Like most new countries achieving their independence and establishing constitutional government under circumstances of difficulty, internal and external, Brazil has been subject to vicissitudes in her monetary circulation, and has been affected by occasional aberrations from the great truths of economical science in the emission of paper money. The law of 1866 has, however, corrected the errors previously committed, and when the restoration of peace shall afford the present President of the Council and Minister of Finance, who, when holding the same offices in 1853, evinced both the capacity and determination to place the financial condition of the Empire on a sound foundation, the Viscount Itaborahy will, no doubt, achieve for his country even a greater financial reform than that which secured for him in Brazil a reputation not dissimilar from that of Sir Robert Peel in England.

The Brazilian standard of value is the gold oitava of 22 carats, of the value of four milreis, the par value of each milreis being by law 27d. sterling. The ancient mercantile par of the exchange of the milreis was in sterling 60d. After the arrival of King Dom Joao VI. in Brazil the exchange on England gradually rose, until in 1814 it reached 96d. This rise was owing to the increase of its commerce, consequent to the freer commercial legislation which was then first introduced and to the depreciation of English irredeemable paper money consequent on Mr. Pitt's Bank Restriction Act. The war which the Argentines plunged the Empire into immediately after their independence to deprive it of its Cis-Platine province produced, however, great financial embarrassments, and they were increased by the mismanagement of the paper circulation by the then Bank of Brazil, which King Dom Joao VI. had founded, by attempts at revolution in the northern provinces, by the intervention of the Emperor Dom Pedro I. in the affairs of Portugal, by his abdication of the Brazilian crown in 1831, and by serious and prolonged domestic troubles. The consequence was in 1833 the reduction of the ancient par to 43?d. the milreis. From 1831 to 1840 distracted regencies governed Brazil. During one of the regencies a civil war broke out in the great province of the Rio Grande do Sul, which only terminated in 1845, thanks then to the efforts and capacity of Count (now Marquis) de Caxias, who is at this hour as heroically fighting, in his old age, the battles of Brazil in Paraguay with equal success. Then followed other provincial and political difficulties of less importance, but all reacting on the financial position of the Empire. So that again in 1846 the par of the milreis had to be lowered to 27d., at which it has since been preserved. And it is to the credit of the Empire, its Government, Legislature, and people, that subsequently, neither the great financial and banking crisis of 1864, nor the pressure of the war with Paraguay, which has continued from 1865 to the present time, has produced any propositions for its further reduction. The maintenance of the par of the milreis at 27d. is now the established fundamental policy of Brazil. This policy is made especially and emphatically manifest in the financial measures of Viscount Itaborahy, who is once more Prime Minister and Finance Minister of the Empire, with the prospect, it may be hoped, of as long an administration as that which distinguished his Government from 1848 to 1853, during which period he governed so greatly to the advantage of the nation, terminating the slave trade, and introducing a financial system, the departure from and disregard of which in 1857 undid the good which he then accomplished.

The free trade legislation of England in 1845 opened the consumption of this country to Brazilian sugar, one of the great productions of Brazil, and the Revolution of 1848 in France was followed by the partial admission to France of Brazilian coffee, then the largest item of the agriculture of the Empire. Under these influences an immense impetus was given to the productive capacity of Brazil. The firm and enlightened Government of Viscount Itaborahy gave the Empire concurrently a period of domestic repose, of which the planters made the most. Political passions subsiding agriculture made huge strides. The termination of the African slave trade gradually relieving agriculture from debts and embarrassments, introduced better systems of cultivation, largely increased production, augmented commerce, released for better purposes a great amount of capital engaged in that abominable traffic, stimulated honest improvements of every sort and kind, and the exchange on England rose to 28¼d. the milreis. At this time Treasury notes were the only paper money in circulation, and their amount was so insufficient for business purposes that coin became more abundant than paper money, to the inconvenience of trade and society in so vast an empire.

The necessity of a convertible paper money became apparent and it was generally demanded. The result was the enactment, on the proposition of Viscount Itaborahy, of the law of the 5th of July, 1853. Under it the Bank of Brazil was established as a bank of issue to a limited extent; other banks were merged in that great institution; branches of it were established in the larger provinces, with similarly restricted powers of issue in circumjacent districts; the privilege of issue was confined to this one establishment, and Brazil was provided, as England now is, with one great bank issuing convertible paper in connection with, yet to a large extent independent of, the State, and the Executive Government had virtually no authority or power to found other banks of issue. Thus unity of banking was established so far as paper money was concerned, and to the immense advantage of the country. An easy, cheap, and convenient paper currency was provided, always convertible into coin, yet preferable for the ordinary purposes of life to coin; and the provinces and the metropolis were equally well supplied with this currency. The consequences were still further progress in the Empire, the Treasury was relieved from the trouble of regulating the currency, the revenue and trade increased, and an impetus was given to activity throughout the Empire. For all this Brazil had to thank the good sense and statesmanship of Viscount Itaborahy.

The Viscount's Cabinet terminated in 1853 in the midst of the improvement it had created. The progress thus produced by wise and scientific legislation unfortunately rendered a powerful section of the country impatient for further progress and misled succeeding Governments into a policy of a very different kind, whence mainly have flowed the subsequent financial misfortunes of the country. From the substantial but slow benefits of sound legislation, Senhor Souza Franco, a successor of Viscount Itaborahy in the Ministry of the Treasury, was led into the evils of unsound banking. He became enamoured of the then American system of free banking, as it was termed, and in 1857, misinterpreting the real meaning of the law of 1853, established plurality of banks of emission. Banking societies were then empowered to issue their own notes convertible by law, it is true, on presentation into coin, but without any corresponding security wherewith to furnish gold for their payment on presentation. The Government sanctioned no fewer than six banks of emission, two in Rio de Janeiro and four in the provinces, and assigned to each districts within which the right of paper issue might by means of branches be further extended. In the same spirit the Government sanctioned the establishment of joint stock companies and anonymous societies for all kinds of purposes throughout the Empire. The right thus assumed by Government was superabundantly exercised. Speculation spread apace in all directions, and fictitious prosperity for a moment took the place of real progress; shares and pecuniary responsibility, far beyond the means of those who assumed them, became the order of the day; long credit and increased discount aggravated the evil; gold began to leave the Empire rapidly, the rate of exchange to fall heavily, and in 1859 pecuniary anarchy was the consequence of this policy.

Senhor Souza Franco had to retreat before this result, and he was succeeded by Senhor Torres Homem, who soon found in the Chambers a spirit opposed to those wiser measures he recommended which he was unable to overcome during his short tenure of office. Then came Senhor Ferraz at the Treasury; he was more fortunate in remedying the mischief thus caused. The Empire and the General Assembly had recovered from their delusions. So, on 22nd August, 1860, a new law of banking, &c., was enacted. Its principles were the resumption of cash payments by the banks of emission and the withdrawal of all power from the Executive Government to sanction powers of emission or of anonymous societies, reserving such power for the Imperial Legislature. By this law the Bank of Brazil was prohibited from further emission until it had resumed payment of its notes in gold, the power of emission was reduced and fixed, and no banks can now be established except by legislative authority.

Immense as was the mischief caused by the measures of 1857, the law of 1860 to a considerable extent corrected it. The two banks of emission at Rio de Janeiro resigned the privileges they had acquired; within two years the Bank of Brazil resumed payment of its notes in cash; the Bank of Pernambuco withdrew its notes from circulation; and the currency of the Empire had undergone substantial improvement when—in September, 1864, suddenly a great “crisis” burst on Rio de Janeiro, immediately the consequence of adverse European influences, but substantially the result of unscrupulous and indefensible mismanagement of discount and private bankers in that capital.

Their establishments were in the enjoyment of great credit. Their chiefs were men of mercantile activity and public spirit, living en evidence, pushing business, giving facilities to everybody, and dealing with money as if possessed of boundless capital of their own. Their means for this pecuniary profusion was, however, chiefly derived from money deposited with them, for longer or shorter periods, or “at call,” sometimes in large, but more frequently in small sums, on which they allowed interest of, say, 8 per cent. Thus they became possessed of a greater part of the floating and uninvested capital of Rio de Janeiro. Receiving money in this way freely and largely, from the poorer public chiefly, it was the duty of these bankers to place it out at higher rates of interest, but on ample security always, and easily convertible into cash. By such business they would have reaped substantial profits for themselves, have assisted honest commerce, and have provided effectually for their depositors. A run upon one of these houses in September, 1864, after the arrival of bad financial news from Europe, resulted in its closing its doors on its depositors. This stoppage alarmed the creditors of the other houses, and they followed suit by demanding back their deposits. With the same effect—the closing of doors and stoppage—until five of these bankers suspended payment with deposits of £5,655,000.

Investigation into their affairs showed how reckless had been their management, how disregardful of every rule of deposit banking. The funds entrusted to them had been invested in houses, advanced on mortgages, lent to planters on bills renewable; and thus Rio de Janeiro was by their misconduct involved in unexpected ruin. The Government had to interfere with the payment of bills of exchange, to direct the administration of their insolvent estates. The Bank of Brazil was involved in large advances to these houses and unable to assist the community at the moment when assistance was most needed. The consequence was a suspension of its cash payments.

This crisis once more raised the question of the currency and of banking, and led, after a prolonged discussion, to further legislation in 1866.

By the beginning of 1865 the paper circulation of the Empire reached the enormous sum in sterling of £11,025,000, of which, however, only £3,150,000 were notes of the Government having general circulation throughout the country. For the balance of £7,785,000, the circulation of which was limited to defined districts in which the issuing banks were situated, the public, had no adequate security. The natural consequence was disarrangement in the internal exchanges and general disturbance of the money market. To remedy it Government proposed a radical reform of the Bank of Brazil, and its separation in two departments,—one of issue, the other of banking. The discussions on this question continued through the legislative sessions of 1865 and 1866. And during these discussions the adverse situation was illustrated by further decline in the foreign exchanges and the augmentation of the non-Government paper in circulation to £9,225,000, to which it had swollen in May, 1866.

In the session of that year the difficulties of this state of affairs were brought under the consideration of a Committee of the Senate, of which Viscount Itaborahy was the most eminent member, and to which a remedial measure of a radical character was referred for examination. The result of its deliberations was the expression of an opinion that the Bank of Brazil, having in two years doubled its circulation, could no longer accomplish the essential objects of its existence. Thus sentence of death was passed on that institution by the statesman who had formed it, and legislation became inevitable after such a condemnation.

Accordingly, on the 12th of September, 1866, a measure became law which enabled the Government to abolish the contract under which the Bank of Brazil existed. The principal provisions of this law were: 1. The cessation of the bank's privilege of emission. 2. The division of the bank into two departments—one for banking purposes only, the other for mortgage loans, in order to effect a gradual liquidation of the securities given by the agricultural classes, and so to form the commencement of the operations of the law of September, 1864. 3. The sale of the bank's stock of bullion, which amounted to £2,925,000 and the application of the proceeds to a proportionate withdrawal of its notes from circulation. 4. The annual contraction of its remaining paper circulation. 5. The payment to the bank for the State notes it used in accordance with its primitive contract, in withdrawing from circulation about £1,237,500, by the substitution of bank notes by State notes, and the discharge of an insignificant amount of treasury bonds cashed by the bank. 6. The issue in payment of floating debt, and those treasury bonds of State notes, to the amount of notes withdrawn by the bank.

Thus the Government were supplied with coin for remittances to the army and navy engaged with war in Paraguay, and the Bank of Brazil was reduced to a mercantile association. So it now remains, only a small and scarce portion of its notes having a forced circulation, and that small portion is being greatly reduced.

Thus, too, the exclusive functions of providing for the circulating medium were restored to the State, instead of being confided to a bank on which were at times painfully and mischievously exercised the exigencies of internal credit, and the reaction in Brazil of those crises in Europe and the United States, that affected the Brazilian Empire while its currency was in so unsound a condition with great violence.

In 1867, the increasing pecuniary requirements of the war compelled the General Assembly to vote the Government a credit of fifty thousand contos (£5,625,000) which have in great part been used by the Government. But, inserted in the law which authorised the issue, is a provision that on the termination of the war, the legislature will fix in the budget of each year the necessary amount to be applied to the withdrawal of this addition to the State notes.

It was not, however, only by further emissions of State notes that the General Assembly in 1867 made provision for the extraordinary expenditure of the Government. In that session old taxes were increased, new sources of taxation opened up, and the whole system of taxation was re-organised in a more rational and scientific way, greatly to the increase of the general revenue of the Empire. So much so that in the session of 1868 the budget for 1869-70 showed under the influence of greatly enlarged receipts, and of economies effected in the various departments of the State, an important surplus.

And while thus placing the paper circulation on the more solid basis of national security, important reforms were effected in the same session of 1867 in the coinage of the Empire.

Owing to the fineness of the silver coinage a fall in the foreign exchanges was immediately followed by the exportation of silver from Brazil to the great inconvenience of petty commerce. So in September, 1867, for the silver coinage of Brazil was adopted, in respect of the coins of two milreis (4s. 6d.) and milreis (2s. 3d.) the fineness and weight introduced by the International Convention between France and other countries. And the Government substituted for the old copper coinage bronze pieces of twenty reis (½d.) and ten reis (¼d.) of a similar alloy to that of our present bronze coinage—viz., ninety-five parts of copper, four of tin, and one of zinc. So that the Brazilian coinage consists of gold pieces (of twenty and ten milreis of 917 milliomes,) legal tender for any amount—that is, of 27d. per milreis, and of these silver and copper pieces for tokens. In addition, English sovereigns and half-sovereigns are also legal tenders for any amount in Brazil.

On the change of Ministry in July, 1868, which led to the formation of the Cabinet over which Viscount Itaborahy now presides, the Chamber of Deputies, by an unexpected and sudden combination of forces previously adverse to each other, came to a resolution which left the newly formed Cabinet no alternative but an appeal at once to the nation, and that without the Chamber making full financial provision for the conduct of the war. Left in this position by no fault of its own, the Cabinet in September, 1868, had no alternative but the adoption of financial operations on its own responsibility. But they have fortunately met with the full approval of the country, and will, no doubt, be sanctioned by the result of the now impending general election of deputies.

These measures were of an alternative character. First of all they consisted of a decree authorising a further issue of State notes to the amount of 40,000 contos, viz., £4,500,000. But this decree was followed by another empowering the Treasury to raise a domestic gold loan of 30,000 contos, £3,335,000. The former decree was, however, only intended to support the credit of the Government, in the event of the failure of the loan authorised by the latter decree, and as it has been successful, a further issue of State notes will, it may be anticipated, be averted to any considerable amount.

In explanation of these measures it is necessary to state that the pressure of the war expenditure going on since April, 1865, had led, under the previous Cabinet of Senhor Zacharias, to the creation of a large floating debt, represented by Treasury Bonds, issued for various short periods. There is always in Rio de Janeiro a large amount of loanable capital seeking interest on temporary investment, which it had found previously to the crisis of 1864 in the deposits of private bankers' establishments. This loanable capital deprived of such resource after the crisis of that year found better and safe temporary shelter in Treasury Bonds. And obtaining money in this way to carry on the war, the preceding Cabinet was able to avoid new permanent operations for supplying the means for its necessities. The wants of the Government so supplied, however, deprived commerce of part of its legitimate supplies of money and made the situation of the Treasury precarious and hazardous. The extent, too, of temporary resources of this kind had obviously reached their limit. It was, therefore, partly to extinguish a large amount of this floating debt, and so to relieve the Treasury from any embarrassment that might arise from failure in the renewal of Treasury Bonds when at maturity, and partly to provide for the exigencies of the war, that the Government in September, 1868, resorted to the internal loan of 30,000 contos, £3,335,000, issued at ninety percent., in bonds bearing six per cent. interest payable in gold, redeemable in thirty-three years by purchase when under par, and drawing when at or above par, in which last case payment to be made in gold. This loan was so favourably received that applications for it were received in Rio only to the extent of 105,000 contos, and it quickly rose to a premium of seven per cent.

Again, then, complete success has attended the financial policy of Viscount Itaborahy, and the Treasury has been provided with the means of discharging a large amount of floating debt and of prosecuting the war.

In spite of the provisions adopted by the legislation, and of the concurrent necessary activity of Brazilian commerce, the exchanges in London after the crisis of 1864, though high in reference to the over issue of inconvertible paper, had fallen, and in February, 1868, declined, as if in panic, to 14d. This fall was partly due to the remittances to England of bills for purchasing gold and honouring the Government commitments on this side, and still more to the large orders from the Plate for operations in exchange, and purchases of bullion here caused by the financial crisis of Monte Video.

This decline in the rate of exchange on London was, however, brief. Thanks principally to the financial measures just described, and to the improving prospects of the war, the rate has again risen, and is still rising.

Such, in necessarily brief and rough outlines, is the history of the circulating medium of the Brazilian Empire.

Everything, it will be seen, conduces to the conviction that with the close of the war and expenditure there will be a certainty of maintaining the standard of 1846, so solemnly reproduced in the laws of 1853, 1860, and 1867, and in the internal loan of 1868, and that the foreign exchange will once more rise, in the interests of commerce and of all domestic industries to above the legal level so fixed in 1846. When this has been accomplished it will be recognised, and be due to an intelligent and prudent administration of the finances, to the prodigious development of the external commerce and to the inexhaustible resources of the great American monarchy.^[8]