War, taxes and gold : the inheritance of the real

Having stated the approach, this introduction proceeds with the outline of the paper, provides a quantitative overview of the period 1555-1910 (section 1.2) and explains the role of the Cortes in fiscal and monetary developments since the XIV century (section 1.3). Section 2.1 emphasises the role of domain revenues. Section 3.3 uses the structure of state revenue to reveal how the entrepreneurial domain state undermined the contractual basis of taxation, hindering reform and delaying economic development in the late XVIII century. The three following sections correspond roughly to the XVII, XVIII and XIX centuries. Guiding the analysis in the different subsections are changes in the monetary or fiscal regime, largely a reflection of the pressure coming from foreign invasions, let alone successive wars or revolutions at home. In section 2, the pressure helps understand the build-up against the end of union with Spain and the fiscal and monetary effects of the restoration war, respectively the early introduction of an income tax in 1641 (section 2.2) and successive currency debasements until 1688 (section 2.3). Section 3 presents monetary and fiscal developments following the discoveries of gold in Brazil, beginning with a characterisation of the bimetallic monetary regime which preserved currency convertibility and stability until 1797 (section 3.1). The drop in tax revenues from foreign and colonial trade and the risks of further involvement in the Seven Years war led to a major reform of fiscal institutions in 1761 (section 3.2). The impact of Napoleonic wars ( 1796-1808) on the tax system was most apparent in the efforts to overcome the tax immunities enjoyed by nobility and clergy. The tax debate achieved almost the same salience as it did in pre-Revolutionary France. But it did not bring about an efficient, equitable and simple tax system. Instead, mounting budget deficits resulted in the issuance of public internal debt. The transition to constitutional rule in 1820 was fraught with financial instability, including the first experience with inconvertibility followed by the transfer of the crown to Brazil and currency devaluation. After the Brazilian declaration of independence in 1822, social unrest continued and led to a civil war (section 4.1). The redefinition of property rights and state functions is at the core of the political debates and actions attempting to build up a liberal state. Nevertheless, the establishment of representative institutions did not provide a new legitimacy for taxation. On the contrary, the liberal revolution was associated with the loss of social confidence and financial reputation, making the coexistence of political and financial freedom difficult, to the point that a major tax reform was introduced during civil war (sections 4.2 and 4.3). Up to the 1850s, many financial schemes designed to raise government revenue were tried, including debt issue, tax reform, forced debt, forced donations from the mercantile community, property confiscation and privatisation of state property. Eventually, there was a peaceful change in economic regime, involving compromises that softened political conflicts and maintained political and financial freedom for forty years. Yet systematic resort to deferred taxation via external borrowing narrowed the domestic tax base and made the financing of public infrastructures unsustainable. Domestic political instability returned and the Baring crisis of 1891 was sufficient to force Portugal off the gold standard, keeping the real and then the escudo inconvertible for the next hundred years (section 4.4). Section 5 concludes, stressing how forgetting the inheritance of the real may hurt Portugal's prospects in the eurozone.