Latin America, Great Depression in

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LATIN AMERICA, GREAT DEPRESSION IN

Although the nations of Latin America had won their political independence during the nineteenth century, they continued to remain subordinate to external economic forces. The reason lay in their adherence to the model of economic development that had begun during the colonial era and which concentrated on the production and export to Europe and North America of large quantities of staple commodities, such as sugar, tobacco, coffee, cotton, grain, wool, meat, fruit, copper, tin, and silver. While the policy of export-led growth could claim considerable success and justification so long as international commerce flourished and the world economy enjoyed prosperity, its inherent defects were displayed at times of adverse economic developments. This was especially the case for Latin America whenever trade and inward investment were affected with the leading economic powers of Great Britain, France, Germany, and the United States. Consequently, the worst international economic crisis of the twentieth century, which began with the stock market crash on Wall Street in October 1929 and subsequently developed into the Great Depression, was extremely damaging to the economies of all the Latin American countries.

ECONOMIC IMPACT

Even before the 1929 crash, Latin America was already experiencing economic difficulties as a result of falling world prices of staple exports, such as Argentine grain, Brazilian coffee, and Cuban sugar. The amount of inward foreign investment had also declined as funds were drawn away to fuel the speculative fever that raged in American and European stock markets in the late 1920s. The economic downturn in 1929 was, therefore, not entirely unexpected. What was surprising was the sheer scale and longevity of the subsequent Depression. Instead of a temporary reduction in external demand for foodstuffs and raw materials, the traditional markets for Latin American goods in Europe and North America severely contracted as the value of world trade fell by more than half within three years. Furthermore, Latin American exports were sharply reduced in terms of both quantity and value and dropped to low levels not seen since World War I. Agriculture and mining were seriously affected throughout the region, ranging from the sugar industry in Cuba to the extraction of tin and copper in Chile. In 1939 the value of these Chilean exports had decreased to one-sixth of the 1929 figure. In addition, the collapse of world commodity prices was so marked that exports fell more in value than imports of capital and manufactured goods so that the terms of trade decisively turned against Latin America. The notable exception was Venezuela, where the production and export of oil continued to be profitable.

GOVERNMENT RESPONSES

The Great Depression caused considerable monetary difficulties for Latin American governments. There was not only a problem in finding sufficient foreign exchange to finance external commerce and particularly to pay for imports, but there were also increasing difficulties in servicing the foreign debt. Taxes on exports and tariff duties on foreign imports had long been a significant item in the revenue of Latin American governments. Declining trade meant, however, a corresponding fall in revenue. The combination of severe balance-ofpayments difficulties, budget deficits, and the dwindling of gold reserves to the point of exhaustion led the majority of Latin American governments to suspend payments to foreign bondholders. In some cases, outright default could not be avoided as exemplified by Bolivia in January 1931, followed by Peru in May and Chile in August. Even for those countries that struggled to service their external debt, the fact that the interest rate remained unchanged meant that the debt actually rose in real terms if increased payments could not be made. Indeed, all governments were forced to enter into complex and often protracted negotiations with North American and European governments, bankers, and bondholders to seek a read-justment of their foreign debt and a rescheduling of payments. In contrast to the later debt crisis of the 1980s, however, Latin American indebtedness during the 1930s was not singled out for particular condemnation. Such was the international extent of the debt problem that Latin America was not considered to be any more profligate or financially reckless than other regions of the world.

The effects of the 1929 crash soon brought a severe contraction of economic activity in both agriculture and industry and, consequently, a sharp rise in unemployment and under-employment throughout Latin America. The resulting economic discontent led to political protests directed against the governments in power, which were blamed for economic mismanagement and corruption. A series of successful coups, often involving the military, occurred in 1930. In May, President Hernando Siles was overthrown in Bolivia. In August, President Augusto Leguía resigned in Peru. In September, General José F. Uriburu led a military coup that overthrew President Hipólito Irigoyen in Argentina. In October, Gétulio Vargas assumed power in Brazil. In July 1931 a general strike in Chile forced President Carlos Ibañez to resign and go into exile. Changes of government also took place in several nations of Central America and the Caribbean, including the overthrow of President Gerardo Machado in Cuba in March 1933 in what became known as the 1933 Cuban revolution.

The governments that came into office in Latin America during the early years of the Great Depression found that their economic options were tightly constrained. Even during times of prosperity the political power and influence of entrenched landed oligarchies and business elites made it extremely difficult for central governments to raise income or property taxes. Moreover, the outbreak of the world economic crisis ruled out the customary resort to external borrowing in the form of large foreign loans from European or American bankers. As a result, the newly empowered Latin American governments generally sought to balance their budgets by pursuing orthodox deflationary policies that stressed the reduction of public spending. So great, however, was the scale of economic crisis in the early 1930s that conservative laissez-faire attitudes were gradually abandoned in favor of the state adopting a more active and assertive role in economic policy and planning. This was evident in the establishment of strict exchange controls to alleviate the scarcity of foreign currency caused by the sharp fall in levels of trade. The policy of maintaining the gold standard was also either suspended or abandoned. Local currencies were pegged in value to the pound sterling or the U.S. dollar. In effect, Latin American currencies were allowed to depreciate in value. At the same time the circulation of money was often expanded by reflationary measures that were similar to those undertaken by the New Deal in the United States and the fascist regimes of Benito Mussolini in Italy and Adolf Hitler in Germany. In order to stimulate the domestic economy, a number of Latin American governments resorted to large programs of public spending, especially in developing economic infrastructure such as roads and highways. However, due to prevailing deflationary conditions resulting from the general lack of world demand, loose monetary policies did not result in rampant inflation.

During the early 1930s the primary objective of governments throughout Latin America was to combat the economic crisis by stimulating exports. This was regarded not only as the best means of generating increased earnings of foreign currency but also as essential to save particular export sectors from what was perceived to be an imminent danger of complete economic collapse. Attempts to improve price levels for staple commodities were not new and had been tried earlier, as in the case of the Brazilian valorization of coffee at the beginning of the twentieth century. Such policies, however, involved an element of manipulating market forces by fixing prices and imposing controls on production. Consequently, they had proved controversial so that their implementation had generally been left to private rather than governmental agencies. To achieve stable price levels during the Great Depression, however, it was necessary for the state to intervene directly in the economy. Central economic planning was adopted to regulate domestic production and prevent overproduction. Surpluses were stored and, where necessary, destroyed. During the decade of the 1930s an estimated sixty million bags of coffee were burned in Brazil, the equivalent of two years of world consumption of coffee.

A similar strategy to improve the balance of payments was import substitution. Known as import-substituting industrialization (ISI), this policy was designed to promote domestic industries by supplying capital investment in the form of government loans and subsidies. In addition, domestic products would be given protection from competing foreign imports, most usually by increases in tariff duties. ISI was initially a series of measures rather than a systematic policy. It was introduced in limited stages and mostly applied to nations with strong manufacturing sectors such as Argentina, Brazil, Mexico, and Chile. At first, the policy was limited to processed food, beverages, and textiles, but it was later extended to a wide range of manufactured goods, chemicals, and pharmaceuticals. Particular success was achieved in Brazil, where domestic industry accounted for almost 85 percent of the country's supply of manufactured articles in 1938. ISI, however, did not aim to produce self-sufficiency. Foreign imports, especially of capital goods and machinery, were still considered vital for economic growth and could not be readily replaced by domestic production. In fact, during the 1930s Latin American governments placed more importance on export promotion than ISI. Beyond the decade of the 1930s, however, the development of ISI brought significant structural economic change as it influenced the shift of emphasis from agriculture to manufacturing. In the process, Latin American economic growth was made less dependent on foreign trade and inward investment.

POLITICAL CONSEQUENCES

The beginning of the Great Depression in Latin America can be directly associated with the Wall Street crash in 1929. The actual ending is more uncertain, but it is generally accepted that the effects of the Depression lasted throughout the decade of the 1930s and that the next period of significant economic change was started by the outbreak of war in Europe in 1939. In fact, economic recovery was clearly evident in some Latin American nations as early as the 1931 to 1932 period. In 1933 Brazil's trade balance was back in surplus and industrial production had recovered to its 1929 peak. Indeed, economic performance in the region as a whole was superior to that of Europe or the US. With the exceptions of Honduras and Nicaragua, by the end of the 1930s the gross domestic product figures of all the Latin American nations were back to 1929 levels. The actual pace of recovery varied from country to country and was most rapid in Brazil, Chile, Cuba and Mexico and weakest in Panama and Paraguay. Arguably the improvement resulted not so much from particular government policies, such as exchange controls or ISI, but from the pick-up in world economic activity and consequent revival in demand for the staple commodities traditionally produced by Latin America. For example, the recovery of world copper prices meant that Chilean copper production regained its pre-1929 levels in 1937. Similarly, the rise in the price of sugar restored the profits of sugar producers, especially in Cuba, where the value of exports of sugar doubled between 1932 and 1939. The production of some commodities actually increased in quantity, as well as price, as a result of buoyant world demand. A prominent example was cotton, which was widely and profitably cultivated in Brazil and Peru.

During the 1920s the large majority of Latin American countries exhibited outwardly stable political systems. The shock of the Great Depression, however, brought a general crisis of confidence among the ruling elites of Latin America and contributed to a decade of political turmoil and, on occasion, violent change. This was particularly the case at the beginning of the 1930s when the traditional policy of export-led growth was suddenly brought into serious question. The exploitation of natural resources had greatly benefited the powerful landowning oligarchies and was the basis for their considerable political influence. The sudden collapse of external markets resulted not only in considerable economic loss but also provoked public disaffection with rule by the oligarchies. The political left, including the Communist parties and labor unions, responded by organizing strikes and protests and, in some cases, attempted unsuccessful military coups, as in Cuba in 1933 and Brazil in 1935. The appeal of the left, however, was very limited and was generally confined to the cities and industrial workers. It did not extend to the large masses of population that lived at subsistence level in the countryside and were historically excluded from active participation in the political system. Moreover, the threat of revolutionary upheaval posed by the left and especially the ideology of communism served to unite the urban middle class and the military with the landowning oligarchy. It was a combination of these basically conservative elements, often led by senior military officers, that assumed political power during the period of the Great Depression, which explains the subsequent emphasis of these governments on policies intended to produce stability rather than radical change. In many cases, the result was the establishment of repressive authoritarian regimes in which military figures, such as Augustín Justo in Argentina, Fulgencio Batista in Cuba, Rafael Trujillo in the Dominican Republic, and Jorge Ubico in Guatemala, took a leading role in government.

EXTERNAL ECONOMIC RELATIONS

The political rise of the military notably contributed to the adoption of nationalistic economic policies like ISI. For example, in Brazil the government of Gétulio Vargas was sympathetic to the views held most prominently by junior military officers known as tenentes (lieutenants) that industrial growth was essential to reconstruct Brazil into a strong and prosperous modern state. The tenentes were also critical of their country's long-standing economic subordination to the world economy. They urged Vargas to assert Brazil's economic independence from external powers by expanding the role of the federal government in regulating foreign owned utilities, such as electricity, telephone, and gas, and by promoting efforts to achieve self-sufficiency in products with natural security implications, notably oil and steel. Similar action was taken in Bolivia in 1937 and Mexico in 1938 to remove foreign control over national oil industries.

While the Great Depression stimulated an increase in antiforeign sentiment among the people of Latin America, it did not promote any marked desire for greater regional economic cooperation or integration. So long as the economies of the Latin America countries were essentially agrarian, there was not a great deal of potential for significant commercial exchange. Consequently, the 1930s saw only a modest increase in trade between Latin American nations. Nor were there any concerted attempts to form cartels to support and manipulate price levels of particular commodities. In fact, the pattern of Latin American trade continued to stress the maintenance of close links with the markets of North America and Europe. In 1933 Argentina negotiated the Roca-Runciman Treaty, a commercial agreement with Great Britain that was designed to make exports of Argentine meat secure. Brazil entered into barter arrangements with Nazi Germany that helped to double Brazilian exports to that country from 1933 to 1939. Indeed, Germany gained from the Great Depression in that the German share of Latin American exports rose from 7 percent in 1930 to more than 10 percent in 1938.

Economic relations between Latin America and the United States followed an ambivalent course during the 1930s. Initially, the United States appeared unsympathetic to the economic plight of Latin American exporters because it maintained a strongly protectionist attitude that was symbolized by the passage of the Hawley-Smoot Tariff in 1930. During the presidency of Franklin D. Roosevelt, however, the United States launched the Good Neighbor Policy in an attempt to improve hemispheric relations. While the policy proclaimed the importance of closer political cooperation, it also stressed closer economic contact to help the American economy recover from the Great Depression. Starting with Cuba in 1934, the Roosevelt administration concluded a series of bilateral trade treaties with eleven Latin American countries by 1939. Although its share of the Latin American export trade actually declined slightly from 33 percent in 1930 to just over 31 percent in 1938, the United States remained the largest single market for Latin American goods. The challenge to the United States of European economic rivals such as Great Britain and especially Germany was substantial but was considerably weakened by the outbreak of World War II in 1939. The resulting wartime economic boom enhanced the preeminent economic role of the United States in the hemisphere and brought an end to the Great Depression in Latin America.