The victory over Maximilian did not automatically lead to economic development as the liberals had hoped. Mexican society remained very traditional, with 61 percent of its workers employed in agriculture and mining. Some 64,000 artisans dominated manufacturing. Church wealth, which liberals had hoped would provide a stimulus to the economy once it was transferred to private hands, had been largely dissipated by war.2
The restored republic faced many of the same economic obstacles Mexico had faced earlier in the century. Mexican entrepreneurs were lacking, especially those devoted to technological change and long-term growth. Forced loans, banditry, and property destruction continued to deter investment. Finally the appalling transportation system prevented the creation of integrated markets. Austrian Lt. Ernst Pitner, who fought on the French side in the 1860s, commented on the allimportant transport route between Mexico City and Veracruz:
The mud between Orizaba and Cordoba reaches in places to a pedestrian’s armpits. Laden mules in large numbers get stuck in it and suffocate. On the route one sees at least twenty such dead animals. At times soldiers with packs had to be pulled out with ropes slung under their arms.3
Juarez felt economic development would create a strong state that could defend Mexican interests. Given the lack of local capital to spur development, his administration sought foreign investment. That led to a conundrum—how to attract foreign capital without inviting the foreign intervention that development was designed to prevent.4
After the 1820s, British lenders maintained a loan embargo on Mexico due to its bond defaults. Obtaining foreign capital was further complicated when France, Spain, and Great Britain broke diplomatic relations with Mexico after the execution of Maximilian. Almost by default, Mexico turned to the United States for the investment capital Europeans would not provide. In 1873, Ignacio Mariscal, Mexico’s ambassador the United States, made this opening explicit:
It should be clear to any impartial observer that Mexico fervently desires the investment of foreign capital, and especially that of the United States, to develop its wealth and uncover the immense treasures which lie hidden in its valleys and mountains and which await the effort of intelligent industry to be converted into inexhaustible sources of life and wealth.5
Throughout Latin America, the elite shared the view that economic development would occur by Latin American nations’: 1) exporting commodities, 2) receiving foreign investment, and 3) attracting European immigrants. Before 1880, the Mexican government did not assume an active role in the development process due to the general feeling that development would be almost spontaneous. Even if it had desired to do so, the government’s meager budget would not have allowed it to play an active economic role.6
When Diaz became president in 1876, the government lacked the resources to buy off regional warlords or to cow them into submission. In the short run, he could not solve his financial problems by raising taxes since the government did not have the administrative structure necessary for effective taxation. In addition, the economy was simply too small to provide much revenue.7
Diaz pulled Mexico out of a self-replicating cycle of violence, predation, and zero growth by granting special privileges to certain businessmen. These special privileges, such as protecting bankers from competition and establishing high tariffs on imports competing with Mexican producers, allowed the operations of certain individuals to be so profitable that they assumed the risk of investing in Mexico. Diaz ensured that the property rights of those enjoying his favor were respected. As these privileged individuals prospered, they provided financial and political support for Diaz, enabling him to defeat or buy off his rivals.8
After 1880, the Mexican economy began sustained economic growth. U. S. investment began flowing into Mexico, in part due to an effective public relations campaign undertaken by the Mexican government. In 1879, Development Secretary Vicente Riva Palacio arranged for a delegation of U. S. journalists and merchants to visit Mexico at the Mexican government’s expense. Diaz and his cabinet received them in a calculated effort to create a favorable impression and thus attract investment. At the world’s fairs in 1889 and 1892, the government invested substantial sums to project a modern, positive image of the country.9
Increased mining activity became economically feasible due to the construction of railroads to haul ore and metal to foreign markets. These foreign markets were especially buoyant, because the demand for raw materials was soaring as the North Atlantic nations were undergoing rapid industrialization.10
Technological change played a major role in the post-1880 economic expansion. Steamships facilitated the export of raw materials and the import of machinery. By 1888, the American-organized Mexican Telegraph Company had installed more than 19,200 miles of telegraph line. Later in the Porfiriato, the introduction of electricity revolutionized the mining and textile industries. Between 1900 and 1911, installed electrical generating capacity increased from 22,430 kilowatts to 165,100 kilowatts. In turn, electricity allowed for streetcars, which made large cities workable. By 1905, Mexico City’s 190-mile long streetcar system had an annual ridership of
48,000,000."
After 1880, the government began to play a more active role in promoting development. Under the Gonzalez administration (1880—1884), for the first time a government agency—the Department of Development (Fomento)—had a larger budget than the War Department had. Legislative changes encouraged investment. The 1884 commercial code paved the way for joint-stock companies (sociedades anonimas). This legislation limited investors’ liability to the amount invested in the corporation. Until that time, an investor’s entire assets were liable in case of corporate loss or damage claims. By 1900, some twenty-five large joint-stock companies operated in the tobacco, textile, brewing, and metallurgy sectors.12
The formation of the Banco Nacional de Mexico (Banamex) in 1884 provided the government with access to funds, including money to subsidize the construction of railroads. Diaz allowed those lending to the government to extract benefits from the rest of society. This allowed his administration to avoid paying high interest rates to compensate for the risks of lending to a government with a deeply flawed credit history. To induce it to lend to the government, Banamex was allowed to manage the mint and collect customs and excise taxes. The government protected Banamex by not granting charters to rival banks and allowing it to avoid taxes and reserve requirements imposed on other banks. Only two banks—one of which was Banamex—were allowed to branch freely across state lines. These privileges made it well worth Banamex lending to the government. The bank averaged 30.5 percent profits on equity between 1885 and 1898.13
After returning to power in 1884, Diaz established a solid reputation as a friend and protector of investors, and by the dawn of the twentieth century, that image provided a strong inducement for investment. To maintain his investment-friendly image, Diaz offered investors low taxes, liberal concessions, cheap labor, police protection, predictably pro-business judicial rulings, and laws adjusted to the international legal order of the developed countries. This occurred as the home markets of the industrialized nations were becoming saturated, leading to increased export of capital, much of which was invested in Mexico. In 1895, American mine operator Alexander Shepherd proclaimed Diaz to be the greatest man in North America because he had made property “twenty times safer in Mexico than it is in the United States.”14
Mexico finally put the Maximilian era behind it. By 1884, Spain, France, and Great Britain had restored diplomatic relations with Mexico. After the resumption of diplomatic relations and after having consolidated past debts, Mexico again began to receive foreign loans. A crucial step to obtaining this credit was the government’s placing of all its foreign debt operations in the hands of Banamex. The bank, with its influential European and North American financiers, was crucial for gaining the confidence of foreign lenders.15
Later in the Porfiriato, banks proliferated. Between 1897 and 1903, twenty-four banking concessions were granted. Unlike Mexican mines and industries of the time, the banks sold stock on the Mexican and European capital markets. Although banks operated under Mexican management, between 60 and 70 percent of the capital invested in them was foreign, with the French being the principal investors.16
Banks played a major role in economic development by providing long-term, low-interest financing for cotton-textile factories, metallurgical firms, and railroad companies. Their issuance of banknotes freed commerce from its old bugaboo of lacking a medium of exchange. Between 1882 and 1897, the amount of paper money in circulation increased by 21.5 percent a year.17
The banking structure inhibited more robust economic growth. Just two banks, Banamex and the Bank of London and Mexico, held more than 60 percent of banking system assets. Those without connections to the banking elite rarely received loans. Only ten of the forty-seven banks existing in 1911 were legally allowed to lend for terms of more than one year.18
By the beginning of the twentieth century, Mexico was inexorably linked to U. S. and world markets. When the 1907 recession hit the United States, the Commercial and Financial Chronicle, a Wall Street paper, declared, “Of course Mexico could not escape being affected by business depression in the United States.” The price of silver and copper fell, mine production declined, and mine workers were laid off. Since mines and railroads were the main consumers of manufactured goods, recession rippled through the Mexican economy. Between 1900 and 1910, the proportion of the population working in agriculture rose, as those forced out of mines and factories returned to the farm. The 1907 recession even brought down the financially overextended Colonel Greene, who lost control of his Cananea mines, which were valued at $25 million.19
The 1907 recession notwithstanding, the elite expressed satisfaction with the course of Mexican development. Mexico was enjoying low-cost credit as Treasury Secretary Jose Limantour had balanced the budget and renegotiated Mexico’s foreign debt. Also under Limantour, the alcabala, a form of internal tariff, was abolished, facilitating the creation of a national market. The heavy reliance on foreign investment, which increased from $200 million at the beginning of the Porfiriato to between $1.5 billion and $2 billion at its end, was seen as a transitory stage. In 1905, Limantour told Congress:
The day will come, as has been exemplified by the history of other modern nations, when the
Population, increased by the multiplication of the means of livelihood and trained in more
Laborious habits, will by degrees redeem itself from indebtedness, and when that happens, the bonds, shares, and other securities of our most flourishing enterprises will be held at home and will not be allowed again to leave the country.20
In sharp contrast to the period before 1870, during the Porfiriato Mexican economic growth exceeded that of the United States. In 1870, Mexican gross domestic product (GDP) per capita was 27.6 percent of that of the United States. By 1910, it had risen to 34.1 percent.21
World History
