South America and the First World War the Impact of the War on Brazil, Argentina, Peru and Chile...

CAMBRIDGE LATIN AMERICAN STUDIES

GENERAL EDITORSIMON COLLIER

ADVISORY COMMITTEEMARVIN BERNSTEIN, MALCOLM DEAS

CLARK W. REYNOLDS, ARTURO VALENZUELA

65

SOUTH AMERICA AND THEFIRST WORLD WAR

For Maya and Saul

SOUTH AMERICAAND THE FIRST

WORLD WARTHE IMPACT OF THE WAR ON BRAZIL,

ARGENTINA, PERU AND CHILE

BILL ALBERTSchool of Economic and Social Studies

University of East Anglia

WITH THE ASSISTANCE OF PAUL HENDERSON

School of Economic and Social StudiesUniversity of East Anglia

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First published 1988First paperback edition 2002

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Library of Congress Cataloguing in Publication dataAlbert, Bill.

South America and the First World War.(Cambridge Latin American studies; 65)

Bibliography.Includes index.

1. World War, 1914-1918 -South America.2. World War, 1914-1918-Influence. I. Henderson, Paul.

I. Title. II. Series.D618.A42 1988 330.98'0033 87-14310

ISBN 0 52134650 9 hardbackISBN 0 521 52685 X paperback

Contents

Tables page y[

Acknowledgments x

Introduction i1 Before the War 72 The early impact of the War 373 The recovery of trade during the War 554 Seeking financial solutions 1225 The War and the growth of manufacturing industry 1806 The War and the workers 2337 After the War 306

Notes $11Bibliography 360Index 379

Tables

1.1 Argentina's principal exports 1910-1914 131.2 Per capita value of imports, exports and national debt 1911.

Brazil, Argentina, Chile, Peru and the USA 191.3 Percentage share of commodities in Brazilian exports

1821-1914 201.4 Percentage share of major Peruvian exports 1910-1913 313.1 Export and import values 1911-1919 563.2 Export and import quantums, terms of trade, capacity to

import 1911-1920 563.3 Structure of exports before and during the First World War 593.4 Agricultural production and export of wheat, maize, and

linseed 1911-1920 633.5 Exports and prices of Argentine meat 1912-1920 683.6 Bank deposits and advances in Argentina 1913-1919 713.7 Argentine imports by category 1913-1920 733.8 Argentine capital goods imports by category 1913-1920 733.9 Argentina's wartime fuel supply 1913-1919 753.10 Argentine trade with major trading partners 1913-1920 j63.11 Brazilian exports and imports 1911-1919 in contos 783.12 Coffee. Brazilian exports and prices 1911-1920 803.13 Production, costs and profits - Dumont Coffee Co. Ltd

1901-1917 843.14 Estimated profits for coffee producers 1909-1917 853.15 Brazilian rubber. Production, world production, prices,

export values and share of national export earnings1910-1919 86

3.16 Quantum indices of Brazilian imports 1910-1919 903.17 Quantity of selected Brazilian imports 1910-1919 923.18 Brazil's trade with other countries. Percentage shares

1913-1919 94

Tables vii

3.19 Percentage shares of Chilean exports 1912-1921 963.20 Nitrate production, workers, export, and prices 1912-

1920 973.21 Nitrate markets, percentage shares 1912-1920 973.22 Chilean copper. Production, exports, prices 1912-1920 1013.23 Quantum index of Chilean imports and import structure

1912-1920 1043.24 Regional breakdown of Chilean foreign trade 1913-1920 1043.25 Percentage distribution of main Peruvian export 1910-1920 1073.26 Peruvian sugar 1912-1921 1073.27 Peruvian cotton. Exports, prices, production, area culti-

vated, workers 1904-1921 m3.28 Peruvian copper. Production, prices, workers, 1910-1921.

Export tax on copper 1916-1920 1143.29 Peruvian trade. Percentage shares of major trading partners

1910-1920 1 1 53.30 Peruvian imports 1911-1918 (adjusted values) 1173.31 Indices of Latin American imports from Britain and the

United States 1912-1920 1174.1 Brazil. Main identifiable balance of payments items 1314.2 Brazilian exchange rates 1913-1918 1334.3 Brazilian Federal Government revenue and expenditure

(budgeted) 1910-1920 1344.4 Brazil's servicing of central government debt 1910-1920

and expenditure on gross fixed capital formation 1364.5 Brazil notes in circulation. In banks and held by public

1912-1918 1384.6 Selected Brazilian banking statistics 1913-1919 1424.7 Argentine Federal Government revenue and expenditure

1913-1920 1454.8 Argentine government expenditure. Percentage distribu-

tion 1910-1921 1464.9 Estimated foreign investments in Argentina 1910-1920 1474.10 Composition of Argentine foreign debt December 1911.

Percentage shares 1484.11 Cost of servicing the Argentine foreign debt 1913-1920 1484.12 Argentine Federal Government debt 1910-1918 1504.13 Argentine (Buenos Aires) banks: capital & reserves, de-

posits, discounts & advances, cash 1908-1919 1514.14 Argentine (Buenos Aires) banks: breakdown of loans

1912-1919 153

viii Tables

4.15 Investment as a percentage of Argentine GNP 1913-1920 1544.16 Argentine business failures and stock market transactions

1910-1919 1554.17 Chilean government revenue, expenditure and railway

results 1910-1920 1584.18 Chilean state revenues (excluding loans). Percentage con-

tributions 1910-1918 1594.19 Chilean public expenditure 1911-1918. Percentage shares

of major ministries and exchange rates 1594.20 Chilean currency in circulation at end of each year

1910-1919 1634.21 Chilean banks loans and advances and deposits 1913-1918 1644.22 Peruvian government revenue and expenditure 1910-1920 1664.23 Peruvian public expenditure. Proportion of major categor-

ies 1913-1919 1704.24 Peruvian debt 1913-1919 1724.25 Peruvian monetary statistics and exchange rates 1912-1919 1734.26 Peruvian banking figures 1912-1919 1745.1 Brazilian industry 1907: percentage share of production 1865.2 Relative size of industrial firms in Brazil 1885.3 Quantum indices of Brazilian imports 1901-1920, percen-

tage share of different classes and cement and steelconsumption 189

5.4 Importation of textile machinery and accessories 1913-1921 1925.5 Brazilian industry. Index of manufacturing production and

value added 1900-1921 1935.6 Structure of Brazilian industry 1919 1955.7 Estimates of Chilean industrial production 1880-1913 1995.8 Structure of Chilean imports 1880-1913 2005.9 Structure of Chilean industry in 1914. Share of production 2015.10 Chilean industrial censuses 1911-1918 2045.11 Chilean industry: large and small firms 1914-1918 2055.12 Indexes of Chilean industrial production and export values

1912-1921 2075.13 Structure of Chilean industry and proportion of local

consumption provided by domestic industry 1918 2085.14 Argentine industrial census 1913 2125.15 Composition of Argentine imports 2135.16 Argentine industry 1914: percentage share of production 2135.17 Major Argentine food and raw material processing indus-

tries (excluding mining) 1912-1918 2165.18 Argentine industrial production: volume index 1910-1923 218

Tables ix

5.19 Gross fixed investment in Argentina 1911-1922 2195.20 Number of factories in Peru 1905 and 1918 2246.1 Net immigration into Argentina 1880-1914. Five year

average 2406.2 Argentine occupational structure, 1914 2416.3 Strikes in Argentina 1881-1904 and Buenos Aires 1907-

1920 2446.4 Argentina: cost of living and real wages 1914-1920 2486.5 Unemployment in Buenos Aires and Argentina and net

migration 1912-1919 2486.6 The Syndicalist FORA 1915-1921 2516.y Structure of Brazilian employment 1920 compared with

Chile and Argentina 2576.8 Brazil: indices of food prices, cost of living, wages, and real

wages 1914-1919 2626.9 Index of food prices in Rio 1900-1920 2636.10 Brazil: impor t ( - ) and export of selected foodstuffs 1911-

1918 2646.11 Brazil: Number of strikes 1917-1920 2686.12 Brazil: Reasons for strikes 1917-1920 2696.13 Distribution and growth of Chilean population according

to rural and urban residence (2,000 or more people),1875-1920 273

6.14 Cost of living in Chile and Santiago 1913-1921 2786.15 Per capita consumption of key foodstuffs in Chile 1913

1921 2816.16 Strikes in Chile 1912-1920 2836.17 Numbers of rural workers in Peru 1913-1920 2896.18 Strikes in Callao and Lima 1895-1911 2916.19 Indices of cost of living in Lima and wages of male field

workers on Peruvian sugar estates 1913-1921 2977.1 British and US investments 1913 and 1929 309

Acknowledgments

I was greatly assisted in writing certain sections of this book by beingable to draw on material in Paul Henderson's unpublished PhD thesis,"Latin America and the Great War: A study of the effects of the FirstWorld War on economic and social conditions in Peru and Chile."Furthermore, besides his detailed comments on the entire manuscriptand many other forms of help which he gave, he also wrote the firstdrafts of the sections on Chile before the war, Chilean trade, andPeruvian and Chilean labor. His contribution was invaluable.

I want also to thank Bill Mathew and Shaun Hargreaves-Heap, forhaving read the entire manuscript and for their many extremelyimportant suggestions for improvement. Other advice on sections ofthe work was kindly given by Colin Lewis, Tamas Szmrecsayni,Donna Guy, Joseph Tulchin, Winston Fritsch, and Charles Jones. Iwish especially to thank the staffs of the Public Record Office inLondon and National Archives in Washington DC for their assistance.Additional research and most of the writing was done during the year Ispent at Harvard University. For this I have to thank my wife, whokindly took me along during her tenure as a Visiting Fellow at theDivinity School, and John Womack who arranged for me to become aVisiting Scholar in the History Department. The hospitality shown tome and the facilities generously provided by the Center for the Studyof World Religions were greatly appreciated, as was the friendly andefficient treatment I always received at all the Harvard libraries. I owea particular debt of gratitude to all those working in the Widener andBaker libraries. Finally, I wish to thank the Research Committee of theSchool of Economic and Social Studies at the University of East Angliaand the Nuffield Foundation for providing financial support forvarious stages of the project.

BILL ALBERT

Introduction

IPeru's Canete valley is about 150 kilometers south of Lima. In the firstdecade of the century this was about a three or four-day horseback rideor, more usually, and if you had the money, a day or less by coastalsteamer. As was the case for most of the country's larger irrigatedcoastal valleys it was given over to export crops. Here it was cotton,grown on numerous small and medium-sized estates and sugarproduced by a single large British-owned ingenio. Besides sharecrop-pers, about 3,000 workers were employed either permanently or on acasual basis on the various estates in the valley. On 10 August 1914,the subprefect called an emergency meeting of local merchants,hacendados, and estate administrators in the principal town of SanVicente. A few men sat on chairs, the majority leaned against the wallsof the rather small room which was becoming increasingly filled withconcern and cigar smoke as the official spelled out the extent of thecrisis, of which most of them were already aware. He wanted thosewho had contacts in the capital to ask them for immediate assistancebecause there was not enough cash in the valley to pay agriculturalworkers and estates were having to shut down. There was also aserious food shortage and the likelihood of unrest.1 The suddendisruption in the life of this valley was evidence that the shock waves ofthe recently begun European war had reached rural Peru. It had takenless than a week. In the larger cities the impact had been felt evenearlier. Before the Germans invaded Belgium on 4 August, banksthroughout the continent had shut their doors, factories and work-shops had closed, trade had come to a standstill, thousands of workerswere laid off and food prices soared. These all happened because theregion's life support system had been disconnected. War had severedthe many seemingly indestructible strands of finance and trade whichbound Latin America so closely to Europe and the world economy.

2 South American and the First World WarThe crisis which ensued was to show clearly and dramatically howimportant and deep-seated these external links were.

The war brought chaos to Latin America as well as to most othercountries. In its aftermath the world was transformed. When the gunsfinally fell silent in November 1918, not only was the structure of theinternational economy altered and the political map of Europe ready tobe redrawn, but nineteenth-century bourgeois faith in unlimitedprogress within a secure framework of positivist rationality also lay intatters. This faith was shaken not only by the war itself but also, andperhaps more significantly, by the Russian Revolution and the massiveand worldwide upsurge in working-class unrest which followed. Thepowerful influence of these events was felt not only in Europe andNorth America, but throughout the world. However, while theimpact and consequences of war in the metropolitan countries havebeen the subject of much scholarly attention, regions such as LatinAmerica have been relatively neglected. Partly, this has been due to thefact that the dislocations caused by war, especially in neutral countries,have often been considered as "abnormal", unrepresentative deviationsfrom the long-term trends of socio-political and economic change.According to this view, periods such as the First World War can tell uslittle about how these processes unfolded in a world at peace. This isnot strictly true. For example, because Peru, Chile, Brazil, andArgentina were, to varying degrees, heavily dependent upon foreigncapital, imports, shipping and insurance, access to export markets, andin some cases labor, the collapse of the world economy and itssubsequent restructuring during the war was an extremely testingexperience which created both problems and opportunities for theseperipheral countries. This in turn tended to highlight the strengths andweaknesses of the variants of the primary export-based capitalistdevelopment which had taken root here. It might be argued that thechaos of war was not representative, but it was the fact that the chaostook quite distinctive forms in the different countries which is soinstructive, as it helps to expose the foundations and framework ofprewar economic growth. Moreover, in the postwar period the LatinAmerican countries, which had constructed their economies on theapparently firm foundations of the British-dominated internationaleconomy, had to come to terms with a new, and in many fundamentalrespects, weaker, less stable world economic system. Finally, as it hadin Europe, the Great War and its immediate aftermath witnessedfar-reaching political and social changes in the region, associated in themain with the emergence of a more vocal urban middle class and a

Introduction 3more combative working class. In short, studying the impact of theFirst World War on these four Latin American countries offersinsights as to the course of prewar growth as well as the significance ofthe many changes ushered in by the war.

The principal concern of those studying Latin America during thewar period has been whether or not a significant level of import-substitution industrialization was stimulated by the temporary shor-tage of imported manufactured goods.2 This interest stems from theassumption that progressive, self-sustained development should beequated with industrial growth and that such growth took place duringthe war in the more advanced countries of Latin America. Mostnotably, Andre Gunder Frank has taken this as support for his thesisthat significant economic development can take place only when linksbetween metropolis and satellite are weak or broken.3 As will beargued, this view is wrong on a number of counts. Industrial growthduring the war years was, for the most part, quite modest, and did notdepart from its rather narrowly based prewar structure. Secondly,although foreign investment and imports were curtailed, the exporttrade was greatly strengthened as Allied demand for many of theregion's commodities increased. The Allies also imposed an unpre-cedented degree of control over many aspects of foreign trade,including shipping, purchasing, and the blacklisting of enemy firmsresident in Latin America. This meant not a weakening, but a generalreinforcement of both a major component of Latin America's externalconnection as well as the overall grip of primary export capitalism. Allthis suggests that the central debate over the war period-basicallywhether strong foreign links had a positive or negative effect ondevelopment-has been misconceived and oversimplified. For exam-ple, if, as it seems, industry was not particularly buoyant during thewar this was more likely to have been due to the limitations imposedby the economic structures created in the decades before the war tosupport primary export-based growth, and not to partial isolationfrom the metropolis.

The development of manufacturing industry is an important issue,but it cannot be adequately understood in isolation and was, in anycase, only one of the many interesting aspects of the war years. Whatwas of greatest moment was the destruction of the internationaleconomy. Although it had suffered numerous and often severe crises,this economy had never totally broken down as it did in August 1914.It was never to regain its prewar coherence. This was due in largemeasure to the fact that after 1918 the United States became a major

4 South America and the First World Warinternational creditor, and Britain was unable to perform the vitalequilibrating role which had permitted the expansion and relativestability of the world system before 1914. For a region so externallydependent as Latin America a less secure world system was anextremely serious threat, a threat which was realized dramatically in1929. Paralleling its enhanced world role, the US also substantiallyincreased its economic interest in the four republics during the war.This change, which was particularly evident in Peru and Chile, markedthe beginning of a new form of external domination and was to havefar-reaching economic and political effects throughout the region.

Besides the lasting economic impact of the war, the extremeconditions of these years tended to accelerate the development of anumber of significant social, political, and cultural movements, manyof which had begun to establish themselves before 1914. The culturaltrends were extremely diverse, but a common underlying theme was adisenchantment with the accepted system of "rational" Europeanintellectual values and the desire to create a more robust, independentnational identity. It is, perhaps, not surprising that both economic andcultural nationalism should flourish at a time when the extent ofregion's external dependence became so evident and foreign interfer-ence so blatant. But the more xenophobic variants of nationalism,especially in Brazil and Argentina, were mainly in response to moredomestic issues-the massive upsurge in working-class militancy whichcame during, and most dramatically, immediately after the war. Thiswas one of the most important developments to come out of the FirstWorld War, not only in Latin America, but throughout the world, aseconomic dislocation and the example of the October Revolutionignited widespread proletarian discontent. In Latin America this poseda direct threat to the virtual total political domination of the landedelites, a domination already under attack before 1914 and also beingchallenged from the growing urban middle class, particularly badly hitby wartime inflation. The result was a radical shift, except in Brazil, inthe political climate, which saw the traditional export elites' authorityand control of the state considerably diminished and the beginning ofmass politics. All these movements had their separate, complex histori-cal geneses, but in their different ways reflected the nature and contradic-tions of prewar capitalist development as well as reactions against it.

IIFor Latin America the war and immediate postwar years are clearly animportant and interesting period to study. There are, however, pitfalls

Introduction 5

associated with this type of project. In all works which concentrate onan event as cataclysmic as a war there is a strong predisposition to seethe major changes which occurred as a direct result of that war. Nosuch claim is made here. In almost every case there were clearlydiscernible prewar roots for such important wartime changes as thestrengthening of most traditional export sectors, the greater economicrole of the United States, or the growth of domestic manufacturingindustry (where this occurred). What the war did was hasten inhothouse fashion the emergence of these factors. In doing this, andbecause of the many other strains associated with the war, mostnoticeably domestic inflation, a number of important prewar socio-political changes such as the rise of economic and cultural nationalism,the increased militancy of the working class, and the political challengeto the export elites were also stimulated and their significance greatlyenhanced. The war served as a powerful catalyst.

Another problem which had to be faced, common to anycomparative historical study, was the choice of countries and themes.The two choices were closely related. The principal theme exploredthrough most of the chapters is how the region's multifaceted externallinks helped shape the system of capitalism which took root here andthe significance of the similarities observed for understanding thecharacter of Latin American capitalist development. Of course, eachcountry was clearly unique across a wide range of factors, such aspopulation, geography, historical formation, political structure, cul-ture, exports, etc., but they all shared a very substantial degree ofexternal dependence, and because of this and their Iberian heritagemany major aspects of their capitalist formation were roughly similar.The central driving force in each economy was the export of primarycommodities. Foreign capital, banks, shipping, and merchants were ofkey importance, and to a greater or lesser degree the ruling elitesbelieved that a European ideal of progress could be attained by theircountries adopting the role assigned to them within a seemingly"natural" world division of labor.

In line with the general theme outlined above, Argentina, Brazil,Peru, and Chile were picked for investigation, because although beforethe war other countries were increasing their economic stake in theserepublics, in all cases the dominant foreign interests remained British.This gives some degree of symmetry to the character of externalinvolvement as well as making the outbreak of war in these countriesthat much more traumatic and, therefore, revealing. The author'sknowledge and general interest also was a major factor in thisparticular choice. Finally, it was felt that although it would have been

6 South America and the First World War

possible to include other countries, such as Uruguay or Colombia, orones in Central America or the Caribbean, where United Statesinvolvement was substantial before 1914, this would have multipliedthe external variables, made the study unwieldy, and, in the end, maynot have significantly modified the conclusions as to the dynamics ofprimary export capitalism. Mexico might seem another major omis-sion, but although the war did have an impact here this was marginalwhen compared to the widespread chaos caused by the Revolution.However, as this work is selective, whether what has been observedwas common to all of Latin America must necessarily await the workof other scholars.

Besides choosing the countries and a central unifying theme, theother important decision that had to be made was what sub-topics toexplore and how best to handle them. It was decided to limit coverageto four main areas, foreign trade, finance, manufacturing industry, andthe labor movement, which although not providing anything like acomprehensive picture of these societies, are of key importance and doallow some useful generalizations to be made about both the nature ofLatin America's primary export capitalism and the impact of the warupon it. In order to establish the wider framework for analysis it isimportant to begin with a general discussion of the development ofthese four peripheral capitalist countries within the context of thenineteenth-century world economy. This is intended to provide thereader with a brief account of prewar growth and so give thebackground against which the impact of the war may be more easilyunderstood. The next chapter concentrates on the initial impact of thewar. It was during these months that economic and social upheavalwas most intense and the similarities of experience among the fourcountries most marked. Once they began to adjust to the newconditions imposed by the conflict so there was a greater divergence ofexperience. Because of this it was felt that for the sake of expositionaland analytical clarity it was preferable to devote the subsequentchapters to the four issues mentioned above, as well as to deal witheach country separately within each chapter. In the final chapter thegeneral state of the region after the war is considered and some of themore interesting economic and social changes which were stimulatedby the years of conflict are briefly explored.

1Before the War

Industrial capitalism was the major revolutionary force in thenineteenth century. It not only transformed the economic, politicaland social life of much of Europe and the United States, but itsinfluence was also felt throughout the world as over the century itfashioned a multilateral, interdependent world economy to serve itsinterests. Latin America's role within this system was essentially thesame as it had been in the colonial period, to supply raw materials andfoodstuffs in exchange for manufactured goods. The decision of thelocal elites to continue to organize their economies to complementthose of Europe, a decision which in general only became clear andstrong after some decades of post-independence conflict, was bothunderstandable, and given the prevailing international hierarchy ofeconomic power, realistic. It also admirably suited their owneconomic interests, which, of course, they equated with the nationalinterest. However, it should not be imagined that there was alwaysagreement or harmony among the various sectors of the elite orbetween them and foreign capital. There were, for example, varyingdegrees of intra-elite conflict in all four countries, leading in the mostextreme cases to civil war. There were also disputes, often extremelyacrimonious ones, between Latin American governments and foreigneconomic interests. Through all this there was, however, no seriouschallenge to the basic tenets of development hacia afuera. There wassimply no other way to accumulate wealth so quickly.

However, it was not a simple desire for financial gain whichmotivated the elites, it was also that promoting primary exports wasthe most effective method of achieving and maintaining politicalstability. As Douglas Friedman has argued,1 while the world economyclearly made primary export attractive, the manner by which each countrywas tied to that economy and the impact of that link on economicdevelopment must be seen as the result of distinctive historicalformation and class struggle. As explained more fully below, without


this simple but fundamental perspective it is impossible to explain whycountries, such as Sweden, Canada, or Australia, which were alsoheavily dependent on foreign capital and the export of primarycommodities, should have had greater economic success than thatachieved by Latin American countries.

The process of external economic subjugation encouraged by theelites was necessarily accompanied and underpinned by the acceptanceand promulgation of foreign cultural and intellectual values. In someways these were as important as the import of capital or technology.They provided a powerful ideological framework of legitimation. Forexample, positivism in its various forms was widely taken up, and elitespokesmen argued that to incorporate Latin America fully into theinternational economy was to tread the path to material progress andcivilization. Europe and things European were held up as examples tobe emulated, while native peoples and cultures were generallydenigrated as barbaric. Skidmore writes, "Brazil lay vulnerable, likethe rest of Latin America, to racist doctrine from abroad. It couldhardly have been otherwise, since these doctrines were a vital part ofthe North Atlantic civilization so fervently and uncritically admired bymost Latin American intellectuals before 1914."2 These attitudes wereto come under increasing attack during and after the war.

But as important as ideas were they could not themselves fashionnew societies in South America. In order to meet the demands of theworld market for primary commodities major changes were demandedin productive techniques and organization, and ultimately in therelations of production as well. This had been a continuous, albeitgradual, process in many countries up to about the 1880s, but fromthat time it accelerated as foreign capital and labor poured in, railwaysand ports were constructed, cities grew and were provided withmodern public utilities, and most countries experienced a substantialdegree of export-led growth. By 1914 the development which hadoccurred in the material forces of production was considerable.Almost 2,000,000,000 of foreign capital had been invested, 63,000miles of railway built, about four million immigrants had settled inBrazil and Argentina alone, and large cities, such as Buenos Aires, SaoPaulo, Rio de Janeiro and Santiago had become showcases for thesolid, self-assured architecture so characteristic of the latter decades ofthe nineteenth century. Furthermore, exports had increased dramati-cally, and in all countries industrial sectors were beginning to takeshape. With advances in the productive forces there was also animportant, although in many cases partial, transformation in therelations of production, and by the First World War a self-conscious

Before the War 9

urban, and in some regions a rural, working class had begun to makeits power felt.

A type of capitalism was, therefore, clearly being established inLatin America, but one which it will be argued was far less progressiveand suffered from far more seemingly intractable contradictions thanits European progenitor. One reason for this was that the system'sfoundations were discernibly shaky, built as they were upon theshifting sands of the international economy. This economy generatedgrowth while at the same time fostering chronic instability, whichcould be especially severe for primary producers. There are a numberof aspects to this argument. One of the most important was the factthat many Latin American countries besides having to rely on theofttimes fickle metropolitan demand for their exports, also becameheavily dependent upon constant inflows of capital to service largeexternal debts and maintain balance of payments positions. However,the availability of these funds was largely determined by conditions inthe industrialized lender countries, and capital imports tended ".. .toswell in boom times and dry up in hard times, contributing further toeconomic instability associated with their frequent dependence on oneor a few items of raw material or foodstuffs exports, themselves subjectto wide quantity and/or price variation."3

These problems did not rule out a successful capitalist transforma-tion, but it can be argued that such a transformation was difficult toachieve partly because of Latin America's position within the worlddivision of labor and the role played by merchant capital in helping toestablish and maintain this position. Geoffrey Kay has argued,4 thatcapitalism came to Latin America in the form of merchant capital.Although merchant capital promoted commodity production, and,therefore, did stimulate change, because it derived its profits in thesphere of exchange it had no inherent interest, in contrast to industrialcapital, in revolutionizing the forces of production, the productivesystem, or the relations of production.5 There is much to thisargument, although, as will be explained, it seriously underestimatesthe degree of capitalist transformation which did take place.6 Onepossible explanation for this, was that from the last decades of thenineteenth century merchant capital in Latin America was notfunctioning in its independent form but rather as the agent of industrialcapital. Kay writes,

In its independent form where it is separated from the spheres of productionand consumption and has no direct responsibility for them, merchant capitaltrades where it can and what it can without concern or scruple: here slaves,there opium. But industrial capital is directly involved in the process of social

io South America and the First World War

reproduction, and so must pay closer attention to its requirements thenmerchant capital. It is forced to be more civilized. And merchant capital in sofar as it acts as its agent is forced to adopt a similar code and drop many of itsbad habits.

Kay's argument is perceptive, but provides only one part of theexplanation of the difficulties in developing a more progressivecapitalist system in Latin America. There were other countriessimilarly dependent under the export of primary commodities and alsoin receipt of large amounts of foreign capital, but in which successfuland substantive development was achieved. It is, of course, impossibleeven to begin to offer comparisons between the experiences of, forexample, Canada, Australia, or Sweden and the countries of LatinAmerica, although one important and possibly key difference lay inthe fact that the socio-political systems in the former countries weremuch more egalitarian and not dominated by the landed export elitesas they were in Latin America.7 This tended to reduce the overallintrusiveness of the foreign connection, and made it easier to achieve adiversified, more domestically oriented economic development. Thereare many other distinctions which could be drawn, but the main pointhere is that although the international economy created both opportu-nities and dangers for peripheral capitalist economies, success orfailure depended on the results of the interaction between externalforces and local socio-economic and political structures.

While major changes had been wrought in Latin America'ssocio-economic structure since the beginning of the previous century,capitalist transformation, for all its apparent success, remained flawedat its heart. This was partially due to the fact that merchant capitalfound its natural allies in the local landed export elites. These elites,although placed in a roughly similar position with regard to capitalistdevelopment as had been the European bourgeoisie, whose liberalideology they fervently espoused, were but a pale reflection of thatrevolutionary class depicted so vividly in the Communist Manifesto. Inthe first place, the evolution of this class's hegemonic position wasdistinctive. It came neither in struggle against the landed class as inBritain (in many ways capitalists in Canada or Australia can be seen asproducts of this struggle) or France nor in the collaboration with thisclass as in Germany or Japan.8 For the most part, the Latin Americanelites were the landed class or, at least, a dominant sector of it. Theirpower derived instead from the coincidence of their economic base inprimary exports with the demands of industrial capitalism for these

Before the War n

exports. Their interests lay in maintaining and strengthening thisrelationship. As Cardoso and Faletto argue,9 ".. . the system of(external) domination reappears as an 'internal' force, through thesocial practices of local groups and classes which try to enforce foreigninterests, not because they are foreign, but because they may coincidewith values and interests that these groups pretend are their own."Among other things, this meant that while substantial economic andsocial changes were called for so as to facilitate the growth of theexport sectors, because this consisted in the main of adapting food andraw material output to external demands the pressure to revolutionizethe forces of production was not all that great. The necessary changesinvolved using relatively rudimentary technical innovations and,therefore, productive structures were changed but slowly. Withcertain exceptions, they tended to remain characterized by low levels ofproductivity. This applied both to exports and manufacturing, thelatter being confined primarily to basic consumer goods production.Whether because of low labor costs, a strong position in the worldmarket or natural advantage the need to increase the productivity oflabor by continually revolutionizing the forces of production-one ofthe most dynamic elements of capitalism in the metropolitancountries-was not all that strong for primary export production,clearly the leading sector of Latin America's economies.

The foregoing considerations are not intended as a rigid model, butrather a broad framework for beginning to analyze the development ofcapitalism in Latin America. As the investigation proceeds it willbecome necessary to modify many aspects of this preliminary schema.Furthermore, it must be stressed once again that however powerful aninfluence was exerted by the impositions of European merchant capitalon the Latin American countries, the result, in terms of the specificcharacter of the political and socio-economic structures which weredeveloped, can only be understood in terms of the interplay of localfactors. Marx observed:10 "To what extent it [commerce] brings abouta dissolution of the old mode of production depends on its internalsolidarity and internal structure. And whither this process ofdissolution will lead, in other words, what new mode of productionwill replace the old, does not depend on commerce, but on thecharacter of the old mode of production itself." Referring specificallyto Latin America, Cardoso and Faletto point out11 that to explain thediversity of experience in the region it is necessary to investigate theinterrelationship between foreign domination and " . . .the differentmoments at which sectors of local classes allied or clashed with foreign


interests, organized different forms of state, sustained distinctideologies, or tried to implement various policies or defined alternativestrategies to cope with imperialist challenges in diverse moments ofhistory."

Despite the fact that "the character of the old mode of production"as well as its post-independence evolution varied greatly in the fourcountries under review, there was a remarkable degree of unity withrespect to the ubiquity of external factors and also the course, and inmany ways, the character of domestic capitalist change. Beforediscussing the impact of the war, it is, therefore, necessary to offer abrief outline of the nature of each country's economic and socio-political development up to 1914.

Argentina

Describing Argentina in about 1911, James Bryce wrote,12 "All ismodern and new; all belongs to the prosperous present and betokens astill more prosperous future. Argentina is like western North America.The swift and steady increase in its agricultural production, with anincrease correspondingly large in means of transportation, is whatgives its importance to the country and shews that it will have a greatpart to play in the world. It is the United States of the SouthernHemisphere." This view was widely shared by contemporary criticswho believed it would be just a matter of time before Argentina wascounted among the more developed countries of the world. There wasa good deal of substance to this belief, even though it was oftencoloured by the idea that Argentina could simply be equated withBuenos Aires-the "Paris of South America." Compared to the citiesof Brazil or the Andean countries, the former with its black andmulatto population and the latter with its many poor Indians, in themodern, thriving Argentine capital " . . .a general impression emergedof well-dressed, well-nourished Europeans."13 The prosperity herewas based on the massive export of grains and livestock productsdeveloped from the combination of foreign capital and immigrantlabor supplied to the vast, richly fertile and sparsely populatedpampas.

In 1913 Argentine exports were valued at 484,000,000 gold pesos,their highest prewar level.14 This represented a more than threefoldincrease from 1900. Expansion had been uneven, but from themid-1880s the growth of Argentine exports had outstripped that of allother Latin American countries,15 and before the First World War

Before the War 13

Table 1.1 Argentina's principal exports1910-1914

Percentage share

WheatMaizeLinseedHidesWoolFrozen Beef

19.4U-910.211.012.9

7.6

Source: C.F. Diaz Alejandro, Essays onthe Economic History of the ArgentineRepublic, London and New Haven, 1970,p. 18.

exports per capita at $(US)58 were 45% higher than her nearest rival,Chile.16 She enjoyed favorable trade balances, but the level of importswas also high. In the prewar years much of this was due to the largerquantity of capital and intermediate goods imports, a direct result ofincreased foreign investment from 1905.17 Although any estimates ofGross Domestic Product must be treated with caution, Diaz Alejandrocalculates that in 1913 per capita GDP in Argentina was 1,030 ($(US)of 1970 purchasing power), more than twice what it had been in 1880and four times that for Brazil.18

The composition of exports had shifted quite markedly from theearly years. Whereas in the 1880s wool and hides had accounted for90% of exports, in the immediate prewar years a much morediversified export base had been established (Table 1.1). IncreasedEuropean demand, railway extension and the development of refriger-ated shipping all contributed to this transformation. The growth ofagricultural exports had been the most spectacular, with cultivatedacreage increasing by almost ten times between the late 1880s and theFirst World War.19 In 1914 there were seven million hectares underwheat alone.

Export production was mainly in local hands. There were somerelatively small scale producers, but most of the output came from theowners of large estancias. These estancieros in the pampean provinces,who generally lived in Buenos Aires and effectively controlled thenational government, farmed their land by using immigrant tenant


farmers who were moved on after having tamed the soil by raising afew crops of wheat and leaving the land in alfalfa for cattle.20 Thissystem of ownership and production while generating vast wealth didnot lead to widespread rural prosperity. Instead: "The products of theagricultural and pastoral economy flowed toward Europe, and what-ever stimulus, commercial or industrial, these products provided wasconcentrated in the ports which handled and processed the rawmaterials."21

Besides a dependence on overseas markets, of which Britain was thesingle most important, taking about a quarter of Argentine exports in1913,22 the commercialization and processing of exports were domin-ated by foreign companies. Virtually all grain exports were handled bynine foreign firms, four of which ("the Big Four") accounted for 65%of shipments.23 Meat-packing was also controlled by foreign firms. In1913 British and North American companies were responsible for32.5% and 42.6% respectively of meat exports, the remaining 25%coming from a large Argentine firm.24 While the specific effects of thisoverwhelming foreign domination are still debated,25 it is clear that avery small number of firms were in a position to exert tremendousleverage on the Argentine economy.

One of the main factors underlying Argentina's export success was amassive inflow of foreign capital. The first major boom came in theyears from 1884, faltered five years later, and then ended abruptly withthe Baring Crisis of 1890. The effects of this collapse were severe, andit was almost 15 years before foreign investors' confidence wassignificantly regained. In 1900 Argentine's foreign liabilities stood at alittle over 200,000,000, and with the next major surge, which beganin 1905, the total debt reached about 650,000,000 by 1913.26 Most ofthis (between 6o-yo%)27 was owed to Britain and was in variousinfrastructural projects, particularly railways (55.8%) and in govern-ment loans (24.6%).28

In both absolute and per capita terms Argentina was the largestrecipient of foreign capital in Latin America.29 This afforded manyclear advantages to Argentina, including the provision of an extensivetransport and public utility infrastructure and the ability to maintain ahigh level of imports. There were also costs. By 1913 48% of thecountry's fixed capital assets (excluding land) was owned directly orindirectly by foreigners.30 More significantly, over 30% of exportearnings were needed to service the foreign debt.31 The country'sbalance of payments position was, therefore, extremely vulnerable as itcame to depend upon continued injections of foreign capital, the

Before the War 15supply of which was largely determined by conditions facing thedeveloped countries, particularly Britain.32

The railways are often seen as one of the principal benefits derivedfrom foreign investment. They provided the channels to carry exportsto the ports and the world market. Railway growth had been mostrapid from the mid-1880s to the early 1890s and again from 1905.Between 1900 and 1913 mileage doubled from 10,000 to 20,000.33 Thesystem was dominated by British companies which by the First WorldWar controlled 70% of the mileage.34 More importantly, the fourlargest companies, which had 57% of the track, ran the most profitableand economically vital routes. On the whole the railways admirablyserved the functions the Argentine elite had envisaged for them. Theyopened up the pampas, were important in fostering internal peace andnational unity and helped to create an impressive export-basedprosperity, a prosperity concentrated in the port cities, particularlyBuenos Aires, from which the main rail lines radiated.35 Furthermore,because the system was largely supported by foreign capital, the localelite was freed to invest in more lucrative ventures such as land.36 Inshort, the railways were a key element in the country's development,but at the same time they served to strengthen the pattern of growthwhich made the Argentine economy complementary to and dependentupon the industrialized countries.

Another vital factor for Argentine growth was labor, for in i860there were only 1.2 million people in the country's over 1.5 millionsquare miles. It is little wonder that Juan B. Alberdi's 1850s dictum:"To govern is to populate" was taken up by the elite. By 1914 thepopulation of Argentina had reached 7.8 million.37 This extraordinaryrate of growth was fueled by mass immigration, especially heavy fromthe 1880s onwards. No other Latin American country depended somuch on immigrants. In 1914 30% of the country's population andabout one half of those in Buenos Aires were foreign-born. Theelite encouraged immigration in order to secure a labor force, but,strongly influenced by positivism and European theories of biologicaldeterminism, they also felt that Europeans were superior to thenative mestizo and would, therefore, help establish "civilization"in Argentina.38 This was another important aspect of foreigndomination.

The attitude of the elite toward the immigrants and particularly theirimpact on Argentine society, had begun to change by the first decadeof the century from acceptance to suspicion and hostility, as witnessedby the development of a strongly defined Argentine cultural national-

16 South America and the First World Warism. This was partly due to the fact that instead of a docile work forcethe oligarchy found themselves faced with a growing number ofimmigrant entrepreneurs, and an increasingly combative urban work-ing class.39 With respect to the latter, although the roots of organizedlabor can be traced to the 1850s, the most explosive phase came in theyears of anarchist-led strikes from about 1902, which ended with themassive and violently suppressed general strike of 19 io.40 The threatposed to the elite remained, but this defeat left the Buenos Airesworking class temporarily demoralized and disorganized, and so itremained until the outbreak of the First World War.41

The challenge from the working class was one element whichcontributed to the seemingly major political changes which occurredjust before the war when the dominant landed oligarchy agreed toshare power with some elements of the middle class and those from thelanded class who had been excluded from government, many ofwhom, organized in the Union Civica Radical, had been in activeopposition since the 1890s. This was done by extending the franchisein 1912. However, this ".. .did little more than open up the politicalsystem to the native-born, property-owning middle class groups and tothe minority of workers who had also been born in the country Itwas an act of calculated retreat by the ruling elite. "42 It was also animportant indication of the tensions created within Argentine societyby rapid export-led growth.

By the First World War the growth of grain and livestock exportshad created undoubted prosperity in Argentina. "The entire countryhad changed, not only the rural landscape where the desert had givenway to seas of wheat and trees and dwellings, revealing the presence ofhumans in a formerly empty landscape, but cities where poor, austerestructures.. .were replaced by a style which mirrored the new wealthand strove to repeat the style of the great European metropolises. "43However it may have looked, this was a prosperity which was bothdistributed very unevenly and constructed on unsteady foundations.The latter had much to do with the high degree of dependence onworld trade, which was vital not only for the sale of the country'sproducts, but which also, through import duties, provided over 50%of government revenue.44 Large foreign debts, and a reliance oncontinued inflows of capital were other important features of thecountry's economic vulnerability. Added to this was the direct controlexercised by foreign firms on the economy. Export production was forthe most part in Argentine hands, but the transport (both by rail andsea), commercialization, processing and financing was largely domin-

Before the War 17

ated by foreign companies. Banking, insurance, and public utilitieswere other areas where foreign influence was strong. In no other SouthAmerican economy was the role of foreigners so pervasive. Directforeign involvement in itself was not necessarily harmful becausepresumably these firms prospered when the Argentine economy washealthy. But, the problem in terms of long-term materially progressivecapitalist transformation was that they did well by maintaining theprimary export orientation of the Argentine economy. They were ableto do this because it also benefited not only the landed elite, but mostother sectors of Argentine society as well. This explains, in part, whyalthough there was vocal criticism of foreign domination, within thecountry there seems to have been no substantive conflict as to the roleof exports before 1930. Struggles centered more on the distribution ofthe income generated by the export sector.45 The dependent nature ofArgentina's economy was, therefore, largely self-imposed, and mustbe understood as arising out of the relationship between the interactionof domestic class forces and the pressures exerted and the possibilitiesoffered by the world market.

Brazil

Each of the many travelers to Latin America saw the region withdifferent eyes, and so to maintain a comparative edge James Bryce iscalled upon once again.46

Less here than in Argentina or Uruguay, has one the feeling that the nation isstill in the first freshness of youth, eagerly setting itself to explore and furnishits home and to develop resources the possession of which it has just begun torealize Comparatively few shew themselves sensible of the tremendousproblems which the nation has to face, with its scattered centres of populationto draw together, its means of communication to extend, its public credit tosustain, its revenues to be scrupulously husbanded and applied to usefulpurposes, above all, its mass of negro and Indian population to be educatedand civilized. Nowhere in the world is there a more urgent need for a wiseconstructive statesmanship.

Generalizations about a country as vast and diverse as Brazil arealways suspect, but Bryce's views, including his racial pessimism, weremore or less shared by other contemporary observers. Compared toArgentina, Brazil seemed less dynamic, a hot, tropical country, clearlynot "in the first freshness of youth" weighed down as it was by acolonial heritage of plantations and slavery. It had been ruled by the


Emperor Dom Pedro II, until the declaration of the Republic in 1889,and it was only in the previous year that slavery, in decline from aboutmid-century, was finally abolished. By 1914 a very small proportion ofthe Brazilian population (10%) lived in cities of over 20,000 people,subsistence agriculture was widespread, and large areas of the countrystagnated, suffering either from the decline of a former export, such assugar in the Northeast or a collapse of a new one, such as rubber in theAmazon. While this meant that for the country as a whole rates ofeconomic growth were not all that dramatic, nonetheless, a form ofrapid capitalist transformation, based mainly on the spread of coffeecultivation, had taken place in the central southeastern part of thecountry around Rio de Janeiro and Sao Paulo. These cities grewrapidly, colonial architecture was replaced by self-consciously grandEuropean styles and manufacturing industry expanded. As hadhappened in Argentina, the transformation was propelled by thecombination of primary exports, and a massive influx of immigrantsand foreign capital.

The value of the country's exports increased by 4.5% per yearbetween 1883 and 1913,47 with an acceleration in growth from 1897 tothe outbreak of war.48 Imports also grew, but an increasingly healthybalance of trade was maintained until 1913, when the first trade deficitfor many years was experienced. Exports were of great importance,but in the years 1911-13 they accounted for only 16% of grossdomestic product.49 In per capita terms Brazilian dependence onimports and exports was much less than either Chile or Argentina.Only Peru could boast a lower figure (Table 1.2). This is indicative ofboth substantial interregional trade within Brazil and the very largedomestic agricultural sector, the latter, which because of its lowproductivity, may have50 retarded the pace of economic development.This in turn helps to explain why by the First World War Brazil's percapita GDP (in US$ of 1970 purchasing power) was only 230, less thana quarter of that achieved in Argentina.51 Nonetheless, because of themassive expansion of coffee production the southeast of the countryexperienced much more substantial progress than indicated by thiscountrywide figure.

By the late 1830s coffee had emerged as Brazil's leading export,displacing sugar, which with its archaic production methods wasfinding it increasingly difficult to compete in the world market. Withthis change the economic heart of the country shifted from theNortheast to the Central-Southeast, and there it remained. Initiallycoffee cultivation was concentrated in the Paraiba valley, in the

Before the War 19

Table 1.2 Per capita value of imports, exportsand national debt 1911. Brazil, Argentina,

Chile, Peru and the USA

ArgentinaBrazilChilePeruUSA

Imports

48.5711.1637.824.58

16.39

(US dollars)Exports

5J-4514.68

35-836.93

21.56

Nationaldebt

91.5038.6062.38

5.7610.88

Source: United States Statistical Abstract for 1911,cited in Anuario estadistico de la Republica de Chile1911, pp. 94-5.

hinterland of Rio de Janeiro. The fazendeiros here adopted extractive,land-extensive techniques and by the 1870s and 1880s, burdened withdebts, soil exhaustion and a depleted number of slaves, the area was inirreversible decline.52 It was at about this time that Sao Paulo assumedthe position of leading coffee producer as the extension of the railwayand the beginnings of large scale immigration helped the rapid spreadof plantings into the western part of the state. Coffee continued to begrown in Rio as well as the states of Espirito Santo and Minas Gerais,but the most explosive growth occurred in Sao Paulo.

Brazil's other major export in the latter part of the nineteenthcentury was wild rubber from the Amazon.53 A great deal of moneywas earned in its collection and sale, but the way in which the industrywas organized and the nature of the region itself mitigated againsteither improvements in production or the profits made serving as thebasis for any form of diversified economic expansion. When the effectsof competition from Asian plantation rubber began to be felt after 1910there was little that could be done. It is true that Brazil's economichealth relied increasingly on a single commodity, but other exportssuch as sugar, yerva-mate, hides, cotton, cocoa, tobacco, etc. wereimportant regionally. Although their contribution to the nation's totalforeign earnings may have been relatively small (Table 1.3), their localimportance should not be ignored, particularly as more sugar, meatproducts, and raw cotton were sold within the country than sentabroad.


Table 1.3 Percentage share of commodities inBrazilian exports 1821-1914

CottonSugarCoffeeLeatherTobaccoCocoaRubberYerva-mate

1821-1823

25.8%23.1%18.7%13.5%3.2%0.6%0

0

1871-1873

16.6%12.3%50.2%6.4%3.2%0.8%

5.3%1.6%

1912-1914

2.9%0.3%

60.4%4.7%2.6%2.9%

17.4%3.3%

Source: Leff, Under development, p. 85

In Brazil, as in Argentina, although there were some largeforeign-owned estates (in 1911 8,000 of Sao Paulo's 57,000 estates wereunder foreign control),54 the majority of all commodity productionwas in local hands. This meant that exports generated substantialdomestic income, and in the southeastern part of the country this ledto a radical economic transformation, including rail building, rapidurbanization and the growth of manufacturing. Leff observes that,55".. .nineteenth-century Brazil was not a classic export economy. Theconditions which in other underdeveloped countries made for largeexternal leakages and a small spill-over effect from expanding trade onthe domestic economy were much mitigated in Brazil." Nonetheless,there was an extremely strong direct foreign influence in the Brazilianeconomy, particularly in commerce, banking, the provision of socialoverhead capital and in government loans.

The coffee trade was dominated by a few large foreign merchanthouses. By the turn of the century about 60% of the coffee sales wascontrolled by six or seven companies.56 German firms alone wereresponsible for the same percentage of rubber exports.57 The foreignmerchant was in an immensely powerful position vis-a-vis the plantersor the aviadores (middlemen in the rubber trade) because of hisinternational market contacts, control of credit, and, in the case ofcoffee, his increasing interest in processing and warehousing. Notsurprisingly, this aspect of foreign domination was the subject of muchcomplaint and bitterness. Greenhill writes,58

.. .the coffee trades structure increasingly favoured the foreign merchant, whoforced lower prices on the producer in a depression while protecting himself

Before the War 21

by his employment of the world's marketing machinery. Producers, unable toreduce wages and overheads, naturally resented "the fat profits which themerchant seemed to be making." The very fact that disorganized fazendeirosdepended on a few powerful houses, financed abroad and working in closeproximity, inevitably aroused suspicion.

However, the planters were not powerless. In 1906 valorization(taking coffee off the market to force up the price) was firstintroduced. This clearly benefited the planters, but the scheme onlyworked because it was also in the interests of the foreign merchantsand bankers who gave it their active support.59

The other area of major direct foreign intrusion in the Brazilianeconomy was finance. Foreign banks were particularly active here. In1913 they controlled 46% of all Brazilian deposits, about 20% morethan similar institutions in the other three countries.60 Brazil also hadan extremely large external debt (Table 1.2). The total was407,600,000, 151,700,000 of which was owed by the government(national, state and municipal).61 The latter represented the highestratio of public debt to export earnings in Latin America.62 Amongother difficulties, this made the country's balance of payments positionhighly vulnerable, and often put the government at the mercy offoreign banks. In the period 1860-1913, besides official borrowing,over 290,000,000 was invested by foreign companies, of which 255,900,000 was outstanding in 1914.63 As elsewhere, British firmsaccounted for the largest proportion of this (62%), and over 60% wasdevoted to basic services such as urban transport, gas and electricitycompanies, ports, and railways.

The railways were by far the single largest recipients of foreignloans. There was 66,500,000 invested in foreign companies alone.64To this must be added the sums borrowed abroad both by local linesand state and federal governments, the latter needing to support boththeir own railways and interest guarantees given to private companies.It was the increasing burden of the latter obligation combined with acrisis in government finances which forced the steady nationalizationof railways from 1900.65 This was essentially an operation in financialretrenchment. The government did not, therefore, want to assume theresponsibility for operating the lines, and most were rented out toprivate companies. In 1914 only 20% of the railway mileage wasstate-run, although it owned over 60%. The railways in Brazil werebuilt primarily to facilitate export expansion. Because of this and thephysical difficulties of construction a national network was nevercreated. The most comprehensive system of lines was in the


Central-Southeast, reflecting and helping to perpetuate the regionalbias of the country's coffee-based development.

The railways not only carried coffee, but also the hundredsof thousands of immigrant workers who came to work on thefazendas. Brazil did not suffer from as serious a labor shortage as didArgentina, but it proved easier and cheaper to bring in workers fromabroad than to try to force labor out of the subsistence sector and/orrecruit workers from the impoverished Northeast or elsewhere in thecountry.66 European immigrants were also generally welcome be-cause, in line with Brazil's quite distinct variety of racism, it wasbelieved they would help to "whiten" the population.67 Unlike theinflux into Argentina, a large part of Brazilian immigration was heavilysubsidized. A scheme devised by the new federal government in 1892was suspended three years later, but in the state of Sao Paulo, whereabout 50% of new arrivals first landed, an active recruitment programwas continued.68 Here, between 1889 and 1900, 80% of theimmigrants received subsidies and a system was established to channelworkers directly to the coffee plantations.69 From the beginnings ofmass immigration in the 1880s to the First World War, over 3 millionpeople came to Brazil, mainly Italians (40%), Portuguese (28%), andSpaniards (i3%).70 There are no net figures, but it seems approximate-ly half stayed in the country. According to the 1920 Census, of a totalpopulation of over 30 million only 1,565,000 (5.2%) were listed asforeign or naturalized.71 Their impact on the country was, however,out of all proportion to this relatively small number because they wereheavily concentrated in the southeastern coffee-producing states, andin the cities, especially Sao Paulo. For example, in 1905 56% of theagricultural laborers in rural Sao Paulo were immigrants,72 and fiveyears earlier it had been estimated that more than 90% of the state'sindustrial workers were foreign-born.73 Immigrants not only made upa large proportion of the growing urban proletariat, but many of theemerging urban capitalists, the most famous example being theindustrialist Francisco Matarazzo, were also immigrants.74

As had happened in Argentina, in order to increase its wealth andmaintain its power the landed elite in Sao Paulo had to import laborand institute a capitalist transformation of its agricultural system. Indoing so it set in motion a process which was to lead to rapidurbanization, industrial growth, and overall the emergence of a muchmore complex society in which their authority was to come underattack. A somewhat similar phenomenon took place in some neighbor-ing states, especially Rio de Janeiro, but elsewhere in the country

Before the War 23

relations of production were not radically altered and the balance ofclass forces remained relatively more stable. From about the turn ofthe century, most forcefully in the cities of Rio de Janeiro, Santos andSao Paulo, the urban proletariat began to organize and assert itself.This was quite clearly not part of the elite's plans for modernization,and the state moved fairly quickly, forcibly suppressing working-classagitation and deporting labor leaders.75 But, despite the strongreaction, the movement here was far weaker than in Argentina.Pressure from the workers did not, for example, help bring about anymajor political changes in Brazil. This would have been quite difficultto do in any case, for because of the extreme federalism establishedunder the First Republic, there were literally no national politicalmovements, the states were more or less left to themselves and thecentral government was controlled by the elites of Sao Paulo andMinas Gerais. This may, in part, account for the fact that during theseyears there were no viable political alternatives to elite rule in Brazilsimilar to that presented by Yrigoyen in Argentina, Alessandri in Chileor Billinghurst and later Leguia in Peru. The absolute political powerof the Brazilian landed classes did not begin to be materially threatenedand little compromise was necessary until the multiple crises broughtby the First World War led to a working-class revolt and greaterassertiveness on the part of the urban middle classes.

Bryce and other observers at the time always drew quite sharpdistinctions between Brazil and Argentina, and these were, on thewhole, well-founded. They were very different countries in terms oftheir populations, geography, social and political structures, exportproducts, and history. Nonetheless, on the eve of the Great War manyunderlying similarities could also be seen. From the 1880s bothcountries had undergone dramatic agrarian-based capitalist trans-formations, involving extensive railway construction, mass immigra-tion, urbanization, and varying degrees of industrial development.Productive sectors were controlled primarily by nationals, but therewas extremely strong foreign domination of overseas transport,commerce, banking and insurance. Government finances were similar-ly dependent on import duties and continued foreign loans, andeconomic prosperity rested on the volatile base of primary exports. InBrazil this base was particularly narrow. Finally, elites in Argentinaand Brazil fully embraced the Ricardian notion of comparativeadvantage as well as the European ideal of progress and much of thecultural baggage that came with it. Brazil's external orientation, mostimportantly the central-southeastern states' primary export capitalism,


represented, as did Argentina's, a conscious choice on the part of thecountry's rulers. While the world economy functioned more or lesssmoothly and the export sector continued to generate income it was achoice which was widely accepted by all classes, at least in theprosperous coffee-growing states. However, the war was to shatter themany fundamental nineteenth-century economic and cultural assump-tions and in so doing prompt a major reaction against what becameperceived as Brazil's subservient status.

This reaction was manifested in a rising tide of nationalism.76Although it drew on a substantial body of nineteenth-century work bysuch writers as Manuel Bomfim and Alberto Torres,77 it was, inSkidmore's words, "a New Nationalism," in that it represented,among other things, a major shift in the conception of how theinternational economy worked and of Brazil's position within it.

Since the 1880s the Brazilian elite had been explicitly committed to theintegration of their country into the North Atlantic economy and culture.Brazil would export agricultural products needed by the North Atlantic worldwhile at the same time attracting their immigrants and investment. Theoccasional nationalist critics were argued down on the grounds thatnationalism had become obsolete... the war, however, was a brutal reminderthat nationalism was far from obsolete. The conflict within Europe hadcontradicted the liberal ideology, which in effect prescribed for Brazil a minorrole within a world increasingly dominated by Europe.78

This new-found nationalist critique extended over more than econo-mic issues. "By destroying so many nineteenth-century illusions,"Bello writes,79 "The war of 1914 stimulated the desire for autonomy inall fields, and made the new generation of Brazilian intellectuals morecurious about everything to do with their own country."

Chile

After passing through Bolivia and the "dreary and waterless wastes" ofnorthern Chile, the well-traveled James Bryce arrived in Santiago.There he found a city much to his liking.80

Prosperity and confidence are in the air. Great, indeed, is the contrast betweenthe old-fashioned Lima... and this brisk, eager, active, modern city, wherecrowded electric cars pass along crowded streets and men hurry to theirbusiness or their politics even as they do in western Europe or North America.Santiago is a real capital, the heart of a real nation, the place in which all thepolitical energy of the nation is focussed, commercial energy being shared with

Before the War 25

Valparaiso. Here there are no loitering negros, nor impassive Indians, for thepopulation is all Chilean.

The "all Chilean" population Bryce saw was in the main mestizo,and for a number of Chilean intellectuals, as for their counterparts inArgentina, the mestizo, like the black or the Indian, represented aninferior race which stood in the way of "progress." The solution wasto encourage immigration, preferably from northern Europe to"whiten" the population. However, unlike Brazil or Argentina, Chilewith its over three million inhabitants in 1907, was already fairlydensely populated (with respect to arable land).81 There was,therefore, little demand for agricultural labor, the main spur to foreignrecruitment in Brazil and Argentina. Despite various efforts to fosterimmigration, only about 4% of the population was foreign-born at the1907 Census. These relatively few immigrants were to play animportant role in the country, but this was as professionals andenterpreneurs in the cities, not proletarians as in the two east coastrepublics.

As there were many among the elite who would have disagreed withBryce's rosy view of the country's racial character, there were alsothose who were critical about the way the economy had developed,particularly the extent of direct foreign control.82 However, thecountry had experienced rapid economic growth from the end of thenineteenth century. In the two decades from 1890 the value of exportsrose by an annual average of 9.3% and 7% respectively, while importsincreased by 6.6% and 8.7%.83 In 1910 the country had an extensive,and largely state-owned, railway network, and, judging by thenumbers enrolled in school, it could also boast the most comprehen-sive educational system in Latin America.84 Manufacturing industryhad made important strides, and Chile also experienced rapidurbanization in these years. By 1907, 22.2% of the population lived incities of over 20,000.85 The vast majority were in the Santiago-Valparaiso-Concepcion triangle, where commerce, finance, andindustry were concentrated. There are no GDP figures comparable tothose for Brazil and Argentina, but in 1914 national income per capita(in US$ of 1980 purchasing power) was about 1,000, a substantialachievement.86

Despite these signs of success the country's capitalist transformationwas uneven and troubled. Much of this was due, as in other LatinAmerican economies, to the fact that growth was led by primaryexports. In the first three quarters of the nineteenth century Chile had

i6 South America and the First World Warrelied primarily on the export of copper, silver and wheat. But thesuccess of these commodities had been based on natural advantage noton improvements in productivity, and by the 1870s when prices beganto fall all three went into decline. The economy was rescued by theWar of the Pacific which broke out in 1879. Chile's victory over Peruand Bolivia, left the country in complete control of the vast nitratedeposits of the Atacama Desert. This completely transformed thepattern of export growth and marked the beginning of a new period inthe country's economic development.

In 1884 the value of Chile's nitrate exports was 67,000,000 pesos (of18 pence sterling). By 1913 this had reached 315,000,000 pesos.87 Thestrong demand from European agriculture for nitrate as a fertilizer andthe fact that Chile possessed a virtual monopoly of its supply led to adegree of dependence on a single commodity unparalleled in othercountries. In the period 1910-13 nitrate and its by-product iodineaccounted for a staggering 77% of the total value of exports, withcopper representing only 8%.88 At the same time, the British Empire,Germany and the United States took 80% of the country's exports andprovided 77% of imports.89 The success of nitrate production wasconsiderable, and within a short time the entire fabric of the Chileaneconomy came to rely on the fortunes of this industry. It is true, asSunkel and Cariola have argued,90 that the prosperity brought bynitrate exports facilitated the further expansion of capitalism in termsof manufacturing industry, commerce and transport, but there can belittle doubt that such a high level of dependence on one product alsoleft the entire economy excessively exposed to outside pressures andsevere fluctuations in employment and output. This became apparentwith increasing force from 1914.

The economy's external link through nitrate was complemented by asubstantial degree of foreign investment. Public indebtedness wasconsiderably less in Chile, than in either Brazil or Argentina, althoughthe government did borrow abroad, mainly in Britain, to financerailway construction and other public works.91 The most strikingdifference in Chile was the extent of direct foreign investment inexport production. By 1894, 92% of the country's nitrate was beingproduced by foreign firms, most of which were British.92 Although by1921 Chilean capital seems to have recovered and controlled about halfthe output, according to McQueen,93 this came about mainly by"...the Chileanization of enterprises and individuals primarily for-eign, rather than the development of new enterprises by purelyChilean interests." This meant that a substantial proportion of nitrate

Before the War zjprofits flowed directly abroad. It is estimated that between 1880 and1930, 30% of nitrate export earnings were repatriated, representingabout 7% of the country's gross domestic product.94 This process offoreign domination was to gain considerable momentum during thewar, as improvements in technology permitted large United Statesmining companies to begin to exploit Chile's massive deposits of lowgrade copper ore.

Notwithstanding the problems caused by dependence on nitratesand foreign capital, by the First World War Chile was one of LatinAmerica's most materially advanced countries.95 An important indica-tion of this was the country's prominent manufacturing sector.96 Itsdevelopment can be traced to the period before 1879, but with thestimulus provided by nitrate exports, industrial output grew morerapidly from this time. According to the National Census, by 1913there were almost 8,000 industrial firms, although many must havebeen little more than small workshops. They employed about 85,000workers and Palma estimates that by this time about 16% of theChilean work force was in manufacture.97 Yet as impressive as thisachievement was, manufacturing industry showed few signs of playingthe revolutionary transforming role which it had in the more advancedcapitalist countries. The reasons for this must be sought in the natureof Chile's class structure and its relationship to the main engine ofeconomic growth, the nitrate sector.

Essentially, industrial growth did not throw up a nationalbourgeoisie with the power to transform Chilean society. Manufactur-ing continued to be seen as secondary to the export of primarycommodities, upon which it was in any case dependent. Furthermore,because the income from nitrates was extracted through export dutiesand distributed by the state, it did little in economic or political termsto disturb the dominant position of the country's traditional landhold-ing elite. Bauer observes that:98 "The nitrate fields produced a torrentof wealth but paradoxically this went to fortify an elite whose principalvalue was still landholding." It is not surprising that, despite the criticsof foreign control, there was little done to challenge the economy'sexternal orientation or the increasing direct control of foreign capital.This situation not only suited the elite, but in terms of the incomegenerated, it also provided immediate benefits, albeit ones which weregrossly unequal, for all classes within Chilean society.

The country's political system was well-suited to perpetuate theseconditions. Throughout most of the nineteenth century Chile enjoyeda level of political stability uncommon in Latin America, or indeed


anywhere in the world. Except for two short-lived rebellions in 1851and 1859, and the Civil War of 1891, there was a peaceful and orderedsuccession of elected regimes. But as was the case in Europe or theUnited States, a functioning parliamentary system did not indicate ademocratic society. In Chile, although dissident political voices wereraised and for the most part tolerated, the elite remained in securecontrol of the apparatus of the state. In many ways parliamentarypolitics represented little more than bargaining over the distribution ofpatronage on the part of the oligarchic Liberals and Conservatives whoessentially shared the same overall view on how the country should bedeveloped. Moreover, bribery and corruption were rife at electiontime and in any case only an extremely small number of peopleparticipated in the electoral process. In 1915, for example, only 5% ofthe population actually voted in the presidential election." JamesBryce looked on with apparent approval at the ordered way in whichChilean elections were conducted. He wrote:100 "I saw an electionproceeding under it [proportional representation] in Santiago. Theresult was foreknown because there had been an arrangement betweenLiberal sections which ensured the victory of the candidates they hadagreed upon, so there was little excitement. Everything seemed towork smoothly."

While this election seemed to work smoothly, this was increasinglynot the case with respect to Chilean society generally. As elsewhere inLatin America, the elite had fostered primary export capitalistdevelopment, only to find its political hegemony threatened by theworking class and to some extent by an urban middle class which thatdevelopment demanded and had created. Although the Chilean stateadopted a more or less laissez-faire approach to industrial relations,when it appeared that labor might be gaining the upper hand, likestates throughout the world, it was quick to act in the interests ofcapital. What distinguished the actions of the Chilean state was theirlevel of brutality. For example, in 1905 over 300 people were gunneddown during food riots in Santiago, and four years later, in what wasprobably one of the worst massacres of workers ever in Latin America,more than 1000 striking nitrate miners and their families weremassacred by troops in lquique.101

By 1914 Chile had achieved substantial material progress. However,it was progress built on a narrow and vulnerable foundation. Theoutbreak of war was to show just how vulnerable it was. Furthermore,as class conflict increased in the years before the war so the country'sseemingly stable political structures began to show signs of cracking

Before the War 29

under the strains. The events of the war years were to intensify thepressures and lead to major changes in the nature of class relations andChilean politics.

Peru

In Peru, our traveler found a country markedly different from Brazil,Argentina or Chile. Here it was the past glories of the Inca and Spanishempires which seemed more impressive than any recentdevelopments.102

Lima retains more of an old Spanish air than do the much larger capitals of thesouthern republics, Argentina, Chile, and Uruguay... there is no growth ofindustry or commerce. The Limenos are not what a North American wouldcall either "progressive" or "aggressive". The railways and mines of Peru aremostly in the hands of men from the United States, shipping business in thehands of Englishmen and Germans, retail trade in those of Frenchmen,Spaniards, and others from continental Europe... Some day or other Lima willbe drawn into the whirlpool of modern progress. But Europe and NorthAmerica are still far off, and in the meantime the inhabitants, with theirpleasant, courteous manners and their enjoyment of the everyday pleasures oflife, are willing enough to leave mines and commerce to the foreigner.

Although this was both somewhat inaccurate and too harsh a judgmenton local enterpreneurial abilities and attainments, it does reflect thefact that compared to the other countries under review Peru seemed farless dynamic, far less "modern."

Possibly the most striking difference about Peru was the fact that itwas essentially an Amerindian country, and that the majority of thepopulation lived in the sierra, far away both physically and culturallyfrom the centers of political and economic power on the coast. Thereare no reliable population figures between 1876 and 1940, but it isestimated103 that in 1906 there were about 3.6 million people in theentire country, 63% of whom lived in the sierra, 12.5% in the jungleand montaha, and only 24.5% on the coast. Lima was growing, but in1908 there were still but 140,884 people in the city. By 1920 a further83,000 had been added.104 It was here that most of the country's smallnumber of immigrants were to be found. The two largest groups werethe Chinese and the Japanese, both originally brought over as contractlabor for the coastal estates.105 There was also a sizable Italian colony.They and most other foreigners in Peru were either artisans or engagedin various forms of commerce, although some immigrants did findtheir way into the ranks of the country's elite.


There were increasing direct and indirect economic links betweenthe white and mestizo coast and the Amerindian sierra, but in manyways the two worlds remained distinct. The Peruvian novelist JoseMaria Arguedas wrote of his first visit to Lima from his home inAndahuaylas in 1919,106 that in the capital serranos were viewed as" . . . strange and unknown, not as citizens and compatriots." But thenit was also true that, "In the majority of small Andean villages thesignificance of the word Peru is unknown." The lack of a commoncultural and national identity was found to varying degrees in everycountry, but it was much stronger in Peru than elsewhere. This had amajor impact on the pace and character of the transition to capitalism,as well as reaction against it.

The key to this transition was the growth of exports. The centralplace of silver in the colonial period had been replaced from about the1840s by guano and later by nitrates. Times changed once again whenby the 1870s the most productive guano deposits had been exhausted,and Peru lost her nitrates to Chile following the War of the Pacific. Itwas not until the mid-1890s that the country's export sector began asustained recovery.107 The value of exports grew very rapidly,increasing by almost 20% per annum between 1895 an a nd thenshowing a fluctuating but considerably slower rate of growth up to theFirst World War. Despite this, in comparison with the other threecountries (Table 1.2) Peru's export development had been relativelymodest. Imports also increased, but the trade balance remainedpositive during the years leading up to the war. What emerged by thistime was a far more diversified export mix (Table 1.4) characterized byan extremely wide geographical distribution. From the coastal valleyscame sugar and cotton, petroleum was exploited on the far north coast,silver, copper, and wool were produced in the sierra and rubbercollected in the jungle.

Until recently it was widely held that by the First World War Peru'smajor export sectors were directly dominated foreign capital; that theywere in effect enclaves.108 However, it is clear that while the countrywas firmly tied to foreign markets, and that a few large merchanthouses such as Duncan Fox, W.R. Grace & Co., Balfour Williamson,Graham Rowe & Co., and Wm & Jn Lockett, did dominate commerceand credit, three of the most important export sectors, sugar, cottonand wool remained largely in local hands.109 Direct foreign control ofexports was, nevertheless, of major importance in Peru, particularly inmining and petroleum, with the major takeovers coming immediatelybefore the war. Although Peruvian capitalists had been active in

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Table 1.4 Percentage share of majorPeruvian exports 1910-1913

Sugar 17.5%Cotton 13.8%Copper 20.5%Petroleum 6.3%Rubber 12.3%Wool 7.7%Total 78.1%

Source: Peru, Extracto estadistico del Peru,Lima, 1926, p. 61.

developing various mining ventures, from about 1900, US capital,represented principally by the Cerro de Pasco Mining Company,began to buy up and consolidate copper mines. The First World Warsaw an extension and acceleration in the process of foreign takeover,with Anaconda and the American Smelting and Refining Companyalso taking part. In petroleum two major British-owned companies(formed about the turn of the century) were bought by Standard O

South America and the First World War the Impact of the War on Brazil, Argentina, Peru and Chile...

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