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The Encilhamento was an economic bubble that boomed in the late 1880s and early 1890s in Brazil, bursting during the early years of the First Brazilian Republic (1889–1894) and leading to an institutional and a financial crisis.Amy Chazkel; "Laws of Chance: Brazil's Clandestine Lottery and the Making of Urban Public Life" Duke University Press 2008 pp.146Assis, Oxford Edition 2000. Foreword pp. xv Two Finance Ministers, first the Viscount of Ouro Preto and then Ruy Barbosa, adopted a policy of unrestricted credit for industrial investments, backed by an abundant issuance of money,Ney O. Carvalho; "Encilhamento: Anatomia de uma bolha brasileira" ("Encilhamento: Anatomy of a Brazilian Bubble") Bovespa 2004Chazkel, 2008 Chapter 4 in order to encourage Brazil's industrialization. This policy of economic incentives created unbridled speculation and increased inflation, and encouraged fraudulent initial public offerings (IPOs) and .Jeffrey D. Needell; "A Tropical Belle Epoque: Elite Culture and Society in Turn-of-the-Century" Cambridge University Press 1987 Page 12Jose Murilo de Carvalho, "Os Bestializados, o Rio de Janeiro e a República que não foi" ("Brutalized ones, Rio and the Republic that didn't came") Cia das Letras 1987 P.20
In spite of the considerable volume of native capital being released with the abolition of the slave trade in 1850 – at the same time when the Baron of Mauá was laying the foundations of the modern banking system in Brazil – decades later at beginning of the Republic, the Brazilian economy was still being held back by, amongst other things, restrictive economic legislation – notably the "Land Law" of 1850 and the "Barriers Act" of 1860, which inhibited the access to land ownership by former slaves and immigrants at a time where agriculture was economically predominant in the country,John Schulz, "The financial crisis of abolition" Yale University Press, 2008 Chapters 2 to 4Nassif 2007 Ibidem page 77 and curbed for decades the development of Brazilian financial markets, with them having become at that time, a kind of "Oligopoly" under the control of few families.Marta Barcellos & Simone Azevedo; "Histórias do Mercado de Capitais no Brasil" ("Histories of Financial Markets in Brazil") Elsevier 2011 Introduction (by Ney Carvalho) & page 22
Proposed changes in land legislation were one of the reasons why large landowners and former slaveholders supported the establishment of the republic.Schulz 2008 IbidemNassif 2007 Ibidem page 79 In this political, economic and social environment, under the pretext of promoting the industrialization of the country, occurred the Encilhamento.
In this environment, the Viscount of Ouro Preto decided to create an institution to act as a regulatory agency for the financial market, a private central bank in the European manner, a reserve bank, a monetary authority of liquidity. The fact that Ruy Barbosa had been a great opponent of such system, accredited him to be appointed by the military as finance secretary, when they imposed the republic.Gustavo Franco, "Crônicas da convergência" ("Chronicles of convergence") TopBooks 2005 p.16 When he took office, soon after the proclamation of the Republic, he put into practice all what he had criticized before. In January 1890 he enacted a new banking law inspired by the ideas of counselor Mayrinck, his banker and personal friend, who he without consulting the president appointed as head of the new Central Bank, signing the bill late at night in a scandal that would be the first of a series until his departure from the secretary.
This however didn't stop the enacting of the new law, despite protests and opposition from secretaries like Demetrio Ribeiro and Campos Sales, who predicting the consequences of measures, got a central bank to São Paulo.Gustavo Franco, "Reforma monetária e instabilidade durante a transição republicana" ("Monetary Reform and instability during the republican transition") BNDES 1987 pp. 112 and 114
Unregulated speculation rose as a direct consequence of the new law and reached all major sectors of the economy, with its highest volume reached in currency trading. The majority of political fallout has however been generated by rogue IPOs - as the new banking law effectively allowed authorized issuers to act freely, without any supervision or official punishment.Ney Carvalho 2004 Ibidem; pág.174 For example, a company without any capital could launch an IPO, but also whenever it needed more money it could simply create new shares - with existing stakeholders losing rights to their stake if they refused to purchase any.Schulz 2008 Ibidem; pág.84
Since the new law tied stock prices to their nominal values, there was no official oscillation of stock prices, and consequently, no way to negottate them directly in the Stock Exchange in order to both minimize losses or maximize profits. This in practice not only restricted the trading of securities to the OTC market, congesting it by supply, but also led to a deadlock for new issues in the stock market, locking out legitimate business that could have taken off out of the process, besides causing a total loss to many inexperienced investors.Ney Carvalho 2004 Ibidem; pág.146
Instead of help to promote economic growth and structural change in the economy, the process led to one of the worst inflation outbreaks in the country's history, while the Brazilian economy suffered violent "collapse".Gail D. Triner; "Banking and economic development: Brazil, 1889–1930" Palgrave™ 2000 Pages 44–74Murilo de Carvalho Ibidem 1987 The Encilhamento's "last straw" came with the financial shock wave caused by the default of Argentine government bonds following the 1st collapse of the Barings Bank at the end of 1890, and although the burst has been initiated then, it occurred in a slow way, until 1892.Triner 2000 IbidemGustavo Franco 1987 Ibidem, pp. 41-42 and 127Maria Eulalia L. Wolf, "História do Rio de Janeiro; do Capital comercial ao capital industrial e financeiro" ("Rio History: from commercial to industrial & financial capital") IBMEC 1978
On January 20, 1891, Rui Barbosa stepped down as finance secretary to head two companies that were created during the Encilhamento and which he had partnership with Counselor Mayrink.Needell 1987 Ibidem; p.84Nassif 2007 Ibidem; p.104 3rd paragraph General Deodoro da Fonseca resigned on 23 November of that year, during the 1st naval revolt, under imminent threat of deposition by the Republicans, represented by Vice President Floriano Peixoto, who "naturally" assumed the presidency.
However, due to the extraordinary powers conferred to monetary authorities, the private interests in Encilhamento overtook the public interest. So, instead of a slow and steady promotion of development, economic growth, distribution of wealth, financial literacy & confidence; what occurred was an increase in concentration of wealth, overvaluation of profiteering at expense of productive activity, widespread bankruptcy, as well as ignorance and distrust regarding how politics and markets work, in addition to the geometric increase of debt and economic stagnation.Chazkel 2008 IbidemMaria Alice R. de Carvalho, "República no Catete" ("Palatial Republic") Museu da República / FAPERJ pág.95 2001
The three main reasons for the failure of the movement as a lever for development are as follows:Nassif 2007 Ibidem, pages 34 and 35
Following the effects of the bust, came the usual period of "witch hunt" that lasted until 1895, when especially during the tenure of Floriano Peixoto, some prominent figures in the Encilhamento period had their assets frozen, seized and have been prosecuted publicly and administratively. Among these was Rui Barbosa, who had to go into exile in Europe.Barcellos & Azevedo 2011 Ibidem
The legislation concerning financial markets in Brazil, in a vain attempt to control their volatility, at a time when the concept of Antifragility academic paper by Nassim Taleb; Polytechnic Institute of New York University, September 2010 was unknown, suffered a violent setback to the era of the "Barriers Act" – the restrictions only being loosened 70 years later in 1965.
Although the bubble burst happened between 1890 and 1892, its economic and political effects were made throughout the decade,James D. Henderson, Helen Delpar, Maurice P. Brungardt & Richard N. Weldon; "A reference guide to Latin American history" M.E.Sharpe Inc. 2000 p.172 with only in the end of the Campos Sales administration, with Rodrigues Alves in charge of the Brazilian economy, been decreased, but at a high social cost,Murilo de Carvalho 1987 Ibidem, p.21 due to the economic policy of austerity taken in accordance with requests of the big international capital.Needell 1987 Ibidem; p.17
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