FINANCIAL CRISES

The new republic was caught in a vicious cycle: financial problems caused political turmoil, which in turn unsettled an already shaky economy.

Ruth Olivera and Liliane Crete, 1991101

A lack of revenue severely constrained government effectiveness and the incumbents’ ability to resist challenges to their power. When revenues fell, the government could not meet defense costs and became vulnerable to challenge by regionally based military strongmen. If taxes on outlying areas were increased, those being taxed might rebel. If the government could not meet its international financial obligations, it risked foreign intervention to collect debts owed to foreigners.

In 1825, President Victoria’s budget totaled 21 million pesos, of which the military received 90 percent. This proposed expenditure amounted to four times government income, since between 1806 and 1824, government revenue declined from 39 million pesos to 5.4 million. To further add to its financial woes, the national government accepted the debts of the colonial administration. Even after dubious claims were disallowed, the colonial debt assumed by the republic totaled 45 million pesos. Accepting the colonial debt favored those who had lent the most to sustain the colonial regime—the Church and the elite.102

The traditional sources of revenue the colonial government had relied on were either greatly reduced or unavailable. Both the mining tax and Indian tribute, which together had supplied 30 percent of colonial revenue, were abolished. In addition, the alcabala and the pulque tax were transferred from the federal to state governments. Customs receipts formed the only reliable source of federal government revenue. However, the government pledged much of these receipts to liquidate debts, leaving little for day-to-day operations. When protectionists were ascendant, imports declined, reducing tariff collection. Smuggling and the seizure of customs receipts by military officers to pay troops further decreased tariff revenue. Also, since Mexican exports did not generate enough revenue to finance large-scale importation, there were few imports to levy tariffs on. Imports fell at an average rate of 3 percent a year from the mid-1820s to the mid-1840s, thus undermining customs duties as a revenue source. Despite these limitations, between 1826 and 1831 levies on foreign trade generated 54 percent of tax revenue.103

Financial solvency was undermined by the fallacious assumption that the tax structure that had functioned so well during the colonial period could finance the republic. Officials simply assumed that the new government would inherit the legitimacy of the Crown. However, the elite, which had willingly financed the Crown, refused to pay taxes since it regarded the newly created federal government as a greedy consumer of its wealth, not as a partner in the development of the nation. Between 1824 and 1867, financial policy was in constant flux, as is indicated by fact that the average term of finance ministers was less than five months.104

Since the old colonial tax collection system had collapsed, states assumed the responsibility for collecting taxes and then transferring revenue to the federal government. However, this often resulted in delayed payment. In other cases, states simply failed to report what they had collected. In desperation, the federal government responded to its fiscal problems with ad hoc measures such as forced loans, confiscation and sale of assets, including those of the Church, and a wide variety of tax increases.

Some decisions that individually appeared to be sound further undermined government finances. The tobacco monopoly was eliminated to please the citizenry. In the name of equality, the tribute paid by Indians was abolished. Taxes on silver production were sharply reduced to reinvigorate mining.

For a brief period in the 1820s, the government remained solvent by borrowing aboard. However, after it defaulted on its foreign loans and could no longer borrow abroad, it turned to domestic moneylenders (agiotistas). The agiotistas produced a vicious cycle of mortgaging future income to secure funds at ever higher interest rates. This reduced even further the revenue available for daily needs and necessitated increased borrowing from the moneylenders.105

In the context of a shrinking economy, government borrowing at annual interest rates as high as 536 percent created a veritable Ponzi game. Since the government had no solid revenue base, it used new loans to liquidate old debts. Since the loans were so risky, interest rates were exorbitant. When the amount borrowed reached untenable levels, as it frequently did, the whole system would collapse. Sometimes new governments would repudiate loans to previous governments. In other cases, they lowered interest rates by decree. Often, when all obligations could not be met, certain sets of lenders were paid, and others were not. Lenders would use all their political leverage, domestic and foreign, to ensure they were among those repaid.

The agiotistas became one of the most influential groups, utterly unaccountable to any constituency. They would lend money to those contemplating a coup if they felt that their chances of having previous loans repaid would be enhanced by the coup. These financiers often obtained their initial capital in foreign commerce, profited from lending to the government, and then diversified into other activities, notably the textile industry and agriculture. In 1844, historian Carlos Bustamante observed they constituted a “class of people cursed by God and abhorred by the whole nation.”106