manhood, skill, and gold came from Europe. Brazil’s debt to other parts of the world is small. The African slave contributed more towards the opening-up of Brazil than any other race, and it is almost impossible to conceive of a flourishing Brazil without him during at least the first three centuries after Portuguese possession; the Asiatic only came here in noticeable numbers since the beginning of the present century, and the Oriental is not a strong element. North America has done remarkably little for Brazil. With the exception of a few technically skilled individuals, and the ill-fated little colonies which sought a home here after the Civil War in the United States there has been practically no investment in personality until within the last few years, when branches of American businesses have sent resident employees to Brazil: investment in money is still in its infancy so far as Government or State loans[[19]] are concerned, development work in railways, docks, harbours, or city improvements, and it is only within the last few years that North American money has made timid entry into Brazil for the establishment of industries. The opening of branches of North American financial establishments in Brazil dates only from 1915, and the capital so far employed is insignificant in comparison with that of the powerful European banks, established in South America for a couple of generations.
No Brazilian securities were, up to the end of 1916, listed upon the New York Stock Exchange, for the simple reason that there were practically no North American investments in South American securities; but since the war, changes in the world’s finance have induced a lively interest.