Brazilian Economy in the Café Filho Administration

From 1954 to 1955, Brazil was governed by President João Fernandes Campos Café Filho, commonly known as Café Filho. He had been vice president during Getúlio Vargas’s second term and reached the presidency after Vargas’s suicide. Upon taking office, he initially changed economic policy under Finance Minister Eugênio Gudin. In 1955, political pressures led to Gudin’s replacement by José Maria Whitaker, who pushed Brazilian policy from contraction toward expansion. By the end of Café Filho’s government, Whitaker resigned because he could not implement his exchange-rate reform. His successor, Mário Câmara, had little time to act in the administration’s last three months.

Gudin’s term as Finance Minister

Orthodox stabilization

Following President Vargas’s suicide on August 24, 1954, Café Filho assumed the role of interim president until new elections were held. He inherited a scenario of inflation, fiscal deficit, and balance of payments crisis. The first two were due to the previous government’s expansionist policies, which sought to use state power to stimulate economic growth. The third issue, in turn, stemmed from excessive levels of external debt and a boycott of Brazilian coffee promoted by American buyers, leading to a price drop that harmed Brazil’s exports.

To address this unfavorable scenario, Café Filho appointed proponents of economic liberalism to all the main bodies that were in charge of managing the economy. Clemente Mariani was at the Bank of Brazil (Banco do Brasil). Otávio Gouveia de Bulhões was at the Superintendency of Currency and Credit (Superintendência da Moeda e do Crédito, SUMOC), a kind of central bank. Eugênio Gudin was at the Ministry of Finance.

In terms of domestic economic policy, Gudin adopted a fairly orthodox stabilization plan, characterized by the following measures:

• Contractionary monetary policy: Interest rates, rediscount rates, and compulsory reserve ratios were increased. Moreover, bank funds that were compulsorily retained by the government would now be held not by the Bank of Brazil but by SUMOC, with the aim of ensuring credit contraction.

• Contractionary fiscal policy: There was a reduction in public investments and a fruitless attempt to increase taxes, which was blocked by Congress. Additionally, the government maintained the system of multiple exchange rates, which had been introduced by Instruction 70 of SUMOC in the previous government. This contradicted the wishes of the International Monetary Fund (IMF), which sent a technical mission to Brazil in March 1955 to try to change this. However, the government demonstrated that fiscal revenue from foreign-currency auctions at different rates was essential for the country.

The orthodox policies of Gudin had immediate damaging effects. As liquidity suddenly dried up, private investment fell and a series of bankruptcies and creditor settlements followed. The crisis was severe enough that the government carried out emergency rediscount operations, providing immediate cash to banks in exchange for debt securities. Despite that shock, Brazilian industrial activity did not fall significantly. Inflation inherited from Vargas did decline, but falling international prices for agricultural products explain that movement better than the contractionary policy itself. One indication is that Brazilian industrial prices increased significantly during the same period.

External loans and balance of payments

Eugênio Gudin’s priority, however, was to stabilize the country’s balance of payments, which was experiencing severe problems. An initial measure in this regard was securing external loans. Brazil had already secured 80 million dollars, obtained by former Finance Minister Oswaldo Aranha from the Federal Reserve Bank in Washington. Thanks to Gudin’s prestige among the international financial community, Brazil managed to secure another official loan, of the same amount, from the US government. However, as the new amount was deemed insufficient and the Eisenhower administration was reluctant to assist Brazil, Gudin had to seek an additional 200 million dollars in loans from private banks. This credit would be repaid over five years, at an interest rate of 2.5% per year, and would be backed by the country’s international gold reserves. Although involving large sums, these loans only solved the foreign exchange problems in the short term.

Instruction 113 and capital-goods imports

The long-term solution came with Instruction 113 of SUMOC, issued in January 1955. In practical terms, it was a measure to facilitate the importation of machinery, equipment, and inputs for the Brazilian industry. It worked like this:

• Previously, the Foreign Trade Department of the Bank of Brazil (Carteira de Comércio Exterior do Banco do Brasil, CACEX) only issued import licenses if there was the so-called ‘exchange cover’: importers were required to obtain a commitment that Bank of Brazil would sell them foreign currencies to be sent abroad, in exchange for the imported product. This mechanism was unfavorable to foreign investors, because they first had to bring currency into Brazil at the (devalued) free exchange rate and then purchase import licenses at the (valued) exchange rate for the importation of capital goods.
• With the issuance of Instruction 113, CACEX was authorized to issue import licenses for capital goods without exchange cover — that is, without the acquisition of dollars by the importers. In exchange for the importation, foreign companies could simply have a stake in the shares of the importing company. This gave an indirect subsidy to foreign companies, which would no longer lose money on foreign exchange operations.
• Furthermore, Instruction 113 also authorized CACEX to issue licenses for national companies to import capital goods financed abroad for a term not less than five years. The exchange rate that would be used to settle these financings would, in practice, give a ~30% advantage to national companies. However, as there were no financings abroad that met the requirements demanded by the law, national investors, in practice, did not benefit from the changes brought by Instruction 113.

For Brazilian economist Demosthenes Pinho Neto, Instruction 113 did nothing more than deregulate imports without exchange cover that had already been occurring under politically vulnerable authorization. Such imports were already occurring previously, but depended on the authorization of bodies subject to political pressures. As a consequence of the new import regime, the demand for dollars fell — which benefited the government and society as a whole — and numerous multinational companies expanded their investments in Brazil. This would be of considerable relevance in the government of Juscelino Kubitschek, when there would be strong incentives for the establishment of automotive industries in the country. On the other hand, Instruction 113 was strongly criticized, because it favored foreign investors and facilitated the importation of less advanced equipment without monetary compensation.

Coffee policy and resignation

Regarding the Brazilian coffee sector, which had carried great weight since the Imperial Period, Eugênio Gudin maintained the policy pejoratively known as ‘foreign exchange confiscation’ (confisco cambial). This policy stemmed from Instruction 70 of SUMOC, which discouraged coffee exports by setting a more valued exchange rate for that operation. In April 1955, facing opposition to his orthodoxy and to policies hostile to coffee exporters, Eugênio Gudin resigned from the Finance Ministry and was replaced by José Maria Whitaker, a name that pleased coffee growers.

Whitaker’s term as Finance Minister

Credit expansion and coffee policy

Upon taking office as finance minister, José Maria Whitaker implemented an expansionist monetary policy to soften the effects of Gudin’s orthodox adjustment. Rediscount rates and compulsory reserve ratios were reduced, and credit expanded. Whitaker tried to prevent that shift from reviving high inflation by limiting new credit to the agricultural, industrial, and commercial sectors, with a maximum repayment term of 120 days. He believed in the ‘real bills doctrine’, according to which short-term credit for productive sectors would not lead to an inflationary spiral.

Although Whitaker was supported by coffee growers, he believed that artificially sustaining high coffee prices was a mistake. He thought the Brazilian government bore all the costs of this policy, yet it equally benefited foreign competitors in the coffee market. Thus, he determined the temporary suspension of government purchases of coffee, to reduce prices, harm the competition, and conquer new markets. This shift was vehemently criticized by Alkindar Junqueira, president of the Brazilian Coffee Institute (Instituto Brasileiro do Café). Junqueira argued that reducing the international price of this product would not be favorable to Brazil, given that it is a product with inelastic demand — that is, a demand that does not increase as much when the price falls. He then established a plan with Brazil’s competitors to contract the coffee supply, but this was rejected by the government and resulted in his dismissal.

Exchange-rate reform project

Whitaker’s priority was to end the so-called ‘foreign exchange confiscation’ (confisco cambial), by instituting a single floating exchange rate, which would be devalued, for any type of import or export. Although this could potentially exacerbate inflation, the minister was convinced it was the right thing to do. In this regard, he gave autonomy to the superintendent of the National Economic Development Bank (Banco Nacional de Desenvolvimento Econômico, BNDE), Roberto Campos, to draft a currency reform.

Campos knew that to unify the exchange rates, Brazil needed to reduce pressures on the balance of payments. This would be done through three measures:

• Consolidate short-term debts into a single long-term debt.
• Obtain a reserve line of credit to stabilize the foreign exchange market.
• Reform import tariffs to protect the national industry from the detrimental effects of the anticipated exchange rate devaluation. To this end, Brazil notified the General Agreement on Tariffs and Trade (GATT) of its intention to replace its specific tariffs (charged as a fixed amount per quantity of imported products) with ad valorem tariffs (percentage tariffs, which would vary according to the prices of imported products) starting from 1956.

In June 1956, the director of the IMF, Edward Bernstein, published a report on how to reform Brazil’s foreign currency policy. The report proposed two paths for reducing exchange-rate distortions while protecting scarce reserves. One path maintained a fixed exchange rate while devaluing and unifying most rates. The other adopted a floating exchange rate, with unique rates for imports and exports and additional import surcharges.

Based on the Bernstein Report, Roberto Campos drafted a SUMOC instruction that envisioned adopting a floating exchange rate and unifying the exchange rates. The design linked exchange-rate unification to a gradual transition for coffee exports and reserve management. The exception to this would be the exchange rate for coffee exports, which would be progressively devalued until it reached the level of the unified rate. Although José Maria Whitaker advocated for the immediate abolition of ‘exchange rate confiscation’ (confisco cambial), Roberto Campos convinced him to support a gradual abolition, over two years, to avoid disturbances in the coffee sector. In addition, the income of coffee growers in Brazilian currency (the cruzeiro) would be backed by the government, because the pace of devaluations would be proportional to any potential drops in the price of coffee.

Roberto Campos’s project reflected a critical view of import-substitution industrialization, a model adopted in Latin America that hindered imports through artificially overvalued exchange rates. For the superintendent of the BNDE, this policy hurt the balance of payments. The IMF approved the project enthusiastically.

However, the staff of the Finance Ministry and the economic elites opposed such a sweeping reform in a provisional administration that was nearing its end. Because of this, Café Filho decided to send the foreign currency reform project to the assessment of the Congress. In practice, this represented the abandonment of any hope of implementing the project.

Unable to unify the exchange rate, Whitaker resigned from the Finance Ministry and was replaced by Mário Câmara. In the last three months of the Café Filho administration, the new minister adopted monetary contraction by raising rediscount rates, but the measure had little effect.

Conclusion

For a significant part of historians, the Café Filho administration is considered merely an interim period (interregnum) between presidents who reflected the preferences of the Brazilian people at that time: Getúlio Vargas and Juscelino Kubitschek (JK), both interested in stimulating national development. Café Filho began governing with a contractionist economic policy, conducted by Eugênio Gudin, but was soon forced to change course due to pressure from coffee growers. The new minister, José Maria Whitaker, sought to expand economic growth and unify exchange rates, but only succeeded in the first objective. In 1954 and 1955, Brazil’s GDP maintained high growth levels — 7.8% and 8.8%, respectively. From 1956 onwards, under the leadership of Juscelino Kubitschek, the country would experience even greater economic progress.