Banks and Entrepreneurs in Porfirian Mexico: Inside Exploitation Or

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Banks and Entrepreneurs in Porfirian Mexico: Inside Exploitation or Sound Business Strategy?Author(s): Noel MaurerSource: Journal of Latin American Studies, Vol. 31, No. 2 (May, 1999), pp. 331-361Published by: Cambridge University PressStable URL: http://www.jstor.org/stable/157907

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J. Lat. Amer. Stud.3I, 331-361 Printed in the United Kingdom ? 1999CambridgeUniversityPress 3 3 IBanks and Entrepreneurs in PorfirianMexico: Inside Exploitation or SoundBusiness Strategy?*NOEL MAURER

Abstract. Banks in Porfirian Mexico widely engaged in the practice of makinglong-term loans to their own directors, a practice known as 'auto-prestamo'. Thiswas neither pernicious nor fraudulent. Rather, Porfirian banks behaved as thefinancial arms of extended kinship and personal business groups. These groupsused banks to raise impersonal capital for their diversified enterprises and givetheir partnerships a more permanent institutional base. Investors in these banksknew full well that they were investing in the businesses of a particular group anddeveloped sophisticated techniques to monitor bank directors. However, becauseentry into banking was severely restricted under Porfirian law, the systemconcentrated economic power in a few hands and contributed to Mexico'soligopolistic industrial structure.

The prevalent view in the historical and social science literature has beenthat traditional institutions, particularly kinship-based or personalisedbusiness practices, have been a major impediment to Latin America'seconomic growth. Alternatively, however, some scholars have suggestedthat family ties and personal relationships can compensate for thedifficulty of enforcing contracts, for insecurity of property rights, and forlack of organised markets that characterise pre-industrial societies suchas Mexico in I880.1 Kinship groups and personal networks, however,were not enough on their own to organise and finance the complexeconomic enterprises - factories, railroads, mines, and plantations - that

Noel Maurer is Profesor Asociado del Departamento Academico de Economia,Instituto Tecnol6gico Aut6nomo de Mexico.* I would like to thank Stephen Haber, Gavin Wright, Avner Greif, Ted Beatty, JoachimVoth, and the anonymous referees of the Journal of Latin American Studies for theircomments on earlier versions of this paper. Any and all errors are, of course, entirelymy own.1See especially the work of Nathaniel H. Leff, 'Industrial Organization and

Entrepreneurship in the Developing Countries: The Economic Groups', EconomicDevelopmentand Cultural Change,vol. 26, April 1978; 'Capital Markets and the LessDeveloped Countries: The Group Principle', in Ronald McKinnon (ed.), MoneyandFinance in Economic Growth and Development:Essays in Honor of Edward S. Shaw (NewYork, 1976), pp. 97-z22, and 'Entrepreneurship and Economic Development: TheProblem Revisited', Journal of EconomicLiterature, vol. 17, March I979, pp. 46-64.


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332 Noel Maurerincreasingly characterised the Mexican economy after i880. Tacklingthese projects required long time-horizons and access to sources of capitalbeyond individual family networks. For that reason, kinship groups inPorfirian Mexico ( 876-I9 I ) moved to establish associated banks as soonas the law permitted.Banks, if organised along the lines described by AlexanderGerschenkron, could have solved the problem of capital mobilisation.2But banks in Porfirian Mexico faced a serious problem: they could notevaluate the credit-worthiness of their borrowers. Scarcity of information,however, was by no means unique to Porfirian Mexico. Indeed, all bankseverywhere face the problem of'information asymmetry', meaning thatborrowers have more knowledge about the riskiness of their loans than dolenders. But while all banks face this problem, the way they solve it is aproduct of a specific social, legal, and economic environment.

Kinship groups in Porfirian Mexico established banks in order to drawlong-term and impersonal capital into their entrepreneurial activities.These new bankers reduced the costs of asymmetric information in theI88os-90oos in exactly the same way that American bankers did in theI83os-I86os: they lent other people's money to themselves. Banksadopted a strategy of making long-term loans to individuals and firmsassociated with their directors - 'insider lending' - in response to thescarcity of information that characterised the Porfiriato. Both con-temporary and modern observers have decried this as an example of a pre-modern business mentality that held back Mexican development - or anoutright fraud perpetuated on the Mexican people by the Porfirianfinancial elite. But it was in fact a rational solution to the informationasymmetries inherent to the banking business congruent with the socialcustoms and legal institutions of 9th-century Mexico.The practice of 'auto-prestamo' or 'insider lending' was widelyrecognised at the time, and became a focal point of attacks by critics of thePorfirian system. A contemporary observer accused the banks of thefollowing: 'Loans... were primarily granted to their own shareholders,who were often the most important merchants, landowners, andindustrialists... without much considering... the real chances of collectingthe loan'. Antonio Manero, an important post-revolutionary figure in theFinance Secretariat, wrote, 'Scarcely after opening their doors, the banks'

2 AlexanderGerschenkron,Economic ackwardnessn HistoricalPerspectiveCambridge,I962). Banks as describedby Gerschenkronraised impersonalcapital for industrialfinanceandputativelyestablished ong-term relationshipswith theirborrowingfirms,promoting more efficient and stronger investment. Recent research, however, hasquestioned the benefits provided by these relationshipsin Germany. See CarolineFohlin, 'Relationship Banking, Liquidity, and Investment in the German Indus-trialisation' (Mimeo, I998).


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Banks and Entrepreneursn PorfirianMexico 33 3capital would disappear into loans for their own functionaries'. ErnestoLobato L6pez, an economist writing in 1944, called insider lending 'anunscrupulous way to use individual bank deposits for the personal benefitof the banks' managerial cliques'.3 One particularly incensed critic,writing after the Revolution, alleged that the practice completely negatedany economic good the banks might have done: 'The concessions wereexploited for the exclusive benefit of the concessionaires, since the creditswere granted to board members and friends, leaving industry, commerceand agriculture in the same precarious position as before'.4This article argues that these negative interpretations of Porfirianinsider lending are incorrect. Banks served as 'engines of economicdevelopment', not merely in spiteof insider lending, but actually because fit. They served as the means by which kinship networks channelledimpersonal capital into their businesses, via soliciting deposits in theirregion of operation and selling bank equity in Mexico City and overseas.Lending your own money to yourself is pointless; lending other people'smoney to yourself can be profitable.While profitable, insider lending was not fraudulent: investors in bankstock knew of its prevalence, and knew that they were really buying sharesin the diversified business interests of the members of the board ofdirectors, and they developed remarkably sophisticated mechanisms tomonitor the directors' activity. In other words, Porfirian banks reducedtransaction costs by transforming the problem of information asymmetryfrom one between directors and borrowers to one between shareholdersand directors, thereby lowering monitoring costs. Porfirian banks' entireraison-d'etrewas to attract outside capital into their owners' businessnetworks, and both parties to the transaction were aware of its nature.This article also musters evidence that Mexican banks competed withone another whenever the law allowed. This was despite the presence ofinterlocking directorates, whose nature has been misinterpreted by theexisting literature.5 Shareholders appointed 'outside' directors from otherbanks to the boards of their own banks, in order to reassure them that the'inside' directors were investing their money responsibly and wisely. Thiswas a necessary mechanism in a market characterised by insider lending,since the shareholders and 'inside' directors of a bank did not necessarilyshare the same interests. Selling stock far and wide was, after all, the entire

3 Jose Antonio BatizVizquez and EnriqueCanudosSandoval, Aspectos FinancierosyMonetarios (i880-191o)', in Ciro Cardoso (ed.), Mexico en el siglo XIX, 1821-1910o:Historia econdmicayde la estructura ocial (Mexico City, 1980), p. 433.4 BoletinFinancieroy Minero, 2 April 1921.5 See Mark Wasserman, Capitalists, Caciques,and Revolution:The Native Elite and ForeignEnterprisein Chihuahua,Mexico, 18g4-1911 (Chapel Hill, I984).


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334 Noel Maurerpoint of founding a bank, and bank stock was indeed held relativelywidely. Thus interlocking directorates in Porfirian Mexico should not beequalled with cartelisation of the credit system.These and other techniques for monitoring the activities of thedirectors were both sophisticated and successful. Despite the prevalenceof insider lending the Porfirian banking system was remarkably stable.There was only a single bank failure resulting in losses to depositors overthe entire period, and the Mexican public proved remarkably willing toentrust their deposits to, and hold the banknote issues of, the banks. Thisconfidence in the system ran both ways, of course: Porfirian bankdirectors accepted deposits with little fear of bank runs or panics. In fact,Porfirian banks were highly leveraged, compared to their Americanequivalents of thirty years earlier.In short, there was nothing pernicious about insider lending in and ofitself. What was pernicious was that few individuals or groups couldparticipate in it, because of legal restrictions that made founding a bankdifficult and offered the existing banks a limited degree of protection fromcompetition with each other.6 This article, however, focuses on theindividual banks and their lending policies, which were both rational intheir intentions and economically positive in their effects.

Commercialbankingpracticein the PorfiriatoBanks in Porfirian Mexico extended credit in three ways: by discountingcommercial paper, by opening 'credits in the current account' (rotatingcredit lines), and through loans guaranteed with real property ormarketable securities.7

Discounting commercial paper in Porfirian Mexico worked as follows:a businessman would present a note, but rather than discounting it hewould receive a loan for its face value, leaving the note on deposit at thebank. Often the presenter pre-paid the interest, and allowed the bank tocollect the note rather than paying off the loan. On the surface, thetransaction was different from that in the USA; in practice, it was6 On the effects of limited banking competition on Mexico's industrial structure, seeStephen Haber, 'Financial Markets and Industrial Development: A Comparative Studyof Governmental Regulation, Financial Innovation, and Industrial Structure in Braziland Mexico, 1840-1930', in Stephen Haber (ed.), How Latin America Fell Behind(Stanford, I997), pp. 146-78. For a discussion of the effects of Porfirian banking

regulation on the overall efficiency of the banking system, see Noel Maurer, 'TheBanco Nacional and the Local Banks in Porfirian Mexico', presented at the Colegio deMexico and Centro de Investigaci6n y Dociencias Econ6micas in January and FebruaryI998. The article is currently in the review process at the Revistade Historia Econdmica.7 Walter Flavius McCaleb, Present and Past Bankingin Mexico (New York, I920), p. I39and Charles Conant, TheBankingSystemof Mexico (Washington, D.C., 1910), pp. 47-48.


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Banks and Entrepreneursn PorfirianMexico 335identical. The banks recognised this, listing the notes held in trust as'discounted documents' on their balance sheets, rather than 'collateralisedloans'. Collateralised loans were backed by cash deposits or marketablesecurities unrelated to the underlying transaction.8Under the guise of being short-term self-liquidating paper discountsfinanced quite long-term investments. A client would deposit a note fora simple, often fictitious, transaction, signed by two prominent businesspeople willing to guarantee the debt. Legally, notes had to be signed bytwo 'reputable' parties, but they did not have to be participants in thetransaction. The bank would then advance a set sum on the note. Ratherthan collect the note at the end of the period, or demand repayment fromthe borrower, the bank would simply reauthorise the credit for another sixmonths and collect interest. By 1907 the practice was so common that theBanco Nacional de Mexico (Banamex) saw fit to specify in loan contractswhen credits would not be renewed after six months.9

In the USA, advances of this type were called 'accommodationloans'.10 In Mexico, they were called 'atavistic' and 'incorrigible'.1l It ishard to estimate which percentage of discounts financed real transactionsand which were accommodation loans. One technique is to look fordiscounts denominated in round numbers, on the presumption that actualcommercial transactions would be far more likely to be in odd amounts.12On that basis, only i8 per cent of Banamex discounts in 1898-1903represented real transactions: the rest was probably accommodationpaper. The percentage of odd-numbered paper rose slightly in 1903-7, butonly to z2 per cent.13Since reputation was everything in the business world of PorfirianMexico, no businessman would risk his 'good name' on risky paper.Porfirian Mexico was not modern California: business failures createdstigmas that were extremely difficult to remove. This was not irrationalMexican anti-entrepreneurialism. Rather, it was a rational response to theconstraints under which businesspeople operated. Mexico lackedthorough disclosure laws. Even registered companies regularly floutedthe requirement that they publish balance sheets. This meant thatinformation was a scarce and very valuable commodity. In the absence ofmore intimate contacts, reputation was everything.

8 Conant, TheBanking ystem f Mexico,pp. 47-48.9 Ordinarysession, ActasdeConsejo,ol. 7, 21 May 1907, Archivo Hist6rico del BancoNacional de Mexico (hereafterAHBNM).10 Lamoreaux, nsiderLending, . 2.1 BoletinFinancieroyMinero,30 March I921.12 Lamoreaux, nsiderLending, . 3.13 Valesdescontadosnla cuentaorriente,el aio de 8A98 anode igo3, AHBNM, and Valesdescontadosnla cuentaorriente, ibroA, No. I, igo3-io07, AHBNM.


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336 Noel MaurerNew England banks of the early 1gth-Century had found a simple wayaround similar constraints: they lent to themselves. How better toovercome information asymmetries? When a bank's customer is also adirector, there are no uncertainties: you know how good a credit risk youare. Bankers routinely funnelled most of their lending to 'themselves,their relatives, or others with personal ties to the board'.14 Investorspurchasing bank stock knew that they were buying stock in a network ofbusinesses arrayed around that particular bank's directors. By forming abank, a network of (often related) entrepreneurs gained access to outsidesources of capital, first their partners, then investors in the Bostonexchange, and later depositors. In this way, New England's entrepreneurs

superseded the limits of family-based businesses, and banks solvedinformation problems by essentially eliminating them.15Banks in Porfirian Mexico faced information problems even moresevere than those in early I gth-century New England. However, Mexico'sbanks did not initially confine themselves to insider lending. Rather, theyturned to it after several unpleasant experiences with outside loans. Theseexperiences were unpleasant precisely because the banks lacked the meansadequately to judge the risks involved.Banamex provides an excellent example. In 1884, the year of itscreation, it opened a 200,000 peso renewable credit line at eight per centto a textile factory in Queretaro, the Hercules mill, for investments inplant and machinery. As security, Banamex demanded that Hercules keepon hand Mx$2 50,000 of cloth 'at current market prices', the warehousingcosts to be borne by the company. This raised Hercules' effective interestrate. A high estimate of the 'real' cost of the loan is 8 per cent, includingthe opportunity cost (calculated as eight per cent of Mx$2 5o,ooo over thevalue of the loan) of keeping a valuable resource sitting in a warehouse.Of course, the company would keep some cloth on hand anyway, so theactual interest rate was between eight per cent and i8 per cent.Nevertheless, the security requirement substantially added to the cost ofthe loan.'6The bank's directors should have wondered why the owner acceptedtheir funds under such onerous terms, for they fell victim to 'adverseselection': at high interests rates, only the worst risks will borrow.Hercules fell so far behind on its debts that Banamex had to send over an'interventor' to supervise its management. In 1887 it unloaded a portionof the debt onto a New York trading house for only 65 per cent of its facevalue. Unfortunately, Hercules continued to miss interest payments, and14 Lamoreaux, InsiderLending,p. 4. 15 Lamoreaux, InsiderLending, p. 4-5.16 Ordinary session, Actas de Consejo,vol. 1, 17 September I884, AHBNM.


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Banks and Entrepreneursn PorfirianMexico 337Banamex eventually took over the entire operation, integrating it intothe Compaiiia Industrial Manufacturera (CIMSA), majority-owned byBanamex shareholders.17

Afterwards, Banamex began heavily involving itself in the day-to-dayoperations of its outside borrowers. Banamex lent a cashmere factory inGuanajuato Mx$78,975 on the condition that it accept one of its owncorrespondents as manager.18Unfortunately, the new manager discoveredthe factory to be in such bad condition that Banamex was eventuallyforced to take ownership of it in a consortium with other creditors. Afterinvesting an additional 50o,ooopesos, the board discussed selling its share,but that would have meant accepting a huge loss in the factory's poorstate.19Banamex eventually wrote-off Mx$7,737 of the debt and reducedthe rate on the remainder to a below-market six per cent.20Banamex repeatedly lacked the means adequately to judge the riskinessof outside loans. In 1886 Mariano Robles, the owner of a mine and metalrefinery in Guanajuato, failed to make his monthly loan payment ofMx$ o,6oo. Banamex sent an interventor, and discovered the market valueof the inventory was only 60 per cent of what Robles had claimed. After'knowledgeable people' reassured the bank that there was no reason thatthe refinery should not be able to turn a profit, the bank asked Robles tosell out to a colleague with whom several Banamex board members hadpersonal dealings. He refused, not wanting 'to appear to be takingadvantage of his partner's bad situation'. Banamex then turned to one ofits shareholders, Ram6n Alcaizar.Alcazar also refused, although he agreedto buy 20,000 pesos of Robles's outstanding debt at a 20 per cent discountand purchase the mining part of the operation for only Mx$2z,ooo.Lacking options, Banamex agreed.21These experiences soured Banamex on outside loans. The rest of thecredits authorised in i886 went to insiders, governments, or businessesguaranteed by the federal government. CIMSA, owned by the bank andseveral of its shareholders, received a credit of Mx$5oo,ooo.22 JuanLlamedo, a shareholder, borrowed Mx$i6o,ooo, despite ongoing creditproblems.23 Substantial credits went to businesses owned by Banamex17 Ordinary sessions, Actas de Consejo,vol. 2, 17 March I885, and vol. 3, 21 June 1887,

23 October x888, and 12 March 1889, AHBNM.18 Ordinary sessions, Actas de Consejo,vol. I, 30 September I884, AHBNM.19 Ordinary sessions, Actas de Consejo,vol. 2, 13 October I885, AHBNM.20 Ordinary sessions, Actas de Consejo,vol. 3, 19 October i886, AHBNM. Banamex mayhave been taken for a ride by De la Fuente, who recommended the loan, accepted thebank's commission as manager, and wound up with a 20 per cent interest in a factoryin which Banamex had invested 57,737 pesos.21 Ordinary session, Actas de Consejo,vol. 2, 20 April i886, AHBNM.22 Ordinary session, Actas de Consejo,vol. 3, 9 November i886, AHBNM.23 Ordinary session, Actas de Consejo,vol. 3, 26 January i886, AHBNM.


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338 Noel Maureremployees or shareholders.24 Three substantial credits went to railroadsand port companies whose debts were guaranteed by the federalgovernment.25 No large, long-term credits went to outsiders without agovernment guarantee until i893; and in that case Banamex owned 130shares of the borrower.26 Banamex made no large outside loans untilI90i.27The I901 loan demonstrated that Banamex was not alone in practicinginsider lending. Half of the loan was a rediscount of paper presented bythe Banco Oriental, based in Puebla, at a below-market interest rate of sixper cent.28 Several of Banamex's directors had doubts about the loan,fearing the Oriental might use it as an opportunity to unload its bad debts.However, Antonio Basagoiti, a prominent Banamex shareholder, assuredhis colleagues that 'the paper the Banco Oriental would send us would beprimarily signed by firms involved in [the cotton textile] industry'.29 Theremainder - this time at the prevailing market rates - went directly toseveral prominent Puebla 'houses', which owned both the Oriental andthe most important Puebla textile enterprises. Basagoiti explained to theboard that the Oriental was the centrepiece of these families' industrialnetwork in the state of Puebla, and that a loan to the Oriental was, inessence, an investment in Puebla textile manufacture.30

Banamex already participated in the textile industry to some extent. Itlent heavily and long-term to CIMSA, and provided working capital tothe Compafiia Industrial de Atlixco cotton textile mill (CIASA) in Puebla.These were insider loans. Banamex owned part of CIMSA; the rest washeld by Banamex shareholders. CIASA was connected to Banamexthrough two of its three board members and chief partners: Luis BarrosoArias, a prominent Banamex board member, and Agustin Garcin, whoowned extensive interests in CIASA, CIMSA, and Banamex.3124 Ordinary session, Actas de Consejo,vol. 3, 3 August i886, AHBNM.25 Extraordinary sessions, Actas deConsejo,vol. 3, i8 February i886 and 15 October 1886,AHBNM, and ordinary session, Actas de Consejo,vol. 3, 2 March I886, AHBNM.26 Ordinary session, Actas de Consejo,vol. 4, I3 December 1893, AHBNM.27 Ordinary session, Actas de Consejo,vol. 5, 26 November I901 and 3 December I901,AHBNM.28 According to the Economista Mexicano, the retail interest rate on secured loans inMexico City was seven per cent in November I901. Rates edged upwards to 7.5 percent in December. The Banco Oriental later established branches in Tlaxcala, Guerrero,Oaxaca, and Chiapas, and merged with the Banco de Oaxaca and Banco de Chiapas in1908.29 Ordinary session, Actas de Consejo,vol. 5, 26 November I901, AHBNM.30 Ordinary session, Actas de Consejo,vol. 5, 3 December I901, AHBNM.31 Leticia Gamboa Ojeda, Los empresariosde ayer: el grupodominante n la industria textil dePuebla, 1906-I929 (Puebla, I985), p. io. CIASA also possessed direct ties with the BancoCentral and its subsidiary, the Compafifa Bancaria para Obras y Bienes Raices, throughthe third partner Fernando Pimentel y Fagoaga.


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Banks and Entrepreneursn PorfirianMexico 339Outside of the firms connected to Banamex, the Oriental dominated thePuebla textile industry. Its board members make up a list of the most

important names in Puebla textiles: Hidalga, Villar, SainchezGavito, DiazRubin, and Conde.32 These families also invested in telephone companies,bakeries, cement plants, mines, and electricity distribution.33This is not to make any grandiose claims about the existence of a smallgroup of conspiring capitalists during the Porfiriato. Banamex's loan tothe Oriental was a reasonable investment in a diversified industrial group,even though it competed with some of its other interests. From the pointof view of the Puebla textile magnates, the Banamex loan was a sign of thesuccess of their strategy of using the Oriental to attract capital fromoutside the group.34Essentially, the Oriental gave the inter-family partnerships of Puebla 'alife independent of their constituent economic units'.35 The Orientalallowed them to tap Mexico City capital markets. By selling stock in thebank and not the manufacturing enterprises, the directors could bring inoutside capital while retaining control of their operations. The bank alsoallowed them to leverage their resources though the issuance of banknotes,or paper money guaranteed by the bank's reserves of specie, and let themtap local hacendadosy soliciting deposits.

Banks also allowed collaborations between family-based groups tooutlast the individual partnerships. Before banks, all accounts had to besettled and creditors paid off when partnerships dissolved. This imposedserious costs: if the partners were not sufficiently liquid, an otherwisesuccessful enterprise could collapse. Similarly, if the partnership hadinvested heavily in tangible but illiquid assets, an unforeseen eventaffecting one member, like a death or bankruptcy, could force fire salesand heavy losses. Ownership in a bank smoothed these breakups andreformations by providing credit to partners when needed, allowing notesto substitute for real assets.3632 List of board members from BoletinFinanciero Minero,3 March 1903. The names ofprominentPoblano capitalists s from Gamboa,Los empresarioseayer.33 Gamboa, Los empresariosde ayer, pp. 204-I I.34 Only the Oriental received the low interestrate; when Banamexmade a similarloanto the bank'sownersdirectly, t chargedmarketrates.There were two reasonsfor this.First, the bankwas more liquidthan the enterprises t financed,and second, the bankhad to publish balance sheets on a monthly basis and submit to federal oversight.Accordingto unpublishedwork by Leticia GamboaOjeda,discussedwith the author,the Banco Orientalcharged ts inside debtorsa six percent interest rate dentical o rate

charged o it by Banamex.This indicates hat the Oriental,asa corporateentity, gainedlittle or nothingfrom the rediscount: he benefitswent to the insidefirmsthat receivedand invested the capital.35 The quote is from Lamoreaux, InsiderLending, pp. 26-27.36 See Lamoreaux,InsiderLending, p. 26-27, for a discussion of how this worked innineteenth-centuryNew England.


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340 Noel MaurerQuijano y Rivero y Compaiia, formed in I900 to establish the La

Esperanza cotton textile factory, demonstrates these advantages. TheCompafia was, in fact, a partnership of partnerships: the 'socios' were theoriginal Jose Antonio Quijano and Manuel Rivero Collada partnership ofPuebla, the Mowatt y Grandison Hijos partnership of Oaxaca, andFrancisco M. Conde. They invested Mx$ 53,000 in the venture. Withinsix years, that investment had leveraged Mx$429,73I pesos in netborrowing, which financed the purchase of assets valued at Mx$ 5o8,74I .37Nevertheless, the business was not successful, and in I906 thepartnership dissolved after four years of losses. Ownership of the LaEsperanza factory passed to Quijano and Rivero, who now owed theother two partners Mx$52,674. Rather than sell off ten per cent of thefirm's assets to pay off their partners, they financed their takeover throughpaper discounted at the Oriental - of which Rivero was president. Theythen re-equipped the factory, and it achieved profitability by i9go.38 Hadthey lacked recourse to the Oriental, it is likely that the factory would havebeen broken up upon the partnership's dissolution in I906. Actually, itwould probably never have been founded, since the partners would havebeen unlikely to invest 53,ooo pesos in a textile venture - let alone582,73I - without the assurance that they could easily get out.

Other family networks operated similarly. The Banco Mercantil deVeracruz (BMV), served as the financial arm of the Zaldo family. At itsfounding, the Zaldos directly controlled 81.2 per cent of BMV stock.39The intention, however, was to use the bank to bring outside capital intothe family's mercantile, industrial, and agricultural enterprises. To thatend, the Zaldos used their connections with Antonio Basagoiti, whoowned stock in the Banco Hispano-Americano of Madrid.40 TheHispano-Americano arranged to list BMV shares on the Madridexchange.41 By I906, when BMV received federal permission to issue0o,ooo new shares on the Mexico City Bolsa, the Zaldos' interest in thebank had fallen to 30.5 per cent.42Presumably, their share fell even further37 Note that much of this financingcame from Banamex,as well as the Banco Oriental.By this time the textile magnates had acquiredenough credibility to attract loansdirectlyfrom outsideinstitutions,and not just throughthe Oriental.Ordinary ession,Actas deConsejo,ol. 5, 3 December I901, AHBNM and Leticia GamboaOjedaandRosalinaEstrada,Empresasyempresariosextilesde Puebla:andlisisde doscasos Puebla,986), pp. 25-27.38 Gamboa and Estrada, Empresasy empresarios extiles de Puebla, pp. 25-27.39 Libro de Actas del BancoMercantilde Veracrugvol. o, 26 October 897, Archivo Generalde la Naci6n (hereafterAGN).40 R. G. Dunn Libro de Credito 900o-ol, no. I67, 8 January I902, AHBNM.41 Libro de Actas del BancoMercantil de Veracruz, vol. I, 27 September I9oI, AGN.42 Libro de Actas del Banco Mercantil de Veracruz, vol. 2, 8 May I906, 16 June I906, andii July I906, AGN.


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Banks and Entrepreneursn PorfirianMexico 34Iafter that. Essentially, the Zaldos paid-in the capital needed to obtain thebank charter. They then lent the money to themselves. Subsequently, theysold their shares to third parties at a markup. Between 1898 and I906,BMV enabled the Zaldos to attract between Mx$57I,896 andMx$I,875,900 into their family enterprises.43 In this way, the Zaldosattracted capital from outside their network, outside Veracruz, and as faraway as Spain.44Among their other interests, the Zaldos financed La TabaceleraMexicana, Mexico's second largest cigarette manufacturer. The Tabacelerawas a partnership formed in 1899 by the Zaldos, Antonio Basagoiti, andthe firms of Solana Barreneche y Compafiia and Martinez y Compafiia.45The Tabacelera controlled approximately twelve per cent of Mexico'scigarette market.46 BMV financed the Zaldos' equity state, and loaned anadditional 200 to 300 thousand pesos to the company by I904, secured bythe partners' personal signatures, thereby allowing the partners to tap theMexico City capital market without risking their control of theenterprise.47 The Tabacalera did not go public until I907.Family groups in northern Mexico followed similar strategies. TheBanco de Nuevo Leon (BNL) began operations in 1892. Evaristo Maderoowned 43 per cent of the initial shares. His son-in-law, Viviano Villarreal,served as BNL's president until i911, while its first manager was hisbrother-in-law. Its second manager was his son, Ernesto.48 BNL was the43 These figureswere calculated n the following way. The Zaldos sold off 10,140BMVsharesbetween I898 and I906. They initiallypaidin Mx$5ofor each share,which hada parvalue of Mx$ioo. By 900ohe shareswere fully paid-in,andtradingfor Mx$I30on the MexicoCitybolsa. The highest priceBMV stock ever commandedwas Mx$I85in SeptemberI905. The low estimate assumes that 12.8 per cent of the BMV's initialloans went to the Zaldo family, as indicatedby an accounting of the entries for thebank's first two years of operation (I898-99) in the Libro de Archivo del BancoMercantilde Veracrug, atalognumber1.7.5, AGN, and that the familythen sold the shares for

Mx$ioo each.A minimumestimatefor outside capital nflows to the group, therefore,is o.2z8*Mx$50*I0o,40+Mx$5o0*i0,40 = Mx$57I,896. The maximum estimateassumes that all the initial loans went to the Zaldos (through partnershipwith thenominal borrowers), and that they sold their stock for Mx$I85, or Io,I40*Mx$I85 =Mx$i,875,900.These estimates representonly the equity capitalchannelled to the Zaldo familythrough BMV. They do not representseigniorage gains (the benefitsaccruingto theZaldo familygroup from the abilityto issue currency)or later resourceschannelled othe group from deposits in the bank.44 R. G. Dunn Libro de Credito i9oo-oy, no. 258, 30 January 1904, AHBNM.45 The Martinez amilywas involved in the BMV and borrowedheavily.See the Librodecuentascorrientes restamos, 5 March I906-3 April I909, gal. 2, AGN.46 Stephen Haber, Industryand Underdevelopment: he Industrialitation of Mexico, 1890-1940(Stanford, 1989), p. oo00.47 R. G. Dunn Libro de Credito i900-f, no. 258, 30 January I904, AHBNM.48 Mario Cerutti, Burguesia,capitalese industriaen el nortede Mexico: Monterreyy su dmbitoregional,(Monterrey, I992), pp. 221-22.


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342 Noel Maurerfulcrum used by the Maderos to leverage their holdings of two Coahuilacotton plantations and a textile mill into a vast and diversified businessnetwork.49

First, the bank allowed Evaristo Madero to pool his family's resourceswith two other kinship groups: Francisco Armendaiz and AdolfoZambrano sat on the BNL board of directors.50 The Zambranos ranmercantile operations in Nuevo Le6n and Coahuila, in association withReinaldo Bernadi.51 Francisco Armendaiz was a trader, and his soncontrolled almost 90,000 hectares of arable land in Durango.52Secondly, BNL allowed them to tap the Mexico City exchange. WhenBNL began operations in I 892, only half its capital was paid-in: that is tosay, the Maderos, Armendaizes, and Zambranos had only investedMx$300,000 in the bank. When they sold shares on the stock exchangethey could then 'call in' up to 50 pesos per share from the new owners.The actual capital inflow to the three family networks would be greater,of course, depending on how many of the BNL's loans and discounts wentto family-owned enterprises, and on how far above par the shares soldfor.53 Just as with the Zaldos and the BMV, the families running BNLused the bank to bring in capital from outside. By 190, the share of BNLowned by the Maderos had fallen to 7.1 per cent. The market value ofthose shares was Mx$36,ooo less than their personal indebtedness to thebank, not including the direct borrowings of their companies.54Thirdly, BNL enabled its owners to benefit from seigniorage. Itscharter permitted it to issue banknotes that freely circulated within thestates of Tamaulipas, Nuevo Leon, and Coahuila.55 That meant that forevery peso invested or deposited in BNL, it could make three pesos worthof loans.56 Since federal law denied merchant money-lenders operating inNuevo Leon the right to issue such notes, this charter gave BNL's ownersthe exclusive ability to benefit from seignoirage.

The business empire the BNL's founders proceeded to build wasimpressive for both its depth and breadth. By 1905, Adolfo Zambranoowned stock in, or sat on the boards of, 32 different companies. Some 2349 Cerutti, Burguesza, apitalese industria,pp. Ioo-I.50 EconomistaMexicano, 5 October I892.51 Cerutti,Burguesia,apitales industria, p. 99-0oo. Berardialso served on the BNL'sboard, EconomistaMexicano, 5 October I892.52 Cerutti, Burguesia,capitalese industria,p. I62.53 By December 390o, BNL shares traded for Mx$I47.5o, Mx$47.50above par.54 R. G. DunnLibrodeCredito900-0o,nos. 39-40, 3 DecemberI90o and 25 June 1903,

AHBNM.55 After the 9o00establishmentof the Banco Central,these notes circulatednationally.56 The only reasonit had to stop there was its charter.Without that, the only limit onBNL's note issues would be the willingness of regiomontanoso believe that these fancily-engraved pieces of paper were really money. Banamex and the BNL were the only twobanks able to issue notes up to three times their specie reserves: other banks werelimited to twice.


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Banks and Entrepreneursn PorfirianMexico 343of these were in mining, but they also included a book printer, asteelmaker, a glass bottle factory, and several textile mills.57 Maderofamily members sat on the boards of 30 mining companies, two orerefineries, Fundidora Monterrey, a public bathhouse, and a theatre.58 Inaddition, the Zambranos and Maderos sat on the boards of a brickmaker,a mechanised flour mill, a cardboard factory, a soap manufacturer, and asugar refinery.59 In short, they built a huge industrial empire arrayedaround BNL. Very few of these companies ever went public. Rather,control was tightly kept within the group, and financing came from BNLloans to the companies or their directors.Many scholars, limiting their investigations to an examination of bankshareholder lists, have misinterpreted the nature of industrial financingand inter-family cooperation during the Porfiriato.60Industrial companieswere quite tightly held. Initial financing came from personal loans to bankdirectors, usually in the form of notes discounted by the bank, which wereused to pay-in part of the firm's listed capital. Bank stock, however, washeld relatively widely. In fact, selling stock far and wide, was the entirepoint of founding a bank. In order to satisfy the 'outside' shareholders inthe group's bank, 'inside' companies distributed token amounts of sharesto members of other family groups, and nominated outsiders to the boardsof inside companies. The purpose was to reassure the bank's outsideshareholders that their money would be used responsibly.61 Eventuallysuccessful companies with good reputations, would seek outside finance,either by listing on the stock market (like Tabacalera Mexicana) or byapplying for loans at other banks. Outside board members offered anecessary 'good housekeeping seal of approval'. This did not representcollusive behaviour.

The Compafifa Industrial e Parras, S.A. (CIPSA), a textile mill inCoahuila, provides an example. Evaristo Madero, his sons, and his son-in-law owned all but a few small shares, which they distributed 'with the aimof completing the Board of Directors' in order to provide credibility.Outsiders sat on the board, but owned only a minuscule stake. The paid-in capital was financed by discounted two-signature notes signed by theprincipals. CIPSA then bought a controlling (38 per cent) interest in theCompaiia Industrial del Norte textile plant, financed by borrowing, as aprecursor to borrowing funds from Banamex's Monterrey office at betterrates than BNL could offer.62

When Porfirian banks made long-term loans to companies, they57 Cerutti,Burguesia,apitales industria, . 227.58 Cerutti,Burguesia,apitales industria, p. 229-31 and p. 235.59 Cerutti,Burguesia,apitales industria, p. 233-35.60 See in particularHaber, IndustryndUnderdevelopment.61 R. G. DunnLibrodeCreditogoo-oy, no. 79, 24 January1904,AHBNM.62 R. G. DunnLibrodeCredito9oo-oy, no. 79, 24 January1904, AHBNM.


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344 Noel Maurerpreferred to lend to their directors as individuals, who then used the fundsto finance their particular businesses. When they lent directly tocompanies, they demanded personal guarantees from the managers.Again, the reason was informational: the banks did not trust lending toanonymously owned companies. 'It cannot be forgotten', wrote aprominent banker, 'that the patrimony of a corporation is exclusively real,and that neither the partners nor the administrators ... have any personalresponsibility'.63 For example, in 1894 Banamex lent Mx$5oo,ooo to acotton-growing enterprise in Coahuila. The bank mortgaged thecompany's lands, but it also required its directors to assume personalresponsibility for the loan.64Another example two years later was Banamex's half-million peso loanto Gabriel Mancera, a board member. Mancera used the money to financeimprovements and extensions for the Ferrocarril Hidalgo y Noroeste, andthe loans were backed by mortgages on the company's property.However, these loans were made to Mancera personally, although theycould have been made to the railroad. After all, they were backed byrailroad property. But from Banamex's point of view the Hidalgo yNoroeste was nothing more than a group of unknown individuals, whileGabriel Mancera was a trusted associate.65 In another example, Banamexlent CIASA Mx$300,0oo in I905 on the personal guarantee of its boardmembers, also Banamex insiders.66Banamex's ledgers are filled with loans made to limited-liabilitycompanies on the basis of their Banamex-connected directors' personalguarantees. When the bank began making loans to outside companies, itoffered a variety of terms, depending on how much responsibility theborrower's managers were willing to assume. In I905, when the Orientalrequested a Mx$4oo,ooo credit line from Banamex, Banamex agreed, inprinciple. But it offered the following terms: eight per cent with liquidcollateral, 8.5 per cent with the personal guarantees of the Oriental'sboard, and nine per cent with just the bank's corporate signature. Thepersonal reputations of the directors were worth a full o. per cent.67The Oriental loan of I905 also illustrates another reason why banksrarely lent directly to corporations without personal guarantees:corporations lacked liquid collateral. Banks freely financed companies'working capital. That involved self-liquidating paper backed by tangible63 EconomistaMexicano, I2 January I90o. Interestingly enough, the author went on to

denounce insider lending. That part of his argument was not as influential.64 Ordinary session, Actas deConsejo,vol. 4, 5 October 1894, AHBNM. Saturnino Sauto,Juan Llamedo, and Fermin Zubiaur were all Banamex insiders.65 Ordinary session, Actas de Consejo,vol. 5, 25 November I896, AHBNM.66 Ordinary session, Actas de Consejo,vol. 6, Io March 1905, AHBNM.67 Ordinary session, Actas de Consejo,vol. 6, z8 November 1905, AHBNM.


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Banks and Entrepreneursn PorfirianMexico 345and salable goods. Long-term loans were different: they could only besecured by risky and illiquid mortgages of company property. But even ifthe proceeds financed real investment, a personal loan to a shareholder ina company could be guaranteed by liquid shares in the firm. Whencompanies received funds directly for long-term investment, it wasbecause they could pledge shares in themselves or other reputablecorporations as collateral. For example, the Petioles mine borrowedMx$400oo,ooon 1904, based on 267 shares of itself, valued at Mx$I 500 pershare.68In essence, this method of lending reduced the transaction costsinvolved in repossessing a corporate borrower's property.

Lending remained remarkably personalised throughout the Porfiriato.Few companies had enough of a reputation to borrow substantial sumsdirectly. This has led several studies of Porfirian industry to underestimatethe involvement of banks and debt finance in industrial start-ups. Forexample, the Banco de Londres y Mexico (BLM) lent directly to thepartnership of Lambert y Compafiia, which included BLM boardmembers, which then invested Mx$2oo,ooo in the Compafiia Electrica eIrrigadora de Hidalgo. The Electrica, however, rarely possessed directdebt balances of more than Mx$3o,ooo, on assets with a book value overtwo million pesos.69

The short payback times demanded by the banks on their corporateloans have contributed to this misunderstanding, since most studies,particularly Haber's seminal work, used data from the companies' lateryears. The Compafiia Industrial de San Ildefonso, S.A., (CISISA) providesan example. Ernest Pugibet founded this woollen-textile company in1896, in partnership with Leon Signoret.70 CISISA was financed by600,000 in dollar-denominated debt issued by BLM,71 on whose board ofdirectors Signoret served.72 Half this debt came due in 1902, and thecompany decided not to pay dividends for several years until it had paidoff the rest.73 By 1906 its outstanding debt had been reduced toMx$6o,386, a bare 2.4 per cent of its assets, but much of the initial capitalcame from loans.74 Since it is probable that Signoret and companyborrowed from BLM much of the capital they personally invested in theenterprise, CISISA's real reliance on borrowed funds for its origin waseven greater.68 Ordinarysession, Actas deConsejo,ol. 6, 3I May 1904, AHBNM.69 R. G. DunnLibro de Credito9oo-of, nos. 98 and 99, zi June 190o and 5 November

1902, AHBNM.70 Haber, ndustryndUnderdevelopment,p. 74-75, and p. 95.71 R. G. Dunn Libro de CreditoI9oo-of, no. 215, 26 March 1904, AHBNM.72 Haber,IndustryndUnderdevelopment,. 74.73 R. G. Dunn Libro de Credito i9oo-of, no. 2I , 26 March 1904, AHBNM.74 Balancesheet publishedin BoletinFinancieroyMinero.


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346 Noel MaurerAnother example of the rapid payback demanded on start-up loans isthe Compafifa Mexicana de Cal Hidraulica, Cemento, y Materiales deConstrucci6n. Three partners with ties to Banamex, Ignacio de la Torrey Mier, Faustino Martinez, and Gonzalo de la Murga organised the

company in 1898. Hugo Scherer, a Banamex director and owner of aprivate banking company, invested the following year. The partners setthe company's capital at Mx$5oo,ooo. They only paid-in Mx$ o,oooduring the first year, but the company spent more than Mx$2oo,ooobuying limestone fields and cement ovens, the difference coming fromshort-term loans. Within four years, by 902, all the capital was paid-in,and the loans on the company's books were retired.75This section has argued that the personal nature of bank lending was areasonable response to information asymmetry, and not a sign of anoverly personalistic business culture. In fact banks, outside credit agencies,and the government, tried ways to overcome these uncertainties and placelending on a more 'scientific' basis. This represented a serious attempt tocapture the returns from an ability to judge the risks posed by outsideborrowers.

Attempts to overcomeinformationuncertainties:GovernmentuaranteesGovernment subsidies or guarantees areone way to overcome informationasymmetries. The Porfirian federal authorities used these tools to promoteprojects that they considered necessary for national security and economicgrowth, but feared would not be sufficiently funded by the private sectoron its own. The railroads provide an example of how government policieswere used to overcome information asymmetries and promote investmentsthat might otherwise not have occurred.The Porfirian government prioritised the creation of a nationaltransport network. Poor transportation impaired Mexico's economicprosperity and threatened its political unity. When Porfirio Diaz came topower, only half of the federally-maintained roads were even suitable forbeasts of burden. The entire country, without good waterways, had only400 miles of railway, of which a sixth used mules rather than steam enginesto pull the trains.76Unfortunately, market forces were unlikely to muster the necessarycapital by themselves. The problem was that the information asymmetriesinvolved in railroad construction were so large that no private investor75 R. G. Dunn Libro de Credito Igoo-ol, no. 23, 17 July 1899 and 30 October 1902,AHBNM.76 John Coatsworth, Growth Against Development: The Economic Impact of Railroads inPorfirianMexico (DeKalb, Illinois, i98I), p. 35.


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Banks and Entrepreneursn PorfirianMexico 349Banamex made unsubsidised loans to only three transportation projects.A series of railroad credits went to Gabriel Mancera, on behalf of theFerrocarril Hidalgo y Noroeste.84 The Maryland Trust Company ofBaltimore guaranteed a 1903 credit the bank granted the F. C. Veracruz-El Pacifico.85 The Ferrocarriles del Distrito, a streetcar company, receivedan unsubsidised credit in I906.86 These three loans made up less than3 per cent of all Banamex advances to railroad and port improvement

companies. Two of the companies had inside connections to Banamex,while a reputable US bank guaranteed the third.87Banamex's reluctance to lend to the railroad sector without federalguarantees or inside connections is understandable. Railroad lines in the88os were built ahead of demand, in a speculative frenzy provoked by theindiscriminate issuance of federal subsidies. Later on it became evidentthat the major trunk lines were albatrosses. Table i reproduces theaverage annual rate-of-return on real assets for the listed period, adjustedfor inflation using the Colegio de Mexico's Porfirian price index. Thetrunk lines consistently lost money, and could barely repay their existingheavy debt loads: lending even more money to them would have beenfolly.Returns on the smaller feeder lines varied wildly. Banamex realised thatthis meant that loans to them would suffer from adverse selection,meaning that the riskiest and least-profitable lines would be the mostlikely to borrow. Since Banamex had few ways to judge a railroad's credit-worthiness, it made few loans to the small lines. Without federalguarantees it would have made still fewer.

Attempts to overcomeinformationuncertainties:Creditagencies nd reportsBanks realised that methods of judging the risks posed by outsideborrowers held high potential returns for those able to develop them.They attempted to place lending decisions on a more 'scientific' basis. Thesolutions they hit upon, or imported from the United States, did not workperfectly, and did not replace insider lending. But they were tried. Bothborrowers and lenders possessed incentives to develop techniques forevaluating impersonal credit risks. Such techniques would allowborrowers without inside connections to gain access to long-term credit84 Mancerawas a Banamexboardmember,and these were inside loans. Ordinary ession,

Actas de Consejo,vols. 5 and 6, 24 November I896, 8 August 1901, 9 October I901, andI5 February I905, AHBNM.85 Ordinary session, Actas de Consejo,vol. 6, 14 July 1903, AHBNM.86 Ordinary session, Actas de Consejo,vol. 6, 2 January I906, AHBNM.87 Banamex enta total of I I.6 millionpesos to railroadandport improvementcompaniesbetween its founding and I9I0, calculated rom the minutesof the bank directors.


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35 Noel Maurerand to reduce the amount of collateral they had to provide. Evenborrowers with inside access would benefit, by gaining the ability toborrow from multiple credit institutions and to raise more capital thanthey otherwise might.Lenders' incentives were equally obvious. A greater ability todiscriminate among borrowers would reduce the risks they faced andenable them to expand their lending into new and potentially lucrativemarkets, both geographically, socially (in the sense of lending to newentrepreneurs), and economically. Increases in the competitive pressuresin the banking market only raised the banks' incentives to develop meansof evaluating outside credit risks. In the 90oos several institutions sprangup in response to these incentives, most notably independent and bank-affiliated credit evaluation agencies. For better or for worse, however,these new institutions had only limited effect in the 190o5-i period, beforethe outbreak of the Mexican Revolution cut short the development of thebanking system. The asymmetric information problem was too big to besolved quickly.

Growing competition pushed the banks to extend more credit at thesame time that borrowers began increasingly to look outside the limits ofinsider lending. In I905 a Banamex board member claimed that 'otherbanks loan quantities far above those granted by Banamex', so Banamexreduced the collateral demanded on outside loans from I5 per cent of theloan's value to 125 per cent.88 This move caused the proportion ofBanamex collateralised loans (loans guaranteed by cash deposits orsecurities) going to outsiders to jump from less than 50 per cent in 1903to 78 per cent by 90o8-i I.89 The percentage of Banamex discounts goingto outsiders rose less dramatically, from 5I per cent in I898-1903 to 54 percent in I903-7.90 For this growth to continue, however, the banks had todevelop new and better ways of evaluating their customers.Borrowers increasingly resorted to R. G. Dunn & Company, anAmerican credit agency which entered the Mexican market in I904, or tolocal newspapers to advertise the financial state of their businesses to gainaccess to outside loans, even if they already had access to inside credit.Federico Sisniega, manager of Banamex's Chihuahua branch and owner ofthe La Paz clothing factory in Chihuahua City, provides an example. Wedo not know how much he paid for the factory, but in 904 he opened hisbooks, revealing La Paz's net worth to be Mx$77o,ooo, and thatBanamex's branch had loaned La Paz Mx$ 50,000 since Sisniega's88 Ordinary session, Actas de Consejo,vol. 6, 29 August I905, AHBNM.89 Prestamossobreprendas, Libro B, No. 3, r908-1I, AHBNM.90 Vales descontadosn la cuentacorriente,del ano de 1898 a ano de I90o, AHBNM and Valesdescontados n la cuentacorriente,Libro A, No. I, I90o3-907, AHBNM.


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Banks and Entrepreneursn PorfirianMexico 35purchase. Despite this access to Banamex credit, Sisniega opened hisrecords in order to gain access to other sources of capital.91Of course, for lenders the utility of these mechanisms was limited. Thefinancial press did nothing to certify the financial information providedthem. R. G. Dunn did, at times, send agents to verify data, but theirtechniques were rudimentary at best. Given the potential borrowers'obvious incentives to exaggerate, the impact of these innovations wasfairly limited.Banamex eventually established its own internal arrangements to assesspotential borrowers. When Banamex opened an agency in the growingagricultural district of Zamora, Michoacan, in 1905, it prepared a 'Librode informes' which listed all the potential clients in the area and attemptedto assess their credit risk.92 Zamoran agriculture was dedicated primarilyto wheat and corn production for the domestic market. The district alsocontained a substantial number of sugar plantations, flour mills, cigarettefactories, and hydroelectric generation and transmission facilities.93Banamex came up with a list of 315 potential clients, of whom 21oproportional financial information concerning their assets and liabilities.The bank did its best to value their assets, be they agricultural lands,factories, mercantile enterprises, or debts owed them, and determine theirliabilities. It also noted their business reputations, and then divided theminto four categories: good credit risks, acceptable risks, acceptable withqualifications, and unacceptable.Only 6.3 per cent were rated good. Save for a single doctor in the townof Cotija, all then were involved in agriculture, although a few hadsecondary interests in trade or manufacturing, primarily flour mills. 73.3per cent fell in the acceptable category. A further 7.0 per cent were ratedacceptable with qualifications, usually because they had taken on a greatdeal of debt. People who had married into wealth also fell into thequalified category.94A relatively small 2.4 per cent were deemed unacceptable, although itmust be borne in mind that the list was already biased in favour of those91 R. G. DunnLibrode Credito o900-f,no. 334, 5 February I904, AHBNM. Sisniegamarried nto the Creelfamily,probably n an attemptto gain accessto their resourcesin Chihuahua.Interfamilybusiness connections were often sealed by marriage inPorfirianMexico. See Wasserman,Capitalists,Caciques,ndRevolution: heNative EliteandForeignEnterprisen Chihuahua, exico,Sf84-9Igi,p. 30. Creditreportsoften notedthe reputation,or solvency,of the potentialborrower'sspouse, often insistingthat the

husband or wife co-sign any loan agreement. See the R. G. Dunn Libro de Credito1900-f, AHBNM.92 Ordinary session, Actas de Consejo,vol. 6, 4 April 1905, AHBNM.93 GladysLizama, Los capitales amoranosaprincipiosdel siglo XX', HistoriaMexicana,vol. 39, no. 4 (I990), p. I033 and p. 1037.94 Lizama,'Los capitaleszamoranos', in HistoriaMexicana,p. I052.


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35 2 Noel Maurerthe bank thought would be good risks. Those deemed unacceptableincluded hacendadoswith a net worth of zero (or less), anyone who hadfailed to pay a debt, or had been forced to sign over collateral, or to sellreal property, and those with a bad reputation.95By the end of the Porfiriato most credit was still either distributed onthe basis of personal connections or guaranteed by real short-termtransactions. Porfirian banks and bankers tried to change this, and to reapthe rewards that would accrue from the ability accurately to judge outsidecredit risks. Nevertheless, their moves in this direction were halting andincomplete, and the necessary innovations remained in their infancy. Thebanks may have been trying to move away from insider lending, butwithout deep and impersonal capital markets, easy entry into banking, andeffective reporting requirements, the process was slow.

InsiderlendingandcompetitionPorfirian bank charters were hard to procure.96 After I892 prospectiveapplicants had to convince a very busy and highly conservative Jose I.Limantour to grant one. After 897, federal law limited banks of issue toone per state. This imposed a high hurdle for potential entrants.

Nuevo Le6n provides a brief glimpse into what might have happenedin the absence of these limits. A clause in the General Banking Act of I 897allowed for the establishment of a second bank of issue in the state. InI899 the Banco Mercantil de Monterrey (BMM) took advantage of thisloophole. Of an initial capitalisation of 2.5 million pesos, the Hernaindezand Mendirichaga families owned 28.3 per cent. Enrique Creel ofChihuahua held the second largest share, I1.4 per cent. The third largestshare, 8.6 per cent, belonged to the Madero family.97The large stake held by the Maderos in the new bank has been taken asevidence of a lack of banking competition in Nuevo Le6n. Since theMadero family held a significant share in BMM, runs the logic, it isunlikely that it competed with their pet bank, BNL. Therefore, bankingwas monopolistic and uncompetitive.98This characterisation is incorrect. Porfirian law had an insalubriouseffect, because it limited entry, but interlocking directorates were not theproblem. When banks coexisted in the same area of operation, competitionwas fierce. For example, BMM introduced the payment of interest on95

Lizama, 'Los capitales zamoranos', in Historia Mexicana, p. 1053.96 See Maurer, Finance and Oligarchy: Banks, Politics, and Economic Growth, I876-1928(unpublished dissertation, Stanford University, 997), chapters 2 and 3, for a discussionof the politics behind Porfirian banking regulation.97 Calculated from data in Cerruti, Burguesia,capitalese industria,pp. 240-41.98 Cerutti, Burguesia,capitalese industria,p. 241.


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Banks and Entrepreneursn PorfirianMexico 353Loan-asset ratios8070 T -60 _

50 J. -_-_. J- -_- _.?--BNL50 I I * I * loan/asset% 40 . _ _ _ , _ _ * *_ *_ _ , _ _ _ _ _ _ _ _ + _ _30 -- T r- -I I I I I BMM loan/20 '; _-'-;-;-'-- t --s --I--;- -i-- asset2010 -JA * *- *-.* L - -S_-J L -.J-- A0XV) L ED r 0)0 ' o LX co r-0) 0) 0) 0) o0) 0) 0)0 0 o oo o o o00 0 00 00 00 0) 0) 0) 0 ) ) 0) 0)

Fig. i. Loan-asset ratiosfor BNL and BMM, I893-I907. Source: Bank balancessubmitted toHacienda andpublished n Economista Mexicano.

sight deposits when it opened in I899. BNL reluctantly followed, and byI903 competitive pressures forced Banamex and BLM to begin payingdeposit interest.9 Had BMM been nothing more than an extension ofBNL, it is unlikely that its managers would have introduced deposit-interest and cut into the profits of both institutions. In addition, severalbank ratios for BNL changed abruptly in I900, BMM's first full year ofoperation. BNL's loan-asset ratio jumped from 54 per cent to 73 per cent(Fig. i). The loan-asset ratio is the ratio of a bank's loans and credits toits total assets. It indicates how much of its resources a particular bankchooses to lend out.

The rise can be interpreted as showing that BNL became lessmonopolistic and more efficient after BMM's entry. The logic is asfollows. Leaving silver coins or the notes of other banks sitting around ina vault is not (ceterisparibus)the best use of a bank's resources; the moreit can convert into productive, earning assets, the more money it willmake. But banks enjoying some degree of monopoly power will havelower loan-asset ratios than competitive banks, because monopolistsreduce the quantity of their output in order to drive up the price. Sinceloans and discounts are a banks 'output', a monopolistic bank would lendout less of the resources available to it than a more competitive one,translating into a lower loan-asset ratio.100While not conclusive, it is telling to note the large and sustained jumpin BNL's loan-asset ratio after BMM's entry in 899, following a slow fallduring its years as Nuevo Le6n's sole bank of issue. BNL freed up more99 EconomistaMexicano, I March I902, 8 August I903 and 19 September 1903.100 An alternative interpretation holds that monopolistic banks would engage in credit-rationing rather than raising interest rates, and limit their lending to the best risks.This behaviour would also be expected to produce a lower loan-asset ratio at any giveninterest rate, since the bank would be rejecting applicants that banks in morecompetitive situations would probably take a risk on.


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354 Noel Maurerresources for investment after BMM's arrival. This is not what would beexpected if BMM had been nothing more than an extension of the sameeconomic oligarchy that controlled BNL. The Maderos probably hopedto control the access to capital in Nuevo Leon: few capitalists have everparticularly welcomed competition. But their 8.6 per cent stake in BMMwas not enough to contain the competitive pressures unleashed by thearrival of the new bank.

Essentially, BMM's creation allowed for two developments. First, anew group of rising capitalists, in this case the Hernandez and alliedMendirichaga families, gained access to the resources of the Mexico Citycapital market to finance their activities. Secondly, existing merchants andagriculturalists and other users of short-term capital now found anadditional credit institution capable of satisfying their needs. The presenceof Antonio V. Hernandez (a Madero family member) as BMM's managerserved as a 'seal of approval' that BMM would not lend indiscriminatelyto insiders regardless of the worthiness of their projects. His presence didnot indicate a banking cartel that controlled access to capital.In fact, competition grew further, as Banamex and BLM expanded theiractivities and Limantour allowed banks of issue from neighbouring statesto enter the Nuevo Le6n market. For example, in i905 the CompafifaMetalurgica de Torre6n borrowed Mx$8oo,ooo from Banamex, in additionto its debts to BNL. This was a long-term investment: the credit was stilloutstanding in I908.101 In 1906 three Madero-controlled textile companiesborrowed 300,000 pesos from Banamex's branch in Monterrey, on theirdirectors' personal guarantees. Banamex deliberately undercut BNL'srates, offering nine per cent.102Why did BNL not offer cheaper capital to an 'inside' company than itscompetitor? The answer is that it could not do that and still satisfy thebank's outside shareholders. One of the reasons the Zambranos andMaderos founded BNL was to attract outside capital into their businessempire. These outside investors in the bank demanded a steady return, orelse they would lose faith. BNL consistently paid dividends of fifteenpesos per share, year-after-year, and with no relation to the bank's actualprofits, in an effort to keep these outsiders happy, and to signal that it was101 Ordinary session, Actas de Consejo,vol. 7, 31 March 1908, AHBNM.102 Ordinary session, Actas de Consejo,vol. 6, 30 October I906, AHBNM. The rate-of-return on earning assets (RoEA) for the BNL in 906 was ten per cent, derived from the

balance sheets published in the financial press. The RoEA provides an underestimateof the retail interest rate charged by the bank, since it does not include bad debts. Onaverage banks usually charge a higher interest rate than the profits they earn, since theyknow that a certain percentage of debts will never be repaid or some debtors will fallbehind on their interest payments. Neither Banamex nor the BMV offered insidecompanies lower rates, and it is unlikely that BNL departed from this practice.


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Banks and Entrepreneursn PorfirianMexico 355using their money wisely.'03 Had BNL made subsidised loans to insidecompanies, then it would have excited the ire of its outside shareholders.Other evidence exists that the entry of new banks into existing marketsincreased competition. The establishment of the Banco de Durango in1892 broke Banamex's local monopoly. The new bank immediatelyundercut Banamex, making the state government a loan for one percentagepoint less than Banamex offered.104 In more general terms, an OLSregression model using data on all the banks for the I90I-I I period founda statistically significant relationship between banks' loan-asset ratios andthe number of competitors operating within their region. A doubling ofthe number of banks within a concession territory led to a threepercentage point rise in the banks' loan-asset ratios.'05This is not to argue that the limits to competition established by thePorfiriato had no effect. In fact, the above argument bolsters the oppositeconclusion: a more liberal bank policy would have allowed moreentrepreneurs access to outside capital, promoted more competition inother fields, and facilitated more and faster economic growth. Because thenumber of banks was limited, only a limited number of entrepreneurscould avail themselves of their benefits. The Porfiriato's restrictivepolicies showed in the companies that never grew to their potentialbecause they were denied access to capital. These companies were deniedcapital not because they posed potential competition for the existingburguesia, ut because they were unknown and too risky to be lent capitalby bankers with no personal connections to them. Since bank start-upswere limited, the system locked out these new entrepreneurs.103BoletinFinancierojMinero, ariousissues. 1905 was the only exception,when the bankpaid 'only' fourteenpesos.104The rateofferedwas ninepercent,versus ten percent for Banamex. nformationaboutvariousrandomly elected oan contracts n the state can be foundin MariaGuadalupe

Rodriguez L6pez, 'La banca Porfiriana n Durango', in MariaGuadalupeRodriguezet al., Durango(I840-191I): Banca,transportes, ierra e industria(Monterrey, 1995), p. 20.It could be arguedthat the lower rateon the Banco de Durango'sloan to the state wasa function of its shorter term: Banamex's oan was for 180 days, while the Banco deDurango's was for only 75. Later loans by the two banks in Durango, however,exhibited no discernible erm structure or short-term oans. Banamex,for example,offered he stategovernmentotherwise similar oans at ninepercent in 894for termsof six months and one year, respectively.105 For the derivation of the model and the exact variables used in the regressioncalculation, see Maurer, 'The Banco Nacional and the Local Banks,' p. 25. Thedependentvariableused was the liquidityratio,or inverse of the loan-assetratio,andthe coefficient or the marketstructurevariable thenatural og of the numberof banksoperating n the state)was -0.03, with a t-statisticof - 5.25.The overalladjustedR2for the entire regression was o.6I.


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Banks and Entrepreneursn PorfirianMexico 3 7To an extent, Fig. 2 exaggerates the differences between the NewEngland banks and those of Mexico. This is because New England banksbroke out interbank deposits from their other deposits. Nevertheless,Porfirian banks depended on deposits more heavily than their NewEngland counterparts. This is a testament to the efficacy of the monitoringmechanisms developed to deal with the asymmetric information problembetween bank shareholders and bank directors.A priori, the relatively high dependence of Porfirian banks on depositsand banknote issues for their resources meant that the risk of failure wasshared among many broad groups, rather than being concentrated amongthe shareholders, and therefore posed a greater risk to the stability of the

Porfirianeconomy. The historical record of the Porfiriato, however, beliesthis. The Crisis of 1907-08, prompted by the international financial panicthat originated in the United States, caused five Mexican banks to shutdown or reorganise. There is, however, no evidence, that insider lendingcaused any of these failures or near-failures. In addition, the bankingsystem weathered the failures relatively well.The Oriental purchased two failed banks, in Oaxaca and Chiapas.Depositors suffered no losses, and neither bank suspended convertibility.The Oriental, as discussed previously, was one of the most prominent andegregious practitioners of insider lending. If insider lending had been in-and-of-itself deleterious for bank solvency, then the Oriental should nothave been in a position to save its two unhealthy compatriots.Some contemporaries blamed the failure of the Banco de Campeche onthe abuse of its credit facilities by its directors.110The state of Campeche,however, was located on the Yucatan peninsula, and its economy wasalmost entirely dependent upon sisal cultivation. When the price of thefibre slumped in I908, so did the local economy, and the solvency of theCampeche's directors-cum-borrowers soon followed. Two other banks inYucatain failed (and merged after substantial write-offs) for the samereason.111

The Banco de Jalisco was in trouble before the crisis hit in late I907,due to insider lending. But shareholders were well-aware of the bank'sdifficulties, and called a special assembly in October I906 with the aim ofcleaning the books of accumulated bad debts.1l2 In March of I908,unhappy with the management, and displeased with the discovery of'severe irregularities' in the bank's books, the shareholders replaced theentire board save Vice-president Eugenio Cuzin.113 This pre-emptiveaction by the shareholders was successful: the Banco de Jalisco did not110 El Pais, 9 March I91 . "' BoletinFinancieroy Minero, z January I908.112 BoletinFinancieroy Minero, 25 April 1907.113 BoletinFinanciero Minero, 20 March I908.


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100

80 ?

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40

i:: :: ff 0if iD ~~;.j:i::i:j: :5~f~~g . ::-::: : :_:::_::.___ : : $S404:;tt::40

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0i I w,t LO CD % 00 0C 0 r CN () lt LO C I- 00 CD 00 0) 0) 0) 0 0) C 0 00 0 0 0 0 0 -00 00 00 o00 0) n0) 0) 0)o 0)'- -- r- - -lFig. 2. Liability structureof PorfirianBanks. Source:Balances ubmitted o the Secretariade Haciendaandpubliand El Boletin Financiero y Minero.


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Banks and Entrepreneursn PorfirianMexico 3590.45 . . . , ,, , ,0.405 ^ - -----'----- '-----.-----.------0.30 * * - - - - i I I I I I I I I I0.35 -i...---J-0.20 T - -i - -n- -,-c01 L--- ----- --- - 0-*-N -- -- --- --^- 00 )-- 0--

0.10--.-'-'--,--,--'-- --- .---r-----l-----|---J.--*r . J!-T---?-f0.05 Iact, the BaI Io b t ad It Big. 3. Her ndhal ndex or Mexicanbanking. ource:Economista Mexicano issues.

fail. In fact, the Banco de Jalisco bought and rescued the Banco deAguascalientes from failure at the end of I98.114In fact, considering that Banamex systematically denuded the bankingsystem of liquidity during I908, the banks weathered the crisis of 1908rather well.1'15As the case of the Banco de Jalisco demonstrates, investorsin banking stocks were aware of the prevalence of insider lending, anddeveloped sophisticated methods of monitoring their interests, whichgenerally succeeded in preventing failures even during a serious financialcrisis.

by the favoritism of existing institutions'."16 In Mexico, such entry washighly restricted. Families that lacked adequate resources of their ownwere stifled by a lack of credit.

Figure 3 graphs the Herfindahl index, an index of concentration, for theMexican banking market during the late Porfiriato. The Herfindahl indexis defined as the sum of the squares of the market shares of the variousfirms in the market. In this case, market share was defined as thepercentage of the total assets of the banking system pertaining to anyparticular bank. The advantage of the Herfindahl index as opposed toother measures of concentration is that it allows concentration to becompared in markets with substantially different structures. Conceptually,a market with a Herfindahl index of 0.5 is just as concentrated as a market114 BoletinFinancieroy Minero, 24 December l908.115 See Maurer, 'The Banco Nacional and the Local Banks', for a detailed discussion ofBanamex's role in the criiss of 1907-8.116 Lamoreaux, 'Banks, Kinship, and Economic Development', Journal of Economic

History, p. 663.istory1,. 663.


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360 Noel Maurercontaining two equally-sized firms, and a market with an index of o. 33 justas concentrated as one made up of three equally-sized firms, and so on,regardless of the actual number of firms in the market.The banking market was highly concentrated, and as Fig. 3 shows,remained highly concentrated after 1902. This flaw, more than any other,gave the Mexican economy its uniquely concentrated industrial structure,which survived the Revolution and persisted for the next eighty years.17In other words, too much insider lending was not the problem: theproblem was that there was not enough insider lending.

ConclusionThere is no one prototypical bank. Rather, banks are bounded by theculture and social system in which they are embedded. The 'rules of thegame' governing their actions are shaped by the politics, social structure,and historical legacy of their particular time and place. Banks mayeverywhere and at all times face certain problems, and exist to carry outcertain functions, but they do not inevitably emerge out of economictheory.Mexican banks operated much like their counterparts in early I9th-century New England. They lent to their own directors or their closeassociates in order to solve the information asymmetries inherent to thebanking business. They did this in a way congruent with the socialcustoms and legal institutions of the g9th-centuryMexico. Impersonalinformation was scarce, and kinship ties highly valued. Given this,Porfirian banks arrived at the same solution developed in other times andplaces where the culture placed a similar importance on family ties, andimpersonal information was hard to obtain. Like their New Englandcounterparts, Porfirian banks served as conduits for attracting impersonalcapital into their family-based business networks from across the region(via deposits), the nation (via equity sold on the Mexico City exchange),and overseas (via equity sold elsewhere). In addition, banks enabledentrepreneurs to develop the long time horizons needed to tackle theindustrial, agricultural, transport, and mining ventures required forgrowth.Far from being pernicious or fraudulent, insider lending allowed banksto overcome the scarcity of good financial information about outsidecredit risks that characterised the Porfiriato. It was no secret that banks in17 SeeHaber,'FinancialMarketsand IndustrialDevelopment: A ComparativeStudyofGovernmentalRegulation, FinancialInnovation, and Industrial Structure n Braziland Mexico, I840-I930', in StephenHaber(ed.), How Latin AmericaFell Behind, p.146-78.


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Banks and Entrepreneursn PorfirianMexico 36iPorfirian Mexico engaged in widespread insider lending. Investors inbanking stock during the Porfiriato knew that they were actuallyinvesting in the network of businesses and enterprises associated with thebank's directors, and developed techniques to monitor their interests andprevent abuses. The uncompetitive nature of the Porfirian banking systemmay have limited the ability of new entrepreneurs to gather the resourcesthey needed to grow, and prevented the Porfirian economy fromachieving the kind of industrial vitality found in countries with moredecentralised capital markets, but the banks' use of insider lending did notin-and-of-itself retard Mexico's economic growth or industrialisation.Insalubrious effects emerged from the interaction of high concentration,barriers to entry, and insider lending, but not from insider lending initself.Porfirian Mexico did not allow free entry into banking. Rather, entrywas highly restricted. Even more, Mexican policies favoured thosefamilies and individuals connected with Banamex and the Banco deLondres y Mexico. The system choked off opportunity and limited thenation's long-term potential. To paraphrase Naomi Lamoreaux, Mexicoenjoyed the benefits of the group form of enterprise (the ability tomobilise impersonal capital, the partial solution of the problem ofasymmetric information, and the lengthening of entrepreneurial timehorizons), but it was unable to avoid the primary drawback - theconcentration of economic power.

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Banks and Entrepreneurs in Porfirian Mexico: Inside Exploitation Or

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