Hunefeldt C., Harris B. A Brief History of Peru

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A BRIEF HISTORY OF PERU

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Pardo’s presidency was not without serious hurdles. He had inher-

ited both an immense foreign debt, which inevitably prompted seri-

ous financial problems amid decaying guano revenues, and unending

small rebellions in the interior, largely waged by caudillos and the

pierolistas.

Guano

Between 1840 and 1880 Peru exported approximately 10.8 million met-

ric tons of guano at an average price of £10 per ton. Thus, over the

course of these 40 years, Peru earned around £100 million from the

guano trade and became one of the wealthiest countries in Latin

America. Moreover, guano was state owned; in other words, all the

income from exporting guano went to the state coffers. Because these

revenues were state administered, the Peruvian government had a

unique opportunity to develop projects under its own auspices.

What did the Peruvian state do with the money obtained from sell-

ing guano to Europe? The answer to this question is complex and mul-

tilayered. It involves how guano was extracted, who participated in

Seabirds, seen here on one of the Chincha Islands off the coast of Peru, have ﬂocked for

hundreds of years on South America’s coastal islands, leaving thick deposits of guano. In the

19th century guano was mined as a hugely lucrative source of agricultural fertilizer.

(Photo by

Alejandro Balaguer/Andes y Mares)

what ways in the guano exports, and how British and Peruvian interests

merged or conﬂicted in this export venture.

In contrast to ores or agrarian produce, guano was easily accessible

and needed no heavy equipment or high capital investment. Packing

guano and loading it on ships bound for Europe required only men,

bags, shovels, and transportation. The men were mostly convicts or

Chinese immigrants known as coolies, who provided cheap labor that

accounted for about 4 percent of total production costs. Bags were eas-

ily provided by small-scale textile workshops. Shovels were imported

and paid for by money minted in Cerro de Pasco. The ships sailed

under European ﬂags.

Guano exports hugely enlarged the government’s ﬁscal revenues. In

1846 revenues obtained from guano accounted for less than 10 percent

of state revenues (513,000 soles of 6.113 million soles). (The sol was

established as the national currency in 1863.) Only ﬁve years later this

percentage had risen to more than 25 percent (2.194 million of 7.636

million soles), and by 1872, to about 50 percent (34.566 million of

67.987 million soles) (Manrique 1995, 121). Such ﬁnancial windfalls

made it easy to get loans on the international ﬁnancial markets and

allowed Peru to borrow against future guano production, although this

practice would eventually lead to a deep ﬁnancial crisis.

The Impact of Guano Exports

Many Peruvian and non-Peruvian authors have discussed at length why

Peru—having access to the tremendous resources provided by guano

exports—did not achieve economic and political modernization.

Historians previously assumed that the guano revenues beneﬁted mainly

foreigners, but recently it has been convincingly argued that most rev-

enues were retained inside the country. By analyzing state expenditures,

U.S. economist Shane Hunt (1984, 51) has shown that 53.5 percent of

the Peruvian budget was spent on expanding Peru’s civil and military

bureaucracy, 20 percent on the building of railroads, 11.5 percent on

transfer payments to Peruvians and 8 percent to foreigners, and 7 per-

cent to reduce tributary impositions on poor people. The nature of these

expenditures tells the story about the lost economic opportunity.

At the beginning of the guano era the Peruvian governmental appa-

ratus was small, amounting to only three ministries with a few dozen

bureaucrats each. The demands of the guano boom, however, rapidly

expanded almost all branches of the Peruvian government and added

hundreds of state-employed workers. Both police and military forces,

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THE AGE OF GUANO

for example, were increased in numbers and had their powers extended

to the provinces, which had the side effect of substantially reducing the

autonomy and power of caciques. With money from the guano trade

Peru became one of the strongest military powers in South America and

one of the ﬁrst nations on the continent to own armored steamships.

The Peruvian navy was strong enough in 1866, for example, to ﬁght to

a standstill a Spanish ﬂeet that had attacked Callao.

In addition to providing such beneﬁts, however, the employment

rolls of the expanding state apparatus were also used as patronage to

recruit and reward followers. Such hiring abuses led to high levels of

inefﬁciency and corruption. Investing more than 50 percent of state

revenues in an inefﬁcient state administration stiﬂed progress.

Previous loans and the accumulated interest on them further drained

state resources. In 1822 and 1824 the Peruvian state contracted two

loans in London in the amount of £1.81 million. Succeeding govern-

ments were unable to repay them, and by 1848 these loans and the

principal and interest had increased Peru’s debts to £5.38 million—

three times the initial loan. Recognizing Peru’s sudden economic wind-

fall, the British bondholders of the debt exerted great pressure to make

Peru repay the outstanding loans. In 1849 the Peruvian government

signed a treaty by which Peru agreed to repay these loans through new

bond issues backed by future sales of guano. With this treaty Peru was

readmitted to the international ﬁnancial community and could obtain

new loans. However, new loans soon had to be used to repay old loans

and accumulated interest, and old loans and new loans eventually ate

all available ﬁscal resources.

In 1869 the minister in charge of Peru’s economics, Nicolás de

Piérola, signed a contract with the French businessman Auguste

Dreyfus by which Dreyfus became the only agent allowed to extract

guano. Until then a large group of Peruvian consignment agents had

been in charge. With the money he gained by exporting guano, Dreyfus

made new loans to the Peruvian government. With £11.92 million

loaned by Dreyfus to the administration of José Balta in 1870, the gov-

ernment began the construction of railroads. In the end guano deposits

were greatly depleted; the railroads were left unﬁnished; and Peru faced

an external debt of £35 million, an amount that required an annual

interest and principal payment of £2 million, which then was the entire

annual budget.

In addition to the British bondholders many native Peruvians held

long-standing claims on the government. Under pressure from such

claimants the Peruvian government recognized this internal debt. The

A BRIEF HISTORY OF PERU

126

government acknowledged the nation’s obligations to its own citizens,

such as those who had supplied funds for the patriot armies during

the wars of independence. Over time more and more claimants pre-

sented larger and larger claims. In 1851 the state-recognized internal

debt amounted to 4.88 million pesos; by 1858, it had grown to 23.2

million pesos, or five times the annual budget of 1850 (Contreras and

Cueto 2000, 125). Governmental corruption lay at the heart of much

of this drastic increase. The state also acted intentionally to transfer

public savings to private hands in the hope of promoting investments.

The state’s recognition of an internal debt was intended to foster the

development of an entrepreneurial middle class and to forestall suspi-

cions harbored by nationalists about the government’s relations with

foreign capitalists.

Rather than becoming revenue producers, as hoped, Peruvians con-

tinued to receive money from the state. Peruvian historians Carlos

Contreras and Marcos Cueto (2000, 133) have calculated that each

Peruvian cost the state ﬁve times more a year than he or she contributed

to the state. During the boom the gap was ﬁlled by guano revenues. Who

gained from these state-earned distributions? According to Peruvian his-

torian Alfonso Quiroz in his 1987 book, La deuda defraudada, a total of

2,028 people r

eceived state bonds; however, two-thirds of the total bond

value was held by only 126 people, mostly large land owners and mer-

chants and some state bureaucrats. Money thus obtained from state cof-

fers was only marginally invested in productive ventures, such as a few

banks and small textile and food industries. In large measure the money

was reloaned to the state. For lenders this was a less risky investment

with higher yields than investing in industrial development, at least

until the Peruvian state went bankrupt. In a sense the Peruvian guano

age suffered from what contemporary economists would call the “Dutch

disease.” Abundance of money lowered prices for imported goods and

increased labor costs, whereas the high proﬁtability of guano exports

increased the borrowing price of money (that is, interest rates).

During the boom Lima and other coastal cities beneﬁted most from

guano revenues, sometimes through the internal debt mechanism but

more often simply because more money entered the economy. For

example, real salaries increased on average 3 percent annually.

However, with more money circulating in the cities came inﬂation, and

inﬂation further accentuated economic differentiation. Between 1856

and 1869 the accumulated price inﬂation surpassed 100 percent. As a

result labor conditions and standards of living worsened. Lima’s arti-

sans were the ﬁrst to react when in 1858 they marched through the

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128

city’s streets protesting against elite consumption patterns. Suddenly

enriched, Lima’s elites resorted to imports. Doors, windows, pianos,

shoes, and clothes came from Europe, leaving Lima’s artisans (most of

them descendants of former slaves) without work and income.

Slavery and Indian Tribute Reassessed

One important expenditure of the Peruvian government during the

guano boom was money spent on effectively abolishing slavery. Seven

percent of guano revenues were set aside, and the government bought

the liberty of 25,505 slaves from slave owners for 300 pesos each. In

theory there were no slaves in Peru, as slavery had been abolished by

General José de San Martín in 1821. Shortly after San Martín’s procla-

mation, however, former slaves were put under the tutelage of their

owners. At ﬁrst this tutelage lasted until the former slaves reached age

21, but in 1839 it was extended until age 50. Decrees, intentions, and

reality were revealed in the state abolition expenditures. A simple cal-

culation shows that the Peruvian government paid 7.65 million pesos

to slave owners, money that was largely spent after 1854 on expanding

sugar and cotton plantations.

A public square in Lima, decorated for the July 28 celebration of independence day in 1868 at

the height of the guano boom

(Library of Congress)

The other component of social expenditure was the temporary abo-

lition of the Indian tribute, which until around 1840 had represented

25 percent of state revenues. After 1840 the Peruvian state made several

attempts to reform Peru’s tributary system, but each met political resis-

tance. No party or leader wanted to support such unpopular actions.

President Castilla abolished the tribute in 1854. The reform imple-

mented in 1866 by Manuel Pardo, Peru’s minister of economics (and

later its ﬁrst civil president), was short lived. Pardo wanted to make tax

collection uniform by taxing all Peruvians, not only Indians. According

to his plan all male Peruvians between the ages of 21 and 60 were to

pay the equivalent of 12 days’ labor in a year in taxes. The experiment

lasted less than a year and ended with the ouster of President Mariano

Ignacio Prado.

Despite attempts, the Indian tribute was not replaced with a more

efﬁcient and ethnically neutral taxing system. To the contrary, the same

Indian tribute abolished in 1854 was reintroduced in 1885. Between

1854 and 1885, however, abolishing the tribute had long-term conse-

quences for mining and agriculture in the highlands. It also at least par-

tially explains why coastal plantation owners could not use Indian

labor and resorted to importing Chinese laborers to work on their

ﬁelds: Once the Indians had no need for cash to pay their tribute, they

largely could engage in their own endeavors.

One of the peasants’ few monetary needs was money to fulﬁll com-

munal religious duties, including buying candles, providing dresses for

statues of the local patron saint, and paying the services of a priest.

Many hacienda and mine owners were aware of this cyclical need for

money and visited the peasant communities (or sent a hired intermedi-

ary) knowing when such festivities were scheduled to take place.

Subsequently hacendados or their agents would entice the peasants

involved to accept gifts or money. In exchange the ensnared peasants

would ﬁnd themselves obligated to work off the value of the gifts or

loans by laboring in a mine or on a hacienda. This form of hiring labor-

ers has been called enganche (meaning a “hook”). Often such practices

were endorsed by or even organized with the help of local political

authorities. Once entrapped by this system, workers saw their debts

constantly increase.

The abolition of both the Indian tribute and slaver

y meant a retreat

of Indians and former slaves from the labor market, leaving plantation

owners on the coast and hacienda owners in the highlands with a labor

shortage, and the state with lower income from internal taxation. As

landowners’ complaints became louder, the Peruvian government

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THE AGE OF GUANO

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130

sought to replenish the labor supply. First Peru invited European immi-

grants, who according to contemporary thinking would also improve

Peru’s racial proﬁle. Then—once it became clear that Europeans were a

demanding rather than obedient labor force—Peru organized, in con-

War With Spain

he causes of a mostly maritime war with Spain, fought in 1865 and

1866, could be traced to an 1859 policy of the Peruvian govern-

ment to promote the immigration of Spaniards as a way to help

Europeanize the Peruvian population.Among the immigrants were 175

Basques, who were settled in a northern coastal estate to grow cotton

on shares.The estate owner treated them poorly, and tensions eventu-

ally resulted in armed violence in 1863. The Spanish government

protested when the Basque workers were arrested, and the conﬂict

escalated over the course of the next two years.

In 1865 Spain occupied the guano-rich Chincha Islands, thereby

depriving Peru of its principal source of revenue, and landed a small

force of sailors in Callao, where one Spanish sailor was killed in a

fight with local Peruvians. In May 1866 a Spanish fleet opened fire on

Callao and was subsequently attacked by several modern, well-armed

and well-trained Peruvian warships. The Peruvians disabled the prin-

cipal Spanish ship and forced the Spanish forces to retreat (Manrique

1995, 131).

The Chincha Islands, temporarily seized by Spanish forces in 1865 (Photo by

Alejandro Balaguer/Andes y Mares)

junction with Chinese consular representatives, the importation of

unskilled Chinese workers from Macao and Canton (Guangzhou).

Several factors converged to lay the groundwork for the expansion

of coastal plantations in the 1860s: money paid by the state for the

manumission of slaves, fresh labor in the form of Chinese coolies,

high prices in the international market, and capital from merchant

houses and the newly created banks. Sugar production reached

unprecedented heights in the 1870s—growing 495 percent between

1871 and 1878—and by 1879 sugar exports accounted for 32 percent

of all Peruvian exports. In the wake of this expansion many wheat-

producing haciendas in valleys near Lima switched to sugar produc-

tion, and Peru imported wheat from Chile. Coastal valleys between

Lambayeque and La Libertad contained the most important sugar-

producing plantations. Cotton production did not lag far behind,

especially during the years of the U.S. Civil War. Piura contributed 14

percent of all cotton exports, Lima 38 percent, and Ica (south of

Lima) 42 percent (Manrique 1995, 130–131).

Chinese Immigrants

Between 1840 and 1874, 100,000 Chinese immigrants, mainly men,

arrived in Callao. The Pacific passage caused high death tolls.

Estimates indicate that between 10 and 30 percent of people who

embarked in China died during the trip. Once these Chinese laborers

were in Peru, their living conditions resembled those of former

Peruvian slaves. Publicity about the deadly shipboard passage and

labor conditions on the guano islands and on coastal plantations led

to diplomatic protests, followed by an influx of Chinese laborers

between 1870–74 before the looming abandonment of “importing”

this labor supply. Chinese laborers were reportedly subject to harsh

mistreatment, including whipping, incarceration, overwork, and even

forced celibacy. The largest Chinese populations were in Lambayeque

and La Libertad, where historian Humberto Rodríguez Pastor, using

the 1876 census, counted 15 Chinese women and 12,864 Chinese

men (1989, 68).

Since it was the landowners who provided the Chinese immigrants

with the money to pay for the trip from China to Peru, these workers

were indebted to and completely dependent on their employers. Once

settled on the hacienda, Chinese laborers had to repay their travel money

out of their wages in addition to feeding and clothing themselves.

Hacendados would lend workers more money to meet their living

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THE AGE OF GUANO

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132

expenses, thus continually extending the initial labor contract. Chinese

laborers were unable to leave their “owners” because of this continued

indebtedness. Very gradually, however, Chinese laborers managed to rid

themselves of their initial labor contracts to become small merchants,

ﬁrst in provincial cities and then in Lima. The common saying in Lima

el chino de la esquina (“the Chinese on the corner”), which came to mean

Chinese immigrant workers picking cotton in an irrigated ﬁeld near Vitarte. Many Chinese

agricultural laborers were brought to Peru in the 1870s and faced harsh conditions and

treatment.

(Library of Congress)

the small neighborhood grocery store, was testament to the role of

Chinese merchants in this period, even after such stores were no longer

in Chinese hands.

The Railroads

The building of Peru’s railroads absorbed about 20 percent of the

guano revenues during the decade between 1868 and 1878. Peru

built its railroads in the hope of promoting development, integrating

the country’s economy, and linking the country to international

trade. In the long run the only goal achieved was joining Peru more

closely to the international market through the export of raw materi-

als: wool, silver, copper, sugar, and cotton. Railroad construction

closely coincided with the location of the main production sites of

these raw materials.

In 1860 Peru only had two railroad lines: One linking Tacna and

Arica in the south, and another (12 miles long) linking Lima to its

port city, Callao and the elite vacation resort of Chorrillos. In 1872,

president Manuel Pardo campaigned for the urgent need to massively

expand the railroad system. He was certain that train whistles would

awaken the country to the benefits of modernity. But dreams of

modernity confronted an almost impossible geophysical landscape.

To reach the highlands locomotives had to climb to 12,000 feet above

sea level, and technological knowledge of this time was not up to the

challenge.

It was an engineer from the United States, Henry Meiggs, who con-

vinced the Peruvian government to launch a railroad-building program.

Between 1869 and 1872 the Peruvian government borrowed £36 mil-

lion to start building railroads. Ten new lines were built, though not all

10 were state initiated. The Lima-Chancay, Pimentel-Chiclayo, and

Pisco-Ica lines were in private hands. Few of these large projects ever

reached their ﬁnal goal. For example, from 1868 to 1878, about 700

miles of railroad were built; this represented only about 10 percent of

what had initially been planned. An economic crisis in the 1870s

brought railroad construction to a halt. Meiggs died in 1877 leaving

behind muddled and illegible plans and unpaid bills (Contreras and

Cueto 2000, 139). His unﬁnished railroad network, which ended in iso-

lated peasant communities, was virtually worthless. The evaporation of

state resources with the end of the guano boom and the War of the

Paciﬁc (1879–83) between Peru and Chile postponed all railway

endeavors for several decades.

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