Brazilian Economy in the Vargas Era (1930-1945)

A group of men, most wearing formal attire and hats, walking down a street with a banner that says 'THE WORKER ALSO HAS HIS PLACE IN THE NEW STATE'. The scene reflects a public event or demonstration, with buildings in the background, and suggests a specific political or social context.
“The worker also has his place in the Estado Novo”. Banner in defense of Vargas’ labor policy. Image by unknown author.

The Vargas Era (1930-1945) was the period during which Brazil was governed by Getúlio Vargas — first as a provisional ruler, then as an elected leader, and finally as a dictator. During these 15 years, Brazil had to deal with a series of economic crises (domestic and/or international), and the chosen approach was to focus on increasing the competitiveness of Brazilian firms through protectionism. These were the main characteristics of the Brazilian economy during the Vargas Era:

  • State Intervention: Even without a Ministry of Planning, the federal government established guidelines for the Brazilian economy and created bodies to oversee their implementation.
  • Centralization: Unlike during the First Republic, the various states within Brazil had little say in the definition of economic policy, which was developed by bureaucrats of the central government.
  • Laborism or Capital-Labor Pact: The government actively promoted the idea that employers and workers should cooperate for the common good. For the workers, the government began to promote work ethics and created labor laws that secured political support for Vargas even after 1945. For employers, protectionist measures were put in place, and the government spread the idea that labor rights would help to discipline labor relations, expand the consumer market, and grow the Brazilian economy.
  • Shift in the Core of the Economy: Since the Colonial Period, the Brazilian economy was oriented towards meeting external demand for tropical products. From 1930 onwards, Brazilian household consumption increasingly became the most important part of the national GDP.
  • Activity of State-Owned Companies: Government enterprises acted to boost development in sectors that were not very profitable for private capital but were considered fundamental for the country.

Below, there is a chronological context of the economic policies and the general state of the Brazilian economy during the Vargas Era.

Provisional Government (1930-1934)

Right at the start, the Wall Street Crash of 1929 had a severe impact on the external sector of the Brazilian economy. There was a fall in capital inflows, imports, exports, and consequently, in international reserves. At that time, England led the foreign direct investments in Brazil, in traditional sectors such as the railways, but the United States was gradually increasing its participation in Brazilian industry and services. However, amidst the Great Depression, the trend was a decline in investments. Furthermore, a massive devaluation of the Brazilian currency, the mil-réis, by 55% was seen. This harmed the government’s foreign currency earnings from coffee exports, as well as the payment of foreign debt.

Initially, the new government’s economic policy was marked by what Brazilian economist Marcelo de Paiva Abreu calls a “primitive rhetorical liberalism. This was evidenced, for instance, by the fact that the exchange rate was kept floating, just as in the final years of the First Republic. However, in practice, there were restrictions on foreign exchange transactions as the country was forced to declare successive moratoriums on foreign debt — largely quoted in British pounds or US dollars, and therefore unpayable in that moment of crisis.

Nonetheless, the deleterious effects of the 1929 Crisis soon led the government to adopt protectionist measures — although, that liberal rethoric was maintained in governmental speeches. In 1930, Brazil officially abandoned the gold standard but kept a fixed exchange rate, which would henceforth be set by the government. This change led to a contraction of Brazil’s monetary base, but national banks resisted it. To help maintain the liquidity of the banking sector, the Bank of Brazil‘s Rediscount Portfolio (Carteira de Redesconto do Banco do Brasil) — a kind of lender of last resort for banks — was recreated in that same year.

In 1931, import tariffs were increased, and exchange controls were reintroduced — that is, measures to limit the buying and selling of foreign currency. From then on, the Bank of Brazil would have discretionary power to choose who could engage in foreign exchange transactions, and foreign currency reserves would be used mainly for government purchases, for paying the foreign debt, and for essential imports. This measure led to the formation of a parallel foreign exchange market, so that exchange controls would later be relaxed in 1934.

Also in 1931, Brazil received the Niemeyer Mission: a mission of British economists, led by Otto Niemeyer. It aimed to recommend orthodox reforms for the country, and the Brazilian government stated that their adoption would not be a prerequisite for contracting new loans with England. The main proposals of the experts were the following:

  • In terms of fiscal policy, the government had to reduce the public deficit: One possibility would be to increase direct taxation — that is, it was expected that taxes on the external sector would be reduced or zeroed. Another possibility would be the end of the government’s involvement in plans for the artificial valorization of coffee prices.
  • In terms of monetary policy, the government had to stabilize the mil-réis: It was proposed to create a central bank, which would be in charge of currency issuing, and to return to the gold standard, potentially with the help of a large English loan for economic stabilization.

Economically, the mission had practically no results, as its proposals were unfeasible in that context. On the one hand, Brazil would not end the valorization of coffee. On the other hand, England would soon abandon the gold standard soon afterwards. Politically, however, the mission increased Otto Niemeyer’s prestige and influence over the Brazilian government.

During the First Republic, Brazil had renegotiated its external debt twice, through the so-called Funding Loans. Also in 1931, the government obtained a third Funding Loan, but this time, it did not come from an agreement with creditors. In fact, Brazil unilaterally declared that it would maintain full payment of the previous Funding Loans (from 1898 and 1914), but for three years, the interest on other federal loans would be paid with 5% per annum bonds. In practice, this meant that Brazil was forcing other creditors to grant a new loan. This was unsatisfactory because it only postponed and expanded external debt. Moreover, it caused great dissatisfaction in the United States, which had lent money to Brazilian states and municipalities, and they would not be paid normally.

As Brazil suffered a shortage of foreign currencies, various commercial arrears began to accumulate: external debts were paid in mil-réis, but not in foreign currency. While it is true that this caused friction with some creditors, Brazil suffered no foreign pressure — either because the creditors had no bargaining power (France and England) or because they did not want to use it (USA).

In 1933, given the challenging scenario brought about by the Great Depression, Vargas’ Brazil rearranged its policy towards the coffee sector. Since the final decades of the Empire, coffee export was of great significance, and the government needed to find a way to increase the prices of this product. At the beginning of the year, the solution was to split coffee stocks into three parts: 40% of the harvest would be burned (the so-called “quota of sacrifice”), 30% would be retained, and the remaining 30% would be freely traded by the producers. These percentages would remain in place until 1937, but the burning of coffee would only end in 1944. At the end of 1933, there was the so-called Economic Readjustment: a renegotiation of debts in the coffee sector. Thanks to this measure, the debts incurred by coffee growers were reduced by half, with amortizations over 10 years.

A group of men, some wearing white outfits and hats, are in an open field in front of a large pile of coffee beans. One of them, in the center, holds a long shovel and handles the beans. In the background, a group of people, including women in period attire, watches the scene.
Piles of coffee beans destined for destruction in 1938. Image by unknown author.

For Brazilian economist Celso Furtado, the core of Vargas’ coffee policy was a kind of Keynesianism even before Keynes’ ideas were published — because it was based on expansionist monetary and fiscal policies. The government issued paper money and used it to increase its own spending, through the purchase of coffee that would be burned. The process of buying and burning generated domestic income, as it put money in the hands of producers, while ensuring the sustenance of high coffee prices in the international market. This was a quite effective process for stimulating aggregate demand. However, by increasing the prices of this crop, Brazil was harming itself in the long run, as it stimulated the production of competitors.

Due to the measures adopted by the government, Brazil recovered relatively quickly from the 1929 Crisis, becoming less dependent on coffee. The alternative to this product was the national industry, which grew based on an import substitution model — after all, it was difficult to import products in the context of the Great Depression and restrictions on foreign exchange transactions.

Constitutional Government (1934-1937)

In February 1934, facing the imminent end of the 1931 Funding Loan, Brazil concluded what became known as the “Aranha Scheme” (Esquema Aranha). This was a renegotiation of the external debt, with the consent of the creditors, to temporarily reduce the interest rates. Until 1938, the country would pay 8 million pounds sterling per year, instead of 24 million pounds per year — which represents a reduction of two-thirds of the debt. Due to Otto Niemeyer’s influence, priority would be given to the payment of debts in pounds.

The Aranha Scheme relieved the problems of the balance of payments, but there was still a shortage of foreign currencies, and consequently, commercial arrears persisted. Some American businessmen wanted their government to pressure the Brazilian government to relax restrictions on the outflow of foreign currency from the country, but this did not happen. In 1934, a representative of the Federal Reserve (Fed), John Williams, came to Brazil and concluded that exchange controls were important for stabilizing the Brazilian economy and did not discriminate against American products. Despite this, due to John Williams’ recommendations, Brazil loosened exchange controls in September 1934, allowing the free negotiation of foreign currencies obtained from exports (except for those obtained from coffee exports).

This liberalization, however, caused severe problems in 1935. Brazil simply could not afford to give up exchange controls, and, therefore, they were reinstated. According to the scheme announced in Washington, D.C., 35% of foreign currencies had to be sold, at market price, to the government, so that it was able to pay its debts. In spite of this, it was common for the Federal Council of Foreign Trade (Conselho Federal de Comércio Exterior) to grant exemptions from this rule, thus the Brazilian exchange rate fluctuated in the following years. Also in 1935, Brazil reached an agreement to unfreeze commercial arrears with the governments of England and some other countries.

Despite the problems in the balance of payments, the Brazilian economy grew and became more developed during Vargas’ constitutional government. These were the main reasons that explain this fact:

  • The country adopted expansionist economic policies: For example, in 1937, the Agricultural and Industrial Credit Portfolio of the Bank of Brazil (CREAI, in Portuguese) was created — a mechanism that was initially intended to finance the agricultural sector during off-season periods.
  • The Brazilian exchange rate was devalued: Due to the higher cost of imports, national industry was stimulated.
  • The government introduced or expanded protectionist measures: For example, the import tariff increased by 15% in 1934.

Estado Novo (New State) (1937-1945)

In 1937 and 1938, even exchange controls did not suffice to prevent problems in Brazil’s balance of payments. Due to an economic crisis in the United States, the main buyer of Brazilian coffee, there was a 25% drop in the price of this product and in the depletion of the foreign reserves accumulated by the Bank of Brazil. Interestingly, the volume of coffee exports increased during this period, but not enough to compensate for the contraction in the price of coffee and in the volume of exports of other products.

Faced with this adverse scenario, the government stopped prioritizing the payment of foreign debt. Instead, it opted to intervene in the economy to ensure investments — especially in the Armed Forces and in transport infrastructure. In 1937, three measures symbolized this turn:

  • A moratorium on foreign debt was declared.
  • The policy of valorizing the price of coffee was abandoned — because it was understood that Brazil had lost space in the international market and that this policy would benefit the country’s competitors more. If the price of coffee was low, less competitive competitors would leave the market.
  • Exchange controls were reinforced.

Although the Brazilian measures led to protests from creditors, the USA remained tolerant of Brazil and maintained good relations with it, to the point of receiving the Aranha Mission (1939). This was a visit to Washington, D.C., by then Foreign Minister Oswaldo Aranha. It had a quite ambitious agenda, but the expectations about it did not materialize. As positive outcomes, the USA would lend money to Brazil, through Eximbank, for the unfreezing of commercial arrears; while Brazil would liberalize foreign exchange, reduce trade with Nazi Germany, and resume the payment of its foreign debt. Although the mission had negative repercussions in Brazil, the commitments made in it were generally respected.

Middle-aged man with gray hair, wearing a dark suit and tie, with a serious expression, in an indoor setting with people in the background.
Oswaldo Aranha, the man responsible for renegotiating Brazil’s external debt and obtaining economic concessions from the USA. Image by unknown author.

The new Brazilian foreign exchange policy, announced in 1939, established a regime of multiple exchange rates. 70% of the foreign currencies from exports could be traded freely, while the remaining 30% had to be sold, at favorable rates, to the Bank of Brazil, so that it could pay the government’s debts. For private financial transactions, such as profit remittances, there would be a “free-special” exchange rate, more devalued, intended to discourage capital outflow.

Also in 1939, Brazil attempted to renegotiate the payment of the external debt, but negotiations were interrupted because of World War II. The following year, a temporary agreement was reached, valid for four years, according to which Brazil would pay half of what had been determined in the Aranha Scheme — that is, 4 (not 8) million pounds per year. Additionally, the Anglo-Brazilian Payments Agreement was signed, stipulating that the pounds earned by Brazil in trade with England could only be used to pay debts to English creditors. At the time, the English government commonly signed such agreements with various countries.

Due to the outbreak of World War II, the Brazilian economy was immediately negatively impacted. There was an immediate drop in the level of imports, for various reasons: few pounds were entering Brazil, the pounds Brazil already had were blocked in England, and European countries were closing off to international trade as their economies turned to war efforts. Thus, Brazil saw a significant decline in the national GDP, largely due to stagnation in the agricultural sector and the difficulty of importing industrial inputs and machinery. Nevertheless, in the following years, the Brazilian industry would grow based on an import substitution model.

From 1942 onwards, Brazil’s economic situation improved significantly, influenced by several factors:

  • Increase in exports: Strategic materials, such as rubber, were sent to the United States to meet war needs, and agricultural products were again exported to Europe. Additionally, as a way to prevent Axis countries (Germany, Italy, Japan…) from winning hearts and minds in Latin America, the USA contributed to sustaining higher prices for the continent’s agricultural products.
  • Increase in US investments: An example of this was the creation of Brazil’s National Steel Company (Companhia Siderúrgica Nacional, CSN) in 1941.
  • Adoption of clearly expansionist economic policies: Thanks to currency issuance and the expansion of credit offered by the Agricultural and Industrial Credit Portfolio of the Bank of Brazil (CREAI, in Portuguese), there were stimuli to aggregate demand, in order to boost economic growth.
  • Little emphasis on combating inflation: There was a currency change, moving from the mil-réis to the cruzeiro. However, inflation still increased.

In 1943, Brazil achieved a Definitive Agreement on External Debt, reducing it by half: from 220 million to 110 million pounds. In 1944, the country participated in the Bretton Woods Conference, which reorganized the international financial system. There, the need to create a Brazilian central bank emerged, and this would be the newly-created Superintendency of Currency and Credit (SUMOC). The intention of this measure was to form an institution that was independent from private banks, to regulate their operations and prevent an excessive expansion of the monetary base. However, in Brazil, these ideals were not fully implemented, because SUMOC was subordinated to the Bank of Brazil and, therefore, could be used to print money without any restrictions. This unorthodox solution is explained by the fact that the Bank of Brazil was employed to buy political support, thus many authorities resisted weakening its powers.

As World War II was coming to an end, however, the Brazilian economy had to deal with a change in scenario: the drastic reduction of US investments. For the US government, as there was no longer a war, there was no longer a reason to generously finance Latin American countries. With this, Brazil suddenly found itself deprived of support to sustain the price of coffee, to build new industries, and to receive the necessary capital to ease the pressure on the balance of payments. A notable example of this was the decision of the Ford Motor Company to abandon the Fordlândia project — a region in the state of Pará that had received numerous investments to become a rubber production hub. The lack of US generosity would have significant implications for the Brazilian economy during the government of Eurico Gaspar Dutra (1946-1951).


The Vargas Era began strongly conditioned by the 1929 Crisis and the Great Depression. Due to the outflow of foreign currency, the government was forced to adopt exchange controls, to increase import tariffs, and to seek renegotiation of external debt. Measures like these were effective in pulling Brazil out of the crisis but were maintained even when they were no longer necessary. Thanks to them, the national economy was able to develop, especially the industrial sector, which became the great achievement of the Vargas Era. Some foreign exchange crises occurred, but they did not lead the country to failure. In fact, after World War II, the main concern of the government would be to preserve the advancements previously obtained and to deal with the withdrawal of US capital. The measures taken by Vargas had a profound impact on Brazil’s economic condition throughout the 20th century, and some of them continue to influence the country to this day.




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