Vargas Era - Great Depression

Great Depression

The tenente rebellion did not mark the revolutionary breakthrough of Brazil's bourgeois social reformers. But the ruling paulista coffee oligarchy could not withstand the near-breakdown of world capitalism in 1929. Brazil's vulnerability to the Great Depression had its roots in the economy's heavy dependence on foreign markets and loans. Despite limited industrial development in São Paulo, the export of coffee and other primary products was still the mainstay of the economy.

Days after the U.S. stock market crash on October 29, 1929 (See Black Tuesday), coffee quotations immediately fell 30% to 60%. The subsequent decline was even sharper. Between 1929 and 1931, coffee prices fell from 22.5 cents per pound to 8 cents per pound. As world trade contracted, the coffee exporters suffered a vast drop in foreign exchange earnings. The Great Depression possibly had a more dramatic effect on Brazil than on the United States.

The collapse of Brazil's valorization (price support) program, a safety net in times of economic crisis, was strongly intertwined with the collapse of the central government, whose base of support resided in the landed oligarchy. The coffee planters had grown dangerously dependent on government valorization. For example, in the aftermath of the recession following World War I, the government was not short of the cash needed to bail out the coffee industry. But between 1929–30, world demand for Brazil's primary products had fallen far too drastically to maintain government revenues. By the end of 1930, Brazil's gold reserves had been depleted, pushing the exchange rate down to a new low. The program for warehoused coffee collapsed altogether.

Washington Luís Pereira de Sousa's government faced a deepening balance-of-payments crisis and the coffee growers were struck with an unsellable harvest. Since power ultimately rested on patronage, wide-scale defections in the delicate balance of regional interests left the regime of the Washington Luís vulnerable. Government policies designed to favor foreign interests exasperated the crisis as well, leaving the regime alienated from just about every segment of society. Following the Wall Street panic, the government attempted to please foreign creditors by maintaining convertibility according to the money principles preached by the foreign bankers and economists who set the terms for Brazil's relations with the world economy, despite lacking any support from a single major sector in Brazilian society.

Despite capital flight, Washington Luís clung to a hard-money policy, guaranteeing the convertibility of the Brazilian currency into gold or British sterling. Once the gold and sterling reserves were exhausted amid the collapse of the valorization program, the government was finally forced to suspend convertibility of the currency. Foreign credit had now evaporated.