Bolivia’s independence day and how our economics was back then…

On this special day for all of us, I thought there is no better homage than to share Fundacion Milenio’s wonderful work:

Escudo NacionalThe economic situation in Bolivia in its creation: August 6, 1825

What was the situation of the Bolivian economy on August 6, 1825?

Once created the Republic of Bolívar, to then be called Bolivia, the first President Simón Bolivar and especially the second, José Antonio de Sucre (Dec/1825-Apr/1828), had to face a set of problems, a difficult external economic context. Internally the economy was going through a severe downturn, due, among other factors, to the exhaustion of the silver mines and the negative effects of the war for independence.

The first global financial crisis 1825-1826

Since 1822 the British economy, financial center of the world, experienced a bullish phase in values driven by the placement of government bonds of debt placed on the London Stock Exchange, by the new Latin American republics who faced problems of funding due to its bulky tax expenditures. On the other hand, the reputation of the mining riches of Latin America had promoted the formation of societies to exploit the deposits mainly gold and silver.

Between 1822 and 1825, the countries that captured resources in London were: Colombia (which included Colombia, Venezuela and Ecuador), Chile, Peru, Brazil, Mexico, the city of Buenos Aires and the Central American Federation. Total debt were placed for a total of 24.4 million £ [pounds]. In the mining field, between 1824 and 1825, there were 25 organized mining companies, with a £ 24 million authorized capital, however only met three £ million. Overall, Latin America received the 62.3 per cent of the capital who came out of the city.

When doubts about the ability of Peru emerged to meet the debt service, in May 1825, the bubble was punctured. The impact went from the stock-market to the banking and monetary system. The banks that made loans to speculators, could not recover their resources and the panic spread to the whole of the banking system who faced a run from deposits. The results were the failure of 73 banks and the fall of gold from the Bank of England reserves.

Although Bolivia had not indebted and 25 mining companies formed in London, only two were created to exploit the Cerro Rico de Potosi, the effect of the crisis was important because it could not attract investment to revive the production of silver.

The situation of silver mining

Having failed the first attempt of direct foreign investment, the situation of the silver mining was dramatic. The British Joseph B. Pentland, was sent by his Government to conduct a review on the economic possibilities of Bolivia in 1826, which demonstrates the dramatic description of this situation. Between 1826 and 1827 in Potosi and Oruro production was obtained mostly from deforestation, and the number of units refineries in the city of Potosi, in 1826 was 12, while in 1809 there were 140.

Diminishing returns or decline in production and decrease in purity of ore, or grade emerges due to depletion of deposits, mainly of the Cerro Rico de Potosi, a typical phenomenon of the mining activity. The decline of the production began towards 1650, due to the lack of technological innovation. Production recovered to starting from the Decade of 1750 by the reduction of the tax burden in 1736, which lowered the tax on the value of production, from 20 to 10 percent, factor that facilitated the exploitation of veins of minor grade and, consequently, achieve momentary increases in production. However, since the 1790, again the production decreased.

Bolivar and Sucre were aware of the mining crisis, and consequently took several measures which, however, did not achieve its objectives. They reorganized the Mint and created bailouts of banks, instead of the actual Bank of San Carlos, in several cities of the country. In 1826, the restoration and maintenance of the lagoons of Potosí which not only fed water to the mills, but also provided water to the city and labor recruitment was favored and the provision of mercury.

The liberators were aware that without investment there would be no possibilities of reactivating mining and they sought to create the conditions to attract foreign investment. Along those lines, Bolívar, on August 2, 1825, ordered that all mines who were under concession and that since the independence they were abandoned, flooded and collapsed would pass to the power of the State. This measure was implemented in Bolivia through the resolution of August 29, 1825, in which, moreover, stated the intention of the Government to lease or sell, by public auction, the mines that were reverted to the State. In the context of the speculative boom of mining investment in London, Bolívar intended to attract European investment. The financial crisis of 1825-1826, nipped these intentions.

Another in=depth problem of the mining was the State monopsony; i.e. export was prohibited, and the State was the sole buyer. This, in addition, paid prices lower than the current externally. Also we have to name the disposal of mercury, basic input for the smelting of ore, the lack of manpower and the high tax burden, which hindered the mining operations.

Roads, distances and freight transport

The State of the roads when Bolivia was created was disastrous. Pentland made a stunning Description: “the roads […] suit only for mules and llamas; a road for wagons or carts there is nowhere to be found […] and with the exception of one or two carriages used in religious ceremonies in Chuquisaca, a wheeled vehicle there is nowhere […] Therefore everything is transported on mules, donkeys and llamas, the latter the most common and useful beasts of burden that has the Aboriginal people”. Also the location of major cities, away from the coasts and cities such as Lima or Buenos Aires, determined the existence of vast distances and high freights of transport.

Population

In 1826 Pentland estimated that the total population reached approximately 1.1 million, of which in the Department of La Paz lived 32 per cent of the total. The city with the largest number of inhabitants was La Paz with 40,000 people, due to its excellent commercial location, then they were Cochabamba with 30,000 and the capital, which then would be called Sucre, with 12,000. Potosi, which at the end of the 16th century had 160,000 inhabitants, in 1826 hardly had 9,000 people. This decline of the city in Potosí population, was due to the gradual contraction of silver production from the second half of the 17th century.

Foreign trade and trade balances in 1826

The British observer also made a record of the trade balance in 1826, which warns the export structure focused on raw materials which, together, contributed with 97 percent to the total exports, of which mining companies contributed with 87 percent, while exports of manufactures and semi-manufactures hardly amounted to 3.0 per cent. Imports of finished products reached 92 per cent and in raw materials and inputs were to silver mining. Another relevant aspect of this first calculation of the balance of trade was the significant trade deficit that was financed with the export of silver coins, which by its great quantities, could even generate surplus.

The fiscal situation in the early days of the Republic

Once created the Republic of Bolivia, one of the most pressing problems that had to face the new authorities, was the financing of the costs of the new State. The extensive war of independence shrank tax revenues before founding the Republic. In 1820 the total income of the Alto Peru (Audiencia de Charcas), was 2.2 million pesos, down at 35.3 per cent in relation to the average registered between 1800 and 1809, while in 1825 income barely reached 1.6 million pesos.

The structure of fiscal expenditure shows the enormous weight of the military apparatus that between 1826 and 1827 existed, absorbed the 61.4 percent and 59.2 percent respectively of the total expenditure. This situation is explained by the large number of troops of the national army and the Liberator joined army, consisting mostly of Colombian and Peruvian troops that remained in the country at the request of the constituent Assembly. The second category in importance was constituted by payment of salary to State officials. As a result of high costs and depressed levels of tax revenues, fiscal balances were continuously deficits; for example, in 1826 the deficit reached 39 per cent of the revenues collected.

Elimination of the tribute of indigenous or indigenal contribution and its replacement

The tribute to indigenous people or the indigenal contribution was a tax introduced in the colonial period that the Indians had to pay for the usufruct of the land.

This tax was abolished by Bolívar in Cuzco on July 4, 1825, however, the measure did not extend to the Alto Peru. It was only on December 22, 1825, that, by Decree, this tax was abolished and was replaced by the wealth and income taxes. However, this reform has failed, and in January of 1827 recovered the indigenal contribution which provided in that year with 39 percent to tax revenues.

In summary, the birth of the Republic of Bolivia occurred under completely adverse economic conditions. However, the task of administrative and institutional organization that deployed Sucre, until the moment that he was overthrown, certainly did not mean the overcoming of the problems, but it allowed the country to start its consolidation and reaffirm its independence.

The Spanish original document can be seen here: Coy_204_-_La_situación_económica_de_Bolivia_en_su_cr eación__6_de_agosto_de_1825 

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