Part II – The precedents
Portugal did not follow the movement to establish specialised banking institutions that developed in the main European markets. The projects undertaken (and only effectively implemented at two moments of particular political significance) may be considered tardy. The creation of the Banco do Brasil (after the king and court had moved from Lisbon to Rio de Janeiro as a result of the Napoleonic Wars) in October 1808, and in December 1821, when the first Portuguese bank, the Banco de Lisboa, was finally established.
Engraved by P. G. Bertichem, 1856
The context of the revolutionary movements of 1820 stimulated public discussion through both parliamentary debates and the press, via the publication of ideas and memoirs in the form of pamphlets. The demand to create a national bank to solve the problem of consolidating public debt and amortising paper money was made in these pamphlets, and several plans to this effect were presented to the Constituent Assembly.
Plan for the creation of a royal bank in Lisbon
The growing popularity of paper money, based on the subscriber’s promise to pay the debt, led to growing distrust as to whether it would maintain its value and convert into coin. Rodrigo de Sousa Coutinho, future Count of Linhares and President of the Royal Exchequer, was particularly important among the personalities who attempted to find a solution to this issue. In memoirs and reports on the State’s financial situation, he defended the idea of reducing the volume of paper money by converting it into consolidated debt through policies, which gave creditors more guarantees and allowed the State to settle public debt more smoothly. As a basis for supporting this process, Rodrigo de Sousa Coutinho defended the establishment of a bank, composed and managed by shareholders, which would act as a financial backer of the State.
D. Rodrigo de Souza Coutinho
Rodrigo de Souza Coutinho, Count of Linhares, Minister of Foreign Affairs and War and State Councillor and President of the Royal Treasury. In this last function, he defended, since 1798, the consolidation of the volume of paper money, in a plan that involved the creation of a bank.
Engraved by José Maria Caggiani
National Library of Portugal
The Banco do Brasil
The Banco do Brasil was founded in 1808, based on the ideas put forward by Rodrigo de Sousa Coutinho. Although in practice the Banco do Brasil was the first Portuguese bank, its activities were limited geographically to Brazil, where the Portuguese court was at the time. Its main role was to provide loans to the Portuguese government and then the Brazilian government after Brazil’s independence.
The Banco do Brasil started issuing banknotes in 1810, putting a wide range of denominations into circulation, ranging from 4,000 to 400,000 réis. However, issues grew uncontrollably and the Bank made no amortisations between 1814 and 1820. The rapid multiplication of the stock of paper money in circulation during this period – by more than eight times – contributed to discrediting the institution.
The first half of the 19th century was marked by the stagnation of the Portuguese economy, thanks essentially to first the Peninsular War and then the Civil War. With a population slowly growing from approximately 3.2 million to around 3.9 million over that period, Portugal saw the value of its exports decline to half those recorded at the beginning of the century. Civil war and the instability of the State led to an increase in military expenditure and a reduction in revenue due to difficulties in collecting. The liberal progressive project considered that the solution to this situation was a reform of the civil service, the judicial system, the system of property ownership and a project of economic growth based in part on the reform of the tax system and relief for the bourgeois classes.
Small policies of the Royal Exchequer, 1805-1807 issues
The apólices pequenas (“small policies”) of the Royal Exchequer were both debt instruments and means of payment. They bore annual interest of 6%, were mandatory legal tender and required to be accepted in half of the value of all payments. The last issues, in 1805 and 1807, only included the nominal values of 1,200 and 2,400 réis and no longer bore interest, becoming a form of banknote.
On the eve of the creation of the Banco de Lisboa, more than 10.3 billion réis remained in circulation in inconvertible policies. The amortisation of these securities was a complex process that took decades and in which the Banco de Lisboa was a key agent.
Discount table, 1817
The mandatory legal tender and inconvertibility of the Royal Exchequer’s “small policies” and the proliferation of issues undermined public confidence in these policies. As a result, these securities began to be traded at discount, which exceeded 30% in times of greater disruption and even reached 40% in June 1808, under the threat of the First French Invasion.
This discount table was not ground breaking, but it was very useful. Users could easily verify the net result of a discount transaction with rates between 10% and 20% for all denominations issued as well as a number of intermediate figures. Effective discount rates ranged from 15.5% to 18% that year.
Banco de Portugal’s Library
The amortisation of massive paper money issues became a national priority. In the tradition of the opinions and proposals of the 17th and 18th centuries, António Pinto, magistrate of Portalegre, was among those who addressed several proposals to solve the problem to the Assembly that arose from the Revolution of 1820. Suggestions included the creation or reform of taxes on income, consumption and imports, the rationalisation of existing taxation, the issuance of debt eligible for the purchase of national property, as well as instruments such as lotteries and tontines.
Banco de Portugal’s Library
Spurred on by a broad consensus on the absolute need for a national public bank, on 13 December 1821 the deputies of the Constituent Assembly began discussing the proposal to create a bank that would later be named the Banco de Lisboa.