The Economy - a Period of Sweeping Change, 1930-45
The decade of the 1930s was a period of interrelated political and economic changes. The decade started with the 1930 revolution, which abolished the Old Republic (1889-1930), a federation of semiautonomous states. After a transitional period in which centralizing elements struggled with the old oligarchies for control, a coup in 1937 established the New State (Estado Novo) dictatorship (1937-45) (see The Era of Getúlio Vargas, 1930-54, ch. 1).
To a large extent, the revolution of 1930 reflected a dissatisfaction with the political control exercised by the old oligarchies. The political unrest of the first half of the 1930s and the 1937 coup were influenced strongly by the onset of economic problems in 1930. The coffee economy suffered from a severe decline in world demand caused by the Great Depression and an excess capacity of coffee production created in the 1920s. As a result, the price of coffee fell sharply and remained at very low levels. Brazil's terms of trade (see Glossary) deteriorated significantly. These events, and a large foreign debt, led to an external crisis that took almost a decade to resolve.
The external difficulties had far-reaching consequences. The government was forced to suspend part of the country's debt payments and eventually to impose exchange controls. Excess coffee production led to increasing interventions in the coffee market. The state programs to support coffee prices went bankrupt in 1930. To avoid further decreases in coffee prices, the central government bought huge amounts of coffee, which was then destroyed. Central government intervention provided support to the coffee sector and, through its linkages, to the rest of the economy.
Despite the economic difficulties, the income maintenance scheme of the coffee support program, coupled with the implicit protection provided by the external crisis, was responsible for greater industrial growth. Initially, this growth was based on increased utilization of the productive capacity and later on moderate spurts of investment. The initial import-substitution industrialization (see Glossary) that occurred especially during World War I did not lead to industrialization; it became a process of industrialization only in the 1930s.
The 1930s also saw a change in the role of government. Until then, the state acted primarily in response to the demands of the export sector. During the first half of the decade, it was forced to interfere swiftly in an attempt to control the external crisis and to avoid the collapse of the coffee economy; government leaders hoped that the crisis would pass soon and that another export boom would occur. However, with the magnitude and duration of the crisis it became clear that Brazil could no longer rely solely on exports of primary goods (see Glossary) and that it was necessary to promote economic diversification. During the Estado Novo, the government made initial attempts at economic planning, and in the late 1930s began to establish the first large government enterprise, an integrated steel mill.
The World War II period saw mixed achievements. By the late 1930s, coffee production capacity had been reduced drastically, the worst of the external crisis had passed, and the Brazilian economy was ready to grow. However, the war interfered with development efforts. Output increased mainly through better utilization of the existing capacity but, except for the steel mill, there was little industrial and infrastructure investment. Thus, at the end of the war Brazil's industrial capacity was obsolete and the transportation infrastructure was inadequate and badly deteriorated.
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