Doug Muir observes that breweries and banks seem to survive civil wars. Now, Doug would never tell you, because he’s modest, but it so happens that he has a friend who’s a little bit knowledgeable about the effects of political violence and instability on economic activity. His friend has even written an entire book about banking and instability.
So, is Doug correct that banks and breweries tend to make it through political instability? Short answer: yes.
Long answer: well, let’s examine the data from one of the worst bouts of political instability to afflict any country with a substantial financial sector and developed manufacturing, at least outside the benighted continent of Europe. Between 1910 and 1929, Mexico suffered a revolution, two insurgencies against the winner of the revolution, a counter-revolution, a counter-counter revolution, a civil war among the winners of the counter-counter-revolution, a military coup, another bout of civil war after an attempted coup by the Secretary of the Treasury, a presidential assasination, three more attempted coups, and a third civil war fought by angry Catholic guerrillas with a penchant for dynamiting passenger trains. Among all that, what happened to the banks and breweries?
Let’s start with the breweries. Mexico’s domestic industry was created almost overnight during the last decade of the 19th century, with local monopolies established in virtually every major city by the 1900. One of the industry’s leading firms (the Cervecería Cuauhtémoc of Monterrey, Nuevo León) came to control 28 percent of the national market. It went on to spin off a glass bottle making company (Vidriera Monterrey) that quickly established itself as a domestic glass monopoly. The other two major breweries were the Cervecería Moctezuma (of Orizaba, Veracruz) and the Compañía Cervecera de Toluca y México near Mexico City.
During the civil wars, armed factions viewed factories as strategic assets that could be used to generate income for the army. What typically occurred in occupied areas was that a faction would seize the factories and run them for its own benefit, or it would threaten to do so unless the management made a “loan” to the revolutionaries. In April 1914 the forces of Pablo González took control of Monterrey. For most of the year González occupied and ran the Cervecería Cuauhtémoc, where he continued to employ the brewery’s workforce. By November the company’s stocks of raw materials had been used up.
At that point, having extracted what he could from the operation, González returned the factory, apparently undamaged, to its owners.
The upshot is that while production dropped during periods of generalized violence — 1914-19 and to a lesser extent 1922-24 — the breweries themselves pretty much came through intact. In fact, beer was such a good market that the Cervecería Modelo started up in 1925, while the country was still rather unstable.
So what about the banks? Well, the banks didn’t fare that well during the civil wars. They were where the money was. Governments and revolutionary factions plundered their cash reserves, forced them to make loans, and engaged in the unrestricted printing of currency. It did not do good things for the banking system, which by 1916 ended up in government receivership — although in many cases the Carranza government wound up with little more than a Mexico City branch office and some papers. On the other hand, the governments that came to power after 1916, however, regardless of their stated ideologies, all recognized that they needed a source of credit in order to restore political order.
It took a while to put humpty-dumpty back together again. A private banking system came back to life, but a December 1920 banking panic caused most of them to fail. In 1921, President Álvaro Obregón announced that twelve banks would be returned to their owners; only five were able to reopen. The government tried to regain access to foreign capital markets by restarting payments on the foreign debt, but the civil war triggered by Treasury Secretary Adolfo de la Huerta’s revolt put paid to that. On the same day the revolt began, Banamex (the largest private bank, and one that existed before the Revolution) transferred $13.5 million to the International Bankers Committee. The government simultaneously borrowed $5 million from the Huasteca Petroleum Company against future oil tax liabilities, with the intention of using the funds to make additional payments on the foreign debt. Instead, the funds went to fight De la Huerta. The diversion of funds meant that the government had to borrow from Banamex to pay foreign creditors ... on July 2nd, 1924, the government gave up and defaulted once again, this time for good.
In other words, this was not a healthy banking system. A snapshot in 1917 would have showed it as pretty much dead ... but no matter how you put it, five banks did survive (including the two largest) and the system schlumped along despite the occasional civil war. The government needed the bankers too much to kill the system dead. In fact, it went out of its way to reactivate bank lending in 1925.
So how did they reactivate the banking system in 1925? That’s another story. The moral of this story is that Doug is right: banks and breweries can survive even extreme levels of violence.