6. Textile Manufacturing in Mexico: Miraflores, 1840-1860

The Factory

The adventure began simply enough-an opportunity to invest in an enterprise that promised sure and easy profits, if one could get in. Pedro outlined the prospects to Gregorio José in April 1840:

F. N. del Barrio has a speculation in yarn and in an iron foundry on a small hacienda named Miraflores that is 10 leagues from here [Mexico City], situated at the foot of the volcanoes and that one can reach by country coach in 4-1/2 hours; the major part of the 3,500 spindles with which to start have arrived already in Veracruz and will be installed probably in three or four months, as he has everything already prepared; the power for the machinery is water from ... three streams; I believe we might be able to obtain an interest in this business; I like it very much; Pablo and I have visited it and are enchanted with it.... All the factories of this kind that have been established are producing copiously and even though they are increasing every day, I think they are not sufficient to suit the country and for a long time it will be a good speculation.... The establishments of this kind are already a guarantee it will protect them, particularly as they owe their origin to the Yorkinos and since their opponents have continued to sustain them.

In the summer of 1840 Martínez del Río Hermanos lent Barrio cash to buy machinery that José Domingo Rascón had brought from the United States. The firm purchased one thousand quintales of cotton to supply the factory and paid the costs of moving the equipment and supplies from Veracruz to Chalco. Afterward, Martínez del Río Hermanos joined the enterprise as Barrio's partner because, as Pedro pointed out in July 1840, "all those who have yarn factories are profiting greatly."

The political economy that made those factories so profitable was the work of diverse interest groups with unequal capacities to make demands on the Mexican state. After enduring ruinous competition from British textiles in the years following independence, artisan cotton spinners and weavers pressured Guerrero's government to approve the Law of 22 May 1829, a measure that banned future imports of cheap cotton cloth. When Bustamante's government relaxed those constraints on imports the following year, it initially sought to appease that constituency by promising (with the Law of 6 April 1830) to set aside a portion of customs duties collected on formerly prohibited articles to help the ailing (artisan) textile industry in Mexico. Nevertheless, given the greater sensitivity of the Bustamante government to the entreaties of empresarios, new legislation in October 1832 authorized the use of that quota of customs duties to fund a development bank, the Banco de Avío, to subsidize the establishment of mechanized cotton textile factories to replace traditional artisan workshops. Before its liquidation in 1842 (it had exhausted its funding by 1836), the Banco de Avío had lent $509,000 for the purchase of machinery and the construction of facilities for textile mills situated in the states of Mexico, Puebla, Veracruz, and Querétaro. Estevan de Antuñano, the principal beneficiary of these low-cost loans, received $146,000 to build La Constancia Mexicana in Puebla. Lucas Alamán, the minister in Bustamante's government who had worked to create the Banco de Avío, borrowed $60,000 for his partnership with Legrand Hermanos in the factory of Cocolapam in Veracruz.

The demands for protection of this new group of industrialists (and the old group of artisans) were answered with the Tariff of 11 March 1837, which banned the import of cheap cotton yarns and cotton cloth (manta) This powerful incentive persuaded many more investors to move into the industry, even without the promise of inexpensive loans from the development bank. Through 1840 the attempt to create for manufacturers a closed market-with the use of import prohibitions and the artificial scarcity they induced-helped to push prices high enough to cover profitably the substantial costs of manufacturing textiles in Mexico. From four cotton textile mills in 1837, the industry expanded in less than a decade to more than fifty mills--representing a $10 million investment.

It was with that political economy of textile manufacturing in mind that Martinez del Rio Hermanos and Barrio entered into a partnership on 5 December 1840. Because Barrio failed to comply with his contracted obligations, Martinez del Río Hermanos had to finance by itself the expensive works needed to put the factory into full operation. For this reason, it had a free hand in managing the factory, and Barrio remained very much a silent partner. By mutual consent their partnership was terminated prematurely on 31 December 1848 under conditions not provided for in the original contract. Martinez del Rio Hermanos secured exclusive ownership of Miraflores by purchasing Barrio's share for $99,900 (payable to the V.da de Echeverria é Hijos mortgage, which had kept Barrio out of bankruptcy in 1843.

The Sinkhole

As early as July 1840 Pedro prepared elaborate calculation to demonstrate to skeptics like Ventura de la Cruz and Gregorio the profitability of an investment in textile manufacturing The installation up to fifteen hundred spindles and the purchase of essential equipment, labor, and raw materials for the first two years of operation would amount to $240,000. The daily manufacture of 2,875 pounds of yarn in a 260 working days would provide an annual production of 747,500 pounds of yarn. This yarn, if sold at an average profit of 2 r. per pound, would generate an annual income of $186,875, a 78 percent return on the $120,000 invested each year. Returns from the factory in 1841 and 1842 fell far short of Pedro's projections. Costs for purchasing and installing mac recruiting and training workers, and, especially, for buying raw cotton exceeded expectations. Worst of all, demand and prices for cotton yarn tumbled after 1841.

If expectations failed to meet unrealistic projections, why did the firm make progressively larger investments in the factory over the next two decades (see tables 24 and 25)? In July 1842 Pedro conceded that even though their factory might make a small profit, "it will never compensate for the frights, vexations, and work." José Pablo concluded in December 1843 that it should be sold-if they could find a buyer. Unwilling to accept the heavy losses that would result from selling out under adverse conditions, the partners preferred to wait for an expected turnabout in the industry. José Pablo predicted the return after 1843 of "another happy era-for those who survive the present crisis." In fact, brief revivals of favorable conditions did occur periodically, but Miraflores's owners responded to the improving market for textiles by making new commitments and investments, putting off for a while longer the sale of the factory. After a good year (1845), José Pablo judged in July 1846 that the time of crisis for the factories had passed. Three months later, raw materials were expensive and scarce, and finished products could hardly be sold at any price.

In a desperate attempt to wring profits from Miraflores, its owners made costly new improvements to the physical plant. The impetus for constructing facilities to weave cloth derived from the need to find an outlet for Miraflores's yam. In 1846 the factory could not respond fully to market conditions of high demand and high prices for textiles. Because of drought conditions and a water shortage, it lacked sufficient power to keep its machines in motion. The solution was a costly improvement to the hydraulic installations. Faced with the reality of earning only small returns on a huge capital investment, the partners attempted to make better use of their machines by operating them day and night, but the increased overhead costs (for salaries and oil to keep lamps lit) further reduced profit margins Ventura de la Cruz proposed in 1849 to use the recently invented electric arc light to reduce illumination costs and make night operations at Miraflores more efficient. Although his proposal was never acted on, it does illustrate the manner in which the Martinez del Ríos attempted to deal with the problems. Again in 1855, Pedro recommended the placement of more technology--a steam engine--to increase productivity. With production-side improvements, it was possible to manufacture textiles with sma11 margins of profit over the costs of routine inputs such as cotton--as long a there were no marked disruptions of the marketplace. There is no evidence that Miraflores's owners ever included the depreciation of the physical plant in their accounting methods, and, if the cost of amortizing the capital invested in the plant is added to the routine expenses of manufacturing, profits for Miraflores were nonexistent.


For bookkeeping purposes, Martínez del Río Hermanos maintained two accounts pertinent to Miraflores. The first consisted of an inventory of the physical plant and the capital required to construct the plant. The second account, the Agencia de Miraflores, encompassed more routine commercial relations. The expense side of this account included purchases of cotton and other supplies, payments for transport costs, and libranzas drawn by the management of the factory against Martinez del Río Hermanos. The income side consisted of payments received for consignments arranged by the firm. Little, if any, cash moved directly from the factory to the firm. For its internal operations, the factory maintained a separate set of books, which reported expenses for employee salaries and other routine costs and listed income earned from direct sales of the factory's textiles.

As the resident manager of Miraflores, Jacob H. Robertson's duties included the supervision of normal operations, the management of new installations and constructions, and the verification of accounting procedures. For these services, the firm paid him an annual salary of $2,400 plus a 2.5 percent share of all profits from the factory. The Scot had a free hand in running the factory. The partners had little technical training pertinent textile manufacturing and, as a matter of principle, they preferred to limit themselves to matters of finance and to stay out of production.

The Work Force

Little is known about the workers who operated the machines at Miraflores that transformed raw cotton into yam and cloth. Skilled workers of this category were scarce; labor costs were relatively high (by Mexican standards). The problem of retaining workers was such that management was obliged to operate the factory during unprofitable periods, for fear that the workers, if idle, would move elsewhere. Periodic shortages of operators obstructed efforts to increase production, as in September 1844, when no more than forty looms could be operated because of a lack of workers. Other factories reacted to the shortage of trained workers by importing textile workers from Great Britain, but Miraflores's workers were Mexicans who had been trained to operate the imported machinery.

Miraflores was one of the largest factories in Mexico-with a correspondingly large work force. In 1854 it employed 256 employees who earned annual wages totaling $96,000. These included operators and clerks as well as craftsmen such as carpenters and blacksmiths. Wages were paid partially in cash and partially in script or tokens redeemable in the company store. Miraflores traded yarn and cloth to local hacendados in exchange for supplies of wheat, com, and beans to feed its workers. The factory's employees resided in company-owned housing located adjacent to the factory.


Table 26 shows the expansion of Miraflores's installed capacity to produce yarn and woven cloth (manta). Production began in November 1840, when about half of the 3,912 spindles that Barrio had purchased installed. In January 1841 Martínez del Río Hermanos placed a $10,000 order in New York for additional machinery to increase the factory's yarn output in 1842. To begin production of woven cloth, the factory purchased 120 power looms from Duport & Company in Mexico, which had ordered but never used the looms for another factory. These looms cost Martínez del Río Hermanos $15,500. Their installation cost another $10,000. Because of delays in constructing a building to house the machines and the necessary hydraulic installations to power them, the factory had only 40 looms in operation as late as September 1844. The following year the firm purchased 40 more looms in Mexico for $2,200. Their installation cost $4,000. In 1845 Miraflores's installed capacity rose to 160 looms, and the drive to increase production continued. Good fortune in its other enterprises enabled Martinez del Rio Hermanos to increase the tempo of its investments in the factory during the early 1850s. By 1854 the firm had invested $119,828 in machinery for yarn production and $86,332 in that for cloth. In mid-1850s the factory's installed capacity stabilized with 5,556 spindles and 238 looms. The exhaustion of exploitable hydraulic resources precluded the installation of additional machines.

In January 1841 the factory's daily output was 500 pounds of yarn. By July 1845 weekly output had reached 11,000 to 13,000 pounds. Expressed differently, yam production for 1840 totaled 3,631 pounds. With more spindles in operation, that figure increased to 159,159 pounds in 1841 and 202,455 pounds in 1842. By 1846 the factory was spinning over 500,000 pounds of yarn annually, doubling its output over the same installed capacity.

A similar phenomenon occurred with manta. Production increased from 1,456 pieces in 1845, to 16,331 in 1846, to 67,200 by 1854. Although the expansion of Miraflores's productive capacity proceeded rapidly after the mid-1840s, it lagged behind the more favorable market trends. For example, prices for manta soared in 1843. Established mills such as La Constancia in Puebla easily sold their weekly output of six hundred mantas at $7.00 per piece, a handsome profit. Before installations to produce this item at Miraflores had been completed in 1844 and 1845, the market for manta collapsed. In 1846 the factory was hard-pressed to sell it at any price.

Miraflores produced many grades, classes, and varieties of textiles. Its line of cotton yams and threads included the standard sizes No. 10 (course) to No. 24 (fine) as well as special lower-price grades spun from waste cotton and remnants. Manta production began with an imitation of Ledvar's Baize, a flannel-like English weave. Miraflores's baize, a high-quality made product, compared favorably with the European fabric disadvantage of this weave was that its production required large amounts of cotton. As prices for cloth fell, Miraflores began fabricating an imitation of lightweight Puebla manta made with much less cotton. Mantas of both types were manufactured in pieces about thirty-two yards long and marketed in 175 pound lots (tercios). The price per tercio of manta depended on the class and grade of the product. In December 1859 tercios branded " YT" or "GB" contained twenty pieces, and brand "A" had thirty-two pieces. Other markings included "MF" (twenty-five pieces), "MG" (twenty-two pieces), and "W" (twenty-eight pieces).

Although they improved the factory's efficiency by raising the volume of production, Miraflores's managers were less successful in lowering production costs on a per unit basis (see table 27 for costs for producing yam and manta for the few years in which reliable data on costs at Miraflores are available). The effects of scarce and high-priced cotton on Miraflores's operations and the attempts by Martínez del Rio Hermanos to speculate in cotton are discussed in a separate section.


If a single lesson can be drawn from the experience of Miraflores, it is that making textiles was easy; selling textiles at a consistent profit was nearly impossible. Although production costs remained more or less constant, the long-term market trend was toward a pronounced decline in prices. Those economic facts of life help to explain why the textile industry came to be a sinkhole for the capital of unwary investors like the Martínez del Ríos.

Martinez del Río Hermanos did not retail the textiles produced by its factory. The profits from a retail operation were unlikely to make up for the bother and, in any event, an 1843 decree restricted the retail trade to Mexican citizens. The firm did engage in the wholesale trade in textiles, especially in the early 1840s. Guillermo Drusina in Mexico City and German F. Poh1s in Guanajuato placed orders for Miraflores' yarn as early as January 1841. Most sales were tied to credit terms giving buyers up to six months to pay for purchases. After the mid-1840s, the administrator at Miraflores usually handled direct sales, although Martínez del Río Hermanos negotiated terms for volume deliveries. For example, Gamio & Domereq contracted in January 1853 to receive a weekly allotment of twenty-eight tercios of manta at a guaranteed price of $3,028 per lot. Payments were made in libranzas drawn by Miraflores against Gamio & Domereq and payable to Martinez del Río Hermanos.

Direct sales carried certain disadvantages. Most were made on credit and repayment was postponed for considerable periods of time. The buyer might go bankrupt or otherwise fail to cover the purchase. For example, in October 1850 Carballeda & Gamio asked Martínez del Río Hermanos for 80 tercios of manta, promising to pay for these textiles with weekly installments extending over three months. This sale was risky because the buyer was known to have weak finances. With a large inventory of textiles piling up in warehouses, Pedro ignored the risks and approved the sale. Three weeks after making delivery, he learned that Carballeda & Gamio had declared bankruptcy. Shrewdly, Pedro rushed a notary to the scene to inventory the textiles still stored in the debtor's place of business. These would be seized before a concurso could be convened. His foresight paid off as Carballeda & Gamio allegedly owed $1.8 million in debts against assets of $300,000.

Even with such drawbacks, most businesses preferred direct sales to the alternative arrangement for marketing--consignment. Under the consignment system the seller shouldered all the burdens of finance, transport, commission, and risk. In the 1850s Martinez del Rio Hermanos found itself playing a role reminiscent of the relations between the European manufacturers and Drusina & Martinez in the 1830s. In a buyers' market the firm had no choice but to submit to sometimes onerous terms. Its experience in 1849 with 5,935 pieces of manta consigned to Olasgarre & Prieto in Guadalajara showed what could happen with consignments. The manta sold for an average price of about $5.00 per piece, but deductions for transport, taxes, and other costs reduced the gross receipts to $24,609. On this sum, Olasgarre & Prieto charged its 2.5% commission, reducing the net unit sales price per manta to $4.04. Unit manufacturing costs at Miraflores for these textiles were higher, about $5.00 per piece.

The shift from direct to consignment sales is evidence that the terms of trade deteriorated for textile manufacturers in the 1840s. Miraflores experienced, as well, a geographical contraction of its market. Prior to the war with the United States, Martinez del Rio Hermanos regularly reported sales of Miraflores's textiles to Zacatecas, Guadalajara, San Luís Potosí and Guanajuato. As late as July 1847, of $112,595 in bills owed for deliveries of the factory's textiles, $47,273 originated in sales and $32,663 derived from consignments to those areas. After the war, high transport costs, local trade barriers, new textile plant production, and an expanding contraband trade caused the factory to lose its markets in the North.

Outside the crowded and competitive market in the Valley of Mexico, only Guanajuato remained as an important destination for Miraflores's products. As a leading commercial house in Guanajuato, Germán F. Pohls & Company (also Pohls & Goerne) had marketed since the early 1840s the textiles supplied by Martinez del Rio Hermanos. Pedro described Pohls's business in October 1846:

Rs G.e [Pohls & Goerne] have never been punctual in their payments, and even though he is paying some interest, and higher than he should, I consider that this results from the disorder in which he carries on his business rather than from necessity; I place him as one of the most respected men in the country; apart from the many investments he has in haciendas, the Luz mine in Guanajuato has rewarded him with hundreds of thousands of pesos each year to replace those lost in Cocolapam.

Pohls invested with Lucas Alamán in the ill-fated textile factory of Cocolapam, which went bankrupt in 1841. Alamán was ruined, but profits from mining helped Pohls to make up for his losses in manufacturing and commerce. Like Pohls, Gregorio Jiménez (also Jiménez & Hijo) sold Miraflores's textiles in this mining center and, like Pohls, Jiménez's commercial relationship with Martinez del Río Hermanos gradually changed during the 1840s from that of a buyer to a new status as consignee. Pohls and Jiménez each charged Martínez del Río Hermanos a 2.5 percent commission on sales and a 1.5 percent warehouse or brokerage fee on the total volume of merchandise they handled in Guanajuato.

Beginning in September 1853, Martinez del Río Hermanos introduced an innovation in marketing that the firm hoped would alleviate the worst disadvantages of direct and consignment sales alike. The firm and José María Carballeda formed a company to sell Miraflores's textiles. This arrangement promised not only to reduce marketing costs, but also to produce modest profits. As the socio capitalista, Martínez del Río Hermanos put up the venture capital to begin the enterprise and supplied the new company with textiles. Carballeda, the socio industrial, managed the new company (José Maria Carballeda & Company) and assigned to it his rights as the renter of a building located at No. 3 Flamencos Street in Mexico City. The company sold yarn and cloth at both the retail and wholesale levels. In addition, the Miraflores product went into clothing fashioned and marketed in Carballeda's clothing factory and store, El Cometa, located at the same address. In the beginning, their company worked well and the contract was extended for another five years beginning in 1858. Afterward, with the outbreak of the Three Year's War, sales began to fall, the company's profits declined sharply, and Martínez del Río Hermanos ordered the premature liquidation of the partnership in 1860. The experiment ended with Carballeda owing Martínez del Río Hermanos $36,000.

Although J. M. Carballeda & Company foundered in the late 1850s, Antonio Sosa y Ansoátegui did a brisk business selling Miraflores's textiles on consignment in Cuernavaca. Figure 2 shows his gross sales for September 1859 through October 1860. Sosa charged his supplier (Martinez del Rio Hermanos) the customary 2.5 percent on sales plus 0.5 percent for brokerage. Characteristically, the volume and varied greatly from month to month.

For the whole period of this study, demand for textiles remained volatile. The decade of the 1840s began with heavy demand and high prices. Then in mid-1841 a prolonged political crisis paralyzed commerce. From December 1841 through late 1843, sales of yam and manta were slow. Demand increased after 1844, peaking between the eve of the of the outbreak of hostilities between Mexico and the United States in 1845 and the actual occupation of Mexico City in 1847. Faced with an avalanche of contraband after 1847, the industry suffered through another period of depressed demand until the early 1850s. Then the market improved briefly, only to turn down sharply as civil war engulfed the country after 1858. The bad times continued unrelieved through the early 1860s, aggravating Martínez del Río Hermanos's cash flow problems and helping to provoke its bankruptcy.

In 1840, when Barrio began finishing the initial construction at Miraflores and when Martinez del Río Hermanos calculated its in the enterprise, No. 16 yarn sold for 7.5 r. per pound. Five years later it brought only 4.5 r. per pound. This increased to 4.88 r. for a short period in 1846, only to fall to 3.5 r. by 1853. The price for No. 16 yarn in 1859 was 3.88 r. per pound (table 28 lists the combined average selling price for yarn and cloth for selected years, 1840 to 1860). A reasonably accurate measure of Miraflores net receipts from these sales can be computed by subtracting 10 percent from the prices listed in table 28 to cover transport and other overhead costs paid to market these textiles. Comparison of these adjusted prices with actual production costs listed in table 27 reveals only a minute margin between profit and loss. Reliable information on Miraflores's profits is scarce. Table 29 lists the best available data for selected years. Although profits ranging up to 20 percent were sometimes reported, overall returns were generally disappointing, as the owners claimed they spent $1 million on the factory between 1840 and 1861. Table 30 shows these reported profits as a percentage of Miraflores's assessed value for selected years.

The Politics of Profit

Political variables-the degree of a government's commitment to protectionism, its effectiveness in impeding the flow of contraband into Mexico, the imposition of taxes on industry, and the inability of any government to long sustain itself in power-very often influenced, or even determined, market conditions for Miraflores textiles. The owners of Miraflores-the Martinez del Rios-had only limited resources for dealing with Mexican politics. They were reduced most of the time to a role as passive observers, aware of their interests, impotent to affect political outcomes, and dependent on others to articulate and defend the interests of the textile industry. In this area, the family's genius for persuading the British to protect them could not be employed, as protection for Mexican factory owners (whatever their nationality) was anathema to British policymakers.

Fiscal considerations, pressure from textile-exporting countries like Great Britain, disillusionment with the prospects of ever developing an-efficient domestic industry, and sheer political chicanery combined in 1841to erode Bustamante's commitment to enforcing statutory prohibitions on textile imports. To raise money to finance a promised new offensive against Texas in 1841, the commander of the Army of the North, General Mariano Arista, authorized the sale of special licenses to permit the import of yarn through the port of Tampico. Guillermo Drusina and Cayetano Rubio engineered this circumvention of tariff codes, drawing on themselves and on Bustamante's government the wrath of textile factory owners and other protected groups in Mexico. As neither the president nor his ministers were anxious to confront Arista on this issue, those affected called on Santa Anna to enforce the law. Pedro reported in February 1841 that "el cojo [Santa Anna] is in favor of the manufacturers and [cotton planters]; the only thing that worries me about this question is that it may lead to a revolution, which will delay payment of our [government public debt] funds. Aside from that, I am pleased with these developments, as they will reaffirm the rights of the manufacturers."

Enjoying influence with neither Bustamante nor Santa Anna, the many foreigners who had invested in Mexican industry rushed to enlist the aid of their home governments in overturning Arista's action. The French minister supported his nationals' reclamation; the British minister did not. British investors complained in a manifesto to Pakenharn dated 11 February 1841 "that in the faith of the inviolability of this law [the Tariff of 1837] we have embarked large capitals in the establishment of works for the manufacture of these articles." By staging a public demonstration outside the minister's residence, a group of angry Britons led by factory owners Andrew Lyall and Archibald Hope planned to pressure the minister into changing his mind. Mexican authorities intervened, however, and outlawed the meeting. Furious with this abridgment of their rights as Englishmen, the demonstrators naively asked Pakenharn to intervene so that they might meet to protest his arbitrary behavior. The minister declined their invitation.

Pakenham worked quietly, but vigorously, to defeat the prohibitions. On 26 February 1841, he confided gleefully to the British Foreign Office in London that "the licenses to import prohibited goods are illegal, but I am humbly of the opinion that they are quite legal enough to bind the Mexican government. Although Congress probably wished to act otherwise, powerful political pressures persuaded it to decree Arista's licenses illegal. According to a jubilant Pedro, the outcome was entirely predictable: "It could not happen any other way, as there are at present many enterprises and projected factories for making yarn in various parts of the Republic and associated with these can be found persons of consequence for their wealth and connections.

The wave of protest that followed the brazen attempt to evade the prohibitions weakened Bustamante's government and helped to create the climate of political discord that led to Santa Anna's successful revolt in the autumn of 1841. On assuming power in October, one of Santa Anna's first acts was to order that all cotton yarn and cloth brought into the country because of Arista's licenses be burned in the ports or wherever else they might be discovered. Santa Anna further recognized the interests of the textile manufacturers in December 1842 by granting them corporate status as the Junta de Industria.

Despite these demonstrations of sensitivity to the special needs of the industrialists, however, this caudillo was susceptible to the same forces that had shaped economic policy in the government he replaced. Veiled threats and intimidation from the British foreign minister (mixed with promises of rewards), outright bribes from enterprising importers, and the most powerful inducement of all, the bankruptcy of the National Treasury, tempted Santa Anna to forget his commitment to protectionism. As early as March 1842 the influence peddlers were back at work: "Morphy is the secret Minister of his S.E. El cojo and is doing enough ... he is entrusted by Drusina, Rubio, etc., to effect the reinstatement of Arista's licenses that caused such an uproar and was annulled by the Congress ... in my opinion Pakenham is assisting them greatly, as his interest is in lifting the prohibitions.

Drusina and his associates managed to strike a deal with Santa Anna whereby they were allowed to import up to 700,000 pounds of yarn with duties ranging from 2 r. to 4 r. per pound. It was the first step toward a subtle reordering of the political economy of textile manufacturing and a matter that portended grave consequences for factories such as Miraflores. In July 1842 Pedro assessed the situation:

Last year the revolution and in this year the fear that the new tariff will lower prohibitions, linking them to a scarcity for the manufacturers, made the price for yam fall at the same time that cotton remained high, now the former did not recover and the latter stays high. If this continues, the outlook for the balance of the year for this establishment will be bleak and if there is any profit it will be miserable.

Implemented late in 1842, the new tariff schedule pleased no one. Mexican manufacturers worried about the relaxation of prohibitions. Pakenham protested that high duties on imports damaged British trade interests and warned that "such an unfriendly line of policy towards England might have grave consequences at a time when the United States had begun to look hungrily toward Mexican territories. After assessing the political risks a careless attitude toward the prohibitions would carry, Santa Anna's government chose to ignore British threats. It revoked the permissive 1842 Tariff and replaced it with the restrictive Tariff of 14 August 1843. But once again, the ink was hardly dry on this latest decree before the influence peddlers began conspiring to undo it. In October 1843 José Pablo warned:

Mr. Pakenham, with the aid of Ml. Escandón, has tried to secure from the present corrupt administration a treaty whereby Mexico is obligated to admit English goods under certain tariff schedules, and not to change these tariffs for a good number of years!! They promised El cojo $250,000-and V. assures me ... that he had already received that sum-all was prepared when Rubio succeeded in undoing it-or complicating it with a thousand works, because that was convenient to his own interests [Rubio had acquired an interest in various textile factories in Mexico City and Querétaro].... Rubio himself communicated this to V. in confidence.

As rumors of the proposed treaty leaked out, the manufacturers hastily reminded Santa Anna of the political costs a betrayal would entail. José Pablo described the confrontation in November 1843:

According to the reports that I go about collecting from all parts, it seems that the industrialists of Mexico-of this Republic-are very resolved to confront the government in case it wishes to sacrifice their interests to those of England. I have been told that they have even warned the Saint [Santa Anna] that in case those interests are not maintained, they will make another revolution to overthrow him. By this I can understand that the manufacturers are going to have to pass through a crisis, and that those who survive it will afterward find a more advantageous situation, and even more so, as some of them inevitably will have to shut down their factories for lack of money.

Faced with an ultimatum, Santa Anna stopped dallying with Pakenham. The debate over protectionism lapsed into an uneasy stalemate, but opposition to the privileged status of the textile industry continued to grow. The importers and their political allies in the liberal camp were becoming increasingly strident in their denunciations of protectionism. Pedro attempted to reassure Gregorio José in September 1845: "The disposition that you observe in the importers against the manufacturers and the bondholders is nothing new, as this conflict has always existed and each one works for his interest."" After legislation to reform the tariff schedule and to abolish the prohibitions narrowly failed passage in Congress in the autumn of 1849, Domingo Ansoátegui reassessed the political outlook for the textile industry:

About this business it is not likely they will return to deal with it until next year, and then we will have some more defenders among the deputies, even so we will have an increase in the number of enemies among the senators; nevertheless, as here all questions are not seen by the general interest, but by that of party, no one can predict. Among the deputies we have Alamán, Olasgarre, Palomar, and others, some interested and others decided in favor of the industry that will make a good and well sustained defense. Mr. Pedro Echeverria, who was among those who voted against the industry, was in favor. He is a committed enemy of the monstrous project and will attack it.

Although liberals failed in their efforts to reform the tariffs, opponents of industry began to tax it as a means to compensate the Treasury for revenues lost because of the prohibitions. The 1850 Congress imposed an annual tax of 1.5 r. per loom. This was doubled in 1853. Textile manufacturers were required after 1850 to pay an annual tax of 1.5 percent on the value of their buildings and machinery. As the decade progressed, friends and foes alike taxed whatever property they could find, and textile factories were notoriously difficult to hide. In 1857 the liberal Supreme Court justice Juárez approved a tax reform that lowered the assessment on industry to 0.5 percent, but the following year the conservative General Miramón tacked on an additional I percent assessment. These charges were increased to 10 percent in July 1859. Then came new property valuations and requirements that taxes be paid one year in advance.

State and local governments levied a variety of taxes on industrial establishments. Although they were a costly nuisance, property taxes were not as detrimental to a factory's operations as were the alcabalas. These were discriminatory taxes that worked to protect local producers from outside competition. States and municipalities with textile factories or artisan workshops charged a tax on each piece of manta or pound of yam that entered their jurisdiction from outside. The alcabalas for textiles usually was set at about 8 percent of value, although Puebla's was fixed at 12.5 percent. The imposition of such taxes is a plausible explanation for Miraflores's loss of lucrative markets in Zacatecas, Guadalajara, and San Luis Potosí.

Because of vacillations in government policy toward the textile industry and the consequent harm inflicted on their interests, textile manufacturers who were burdened with increasingly unprofitable enterprises attempted to squeeze an indemnity out of the state. The Martinez del Rios felt that such compensation was perhaps the only way to rid themselves of Miraflores. The first serious discussion of an indemnity surfaced after promulgation of the Tariff of 1842. Manufacturers proposed that the Mexican government should borrow from Great Britain to purchase their factories. As the British were unwilling to lend more money to Mexico, even in exchange for liberal trading concessions, the project was abandoned. In 1846 a new proposal for the same purpose took shape. The more knowledgeable political observers conceded that such an irregular undertaking could be realized "only when Morphy has his padrino in the Candelero [that is, when Santa Anna returned to power]." As the lot of factory owners worsened after the war, the idea of an indemnity surfaced again in 1849 and 1850. Because such an undertaking would require not only the complicity of politicians but also a commitment of financial resources quite beyond the capacity of any Mexican government, the indemnity was doomed to remain a study in fantasy.

The contraband trade is treated here as a political variable because such activity naturally follows a government's attempt to circumvent market forces. The greater the discrepancy between natural conditions of supply and demand and the artificial conditions prescribed by the state, the greater must be the coercive capacities of the state if its policies are to be effective. Mexican textile manufacturers could not produce yam or cloth at cost levels reasonably close to those of foreign manufacturers. The raw cotton needed to produce a pound of cotton yam often cost $0.30 a pound or more delivered to Miraflores. The finished Mexican product cost about $0.40 a pound. English yarn could be delivered in Veracruz for $0.21 a pound. Whatever their predisposition toward protectionism, no Mexican government of this period had the power to override market forces of this magnitude. Higher tariffs only encouraged more smuggling. The collapse of each government (there were thirty-three between 1840 and 1860) opened the way for successive escalations in the scale of illegal activity.

It is difficult to measure objectively the impact of contraband textiles on enterprises such as Miraflores. The periods in which contraband traffic was heaviest do seem to coincide with the times in which the factory's management found it most difficult to market textiles-1842 to 1844, 1847 to 1850, and 1857 to 1864. The loss of Texas after 1836 left Northern Mexico exposed to overland trafficking in textiles from the United States. At the same time, the national government's growing weakness facilitated the establishment of large-scale smuggling operations based in the West Mexican Ports and mining towns. The declaration of war with the United States in 1845 disrupted the contraband trade, as smugglers were reluctant to move goods that might be caught between advancing armies in Northern Mexico or be intercepted by blockading naval units from the United States.

Nor could complacent Mexican officials continue without grave risks to overlook clandestine movements of men and materials in areas under their jurisdiction. The blockade and invasion of Veracruz early in 1847 isolated the center of the country and created, briefly, the artificial scarcity that Mexican industrialists longed for. Once Mexico City had been taken late in 1847, however, the way was open for a flood of foreign manufactures. The national government disintegrated and for a time no successor could be found to impose any level of control. With the loss of California and New Mexico, it became progressively easier for smugglers based in the United States to penetrate the Mexican market. For a brief period after Santa Anna's return to power, contraband activity seems to have declined because of increased vigilance. After 1858 contraband poured into Mexico as the nation suffered a generalized political breakdown.

Apart from making trade in prohibited articles less difficult, the Civil War and the French intervention damaged Mexican and industrial interests by disrupting communications and by provoking a serious labor shortage (workers were conscripted by both sides). Of all these factors, Martinez del Río Hermanos insisted that unfair competition from foreign products provoked its bankruptcy and the "ruin of manufacturers. What Martínez del Río Hermanos and most other owners of textile factories were reluctant to discuss publicly was why their products were so noncompetitive.

The Political Economy of Cotton

Cotton was cultivated in the lowlands of Veracruz long before the Conquest of Mexico. Through the 1850s, this region remained the primary zone of cultivation. Other areas, which produced less cotton and which were disadvantageously located for the manufacturers of Central Mexico, included narrow portions of the Pacific Coast near Acapulco and Tepic and well-watered river valleys in the deserts of Durango and Coahuila in Northern Mexico. New Orleans supplied most of the foreign cotton legally imported through the ports of Tampico and Veracruz, although some cotton from Texas moved overland along with other classes of contraband. Miraflores also occasionally consumed cotton shipped from Guayaquil, Ecuador.

The cost of domestically produced cotton textiles in Mexico was a function of cotton prices, as the raw material accounted for one-half to four fifths of the cost of the finished articles. To encourage the development of Mexican agriculture (and to keep the cotton planters appeased), manufacturers were obliged by law to purchase all cotton from domestic sources. Despite the incentive of high prices, Mexican production chronically fell far short of demand. Table 30 shows how the changing cost of raw materials affected overall production costs. Whereas cotton accounted for less than 6 percent of the cost of manta woven in Puebla in 1800, it made up 73 percent of the costs of manufacturing manta in 1843, undoing many of the savings introduced with mechanization. Raw cotton made up 70 percent to 80 percent of the expenses incurred in the manufacture of cotton yam and about 50 percent of the costs of manufacturing cotton manta at Miraflores in the 1840s. The procurement of cotton required more attention on the part of Martinez del Río Hermanos than any other aspect of the factory's operations. The 800,000 to 900,000 pounds of cotton consumed annually by Miraflores usually cost between $200,000 and $300,000--a sum that exceeded the cost of the machines that spun and wove the raw material into finished products. Ordinarily, cotton purchases were financed with generous credit terms, but large sums of cash in advance were required to make the most advantageous deals. Sometimes no cotton could be obtained at any price, and Miraflores and other mills were obliged to make costly shutdowns.

Whether acquired from Veracruz planters or from Mexico City speculators who had obtained special import licenses, cotton cost manufacturers (and consumers) dearly. Table 31 lists estimated and reported prices for one-hundred-pound bales of cotton in Mexico City, Puebla, and Veracruz. By way of comparison, cotton from the United States could be delivered in Veracruz in 1845 for $12.00 per quintal. During October and November 1851, cotton in New Orleans cost $7.50 and $8.00 per quintal. Import licenses and other duties, transport costs, and fees to middlemen might triple the price of cotton as it moved from New Orleans to Mexico City. In November 1851, shippers charged 10 r. ($1.25) per tercio to carry cotton from New Orleans to Veracruz. Moving cotton from the coast as far inland as Puebla might add $4.00 to $7.00 per quintal. The whole trip from Veracruz to Mexico City probably increased costs by $10.00 per quintal (including charges by the arrieros and formal and informal duties charged by interior customs houses).

Regardless of how cheaply or efficiently their machines and their work forces performed, the high cost of cotton made it impossible for Mexican factories to manufacture textiles at competitive prices. What accounts for the failure of the factory owners to free the market of the costly prohibitions on cotton imports that made the industry ruinously noncompetitive? First, in ideological terms, the monopolization of any commodity, no matter how expensive and inefficient the results, was consistent with the traditional organization of the Mexican economy. Second, in practical terms, a free trade in cotton would undercut broad support for protectionist policies (that is, the ban on cotton yarn and cloth imports), which gave manufacturers and their enterprises a privileged status. If manufacturers deserved protection from foreign competition, then so did agriculturalists whose enterprises were even more expensive and inefficient when compared to the standards of the world market. Besides cotton, imports of staples like tobacco and cane sugar distillates (aguardiente) were banned because producers could not compete in a free market.

As early as 1821 the Veracruz planters demonstrated their political clout by persuading Iturbide to decree a ban on the import of raw cotton. Well-organized, with practical experience doing business with an overtly monopolized commodity like tobacco, the Veracruz planters had the additional advantage of close ties with Santa Anna, the dominant political figure in early national Mexico. Following Santa Anna's conservative coup in 1835, the Law of 18 August 1836 prohibited the import of raw cotton (even before the prohibitions on imports of cotton cloth were reinstated). In the summer of 1842, after his regime had granted licenses to import limited quantities of yarn, many observers expected Santa Anna to lift the prohibition on cotton imports. That was not the case-because "doubts caused by fear of some movement on the coast" obliged Santa Anna to treat planters with deference. There was already the precedent of his own revolt in 1841. Such was the influence of the planters that the ban on raw cotton imports was incorporated as Article 67 of the Bases Orgánicas, the conservative constitution adopted in 1843. Under authority of the Law of 12 April 1843, a few special licenses to import raw cotton were granted, but these were limited to the privileged few who had influence with Santa Anna. The procedure for obtaining these permits remained clandestine and semisecret. Among the firms able to deal with el cojo in such a sensitive matter was the politically experienced commercial house, Agüero, González & Company, which imported seventy thousand quintales for a fee of $6.00 per quintal.

Even after Santa Anna was ousted in 1844, the planters obstructed attempts by General Herrera's government to loosen the prohibitions on cotton imports. Not until after January 1846, when Mexico desperately needed funds to finance the war effort, did Congress and the chief executive freely make available an unlimited supply of permisos de importación de algodón at a cost of $ 10.00 per quintal. Generous discounts were advertised as the war progressed. After the war, the prohibitions on raw cotton imports were reinstated (by a liberal government) and no new permisos were issued.

Although the cotton growers were a powerful political force, the textile manufacturers included many of Mexico's wealthiest and most influential citizens. But unlike the growers, who worked together to achieve their purpose, the manufacturers were not united by a common purpose. Estevan de Antuñano, who worked tirelessly to promote the textile industry, failed time after time to mobilize the manufacturers in support of proposals to lift the prohibition on raw cotton imports. In 1840 his campaign to persuade the Bustamante government to adopt a more liberal policy was opposed by other manufacturers, who benefitted from the scarcity of cotton. The manufacturers as a group did not seek an open market in cotton because individual manufacturers were the principal speculators in this commodity. As early as 1841, Pedro was moved to comment, "Cotton. This article continues to present a vast field of speculation."

Whereas risk aversion initially kept many factory owners from buying large quantities in advance, the practice of buying small shipments to meet current requirements left them at the mercy of speculation-minded suppliers. By necessity, then, manufacturers became speculators as they sought to acquire "comfortable" inventories of cotton for their factories. The costs of these purchases against future cotton prices determined the overall profitability of their manufacturing establishments. For example, the purchase of a large supply of cotton at lower-than-average prices in 1844 helped Miraflores turn a $50,000 profit." Few manufacturers wished for cotton prices to fall quickly. Lower prices would destroy the value of supplies of raw cotton already purchased and inventories of yarn and cloth manufactured from expensive cotton would be transformed into permanent liabilities. These losses might bankrupt any mill owner.

Martínez del Río Hermanos's speculations in cotton between 1846 and 1851 illustrate the practical considerations that enticed manufacturers to enter into progressively larger speculations. Unwilling to risk his firm's shaky finances in a costly speculation with imported cotton, Pedro outlined his scheme for securing the cotton Miraflores needed for the summer of 1846:

I did not wish to obtain any permisos de algodón, first, because it is not urgent and we must not make any disbursements for an end so far in the future, and, second, because knowing this country, I was hoping to get them more advantageously than the government was giving them, and that is what happened, as before the suspension [of payments to the public debt] they offered them to me at a 25 percent discount. Besides, I was hoping to trap the Güero [Rubio] in one of his fixes, in order to get enough to last the rest of the year with a comfortable price and terms ... but all has come undone with the suspension and the blockade ... but still I am resolved to secure it [the cotton] here, if I can get it reasonably, to avoid having to make drafts on New Orleans for that and for the large advance we would have to make for permisos, transport, etc.

Sticking to his plan, Pedro arranged in June 1846 to buy two thousand quintales from Rubio at the "convenient" price of $27.00 per quintal, but within two months Miraflores had consumed that supply and prices for cotton had risen. As a stop-gap measure Martínez del Río Hermanos purchased eight hundred quintales from Manuel Martínez del Campo at $ 31.00 per quintal. As Miraflores used seven hundred quintales per month, more cotton had to be found quickly and that would be costly. Pedro's conservative approach to the problem of cotton had miscarried. With that experience in mind, Martínez del Río Hermanos and a few well-placed associates were quick to take advantage of the government's plight in September 1847 to purchase a large quantity of permisos at very low prices.

Within Mexico, Miraflores's most dangerous rivals were fifteen textile mills in Puebla, which accounted for 40 percent of the industry's output in 1845. Table 31 compares the costs of producing manta in Puebla's largest factory, La Constancia, with production costs at Miraflores. Labor and other costs (excluding cotton) per unit were about 50 percent cheaper in the Puebla factories. Although La Constancia employed more workers than Miraflores, the majority of Puebla's factories were small enterprises (ninety to nineteen workers), technologically primitive and labor-intensive, and perhaps better-suited than Miraflores to the conditions of the Mexican market. As an additional advantage, Puebla's manufacturers tended to have cheaper and more reliable access to cotton supplies in Veracruz. By raising raw material supply costs for Puebla's factories, Martinez del Rio Hermanos could make Miraflores's products more competitive.

Working in combination with Smith & Duncan of Puebla, Viya Hermanos of Veracruz, and Guillermo Drusina and Manuel Escandón Mexico City, Martinez del Rio Hermanos began a bold campaign in 1849 to monopolize the supply of cotton in Mexico. As this syndicate owned all remaining prewar import licenses, they could control the inward flow of foreign cotton. As Pedro explained to J. L. Lemmé in November 1849, "The business in which we have entered is not a monopoly conceded now by the government, but incidental from past circumstances." He boasted that the combine had acquired all but one thousand quintales of the Veracruz harvest.

Although his claim was exaggerated, the group did control much of the domestic supply of cotton--enough to interest another group of seasoned speculators. Manuel Lizardi and Cayetano Rubio offered to trade $1 million in government debt issues for the cotton. Martínez del Rio Hermanos proposed instead to trade Miraflores, but a factory was not as lucrative as the cotton needed to keep it running, so nothing came of these negotiations. To keep cotton prices high Martinez del Rio Hermanos refused to use its import licenses "until the opportune moment." Although it already had stockpiled nine thousand quintales of cotton at Miraflores, the firm ordered its agents in Veracruz and Puebla to purchase all the cotton that came on the market there. Martinez del Río Hermanos also attempted to buy the crops in Acapulco and San Blas. In Mexico City Domingo Ansoátegui gloated, "The cotton speculation is turning out brilliantly." In Veracruz, Gregorio José reported, "Here the people are very alarmed with our purchases ... the thing looks good. Later, Domingo confirmed, "The Pueblans have been hoping to obtain cotton in Veracruz--but now they have learned it will not be possible, as they have been unable to fill the orders that have gone to this port ... and soon they will begin to fall in our pockets. That left only one other concern. Gregorio José warned, "I fear the jealous ones will make some cheating deal or intrigue in the Chambers to remove the prohibitions on the articles, or authorize the government to emit new permisos since our friend [sic] Otero is working in the Senate to lift the prohibitions. Their fears remained unrealized, perhaps because the liberals were wooing the Veracruz planters. Domingo noted with relief, "They [the Congress] have not been very busy scrutinizing our business with 'permisos.'"

In September and October of 1851 Martínez del Rio Hermanos used its remaining permisos to put together a last grand venture with José Velasco, the owner of El Patriotismo Mexicano. Velasco furnished cash to buy 35,000 quintales of cotton in New Orleans and to transport it to Veracruz. Martinez del Río Hermanos provided the permisos to make the importation legal. When the shipment arrived in the port, Velasco took 10,000 quintales to use in his factory; Martínez del Río Hermanos took an equal quantity for Miraflores. They marketed the remaining 15,000 quintales in Veracruz, Jalapa, and Mexico City. As Martínez del Río Hermanos already had another 3,000 quintales stored in Veracruz, the firm chose to keep for its factory only 8,000 quintales (a year's supply) of the total 13,000 quintales situated in Veracruz. The firm sold the surplus cotton to pay the costs of transporting the remaining 8,000 quintales to Miraflores.

Pedro calculated that of the 720,000 pounds of yarn spun from 800,000 pounds of raw cotton, 320,000 pounds of yarn would be marketed at $0.45 per pound. Mantas would be woven of 400,000 pounds of yam and would sell at $4.00 per piece. After deducting $70,000 for manufacturing costs from the $344,000 earned from the sales of the finished products, that would leave a clear profit of $274,000." Although this sum would appear on the firm's books as a profit from Miraflores, it was more properly the result of a successful speculation in cotton.

For Velasco these speculations were a routine part of his business. Since the 1840s he had monopolized the supply of cotton in the principal cotton-growing town of Tlacotalpam, Veracruz. Although his mill, El Patriotismo, paid $34.00 per quintal for cotton in 1843, his competitors were forced to pay up to $40.00 per quintal. Velasco could afford to pay higher-thanaverage wages in Puebla while still enjoying consistent profits from his factory. Antuñano, who did not speculate in cotton, went bankrupt owing $200,000 (equal to his investment in machines and buildings at La Constancia) to cotton suppliers.

By 1854 Martinez del Rio Hermanos had lost its enthusiasm for speculative ventures in cotton. Its supply of permisos was exhausted. Perhaps it had gambled once too often and lost. Its partners began to insist that the practical solution to the supply problem was not speculation, but cultivation. They urged manufacturers to take charge of growing cotton to assure a cheap and reliable supply of the vital raw materials. The successful Puebla mill owners were those who integrated their factories into vertical enterprises linked directly with cotton estates in Veracruz. José Pablo had long experimented in planting cotton in areas adjacent to Miraflores. Pedro praised his effort in July 1854: "If we succeed in establishing it [cotton] in the valleys neighboring our factories, we will not require more protection.

To promote his ideas, José Pablo circulated in Mexico his 1854 translation of a French work on cotton cultivation. Unfortunately, geography and climate conspired to defeat his plans. A century and a quarter later, Mexican cultivators still cannot fully supply the textile industry in Mexico.


The manufacture and sale in Mexico of domestically produced textiles was an activity that was overtly political in nature. The market for these goods was an artifice of the state. The prosperity of manufacturers depended almost exclusively on the willingness and the capacity of the state to police the marketplace. As the progeny of an interventionist state, the textile industry that was constructed in early national Mexico had more in common with the monopolistic practices of Spanish colonial commerce than with industrial establishments, physically identical, which were situated in Western Europe or the United States. The latter were more properly genuine expressions of economic liberalism; the former clearly were in keeping with the precepts of the older. Consequently, Mexican manufacturers were more likely to be affiliated with the conservative cause. Conversely, opponents of protectionism and of other programs favoring industry were often liberals.

Ironically, when sizable numbers of investors had been drawn into textile manufacturing, the devotion of Mexican governments to the ideal of protectionism had begun to wane after 1841. Worse still, the state showed visible signs of political degeneration, a trend that continued unrelieved through the next two decades. The absolute decline in the market prices for textiles reflected the slow disintegration of the politicized economy in textile manufacturing. This decline is measured in table 32, which lists prices for manta in Mexico City markets from 1800 until 1859. Although empresarios like the Martinez del Ríos invested heavily in new technology to make their factories more efficient (and, they hoped more profitable), the increase in productivity hardly compensated for the fall in prices. Mexican manufacturers were never remotely competitive with their overseas competitors.

The larger implications of this economic failure should be obvious. There was no indigenous "Industrial Revolution" in Mexico. No dynamic entrepreneurial class emerged to transform Mexican society. Rather, as the case of Martínez del Río Hermanos and Miraflores demonstrate, what in other circumstances might have marked the birth of a Mexican bourgeoisie--the formation of a new class of industrial capitalists--here brought only failure. The empresarios and their enterprises were caught up and strangled by the contradictions of an enduring superstructure that stubbornly refused to be superseded. In fact, changes in Mexico would not be thwarted, at least not entirely, but these changes would occur in a manner distinct from the European ideal model. That saga is the subject of the next chapter.

7. The Funds and the Conventions, 1838-1848

Public Debt and Private Profit

Why did Martinez del Río Hermanos invest so heavily in Mexican government debt issues? The most plausible explanation for what seems in retrospect to have been foolish, even dangerous, behavior was that the firm responded to the same stimulus that motivated so many others, namely, comparative advantage. As chapters 4 and 5 showed, there were few opportunities elsewhere. Commerce stayed depressed. Business bankruptcies were the rule, not the exception. Mining was unpredictable. Lending to the private sector was problematic. Why make private loans, which more often than not were destined to finance a larger transaction with the government? If the deal was a bust, the lender felt the consequences anyway. If not, then the borrower, not the lender, reaped most of the profits. The state may have been a bad risk, but so were private borrowers. For the agiotista, the government's debility was itself an asset. Pedro summed up this argument as his contribution to an ongoing debate within the family between 1838 and 1844: "It is important that you judge this country as best for a merchant who wishes 'to make large or small fortunes according to the risks. . . . What would become of us if there were a well-established government swimming in money? For us there would remain no recourse except to give up our accounts and become farmers or mortgage our Capital, like the nuns and friars, to live vegetating on our revenue."'

Nothing else promised the 15 percent to 20 percent annual returns the family expected from its investments. Foreign investments had given poor results. Along with other investors, the Martinez del Ríos suffered the reverses occasioned by the banking collapse that began in the United States in 1835. The year 1836 witnessed the coronation of Queen Victoria and the beginning of a commercial panic in London. In 1840 a great depression weighed down the economies of all the industrializing nations.

For the Martinez del Ríos the worst part of investing abroad was that, although profit rates (that is, interest and dividends) were low, risks remained high. Conventional wisdom dictated that the family should return to proven , more traditional investment practices-in Latin America-not in Europe or the United States. Pedro reminded Gregorio José, a promoter of investments in the metropolitan countries, that "your father told me once in Panama that having his money in the strongbox on the 31st day of December, he made 6 percent on it before midnight; I will apply that to what we have in New Orleans; if we had it in our box the 31st of December we could get with it 9 percent, which is the most it could make for us in New Orleans [in a year]."' And in Mexico, the government was the best of all possible clients:

This government is the best repayer that I know, as, with rogues, fools, and honorable men in the Ministry, one needs only the necessary prudence to not become overextended because of ambition and to enter strictly in those deals that can be sustained without having to pay the interest of the plaza [Mexican money market rates]: The proof that it is a repayer is that the old 15 percent [Fund] is already completed; and that none of the funds today that are being paid have paper [credits] that are less-deserving of payment than those of the 15 percent, as you remember that in it were placed a multitude of orders that cost only 18 percent to 22 percent. 3

Pedro's assessment of the history of the funds through 1839 was correct, but he had learned a false lesson. Because the government had met its obligations in the past, this did not mean that it would or could do so in the future. Equally fatal, Martinez del Río Hermanos never demonstrated the self-restraint essential to keeping speculation in government debt issues at a manageable level. As was the case with Miraflores, the defense of established investments led to costly new expenditures. Once ensnared, the struggle to escape only sucked the victim deeper into the quagmire.

The Funds, 1838-1842

The first great surge of agiotaje, speculation in the public debt of Mexico, began in 1827, when the government used up the last installment of the 1.6 million borrowed from London banks in 1824. The Law of 27 January 1827 authorized the president to negotiate a new loan of up to $4 million, with repayment guaranteed by setting aside $100,000 monthly in receipts from the maritime customs houses and $35,000 monthly from tobacco monopoly revenues. As Guadalupe Victoria's government already had defaulted on interest owed to the London loan, foreign banks refused new loans. The government's only recourse for deficit financing lay with agiotistas at home. So began the orgy of speculation, which was doomed to collapse once the state had mortgaged all its revenues and once it had surrendered all its properties to creditors.

Before that eventuality, there was, momentarily, a Golden Age of agiotaje. Incessant political violence, the separatist movement in Texas, and the "war" with France drastically increased the government's need for income in the 1830s. To pay the Treasury's many creditors, the Banco de Amortización, founded to amortize the worthless copper currency, auctioned the properties of the Inquisition and the Jesuits, which the government had inherited from the colonial regime. Acquisition of these properties and access to progressively larger shares of government revenues gave agiotistas excellent returns on their speculations.

What made it possible for the government to pay its obligations even in such stressful times was that new investors, hoping to duplicate the recent successes of notorious agiotistas, lent the government even more money. An additional factor, rarely considered, which helped to keep the government and the agiotistas solvent was that the wars themselves provided a pretext for the cynical manipulation of Mexican chauvinism and patriotism. Successive governments from 1836 to 1844 used forced loans and voluntary fund-raising drives to finance new military campaigns to reconquer Texas and to erase the humiliation of San Jacinto. No serious campaign was ever mounted, nor was there an accounting of the large sums received for the campaigns. These monies simply flowed into the National Treasury, where they were used to cover routine government operations-including payments to creditors.

The first of the several public debt funds that proliferated in the late 1830s was created by the Law of 20 January 1836. This law set aside a 15 percent quota of revenue from the maritime customs houses (aduanas maritimas) to be used to pay off all existing loans and contracts with the government. Creditors no longer could charge their orders against the customs houses separately, as Drusina & Martinez and other speculators had done in the past. Instead, they were obliged to pool their credits into the 15 Percent Fund. An apoderado, chosen from among the creditors, managed the fund and received the libranzas from the customs houses. Periodically, when a large sum had been accumulated, the members of the fund received dividends proportional to their shares in the fund. By 1839 the government had managed to pay off all but $360,000 owed to the 15 Percent Fund. The paper credits that speculators had introduced into this fund (as a part of a loan to the government) usually cost them 20 percent or less. Because dividends on the bonds were paid exclusively in silver, the profits earned from the 15 Percent Fund had been exceptional. After it had redeemed the bonds issued against this fund, the government created a new " 15 Percent Fund" consisting of about $1 million in credits on government salaries and pensions (vales de alcance). With what was to become a favorite device for obliging reluctant creditors to furnish new loans, the government required all creditors of the 15 Percent Fund to pay in 1839 a 15 percent restoration fee (refacción) as the price for receiving dividends from the fund.

The Decree of 20 May 1837 created a 17 Percent Fund, similar in purpose to the 15 Percent Fund, with a principal of $2,534,020. Of this sum, credits for $1,735,030 drew no interest, but the balance of $800,000 earned 2.5 percent to 4 percent monthly interest-giving the whole a nominal interest equivalent to about 8 percent annually. The Ministry of Hacienda required the creditors of this fund in 1839 to pay a refacción totaling $100,000. Aside from these extortions, the 17 Percent Fund, like the 15 Percent Fund, was a good investment because, even in the difficult years 1838 to 1840, the government faithfully paid dividends of 6 percent to 10 percent several times annually. Speculators might reap additional profits as the market value of bonds issued against this fund increased as it became more certain that the fund would be fully repaid. Bonds from the 17 Percent Fund sold at less than 50 percent of face value in 1838, but by January 1839 they were up to 55 percent, and by June 1839 they brought 65 percent. One had to pay 75 percent for these bonds in August 1840.' Two months later, when the principal had been fully amortized, Martinez del Río Hermanos's partners jealously noted the profits their colleagues in commerce had earned with the 17 Percent Fund: "Montgomery & Nicod must have made plenty, as, besides what they had originally, the former made additional purchases, and then at high prices, and calculating today just what can be made on interest, it is a beautiful profit"'

Agiotistas looked hungrily at the quota of customs duties that would become available when payment to the 17 Percent Fund was complete. This time Martínez del Río Hermanos was determined to share in the profits. In early July 1840 the firm joined a syndicate that included the broker (corredor) Juan Rondero, a second British commercial house (Montgomery Nicod & Company), and Antonio Garay (the alcalde of Mexico City), who had been chosen by the group to negotiate an $800,000 loan with the government.' By combining their resources with those of a second group of lenders headed by Ignacio Loperena and Francisco Yturbé, the syndicate arranged in November 1840 to provide Bustamante's government with a much larger $2 million loan, repayable with 17 percent of the revenue from the maritime customs houses. Pedro explained the details:

The business of the two million. . . was finished at last by Rondero with 45 percent in cash and 5~ percent in paper, with 0.5 percent [monthly] interest on the whole; in it we have taken $250 thousand, of which we ceded $30 thousand to Béistegui, who had asked us for it last year; the balance stayed with Dn. G. A y Terán [Gregorio Mier y Terán]; to whom he will divide I do not know. The assessments of coin must be made as 100,000 pesos monthly; for the paper there is a six-month term; these I believe we can obtain at 12 percent [of nominal value].... Montgomery Nicod & Company told me confidentially that they were going to give a share to the French Minister as well as to the English, and in virtue of the law that authorized the Government [to make the loan], they [the ministers] had made this deal.

Experience taught foreign merchants to use their legations as insurance against the arbitrary and often illegal acts of the politicians. In a memorable case, a group of British merchants in Mexico City lent the government a large sum to outfit a punitive expedition against Texas in the autumn of 1836. The loan was repayable as advance payments "entered" into the books of the Veracruz customs house as credit against future imports of merchandise. Later, when the merchants' goods began arriving in the port, the government reneged on its agreement, ordered repayment of the loan through the ordinary funds, and forced the merchants to pay their duties on the spot.'

The lifting of the French blockade of the Gulf ports early in 1839 brought new opportunities for moneylenders. Pedro described a deal being arranged in March 1839:

Now they are trying to deliver weekly to the Government $50,000 in cash, and various English houses have combined for this purpose, and under the recognition and intervention of Mr. Pakenham [the British minister] they propose a deal for 1,350 thousand; for each $100 in cash delivered, they will deliver also one of these three credits: if in cr9ditos antiguos [preindependence credits], $16; in vales de alcance, $20; and in orders of the 58 percent and 68 percent, $30; obliging the government to pay 1 percent monthly for the cash and to deliver payment in libranzas, which incessantly must arrive from Veracruz. The intervention of Mr. Pakenham in this business makes it very secure and for this reason we have subscribed for $150 thousand. I calculate that our disbursement will not reach the half of that, because the unloading of the ships has already begun in Veracruz and within seventy days the first duties will be paid, so that a great part, and in my opinion at least two-thirds of the cash that we have to pay will come from the same that we are receiving.... I have calculated on the capital that we have to disburse, and supposing the half, that will give us 35 percent [profit]. Until now, those involved are Geaves and almost all the English houses, the Echeverrias, and us. Sillem continues doing business in company with Loperena and now is very uncomfortable, because this deal undoes a proposal they had made in league with Carrera, Mier y Terán, Agüero C. [Agüero, Gonzá1ez & Company.

Heroism against French marines cost the general his leg, but restored to him the political reputation lost after the Texas debacle. To make their deal, the British merchants and their Mexican associates were obliged to use Francisco Morphy as a conduit to Santa Anna. After this group had begun delivering their weekly supplements to the government, they found themselves outfoxed by rivals who shared a more intimate relationship with El Cojo. On 30 April 1839, before "retiring" once more from public office to return (heavily laden) to Manga de Clavo (his hacienda near Jalapa), Santa Anna negotiated with Lorenzo Carrera a $300,000 loan to pay the first installment of the indemnity owed to the French. Carrera and his associates furnished the loan as $200,000 in cash and $100,000 in pagas corrientes (orders) on the customs houses. Because this new arrangement jeopardized repayment of their loan, the English merchants retaliated by suspending payments to the government and asking Pakenharn to intervene. That the government paid competitors with Veracruz libranzas promised to the English merchants was serious enough; that these interlopers had secured twice as much interest was intolerable. With Pakenham's mediation the merchants and the government agreed to compromise. The contract of June 1839 was canceled; the $300,000 already disbursed was to draw 2 percent monthly interest until repaid with 10 percent of the revenue from the maritime customs houses."

When Bustamante's government suspended these payments in September 1839 to force the creditors to pay a refacción, the English again sought out their minister. In a note to the Mexican foreign minister on 8 October 1839, Pakenharn warned of the serious consequences of breaking this second agreement and he protested the inclusion of other debts in the 10 Percent Fund, which had been promised exclusively to repay the so-called English Loan. What especially angered foreign creditors was that these new debts originated from transaction, of (more) dubious legality: "In the time of Santa Anna, continuation of Minister Cortina, and afterward Ministers Lombardo & Tornel, were r4ade another series of deals that I will not say were crazy, but infamous, which weighed on 56 percent of the maritime customs houses. After heated discussions, the English merchants agreed to permit the inclusion of these credits in the 10 Percent Fund in exchange for receipt of all the special sales taxes (derechos de consumo) collected from English merchants. The following year, in September 1840, the government reneged on its agreements and diluted the 10 Percent Fund by issuing and marketing additional 10 Percent Fund bonds. Although the obligations of this fund were considerable, these bonds remained highly regarded because they were backed by a mortgage against the Fondos de los Californias, an ensemble of valuable estates once owned by the Jesuits. Since trade was brisk for most of 1839, about one-half of the $300,000 in principal owed to the English Loan had been repaid by July 1840. The fund's apoderado, Pedro Ansoátegui, predicted that the balance would be paid off before the end of the year if the government abolished the 15 percent special sales tax. To avoid paying the tax, merchants in Veracruz refused to ship their goods to the interior and, instead, kept them under bond in the Port's warehouses. The government's heavy-handed attempt to raise revenue by putting the squeeze on merchants had paralyzed commerce and, inadvertently, disrupted its own income sources and those of its creditors in the public debt funds. Even with such setbacks, the government continued to pay dividends, albeit at a slower rate, to the 10 Percent Fund, and the market value of those bonds improved, rising from 35 percent in July 1840 to 55 percent by November 1840.

The 8 Percent Fund originated in credits owed from what observers charged were "loco" transactions approved by Santa Anna's minister of hacienda, José Gómez de la Cortina, during the French blockade. To pay off $2.2 million in contracted debts, Santa Anna set aside 12 percent of customs duties and issued bonds earning monthly interest of up to 2 percent. Unlike the 15 Percent and the 17 percent funds, this 12 percent quota had not been authorized by law. The creditors had collected about 11 percent of the principal when, in September 1839, Bustamante forced them to pay a $40,000 refacción and reduced their quota to 8 percent. The apoderado and principal creditor of the 12 Percent-turned-8 Percent Fund was Agüero, González & Company. Eight Percent Fund bonds sold at about 35 percent of value in July 1840. By November 1840, 37 percent of the $2.2 million in principal had been amortized. Congress created a new 12 Percent Fund in the summer of 1841. The nominal purpose of the fund was to amortize the copper currency. Because Bustamante's government was on the verge of collapse, it was obliged to concede generous terms on this debt issue. The bonds for the 12 Percent Fund, earning 0.5 percent monthly interest, were marketed for 46 percent in cash (three-fourths in copper coin; one-fourth in silver coin) and 54 percent in paper credits of any category.

Considerations apart from a simple profit motive encouraged agiotistas to enter this venture. Pedro reported that Martínez del Río Hermanos had subscribed for $25,000 in cash because "this I have not considered properly as a business deal, and I have entered it only to help nourish this sick one for seven months and to extract in this time all possible from the other funds. Because they rightly feared what might follow, most Mexico City speculators maintained a high regard for Bustamante's government. Although his government had forced creditors to pay refacciones and had reduced the quotas for certain funds, agiotistas generally regarded those acts as a legitimate response to the excesses of the previous administration and as essential to the government's survival. Bustamante and his minister of hacienda, Echeverría, were well liked because, under difficult circumstances, they had repaid many credits. Table 34 is a summary of the 8 Percent, 10 Percent, 15 Percent, and 17 Percent funds, showing payments applied to principal as of July 1840. Table 35 lists Martínez del Río Hermanos's holdings in the funds as of July 1840.

In 1840 government debt issues accounted for $68,268 of Martínez del Río Hermanos's combined assets, which totaled $691,284. Although these credits made up only 9.8 percent of the firm's assets, they produced $37,878 (44.9 percent) of the gross profits of $85,798 reported by the firm. It was with these numbers in mind that Martinez del Río Hermanos began a new round of aggressive speculations after 1840. Table 36 lists public debt issues owned by the firm between 1839 and 1843. What the firm's partners failed to appreciate, however, when they began these new investments in public debt issues, was that the political economy of agiotaje might change radically in the years to come.

The problem all agiotistas would have to face sooner or later was that government debt after independence had continued to increase more rapidly than income. Estimates of the government's disposable income for 1838 to 1842 are listed in table 37. Revenue from the maritime customs houses constituted the government's primary source of income. When the total amount of duties declined after 1840 and when the government began forcibly after 1841 to expropriate progressively larger shares of mortgaged customs quotas, creditors were obliged to war on one another for control of those dwindling resources. Nor were the agiotistas in Mexico City the only group dependent on the state. To pay its creditors the Bustamante government reduced the size of the army and the civil service. These groups waited impatiently, along with out-of-favor power brokers like Morphy, for a chance to recoup their losses.

The Mexico City empresarios were the backbone of the Bustamante regime; many of its principal figures, like the Echeverrias, were themselves merchants and moneylenders. Even so, when in the summer of 1841 it was apparent that the old regime could no longer sustain itself, an important faction of the Mexico City group abandoned Bustamante to begin making an accommodation with Santa Anna. The most prominent defectors were the powerful empresarios who owned the Empresa del Tabaco and who were desperate to return the monopoly to government administration under favorable terms. In the spring of 1841 their several attempts to persuade Bustamante's government to buy back the monopoly had failed. The devaluation of the copper currency that consumers used to buy tobacco products, the inability of the Bustamante government to implement an effective plan to amortize copper, and the prospect of being bankrupted if they could not cancel their five-year contract with the government encouraged the company's shareholders to betray an administration that had treated them kindly in the past. Observers described the empresarios' antics in the summer of 1841:

Our Minister of Hacienda [Manuel Canseco] was placed in the chair by the E. de Tabacos, as it believed he was the most convenient, and in little more than a month he gave it $514,000; such that in the first six weeks of his Ministry he spent nearly a million pesos, with which D. Javier [Echeverrial could have managed four months; Now, the E. is draining the corpse and far from helping is trying to squeeze out the $300 thousand it has left there; our man [Cansecol is now in the worst fix and has not stopped making his blunders. The past week he called the apoderados of the fundsand asked them for alms and they gave him $100,000, which they divided in fourths between each of the funds and which will come out of the first libranzas that arrive; this will retard the dividends a little more. This occasion gave me an opportunity to deal for the first time with S. E. [Canseco] who seems to me a poor man, very good as a mayordomo of a convent, but in no way fit for the position he occupies.

The 25 Percent/26 Percent Fund and the British Conventions, 1842-1848

The reaction that agiotistas feared might accompany Santa Anna's return to power was quick to materialize. The strongman from Veracruz assumed the presidency on 10 October 1841. The following day he ordered the suspension of payments to the 8 Percent, 10 Percent, 12 Percent, 15 Percent, and 17 Percent funds. The Decree of 14 October 1841 lifted the suspension temporarily, but reduced the quota of import duties for each fund by one-half. At the same time, Santa Anna began to increase dramatically the size of the army and the bureaucracy.

Apart from the army and established corporate interests such as the church, the dictator's political coalition for the 1841 revolt incorporated other diverse and heterogeneous forces. Staunch supporters of the old order, Veracruz planters wanted protection for sugar, cotton, and tobacco. Import merchants in Gulf ports were liberals and advocates of free trade, but they joined the conservative movement to protest profiteering in the public debt. Normally, the port merchants paid customs duties with libranzas. The government endorsed these libranzas to the creditors of the funds. Importers viewed the funds as a fraudulent device used to enrich rival merchants and empresarios in Mexico City.

The last important block in the Santanista movement of 1841 consisted of regional interests committed to changing the pattern of government expenditures to shift the flow of resources away from the center and toward themselves. Once Santa Anna had taken power, the coalition began to dissolve--but not before launching a virulent attack on the public debt speculators. Before Santa Anna's return, port merchants had been required to write separate libranzas for each of the funds according to the prescribed quotas. Afterward, they won a reform of this procedure. Santa Anna's government required the funds to select an apoderado general to receive all the libranzas from the customs houses. Apoderados for each fund accepted their share of libranzas from the apoderado general and distributed the proceeds among the individual creditors. Because the apoderados already charged a 1 percent commission and now the apoderado general charged a 0.5 percent commission, the new procedure slowed down the payment process and increased overhead costs for the creditors.

Santa Anna intended to keep his regime solvent by reducing payments to the national debt. Since the 16.67 percent quota for the foreign debt owed to Great Britain could not be set -aside except at grave political risk, that left the public debt funds as the only targets of opportunity. Fearing Santa Anna's designs, the apoderado general, Gregorio Mier y Terán, and the apoderados-Agustín Prado for the 15 Percent, A. J. Atocha for the 12 and Pedro Ansoátegui for the 10 Percent--published on 9 February 1842 a protest denouncing any scheme to set aside the mortgages on the "maritime customs houses or to alter the "method and practice" the government itself had established for the funds.

Ignoring those protests, Santa Anna suspended payments to the funds on 19 February 1842. The suspension continued unrelieved for the next few months. Under such strains, the delicate consensus that united the agiotistas began to splinter. Rivalry and petty jealousy always characterized the agiotistas behavior, yet they had in the past manifested a rudimentary collective consciousness, confronting the government as a bloc and benefitting as a whole from the unanimity of purpose. Predictably, the split occurred along lines of nationality. The more powerful native creditors began to make separate deals for themselves. They could bargain efficiently with Santa Anna; family connections, political promises, and appropriate gifts brought favorable resolutions from politicians at the highest levels. The cooperation of the career civil servants who managed routine government affairs was secured through other arrangements. By law, appointees to posts involving fiscal responsibilities had to have a fiador guarantee their good behavior in office. Empresarios like the Rubios, the Escandóns, and the Fagoaga4, put up fianzas (bonds) for dozens of officials, ranging from the head of the customs house in Tampico to the tax administrator of Tlalpam. In contrast to the proven Mexican model, foreign merchants like the Martinez del Ríos failed to develop useful relations with either the politicians or the bureaucrats, trusting instead that their legations would look after their interests.

Santa Anna announced in July 1842 that payments to the funds would be returned--under certain conditions. The combined 8 Percent, 10 Percent, 15 Percent and 17 Percent funds might receive 15 percent of customs duties if each agreed to pay a $40,000 refacción. Because the new quota would not provide enough revenue even to pay interest on the principal owed, the creditors listened to the proposal without enthusiasm. Many of them were shocked to learn three days later of a new decree that lifted the suspension of Payments to the 15 Percent Fund. Only after this fund had been paid in full, were the other funds to receive payments from that quota, according to the order of their seniority. The special deal for the 15 Percent Fund was the work of Ignacio Loperena and Antonio Garay, agiotistas who had intimate associations with Santa Anna and who had invested heavily in that fund.

Through the ubiquitous Morphy, Santa Anna made it known to the others that a $360,000 refacción would be the price fixed for returning to them a 31 percent share of the maritime customs duties. In late September 1842 Pedro described the inconclusive negotiations being carried on between the creditors and the government:

Eight days ago, by invitation of the government, the creditors of the funds met in the Lonja; here the apoderado general read to them an offer from the Min. of Hacienda, which amounted to a request for a 10 percent refacción in exchange for 16 percent of the customs duties to pay the 8, 10, 12, and 17 percent; It was decided to name a commission; that was composed of Mr. Rosas, Yturbé, and Berruecos, authorizing that they offer for the 8, 10, and 12 Percent funds the sum of $100,000 in order that half the quota of Hacienda and made its offer in those terms, but nothing was resolved. Nicod, as representative for the 17 Percent, told the Junta he would give nothing; he has the hope Mr. Pakenham will receive some instructions about this fund.

Unable to reach a collective agreement with the government, the last vestiges of cooperation between creditors vanished, to be replaced by heated confrontations and controversies. In early October 1842 Martinez del Río Hermanos, along with many other foreign firms, called on the British minister for help: "The Prior [senior partner] in our firm having become a naturalized British subject, we have the honor to solicit your protection.... A large portion of our capital having been placed in jeopardy by the President's decree ... which suspends for an indefinite period the payments on the different funds. The company reported that it had paid weekly subscriptions for the $300,000 loan to Bustamante's government (the 17 Percent Fund) until Santa Anna's revolt in the summer of 1841 reduced its share of dividends. When Martinez del Rio Hermanos tried to withdraw from this commitment, "the head of the Mexican government obliged us to pay the full amount that we had originally agreed on."" Now that same authority refused to pay back the sums owed. Unjustly, "claims of foreign creditors [were] wholly disregarded" while Santa Anna's government made payments to "the Mexican holders of the same bonds and of other paper less formally guaranteed.

At first Pakenharn was loath to support such claims and he suggested that creditors like Martinez del Rio Hermanos should seek recourse from the courts of Mexico. Although he agreed to seek instructions from the Foreign Office, he insisted that Martinez del Río Hermanos must first provide official evidence of Gregorio José's naturalization. Put off by Pakenham, the Martinez del Ríos tried their hand at arranging a Mexican solution. Pedro suggested that "by giving Morphy a good share in which he can interest El Cojo, we can get out of everything at once. The newcomers were slow to appreciate that however useful bribes might be, empresarios needed other, more indispensable resources to ensure the successful execution of such complex maneuvers. When their overtures to Morphy failed, the Martínez del Rios had no alternative except to plead for Pakenham's intervention.

The favored of Mexico needed no legation to intercede for them. Gregorio Mier y Terán paid an $80,000 refacción to secure a private 8 percent quota of customs duties to pay off his $800,000 investment in public debt bonds. Rosas and Yturbé also made private arrangements. Although Pakenham declined Pedro's request that he secure a similar arrangement for Martinez del Río Hermanos's bonds, the show of favoritism by the Mexican government did stimulate the British minister to seek a diplomatic solution for the claims of his nationals.

On 15 October 1842 the ministers of hacienda and foreign relations signed an agreement with Pakenharn that pledged the Mexican government to pay British citizens' claims that had been pending since the 1830s. The three major claims were those represented by Manning & Marshall (assumed by Manning & MacKintosh), J. P. Penny & Company, and Martinez del Rio Hermanos. The claims of J. P. Penny & Company originated with forced loans and the seizure of the company's goods by government troops in Zacatecas in 1836. Martinez del Rio Hermanos represented the investors in the English Loan of 1839. The $250,000 principal of the Pakenharn Convention was payable with a quota of 2 percent on the Veracruz customs house and 1 percent on the Tampico customs house. The apoderado of this fund, the 2 Percent and 1 Percent funds, was Pedro Ansoátegui. After the convention was signed, Martínez del Rio Hermanos rushed to buy credits that could be included in the new fund. As late as December 1842 this paper sold at less than 50 percent of face value. Referring to the convention, Pedro exclaimed, "This business is better than ever ... because this is more secure, signed as it is as a covenant with the Minister of S.M.B. [Great Britain] and as it is between Government and Government. Mr. Pakenharn has told me that he will not give protection for the other funds and if he does it now for the 17 Percent, it is only for the past denigration of justice, this will serve as a counsel for me in the future."

With Pakenham's intervention, the Mexican government pledged in a second convenio signed on 21 January 1843 to repay the $2.2 million loan of 1840, which formerly had been part of the 17 Percent Fund. To cover the principal, interest, and a 6 percent refacción, the government issued new bonds earning 1 percent monthly interest to replace 17 Percent Fund bonds, which had drawn only 0.5 percent monthly interest. The new bonds were repayable with libranzas endorsed to Montgomery Nicod & Company against an 8 percent share of the maritime customs house. As of January 1843, Martinez del Rio Hermanos's share in the $2.2 million loan and in the 17 Percent Fund and, hence, in the new arrangement was $220,000 in principal and $75,904 in interest. In March 1843 the firm acquired additional 17 Percent bonds by putting up 2 percent of the 6 percent refacción owed by Montgomery Nicod & Company. Nicod, who masterminded the original speculation with the 17 Percent Fund, had by this late date lost patience with the constant intrigues that after 1841 were synonymous with operations in the public debt. José Pablo reported from Paris, "According to what Mrs. Lubervieille has told me, Nicod has gone mad as a result of all the disgusts he has had in his dealings with the government: I suppose in other words this means the 17 Percent.

The 25 Percent/26 Percent Fund, 1843-1849

Nicod was not the only one disturbed by the handling of the 17 Percent Fund. Santa Anna had retired to Manga. del Clavo in late October 1842, perhaps to escape association with the capitulation to British pressures. In early March 1843 he rushed back to Mexico City and reassumed the presidency, a position that his subordinate, Nicolás Bravo, had occupied. Creditors of the funds reported that" Santa Anna has come back furious with all the acts of his substitute ... so that the arrangement of the 17 Percent also enters into this . . . he has given a secret order to suspend it."

Santa Anna and his partisans also looked with disfavor on Bravo's decision to lift the suspension of payments to the 8 Percent, 10 Percent, and 15 Percent funds in December 1842. The caudillo had hoped to pry more cash from the creditors as the price for such action. The best the Bravo government had gotten from them was their acquiescence to another 50 percent reduction of the funds' quotas. But because the British government had forced Mexico to increase its quota for the foreign debt from 16.67 percent to 20 percent of maritime customs duties, the surrender of even $456,000 annually from the fund quotas was not enough to cover the government's deficit. In returning to Mexico City, Santa Anna's intention was to consolidate all the internal debt into a single fund and to finance this with a small quota of customs duties. For that purpose, the Law of 11 May 1843 created a 25 Percent Fund (later 26 Percent) and ordered that the 8 Percent, 10 Percent, 12 Percent, 15 Percent, 17 Percent and all other classes of public indebtedness be paid with a 25 Percent quota of customs duties. As the price of admission into the new fund, all credits were required to pay an additional 6 percent refacción. The alternative to not entering the 25 Percent Fund was an indefinite suspension of payments. Aggregated to the 25 Percent Fund (but exempt from the refacción were $5 million in tobacco debt bonds issued to the Empresa del Tabaco in January 1842. Allegedly, the tobacco empresarios had purchased this preferential treatment for the tobacco bonds (and won a separate concession that transferred to the Empresa the government's shares in the Fresnillo mines) by favoring Santa Anna with an $80,000 bribe.

Most creditors had no choice but to go along with the onerous conditions decreed by the Law of 11 May 1843. Santa Anna did not attempt to force the 2 Percent and I Percent Fund, protected by the Pakenham Convention, into the 25 Percent Fund, but he did challenge the arrangement of Montgomery Nicod & Company's $2.2 million in the 17 Percent/8 Percent funds. Despite strenuous objections from Pakenham, the suspension of payments to the $2.2 million debt (the 8 Percent Fund) continued until mid1844, when the government reorganized it as the 5 Percent Fund. Although Martinez del Río Hermanos looked to the British to defend their interests against Santa Anna's schemes, José Pablo clung to the delusion that the family might yet be able to arrange its own deal. He wrote Pedro from Paris in March 1843 to suggest that:

"if Morphy returns to Mexico could you interest him in [securing] payment of the 17 Percent-The knowledge I have of the people and things of that place make me believe that it would not be so difficult to obtain the payment of this fund under some pretext, singing the mandarins a lullaby, that is to say, giving them a share of the dividends. Santa Anna knows how to squeeze blood from stones and he who knows how to manage Santa Anna will always be able to do business."

Corruption was commonplace. To arrange the consolidation of Mexico's foreign debt in London, the Lizardis bribed Santa Anna with $125,000 and Morphy with $60,000 in October 1843. When his collusion with the Lizardis was detected, Morphy was forced to give half his share to the minister of war, José María Tornel, and to pay lesser amounts to the British consuls in Great Britain. In April 1844 the minister of hacienda, Ignacio Trigüeros, ordered the payment of $214,000 in pagas corrientes at full face value. This class of government debt issues was nearly worthless (selling in the market for less than 7 percent of nominal value), so this transaction gave privileged speculators (and their political patrons) a minimum 93 percent return.

How were Santa Anna and his group spending the profits of public office? José Pablo described their antics: "Los Santos just had another round of gaming and cockfights at the Hacienda del Encero and it is said that the Gang won some $80 D [thousand]!! Morphy was losing an equal sum and finally succeeded in dropping everything; Escandón left winning with 30 to 40,000 [gold ounces].

Meanwhile, the lot of many agiotistas was grim. The combined principal of the 25 Percent Fund in 1843 was about $13.5 million. This extraordinary dilution of the historical ratio between credits and quotas was reflected in the market price for its paper. Early sales of 25 Percent Fund bonds yielded up to 37 percent of face value. By August 1843, no buyer could be found at 35 percent. That stood in sharp contrast to the 60 percent to 65 percent prices for various classes of bonds in 1841. And the situation only worsened. In August 1844 the 25 Percent bonds dropped to 23 percent. In 1846 and 1847 they sold at 18 percent. Declining further in the next decade, their value fell to 7 percent by 1856.

British protection enabled Martinez del Río Hermanos and other creditors with foreign connections to escape total submersion in the 25 Percent Fund. For their holdings in the 8 Percent, 10 Percent, and 12 Percent ftinds there was no alternative but to convert them. Table 38 lists the principal and interest owed the firm in May 1843 for bonds nominally valued at $228,534 (representing a real investment of $94,200). The performance of bonds backed by a British guarantee (the 2 Percent and 1 Percent, and 5 Percent funds) contrasted vividly with the 25 Percent bonds: higher interest rates (12 percent annual versus 6 percent annual), higher market value (80 percent versus 18 percent), and regular dividends large enough to pay principal and interest.

The reaction of Martinez del Río Hermanos to these circumstances was predictable. It made new investments in the 2 Percent and I Percent, and 5 Percent funds, and it tried to get rid of its 25 Percent bonds. José Pablo explained these operations to Gregorio José in 1844:

I am confident that this business [the 5 Percent Fund] will continue very good and that the results will be satisfactory to you.. . because the English Legation does not lose sight of it. For the same reasons I am not in accord with your idea of buying in preference the credits of this government that are less expensive [that is, 25 Percent bonds]: these today are trash and the trash heap is growing every day, in contrast the English guarantee is very well sustained so that John Bull will make of it an exceptional and privileged fund. 42

The Laws of 2 March 1845 and I May 1845 rechristened the 25 Percent Fund as the 26 Percent Fund, but set aside only a 6 percent quota of the maritime customs duties to amortize the fund. Pedro was outraged at this development:

I do not believe that the government had the right to make the law that created the 26 Percent Fund.... Certainly, I was opposed to the majority of those who attended, as they were compinches [sic] of Dn. Francisco [Yturbé, the minister of hacienda] and such hypocrites ... his way [Yturbé] is to work concealed ... all the rest that concurred were not working for more than their own special interests and in no way for the well-being, or peace, or community of creditors.

The following year the government issued more bonds on the 26 Percent Fund, depressing its value still further. In March 1846 Martínez del Río Hermanos tried to sell $100,000 in 26 Percent bonds, but it could find no buyer even at 18 percent. Prominent native agiotistas like Yturbé were not powerless to defend their interests, but given the government's lack of resources it was unrealistic to expect the state to liquidate the public debt--no matter who controlled the government. Therefore, the strategy native creditors adopted was to maximize their share of whatever payments the state did make. Necessarily, that entailed a sustained attack on the privileged status of foreign creditors. José Pablo complained:

Having entered recently as Minister of Hacienda, Yturbé ... enemy of the 5 Percent, the first measure he took was to decree the suspension of monthly payments; this has been sustained until now with the greatest obstinacy; there is no doubt that in doing so his principal object has been to harm that fund and all that is foreign. That is, also suspended are the payments, corresponding to the old English debt!!--that of the 1 Percent & 2 Percent, etc., in a word all--all payments ... as also the Minister of War, Tornel, has found his powder contract suspended, etc., it will not be strange if he [Tornel makes some mischief to rid himself of so vexatious a colleague ... in spite of [Yturbé's] having said to his friends that he would hang before abandoning the post. The extra-avaricious genius of Yturbé is recognized, and his judaism [sic] is so notorious that naturally the whole world believes he will care for his own interests before the public good; and as he has a large sum ($800,000) in the 26 Percent, it is probable that his measures in regard to this fund will not harm that in the least."

As the United States army marched toward Mexico City in the summer of 1847, well-placed agiotistas took advantage of the confusion to cut their losses in public debt speculation. While Santa Anna was instructing his army to retreat, the minister of war, Ignacio Gutiérrez (described by José Pablo as "a cursed and vile creature of Santa Anna"), the minister of foreign relations, Manuel Baranda, and the minister of hacienda, Juan Rondero, were using the $1.5 million church loan of 1847 as a vehicle to rid themselves of the useless 26 Percent Fund bonds. This loan consisted entirely of libranzas drawn against agencies of the church. Rondero, Mier y Terán, Rosas, Yturbé, and other officials skimmed off the choicest of these libranzas, paying 50 percent in cash and 50 percent in 26 Percent bonds. Less-privileged persons paid 67 percent in cash and 33 percent in 26 Percent bonds, without being able to choose their libranzas. Selection was an advantage because libranzas drawn on the poorer church agencies were virtually worthless.

Xenophobes and Xenophiles

With the government's credit rating with the agiotistas impossibly low after 1841, forced loans became a universal solution to the problem of deficit financing. Like other foreign merchants, the Martínez del Ríos used their nationality to win exemptions from the forced loans. When Mexican officials threatened to embargo Miraflores after Martínez del Río Hermanos refused in April 1843 to pay its share of a new forced loan, the British Legation interceded, the matter was conveniently forgotten, and the company was left unmolested for a time.

With the coming of war, a new urgency was added to the state's relentless search for revenue sources. The Decree of 17 June 1847, which announced the imposition of another forced loan, assigned Martinez del Río Hermanos a quota of $2,250--a sum presumably based on the amount of capital that the firm employed in Mexico. Edward Thornton, representing the British Foreign Office, wrote the Mexican foreign minister, José Maria Pacheco, on 7 July 1847 to suggest that this assessment was too high. He pointed out that most of the firm's capital was invested in Miraflores, where it had produced few profits. The remainder of its capital was tied up in government debt issues. Since payments to the public debt had been suspended, those assets could not be counted as capital in circulation.

Despite Thorton's intervention, a detachment of soldiers appeared at the firm's doors two weeks later and announced that Martinez del Río Hermanos had been embargoed and that its properties would be seized and sold. In a panic, Pedro rushed back to see Thornton, who ordered the Mexican foreign minister and the military commander of Mexico City to suspend those proceedings. Pedro gleefully confided in November 1847 that, according to the instructions of the British foreign minister, Lord Palmerston, the firm would be exempt from any forced loan. For Pedro it was a personal triumph: "I am very happy, as much for the savings of money as for the blow dealt to Yturbé and his friends, who were very vainly boasting of having won the principle that the foreigners should not escape.

Given the institutional context of these desperate times, neither the strategies of Yturbé and other native creditors to use personal influence and public office to promote their private interests nor the plans of the Martinez del Rios to protect their investments with British power were unusual or immoral. To stay in business everyone needed insurance against the arbitrary, capricious, and frequently illegal exactions of the government. What was new and dangerous was that public debt speculation had become a zero-sum game. If native creditors prevailed, then foreign merchants who had invested heavily in public debt issues would be ruined, and vice-versa. Initially, creditors with foreign connections were the more successful group, as demonstrated by the higher returns of the conventions in the 1840s. But the battle was far from over. Foreign merchants became favored targets for political harassment by nationalist interests. Decrees in 1842 and 1843 imposed a 4.5 percent tax on foreign capital employed in Mexico, outlawed foreign participation in the retail trade, and restricted the use of public debt issues to pay import duties. There were other proposals to expel foreigners from the interior and to restrict them from the coast. These reprisals were visible evidence that a "community of creditors" no longer existed in Mexico. Inevitably, as the rift dividing the monied class widened, native creditors would join other interest groups in a general offensive to realign Mexico's politicized economy.