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Debt, Taxes, and War: The Political Economy of Bolivia, c. 1920–1935

Published online by Cambridge University Press:  05 February 2009

Manuel E. Contreras
Manuel E. Contreras
Affiliation:
Lecturer in Economic History at the Universidad Mayor de San Andrés and the Universidad Católica Boliviana, La Paz
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Extract

During the first thirty years of this century the Bolivian economy provided a classic example of export-led growth. Mining, with tin at the forefront, responded to the stimulus of both world demand and price, and was the leading sector of the economy. Tin exports increased five-fold from 1900 to 1929, and Bolivia's share of world production more than doubled, accounting for approximately a quarter of total world production from 1918 to 1929.

Type
Articles
Information
Journal of Latin American Studies , Volume 22 , Issue 1-2 , March 1990 , pp. 265 - 287
Copyright
Copyright © Cambridge University Press 1990

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References

1 Ayub, Mahmood and Hashimoto, Hideo, The Economics of Tin Mining in Bolivia (Washington, 1984), Table SA.13, p. 87.Google Scholar The nineteenth-century background to tin mining is found in Hillman, John, ‘The Emergence of the Tin Industry in Bolivia’, Journal of Latin American Studies, vol. 16 (1984), pp. 403–37.CrossRefGoogle Scholar A characterisation of the structure and growth of the industry in the first quarter of this century is provided in my ‘Tin Mining in Bolivia, 1900–1925’, unpubl. MA thesis, University of London, 1980.Google Scholar

2 Thorp, Rosemary and Bertram, Geoffrey, Peru 1890–1977: Growth and Policy in an Open Economy (New York, 1978), p. 18.CrossRefGoogle Scholar

3 Unidas, Naciones, Análisis y proyecciones del desarrollo económico, vol. IV: El desarrollo económico de Bolivia (Mexico, 1958), p. 12.Google Scholar

4 See, for example, Cuadros, Eduardo Arze, La economía de Bolivia. Ordenamiento territorial y dominación externa, 1492–1979 (La Paz–Cochabamba, 1979), pp. 253–9Google Scholar and, in a less simplistic approach, González, René Ruíz, El drama de Bolivia. Una economía deformada (La Paz, 1986), pp. 169–75.Google Scholar

5 The principal reason for this has been that they solely concentrated on macro-analysis with aggregate data, and wholeheartedly relied on the UN study and other secondary sources, the most common being Peñaloza, Luis, Historia económica de Bolivia, 2 vols. (La Paz, 1953, 1954)Google Scholar, and his more recent Nueva historia económica de Bolivia, 7 vols. (La Paz, 1981–1985).Google Scholar

6 A notable exception is Laurence Whitehead's perceptive essay on the Depression's effect on Bolivia, which challenges the changes brought about by the apparent ‘modernisation’ process that took place from 1900 to 1925. He critically evaluates how railways, banks, public finances, political parties, and the principal mining companies ‘really operated in the Bolivian context’, providing us with a lead to the fragility of Bolivian institutions. ‘El impacto de la Gran Depresión en Bolivia’, Desarrollo Económico, vol. 12 (04–06 1972), pp. 49–80.Google Scholar Unfortunately, this article has had very little dissemination in Bolivia.

7 Gómez-D'Angelo, Walter, La minería en el desarrollo económico de Bolivia (La Paz, 1978), pp. 142–6.Google Scholar Surprisingly, Gómez-D'Angelo's valuable study has not had much impact yet on Bolivian historiography.

8 Ness, Norman T., ‘The Movement of Capital into Bolivia, a Backward Country’, unpubl. PhD Diss., Harvard University, 1938, Table VIII, p. 104.Google Scholar

9 Marsh, Margaret, The Bankers in Bolivia: A Study in American Foreign Investment (New York, 1970 [1928])Google Scholar is the best source for the background and the conditions to the 1922 loan. The State Department Records (Record Group 59) in the US National Archives (hereafter, NA), Washington, D.C. provide the detailed correspondence between the Bolivian government and the bankers, as well as information on the State Department's role during this period.

10 One of the issues that has arisen from the harsh conditions accepted by the Bolivian government has been whether or not there had been corruption. Marsh stated ‘The initial mistake had been the prior option, which cut off from the start all possibility of competition. This and the Government's urgent need of money forced the acceptance of an unquestionably shrewd and hard bargain, in which the negotiations were perfectly open and above board but the whip handle was always in the hands of the bankers’ (p. 116). Four years later a State Department official referred to the loan as ‘allegedly and prima facie procured by fraud between the bankers and the Bolivian negotiators’ (NA 824.51/615 Stinson, J. Whitla, ‘American Diplomatic Policy. Bolivian Government Financing [1921–1931]’, p. 23Google Scholar). Subsequently, historians have assumed corruption, see Klein, Herbert S., Bolivia. Evolution of a Multi-Ethnic Society (New York, 1982), p. 174.Google Scholar

11 McQueen, , Bolivian Finance, p. 41.Google Scholar

12 Calculated from Unidas, Naciones, Desarrollo económico, p. 10.Google Scholar Export value is an estimate of the Bolivian Customs and although it takes account of some of the value added by shipping and smelting, it is an appropriate proxy indicator.

13 Data from the Comisión Fiscal Permanente quoted in Ayub, and Hashimoto, , Economics of Tin Mining, table 3, p. 12.Google Scholar

14 See: Permanente, Comisión Fiscal, [Primera] Memoria…que presenta…a la consideración del… Ministro de Hacienda e Industria, 1924 (La Paz, 1924), pp. 7 and 12.Google Scholar

15 Permanente, Comisión Fiscal, Tercera Memoria, pp. 33–9, 104Google Scholar; Séptima Memoria, p. 46.

16 NA 824.51/278 Roswell Barker to State Department, 21 Nov. 1924.

17 NA 824.51/307 Roswell Barker to State Department, 1 April 1925.

18 The tax rate under the 1923 Law was determined by establishing the ratio between profits and declared capital. The higher the ratio, the higher the tax rate. So, by increasing declared capital, mining companies could reduce their tax rate.

19 NA, Roswell to State Department, 28 Nov. 1924. William Lofstrom has suggested that the Asociación's organisation was, rather, the logical outcome of the formation of Patiño Mines. ‘Attitudes of an Industrial Pressure Group in Latin America, the Asociación de Industriales Mineros de Bolivia, 1925–1935.’ Latin American Studies Program. Dissertation Series No. 9 (Cornell, 1968), pp. 22–3.Google Scholar

20 The text of both cables can be found in La República, 10 Aug. 1924.

21 The above discussion and what follows is based on State Department records which include cables from the CFP to US bankers informing them of the situation. See: NA 824.6354/61 Cottrell to State Department, 13 Aug. 1924; NA 824.51/270 same to same, 2 Oct. 1924; NA 824.6354/63 same to same, 29 Oct. 1924; NA 824.51/278 Roswell Barker to State Department, 21 Nov. 1924. The cables from the CFP are found in NA 824.51/377.

For an account of political events leading to the crisis in the Republican party, see Klein, Herbert S., Parties and Political Change in Bolivia, 1880–1952 (Cambridge, 1969), pp. 82–3.Google Scholar A detailed explanation of Patiño's role as ‘peacemaker’ is provided by Geddes, Charles F., Patiño: The Tin King (London, 1972), pp. 193–8.Google Scholar

22 NA 824.51/275 and 276. Telegrams from Barker to State Department, 1 and 2 Dec. 1924. By the time the second telegram was sent, Barker commented: ‘Such protest would now appear to be of doubtful value other than for purposes of record.’

23 The text of the whole telegram, dated 24 Nov. 1924, is reproduced in NA 834.51/377.

24 Quoted from the Asociación's by-laws in Lofstrom, ‘Attitudes of the Asociación’, p. 28.

25 NA 824.51/314 and 346 Cottrell to State Department, 3 June 1925 and 21 Jan. 1926. In the first instance the US Minister went as far as suggesting that it would be in the US bank's interest to loan more money ‘to prevent the Patiño interests from further complicating the situation… relative to the American loan’. Geddes reproduces a letter from Patiño's second-in-command to President Siles offering a loan for continuing the Sucre-Potosí railroad construction: Patiño, p. 206. No mention of freezing mining taxes is made in the excerpt reproduced.

26 ‘Rather than sitting in their imposing New York offices, waiting for clients to call on them, [US] bankers travelled around the world soliciting borrowers,…As U.S. interest rates readily declined, more and more people wanted to buy foreign issues with their higher yields.’ And the competition among US bankers for placing loans in Latin America reached ‘unprecedented levels’. Stallings, Barbara, Banker to the Third World. U.S. Portfolio Investment in Latin America, 1900–1986 (Berkeley and Los Angeles, 1987), pp. 72–4.Google Scholar

27 This was the Vickers contract of 1927, see below.

28 The US Minister commented that the government would be pleased if it could apply funds from the Cochabamba–Santa Cruz railway to internal debt ‘now nearly $5 million in arrears…, and find a loophole to defer building of the railway, if the people of the Departments of Cochabamba and Santa Cruz could be palliated’. NA n.n. Cottrell to State Department, Oct. 1927. Two months later, Congressmen from the interior voted against La Paz public improvements until the Minister appeared before them and explained the use of the funds from the 1927 Dillon, Read loan. NA 824.51 D58/39 and 40 Cottrell to State Department, 29 Dec. 1927 and 2 Jan. 1928.

29 Stinson, Whitla, ‘American Diplomatic Policy’, p. 57.Google Scholar On the financial crisis, see NA 824.52/435, 443 and 445 Cottrell to State Department 21 Sept., 19 and 29 Dec. 1927. The State Department's early fears of default are in Memorandum from the Economic Adviser of 9 May 1928, NA 824.51/449.

30 Permanente, Comisión Fiscal, Tercera Memoria (La Paz, 1927), pp. 24, 110–11.Google Scholar

31 NA 824.51/388 Cottrell to State Department, 20 Oct. 1926. This is not the only indication of the Minister's corruption. Three years earlier, the Vice President of the Caracoles Mining Co. was of the opinion that the Minister was permitted to receive 20% of all taxes he was able to collect, see NA 824.512/7 Flack to State Department, 16 Dec. 1923.

32 NA 824.51/43; Cottrell to State Department, 21 Sept. 1927.

33 An example, drawn from the Treasury Department, will suffice to illustrate this: an employee – whose son was involved in an opium scandal in the United States – had grown rich by ‘auctioning of the work of various taxes’, and yet remained in the Treasury for years because he was related to ‘influential families’. NA 824.51/392 Cottrell to State Department, 16 Dec. 1926.

34 NA 824.51/259 Schoenfeld to State Department, 12 June 1926. Similar comments on the possibility of balancing the budget ‘if a serious effort is made’, were expressed before; see: NA 824.51/259 Cottrell to State Department, 19 Aug. 1924.

35 Such taxes included, among others, taxes on transfer of mineral properties (Law of 23 Nov. 1923) and the sales and profit tax on commerce and industry (Law of 12 Dec. 1923). See note a in Table 3 for a breakdown of the relative incidence of each of these laws.

36 Thorp, and Bertram, , Peru 1890–1977, p. 118 and note 13 on p. 376.Google Scholar

37 NA 824.51/449 Memorandum, Office of the Economic Adviser, 9 May 1928. Kemmerer was a pessimist on Bolivia's future. Two months later, at another conversation with State Department officials, he questioned the patriotic feeling prevalent in Bolivia, and ‘doubted whether the country would survive as a nation’. NA n.n. Internal Memorandum: Conversation Professor E. W. Kemmerer, 20 July 1928. Furthermore, Linda Alexander Rodriguez's research on Ecuador, also using State Department sources, gives no indication of similar corruption, all she mentions is resistance to change; see The Search for Public Policy: Regional Politics and Government Finances in Ecuador, 1830–1940 (Berkeley and Los Angeles, 1985).Google Scholar

38 The New York Times, 16 Oct. 1926, Editorial.

39 NA 824.51 A/28 and 29 Martin to State Department, 13 and 18 April 1929. On Kemmerer's mission to Bolivia, see: 824.51/313 and 1146 Cottrell to State Department, 3 June 1925 and 29 June 1927. For a good summary see also Drake, Paul, The Money Doctor in the Andes: The Kemmerer Missions, 1923–1933 (Durham and London, 1989), ch. 5.Google Scholar Kemmerer Missions to Latin America, from a US perspective, are considered by Seidel, Robert N., ‘American Reformers Abroad: The Kemmerer Missions in South America, 1923–1931’, Journal of American History, vol. 32 (1972) pp. 520–45.Google Scholar

40 NA n.n. Cottrell to State Department, 20 Sept. 1927.

41 de Bolivia, Banco Central, Boletín, no. 3, p. 10.Google Scholar Comparisons for other periods are meaningless because of the Depression. For a description of the CRN, see: Permanente, Comisión Fiscal, Sexta Memoria, pp. 12–14.Google ScholarEl Diario reported favourably on the CRN's performance, 12 sept. 1929.

42 NA 824.51 A/33 Hibbard to State Department, 12 Sept. 1929.

43 Klein has interpreted the creation of the CRN as a sign of Siles's ‘conservative views on the role of government in the economy’, Parties in Bolivia, p. 12. It appears to me that necessity was a stronger reason than ideology.

44 NA 824.51/370 Schoenfeld to State Department, 12 June 1926; NA 824.51/391 Cottrell to State Department, 22 Oct. 1926; NA 824.5 1a/8 same to same, 10 May 1927. Whitehead (‘La Gran Depresión’) has argued that the conflict between mining interests and merchants over the exchange rate was one of the causes why mining interests alienated commercial interests during the Depression. It is clear that this conflict was not‘born’ in the Depression; it had existed long before (when it was perhaps sharper) while during the Depression an amicable agreement – with the Central Bank's mediation ' was reached. See below.

45 Ness, , ‘Movement of Capital’, pp. 104–9.Google Scholar

46 The Liberal's position was stated by President Montes in 1904, thus: ‘How will we make productive the national heritage we Bolivians have? I will say so in two words: establishing railways and laying telegraph wires…this is my administration and government program: build railways.’ ‘Una entrevista con el Presidente Montes’, Iquique, 1 May 1904, quoted in Millán, Juan Albarracín, El poder minero en la administración Liberal (La Paz, 1972), p. 90.Google Scholar Writing in 1928, Marsh, Margaret stated that: ‘…no government could hope to retain control of public affairs in Bolivia that did not attempt to promote railway development’, Bankers in Bolivia, p. 97.Google Scholar Finally, Herbert Klein suggests that public works were pursued by Saavedra to ‘vitiate… opposition, as well as to justify the constructive nature of…government in terms of material progress which all previous governments had used as crucial determinants of success’. And that railways were ‘…a hall-mark of concrete “progress” in Bolivian politics since the days of Arce’ (1888–1892), Parties in Bolivia, pp. 77, 84.Google Scholar

47 As early as 1928 Margaret Marsh pointed out the economic limitations to railway building in general in Bolivia and actually mentioned that a road should precede the Cochabamba-Santa Cruz railroad: Bankers in Bolivia, p. 86. The 1943 US Aid Mission to Bolivia headed by Merwin Bohan confirmed her evaluation and opted instead for a road from Cochabamba to Santa Cruz which was built in the fifties. The railway was never completed. The Sucre–Potosí railway was finished in 1943 and when the UN analysed its performance in 1958 it found it uneconomic on account of the low production levels in the areas it served, Desarrollo económico, p. 217.

48 NA 824.51/766 Shillcock to State Department, 4 Dec. 1933.

49 I have not been able to establish exactly who these interests were, but one possibility – especially during Saavedra's government – is that railway building was a way to ‘placate the [southern] upper-class’, as suggested by Klein; particularly because Saavedra's power-base was the urban middle class concentrated in Paz, La: Parties in Bolivia, p. 84.Google Scholar Another reason was that railway contracts provided ample opportunities for illicit enrichment. There is much evidence of corrupt government officials and political acolytes of the different presidents profiting from railway contracts. See: NA 824.77/73, 76 and 48 Cottrell to State Department, 3 and 30 Sept., and 4 Nov. 1922; NA 824.71/104 Cottrell to State Department, 24 July 1924.

50 Averages calculated from data in McQueen, , Bolivian Finance, pp. 33–6Google Scholar; figure for 1927 from reports of the CFP to bankers in NA 824.51 D581/34; figure for 1930 from NA 824.51/566 Feely to State Department, 16 Oct. 1930.

51 In early 1930 the army had received advances amounting to Bs. 600,000 in addition to their budgetary allocation. NA 824.51/540 Hibbard to State Department, 11 April 1930.

52 NA 824.6354/70 Hibbard to State Department, 26 March 1930; NA 824.51/550 same to same, 10 June 1930.

53 Permanente, Comisión Fiscal, Quinta Memoria, p. 13.Google Scholar

54 See NA 824.51 D58/33 Cottrell to State Department, 27 Aug. 1927.

55 NA 824.51 D58/33 Cottrell to State Department, 27 Aug. 1927.

56 NA 824.51/545 and 566, Hibbard to State Department, 26.April 1930 and Feely to State Department, 16 Oct. 1930. The Comptroller's speech is reproduced in full in El Diario, 28 Oct. 1930.

57 La Razón, 24 March 1931.

58 de Bolivia, Banco Central, Boletín, no 22., p. 15Google Scholar; NA 824.51/578 Feely to State Department, 12 Nov. 1930.

59 See: NA 824.51/547 and 550 Hibbard to State Department, 30 May and 10 June 1930. Cables from the CFP, the Central Bank and the Contraloría to US bankers are reproduced in NA 824.51/552 Chase Securities Corp. to State Department, 2 July 1930.

60 The Commission was headed by Carlos Victor Aramayo, one of the three principal mine-owners, who published the Commission's proposal to the bankers in the local press. The Bolivian government had previously requested a meeting with the bankers and an official US government representative, but this was not accepted by the State Department. See: NA 824.51/564, 565 and 568. The bankers' proposal, not made public by Aramayo, is found in Chase Securities' Geiger to Feely, American Minister in La Paz, 5 March 1931, included in NA 824.51/604.

61 For the Depression's first effects on Bolivia see Whitehead, ‘La Gran Depresión’ and Pacheco, Napoleón, ‘Visión histórica de las crisis en Bolivia’, Análisis (supplement of the La Paz daily, Hoy) IV, nos. 144 and 146.Google Scholar

62 On Bolivia's role in the cartel see Hillman, John, ‘Bolivia and the International Tin Cartel, 1931–1941’, Journal of Latin American Studies, vol. 20 (1988), pp. 83–110.CrossRefGoogle Scholar The internal effects of the cartel are analysed by Hallowell, Burton C., ‘Some Aspects of Tin Control as Applied to Bolivia’, unpubl. PhD diss., Princeton University, 1948.Google Scholar Three chapters of the dissertation have been published: ‘Administration of Tin Control in Bolivia, 1931–1939’, Inter-American Economic Affairs, vol. III, no. 2 (Autumn 1949), pp. 3–24Google Scholar; ‘Tin Control and Bolivia's Foreign Exchange Position, 1930–39’, Inter-American Economic Affairs, vol. III, no. 3 (Winter 1949), pp. 61–83Google Scholar; and ‘Tin Control and Exchange Depreciation in Bolivia, 1931–1939’, Inter-American Economic Affairs, vol. IV, no. 1 (Summer 1959), pp. 71–84.Google Scholar

63 NA 832.51/667 Feely to State Department, 17 Feb. 1932.

64 NA 824.51/64 and 726 Feely to State Department, 19 Nov. 1932 and 11 Jan. 1933.

65 Hallowell, , ‘Some Aspects of Tin Control’, pp. 48–9.Google Scholar

66 NA 824.51/773 Adams to State Department, 31 Jan. 1934.

67 NA 824.51/774 Adams to State Department, 6 Feb. 1934.

68 NA 824.51/750 Feely to State Department, 12 July 1933.

69 While on average 9% lower than the official selling rate, the official buying rate – which is the one the mining industry received – was 64% lower than the unofficial curb-rate (see Appendix I). Percentages calculated from data in Hallowell, , ‘Some Aspects of Tin Control’, p. 195.Google Scholar

70 I use the term in the sense defined by Thorp, and Bertram, , Peru 1890–1977, pp. 18–19Google Scholar, as that amount of the foreign exchange earnings that is returned locally.

71 Hallowell, , ‘Some Aspects of Tin Control’, p. 68Google Scholar and ‘Cuadro demostrativo de… entrega de giros en moneda extranjera al Banco Central’, Patiño Mines Archives at COMIBOL, El Alto (hereafter PMA-COMIBOL), File 1383.

72 The incidence of the foreign exchange tax (FE), as a percentage of gross value of mining exports, for the period 1937–9 has been calculated by Gomez-D'Angelo, (La minería, table 18, p. 217)Google Scholar and it was still higher than export and profit taxes (EP) (Unidas, Naciones, Desarrollo económico, p. 10Google Scholar). In 1937, FE 16.04, EP 12.3; 938, FE 16.68, EP 11.3; 1939, FE 13.49, EP 11.7.

73 Patiño Mines and Enterprises Consolidates, Annual Report… 1934.

74 Patiño Mines and Enterprises Consolidated, Annual Report, 1935. Total tax receipts from the export sector in 1935 amounted to Bs. 13,622,911, and represented 24.3% of total government income, de Bolivia, Banco Central, Octava Memoria Anual…1936 (La Paz, 1936).Google Scholar

75 Mercantil, Banco, Novena Memoria (La Paz, 1934), p. 2.Google Scholar

76 PMA-COMIBOL, see, for example, ‘Informes sobre propiedades mineras recibidas del Departamento de Exploraciones’, 15 Dec. 1936, File 1052; Vice-president to Simón I. Patiño, 20 Jan. 1937, File 837; and ‘Memorandum sobre la petición “Santa Albina” de tierras en el Chaparé’, 10 Nov. 1937, File 1156.