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 to 1954, when Getúlio Vargas returned to power after the government of Eurico Gaspar Dutra. Brazil faced inflation, public deficits, and foreign-exchange crises throughout the period. Monetary, fiscal, and foreign-exchange policy all revolved around the same dilemma: the government wanted to contain inflation without abandoning state-led development, and it used protectionist exchange tools to support national industry. That strategy protected some producers, but it made inflation harder to control. The result was a sequence of monetary, fiscal, and foreign-exchange crises that Vargas did not resolve before his political collapse in 1954.
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.
The formula was politically useful because it promised discipline before expansion, but it also exposed the contradiction at the center of the new administration. Vargas needed conservative fiscal signals to calm creditors and importers, while his electoral base expected higher wages, easier credit, and the infrastructure and protection associated with industrial development. Economic policy therefore became a balancing act between stabilization and developmental legitimacy, and that balance was never secure for long. Every adjustment measure had to coexist with a political promise that the state would keep directing national modernization.
Initial economic adjustment was necessary because Brazil faced inflation and a public deficit. The Finance Ministry, led by Horácio Lafer, adopted contractionary monetary and fiscal measures. Two policies weakened those measures:
- Credit expansion: Ricardo Jafet, president of the Bank of Brazil, insisted on expanding credit despite the government’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 looked favorable. Coffee prices were rising, and Brazilian officials expected the United States to invest in Latin America to secure support during the Korean War. Washington did not intend to make that kind of investment in Brazil. U.S. officials were wary of Vargas’s nationalist policies and angered by Brazil’s refusal to send troops to the Korean Peninsula. Without foreign capital, the Lafer Plan lost its financial base. Congress approved it after strong resistance, and several of its goals would be achieved only under 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 attempt to contract the monetary base failed, and inflation remained near earlier levels. Fiscal adjustment was more effective and produced the first combined federal and state government surplus since 1926.
That contrast mattered because monetary and fiscal policy did not move through a single command chain. The Finance Ministry could announce restraint, but the Bank of Brazil, public investment agencies, and political bargaining over development projects kept expanding demand. The government could register a fiscal improvement without creating a stable anti-inflationary regime, since credit policy and import policy still encouraged purchases that the domestic economy could not easily supply. Inflation therefore remained tied not only to budgets, but also to institutional fragmentation.
The main economic problems then moved to the balance of payments. The overvalued exchange rate encouraged imports, especially capital goods and other production inputs, while exports fell sharply. A global textile crisis also hurt Brazilian cotton production. The government quickly restored import controls and limited import licenses. Existing licenses remained valid for 6 to 12 months, so the foreign-exchange pressure continued. Trade deficits depleted convertible-currency reserves and created commercial arrears. The crisis reduced the government’s capacity to finance growth.
The external squeeze also changed the meaning of protectionism. Import controls were not only a nationalist choice; they were a response to a shortage of convertible currency. Yet protection created costs of its own: firms dependent on imported machinery or inputs had to navigate administrative delays and shifting exchange-license rules. Industrial policy became inseparable from foreign-exchange rationing, so the same measures that sheltered domestic producers could also raise costs while limiting supply and feeding inflationary pressure.
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, economic policy had to change 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 multiple-exchange-rate model meant to link export promotion with restraint on non-essential imports and foreign-capital attraction. In practice, it had disappointing results.
The Free Market Law showed how difficult it was to design exchange incentives in a highly constrained economy. The government tried to make exports more attractive and non-essential imports more expensive without abandoning the official exchange structure altogether. Multiple rates gave officials a way to distribute scarce foreign currency by political and economic priority, but they also made prices less transparent. Importers, exporters, and public agencies had to respond to a system in which profitability depended as much on administrative classification as on production.
In October 1953, Brazilian industry was still growing, but the country faced monetary, fiscal, and foreign-exchange problems. The government responded through two policy changes:
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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.
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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 controversy over coffee exporters was especially important because coffee still anchored Brazil’s external accounts. By retaining part of the exchange gain, the state could strengthen revenue and restrain an export boom that might depress prices. Coffee growers, however, saw the policy as a forced transfer from their sector to the federal government. Instruction 70 improved the state’s short-term finances while deepening conflict with a politically influential export group, and that conflict limited the government’s room to maneuver.
The Programa Aranha failed to control inflation because stabilization required lower public investment and cheaper imports that the governing coalition would not accept.
The plan’s weakness was not simply technical. To make monetary and fiscal contraction credible, Vargas would have needed to accept slower public works, tighter credit, and a more confrontational relationship with groups expecting state support. Those choices would have undermined the developmental coalition that had returned him to power. The administration kept trying to fight inflation with instruments that depended on political sacrifices it was unwilling or unable to make, so each stabilization attempt remained partial.
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.
These pressures reinforced one another. The wage increase raised household income at a moment when the government was trying to show anti-inflationary discipline, while the coffee dispute damaged the export channel that supplied foreign currency. Fiscal policy, labor policy, and foreign-exchange policy were no longer separate fronts of economic management; each one affected the credibility of the others. By mid-1954, officials faced a direct conflict between development spending and wage demands. They also had to calm exporters while defending the currency, because the coffee shock had turned the external account into a political problem. The wage decision and the coffee shock turned stabilization from a technical program into a political test. That combination made a coherent stabilization program increasingly unlikely.
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.
The economic legacy of the second Vargas administration was therefore mixed rather than simply expansionist or simply unstable. It strengthened institutions and policy instruments that later governments would use, including development banking and more active exchange management. At the same time, it left unresolved inflation, fiscal pressure, external vulnerability, and conflict over who should pay for industrialization. Vargas’s last administration made state-led development more ambitious, but it also revealed the financial and political limits of that model in early 1950s Brazil. The deeper problem was that the administration could not decide who would absorb the cost of that model: taxpayers, consumers facing inflation, exporters losing exchange income, or industrial groups protected from foreign competition. That unresolved distributional dispute made stabilization politically explosive rather than merely administrative, and it helps explain why later governments inherited both stronger development tools and the same macroeconomic constraints.