2 - Financial Development in Brazil in the Nineteenth Century

Summary

The development of stock and bond markets in Brazil started relatively late in the nineteenth century for three reasons. First, the regulation of entry constrained the creation of corporations until the 1870s. Second, basic investor protections and free incorporation were not adopted in Brazil's national company law until 1882. Third, macroeconomic instability during the first seven decades of the nineteenth century prevented the creation and expansion of banks and corporations.

This chapter argues that once entry for new corporations was liberalized (it did not depend on government approval), basic investor protections were included in a new national company law, and the economy began to grow, stock and bond markets flourished. Most of the recent literature on the development of joint stock companies and stock markets in Brazil defends the notion that regulation of entry constrained development of the country's financial system during the nineteenth century because it retarded the creation of new corporations. Yet this chapter shows that the liberalization of entry in 1882 was necessary but not sufficient to promote rapid growth in stock and bond markets. Th is is because rapid growth in the listing of stocks and bonds in the Rio de Janeiro Stock Exchange took place only after the government pursued expansionary monetary policies and basic investor protections were set into place (for holders of both bonds and shares).