inflow of foreign capital. The six year period 1908-13, in particular, witnessed a program of heavy borrowing, both by the federal and the state governments, and by private enterprise. The following figures show the amount of new foreign capital annually invested in Brazil during the period 1908-16:

AMOUNT OF NEW CAPITAL IN BRAZIL, 1908-16 1

The easy acquisition of foreign capital led the governments and private individuals into extravagances

into unusually large military and naval expenditure, into railway and other public projects which could yield a return only after some years of waiting. According to official statements, the revenues of Brazil for the five years 1910-14 totaled 2,762,008 contos (paper), while expenditures amounted to 3,514,155 contos, leaving the enormous_deficit of 752,147 contos, or $238,123,000. During the first four years, 1910-13, the deficit was $159,123,000, or an average of $39,781,000 per year. In 1914 it was nearly double that sum. Owing to the war, the revenue decreased to 375,098 contos, while expenditures, tho considerably lower than in the preceding year, amounted to 636,781 contos, thus leaving a deficit of 261,683 contos, or $78,902,000.

The outbreak of war did more than cut down government revenue. It shut off the inflow of foreign capital which was at the bottom of the extravagant expenditure. The sudden cessation of investment in 1914, moreover,

1 Translation in the Pan American Magazine, November, 1918, pp. 16 et seq., of an official statement by Elysio de Carvalho.

2 $5,500,000 lent to the municipality of São Paulo by United States banks.

came after some rather trying experiences in 1913. Brazil was seriously affected by the stringency in foreign money markets which followed the outbreak of the Balkan War. The year 1913, moreover, witnessed a slump in coffee and rubber prices. The value of coffee and rubber exported in 1913 was nearly $56,000,000 less, altho the exports of coffee were over a million bags larger, than in 1912. Total exports declined from over $362,000,000 in 1912 to less than $314,000,000 in 1913. At the same time imports increased from about $308,000,000 to $326,000,000. The result was that in that year the balance of trade was unfavorable by about $12,000,000.

In consequence gold began to flow out of Brazil, and the exchange rate was threatened. In 1912 there was a net inflow of gold amounting to $17,500,000. In 1913, on the other hand, there was a net export of gold of over $23,000,000. Brazilian exchange would have fallen in 1913 from the high level of the 1910-12 period had it not been for the important service performed by the Conversion Office, which issued gold freely to maintain exchange, its gold holdings falling in consequence from 386.7 to 276 million milreis during

1913.1

When the war broke, the federal government was negotiating for a loan in London. The failure of the negotiations made it impossible for the government to pay interest on its foreign obligations. In October, 1914, an agreement was made with the foreign bondholders, represented by the Rothschilds, for a funding loan of £15,000,000. The interest on the foreign debt was paid in the bonds of this loan up to August, 1917, when interest payments were resumed. Amortization of the foreign debt was suspended for thirteen years (until 1927). The effect of the funding loan was to take

1 South American Journal, January 18, 1919, p. 37.

the weight of the foreign interest payments off the exchange market, temporarily, thus preventing a fall of exchange much more serious than that which actually did occur.

As it was, exports of gold increased to the high figure of $40,144,000 in 1914; and the stock of gold in the Conversion Office was reduced to 138.5 million milreis by the end of the year. In December, 1914, the President was authorized to suspend the redemption of notes until December, 1915, the suspension being subsequently extended. The government resorted to issues of paper money. The first issue, authorized by law of August 24, 1914, was for 250,000,000 milreis. A second issue, of 350,000,000 milreis, was authorized by law of August 28, 1915. By June 30, 1918, the total quantity of inconvertible paper in circulation was 1,534,252,000 milreis, representing an increase of 945,000,000 milreis since August 26, 1914.1

In other words, throughout the war Brazil has been on an inconvertible paper money basis; and the foreign exchanges have been subject to all of the fluctuation and unsteadiness which is inherent in every inconvertible paper situation, and of which the most interesting instance today is Chile. Large emissions of paper, moreover, have precisely the same effect on the rate of exchange as does an unfavorable trade balance. They affect unfavorably the ratio between the domestic paper and foreign gold moneys, by increasing the supply of the former relatively to the demand for it, and thus cause its depreciation in terms of foreign gold. Here, then, is undoubtedly one of the causes of the present low rate of Brazilian exchange.

1 South American Journal, January 18, 1919, p. 37. At the end of 1918, the quantity of paper in circulation was stated to be about 2,000,000,000 milreis. Revista de Economia y Finanzas, pp. 609, 610.

came after some rather trying experiences in 1913. Brazil was seriously affected by the stringency in foreign money markets which followed the outbreak of the Balkan War. The year 1913, moreover, witnessed a slump in coffee and rubber prices. The value of coffee and rubber exported in 1913 was nearly $56,000,000 less, altho the exports of coffee were over a million bags larger, than in 1912. Total exports declined from over $362,000,000 in 1912 to less than $314,000,000 in 1913. At the same time imports increased from about $308,000,000 to $326,000,000. The result was that in that year the balance of trade was unfavorable by about $12,000,000.

In consequence gold began to flow out of Brazil, and the exchange rate was threatened. In 1912 there was a net inflow of gold amounting to $17,500,000. In 1913, on the other hand, there was a net export of gold of over $23,000,000. Brazilian exchange would have fallen in 1913 from the high level of the 1910-12 period had it not been for the important service performed by the Conversion Office, which issued gold freely to maintain exchange, its gold holdings falling in consequence from 386.7 to 276 million milreis during

1913.1

When the war broke, the federal government was negotiating for a loan in London. The failure of the negotiations made it impossible for the government to pay interest on its foreign obligations. In October, 1914, an agreement was made with the foreign bondholders, represented by the Rothschilds, for a funding loan of £15,000,000. The interest on the foreign debt was paid in the bonds of this loan up to August, 1917, when interest payments were resumed. Amortization of the foreign debt was suspended for thirteen years (until 1927). The effect of the funding loan was to take

1 South American Journal, January 18, 1919, p. 37.

the weight of the foreign interest payments off the exchange market, temporarily, thus preventing a fall of exchange much more serious than that which actually did occur.

As it was, exports of gold increased to the high figure of $40,144,000 in 1914; and the stock of gold in the Conversion Office was reduced to 138.5 million milreis by the end of the year. In December, 1914, the President was authorized to suspend the redemption of notes until December, 1915, the suspension being subsequently extended. The government resorted to issues of paper money. The first issue, authorized by law of August 24, 1914, was for 250,000,000 milreis. A second issue, of 350,000,000 milreis, was authorized by law of August 28, 1915. By June 30, 1918, the total quantity of inconvertible paper in circulation was 1,534,252,000 milreis, representing an increase of 945,000,000 milreis since August 26, 1914.1

In other words, throughout the war Brazil has been on an inconvertible paper money basis; and the foreign exchanges have been subject to all of the fluctuation and unsteadiness which is inherent in every inconvertible paper situation, and of which the most interesting instance today is Chile. Large emissions of paper, moreover, have precisely the same effect on the rate of exchange as does an unfavorable trade balance. They affect unfavorably the ratio between the domestic paper and foreign gold moneys, by increasing the supply of the former relatively to the demand for it, and thus cause its depreciation in terms of foreign gold. Here, then, is undoubtedly one of the causes of the present low rate of Brazilian exchange.

1 South American Journal, January 18, 1919, p. 37. At the end of 1918, the quantity of paper in circulation was stated to be about 2,000,000,000 milreis. Revista de Economia y Finanzas, pp. 609, 610.