Financing the Central American Federation, 1821-1838¹

I

When Guatemala declared her independence of Spain in September, 1821, the colony, rather ambiguously called a kingdom, comprised five provinces governed by a captain-general. Early in 1822 the provisional government, headed by former Captain-General Gabino Gaínza, voted to unite with Mexico. When this union was dissolved, after the overthrow of Iturbide, the National Constituent Assembly, meeting in Guatemala City, created the Federal Republic of Central America and inaugurated constitutional government in 1825. The stormy life of the federation of Guatemala, El Salvador, Honduras, Nicaragua, and Costa Rica ended in 1838, although the fiction of union was preserved until Guatemala formally seceded in 1847.

Many explanations have been given for the failure of the Central American Federation and the futility of countless attempts to revive it. Thanks to the absolute nature of Spanish rule, the new nation lacked experience in self-government. José Cecilio del Valle, author of the declaration of independence and a correspondent of Jeremy Bentham, understood the strength and the weakness of representative government;² but men of the stature of Valle were too few to provide continuous, responsible leadership and effective public administration. Their advice and warnings failed to stem the tide of factionalism which so often led to aggression and civil war. The idea of the unity of the provinces, which accidentally formed the reino of Guatemala, was a geographical illusion. The mountainous terrain and the formidable physical barriers to interregional communication kept the principal centers of population isolated; and isolation made most people indifferent to political, social, and economic goals transcending local interests. A strong central government might have ameliorated the effects of narrow provincialism and violent partisanship, and so preserved the union. As a matter of fact, the federal government lacked adequate resources to maintain its authority throughout the states and, as Karnes remarks, “the existence of the nation was a constant miracle.”³

It may be argued, practically with equal force, that the chronic embarrassment of the federal treasury made the government weak, and that an ineffectual government induced its own financial straits. Granted that financial insecurity contributed to the demise of the federal system, it remains to be explained why the treasury was so often depleted. Either the struggle between state and federal authorities to control the available public revenues was too often decided in favor of the states, or the failure of the economy to expand kept the tax base too narrow to yield sufficient revenue, state and federal. The two propositions are not mutually exclusive. One may agree with Fació that federalism was a luxury, and yet show that willingness to pay taxes fell short of ability to pay.⁴

II

Article 69 of the Constitution of 1824 seemed to assure the central government adequate funds to carry on its functions. Congress had the power to fix the level of federal expenditures, raise revenue by taxation, and, if tax receipts were inadequate, assess the states in proportion to their wealth and population. The federal legislature also had authority to borrow (and, curiously, “to extend loans to other nations”). Fiscal control was enhanced by congressional power to regulate interstate trade and maintain customs houses throughout the Federation. A constitutional amendment (1835) clarified the commerce clause by forbidding the states to impose duties on interstate or foreign trade without the consent of Congress. Maintaining the value of the “national currency” and fixing the foreign-exchange rate were similarly prerogatives of the federal government. Finally, with a view to promoting the growth of the national economy, the Constitution gave Congress responsibility for building roads and canals, operating the postal service, and enforcing uniform weights and measures.

Congressional authority notwithstanding, the federal treasury was chronically empty. Such is the testimony not only of government officials but of foreign observers who attempted to diagnose the ills of the Federation. John Williams, the first United States diplomatic agent to reach Central America, wrote Henry Clay in 1826 that financial conditions were “most unpromising.” The House of Deputies adjourned without passing an appropriations bill; yet Williams thought the difficulties were

(A later dispatch reveals that Williams considered increasing tariffs to be an “injustice”). In 1829 Mariano Galvez, the treasurer of Guatemala, told the Assembly:

I doubt that it is possible to reconstruct completely the story of federal finance in 1821-1838. There are obvious gaps in the following account, either because the records do not exist or I have not been resourceful enough to find them. But what may be gleaned from available sources may temper extreme views of Central American backwardness. In 1832 our consul, Charles Savage, boasting that he was the only American who understood “these people,” advised the secretary of state that Central Americans “are, have been, and for ages will remain entirely unfit for any government under heaven but an unqualified despotism.”⁷ I am not convinced that Savage excelled as a historian or a prophet.

III

The new nation was born in debt. As of September 15, 1821, the treasury recognized outstanding obligations of 3,138,451 pesos, including an advance from the mint of 1,021,959 pesos con calidad de reíntegro. During the next two years the provisional government increased the debt by 445,125 pesos, and in October, 1823, the Assembly pledged federal revenues for the payment of principal and interest on the entire debt. Including some pensions of colonial vintage, such as the 1,000 pesos (in oro de mina) due to the adelantado of Costa Rica, fixed charges came to about 100,000 pesos a year. The federal debt continued to climb: including interest in arrears it totalled 4,748,966 pesos in February, 1831.⁸

The Federation’s foreign debt has acquired a significance disproportionate to its size; 138 years after the debt was contracted, its memory raises the blood pressure of the Council of the British Corporation of Foreign Bondholders and partly explains the less than cordial relations between the governments of Guatemala and England. In January, 1824, the finance commission reported favorably on a proposal to borrow abroad; improvement of the economy, the commission reasoned, would create the means to service the debt.⁹ In November the government assured the Assembly that “though burdensome to a nation at one time,” foreign loans were “useful and necessary at another.”¹⁰ Authorized to borrow up to 8 million pesos, in December, 1825, the government signed a contract with Barclay, Herring, and Richardson—one of four firms offering to lend—for the sale of Central American bonds in London. John Baily, the banker ’s agent in Guatemala, promptly issued a letter of credit for 20,000 pesos, enough to assure the government funds to open a legation in London. After Juan Francisco de Sosa resigned and Valle declined the appointment, the foreign secretary, Marcial Zebadúa, agreed to serve as Central American minister to England; and in April, 1826, he took up residence at 68 Baker Street.¹¹

On August 24, 1826, the bankers handed Zebadua the following statement of the loan transaction :

In summary, the bankers contracted to sell £1,428,571 (7, 142,857 pesos) in principal amount at 70; as of August 24, 1826, they had disposed of only £111,300 at 68. Interest for six months, commissions, expenses, and disbursements to the government of Central America exceeded the amount realized from the sale of bonds by £18,700. Questioned by Zebadúa, the bankers pleaded “hard luck” in placing the bonds; they also reminded the minister that the states of Honduras and Costa Rica were negotiating foreign loans in contravention of Barclay’s two-year option on all Central American financing. The main obstacle to a successful bond flotation was stringency in the London money market, which in the fall of 1826 forced Barclay, Herring, and Richardson into bankruptcy.¹²

Zebadúa now began negotiating with Reid, Irving, and Company, obtaining their assurances that a million-pound bond issue could be floated in 1827. After honoring a draft for 7,150 pesos, paying £2,000 interest on outstanding bonds, and advancing Zebadúa £1,000 for expenses of the legation, in 1828 the bankers informed him that they could not sell new bonds nor make further advances. Zebadúa scraped up funds, apparently out of his own pocket, to pay rent on his Baker Street residence, and stayed at his post until 1829.¹³

The foreign debt totaled £163,300 when it went into default in 1828. I shall not pursue its tangled history thereafter, but only stop to comment on Facio’s contention that foreign borrowing was a disastrous venture.¹⁴ Since none of the loan was repaid during the life of the Federation, it caused no drain on the federal treasury. On the other hand, the central government had the use of over £80,000, which was spent on diplomatic missions in England and Panama, and for other national objectives. While it is clear that borrowing did nothing to promote education and economic development, two of the announced purposes of the loan, it is hard to believe that the fiasco of a Central American bond issue helps much to explain the failure of the Union.¹⁵

An argument in favor of borrowing abroad was the supposed necessity of holding down the burden of taxation. What one discovers, however, in reviewing the history of federal finance, is not so much the lack of sources of revenue as the inability of the Federation to collect taxes already imposed. When, after a period of uncertainty, it was decided which revenues belonged to the Federation, the central government had to rely on the states to collect the taxes and remit them to the federal treasury. Repeatedly, the states ignored requests for an accounting for federal revenues, and in the end simply appropriated them for state purposes. Only the state of Guatemala regularly made funds available to the federal government, a circumstance which appeared to make the federal treasury a dependency of the state treasury.

The earliest federal treasury statement I have found is for three months, August-October, 1823. Taxes, loans, gifts, deposits, and sundry receipts added up to 195,243 pesos, including a balance from the preceding period of 10,267 pesos. Expenditures for the period -were 187,542 pesos. To jump to the conclusion that the budget was balanced puts too much confidence in government accounting. In October, 1824, the Guatemala legislature reminded the National Assembly that the state had supported the federal government for the past 14 months (i.e., since August, 1823). Nevertheless, the federal treasury was empty; and in December, 1824, Guatemala borrowed 80,000 pesos and made 23,000 pesos of the proceeds available for “urgent needs of the Republic.”¹⁶

In hopes of having a source of revenue which it would not have to share with the states, in December, 1823, the National Assembly voted to levy “in all the territory of the United Provinces” a direct tax on “income or profits.” Preparations were still under way in May, 1824, to distribute the padrón, or register of taxpayers. Common laborers were to pay 4 reales; artisans, 6 reales; weavers, 6 reales per loom; lawyers, 5 pesos; and rentiers, one-half per cent of their property income. Here the record ends, and it may be doubted that this tax was ever collected.¹⁷

A proposal to impose a 20 per cent tax on “all estates belonging to secular and regular religious communities” excepting those engaged in teaching and healing, came before the federal Assembly in 1824. Although impressed by the “prodigious inequality” in the distribution of wealth caused by ecclesiastical mortmain, the legislators approved a tax of only 7 per cent. Little of this was collectible immediately. In 1829 the minister of finance reported 365,651 pesos still owed by religious communities ; some of it, he thought, could be paid by the Guatemala treasury, inasmuch as the state had suppressed four monastic orders and put up for sale their expropriated property.¹⁸

Ultimately, the National Assembly decided not to create new taxes to support the federal government, but to place three or four existing sources of revenue under exclusive federal jurisdiction. In April, 1824, the finance commission advised the Assembly :

Free-trade philosophy and protectionism were mixed in the tariff act of 1822. The export of specie was prohibited; exports of coin were taxed at 4 per cent; exports of most domestic products paid no duty, although indigo, cacao, and balsam were dutied at 2 per cent. The free list of imports comprised books, scientific instruments, and tools and machinery for agriculture, mining, and industry. Rates on dutiable imports were generally 6 to 8 per cent, until an additional 4 per cent went into effect in 1824. Sentiment for protection grew, and in October, 1825, rates of 20 to 30 per cent were imposed on raw materials, cotton goods, and other imports competitive with domestic products. The tariff act of 1831 placed a maximum duty of 20 per cent on textiles similar to those produced in the country, a rate of 15 per cent on clothing, gunpowder, and a few other commodities, and 10 per cent on imports not considered competitive with domestic production. But most duties applied to official valuations (aforos), leaving room for significant discrepancies between stated rates and the effective ad valorem tariff.²⁰

Despite the plethora of laws, the constitutional provision for federally controlled customs administration throughout the nation was imperfectly executed. The decree of June 2, 1824, provided for federal administration of customs at Omoa, Trujillo, and Gualán; elsewhere, state officials were expected to collect the alcabala marítima for the account of the national treasury. Although the “provisional organic law” for treasury administration (1830) defined the division of responsibility between state and federal officials, in fact no law proved adequate to eradicate disputes between the Federation and the states over revenues.²¹ The evasion of customs duties, furthermore, was widespread. Charles Savage estimated that United States trade through the northern ports amounted to $700,000 yearly, including $200,000 in smuggled goods; in the southern ports “the business of the customs is even more fraudulently conducted . . . than on the northern coast.”²²

Customs receipts amounted to 44,417 pesos in the quarter ending October 31, 1823, or nearly one-fourth of total revenue. The 1825 budget anticipated receipts of only 200,000 pesos, despite increases in duties in 1824 and 1825. Data are lacking for 1826-28. In 1829 an additional federal duty of one per cent on imports entering interstate trade was introduced, but in fiscal 1830-31 customs yielded only 73,704 pesos. In spite of this poor showing the 1832 budget estimated customs revenue at 287,560 pesos.²³

In 1833 Congress protested that some states had taken over the customs, as though there were no federal treasury. As an inducement to remit funds collected on federal account, the government proposed to share with the states the proceeds of recent increases in rates. Guatemala and El Salvador promised to comply, but very little money from customs flowed into the federal treasury after this date. In April Guatemala announced that if the majority of the states retained possession of customs and tobacco revenues, Guatemala would have to follow suit. The tariff act of 1837, which placed duties on most imports at 20 per cent, divided customs receipts as follows: 65 per cent for the federal treasury, 25 per cent for the treasury of the altos poderes, and 10 per cent for the state in which the duties were collected. It is doubtful that this arrangement went into effect before Guatemala decreed that all receipts from federal taxes should be deposited in the state treasury, while the state would assume all debts contracted under the authority of the Federation.²⁴

The second most important source of federal revenue was tobacco. In November, 1823, the National Assembly decided that the tobacco monopoly should continue “as long as there is no other source of revenue sufficient to fill the gap which its suppression would leave”; and a year later Valle and O’Horán, though decrying the necessity of sanctioning any monopoly, advised the Assembly that the government had searched in vain for alternative ways of securing the halfmillion pesos which the tobacco estanco produced in an “ordinary year.”²⁵ The tobacco act of 1824 provided for crop offices (direcciones de siembras), in charge of federal officials, at Santa Rosa (Honduras), San Vicente (El Salvador), and San José (Costa Rica). The directors had exclusive authority to make acreage allotments, furnish seed, and arrange crop loans. All tobacco in leaf had to be delivered to warehouses (factorías) controlled by the directors of the crop offices, and interstate trade in leaf tobacco was prohibited. Tobacco manufacturing was uncontrolled, but the factorías had to deliver leaf to processors at the uniform price of 6 reales per pound throughout the Federation. Costs of operating the monopoly were levied against the states in proportion to estimated consumption; the difference between receipts from sales in a given state and the state’s share of the costs constituted net revenue, which was applied to the state’s assessment (cupo) to meet general expenses of the federal government²⁶

Few data have been found to illustrate the finances of the tobacco monopoly. In the quarter ending October 31, 1823, the federal treasury received 42,204 pesos from the tobacco administration. The budget for 1825 estimated revenue at 263,360 pesos, but the principal factoría in Guatemala paid into the federal treasury only 15,501 pesos in one trimester of 1825 and 29,025 pesos in fiscal 1830-31. Estimated receipts from all factorías were 140,000 pesos for 1832. Although the statistics are inconclusive, it is clear from other records that tobacco never produced the half-million pesos Valle and O’Horán thought it would yield or even the 321,000 pesos Zebadúa told the National Assembly the tax could be expected to bring in.²⁷

In April, 1826, the finance minister reported that the factoría in El Salvador violated the federal law by selling tobacco below the fixed price; Honduras and Nicaragua furnished no reports on their factorías, although Honduras did supply information on the activities of smugglers; and Costa Rica complained that production was halted because of the lack of funds to make crop loans to growers. The resistance of El Salvador to federal laws moved the commission on constitutional points to urge the central government to take a firm stand:

This “cold indifference” was not confined to El Salvador. In 1829 the finance minister pleaded with the Honduran government to take vigorous action against the contraband trade, which was “ruining” the legal market for tobacco.²⁹

In 1829 (and probably earlier) Guatemala required state approval of the transfer of funds from the tobacco administration to the federal treasury; four years later the central government surrendered the tobacco monopoly to the states on condition that the states pay the salaries of their senators in the national legislature. Only a year earlier federal officials had issued instructions to “destroy clandestine planting” and reminded state officials that “tobacco is a national revenue.” Guatemala decreed the abolition of the monopoly in 1835, but the following year Morazán ordered the re-establishment of the federal administration, allowing each state to retain one-quarter of the net receipts from tobacco sales in that state. To tighten controls, tobacco production was confined to two regions, Santa Rosa and Tepetitán, and a ceiling was set on the amount that could be produced. Under the decree of July 13, 1837, one-half the net proceeds from the tobacco monopoly was to be applied to the Federation’s foreign debt.³⁰

The sale of gunpowder was a federal monopoly; even the state governments were supposed to buy powder from the Federation. Although an 1824 decree put the powder factory under the tobacco administration, there is little evidence of the results. Receipts of 8,000 pesos were anticipated in the 1825 budget, and in fiscal 1830-31 the administrators collected 4,823 pesos and turned into the federal treasury 2,823 pesos. In June, 1831, the monopoly was abolished, and the government was authorized to sell or lease the powder factory. The expressed purpose of this move was to give business “one more article for speculation.”³¹ The ice monopoly inherited from the colonial government was abolished by the decree of December 31, 1823.

The postal service, another federal monopoly, was not seriously regarded as a revenue-producing operation. It was, on the other hand, expected to pay its way; and one of the objectives of the postal law of 1824, putting the state post-offices under the control of a federal administrator-general, was to end “abuses” which resulted in recurrent deficits. The removal of the franking privilege on official correspondence (April, 1826), may have been a step toward ending these abuses. For the period April 12 to August 31, 1829, carrying the mail cost 961 pesos in excess of receipts; but in fiscal 1830-31 the federal treasury realized 4,894 pesos from the postal service. The budget for 1832 estimated the net income at 9,892 pesos.³²

Miscellaneous revenues came into the federal treasury, generally in insignificant amounts. In 1823 the government collected 10,826 pesos from taxes on brandy, but this was soon eliminated as a federal tax. Fines, gifts, stamp taxes, and other receipts appear in the financial statements; but the paralysis of federal finance was avoided only by domestic loans, issues of paper money, and levies on the states. In regard to the latter, however, only the cupos honored by Guatemala effectively supported the Federation.

The extent to which the federal government was financed by borrowing is indicated by the 50 per cent increase in the public debt between 1821 and 1831. The first of several forced loans occurred in 1823, when the government demanded 6,000 pesos to equip troops sent to guard the northern ports. More than half of this was raised by the Consulado, which assessed 109 merchants amounts ranging from 15 to 45 pesos.³³ The Consulado also managed a voluntary “patriotic loan” of 21,000 pesos in 1824 to meet expenses of the Guatemala City garrison. The loan bore interest at 5 per cent, but the Consulado reported difficulty in securing subscriptions to 70 “shares” at 300 pesos each.³⁴ As the credit of the central government decayed, federal officials depended more and more on the ability of the state of Guatemala to borrow. In the civil war period (1826-28) military commanders as well as the states resorted to forced loans; confiscation of property was the least drastic penalty for refusing to lend.³⁵ From April 12 to July 31, 1829, Guatemala transferred 155,000 pesos to the federal treasury; but state finances were now strained, and Guatemala protested that she could no longer respond to the Federation’s need of 40,000 to 50,000 pesos a month.³⁶

The constitutional provision for making assessments on the states to cover a deficit in the federal budget was first invoked in 1825, when proposed expenditures exceeded estimated tax receipts by 181,248 pesos. Anticipating an even larger deficit, the legislative commission submitted the following scheme for raising 272,570 pesos by state levies:

Understandably, there was a wide margin of error in the estimates of population; even more esoteric were the computations of wealth. Having determined the tax base, however, it followed that a tax rate of 4.7 per cent would be required to yield the stated revenue. Wealth, according to the commission, varied from 4 pesos per capita in Guatemala to 7 pesos in El Salvador.³⁷

Costa Rica appears to have been exempted from the first assessment. In 1829, when Costa Rica was called on for her share of another federal levy, the legislature responded that,

Furthermore, over the opposition of the executive, the legislature insisted on using federal funds in Costa Rica to finance some of the “imperious” needs of the state. Without more knowledge of economic conditions in other regions, one cannot accept at face value the assertion that Costa Rica was the “most backward and wretched province.” In 1838 a Costa Rican official thought that his country was better off than the rest of Central America because the “torch of discord has produced fewer conflagrations . . ., the most unfortunate classes depend on some property, which makes them relatively rich [and] the people’s natural love of property has made them industrious and hard-working.”³⁸

As for the other states, contemporary opinion held Honduras to be too poor to contribute to the support of the federal government; and Nicaragua scarcely recovered, during the life of the Federation, from the effects of civil wars. But El Salvador was called (1827) a “rich and bounteous” state, loath to meet its cupo on the flimsy pretext that the assessment was excessive. The state treasury report for 1827 showed tax receipts and other revenues amounting to 386,550 pesos; expenditures, including 312,679 pesos for army pay and other “military expenses,” totaled 380,393 pesos. It was this year—the only one for which details of El Salvador’s finances seem to be available—that William Phillips, the United States chargé d’affaires, advised Secretary Clay that Central America was “in a complete state of anarchy; and astonishing as it may appear every thing is quite [sic] and tranquil as if the best constituted Government acknowledged in all its ramifications actually existed.”³⁹

“Despite rigorous economy in the budget,” in March, 1832, the federal treasury anticipated a deficit of 114,000 pesos and called for assessments on the states; and in May Congress authorized a forced loan of 50,000 pesos to be apportioned among the states. There is no proof that in either case the states responded. “The lack of resources,” Zebadúa warned in 1834, “can come to such an extreme that the Government may be in the sad situation of dissolving itself.” In 1835 Congress called the states’ seizure of federal revenue “subversive and immoral” and nullified state legislation which permitted this “violation of the federal pact.” Only Guatemala waited until 1839 to declare officially that the federal treasury no longer existed.⁴⁰

The use of paper money apparently started with Gaínza’s issue of 40,000 pesos in billetes in 1822.⁴¹ In January, 1825, Congress voted an issue of 350,000 pesos in vales, which were to be retired with the proceeds of a long-term loan. These, or another issue of vales, were still in circulation in July, 1829, when Congress ruled that paper money would not be accepted for more than one-third of customs duties. The following month the federal legislature approved an issue of 200,000 pesos in treasury bills (libranzas), stipulating that no other form of money would be accepted for customs and other taxes until the issue had been retired. Two more issues of libranzas were authorized: 200,000 pesos in June, 1830, and 200,000 pesos in February, 1832.⁴² Records of the issue and retirement of fiduciary money are incomplete, but as early as November, 1830, the treasurer declared that the Federation had only two means of meeting its expenses: issuing vales and selling federal property.⁴³

The lack of a history of prices makes it impossible to follow the depreciation of the paper money. A traveler in 1838 reported that paper money exchanged at a discount of 80 per cent in terms of “hard” money, but the kinds of money are not specified.⁴⁴

As long as it controlled the mint in Guatemala City the central government maintained the coinage of gold and silver in accordance with colonial monetary legislation. William Phillips sent the State Department statistics taken from the reports of the director of the mint showing coinage in two periods, as follows:⁴⁵

But Phillips said he had learned on “good authority” that not over 15 per cent of the precious metals mined in Central America reached the mint; most of the specie was smuggled out through Belice. Except for the mint report for 1827-31, which showed the coinage of 135 marks of gold and 15,221 marks of silver (at a net loss to the mint of 8,254 pesos), the evidence of what happened to the nation’s coinage is circumstantial.⁴⁶

A congressional commission appointed to probe the “condition of insignificance to which the mint of this Court has been reduced,” reported that the mint had been despoiled by Gaínza and Filísola, who appropriated funds for military purposes. But the real cause of the mint’s inactivity, the commission found, was the lack of a plan to encourage production by making loans (rescates) to miners. Accepting the recommendation of the commission, the National Assembly approved the organization of a private company to furnish mining credit—a proposal which Guatemala’s merchants had made in the 1740’s. In 1825 the mint director acknowledged the real reason for the virtual suspension of silver coinage: silver was undervalued at the mint.⁴⁷ The situation did not improve during the Federal period; thus, in 1832 the United States consul reported that specie was “rapidly disappearing” because of the unfavorable balance of trade.

Debasement of the coinage was a recurrent proposal. Referred to the federal finance commission, the schemes were rejected, despite the demonstration of their “profitability” to the government. Thus, when delegates from Honduras proposed (1822) the coinage of 200,000 pesos in copper, the mint director, Benito Muñoz, calculated that 500 quintals of copper would cost 12,500 pesos and labor costs would come to about 17,500 pesos, leaving a gain of at least 170,000 pesos.⁴⁸ Pedro Naxera, alarmed because even the debased moneda macuquina was leaving the country, suggested the reduction of the silver content of coins by 50 per cent.⁴⁹ In 1826 advocates of copper coinage found an ally in Zebadúa, who wrote from London that in England, “where the spirit of economy and good order keeps everything perfectly arranged,” copper was used for coins of small denomination. At the prices and costs prevailing in London, Zebadúa estimated that Central America could strike off 50,000 pesos fuertes in copper coins at a “profit” of 100 per cent. In 1828 Luís Pedro de Aguirre recommended coinage of up to 200,000 pesos in copper, arguing that even in silver-rich Mexico copper coins were used. Apparently, 500,000 pesos in small copper coins were struck in 1831, although Solorzano claims that the “public received them with repugnance.”⁵⁰

Discussing one proposal for copper coinage, the finance commission recalled that in 1748 José de Araújo made a strong plea for the coinage of vellon and that Father Nicolás Prieto successfully challenged Araújo’s scheme. The Consulado reminded the commission of Say’s advice that pieces of copper could not be regarded as “real money” but only as instruments of credit.⁵¹ But the price of defending the soundness of the coinage was the operation of Gresham’s law: the Federation’s money was supplanted by an assortment of “provincial” coins.

From the outset the monopoly of coinage by the Guatemalan mint irritated representatives from other states, and in August, 1823, the national government approved the establishment of a “minor” mint in Tegucigalpa to coin reales and half-reales. In 1825 the president asked the Nicaraguan government to furnish technical and accounting data to support the claim that “perfect” coins could be minted at León. The approval of state mints, however, did not remove the objection of federal authorities to the coinage of substandard money.⁵²

As early as 1824 the central government complained of the coinage of “false” money in Tegucigalpa and instructed the fiscal to circulate a notice calling attention to the death penalty for counterfeiters prescribed by the laws of Castile. Warnings of this sort seem to have had little effect on the flow of provincial money. In 1825 Congress decried the continued “abuse” of coinage in Honduras and Costa Rica of money inferior to the national standard: “There is no matter of greater import than this, on which rests our credit, our tranquility and the good or bad hopes for our prosperity.” Defiantly, the legislature of Honduras declared that anybody could mint silver coins of the same weight and fineness as the federal coinage but that this did not preclude the “circulation of provincial money.” “Great quantities” of counterfeit money were said to have been minted in Nicaragua and El Salvador. But in 1838 the chief executive of Honduras told the legislature that provincial money had “paralyzed” trade; its depreciation was estimated as 75 per cent. He warned them that “Law, justice, and public convenience are opposed to the circulation of this money.”⁵³

As a matter of fact federal control of the Guatemala mint came to an end in 1826, when the state treasurer was made treasurer of the mint. In 1828 Guatemala announced that the state was free to issue national currency, Article 69 of the Constitution notwithstanding, because the federal Congress had not been in session for two years. And in 1832 the state reorganized the mint administration without making provision for federal intervention. The central government, however, continued to fulminate against the “scandalous falsification” of money, and in 1836 Congress declared “null and invalid” an act of the Assembly of Honduras authorizing an issue of 15,000 pesos in provincial money. Federal officials also complained that in some markets the national peso fuerte was considered less valuable than counterfeit coins.⁵⁴

Inevitably, banking was proposed as a way out of financial stringency. One proposal involved appropriating funds of the Indigo Growers’ Society, which in 1818 had assets of 849,804 pesos. But the Society’s resources were largely in the form of promissory notes for crop loans, and with the decline of the indigo trade these assets were hardly liquid enough to furnish capital for a bank. In 1826 John Williams reported that Congress met in an extraordinary session to deal with finance:

The generosity of financier Williams was quickly forgotten amid the din of cannon, as Central Americans fired on Central Americans.

The ultimate recourse of an honest debtor is to liquidate his assets —if he has any and if they are salable. In 1822 the provisional government discussed the need for a land survey to ascertain the extent of the public domain. There were doubtless more compelling reasons for not carrying out the survey than the advice of one citizen that to disturb land tenures would turn the rural population against the government.⁵⁶ In 1825, however, the National Assembly declared the concentration of land ownership a cause of agricultural backwardness and authorized the sale on easy terms of idle lands (baldíos) under federal control. Inasmuch as there was room for doubt about what belonged to the Federation, the legislature ruled that federal property consisted of all real estate acquired with revenues derived from two or more of the provinces which made up the kingdom of Guatemala. The states could acquire titles to such property by purchase from the federal government.⁵⁷ There is no evidence that land sales provided a significant amount of revenue. The entry “rentals and sales of building, 28,265 pesos,” appears in the accounts for 1830-31; and the 1832 budget anticipated income of 9,200 pesos from the rent and sale of fincas. When the Consulado was abolished in 1826, the Federation took title to the house occupied by the mercantile organization; the state of Guatemala also appeared as a claimant. Ultimately, the proceeds from the sale of the building (5,988 pesos) were divided between the Federation (⅘) and the state (⅕).⁵⁸

To show that the federal establishment was a crushing burden one needs to know not only what funds were sought for its support but also the character and cost of the services the government proposed to render. The evidence, as we have seen, tends to show that a national government, at least after 1826, was an intermittent affair; it existed at the sufferance of the state of Guatemala, which in a sense held the purse strings. Much has been made of the duplication of administrative costs resulting from superimposing a federal bureaucracy on the executive, legislative, and judicial establishments of the five states. In fact, federal officials were never numerous; they were not lavishly rewarded; and they were seldom paid in full or on time.

In 1823 the National Assembly fixed the salaries of deputies at 1,200 pesos a year; they were to draw their pay from the national treasury, which would be reimbursed by the provincial (state) governments. The 1824 budget set aside 87,600 pesos to pay 73 deputies, but the budget for 1825 made no provision for paying members of the national legislature. “Salaries” in 1825 were fixed at 54,950 pesos; “war and navy” were to get 469,524 pesos of the total budgeted expenditures of 652,608 pesos.⁵⁹ The federal budget for 1831 totaled 868,041 pesos, of which 490,792 pesos were earmarked for “war and navy”; but in April 1830 the president told Congress that both civilian and military personnel were still on half-pay.⁶⁰ Among the plans for reducing the costs of government was Zebadúa’s proposal (1834) to abolish the Senate, which would save 38,960 pesos of the 69,200 pesos then budgeted for the pay of senators and deputies.⁶¹ Surely, someone in those troubled years must have realized that the real burden on the people, and strain on the economy, was not the “luxury” of a central government but the waste of resources in constant internecine warfare.

IV

In a manifesto to “Citizens of the United Provinces of Central America,” Pedro Molina, Juan Villacorta, and Antonio Rivera, the triumvirate who constituted the executive in 1823, promised the people “a nation free and opulent.”⁶² Neither goal was realized, least of all that of opulence. It does not follow, however, that the leaders had no plans or exerted no effort to stimulate economic development. Improvement of the provinces, declared the executive in 1824, is the principal object of government, which should bestow on them “all the advantages of which Spanish rule deprived them. Agriculture and population are the bases of their betterment.”⁶³ Agriculture, commerce, and industry, President Arce observed in 1826, “create and sustain the wealth of nations,” thus providing sources of revenue for the support of government. And Valle pointed out that the “government which with one hand exacts increased taxes must with the other hand undertake to increase wealth.”⁶⁴

It would, of course, be ridiculous to speak of Central American economic planning in the 1820’s. All that any government had to go on were sundry prescriptions for intervening, or recommendations not to intervene, in one sector or another of the national economy. In Valle’s El amigo de la patria, as well as in works of lesser renown, the government could find wise counsel for attacking certain problems of agriculture, commerce, mining, transportation, and industry. Yet, even today the unsolved problem of Central America is how to combine knowledge and resources to make the economy grow.

Agriculture was foremost in the thoughts of those who sought economic betterment. Under Spanish rule government’s chief concern was with the export sector, which in the eighteenth century had been dominated by one crop, indigo. Around the turn of the century indigo production commenced to decline; its reported recovery in the 1820’s was at best impermanent.⁶⁵ Cochineal, another dyestuff, entered the export trade around 1820; it grew in importance but never reached the position once held by indigo.⁶⁶ Cacao, an important colonial export, had been eclipsed by the rise of indigo exports, but in 1824 the government proposed to adopt “all appropriate measures” to revive it.⁶⁷ Valle, who could hardly have foreseen the great transformation of the Central American economy after the mid-nineteenth century, wondered why more attention was not given to the production of coffee.⁶⁸

The search for new crops led to the importation from Mexico of olive tree grafts, with results which seem not to have been worth mentioning.⁶⁹ In the 1830’s hopes of getting silk cultivation started led to the offer of a one-ounce gold medal to the first three Central Americans who produced a pound of raw silk.⁷⁰ To encourage agriculture and grazing, in 1834 Guatemala offered prizes of 1,000 pesos to the first person who brought into the state 12 head of merino sheep for breeding, 200 pesos to the first person to produce 100 quintals of coffee; 200 pesos for the first 100 quintals of cotton; 1,000 pesos for importing 12 head of Norman or Friesian horses; 500 pesos for 10 plantings of cinnamon, nutmeg, or clove trees; and 300 pesos for exporting 100 pounds of citric acid made in the state.⁷¹ I have found no record of the awarding of these prizes.

The Patriotic Society was urged in 1823 to survey the agricultural regions and report on any “urgent measures” needed for their encouragement;⁷² and in 1830 the Economic Society of Guatemala was reorganized in order to promote the development of “agriculture, industry, and trade.”⁷³ The following year the Society offered a gold medal for the best essay on the principal sources of wealth in the seven departments of the state and the best ways of promoting their development and a silver medal to the farmer who planted 500 feet of grapevine.⁷⁴ John Williams found the explanation of agricultural backwardness in the primitive methods employed:

In order to encourage their importation, agricultural implements were admitted duty free; and in 1836 Guatemala sent funds to Europe to purchase “machinery, tools, and books” relating to science, the arts, and agriculture.⁷⁶

Immigration was often recommended as a measure conducive to the fuller exploitation of agricultural and forest resources. In 1824 the National Assembly authorized unrestricted immigration to any part of Central America. A minimum of 10 families could take up land, by purchase or government grant, and form a new población. The only restriction on settlement by foreigners was the prohibition of the use of slaves. In particular, settlers were sought for the northern coast of Guatemala and Honduras in order to produce exportable commodities close to the ports.⁷⁷ In 1834 the Guatemala Assembly approved the formation of a colonization company, capitalized at 2 million pesos, to settle 1,000 families along the coast in the Department of Verapaz. At least 136 persons were brought in by the promoters of this scheme, but a similar contract with Carlos Meany and Marcial Bennet to colonize in the Department of Chiquimula was cancelled in 1837.⁷⁸ In 1825 the federal government discussed ways and means of attracting foreigners who had capital, know-how, and perhaps also a steamboat to develop river transportation into the interior agricultural regions.⁷⁹

Valle thought the land tenure system was the key to the stagnation of agriculture. He found scarcely an acre of cultivated land which was not encumbered, and most of the mortgages were held by religious foundations. Though not anti-clerical, Valle feared the “sad case in which the whole area of this vast province should become the property of the secular and regular clergy.” The solution was clear: land should be cultivated by its owners, “the only ones who make it yield all it is capable of producing.”⁸⁰ Land grants out of the public domain, coupled with the sale of ecclesiastical property expropriated by Guatemala in 1829, contributed to the formation of “small nuclei of private property”;⁸¹ but in the light of subsequent history it would doubtless be improper to refer to these measures as land reform.

The first steps to promote industry were directed toward reviving textile manufacturing. According to Valle, in 1795 there were 1,000 looms in Antigua producing coarse cotton cloth; by 1830 the number was reduced to less than 100.⁸² The decline probably commenced before independence, for in 1822 the provisional government was seeking advice on what to do about the “state of extreme decadence” of the textile industry. The Consulado had no doubt that the principal difficulty was the ruinous competition of English cotton goods; hence, the “absolute necessity to remove the English cotton-goods industry from our market.” The finance commission had a different view: the markets for Quezaltenango cottons were in San Salvador, León, Comayagua, and Costa Rica; and civil strife had choked off trade with these regions. The commission denied that low tariffs caused the distress of the domestic industry; furthermore, coarse cottons were used principally by farm workers, who could not afford to pay higher prices.⁸³ The protectionists won out in the tariff of 1825 provoking John Williams to protest that this would stop imports of cotton goods from the United States; and in 1826 he reported to Clay that he “had arrested the operation of the new tariff.”⁸⁴

The Consulado admitted that inefficient methods, particularly in spinning, were partly responsible for the decline of domestic manufacturing; but the merchants, who were primarily concerned with trade, offered no suggestion for improving production techniques. In 1832 the Guatemalan government sought private subscriptions to a fund to finance imports of machinery, particularly cotton gins, spinning frames, and looms; and in 1833 the Assembly offered exclusive rights for 12 years to individuals who imported or invented machinery not already in use.⁸⁵ Efforts to encourage the use of pita-hemp seem to have been rewarded when Santiago Ruiz succeeded in making “several yards” of “perfect cloth.” The government offered a 6-ounce gold medal and exclusive rights for 4 years to the inventor of the best machine to spin pita; but the hope that pita cloth would become an important export industry was never realized. It may be surmised also that the exclusive privilege granted in 1829 to Manuel Bargas to manufacture “all kinds of paper” came to naught.⁸⁶

Several attempts were made to encourage mining throughout Central America. The 1824 immigration act annulled the long-standing prohibition of foreign investment in mining, and in 1829 Congress gave foreigners the same rights as nationals to take up mining concessions. A treatise on the mercury process for extracting gold and silver was reprinted by order of the federal government, and a Mexican professor of mineralogy was invited to visit Central America at government expense. In 1824 the finance commission recommended the removal of all taxes on iron, because “iron is not only a product of agriculture but is also the raw material with which the farmer himself fashions the various tools which facilitate his work.”⁸⁷ Opinion was not unanimous, however, on the desirability of foreign participation in the economic development of the country. In 1825 Congress was asked to require foreign joint-stock companies engaged in mining, industry, or trade to reserve one-fourth of their shares for Central Americans.⁸⁸

No serious diagnosis of the economic ills of the Federation failed to recognize the dearth of transportation and communication facilities as a major obstacle to interstate trade and the free movement of people. There are no roads, there are no highways, there are no decent inns for the accommodation of travelers,” Valle exclaimed. For the lack of roads to market, he observed, produce often lay rotting in the fields.⁸⁹ In 1823 the National Assembly ruled that political bosses” could not be candidates for new government positions until they furnished proof that they had taken steps to repair the roads in their districts; and village priests were asked to urge their parishioners to volunteer to work on the roads. In 1830 “everybody” was required to give three days a year to work on public roads, and in 1832 Indian conscripts were assigned to road building.⁹⁰

Lacking confidence in public road building, the government of Guatemala invited private enterprise, domestic or foreign, to submit proposals for a highway from Guatemala City to Istapa on the Pacific coast. In 1834 the Assembly authorized the formation of joint-stock companies to construct toll roads, with the understanding that the capital invested could earn up to 25 per cent a year. In Costa Rica private enterprise built a road from San José northward into the cacao-growing region, thus opening a “channel of wealth” for farmers and traders.⁹¹ An instructive commentary on the net result of all this agitation for better roads is Facio’s remark:

Since in the 1820’s the most obvious need was improved overland transportation, relatively too much time may have been spent in planning an Isthmian canal. At one time or another, during the life of the Federation, nationals of the United States, England, and Holland gave assurances that the canal, following the Nicaraguan route, would be built. The story of the “Canal Bubble” (as William Phillips described it in 1827) is fairly well known. The amazing thing in the tangled web of unsuccessful negotiations is the unrestrained confidence so many Central Americans had in the economic consequences of the “land divided.” At the closing session of Congress in 1826 Manuel Pavón declared that approval of the Nicaraguan canal “initiated an undertaking of the highest importance for us: it attracts to us the gazes of Europe and it will cause the trade of the universe to converge on our territory.” The canal, Mariano Gálvez said in 1830, “is the most decisive project for our prosperity.” Valle’s was one of the few dissenting voices. It would not be advantageous to open up the canal at this time (1826), he said, since despite any promsies to the contrary, England would seize it as soon as it was completed.⁹³

While hopes for the interoceanic canal faded, some effort was made to develop resources along the coasts. To promote trade with Asia, in 1825 the government offered to waive duties on the first commercial venture to the Orient from a Pacific port; on the second such venture duties would be reduced 50 per cent. In 1831 an English entrepreneur promised to bring from Europe three “machines for sawing wood” to start shipbuilding at Istapa and Realejo, but it is not clear whether the exemptions from taxation he sought were ever granted. Certain privileges were extended to the Compañía Nacional to undertake pearl fishing in the Gulf of Nicoya, and numerous concessions were made to companies and individuals engaged in logging along the shores of the Gulf of Honduras. Except for the well-documented story of British encroachment in Central America, there is little evidence that measures to promote fishing and the development of forest resources bore fruit.⁹⁴

Random measures to promote economic development included the decree of September 11, 1835, which abrogated the laws fixing the maximum rate of interest.⁹⁵ The Guatemalan Assembly, believing that labor was the most “powerful agent of wealth,” proposed to encourage people to work more by reducing the number of legal holidays to seven a year; and in 1829 the state adopted a vagrancy law designed to overcome the shortage of farm laborers. Although motivated more by humane than economic considerations, Central America’s emancipation proclamations deserve more than perfunctory recognition. Mariano de Aycinena, a member of the Guatemala City cabildo in 1821, appears to have been the first official to propose freeing the slaves. Many slaves were freed by their owners prior to the executive decree of April 24, 1824, and the adoption of the Constitution, which outlawed both slavery and the slave trade. The federal act for indemnifying former slave owners never became effective.⁹⁶

It would be idle to pretend that this dismal record of financial maladministration and abortive economic development furnishes more than a small part of the explanation for the failure of the Central American Federation. As the architects of contemporary plans to recreate the union have discovered, apathy and ignorance, fears and prejudices, rivalries and cultural differences may have more to do with resistance to federation than the economics of integration. In reading almost any chapter of Central American history, from Francisco Morazán to Miguel Ydígoras Fuentes, one may easily become convinced that federal government has failed because too many people did not want it to succeed.

Author notes