Encilhamento
The Encilhamento was an
The name
The word "encilhamento", literally "saddling-up", the act of girthing or mounting a horse,[7] was a term borrowed from horse racing and used to refer to the speculative practice of seizing get-rich-quick opportunities whenever they unfold,[8] in an analogy based on the popular Brazilian saying "An unmounted saddled horse doesn't appear twice."[9]
Background
Throughout the 19th century the maturation of technological innovations, especially the development of
In spite of the considerable volume of native capital being released with the abolition of the
Proposed changes in land legislation were one of the reasons why large landowners and former slaveholders supported the establishment of the republic.[14][15] In this political, economic and social environment, under the pretext of promoting the industrialization of the country, occurred the Encilhamento.
Leading figures
- Big
- investment bankers working for the big money, having contact with big business and having learned new forms of financial engineering. In Brazil of that time, the most illustrious figure was the Counselor Mayrink;[17]
- Economists/politicians: They are the makers of economic policies, usually also the middlemen of the rentiers and financiers' interests, eventually acting as their junior partners. They provided rhetoric to the public opinion and the technical means to implement a regulatory model that served big money's interests. Rui Barbosa was the prominent figure of that time in Brazil;[18]
- Haute Finance: The global financial moguls, which from the mid-19th century were already organized to influence the life of nations in order to create the "ideal" environment" for their business.[19] From that time, highlight the British banks led by Rothschilds.[20]
Execution
The first step that led to the Encilhamento took place during the final years of the Empire of Brazil under the command of Viscount of Ouro Preto, the last finance minister of the imperial era, when a new Banking Act was enacted in November 1888. The Rio de Janeiro Stock Exchange, which had already boomed in 1886, had accelerated with the abolition of slavery two years later and again with the measures implemented by the new banking law (that reversed the 1860 "Barriers Act"), and again by the proposed changes for the Land and Real Estate laws in 1889. Along with the increase in market liquidity, there was the introduction of modern financial mechanisms, enhancing the financial leverage possibilities. The reduction in the issuance of government bonds has also opened space for the expansion of stocks issues.[21] All this, slowly led to an increase in speculation and inflation in general, embracing all economic sectors, from the currencies to real estate,[22] combining minor bubbles into a big one.
In this environment, the Viscount of Ouro Preto decided to create an institution to act as a regulatory agency for the financial market, a private central bank in the European manner, a reserve bank, a monetary authority of liquidity. The fact that Ruy Barbosa had been a great opponent of such system, accredited him to be appointed by the military as finance secretary, when they imposed the republic.[23] When he took office, soon after the proclamation of the Republic, he put into practice all what he had criticized before. In January 1890 he enacted a new banking law inspired by the ideas of counselor Mayrinck, his banker and personal friend, who he without consulting the president appointed as head of the new Central Bank, signing the bill late at night in a scandal that would be the first of a series until his departure from the secretary.
This however didn't stop the enacting of the new law, despite protests and opposition from secretaries like Demetrio Ribeiro and Campos Sales, who predicting the consequences of measures, got a central bank to São Paulo.[24]
Unregulated speculation rose as a direct consequence of the new law and reached all major sectors of the economy, with its highest volume reached in currency trading. The majority of political fallout has however been generated by rogue IPOs - as the new banking law effectively allowed authorized issuers to act freely, without any supervision or official punishment.[14][25] For example, a company without any capital could launch an IPO, but also whenever it needed more money it could simply create new shares - with existing stakeholders losing rights to their stake if they refused to purchase any.[26]
Since the new law tied stock prices to their nominal values, there was no official oscillation of stock prices, and consequently, no way to negottate them directly in the Stock Exchange in order to both minimize losses or maximize profits. This in practice not only restricted the trading of securities to the OTC market, congesting it by supply, but also led to a deadlock for new issues in the stock market, locking out legitimate business that could have taken off out of the process, besides causing a total loss to many inexperienced investors.[14][27]
Instead of help to promote growth and structural change in the economy, the process led to one of the worst inflation outbreaks in the country's history, while the Brazilian economy suffered violent "collapse".[28][29] The Encilhamento's "last straw" came with the financial shock wave caused by the default of Argentine government bonds following the 1st collapse of the Bank Baring Brothers at the end of 1890, and although the burst has been initiated then, it occurred in a slow way, until 1892.[30][31][32]
On January 20, 1891, Rui Barbosa stepped down as finance secretary to head two companies that were created during the Encilhamento and which he had partnership with Counselor Mayrink.
Aftermath
The success of the new stage of economic development that Encilhamento was intended to be depended on being able to create an enabling environment for both the relocation of domestic savings and introduction of foreign investments.[35]
However, due to the extraordinary powers conferred to
The three main reasons for the failure of the movement as a lever for development are as follows:[38]
- Lack of a broader statesman to coordinate, correct and adjust the process in its progress;
- The choice of politicians and financiers who led the process, as their personal interests overlapped the country one;
- The fascination with money managements,[30]which would have prevented countless bankruptcies and their harmful consequences.
Following the effects of the
The legislation concerning financial markets in Brazil, in a vain attempt to control their
Although the bubble burst happened between 1890 and 1892, its economic and political effects were made throughout the decade,
See also
Notes
- ^ Amy Chazkel; "Laws of Chance: Brazil's Clandestine Lottery and the Making of Urban Public Life" Duke University Press 2008 pp.146
- ^ Assis, Oxford Edition 2000. Foreword pp. xv
- Bovespa2004
- ^ Chazkel, 2008 Chapter 4
- ^ Jeffrey D. Needell; "A Tropical Belle Epoque: Elite Culture and Society in Turn-of-the-Century" Cambridge University Press 1987 Page 12
- ISBN 978-85-85095-13-0P.20
- ISBN 0-520-20343-7Page 330
- ^ Ignacy Sachs, Jorge Wilheim & Paulo S. Pinheiro; "Brazil: a century of change" University of North Carolina Press 2009 page 58
- ^ An Web Post contemplation about this analogy (in Portuguese)
- ISBN 978-85-00-02094-0Pages 20 & 21
- ^ John Schulz, "The financial crisis of abolition" Yale University Press, 2008 Chapters 2 to 4
- ^ Nassif 2007 Ibidem page 77
- ISBN 85-352-3994-4Introduction (by Ney Carvalho) & page 22
- ^ a b c Schulz 2008 Ibidem
- ^ Nassif 2007 Ibidem page 79
- ^ Nassif 2007 Ibidem, page 28
- ^ a b Nassif 2007 Ibidem
- ^ Nassif 2007 Ibidem; pp 28 & 29
- ISBN 0-8070-5643-XChapter 1
- ^ Nassif 2007 Ibidem; p.29
- ^ Nassif 2007 Ibidem; pág.81
- ^ "Viscount Taunay; "O Encilhamento; scenas contemporaneas da Bolsa do Rio de Janeiro em 1890, 1891 e 1892" ("The Encilhamento: contemporary scenes of Rio Stock Exchange in 1890, 1891 & 1892") (in Portuguese) Editora Melhoramentos, Rio 1893
- ^ Gustavo Franco, "Crônicas da convergência" ("Chronicles of convergence") (in Portuguese) TopBooks 2005 p.16
- BNDES1987 pp. 112 and 114
- ^ Ney Carvalho 2004 Ibidem; pág.174
- ^ Schulz 2008 Ibidem; pág.84
- ^ Ney Carvalho 2004 Ibidem; pág.146
- ISBN 0-312-23399-XPages 44–74
- ^ Murilo de Carvalho Ibidem 1987
- ^ a b Triner 2000 Ibidem
- ^ Gustavo Franco 1987 Ibidem, pp. 41-42 and 127
- ^ Maria Eulalia L. Wolf, "História do Rio de Janeiro; do Capital comercial ao capital industrial e financeiro" ("Rio History: from commercial to industrial & financial capital") (in Portuguese) IBMEC 1978
- ^ Needell 1987 Ibidem; p.84
- ^ Nassif 2007 Ibidem; p.104 3rd paragraph
- ^ Nassif 2007 Ibidem, p.27
- ^ Chazkel 2008 Ibidem
- ^ Maria Alice R. de Carvalho, "República no Catete" ("Palatial Republic") (in Portuguese) Museu da República / FAPERJ pág.95 2001
- ^ Nassif 2007 Ibidem, pages 34 and 35
- ^ Taunay 1893 Ibidem
- ^ a b Barcellos & Azevedo 2011 Ibidem
- ^ "Definition". Archived from the original on 2013-05-07. Retrieved 2011-08-07.
- Polytechnic Institute of New York University, September 2010
- ISBN 1-56324-744-5p.172
- ^ Murilo de Carvalho 1987 Ibidem, p.21
- ^ Needell 1987 Ibidem; p.17