The old and the new Peru

by Marie Robinson Wright

THE VICTORIA COTTON MILLS, LIMA.

CHAPTER XXXV
FINANCIAL AND COMMERCIAL PROGRESS—MANUFACTURING INDUSTRIES

AN INDIAN WEAVING THE PONCHO.

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

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

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

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

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