Brazilian Economy in the Second Vargas Administration (1951-1954)

Portrait of Getúlio Vargas, president of Brazil at two distinct times: from 1930 to 1945, and from 1951 to 1954.
Portrait of Getúlio Vargas, president of Brazil at two distinct times: from 1930 to 1945, and from 1951 to 1954. Public domain image.

The second Vargas administration lasted from 1951 until 1954, when Getúlio Vargas returned to power after a brief interval of Eurico Gaspar Dutra’s administration. During this period, Brazil faced adverse scenarios: inflation, public deficit, and foreign exchange crises. In terms of monetary and fiscal policy, there were both contractionary and expansionary policies — because the government needed to tackle economic woes, yet did not want to give up the prerogative of stimulating economic development. Similarly, in foreign exchange policy, protectionism was often employed to encourage national industry. Despite the benefits of this policy, it made it difficult to fight inflation. Overall, this period of Brazil’s history was characterized by successive monetary, fiscal, and foreign exchange crises, unsolved by Vargas, who left a perverse legacy.

When Vargas ran for the presidential election in 1950, he proposed conducting an administration divided into two stages — “After Campos Sales, Rodrigues Alves,” in his words. It was an allusion to two administrations during the First Republic: the first characterized by economic adjustments, and the second marked by the resumption of projects to spur economic growth.

Initially, economic adjustments were necessary because Brazil faced a scenario of inflation and public deficit. In this context, the Finance Ministry, led by Horácio Lafer, adopted contractionary monetary and fiscal policies. However, there were two elements that undermined the effectiveness of these measures:

  • Credit expansion: The president of Bank of Brazil, Ricardo Jafet, insisted on expanding the granting of credit, despite the administration’s guidelines.
  • National Economic Re-equipment Plan (Lafer Plan, or Plano Lafer): Formulated in November 1951, it was an attempt to develop certain sectors of the economy: agriculture, basic industry, logistics infrastructure, and energy. To invest in them, the government planned to increase taxes and raise foreign capital, mainly from the United States. The money for the plan would be allocated to the newly created Fund for Economic Re-equipment.

At that time, Brazil’s balance of payments was in a favorable situation. The price of coffee was increasing, and it was expected that the Americans would invest in Latin America as a way to garner support amid the Korean War. However, the United States did not have such intentions to invest in Brazil. They were concerned with Vargas’s nationalist policies and were also upset with the Brazilian refusal to send troops to the conflict in the Korean Peninsula. In the absence of foreign capital, the Lafer Plan was doomed to failure. It was approved with great resistance by Congress, and its goals would only come true during the administration of Juscelino Kubitschek.

In terms of foreign exchange policy, Brazil adopted a fixed and overvalued exchange rate, and lifted some import restrictions. The idea was to use the exchange rate as an anti-inflationary mechanism, attract investments, and prevent potential difficulties in importing products in the context of the Korean War.

The efforts to contract the monetary base did not work, and inflation persisted at the same levels as before. On the other hand, the fiscal adjustment worked, resulting in the first overall surplus of federal and state governments since 1926.

The biggest problems in the Brazilian economy became related to the balance of payments. The overvalued exchange rate led to a surge in imports, particularly of capital goods and other production goods, while exports fell substantially. To worsen the scenario, there was a global crisis in the textile sector, which harmed Brazilian cotton production. Immediately, the administration was forced to re-establish import controls, limiting the granting of import licenses. However, as the licenses that had already been issued were valid for 6 to 12 months, Brazil still faced foreign exchange problems as a result. The growing deficits in the trade balance led to the depletion of international reserves in convertible currencies and to the accumulation of commercial arrears. Ultimately, the crisis made it difficult for the government to encourage the country’s growth.

In June 1952, the National Economic Development Bank (Banco Nacional de Desenvolvimento Econômico, BNDE) was created. Its intention was to manage the Fund for Economic Re-equipment and receive contributions from the government and other countries to finance national development projects. However, in 1953, Eisenhower, a Republican, ascended to the United States presidency and began to neglect the financial demands of Latin America. Given that Brazil could no longer count on American credit, it had to change its economic policy at the beginning of 1953.

From then on, an expansionist fiscal policy was adopted, through infrastructure works and the granting of bonuses to public employees. In addition, a protectionist trade policy was inaugurated, through the Free Market Law of January 17, 1953. This regulation introduced a model of multiple exchange rates, aiming to increase exports, decrease non-essential imports, and stimulate the inflow of foreign capital. In practice, it had disappointing results.

In October 1953, although the Brazilian industry continued to grow significantly, the country faced monetary, fiscal, and exchange problems. This required a reformulation of monetary and exchange policies, in two aspects:

  • Instruction 70 of SUMOC: The SUMOC was the Superintendency of Currency and Credit (Superintendência da Moeda e do Crédito), Brazil’s central bank. According to this instruction, the Bank of Brazil would monopolize the sale of foreign currency, and the quantitative control of imports would be abolished — that is, prior authorization to import products would no longer be necessary. Moreover, the system of multiple exchange rates was replaced by a system of bonuses on top of the official exchange rate. In practice, there would be five exchange rates: three rates for imports and two rates for exports, with a protectionist intent.
  • Aranha Program (Programa Aranha): It was an economic plan essentially aimed at curbing inflation, through monetary and fiscal contraction. It prescribed that the Bank of Brazil would be subordinated to the Finance Ministry, to prevent these institutions from adopting contradictory measures (as occurred when Ricardo Jafet was in charge of the bank). Moreover, it prescribed that the government would have a better-defined budgetary policy, to try to curb excessive public spending.

The Instruction 70 of SUMOC resulted in a devaluation of the exchange and an increase in government revenue. Thanks to the depreciated exchange, Brazilian exports were encouraged, leading to surpluses in the trade balance. The increase in tax collection, in turn, stemmed from the fact that foreign currency for most imports was sold in auctions over which the government earned a premium. Another consequence of Instruction 70 was the so-called “foreign exchange confiscation” (confisco cambial): the fact that coffee exporters ended up with lower earnings in Brazilian currency. This happened because the exchange rate set for coffee exports was slightly overvalued, as a way to discourage an excess supply by coffee growers. This measure was widely criticized by this economic sector, but it was not revoked.

The Programa Aranha failed to control inflation, because the government was unable to reduce public investments and because commercial protectionism made it difficult to import cheaper foreign products into the country.

Thus, at the beginning of 1954, Brazil faced a situation of inflation, fiscal deficit, and currency devaluation. Throughout that year, the situation worsened:

  • Inflation and fiscal deficit worsened: On May 1, 1954, the government granted a 100% increase in the minimum wage for the entire population. This adjustment was far above what would have been necessary to compensate for the wage losses caused by inflation (53%). Moreover, such a measure was in direct contradiction to the ideas of politicians like Sousa Dantas, president of the Bank of Brazil, who proposed an adjustment of 33%.
  • The situation on the balance of payments worsened: Faced with a rise in international coffee prices, some consumers in the United States decided to boycott this product. In their view, Brazil adopted monopolistic practices in the coffee market. In reaction, they abruptly stopped buying coffee, causing an immediate drop in Brazilian exports.

On August 14, 1954, the government even tried to face the deterioration of the Brazilian economy, through the issuance of Instruction 99 of SUMOC. This law allowed the sale of part of the foreign currency obtained from coffee exports on the free market, without surcharges, as a way to reduce the minimum price of coffee. It caused a 27% currency devaluation but was ineffective in aiding the coffee sector. Regardless, the economic problems would be left as a legacy for the subsequent administration, because Getúlio Vargas faced political woes and decided to commit suicide on August 24, 1954. For a brief period, Brazil would be governed by then Vice President, Café Filho.




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