Interlude of Prosperity

During the period of relative calm between 1823 and 1826 the economy seemed to be on the road to recovery. Free trade policies had some positive effects. José Cecilio del Valle summarized the situation as follows:

Before independence trade was very scarce, particularly in the later years, due to the Napoleonic disturbances and the pirates, but from 1821 to 1825 it practically doubled and the perspectives for the future in that direction were magnificent, in particular for the import trade, because exports were restricted by the poverty of agriculture. Nonetheless, some articles in demand in the European markets were exported thanks to the prosperity of the industrial revolution, prosperity that favored those countries that produced raw materials or articles used in the textile industry such as cotton, cochineal or indigo. Lately, trade with Spain was limited almost exclusively to the export of indigo and cochineal. Up to 8,500 bales of the former product, with an annual value of over two million pesos, were sent to the peninsula. In 1825 [indigo exports] had reached again their original value of two million pesos and it was expected that, thanks to the new laws, their value could increase to five million pesos.^[21]

Other sources confirm Valle's analysis.^[22] Indigo production, which had declined steadily before independence, was calculated to have reached about 1.2 million pounds by 1826, in sharp contrast to the low pre-independence level of 332,000 pounds in 1818.^[23] The average amount produced between 1809 and 1818 had been only 459,407 pounds. The Consul of the Netherlands, Jacobo Haefkens, attributed the increase in production to the better prices obtained in the free market as opposed to the prices received from the Cádiz merchants.^[24] The combination of peace and free market policies was a powerful stimulus to the economy.

Foreign trade was the main beneficiary of these policies. The positive effects of free trade were reinforced by a marked improvement in the international price of indigo. During the first decade of the century the average price of a pound of indigo in the English market had been 8s . 8d . By 1824 it had increased to 10s . 1d ., in 1825 to 13s ., and in 1826 to 11s .^[25] For the local producer, however, the rise was not as high. Lower export taxes plus freedom from Spanish monopolies do not seem to have had a great effect on the local prices of indigo. Indeed, the difference between local and world prices increased.

There were no ambiguities in the market for imported manufactures; import prices declined across the board. With lower prices and virtually no restrictions there was a trade boom. "It may be said in general," wrote one of the leading merchants, "that the importation and exportation bear a progressive increase from one year to another in the ports of the Atlantic as well as those of the Pacific."^[26] Since imports increased faster than exports there was a substantial outflow of specie. In 1830 it was estimated that 600,000 pesos in gold and specie were exported to Belize.^[27] It was the monetary equivalent of about half of a good indigo crop. Two years later the American consul reported that more specie was leaving the country.^[28] The increase in trade was translated into a sharp decrease in the price of English goods. The tiny market was saturated in a very short time. After all, it was only the few members of the elite who had a taste for European products or the silver to pay for them. From 1824 to 1825 the price of English textiles dropped between 20 and 30 percent.^[29] Newspapers complained that despite the fact that the market was saturated the introduction of large quantities of English cottons to San Salvador was not interrupted.^[30] In the first years after independence legal commerce had risen steadily and dramatically. Central American exports went up from 81,922 pesos in 1823 to 1,051,900 in 1826.^[31] As these figures were estimated from tax collection data, they reflect not only the amount of trade but also the capacity of the state to raise taxes. It is doubtful, however, that the figures exaggerate the trade recovery. All the available evidence indicates that during the federal

period the government's capacity to enforce tax collection was extremely limited.

As a matter of fact, contraband trade, which had been very much alive during the colonial period, became even easier under the weak new authorities. The flight of Spanish bureaucrats had already hurt the ability to collect customs taxes, and the internal divisions of the federation further crippled the system. In 1825 the contraband from Jamaica entering through Omoa was estimated at £100,000.^[32] About half of the goods imported by Guatemala in 1825 came from Great Britain, mainly "broad cloth, all kinds of cotton goods, hardware and other dry goods."^[33] Most of the contraband trade was carried from Jamaica via the British settlement of Belize. Trade with Belize was simple; all that merchants had to do was to go to Belize with hard dollars, indigo, or other produce, and then buy or barter to obatin British goods.^[34] At the same time that the authorities of Belize were reporting to London that trade with the "Guatemalan provinces" had increased considerably, the collection of import and export taxes was decreasing.^[35] In 1826 the authorities complained bitterly about the seriousness of the problem of smuggling, but they were impotent.^[36] In a moment of frustration President Arce asked the British consul for help in controlling contraband, but the latter made no commitments.^[37] In his opinion smuggling was due to the inefficiency of the local authorities; he thought that "there is no place in the world where the collection of revenue is so little understood, and, consequently, where the frauds are so great."^[38] The problem was persistent. There was a costly civil war from 1826 to 1829, and after the war brought havoc to the administration there was no reason to expect an improvement in customs collection. In 1832 Charles Savage, an American consul, estimated that smuggling amounted to about 28 percent of the total goods traded in the northern ports. In the southern ports, the consul observed, "the business of the customs is even more fraudulently conducted."^[39]

It was a two-way smuggling. Indigo and other goods brought to Belize paid no export taxes, and the goods acquired there paid no import taxes. The question that arises with this evidence of smuggling is, Why did it persist and probably increase at a time when trade barriers had been lowered? After all, during colonial times taxes added around 25 percent to the cost of indigo delivered to Spain, whereas in the tariff act of 1822, indigo, cocoa, and balsam had to pay a duty of only 2 percent.^[40] On the side of imports, taxes were also low. Imports that paid duty paid between 6 and 10 percent, a figure that in 1824 was increased by 4 percent. It was not until the end of 1825 that protectionist measures were taken and raw materials and cotton goods were forced to pay duties between 20 and 30 percent.^[41] These duties were low, although not negligible. In comparison to colonial times, when taxes were only one of

many restrictions to trade, the postindependence effective tariff was relatively close to free trade. British goods could be purchased at a price "thirty percent higher than they can be purchased at the respectable retail shops in London" wrote Thompson. This was a different world than before independence. Foreign goods could "in most cases be bought for less than one-tenth of the former price."^[42]

The explanation for the extent of contraband trade can be found not only in the incentive to save taxes but also in the low risk incurred by smugglers. The weakness of the new state made it very easy to smuggle goods. In short, the relatively modest gains from engaging in contraband trade were not outweighed by the costs of being caught. Moreover, the indigo fairs stopped offering the relative security of state-fixed prices. If they had been limited to the legal trade, producers would have been, more than ever, at the mercy of the Guatemalan merchants. But the opportunity to take their products directly to Belize and barter them for dry goods was an excellent alternative, and they took it. As a result, trade was even freer than what the authorities had legislated.

Free trade was not a blessing to everyone. The decrease in the prices of foreign goods meant unemployment to producers of importables such as textiles. José Cecilio del Valle estimated that in 1795 there were one thousand looms in Guatemala, whereas in 1830 only one hundred were left.^[43] Manuel Montúfar in his memoirs described the situation as follows:

Trade, which was open to all nations after independence and, in fact, even before, under the government of General Don Carlos Urrutia, ruined, as was bound to happen, the factories of the country; so that the interior trade that existed in wool and cotton fabrics worn by the poor, has been reduced to the consumption of the Indians of the State of Guatemala ... and it is impossible for [Central American] manufactures to compete against foreign products.^[44]

To a certain extent, incipient industry was replaced by commerce. It was more profitable to devote time, money, and energy, to commerce than to manufacturing. Merchants and weavers, however, belonged to different social groups. Thompson was impressed by the way in which the "most respectable families" engaged in trade. Indigo growers and cattle breeders exchanged their products for dry goods, mainly through the Belize connection, and later became retailers of those products.^[45] Weavers, by contrast, did not have the skills or resources to take advantage of the new opportunities. It was impossible to compete with inexpensive European manufactures; agriculture, cattle raising, and commerce were left as the only possibilities open to the investor.

In this environment of open trade, lax government, and, as we will discuss shortly, great political instability, the economy of Central Amer-

ica experienced important changes. The relative economic integration that had existed in the late colonial period was weakened. The previous system had two basic features: the preeminence of indigo as the basic cash crop, and the trade regulations imposed by Spain. The regulations disappeared with independence, and the importance of indigo declined (this is valid for Central America as a whole, not for San Salvador, which remained dependent on it). Moreover, Guatemala discovered the potential of cochineal, another natural dye. Although indigo exports to Great Britain fluctuated widely (in a very good year like 1839, 700,522 pounds were exported, but in a disastrous year like 1832 only 61,061 pounds were exported), cochineal exports to England were growing at a very steady rate from 4,691 pounds in 1823 to 602,096 pounds in 1839.^[46] This shift in production had great repercussions. As cochineal production was exclusively a Guatemalan endeavor, the previous division of labor, in which the Guatemalans were merchants and the other provinces were producers, disappeared. Guatemalans, including some old merchant families and even Chief of State Mariano Gálvez, were obtaining great profits from cochineal and depended less on the other states for their economic well-being. Old colonial ties were weakened.

Changes in trade routes also contributed to break old ways of doing things. In the past, colonial regulations and the monopoly of the Guatemalan merchant families had forced most trade to go to Guatemala first, to be then exported to Europe via Veracruz or Izabal. After independence, exports via Veracruz made little sense. Belize became the Atlantic port of choice. It had the best facilities and was regularly visited by British ships. Every year between seventy and one hundred ships arrived at Belize with European merchandise and left the port loaded with indigo, cochineal, and other minor exports such as sarsaparilla.^[47] But this trade was nobody's monopoly: Belize merchants consigned goods to Guatemala City; merchants from the different states took their goods to Belize. Anyone with something to sell went to Belize.^[48] Belize merchants prospered rapidly and began playing an active role in the Central American economy. Marshall Bennett, their main representative, exploited the "Tabanco" mine in the northeast of the state of San Salvador.^[49]

Pacific ports were slow to develop, and their advantage over Belize was ambiguous. At the end of the colonial period the importance of Acajutla, off the coast of El Salvador, was very limited; only two or three ships visited it every year.^[50] As a result of independence British merchants based in Chile and Peru began doing business on the Pacific coast. As early as 1824 and 1825, more than ten British and American ships were visiting Acajutla every year. They traded in gold, silver, "Asiatic goods," wine, flour, and European manufactures.^[51] From ten to fifteen British vessels were active in the Pacific trade in 1827.^[52] When

the Atlantic trade was disrupted by the civil wars that dominated the period, the Pacific trade expanded. That is what happened during the civil war of 1826–1829 and again in 1833 when about one-third of the indigo exports were taken to the Pacific ports rather than to Belize. But when calm returned, the latter port was still preferred. Nonetheless, a general increase in commerce along the Pacific coast and new business contacts helped to establish ports like Acajutla and La Unión.

An important development took place in 1833 when the agent to several Manchester manufacturers received a shipment sent directly to the Pacific port of Iztapa (Guatemala) via the Horn. For the first time in Central American history a Pacific port received a direct shipment from Great Britain. The event set a valuable precedent, "the success which attended the experiment," reported the British consul, "caused a native house to follow the example, and in consequence another ship arrived from England in the month of September [of 1834]."^[53]

In a short while British manufacturers were doing direct business with Acajutla and La Unión.^[54] The federal authorities were as interested as the merchants since the Pacific trade could represent a healthy competition to troublesome Belize. In his 1835 message to the congress an enthusiastic vice-president reported that "This [Pacific] trade produces incalculable benefits to the agriculture of the country and it destroys the settlement on the North Coast."^[55] This was a most important development for Salvadorans who for the first time could do direct business with Great Britain from their own territory. This complemented the business done by British houses in Belize, Peru, and Chile who were already advancing merchandise on credit to Salvadoran indigo producers. By 1839 almost 28 percent of the indigo production was regularly exported via Chile and Peru. British merchants became regular customers at the indigo fairs in San Miguel and San Vicente in eastern El Salvador, and they replaced the Guatemalan merchants and the Montepío de Cosecheros de Añil as the main source of credit for the production of indigo. Independence and free trade had opened possibilities and created problems, but the states of Central America were on a new track. For El Salvador this meant that the old commercial dependence on Guatemala could be severed and that it could establish its own channels to obtain credit and trade its products.