7
A Land of Coffee Planters

In the last two decades of the nineteenth century, the structure of agricultural production in El Salvador changed substantially. As coffee exports increased, the Salvadoran economy was opened to the rest of the world. Not only coffee became the most important cash crop, but exports in general became a more important part of the economy. By the 1880s land scarcity had become a serious problem, but by that time the scarcity of credit and entrepreneurial talent had already helped to consolidate an elite; the liberal reforms followed. Changes in international markets, together with the liberal reforms, had transformed the country. Coffee's share to total exports increased from 59 percent in 1882 to 83 percent in 1900, and coffee became the main source of income for members of the ruling class. In 1895 a majority of the members of the Salvadoran legislature were coffee planters.^[1] The elite was small and mostly white; whites of Spanish origin were estimated to be about 8 percent of the whole population, and they were "the exclusive office holding and law making class."^[2] With the profits generated by coffee exports they acquired a veneer of modernity.^[3] The new face of the country was presented to the world at the Exposition Universel in 1889. It was not a contradiction that to finance the exhibit money had to be borrowed from Lazard, Frères & Co.^[4] For its inhabitants the country seemed to have gone a long way, but in order to display its prosperity to the rest of the world it had to ask for room in the Mexican pavilion and to borrow money from a French banker.

Politics changed as a result of the expansion of export agriculture.

Liberals reigned; the old conflict between conservatives and liberals was gone. Liberal ideas inspired the 1886 constitution, the most influential constitution in the history of the country.^[5] The main political issue was to find the best way to protect the coffee planters. President Ezeta (1890–1894) was overthrown when he mismanaged a financial crisis and dared to double the export duty on coffee. His successor, Rafael Gutiérrez (1894–1898), repealed the tax. Gutiérrez was overthrown when the drop in coffee prices in 1898 led to a financial crisis that he could not handle. From 1898, when Tomás Regalado (founder of one of the legendary catorce familias ) overthrew Rafael Gutiérrez, to 1931, there were no coups d'etat and all the presidents were coffee planters. Politicians still plotted to obtain power by staging a coup, but none could find enough support from an elite for whom stability had acquired a new value. The only unsavory incident that affected the presidency during that period was the assassination of President Manuel Enrique Araujo. The motives of the crime were never cleared up, but insistent rumors linked it to business rivalries rather than to ideological differences. There was a sort of pax coffeana . The reasons for this stability have been suggested above—the elite had a firm grip on power and required stability to maximize profits. Undoubtedly there were tensions within the elite, but the interests of most of its members were very similar.

All the elite families were committed to foreign markets; the organization of coffee production was more homogeneous than the organization of indigo ever had been. As coffee was more valuable and more labor intensive than indigo, the losses from taking labor away from productive activities could be very high. The American vice-consul, reporting on the coup that brought Regalado to power, illustrated this point:

All business is at a standstill and as this is the time of picking coffee and no male coffee pickers can be had, and all horses, mules, carts, and oxen are pressed in for military service, the loss to the coffee planters will be very great.

At the end of the coup he reported:

It is very fortunate that this revolution is ended as the coffee season is about to commence and if it would have lasted a month longer the greater part of the coffee crop would have been lost.^[6]

The incentives to maintain stability were higher than ever before and were shared by all those who had the capacity to cause trouble to the government. The restless military found an outlet in conflicts with other Central American countries, but all disruptions of peace in Central

America were rapidly checked. Due to the new importance of foreign trade and to interest in a canal through the Isthmus, the United States government regularly intervened to restore peace in the region and promoted peace conferences that culminated in the Washington Treaties of 1907.

The new century was born under the sign of coffee. Every crisis seemed to reinforce the power of the elite of coffee planters. After the crisis of 1898 there was no question, the planters were there to stay, their interests became law. From then on they ruled the country uncontested until 1931 when they began sharing power with the military.

Foreign Trade

Exports increased rapidly in the last three decades of the century (see tables 19 and 20).^[7] Although indigo production declined slowly, coffee production took off with zest. Indigo exports reached a level of 2,069,100 pounds in 1871, and in 1896 they had gone down to 1,277,293 pounds. In comparison to indigo's decline coffee grew vigorously. Using the same years to compare, in 1871 a total of 4,471,300 pounds of coffee was exported, while in 1896 that figure had increased more than fivefold to 25,266,134 pounds.^[8] It is clear that the growth of coffee was not all at the expense of indigo. Some of it was net growth and some was at the expense of other economic activities. In fact, the average yearly growth of total exports between 1870 and 1895 was 3.5 percent, a faster rate than would be reasonable to expect from the economy as a whole.^[9] Although there were significant ups and downs in imports and exports, the economy was becoming increasingly open.

The move from indigo to coffee and the service provided by the Panama Railroad permitted a diversification of trading partners. During the first half of the century it had been necessary to rely mostly on the British vessels that arrived at Belize or on the occasional ship that visited Acajutla. Not surprisingly Great Britain had the virtual monopoly of the country's foreign trade. After 1855 there were more alternatives. At the Colón terminus of the Panama Railroad there were British, French, German, and American steamships and sailing vessels waiting to take goods to every corner of the world. Moreover, the rapid growth of California provided a formidable market on the Pacific coast. By the end of the century Great Britain was just another market for Salvadoran products, at the same level as Germany or France. The United States, by contrast, was taking a clear lead. In 1892 it received more than 40 percent of Salvadoran exports, the greatest share of which went to

California (see table 28).^[10] California exports were reported separate from exports to the rest of the United States from 1886 to 1889, and during those four years the share of California was never below 65 percent (1887) and could be as high as 84 percent (1889). Most of the revenue generated by the rapid expansion of exports was used to buy manufactured goods, textiles in particular. During the last quarter of the century textile imports accounted for one-half to one-third of yearly imports. No other category of imports even approached them in importance. Machinery, for example, never reached 5 percent. All other items such as iron tools, liquor, flour, drugs, earthenware, glassware, books, and furniture were imported in minor quantities. The Salvadoran elite did not engage in lavish shopping; an analysis of imports leaves a distinct impression of frugality, of a country buying basic things that it cannot produce.^[11] In the case of imports, England lost ground to other trading partners, but in a lesser amount than in the case of exports. Up until 1892 the English, the leading producers of textiles, were still ahead of the Americans when it came to imports. That year 32 percent of total imports came from England.^[12]

The expansion of exports benefited from the liberal reforms and, at the same time, contributed to reinforce their results. Coffee exports produced revenue to finance armies, public works, and even schools. There was a sense of direction, and the direction was given by the coffee industry. After land was redistributed, labor had to be organized differently, banks had to be created, trade had to be rechanneled. At the same time, it did not take long before the country was reminded of the disadvantages of an open economy.

Labor

As the economy was growing and becoming more open, labor became less and less able to reap the benefits of the newly found abundance. Population growth and land redistribution greatly increased the amount of labor available. This was in marked contrast with the first half of the century. "Labor is fairly plentiful," wrote an anonymous planter, "it seldom being necessary to hunt up work people for an estate justly managed."^[13] Laborers kept moving from farm to farm, and few of them found permanent jobs. They were "constantly on the move, working here one, two, or three weeks and then passing to another estate."^[14] Years earlier, peasants found temporary work in indigo haciendas and spent the rest of the year in their ejidos or communal lands; by the end of the century that option was not available any more. Patterns of labor migration that later became a hallmark of rural life in El Salvador were developed during this period.

The abundance of labor made life easy for the planters. Finding people to work on a plantation was very simple. On Monday mornings the administrator rang the bell of the finca to call those interested in working. Then, he allocated the different tasks according to the agricultural needs of the moment and selected a few as day laborers to carry out miscellaneous jobs. Each finca had a few men employed by the month to take care of regular administrative and housekeeping activities in addition to one or two foremen, a cattleman, a house servant, a stableman or two, a cook, and the like.

Working days were long, from 6 A.M . to 5 P.M . Work was from Monday to Friday. On Saturday mornings the foremen and the administrator received the completed tasks. Afterward, the workers returned their tools to the store and, at three in the afternoon, they waited in line to receive payment. Food was part of the compensation. The composition of the diet had not changed much during the century: "The food served to the ordinary workman," wrote our anonymous planter, "consists solely of tortillas and frijoles."^[15] There were two meals a day, and the normal ration consisted of two tortillas and a handful of beans. Women received smaller tortillas. If a worker had to work at night, he or she received double pay and an extra meal. The average daily cost to the planter to feed each worker was between one-quarter and one-half real. The planters made sure that nobody had a second ration; before going to the kitchen each worker received a token that could be exchanged for a meal. The system was also useful to put a check on the cook. To supplement their diets "laborers always look for a farm well supplied with fruit trees, the produce of which they eat in great quantities and in

a perfectly green state, which however seems to do them little or no harm."^[16]

In 1886 wages were still two reales per day (one and a half reales in remote estates), the same as in 1858, but maize prices were considerably higher.^[17] In 1858 the average cost of the fanega of maize was 1.86 pesos (see table 15), and by 1885 it had increased to five pesos. Permanent laborers were slightly better paid; monthly wages were between eight and ten pesos. Cooks, servants, and cattlemen had similar wages. A second foreman earned twelve pesos, and a first foreman between twenty and thirty pesos, while finca administrators earned between eighty and one hundred pesos per month. This wage structure illustrates the peculiarities of the new labor market that had developed after the liberal reforms and the introduction of coffee. Administrators gained in importance in the bigger plantations; they were needed to organize more complicated tasks and a larger labor force. The wage difference between administrators and common laborers shows the importance of the role of the former; an administrator could earn ten times more than a simple peasant. It was difficult to find a person with skill; the planters themselves were not always very able. In the view of an observer:

[T]he greater number of planters both of coffee and sugar, and I may include maize, beans, and tobacco, are equally and in many cases more deplorably ignorant than their work people, who are for the most part an industrious, sober and peaceable set.^[18]

Real wages were definitely lower in the 1890s than in the 1850s. The purchasing power of the nominal wage of two reales had diminished considerably with the increase in the price of maize, the primary component of a peasants diet. The fact that workers received meals as part of their remuneration did not offset the increase in the price of maize because they still had to feed their families. It is clear that peasants, abundant in numbers and dispossessed of their lands, had less bargaining power than before. The subordinate position of peasants and the greater social control exerted by the elite contributed to depress wages. When it was necessary to recruit large numbers of cheap labor to fight locust plagues, rich landowners induced the government to literally conscript workers, "even at bayonet point." In those cases, "each of the involuntary toilers is paid a real per diem, a sum supplying tortillas and frijoles enough to sustain life."^[19] This was a wage clearly below the market rate of two pesos plus food.

The system of advancing wages inherited from the colonial era was still alive.

The system that has been and still is in vogue in these Republics of advancing money to work people on account of work to be done, in an indiscriminate and careless manner, has done much harm to both workman and master. In nearly all cases the master loses both his money and workman, while the money advanced is spent by the latter in some game of chance or in drink.^[20]

Men who worked in the countryside dressed very simply—unbleached calico shirts and trousers, and no shoes. Their complete wardrobe consisted of two such suits. They also had a rough cotton sheet to wrap themselves in at night. A workman spent between ten and twelve pesos in clothing a year. Housing was as frugal as clothing and food. The planter provided laborers with free housing, but the dwellings were of the most elementary nature: a thatched roof and dirt floors were all that peasants were offered.

Direct hiring was not the only way to obtain labor services. There was also a lease arrangement that was, in the final analysis, a form of recruiting labor. Large plantations had the custom of giving land to any "respectable man" who wanted to cultivate it. Virgin land was loaned for one crop, and no monetary payment was required; the only payment was clearing the land. This arrangement was convenient for the owner because he did not have to worry about labor supervision and administration, and he did not have to be concerned with the uncertainties of agricultural production. The only cost for the owner to have his land cleared was the opportunity cost of not being able to use a plot of virgin land during one year. A few laborers were allowed to live on the plantations all year round, and they (the so called colonos ) were given small plots of land to cultivate maize or beans. In that way the planter had access to stable year-round labor.

Agricultural tasks were carried out with the simplest tools. A machete, a large hoe, and a bill hook were the most used implements. Machetes, then as today, had various uses, from pruning to clearing the ground. Ploughs were made with "a triangular piece of iron about four inches broad at the base fastened to a pole." They were rudimentary and could not dig very deep into the soil. Larger plantations used American ploughs.^[21] Irrigation was unheard of. Consul Tunstall replied to an inquiry of the Department of State by reporting that "... no system of irrigation is practiced in this consular district or in the Republic of El Salvador."^[22] Fertilizers, natural and artificial, were seldom used. The most common agricultural practice to recuperate the soil was to "burn all the weeds and refuse on the fields and to spread the ashes from the furnaces, and the skimmings and settlings from the [sugar cane] juice treated with lime."^[23]

Whatever the appearance of backwardness in the rural sector, Salvadorans had learned how to produce coffee and did it well. Large labor gangs were organized to carry out complex tasks. As discussed above, one of many possible ways was chosen to organize production in the countryside. The one chosen carried great social costs. It was not only a productive activity that was taking shape, it was a society.

Credit and Money

Coffee cultivation changed the organization of agricultural units and the relationship between landlord and laborer. It also influenced credit institutions. Partly because of economic growth and the overall modernization of institutions, and partly because of the specific credit demands of coffee cultivation, banking developed rapidly and in a disorderly fashion during the last twenty years of the century. Whereas in 1880 there was only one bank, in 1898 there were six.

Capital was scarce relative to the other factors of production, but the situation improved with the increase in foreign trade. Coffee planters obtained the credit necessary to invest from their European buyers, and the local banks expanded their activities thanks to the deposits of the planters. Nonetheless, the country was in great need of capital to increase the production of coffee. A good illustration of the scarcity of capital relative to labor can be found in the advice given by the American consul to prospective immigrants.

There are at this present time very first-rate opportunities offering to men of industry and sobriety who will put a little intelligent work into the land. Men of this description with a moderate capital of, say five to fifteen thousand dollars, are the men required here. At the same time others with smaller capital have very great advantages of making money from the outset; but those who come merely seeking work will find themselves hopelessly miserable.^[24]

Foreigners were desirable as long as they came with capital and skills. Most often their skills were their greatest asset. Human capital was the scarcest kind. In fact, the immigrants who found success in El Salvador were those who followed the pattern suggested by Consul Duke, including Duke himself. At the end of the century a few foreigners with skill, capital, and business connections in Europe and the United States resisted the temptation to go to Argentina or other more promising places and settled in El Salvador. By and large they had successful careers (more on this later). By contrast, those immigrants who had only their labor to offer had a very difficult time. American consular reports were

full of appeals to the Department of State for funds to protect destitute Americans. Many went to Central America in the hope of finding jobs in railroad construction:

They all claim to have been induced to come here by reports of extensive railroad building and good wages, either in Salvador or some other country, and when they discovered their mistake, they had no means to return.^[25]

El Salvador was not an Argentina full of resources and empty of people. However, the people who lived in the country had not had much of a chance to acquire an education and needed help to do many of the things necessary to achieve their dream of progress.

The lack of educated people made it difficult to organize complex economic activities that required specialized skills. One of those activities was banking. Before the first bank was founded in 1880 there were no financial institutions to speak of. Money was lent by private individuals at high interest rates, and mortgages were difficult because of the prevailing uncertainty over land ownership.^[26] Many efforts to establish local banks failed. Nobody in the country quite knew how to operate a bank and, anyhow, there was no capital to get one started. It was necessary to find a foreigner courageous enough to take a high risk in a country where political stability was not guaranteed, that had no well established export product, and where land rights (and therefore the possibility of mortgages) were not always clear. The first brave man was William Kelly, an English merchant who in 1867 signed a contract with the Salvadoran government to found a bank.^[27] Despite all the guarantees offered by the local authorities Kelly's effort failed. After the 1867 attempt every administration tried to find foreign capitalists willing to establish a bank. Five years later, for example, the next administration sent a special agent to England to negotiate the subscription of stock to finance the operation. Contracts were signed with Don Francisco de Paula Suárez in 1874 and in 1877. Don Francisco tried to raise funds and published a pamphlet publicizing the virtues of the young and promising Republic but, again, there were no results.^[28] At last, in 1880, the first successful bank, the Banco Internacional, was founded. Don Francisco's pamphlet, after all, was not altogether baseless.

Before the end of the century six more banks had been authorized and, although not all of them were successful, the survivors prospered rapidly. Thanks to the development of the coffee industry and to changes in land tenure it was finally possible to make a good profit out of banking. Given the direct link of banking to the growth of the coffee industry, it is not surprising that two of the banks had their headquarters

in the western provinces.^[29] The origin of the funds used to create the new financial institutions is not clear, although in the last resort they were possible thanks to the revenues generated by coffee. Important planters did not have the skill to run banks, but they participated in their organization and were their main stockholders. Following the pattern set by other complex economic activities, all banks had at least one foreign partner or manager.

If the Salvadoran financial system was found slow and imperfect, the option of borrowing money from abroad was always open. The bad credit of the early years of the federation was, in every sense, a thing of the past. As soon as exports began to grow, El Salvador improved its credit standing by settling its portion of the federal debt. In 1861 the government made an arrangement with George B. Kerferd & Co., a Liverpool house that did business in El Salvador, by which Kerferd & Co. agreed to pay the balance of the debt in exchange for exemptions in customs taxes. The system worked quite well, and in two years the full debt of 405,360 pesos had been covered.^[30] This was an indication of the changing economic environment and of the extent of business of Kerferd & Co. in El Salvador.

In order to finance their production costs, small planters sold their crop in advance to companies such as Kerferd & Co. There was no guarantee other than the crop, and the price was fixed at the time of the purchase. One of the advantages of this system was that the producer was insulated from the fluctuations of the international price. The system, known as habilitación, could be quite profitable for the buyer. In some instances he paid as little as 50 percent of the final value of the crop.^[31] This figure of 50 percent was not strictly the interest rate since it implied a portion of price speculation, but it gives an idea of the scarcity of credit.

After the liberal reforms the use of mortgage credit became more common. In 1860 there were 154 mortgages outstanding in the central region, guaranteeing an average loan of 1,292 pesos. Thirty-three years later the same region registered 508 mortgages outstanding guaranteeing an average loan of 2,966 pesos.^[32] Undoubtedly, the creation of a land registry and the existence of more reliable land titles had made mortgage lending more attractive. As Salvadoran businessmen became more sophisticated they began to approach European investors at the source. A good example of this is the Salvador Coffee Estates Company, Limited; a company registered in London in 1887 listing an address in the heart of the City of London. The company raised a capital of £50,000 to buy a coffee plantation in Santa Ana province. One of the thirty-four shareholders was José Francisco Medina, a pillar of the coffee establishment who seven years earlier had founded the Banco

International.^[33] Another instance of this practice was the Santa Ana Central Coffee Company registered in London in 1900. In that case the company was formed by the owners of Alvarez Hermanos, a Salvadoran company, as a device to mortgage their property in El Salvador, five plantations in the heart of the coffee country, and borrow money in London. (Incidentally, the properties were mortgaged to two of the English shareholders of Salvador Coffee Estates Company who were well acquainted with the value of the plantations.) ^[34] Money advances to coffee planters remained common throughout the century. When in 1898 the crop was threatened by General Regalado's coup d'etat, British merchants with operations in El Salvador became concerned. They asked the Foreign Office to safeguard their interests by sending a warship to the coast of El Salvador. It was, they observed, "the season when the coffee crop is being prepared for shipment in which British merchants are largely interested in consequence of their advances of money to the planters."^[35]

Financial operations were carried out in an environment with few constraints beyond the naked market forces. As the country lacked a monetary unit its money market was completely open. Before the creation of local banks and the introduction of paper money, the country had to rely on money minted abroad. Thus, the value of the peso, a remnant of the colonial period, was entirely determined by the market, and there was no local monetary authority. A limited number of coins had been minted during the federal period, but they were very rare.^[36] Chilean, Peruvian, Bolivian, Guatemalan, Honduran, French, English, and American silver coins were used for most transactions. Gold was scarce and was used to pay English and German balances.^[37] More primitive forms of currency were still in use. "Cut money" or moneda macuquina (roughly cut coins with a stamped seal, a remnant of the colonial period) and even cacao beans and eggs were used until the 1880s.^[38] The result of this virtually unregulated system was a considerable amount of confusion. Money was debased, abused, falsified, hoarded and, sometimes, used properly. (In 1874 the Juzgado de Hacienda reported that six out of eighteen criminal cases tried in that court were for money falsification.)^[39] Even cacao beans were falsified with clay. Eggs, however, were not easily falsifiable, but they entered into circulation as soon as they spoiled, thus giving a new twist to Gresham's Law.^[40] Small change was so scarce that the one-quarter real coins (cuartillos) were cut in half creating a tiny crescent-shaped coin that received the nickname of "finger nail."^[41]

The public sought protection against fraud. Only round money (as opposed to "cut" money) was accepted in important transactions.^[42] Yet, the decrees trying to regulate currency that were issued regularly

throughout the century are a constant reminder of the persistence of the problem. It was necessary to bring order to the system. Efforts to establish a mint and a national currency went parallel to the efforts to establish a bank. They faced similar problems: lack of knowledge and lack of capital. A decree was issued in 1869 (two years after the first contract to set up a bank) authorizing the executive to establish a mint. The executive did not follow through.^[43] It may have been difficult to find the expertise and the capital necessary for the operation, but it was always possible to legislate. In 1883 a monetary law was passed fixing standard weights for the silver and gold coins to be minted in the future, but the law had to be shelved for nine years until a mint was built and equipped. Things began moving faster in 1891 when the Syndicat Général de Monnaie, a French company, was given a concession to build a mint. The concession was transferred to a British company, the Central American Mint Limited, and a modern facility was inaugurated in August of 1892. The operation was under a British manager and was hailed by the British consul as "most creditable."^[44] Everything was ready to coin gold and silver according to the regulations established by the 1883 law and to solve the vexatious currency problems.

By 1892 the expansion of coffee exports, that is, the increased opening of the economy to world markets, had permitted the creation of modern financial institutions and the beginning of a national money market. The country was all set to pay for the consequences. At the same time that the mint began its operations the world price of silver was sharply falling. Gresham's Law came into play, and gold went out of circulation. Since by that time Europe and the United States had already adopted the gold standard, importers faced serious difficulties. Having no experience in these matters the government of General Ezeta did not quite know how to react. The legislature was called to an extraordinary session early in September of 1892. Before it met, a committee of citizens gave a report on the problem and recommended prohibiting the importation of foreign silver coins, reminting the coin in circulation, and accepting silver in circulation on a par with gold.^[45] When the legislature met a week later the executive proposed adopting the gold standard, but the committee that studied the proposal, after consulting with prominent bankers and coffee planters, modified it to the point of making it unrecognizable. The committee was dismissed and a new one was appointed to study the problem all over again. In the meantime the full legislature decreed the creation of a new monetary unit, the "Colón," to celebrate the four hundredth anniversary of the discovery of America. The new unit was a silver peso. It was clear that the president was facing a strong opposition to his gold-standard project.

At the end of September the gold standard was forced through. The

timing could not have been worse; silver prices were so low that people preferred to hoard their gold and use silver as currency. To encourage the use of gold the law said that 70 percent of customs taxes had to be paid in gold (with the exception of the coffee export taxes; political suicide had to be avoided).^[46] The plan did not work well at all. Merchants would rather stop imports than part with their gold; it was the beginning of a confrontation. A new decree issued in April of the next year insisted on the gold standard and raised the proportion of the customs tax to be paid in gold from 70 to 85 percent. In March the proportion was raised to 100 percent, but one week later, undoubtedly after strong political pressure, it went back to 85 percent. The importation of foreign silver coins was prohibited, but the planters refused to put in circulation the gold that they had received from the sale of coffee.

Imports plummeted together with government revenues. At a time when the trend of exports was very positive, imports went from 3.2 million pesos in 1891 to 1.8 million in 1893.^[47] The treasury had difficulties meeting the payroll and was angry at the coffee planters. Nobody wanted to use gold and, since import taxes were the main source of revenue, the government coffers were empty. In March of 1893 the Salvadoran legislature, based on the "alleged fact that the rich do not pay taxes in the same proportion than the poor," raised the duty on coffee to two dollars per quintal payable in silver.^[48] A new extraordinary session of the legislature was called in May. A decree was issued according to which import taxes had to be paid 100 percent in gold or (and this was the catch) its equivalent in silver. This was a concession, but at the depressed prices of silver it resulted in outrageously high taxes. It was an untenable situation, and import taxes were lowered, still payable in gold or its equivalent in silver. It was not enough; government coffers were empty. On June 27 a new tax was created: a property tax at a rate of two per thousand. There were consequences; a military uprising in the western provinces, the stronghold of the planters, had to be crushed July 3. Tension was mounting, but the government was prepared: before the crisis it had spent 2 million pesos on weaponry.^[49] The unavoidable coup d'etat was delayed for one full year. In January 1894, a new tax of 25 cents gold per quintal imported was decreed by the president. The proceeds from this last tax were to be applied to the building of the new railroad from La Unión to San Miguel. A tax on urban property and two new taxes on coffee were too much for the elite of coffee planters and, because "the people were tired of military rule and restive under the heavy taxes imposed for railroads and other internal improvements," the government of General Ezeta was overthrown in June 1894 by the legendary "forty-four."^[50] (To date they are remembered fondly; General Ezeta's memory, by comparison, is tainted by his efforts to impose

taxes on the planters.) Once the old general was gone, the new president, General Gutiérrez, reduced the tax on coffee exports from 2.25 dollars gold to less than 30 cents per quintal and repealed the property tax and the gold-standard legislation.^[51] The price of silver had already recovered, coffee exports doubled, imports went back to their 1892 level, and three new banks were chartered in 1895. It was a swift recovery; obviously productive capacity had not been damaged, and Salvadoran exports were producing a good profit. But the financial uncertainty and the political struggle had created great distress.

It was a story of sheer ineptitude on the part of the government. It is not clear whether the conflict between the planters and General Ezeta was the result of philosophical differences or of the chain of events.^[52] At any rate the crisis was misunderstood and mismanaged from beginning to end. No single actor in the whole affair could be accused of economic insight or of political subtlety. The succession of decrees and counter-decrees issued by the government and the adamant resistance of the planters created a situation of uncertainty under which hoarding was the only adequate response. Wide currency fluctuations were a new phenomenon brought about by the openness of the economy, and the country was not prepared to react to them. Nobody understood the problem, and there were no institutions to deal with it. (If the country had adopted the gold standard before the fall of silver prices there would have been no problem.) The main lesson was political in nature. Coffee planters had proven that they could use their economic power to bring a government to its knees. This strong political lesson had an economic implication: there was no easy way to carry out monetary reform without affecting powerful interests. After a faint effort in 1897 El Salvador had to wait until 1919 to carry out a monetary reform. Meanwhile the confusing monetary situation, with coins from all over Latin America, mixed with bank notes and government bonds, persisted.

This laissez-faire environment had permeated every corner of the financial system. Banks operated with minimum constraints and prospered as long as the coffee market was in good health. Their owners and main customers were coffee planters. In years when coffee prices were good, deposits increased and banks were eager to find borrowers. There was a boom mentality. "Money was plentiful, crisp new bills were accepted everywhere, large dividends were paid, everybody was hungry for bank stock."^[53] Even in 1893, in the midst of the gold-standard crisis, business was very good.^[54] After all, the gold-standard crisis had not affected the productive capacity of the country or the value of its exports; people were betting on the future. A greater problem was faced in 1897 when a drop in coffee prices brought the financial system to the brink of disaster. Coffee prices had a positive trend between 1886 and

1896 (see table 19, chap. 5), and production was also increasing. The shock came when prices in the international markets dropped sharply in 1897. Prices at Le Havre were cut in half from 71 to 34 francs per 50 kilograms. In New York the price went from 6.65 to 4.6 cents per pound. Inside the country the price dropped from 32 to 12 pesos per quintal.^[55] The sharp fall was followed by a slow recovery: the trough of the international price of coffee was reached in 1903, and it did not fully recover until the 1910s.

El Salvador's incipient financial institutions were ill prepared to face the new situation. Planters found themselves short of money and were not able to pay their loans. By law, banks were supposed to keep 40 percent of deposits in their vaults, but they did not respect their charter. When it was apparent that they had a cash crisis, there were runs on the banks. They could not sustain the pressure, and four out of six banks in operation went bankrupt. The government was unable to obtain foreign loans. Planters who in the past "could command any loans that they required" could not borrow money.^[56] It was a new experience. The institutions that had come to life thanks to the prosperity were put to the test. Foreigners were accused of keeping coffee prices low, while merchants were accused of sending silver out of the country.^[57] Currency went out of circulation, and even eggs were scarce as currency. Small transactions were settled with candles.^[58] There were rumors of a coup d'etat; some planters expected that with a new and more responsible government, coffee prices would go up.

The government was hesitant about the proper course of action. Its revenue had decreased, and it had no financial means to support its current operations or to bail out the ailing banks. General Gutiérrez knew very well the wrath of the planters; he had led the rebellion against General Ezeta after the gold-standard debacle. Early in January of 1898 he issued a decree accepting bank bills in payments to the state and exempting banks from payment of their obligations in silver. In one stroke he managed to worsen the government's financial problems and to further weaken public confidence. Later in the month the decree was suspended for eight months. In April the policy was reversed and a new decree forced the banks to redeem their notes in silver. The crisis was averted when banks imported currency to meet their obligations.^[59]

The financial crisis, external in its origins, was worsened by the extreme liberality that the banks had shown in their operations during the years of prosperity. According to the American consul, they had "left aside all usages and well-defined laws in banking so that they became mere speculative institutions, hunting borrowers right and left and giving them unlimited credit."^[60] Nonetheless, interest rates remained high

even in the most competitive years. Banks charged up to 24 percent per annum, which also suggests the possibility of inflation.^[61]

In the midst of the crisis the presidents of El Salvador, Honduras, and Nicaragua signed the pact of Amapala, which was supposed to be the first step to the reunion of Central America. The pact, rather than distracting those who were actively planning to topple the government, provided them with political ammunition. General Regalado, the main conspirator, argued that the financial burden of the union would fall upon El Salvador at a moment when the country could ill afford it. Regalado overthrew General Gutiérrez in November 1898. That was to be the last coup d'etat for thirty years. He came to power at a time of financial crisis, but the strength of the ruling class proved to be unshakable.

As it had been proven during the gold-standard crisis, the government was extremely vulnerable to external shocks since most of its revenue came from custom taxes. The boom mentality that had prevailed in the banking industry was also present in government operations. In 1886 the total value of exports had been 4,754,649 pesos, and it more than doubled to 9,745,000 in 1896. Government revenue went up from 3,635,251 pesos in 1885 to 10,174,000 pesos in 1886. The rise had been rapid, and the fall was painful. The decline in coffee prices was sudden, and the economy had a difficult time adjusting to the new realities. In 1898 government revenue was down to 4,609,630 pesos, less than half that of two years earlier. It was necessary to cut expenditure in every possible way. In January the legislature suspended payment of interest on the national debt.^[62] Jails were emptied, police services were reduced, even the music bands were dismissed. The government's printing office had to close because its employees had not been paid in five months.^[63] No sector of the population remained untouched: in the capital, university students insulted the government; in the countryside, Indian groups, still sore after the liberal reforms deprived them of their lands, rebelled and cut off the hands of judges.^[64] Many of the consequences of the crisis went unrecorded since General Regalado, as a money-saving measure, dismissed the employees of the statistics bureau (a fact that accounts for the lack of economic data for El Salvador for the years 1898–1900).^[65]

The nineteenth century was a period of almost absolute freedom in terms of fluctuations in exchange rates and monetary arrangements. The intervention of the government in the money market had been limited to issuing bonds to finance the budget and to occasional forced loans to finance military adventures. Not until the last two decades, with a larger and more open economy, did money-market fluctuations become a

serious problem, a problem that could topple governments. As the fate of Generals Ezeta and Gutiérrez prove, by the last decade of the century the coffee Republic was a full-fledged reality. Coffee planters remained in power until 1931 without having to face serious challenges from within the system. The economy recovered slowly and the government, unable to raise enough revenue, operated with deficits until the end of the century. Coffee exports remained high in terms of quantity, but the price was still depressed. Exports of indigo were waning, and its price was falling steadily. But, after all, the basic trends of the Salvadoran economy remained unchanged. The era of the coffee planters was here to stay, warts and all.

Communications and Transportation

The increase in exports that characterized the last quarter of the century demanded better communications and, at the same time, provided the funds for it. The economic geography of the country had changed, and roads, railroads, and ports reflected the new reality. During the indigo years the eastern part of the country had been the economic center. The fairs of San Miguel and San Vicente were a must for buyers and sellers, and the port of La Unión was the most active in the country. With the ascendance of coffee the western provinces gained in importance; La Unión was replaced by Acajutla and La Libertad. At the end of the century new roads were built to Santa Ana province and its environs, the heart of the coffee region.

Links with the outside world were most important. It was not only a matter of roads and ports; information had to travel fast to take advantage of changing markets. A young American by the name of Billings was hired to install the first telegraph linking San Salvador and the port of La Libertad. The line was inaugurated in 1870. Soon the service was extended to the port of Acajutla via Santa Ana, Ahuachapán, and Sonsonate. In a few months every port could use the telegraph to communicate with the capital. Four years after the inauguration of the first line, the service became international when a new line establishing communications between El Salvador and Guatemala was installed. By 1882 there were fifty-four stations in the Republic and "no town of the least pretension" lacked telegraphic service. That year cable communication with the rest of the world was established. No one missed the commercial significance of the improvement in communications. When the cable service began, the official newspaper commented that "nowadays our exporters of indigo and coffee can learn the prices of those products day

by day and as a consequence they can place the proper orders," thus avoiding commercial losses. A new dimension of the usefulness of these services was discovered when in 1885 El Salvador went to war with Guatemala and a few weeks later when General Menéndez overthrew President Zaldívar. Thanks to the new technology it was possible to mobilize troops more efficiently and to add a new twist to those ancient games. But there was more to come. General Menéndez, presumably pleased with modern advances, introduced telephone services in 1888.^[66]

Despite changes in government, roads improved rapidly. In 1880 there were 128 cart-roads with a length of 575 leagues. That same year a new road was being constructed between San Salvador and Santa Ana, the most prosperous city in the coffee region (by 1887 about one-third of the production of coffee was marketed in Santa Ana).^[67] Every stage in the network had to be improved and there was plenty of room for progress. As the country lacked local talent to carry out complex public works projects it was often necessary to hire foreign companies. American companies such as the "Pacific Bridge Company" obtained contracts to build iron bridges and piers.^[68] By the end of the century the country had over 2,000 miles of good roadway, and its roads were considered to be "far superior to those of most Latin American countries."^[69] It is not necessary to exaggerate the accomplishments of this period. The roads were not macadamized and had to be repaired after every rainy season. With the improvements, however, the cost of internal transportation and the time involved decreased.^[70]

The basic structure of the railroad network was developed during the last two decades of the century. It was relatively short and, following the pattern set by roads and telegraphs, developed first in the central and western parts of the country. The beginnings were shaky and reflected lack of experience in these matters. Early in 1872 the administration of Marshal González signed a contract with J. L. Bueron, an energetic "practical engineer" who had arrived in the country the previous year. Although Bueron's qualifications were less than ideal he was given exclusive concessions to build railways connecting the three ports of the Republic to the closest cities: Acajutla to Sonsonate and Santa Ana, La Libertad to San Salvador and Santa Tecla, La Unión to San Miguel.^[71] The next year Bueron went to France to raise capital for his company. He formed a society in Paris and found a French banker willing to serve as director. It should not have been too difficult to raise the money since the government guaranteed an interest of 8 percent over capital of 11,500,000 francs, but an earthquake destroyed San Salvador in March of 1873 and, at the same time, shook the confidence of potential investors.^[72] Bueron's only accomplishment was a line of about eight miles of railway between San Salvador and Santa Tecla that he finished

in 1876. A local merchant had to provide the money to finish the last few miles. The line was rather modest from the engineering point of view; it had no bridges or tunnels and the cars were driven by horses, but it was just the beginning. Never mind the technical aspects; the owners were pleased with it. It turned out to be the most profitable Salvadoran railway.^[73]

After ten years and only eight miles of railway the government revoked Bueron's contract in 1882. That year the government engaged in feverish activity to address the railroad problem, at least at the level of contract signing and paper shuffling. The Zaldívar administration signed contracts with Francisco Camacho to build the line between the port of Acajutla and Sonsonate and Santa Ana, with Maurice Duke to build the line between San Salvador and the port of La Libertad, and with General Butterfield (an associate of Cornelius Vanderbilt and of General Grant) to build an ambitious line from the port of La Unión to the border with Guatemala. The contracts amounted to a complete program of railroad construction connecting all the vital economic areas to the ports and among themselves; they went a step beyond the Bueron contract in terms of ambition if not in terms of realism. Neither Camacho nor Duke had any known experience in railroad building. Little is known about Camacho and nothing that would lead us to believe that he was a railroad expert. Duke, in turn, was a prosperous and versatile British merchant who had arrived in El Salvador as a young man in his twenties. He had experience as a merchant, as American consul, and years later as a banker.^[74] General Butterfield, by contrast, had better qualifications since at least he had the backing of powerful railroad interests in the United States. Not surprisingly the 1882 contracts accomplished little. Only the line between Acajutla and Sonsonate was finished, rather quickly in June of 1882 when the first steam engine arrived at Sonsonate.^[75] The rest of the project faced countless obstacles.

Efforts were made to raise capital locally at the same time that companies were formed in London to exploit the Camacho and Duke concessions, but the piles of paperwork on railroad construction advanced faster than the trains themselves.^[76] The section from Sonsonate to Armenia was inaugurated in 1884. Work on the Sonsonate—Santa Ana road was interrupted by the 1885 war with Guatemala. Two years later a new government renegotiated the contracts. As a result the country ended up owning three-fourths of the shares of the Acajutla—Sonsonate road and the whole of the part constructed on the Santa Ana road. Despite the nationalistic intentions of the new government, the Salvador Railway Construction Company, a British concern, retained the administration of the Acajutla road.^[77] After more contracts and more delays the Acajutla line was extended to La Ceiba (about 20 miles from

San Salvador) in 1891.^[78] Almost ten years had passed since the line had reached Sonsonate and only 22 miles had been added to the system. The railway connecting Santa Ana to the Acajutla line was progressing at a slower pace; by 1892 only one-third of the projected 39 miles had been completed.^[79] The modest 100-mile network through the heart of the coffee region was completed, at last, in April of 1900.

While the Acajutla line was moving slowly, the Duke and the Butterfield contracts led nowhere. No railway between La Libertad and San Salvador was ever built, while the construction of the La Unión—San Miguel line had to wait until the next century to be completed. Given the problems in the construction of the Acajutla network it would have been optimistic to expect a better performance in the La Unión—San Miguel line. In fact, there were better uses for optimism. Eastern El Salvador had been losing economic ground to the coffee-producing provinces of the west, and the slow pace of the La Unión railway only confirmed this fact. After the contract signed with J. Bueron in 1872 the government signed contracts with nine different companies (including Butterfield's) before the thirty-mile line was finished in 1911.^[80]

During the first stage of railroad development the government tried a number of financial schemes, always insisting on a certain measure of local control and never relying entirely on foreign capital. A turning point took place in 1894 when the government gave a concession to an English firm, the Central American Public Works Company, for the completion of the railroad between Santa Ana and Santa Tecla, the last stage of the Acajutla network. The government guaranteed the CAPW an annual profit of 6 percent, and agreed to the following:

During the life of the contract (50 or 99 years) no negotiations for the construction or operation of any railroad, by anyone in Europe, must be entertained, nor can any railroad be established between Acajutla and the terminus of the Acajutla road, or from Santa Ana, except it be the inter-continental line proposed by the United States.^[81]

The British company, in turn, contracted to pay all the foreign debt of El Salvador. The years of failures and the mounting debt had taken their toll. The CAPW agreement was a substantially different arrangement from any made before. In the past, railroads had been financed stage by stage, internally or through bonds sold in international markets, but the country had not given away the network to foreigners. The railroad from Ateos to La Ceiba, for example, was built with funds obtained from a loan issued in London in 1889, but its operation was in Salvadoran hands.^[82] The portion of the Santa Ana railroad located between Ateos and Sitio del Niño, inaugurated in 1893, was built by an

American contractor and financed by a foreign loan in 1892 but, again, it was not given away. Even in 1894 there was a last effort to raise capital internally. In January of that year the government raised the import tax to finance the La Unión—San Miguel line, and although the scheme failed it still represented an effort to finance public works internally.^[83]

It was the last such effort. The contract with the Central American Public Works Company represented a permanent change in the form of financing and operating the system. Being in the midst of the financial crisis created by the adoption of the gold-standard the government was facing a serious difficulty in paying its obligations abroad. The change, however, had long-lasting effects. Crisis or no crisis, the difficulty of the Salvadoran economy to generate the relatively large amounts of capital and expertise needed for railroad construction and operation was becoming apparent. Although General Gutiérrez renegotiated the contract with more favorable terms, it was within the same general principles.^[84] After a revision of the contract in 1899 the Salvador Railways Company, successor of the CAPW, was left operating the Acajutla network.^[85] In 1908 the government signed a contract with René Keilhauer to finish the project from La Unión to the border with Guatemala. After a series of transactions the concession ended up in the hands of the International Railways of Central America, a subsidiary of the United Fruit Company, which together with the Salvador Railways Company controlled railroad traffic until the second half of the twentieth century.^[86] It is fair to say that not much was given away; Salvadoran railroads were only marginally profitable.^[87] Unfortunately, there are not enough data to calculate the social savings generated by the railroads, but, given the short distances involved, it is doubtful that they were dramatic.

After the railroads took the coffee to the ports, the next step in the transportation network was its shipment to Europe and the United States. In terms of costs this was by far the most important side in the transportation equation, but in this regard the country was unable to affect its destiny in any meaningful way and had to accept whatever services foreign companies were willing to offer. Being very small and having little to export El Salvador was not attractive to shipping companies. As mentioned in chapter 3, the Panama Railroad Company and its subsidiary, the Pacific Mail Steamship Company, had a virtual monopoly of the shortest shipping route to Europe across the Isthmus of Panama and took full advantage of the situation, keeping the fares high and the service poor. Moreover, the Pacific Mail demanded an annual subsidy to carry mail and to provide a regular service.

Efforts to change this situation were fruitless. One way to break the monopoly was to create competition. In 1870 a private company formed

by the main merchants of Central America bought the Prince Albert , a steamer operated by the Australian Royal Mail Service, with the idea of establishing a line between the ports of Central America, Mexico, and San Francisco, a route that was not well served by Pacific Mail steamers. The Central American governments were delighted with the idea and gave all kinds of concessions to the new company. It was a good concept, but Central American capitalists were not ready for such a venture and the company folded after the first trip, reportedly due to lack of capital.^[88] A similar scheme was tried seventeen years later when a new line between San Francisco and Panama was established. The contract with Pacific Mail was about to expire and the Marqués de Campos, a Spanish businessman, approached the government with the idea of a new shipping line that was to be called Hispano—Centroamericana. He was to receive the Pacific Mail subsidy and to replace the American line. Five second-hand steamers were to operate along the route. Optimism was high, and the arrival of the Pioneer was hailed as "the commencement of a brilliant era for the owners and merchants." Feeling the pinch the Pacific Mail lowered its rates until the new company went out of business later in the year.^[89] A last effort in this direction was made in 1894 when a company formed by American and Salvadoran investors was authorized to run a line of steamers from the new port of El Triunfo. The new company planned to operate along the Pacific coast, and its steamers were to visit ports of Colombia, Central America, Mexico, and California. There is no indication that this company ever got its operation off the ground.^[90]

Creating new companies was impossible, and attracting established ones was not easy. The latter approach was tried a number of times with marginal success. In 1884 a contract was signed with a German steamship company according to which the company, Kosmos, was to put in service eight steamers. One was to transport goods to and from Hamburg. Of the remaining seven, four were to travel to South American ports and three to Valparaíso to establish connection with steamers traveling to Europe. The contract had a provision to the effect that Kosmos could not charge higher rates than Pacific Mail, and the Salvadoran government, in turn, offered a subsidy of five hundred pesos per trip. The contract was renewed with some modifications in 1886 and 1891.^[91] Kosmos, however, could not offer the same kind of service as Pacific Mail since its route went around Cape Horn. Nonetheless, it was the kind of thing that made the Pacific Mail react, and it did so by placing more tonnage on its line. The threat of competition was averted. Although a few German and Spanish ships visited Salvadoran ports regularly, the Pacific Mail remained pretty much in control of the market.^[92] Replays of the same story took place in 1891 and in 1892. In 1891 the

government signed a contract with another German company, the Hamburg-Pacific, which included a subsidy of four hundred pesos for every steamship that visited a Salvadoran port, and in 1892 the government tried to entice the "South American Steamship Company."^[93] Neither company was able to make a substantial dent in the business of the Pacific Mail because they had to operate along the Cape Horn route.

There was a third approach to disciplining the Pacific Mail: to withdraw the subsidy and the preferential duty of 2 percent in favor of goods passing by the Isthmus of Panama. This approach was tried in 1874 when one of the contracts of the Pacific Mail expired. The reasoning was that since the steamship company was doing more than reasonable business in El Salvador it had an incentive to continue its service even without any kind of protection. Things were more complicated, as the government found out in due time. By 1874 the Pacific Mail was a huge company operating in the main ports of the Pacific Ocean (the company's steamers went as far away as China), and without a contract it felt free to move its steamers around to operate in whatever route was most profitable at the moment. As a result its service to El Salvador became highly irregular to the point that the government had to reconsider its decision. A new contract was signed in November of 1875 offering a subsidy of 12,600 dollars. In February of 1877 the subsidy was raised to 25,000 dollars, and the next year it was raised to 35,000 dollars.^[94] The sad truth was that the service of the Pacific Mail was far more important to El Salvador than El Salvador's business was to the Pacific Mail.

Despite the many efforts to reform it, the shipping network established in the 1850s around the Panama Railroad remained unchanged. Pacific Mail steamers kept the greatest share of the market despite constant complaints from the exporters of coffee. Whatever permanent improvements in service or lowering of fares took place during this period were due to market considerations as seen by the Pacific Mail and not to responses to actions of the Salvadoran government. Nonetheless, there were quantitative changes in the number of ships that visited Salvadoran ports. In 1856 only 63 ships visited Salvadoran ports; by 1882 the number had increased to 110, and by 1892 to 206. These figures tell only part of the story since the size of steamers and the average tonnage increased over time.^[95]

The development of a transportation and communications network faced the same difficulties as any other complex economic activity: the leaders of the country understood the need for such a network, but they were barely prepared to deal with it. Moreover, the economy was so small and the profits to be made so limited that even foreign entrepreneurs showed little interest, and when they did the country had little

power to negotiate advantageous contracts. Every contract, every step, was a mix of improvisation, determination, and powerlessness. However, by the end of the century the primitive roads that had made life difficult for travelers who came to the country in the 1850s were a thing of the past. The railroad line was only 99 kilometers long, but it was strategically located. The telegraph network had over 2,000 miles of wire and 180 offices. There were 500 miles of telephone lines and a cable service that provided communications with most foreign countries. Ports had been improved and freight rates decreased. The country had acquired the first taste of modernity. Export-related activities enjoyed privileged access to modest versions of new technologies. But modernity was reserved for the capital city and the coffee-growing regions. The increased differentiation between town and country and between the modern and traditional sectors which has prevailed during the twentieth century was created during this period.

Revenues and Taxes

Although the newly found prosperity made it possible to carry out improvements in the transportation and communications system, government revenue did not come directly from taxes on coffee or on the planters' incomes. Until the end of the century two old taxes, import duties and the monopolies of gunpowder and brandy, accounted for almost 70 percent of tax revenues (see table 29). It was harder to modernize the tax structure as compared to other aspects of the economy. But even if the structure remained basically the same, the tax base increased. The growth in imports and the overall economic activity were closely tied to the prosperity of coffee exports.

Some of the main features of the tax system were remnants of the preindependence period. The liquor monopoly, for example, had been a source of revenue since colonial times, but its importance had decreased. In the 1850s revenues from this source were higher than custom duties. By 1887 custom duties generated twice as much revenue as the liquor monopoly.^[96] There were advantages to this monopoly since it did not impose an administrative burden on the state; it was farmed out. The country was divided into nineteen distilling districts, and the concession for distilling in each district was auctioned every four years. The government bought the liquor from the distiller and then gave concessions to sell it to the public. A heavy tax on imported liquor protected this monopoly.^[97] It was a steady source of revenue since the demand for liquor was very inelastic. Liquor concession auctions were not always carried out by the book since, as they were highly profitable, the possibility of bribing public officials to secure a specific outcome was always a temptation. Presidents enriched their friends and political allies by giving them concessions in the liquor monopoly. Import taxes also had a venerable tradition going back to colonial times and became more important with the growth in exports. This was only natural since custom taxes were easy to administer by governments with a very limited degree of organization. They were relatively high and increased over time (see table 30). In the last two decades of the century they fluctuated between 60.6 and 171.5 percent of the aforos value of imports. It was much easier to raise taxes on imports than on exports. Coffee growers, whose power was increasing year by year, strenuously opposed duties on coffee. As imported goods consisted mainly of textiles and tools, the average consumer was badly hurt by high import

taxes. Overall the tax sytem was highly regressive. Obeservers were impressed to see that

... land proprietors and land and houses and lots are untaxed, while the "natives," as the masses of these Indians and Aztecs and mestizos are denominated, must pay a duty of 120 percent, besides freight charges, on their cotton shirts and "machetes." If trade with San Francisco, even burdened with these obstructions, were conducted under terms of a liberal reciprocity treaty, there would be discovered here an invaluable market especially for cotton goods, hardware and agricultural implements and machinery.^[98]

Timid attempts to lower import duties were rapidly repealed. No revenue alternatives were found. In 1883 the government, in an effort to stimulate foreign trade, lowered the import duty by 20 percent.^[99] In 1885, after a fall in revenue, the duties were raised to 50 percent ad valorem: 25 percent payable in cash, 15 percent in custom house certificates, and 10 percent in national bank notes. In March 1885 import duties were increased 20 percent, payable in gold, and in June of the same year a small export duty on coffee that was meant to fill the void left by the cut in import taxes was abolished.^[100] These changes are another striking example of the balance of power that predominated during the period.

There was no clear tax policy. Governments tried to raise revenue to finance their activities in whatever way was politically viable. In general, this strategy did not include hurting coffee planters. Circumstances more than policy seemed to impose new taxes. When the National Palace was burned to the ground in 1889 the government imposed a tax on coffee exports of one peso per quintal to finance the new building.^[101] Despite opposition, this tax became part of the revenue, although the idea of a new palace was left for a better time. However, this source of revenue was endangered when it became mixed with the gold-standard debacle of 1892–1894. President Ezeta, upset by the refusal of merchants to accept the gold standard and facing a serious decrease in government revenues, tried to force the planters to pay higher taxes. After Ezeta was duly removed from power (see earlier) the tax structure was restored to its previous balance favoring the coffee planters. But even General Gutiérrez had to realize that the greatest source of wealth in the country could not go untaxed and, six months after he had almost eliminated the export tax on coffee, he restored it to its former level of one peso per quintal. Finally, after much struggle, the tax on coffee remained permanent. It amounted to less than 5 percent of the price of coffee FOB; a trifle when compared to import taxes of more than 100 percent, but enough to topple governments.

The Limits of Protectionism

This peculiar tax structure justifies a digression on the lack of industrialization in El Salvador. High import taxes can, under certain circumstances, stimulate domestic production. That did not happen in El Salvador. The only industrial activity of any importance was the textile industry. It was mainly in the hands of artisans using handlooms. In 1893 there were around five hundred looms that were used mainly to produce rebozos (a kind of shawl) for export, but they represented a negligible percentage of exports.^[102] Moreover, the cotton thread used to make them had to be imported, thus anticipating the pattern of industrialization in which the country provided the labor force for processing foreign raw materials. Despite the high import duties it was cheaper to import thread than to produce it domestically. Moreover, when an effort was made to protect the rebozo industry more effectively, the limits of the system became evident. In 1893 taxes on imported rebozos (a higher-quality product for well-to-do ladies) were increased to 40 pesos per kilo explicitly to protect the local industry. The results of the new policy became apparent at once. Legal importation of rebozos through the ports stopped immediately, only to be replaced by contraband through the borders. A source of revenue was drained at the same time that the industry was left even less protected than before.^[103]

A threshold on import taxes existed beyond which contraband became an option. Import duties from goods coming from neighboring countries were negligible because they were impossible to administer. Ports were good collecting points because transportation costs by land were so high that, within certain limits, it was a better option for the merchant to pay taxes than to engage in contraband. Custom duties were more like monopoly fees to use the ports. The problem was that when taxes were high enough to protect an industry they were too high to be effective; they begat contraband. This was a direct result of the weak organization of the state.

In fact, cotton production for the rebozo industry would have been possible in El Salvador, but at too high a cost. It had existed but virtually disappeared after the boom of the 1860s. After the end of the American Civil War cotton prices fell and Salvadoran producers could not compete in the international market anymore. Cotton production fell "burying in its ruins a great many capitals, large and small." Even during the best days of the cotton boom producers had to face pests that were beyond their control. Not until the twentieth century, with the availability of insecticides and with a completely different international market, was it possible to produce cotton on a large scale and at good prices. By the 1890s even lamp wicks and carded cotton for surgical purposes had to be imported.^[104]

The leather industry was even less developed but, thanks to protectionism, it did cover domestic needs at a time when most of the population did not wear shoes. A small tanning industry had developed; in 1885 the total number of tanneries was over twenty. High import duties made local leather less expensive than the imported kind. Whereas the price of German leather was twenty-five cents per pound, the price of the Salvadoran product was eighteen cents. Yet, the quality was not the same since local hides were tanned using very crude methods. The barks of locust, mangle, and oak were used for tanning, and the average tannery produced about twenty hides a month. Bigger establishments were technically superior and were run by foreigners; a German tannery turned out two hundred good quality hides every month.^[105] By the end of the century soap and candle manufacturing had developed; another instance in which government protection seems to have had some effect. All the companies engaged in this activity enjoyed tax exemptions to import machinery and inputs.^[106] And although they produced exclusively for local consumption, one of them, "La Favorita," was the beginning of Herbert De Sola's industrial complex, which now produces an impressive array of products, from margarine to toothpaste, and exports to the rest of Central America. Other industries had very little importance. There was some production of hats, baskets, rope, cigars, and other minor handicrafts.^[107] Protectionism, then, was successful only when import taxes did not go beyond the threshold where contraband became attractive, and when the simplest technology was involved.

Mining fared better. It had a slow start but by the turn of the century was an extremely profitable venture—for the British. Since the discovery of silver in the northeast in 1781 mining in that region had advanced slowly. During the period of the federation Marshall Bennett, one of the top merchants of Belize, tried to set up a modern operation in the "Tabanco" mine by bringing English technicians and steam engines to pump water.^[108] Even with access to British capital the venture faced the typical obstacles: lack of qualified labor and management, bad roads, political instability. In 1830 Bennett tried to work "Tabanco" in earnest and brought English miners; the results were discouraging, however:

[T]he machinery introduced was so heavy that, because of the bad roads, it was impossible to bring it to the place where the mineral was located. This circumstance and others due to the political situation of the country made the project fall through.^[109]

Even without the benefit of modern machinery the mines of the northeast were exploited profitably throughout the century. A French

company, the Société Française des Mines de San Salvador (which apparently was owned by the Société du Crédit Mobilier) began operating "Tabanco" and "Encuentros" in 1855. In 1876 and 1877 the two mines together produced 2,168 kilos of silver.^[110] Smaller companies operated in the same region. In 1874 Señor Miguel Macay discovered the "Divisadero" mine and for a while exploited it by himself. By 1882 the annual extraction of silver ores had a value of 700,000 dollars, about 13 percent of the value of total exports. Substantial British investment in mining began in 1888 with the organization of the Divisadero Gold and Silver Mining Company and, the following year, Butters Salvador Mines, Ltd. The latter company was extraordinarily profitable: from 1903 to 1913 it paid annual dividends of 52 percent on average.^[111]

Iron mining remained marginal. Ever since the late colonial period small iron mines had operated in Metapán, Santa Ana. Small foundries operated thoughout the century but never played an important role in the economy. By the 1880s they had very little machinery, and the operations faced great difficulties due to lack of coal. Oak charcoal was used as a substitute source of heat, one of the reasons for the poor quality of the final product. The iron was used mainly to produce machetes.^[112] Local needs were never satisfied by these foundries; machetes and agricultural tools were imported in increasing amounts at the end of the century.

The sorry state of Salvadoran industry, despite heavy import duties and the even stronger protection given by high transportation costs, shows the limitations of the Salvadoran economy. Industry was very slow to develop due to the lack of technical knowledge, resources (lack of coal, for example), capital, raw materials (e.g., cotton for the textile industry), and other inputs (e.g., chemical products to tan leather). The simplistic notion that a certain isolation from world markets could have helped to develop a domestic industry does not seem to have much relevance in the case of El Salvador. There were too many obstacles to overcome and, perhaps a more important reason, from the point of view of the local elite coffee was still a better alternative. In their experience, despite all the uncertainties, fortunes could be made (and were made) in the coffee business. Industry was a more uncertain and more difficult investment option.

Elite Formation

As new economic activities became necessary, the burden of ignorance was much greater. Whenever a new technology was brought or a new institution was created, it was necessary to use foreign expertise in order

to solve the practical problems involved. This only highlights one of the leitmotivs of the economic hostory of El Salvador: the great scarcity of human capital and the great rewards for those who had it. Salvadorans had little access to education and a limited choice of activities to engage in. The educational system had started at the very bottom, and it was not easy to lift it from there. Although the university was founded in 1841 it remained small and offered courses in very few fields. The first subjects taught were law and medicine; potential engineers or people interested in mathematics had nowhere to go. Agriculture was not considered a subject proper for a university. Efforts to take a scientific approach to agriculture were unsteady. An agricultural school destroyed by the 1873 earthquake was not rebuilt. In 1893 a model farm was established to provide examples of modern agricultural techniques. Civil engineering did not fare much better. An effort was made in 1864 to professionalize land surveyors, but the project fell victim of political instability. In 1879, just one year before passing the legislation that eliminated the ejidos , the government realized that there were not enough qualified people to survey the land. It was stimulus enough for the creation of the Facultad de Ingeniería Civil, but it was difficult to raise the standards of the new facultad since teachers were ill prepared. Science had to wait many years before it became a serious matter. As late as 1898 the Commercial Directory listed only 11 engineers in El Salvador (5 of whom were foreigners). Lawyers, by contrast, were relatively abundant (the law school provided the nearest thing to what we would now call a liberal arts education); there were 189 lawyers and 144 physicians, the other profession of choice.^[113] Such was the total of the professional class in a country with more than 700,000 inhabitants.

Given the limited access to education it is natural that the children of the rich were more likely to obtain a university degree than, say, an Indian child from Izalco. Children of the planters, however, seldom went very far in their education. It was not rewarding to spend long years abroad studying complicated subjects when they could learn the intricacies of coffee cultivation at home and be amply remunerated for their endeavors. When the infrastructure became complicated and the time came to create banks or to build railroads, it was always possible to import a foreign expert or semi-expert. Railroad construction was associated with names like Bueron, Scherzer, Hinds, Glower, or Keilhauer. The agents of the shipping companies had names like Mathe, Foote, or Courtade. Banks were administered by British and American citizens.

El Salvador experienced a selective immigration. There were no large national groups moving en masse to El Salvador; immigrants were individuals (often male and single) with a specific expertise. They found out

in a short time that their talents could be profitable and that they could receive rapid social recognition. The Salvadoran elite, too ignorant and too small to do all the work necessary in a growing economy, was ready to adopt the newcomers. Immigrants provided a good avenue to expand a suffocatingly small ruling class. Second-generation immigrants could expect to marry into the elite. Eligible bachelors of good families were few and difficult to catch, and it was more acceptable to marry a successful immigrant with white blood than a local parvenu. Once rich and well married they adopted the cultural traits of their in-laws. Not having contact with others of similar national background to keep the customs of the old country alive, immigrants did not create cultural enclaves and were rapidly absorbed. They provided the blue eyes of their children and received the prejudices of their new relatives in return.^[114]

A study of the Salvadoran bourgeoisie written in 1977 presents a list of sixty-three of the richest families in the country: people involved in agriculture, industry, and banking. This list, although incomplete, is a good sample of the road to economic success.^[115] It can be used to show the link between the changes that took place at the end of the nineteenth century and the formation of an elite that had enormous power until 1979. Only twenty-one (33.3 percent) of the families can be traced back to "old" nineteenth-century families; thirty-eight (60 percent) are immigrant families, and four (6.3 percent) made their fortunes after the 1950s.^[116] Among the "old" families more than half started their fortune before the advent of coffee, and all of them prospered thanks to agriculture, with or without the help of having a relative in the presidency.^[117] Not surprisingly, some of the old families sent their children to study abroad and by doing so enhanced their possibilities of success. Immigrants and old families were direct beneficiaries of the economic environment of the turn of the century. The growth in exports created new opportunities, and the few who had the education or ability to take advantage of them were amply rewarded: they were given a country to rule.

In general, immigrants started in commerce and small industries and then bought land. Nationals followed the opposite route. A rapid look at a list of landowners sheds light on this issue. Colindres's study includes a list of people who in 1972 owned more than 100 hectares of land in seven western provinces (about half of the territory of the country in the best part of the coffee region).^[118] According to his information there were 926 properties that satisfied that size criterion, 105 (11 percent) of which belonged to the descendants of immigrants. If the criterion is narrowed to properties of more than 1,000 hectares, the share of the descendants of immigrants rises to 21 percent.^[119] These figures, together with the information on the "richest" families, show a clear pattern. The

more complex or the larger the size of a business activity the more likely it is that a descendant of an immigrant will be involved.

Successful immigrants went to El Salvador for very diverse reasons, but they had one thing in common: they knew a skill that Salvadorans did not. It could be anything, languages, car mechanics, or beer making. The first known successful immigrant was Robert Parker, an English merchant who had fought with Cochrane in South America; by 1826 he was already considered "one of the most influential persons, who was consulted by the government of that state [of San Salvador] on all important occasions."^[120] He knew languages, the art of war, and the art of buying and selling under duress, a winning combination during the federal period. His decendants are still prominent and linked to "old" families. Another successful early immigrant was Maurice Duke, a British citizen born in Jamaica. He is a good example of how someone with an education had an edge. His knowledge of English and of international business practices allowed him to engage in the most profitable ventures of the time. He arrived at San Salvador in 1864 as a young man of twenty-four and, after only eight years, he was considered to be a person "of character and position" and was appointed American consul. Later in life he owned stock in the piers of La Libertad and Acajutla, was awarded a contract to build a railroad, and was consulted by presidents. His son Rodolfo was one of the founders of the first Banco Agrícola Comercial, and his daughter married into the Guirola family. His descendants are included in Colindres's list of the "richest."

Even the simple skills of a specialized worker could be enough to start a career. An Italian chauffeur brought to the country by a family of coffee planters used his skills to start a car dealership. It was even easier if the skills brought by the immigrant were specifically suited for Salvadoran conditions. When the Alvarez family came from Colombia it was already familiar with the coffee business; before the end of the century the Alvarezes were founding banks.^[121] Don Herbert De Sola can be included in this category. He was a Sefardic Jew born in Curaçao to a business family. His first company was based in Panama and had opened a branch in El Salvador in 1885. After the failure of Fernand de Lesseps's canal in Panama he decided to move his business elsewhere. He made a long trip around the world to find a good place for business (he went as far as Transvaal) and decided on El Salvador. By the time he arrived there and opened his first store in 1896 he was thirty-one and already had some capital, experience, and excellent business connections in Panama and in Europe. It was the right combination of skills and assets; before he died his companies employed 3,200 workers.^[122]

People of Arab descent succeeded with a slightly different set of skills. They were not particularly well educated when they arrived in El

Salvador after the breakdown of the Ottoman empire. However, they came from a long tradition of merchants and had a more aggressive business culture than the natives. As a result of their hard work and remarkable skill their success was swift. Four families of Arab descent are among the thirty-one "richest" immigrant families on our list. The right time to start a big fortune, it seems, were the last twenty years of the nineteenth century and the first twenty years of the twentieth. Virtually all of the immigrants on Colindres's list and all but four of the nonimmigrants started their business activities during or before that golden period. After that the door was virtually closed. The timing of economic success was crucial. For those who arrived later it was much harder. Although Colindres's sample included four "newcomers," it is highly questionable whether they were as wealthy or as influential as the other fifty-nine. It seems a clear conclusion that the Salvadoran elite was consolidated between 1880 and 1920 as a result of the expansion of exports. That was the gestation period of the mythical "fourteen families."^[123] After that period most applications to be a member of that exclusive club were blackballed.

The Standard of Living of the Elite

The coffee elite developed a lifestyle that was in sharp contrast with the simple life of the rural worker described above but that was modest by the standards of the rich in other parts of Latin America. There were few amenities beyond the endless visits and the religious festivities. The capital was less than monumental; in 1887 it had only twenty-one two-story buildings and one theater. Electricity was not introduced until 1888. The National Palace was one of the two "establishments deserving the name of monument" (the other being the military school). It was a wooden building that occupied a full block and housed every single governmental office, from the president's to the telegraph.^[124] Unfortunately it was lost in a fire in 1889, leaving the city with one less monument and historians without archival material. Up until 1885, when a spacious market was opened to the public, groceries were sold at the central plaza, in exactly the same way as during the sixteenth century. In contrast, there were plenty of small shops (64 bars, 58 stores selling imported merchandise, 55 shoe stores, 14 millinery stores, 20 dressmakers, 18 bakeries, 3 bookstores, 5 flower shops, 2 public baths, etc.).^[125] Again, the accomplishments, however modest, seem remarkable when considering the point of departure. Shortly before the breakup of the federation San Salvador was a city of about 15,000, "composed of a few short streets branching off from a 'plaza' and of numerous Indian huts scattered over a large extent of broken ground."^[126]

In 1891, Señor Aguilar, a rich planter, ordered an inventory of his goods. A look at this document gives an idea of his way of life.^[127] He owned two houses in San Salvador, in the center of the city. One of the houses was next to the presidential palace. The living room of the house occupied by the family (one of only ten two-story private houses in the whole city) was furnished with a German piano, velvet sofas and chairs, and damask curtains, although there is no mention of silver or crystal. The planter's wife had jewelry worth more than half the value of one of the houses. Following the Salvadoran tradition, the coffee planter also owned a hardware store valued at 13,184 pesos. He also was a shareholder of the Banco Internacional and owned government bonds.

His most valuable property was a coffee plantation with 150,000 coffee trees valued at 60,000 pesos. The finca had two houses, watertanks, coffee nursery beds, and twenty-five manzanas of woods. There were twelve oxcarts to transport coffee. The main plantation was complemented by a smaller one with 80,000 coffee trees and by a beneficio (a plant to process the beans) that was purchased in 1886. The beneficio was as valuable as the finca. It had a steam engine with its boiler, a pump, iron lifts, and other imported machinery. The machinery was housed in a building with a tile roof.

The main plantation had been bought with a loan from the Banco Internacional, and the planter still owed 10,000 pesos to the bank. He also had financial dealings with a firm in Birmingham and with two German firms, one in Rainschail and one in Hamburg. Aguilar's total fortune was valued at 184,282.90 pesos, and his debts amounted to 20,000 pesos. His fortune was relatively large for the period, equal to about 3 percent of the total revenue of the government. This fortune was not the largest at the time, but it had peculiarities that made it an example of the evolution of the Salvadoran elite. The Aguilars were one of the leading families of the province during colonial times and played a key role in the independence movement. They were prominent in the indigo business, and when Eugenio Aguilar was president he signed the first piece of legislation that gave incentives to coffee production. Later on they branched into banking and, as of 1990, a large part of the fortune was still in the form of coffee plantations. It is a typical case of adaptation to changes in the economy through many generations.

This glimpse into the standard of living of a member of the elite illustrates the contrasts of Salvadoran society at the end of the century. The rich, although modest by European standards, had developed a way of life totally removed from that of the campesinos . The differences could be seen in all aspects of life: access to political power, to education, and so forth. That meant that those in power had a different perception of reality than the majority of the people, and their power was great enough not to be accountable to them.