4
Labor, Land, and Investment 1840–1880

After the long years of warfare attention gradually turned to production. This first period of national reconstruction and consolidation can be set between the promulgation of the first constitution in 1841 and the liberal reforms in 1881. The spirit of the first part of the period is well summarized by the observations made by Carl von Scherzer in 1857:

To heal the wounds inflicted on the country by party strife, to see the abandoned and desolate fields again under cultivation—the culture of indigo, and the trade which had formerly prospered here more than anywhere else in Central America, once more reviving, and to restore the almost annihilated credit of the republic—these were the objects to which all the cultivated or semicultivated inhabitants looked with their most fervent wishes.^[1]

It was difficult to get started. Rafael Carrera, the Guatemalan dictator, interfered in Salvadoran politics causing great instability and making the task of organizing the state very difficult. It took a while before the country could stand firmer and look at the recent past with contempt.

What was the revenue of the state from 1840 until 1844? A pittance, because of poor administration, waste, lack of attention given to this important aspect of public administration, and, above all, the ruin and general poverty, which seem to have estranged commerce and led the spirit of enterprise and agricultural industry into a state of depression; contributing to this malaise was the insecurity and lack of confidence generated by the political situation.^[2]

Slowly the wonders of the industrial revolution came to the country in their more modest versions and opened new windows to the world. In 1852 the elite of San Salvador could enjoy an optical show with still views of Saint Peter's basilica, the battle of Austerlitz, and the canals of Venice. By 1859, young matrons could have their portraits taken with a daguerreotype. The well educated had access to subscriptions to foreign magazines such as El Correo de Europa and El Noticioso de Nueva York which arrived twice a month in the steamers coming from Panama.^[3]

Through foreign publications and occasional visits to Europe the spirit of positivism permeated the ruling classes. Newspapers exalted the virtues of statistical studies of the population and the economy, and a map of the country was commissioned.^[4] The leader of this trend was Gerardo Barrios who in a trip to Europe recognized the need for change. In a letter from Rome written in 1853 he stated:

I urgently needed this trip to correct my ideas and to be useful to my country.... I will return to preach to my fellow countrymen what we Central Americans are and what we can become.^[5]

The people who traveled to Europe were almost by definition members of the elite, and their narrow point of view colored what they learned from their trips. They had little inclination to learn the lessons of the 1848 revolutions; positivist ideas of hierarchy, order, and progress had more appeal to them. The growth of the economy consolidated a landed elite that, imbued with positivistic ideas, proved eager to erase whatever remnants of egalitarian rhetoric were left from the early independent years. La Gaceta published editorials reflecting this stronger class consciousness of the elite. Reflecting on the idea of citizenship the official paper stated:

In the early years of independence the title of citizen was so extensively applied that there was no individual, no matter how notoriously undeserving, who was not honored by that classification ... at that time there was a fanatic cult for democracy, there was a concerted effort to please the mob and to erase all kinds of distinctions ... the title of citizen should be granted only to those with a certain degree of knowledge, and who own such property, wages or earnings that could constitute guarantee of their honesty and their respect for peace and order.^[6]

The "fanatic" cult for democracy was excised from the rhetoric of the elite until well into the twentieth century.

Economic growth and the consolidation of the state had to face serious obstacles. Political instability diminished but did not go away.

The obstacles to growth did not all come from politics, nature took the blame more often than before. The economy had setbacks due to locust plagues, epidemics, earthquakes, and droughts. But international trade offered a strong stimulus and growth followed. The expansion of exports made it possible to break the old vicious circle; in the past the central state's lack of authority led to chaos, wars destroyed the economy, and with a weak economy the state could not raise enough revenue to consolidate. The situation changed with the increase in trade brought about by the Gold Rush. Import taxes became a reliable and fast-growing source of revenue; they were easy to police since they entered through only three ports rather than over porous and poorly defined borders. With a dramatic increase in imports the state finally had enough revenue to finance a strong army. By the end of the 1850s there were reasons for hope: "... the population improves and becomes richer: production has doubled and the spirit of speculation is awakening everywhere," editorialized La Gaceta .^[7]

Labor

Chronic labor shortages characterized the nineteenth century. Even though the population grew steadily, there were not enough people to satisfy the demands of the economy, and producers always complained about the lack of manpower. Even before the opening of the Pacific routes the government had been enacting legislation to force people to work. Vagrancy laws existed in different versions since 1825 when a legislative decree imposed prison sentences on vagrants.^[8] One of the first laws passed after the end of the federation imposed fines on vagrants and forced everyone to carry a document, signed by a reputable employer, that served as proof of employment.^[9] Different police regulations issued in the 1850s insisted that one of the important functions of the police was to enforce vagrancy laws.^[10] The situation worsened later as the export sector expanded faster than the labor force. Between 1821 and 1855 the annual growth rate of the population was about 1.3 percent, and between 1855 and 1878 it was 1.5 percent (see table 11). At the same time total international trade was growing at a much faster rate: its average annual growth rate for the same period was 7 percent. If one compares five-year averages to smooth out the wide fluctuations of the data, one observes an increase of 76.7 percent from the period 1854–1858 to the period 1859–1863, and of 21.6 percent from 1859–1863 to 1864–1868 (see table 10). Despite the obvious shortcomings of the trade data it seems safe to assert that trade outpaced population

growth by a wide margin. This situation created tensions between export agriculture and other economic activities such as subsistence agriculture and public works.^[11]

High demand for labor during the peak of the agricultural season forced public works to come to a halt. In 1855 the governor of Cuscatlán province explained that the lack of labor forced him to interrupt public works during the rainy season (six months), at harvest time (two months), and at the time when indigo was processed (one month). The town of Apaneca experienced a similar situation: "the lack of labor seems to stop the development of public wealth," said the 1858 census.^[12]La Gaceta complained in 1861 that agricultural activities were always wanting for laborers.^[13] The common practice of advancing money to laborers in order to secure their services did not help much. Workers often accepted the advances and later failed to show up. The problem was so widespread that the government felt compelled to send a letter to the governors asking them to enforce the law because of,

... the generalized clamor of agriculturalists and landowners due to the lack of labor that they experience in their activities, because of the frequency with which day laborers break their engagements and defraud the advance payment that they receive.^[14]

As the problem persisted, in 1861 the government imposed sentences of three to eight days' labor on public works on those laborers who did not fullfill their commitments. Those sentences replaced imprisonment, which had proved to be ineffective.^[15] The solution found by the legislators reflects their understanding of the problem. Instead of removing laborers from the field by putting them in prison, they forced them to do work. Not surprisingly vagrants were a rare sight. The wife of the British

consul observed that "there are a few beggars certainly who come regularly every Saturday for their weekly dole but they are as nothing in proportion to the population."^[16]

The practice of weekly contracts and the fact that they were seldom renewed made on-the-job training difficult. This became a greater problem after the introduction of agricultural machinery and complex agricultural techniques.^[17] Efforts to import labor failed. The government gave a concession to a Spanish citizen who promised to bring 1,000 Chinese workers, but the project was never carried out.^[18]

The relative scarcity of labor seems to have given freedom of movement to agricultural workers. The mobility of the labor force equalized wages across the country. In 1858 an agricultural worker in the town of Suchitoto earned two reales per day.^[19] The same year Ilobasco wages were reported to have been "no different than in other towns."^[20] A decree issued in 1852 to help solve the problem of scarcity of workers for public works ordered every male between fifteen and fifty years of age to work two days every year building roads. Those who wanted to avoid the indignities of manual labor could do so, for a fee. They could pay another person or pay a fine of four reales, equal to the wage rate observed in Suchitoto in 1858.^[21]

Most workers labored in agricultural activities. In fact, agricultural employment increased over time. In 1807 Gutiérrez y Ulloa recorded the occupations of the entire male labor force, 76.5 percent of which was engaged in strictly agricultural activities.^[22] Fifty years later the proportion was even higher: the 1858 census of Santa Ana province showed that 85.2 percent of the working men were engaged in agriculture. In Cuscatlán province the equivalent figure was 88.9 percent. (See tables 12 and 13.) A later census made in San Vicente province in 1878, shows

that of the 5,026 economically active men who lived in the city of San Vicente, 60 percent worked in the countryside, a very high rate for city dwellers.^[23]

Nonetheless, population growth was enough for cities to grow, for markets to develop, and for a greater division of labor to take place. In 1807 Gutiérrez y Ulloa listed only twenty different occupations, whereas in 1858 the census of Santa Ana province alone registered twice as many. At that time Santa Ana province had more masons, carpenters, tailors, and shoemakers than the whole country had in 1807.^[24] In Sonsonate, the municipal census of 1853 recorded forty different activities, ranging from lawyers to day laborers. The most common occupations for men outside agriculture were domestic service, tailoring, shoemaking, retail trade, and brickmaking. Women outside agriculture were more likely to be seamstresses or maids. The census seldom acknowledged their contributions to agriculture, but it is hard to believe that they did not play an important role working in the fields.^[25] The larger cities became relatively more sophisticated places and provided a variety of services. In 1858, Sonsonate, the closest commercial center to the growing port of Acajutla, had thirty-two retail stores, four pharmacies, eighteen grocery stores, ten carpentry shops, twenty-two cobbler shops, twelve looms, five brick ovens, and two flour mills. The relative prosperity of Sonsonate must be understood in the proper context: in the whole country there were no more than five towns of the same size. It was located in a prosperous region that produced indigo and coffee, and had the best conditions for raising cattle. However, it exemplified the beginnings of urban life in the country.

Towns were growing and with them the number of artisans and construction workers. San Salvador, which in 1839 had around 15,000 inhabitants, by 1865 had more than doubled its population. Belot reported that in that year it had approximately 35,000 inhabitants.^[26] In 1858 Santa Ana City had 20,845 inhabitants, more than San Salvador

had had twenty years earlier. It was a very tentative kind of urbanization; strong links to agriculture remained. Cities provided the types of services necessary to sustain the growth of commercial agriculture, and manufacturing activities were very basic. According to the 1858 census, 33 percent of the inhabitants of Santa Ana province lived in the city of Santa Ana, but 85.2 percent of the working men of the province worked in the countryside.

Wages in the cities and small towns were comparable to those in the fields. Domestic servants earned wages similar to those of day laborers, and presumably the occupations were interchangeable. A male servant in the town of Suchitoto in 1858 earned thirty-two reales a month plus food and shelter, not very different from the two reales per day plus food that he would have earned working in the fields. Women earned less. A cook earned between twelve and sixteen reales a month, and the maid in charge of running errands made between eight and ten reales. Skilled workers had better wages and were more urban in the sense that they were less likely to exchange their jobs for worse-paying agricultural jobs. A carpenter or a smith could expect to make twice the wage of a day laborer and about the same as a tailor or a shoemaker.^[27]

In the absence of good price series, it is impossible to make comparisons of the purchasing power of 1858 wages, but a comparison with data for the beginning of the century suggests that the diet of the Salvadoran labor force had improved. In 1807 Gutiérrez y Ulloa reported a production of 116,157 fanegas of maize to feed a population of 165,278.^[28] This means that the annual consumption per head averaged 0.703 fanegas (80.82 kgs.). In 1858 the governor of La Paz figured that each individual in his province needed five medios of maize per month and, comparing that estimate to the production of the province, he concluded that there was a surplus. The governor's estimate is equivalent to an annual consumption of 2.5 fanegas of maize per head, 3.5 times the amount of 1807. In the same year Santa Ana province produced 208,600 fanegas of maize for a population of 57,844.^[29] If all the maize was consumed in the province, the average annual consumption would have been 3.61 fanegas per head. Another indication of the abundance of maize is the fact that its price was down from 3 pesos/fanega in 1807 to an average of 1.86 pesos/fanega in 1858, a year when the expansion of international trade had already been felt. Nonetheless, the equilibrium of food consumption was somewhat precarious and consumption could vary widely year to year. In 1878 Castro estimated that in San Vincente province annual consumption of maize was 1.21 fanegas per head, more than in 1807 but less than in 1858.^[30] Sometimes natural disaster struck causing widespread hunger. In 1854, for example, there was a big earthquake and a locust plague which brought widespread famine. "This 1854

was a melancholy year for Central America" wrote the wife of the British consul, "for after the earthquake came a famine, the corn crops being destroyed by locusts that came in millions." The following year the suffering was still vivid. La Gaceta commented on "the horrors of the hunger that we were unfortunate to suffer last year."^[31]

The equilibrium was precarious indeed, but, no matter how precarious, food seems to have been on the average more available than before independence. Labor being scarce, rural workers had some leverage and their living conditions could improve. Property owners were not necessarily happy with the arrangements. In this instance the American consul was an articulate spokesman for employers when he reported that labor was unreliable "owing to the indolent habits of the people, and the almost costless means of subsistence to the lower classes."^[32] Enforcement of vagrancy laws, however, reminded everyone of the alternatives to market arrangements and wage bargaining: the power of the state could impose the rules of the game and even change them. Part of the leverage of agricultural workers was their access to land and to inexpensive food. They could always go back to their ejidos or communal lands. When the export sector gained in importance resources moved from food production to coffee production, and a fierce competition for land began.

Land

The expansion of trade also affected land use and ownership. During the first half of the century the nature of land ownership did not vary much from what prevailed during the colonial period. The land of the country was divided into private haciendas, town land (ejidos), communal lands (which belonged to Indian communities), and public lands (terrenos baldíos); by the end of the century most land was private. Since the 1850s the state carried out an important effort to sell public lands and finally, after 1880, it eliminated ejidos and communal lands as forms of property holdings. Haciendas and coffee fincas emerged triumphant at the end of the century.^[33]

The activities performed in haciendas changed little during the first half of the century. They followed ancient patterns established during the colonial period. In 1847 La Gaceta described a big hacienda offered for sale:

[It] has about 70 caballerías , most of it flat and very fertile and good for all types of agriculture with plenty of water of good quality and unsurpassable for cattle raising. Its buildings are large and good for processing indigo as well as sugar. It has a chapel and a sacristy and everything is in

good shape, the same as the obrajes and tanks with a daily capacity of 300 cargas . Besides, there are two obrajes of 100 cargas capacity that still need a little work to get them ready.

There are 40 mules and 100 oxen, 16 oxcarts, 80 boxes, wheels and other things necessary for processing indigo. For processing sugar there are 2 sugar mills, 3 boilers, 150 foreign molds and everything else. In the current state it is estimated that it is possible to produce from 1,200 to 1,500 arrobas of sugar. The hacienda has 500 heads of cattle and 100 horses. There are various pasture lands, some of them fenced with stone.^[34]

This was a big and rich hacienda, wealthier than most, and it is quite possible that the advertisement included a bit of creative marketing, but in its wealth it gives an idea of what could be expected of properties in rural El Salvador. Indigo had to be mentioned first, but many other activities deserved mentioning. Sugar and cattle raising were also important. All the implements necessary to process indigo and sugar and to take those products to the market were present at the hacienda. Gradually they had accumulated a substantial amount of capital: tanks to process indigo, sugar mills, buildings, and livestock. The abundance of cattle suggests plentiful land. In fact, in the late 1840s prime land in El Salvador sold for lower prices than comparable land in Costa Rica or Guatemala.^[35] No mention is made of the labor force because it was in no way attached to the land. The land produced many things: cash and export crops coexisted with basic foodstuffs. Staple foods, maize and beans, were produced not only in haciendas but in ejidos and communal lands in every corner of the country. Almost all the towns surveyed in the 1858 census mention cereal production. Half of the districts covered by the census mention cattle raising.

Until the 1860s, when the increase in international trade began putting pressure on land, haciendas, ejidos, and communal lands played equally important roles in production. Ejidos were considered to be an essential component of a town. The authorities of the federation had restated the Spanish concept of the ejido with an 1827 decree that endowed with land "towns that do not have enough for their agriculture." Moreover, the law even considered the possibility of "taking the property of a private citizen" if necessary to create an ejido, in which case the owner of the land would be compensated.^[36] There is evidence that Salvadoran authorities complied with the law. When after the earthquake of 1854 the town of Nueva San Salvador was founded, the legislature endowed it with its corresponding lands "considering that its inhabitants will need land in the ejidos for their plants and gardens."^[37] In 1858 San Vicente received 30 caballerías of land for its ejidos and in 1859 Jutiapa received nine caballerías for the same purpose. Ejido lands produced

not only foodstuffs but also indigo and other commercial crops. The ejidos of Rosario de La Paz had very good obrajes and in 1858, as they were underutilized, the mayor decided to open their use to newcomers. The inhabitants of La Paz cultivated indigo and cereals, and raised cattle in their ejidos. When necessary, the municipalities enlarged their ejidos by buying more land. In 1858 the municipality of Guayabal bought communal lands from neighboring Indian towns in order to increase the size of its ejidos.^[38]

Although there was no qestion that the ejidos played an important economic role, land was becoming more valuable. By the 1860s the idea of endowing new towns with ejidos was losing support with liberals under Barrios. (Earlier in their term, they had provided many towns with land.) First they began regulating the creation of new towns. They thought that the "creation of new towns is pernicious when it is done by founders who do not have the necessary elements to maintain their municipal existence." Therefore they decreed in 1862 that as a condition of creating a new town the population either had to prove that they had their own land or had to buy it.^[39] A few days later the legislation that regulated the allocation of new ejido land was abrogated. One can only speculate that with land becoming more valuable, a clever way to acquire some was by creating a new town and then asking the government for ejidos.

Communal lands were also a live and viable institution for most of the century. Indian communities were sometimes accused of owning the most fertile lands in the country, and there was a constant friction between municipal authorities and the communities, since communal and ejido lands were often side by side and limits were not always clear.^[40] In 1867 the government tried to mediate in these kinds of conflicts and the Senate authorized the executive to grant municipalities the right to intervene in the administration of communal lands. That provision was modified two years later when the president gave legal representation to Indian communities that owned land "independent from municipal ejidos" and ordered them to appoint their own representatives.^[41]

Those conflicts were never fully resolved. When the liberals came back to power after Dueñas's defeat in 1871, the government was less sympathetic to the plight of the communities and less willing to mediate. Conflict was more likely to become violent, as happened in 1875 when the Indians of Dolores Izalco rose in arms and assaulted the garrison of the city of Izalco.^[42] But while they existed, communal lands participated acitively in the economic life of the country. Their activities were not limited to subsistence agriculture. The Indians of Santa María Ostuma, for example, had bought their communal lands and used them to produce tobacco for the market and cereals for themselves. In the communal lands of San Pedro Nonualco there were one hundred sugar mills.^[43]

At the same time the government was very active selling terrenos baldíos. Ejido lands left unused by the disappearance of the town that they were supposed to service were also sold. When the publication of La Gaceta began in 1847, it carried periodic advertising of sales of terrenos baldíos. Land sales were not an exercise in generosity or social policy but a revenue-raising operation. Public land was also used to redeem government bonds.^[44] In order to speed up sales the government passed legislation encouraging people to identify and claim baldíos, offering as a reward a percentage of the land. The percentage varied from 25 percent for properties under 20 caballerías to 5 percent for properties over 1,000 caballerías. To discourage abuses surveys were carried out by five government-appointed surveyors who were paid a fee established by law.^[45] Public land was sold at market value in public auction. A terreno baldío in a choice location between San Salvador and Santa Tecla could be sold for five hundred pesos per caballería, whereas a baldío in faraway Metapán could not be sold for more than thirty pesos per caballería. The former ejidos of Cuscatlán, which can be reasonably assumed to have been cultivated, were offered at six hundred pesos per caballería.^[46] Private land was sold at similar prices. A private hacienda in Metapán was valued between thirty and sixty pesos per caballería, a price similar to that of the baldío. A baldío in San Vicente was priced at three hundred pesos per caballería and a hacienda in that same area was valued at 350 pesos.^[47] There was an active land market, and the government was more than willing to take advantage of it. In 1860, ten out of fifteen land cases handled by the governor of Santa Ana were baldío claims.^[48] Renting land was also common. In 1858 the powerful Guatemalan family of the Aycinenas advertised in La Gaceta that it wanted to rent three haciendas in El Salvador.^[49]

The constant entry in the market of terrenos baldíos kept land prices more or less constant and permitted the expansion of haciendas and fincas to satisfy the expansion of exports. Without detailed information on land quality or transportation costs to the nearest market, it is difficult to interpret the meaning of the land prices advertised in La Gaceta ; however, one can observe that year to year land prices remained within the same range until the late 1860s. Marginal land had a price around 20 pesos per caballería, whereas the best cultivated land in a choice location had a price around 700 pesos per caballería (see table 14). However, warning signs appeared on the horizon. The abrogation in 1862 of the law that ordered the creation of new ejidos was only the first. By the late 1870s, when most terrenos baldíos had been sold, it became clear that further expansion would not be painless. As we will discuss later, the local elite felt the need to claim ejidos and communal lands.^[50] Public land sales constituted the only escape valve in the system, but they reached their limit. The expansion of international trade

put heavy pressure on land and all the other factors of production. When the escape valve disappeared the elite had already consolidated in power and, as we will discuss later, used the legislature to change the rules of the game by privatizing all land.

Investment

The bottleneck in the credit market appeared much earlier than in the land market. There was plenty of reason for this since the troubled years of the federation and beyond had retarded the development of credit practices and institutions. As trade with the outside world increased, so did investment opportunities. But without a banking system and with outmoded laws, obtaining credit was a cumbersome process with high transaction costs. Credit operations were difficult and informal, although by no means negligible. In the absence of institutions, human ingenuity played a major role. Importers used a complicated credit system called habilitación based on discounts on the invoice price. An 1855 report of Great Britain's Board of Trade describes the operation in detail:

Business is carried on by the importers in the following manner, viz.: they sell to the resident merchants at about 80 percent, upon invoice prices payable in 12 months, either in part cash, part indigo, or all in indigo, at the current price of that article at the time the payment becomes due, or its market value at the time of the purchase. Those again dole out small invoices to the smaller shopkeepers, also upon long credit, and so every business is done upon trust; a cash sale of 3,000 dollars pesos being seldom heard of.^[51]

The 20-percent annual interest rate in real terms (in cash or in indigo) in the transaction described above was consistent with the 18-percent interest offered to the charity board in 1849.^[52] High interest rates persisted during the period under consideration. In 1865 the French traveler Belot found monthly rates of 1.2 percent.^[53] These practices were still very much alive in 1878. In San Vicente province indigo growers sold their product at the beginning of the year, before collecting the crop, and promised to deliver it ten months later, just before the fairs. They used their haciendas as collateral in transactions that amounted to borrowing money at an annual interest rate of up to 30 percent.^[54] It was a system that permitted foreign credit to trickle down to small producers but at considerable cost. Risks were high and, given the small amounts involved, transaction costs were also significant.

High interest rates, coupled with the scarcity of labor, go a long way to explain the problems of investing in permanent crops such as coffee. Nonetheless, informal arrangements eased the difficulties involved in the process. Informal arrangements had to rely, almost perforce, on personal knowledge of the borrower, making credit operations much easier for the members of the elite. The obstacles for a member of the lower classes to start a business career can only be imagined. A person with connections and of recognized honesty could obtain good deals, and knowing the right person could make the difference between obtaining credit or not.

Dr. Manuel Gallardo's credit history illustrates the advantages of being somebody. He was a young doctor descended from indigo planters from Suchitoto. Able to save enough money to further his education, in 1855 he decided to go to Paris. As there were no banks that could make financial arrangements for him, he had to search for a reliable friend who was willing to borrow his money and send the interest to Paris. The system worked, and he returned from Paris with the enhanced reputation of a man educated in Europe. After a period as rector of the university the young professional decided to start a coffee plantation, the latest thing in business ventures. To select the land he could count on advice from his friend Juan Rafael Mora, a former Costa Rican president cum coffee planter who was in El Salvador as an exile.

But coffee production required a considerable investment, and the trees did not produce revenue until the fifth year. Dr. Gallardo ran out of money. His credit needs were satisfied through his good connections; by that time he had already been a minister and advisor to presidents, and he was a good risk. Commercial houses in San Salvador gave him merchandise payable in twelve months. He resold it, and did so "at great profit." When that was not enough he decided to borrow from a friend who charged him a rate below the market rate and gave him enough time to pay. Dr. Gallardo's finca was a success story. As of 1990, his descendants, among them former ambassadors and cabinet members, are still prospering. Obviously, someone like Doctor Gallardo, a prosperous professional and able entrepreneur with a career in government, was a better risk than most borrowers. His generous friends were doing good business by lending him money.^[55]

Mortgage credit played a role in financing commercial activities. In 1860 there were 154 outstanding mortgages in San Salvador province. Their average value was 1,301.47 pesos and their standard deviation 1,917.85. About a third of all mortgages (52) were secured by urban houses, and the rest by agricultural land including, on one occasion, ejido land. They also included indigo obrajes and sugar mills. Credit obtained by mortgaging property was used for various purposes. Some 28 percent of all mortgage loans were used to pay for the security deposit needed to obtain a license to sell liquor, a lucrative state monopoly. Only 3 percent of the total credit was specifically mentioned to have been used to finance indigo businesses and none for coffee, a new kind of operation of unknown risk.^[56]

There are similar data for San Miguel province. In that region there were thirty-one outstanding mortgages with an average value of 1,265.55 pesos and a standard deviation of 2,184.91. Most of the mortgaged properties (65 percent) were houses, and the rest rural property including, as in San Salvador, ejidos, obrajes, and sugar mills. In this region, one of the main producers of indigo, only one mortgage was used for an indigo business. Most of the credit was used to pay personal debts or security deposits.^[57] These data strongly suggest that mortgages were used mainly for urban businesses, a practice that is understandable at a time when land deeds in rural areas were, to say the least, a very confusing matter. Thus, agricultural production was largely financed by future sales in the manner described above.

The government participated in credit transactions by borrowing from the public. As mentioned before, it sold bonds that circulated freely and even used them to pay for goods and services. They were attractive because they could be used to pay taxes and public lands at a discount. Commercial houses bought and sold bonds at a discount. Their use was so common that they had a great degree of liquidity and,

since they could be endorsed to others, had some of the properties of money.^[58] They helped to ease the scarcity of currency. The country had no currency of its own; gold and silver coins from North and South America were used for local transactions, and the scarcity of coins was such that cocoa beans and even eggs were often used as a means of exchange for articles of small value.^[59]

Credit difficulties slowed the process of capital formation but did not stop it. When Gutiérrez y Ulloa prepared his report there were hardly any machines in the country and the amount of cattle was very limited. In 1858 sugar mills were spread throughout the country. Santa Ana province had 9 imported sugar mills and 166 made in the country. The typical hacienda had obrajes to process its own indigo. The number of construction workers had increased substantially, which means that more houses were being built. Slow investment in agricultural machinery was not only a matter of credit but also had to do with technological problems. Simple sugar mills (trapiches) consisted of two vertical wood cylinders that rotated crushing the sugar cane. They were inefficient but easy to operate and repair, whereas imported machinery needed maintenance and parts, two extremely rare elements. It took a lot of courage to invest in a steam engine without knowing whether it could operate long enough without interruption to be profitable.^[60] The wife of the British consul noted that,

Machinery is beginning to be introduced into Salvador, and would be more so if there were more clever mechanics settled in the country; but people are afraid of spending much in machines when there is no one capable of repairing them when out of order.^[61]

Even more, brave investors sometimes spent a great deal of money on heavy machinery only to find out that it could not be transported from the port to its site. As late as 1894 exporters were warned:

Machinery destined for this country should be made in as small pieces as practicable. The road from La Unión to San Miguel is strewn with heavy pieces of mining machinery, big iron shafts, blocks of granite and marble for monuments, etc., which have never reached their destination. At this date there is actually a boiler at the foot of the pier at Acajutla under 12 feet of water, which broke the chains with which they were hoisting it from the lighter. It is sunk, probably never to be recovered.^[62]

There were modest local attempts to make up for the lack of foreign machinery. In 1859, La Gaceta reported that a Costa Rican carpenter living in Nueva San Salvador had built and installed a water-powered sugar mill that worked "perfectly."^[63] But the use of water power could

not be extensive in a country where rivers are small and vary greatly between dry and rainy seasons. Small shops built simple agricultural machinery. In Santa Ana there was a shop that specialized in making wooden sugar mills, molds for sugar, machines to process coffee, oxcart wheels, and the like.^[64] In the late 1860s sugar exports to California had increased enough to permit the importation of steam machinery for sugar mills.^[65]

Capital formation did not take the form of complicated machines or the development of an incipient industry; the country had a long way to go before reaching that stage. Instead, investment was directed to bringing new land into cultivation, building facilities, installing modest sugar mills and indigo obrajes, starting coffee plantations, and improving transportation, all of which made possible the expansion of foreign trade.

Conclusion

During the early years of the century, the context in which the state defined its role somewhat softened the trend toward greater inequality. The constant need to finance wars and the use of forced loans tended to equalize income. Labor scarcity, aggravated by the needs of the army, gave some leverage to workers, and competition for land was checked by the availability of terrenos baldíos. The limited technological, monetary, and organizational demands of traditional agriculture made it possible for all sectors of the population to engage in it. However, the equilibrium was quite fragile; it was to be upset by the two key developments of the second half of the century: the expansion of exports and the consolidation of the state. The combined action of these developments meant that the ability of labor to obtain its share of the economic pie would be greatly diminished. Labor's bargaining power depended on its relative scarcity, which, in turn, was determined by its natural growth and its access to land. The expansion of coffee production put great pressure on land, particularly land located in the western region where conditions were excellent for coffee production and ejidos and Indian communities were strongest. Market forces and, later on in the 1880s, the new legislation of the liberal reforms reallocated land and increased the numbers of landless laborers.^[66] Moreover, the consolidation of the state and its coercive apparatus made it easier to enforce vagrancy laws. With greater numbers of people in the labor market and a stronger army, plantations would have a steady supply of cheap labor.

At the same time, the increasing importance of coffee production exposed the limits of existing credit mechanisms. Since it took years for

coffee trees to become productive, future planters depended on credit to get started in business. Given the informal nature of the habilitación system, the members of the elite who had a good name, business contacts, and the ability to make a good impression on foreign merchants, were in a privileged position to obtain funds. Things were different for those who worked their ejidos or communal lands. They did not have friends or relatives who could offer a helping hand, and strangers would find it difficult to lend them money. What guarantee did they have to offer? How would a foreign merchant assess the risk of lending money to an illiterate member of an Indian community?

The export sector eroded traditional forms of land tenure before it had any impact on the development of a banking system. The authorities of the emerging state were better equipped and more inclined to enforce vagrancy laws and to change the legislation that regulated land tenure than to provide credit to would-be planters. When coffee production began in earnest, the situation of the labor, land, and credit markets was such that a greater specialization in coffee exports would weaken labor, worsen the distribution of land, and allocate credit only to a tiny minority.