Verily, thou shalt not forgotten the name, Encilhamento ...Who has not seen that, haven't saw nothing! [1]

The Encilhamento was an economic bubble that boomed in the late 1880s and early 1890s in Brazil, bursting during the provisional government of Deodoro da Fonseca (1889–1891) leading to financial crisis. Two Finance Ministers, first, the Viscount of Ouro Preto and then Rui Barbosa, adopted a policy of unrestricted credit for industrial investments, backed by an abundant issuance of money [2][3] in order to encourage Brazil's industrialization. This policy of economic incentives created unbridled speculation, increased inflation, and encouraged fraudulent initial public offerings (IPOs) and takeovers.[4][5]

The name

The word "encilhamento", literally "saddling-up", the act of girthing or mounting a horse,[6] was a term borrowed from horse racing used to refer to the speculative movement due its analogy related to the belief of trying to take advantage of get-rich-quickly opportunities whenever they unfold,[7] in an analogy based on the popular Brazilian saying "An unmounted saddled horse doesn't appear twice."[8]


Throughout the 19th century the maturation of technological innovations, especially the development of rail transport, gas lighting and steamships, among others, all linked to the process industrialization, created opportunities for large speculative movements, leading to an acceleration of the flow of capital in the world.[9]
And despite a considerable native capital volume have been released with the prohibition of the slave trade in 1850, at the same time when Baron of Maua laid the modern banking system in Brazil; decades later at beginning of the Republic, the Brazilian economy was still tied through, among other things, by a restrictive economic legislation that mainly due respectively to the 1850 "Land Law" and the "Barriers Act" of 1860, inhibited the access to land ownership by former slaves and immigrants in a time where agriculture was predominant economically in the country,[10][11] and tied for decades the development of Brazilian financial markets, with them having become at that time, a kind of "notary oligopoly" under the control of few families.[12]
Proposed changes in land legislation for example, was one of the reasons why large landowners and former slaveholders supported the establishment of the republic.[13][14] In this political environment, economic and social under the pretext of promoting the process of industrialization of the country, occurred the Encilhamento.

Leading figures


The 1st step of encilhamento took place during the end Monarchy under the command of Viscount of Ouro Preto, the last finance secretary of that period, when it was regulated a new Banking Act, in November 1888. A rise in the Rio de Janeiro Stock Exchange that had already boomed in 1886 accelerated with the abolition of slavery two years later, having reheated again with the measures implemented by the new banking law (that reversed the 1860 "Barriers Act"), and in 1889 the proposed changes for the Land and Real State laws. Along with the increase in market liquidity, there was the introduction of modern financial mechanisms, enhancing the financial leverage possibilities. The reduction in the issuance of government bonds has also opened space for the expansion of stocks issues.[20] All this, slowly led to an increase in speculation and inflation in general, embracing all economic sectors, from the currencies to real estate,[21] creating minor bubbles into a big one.

In this environment, the Viscount of Ouro Preto decided to create an institution to act as regulatory agency for the financial market, a private central bank in the European manner, a reserve bank, a monetary authority of liquidity. The fact that Rui Barbosa had been a great opponent of such system, accredited him to be appointed by the military as finance secretary, when they imposed the republic.[22] Ironically, when took office, soon after the proclamation of the Republic, he put into practice all what he had criticized before. In January 1890 he enacts a new banking law, inspired by the ideas of the counselor Mayrinck, his banker and personal friend, who he appointed as head of the new Central Bank, without even consulting the president, signing the bill late at night in a scandal that would be the first of a series until his departure from the secretary.

This however didn't stop the enacting of the new law, despite the protest and opposition from secretaries like Demetrio Ribeiro and Campos Sales, who predicting the consequences of measures, got a central bank to São Paulo.[23]

The unregulated speculation rose as direct reflection of the new law and although had reached all major sectors of the economy, especially over currency trading where it picked its highest volume; was in the rogue trading on IPOs, despite its legality, that occurred the main political disaster of the process, due the leniency of the new banking law that allowed authorized issuers act freely, without any supervision or official punishment.[13][24] A example of such issues occurred not only when a company went to the IPO without any economic fundament to support it, but also whenever it needed more money, just issued new subscriptions. The investor who wouldn't answer to the new offerings, lost the rights to the old ones and all the money paid previously.[25]
Since the new law tied to trade rights to their nominal values, there was no official oscillation of stock prices, and consequently, no way to negocitate them directly in the Stock Exchange in order to both minimize losses or maximize profits. This in practice not only restricted the trading of securities to the OTC market, congesting it by supply, but also led to a deadlock for new issues in the stock market, preventing those legitimate business that could take off out of the process, besides causing a total loss to many inexperienced investors.[13][26]

Instead of help to promote growth and structural change in the economy, the process led to one of the worst inflation outbreaks of the country's history, while the Brazilian economy suffered violent "collapse".[27][28] The Encilhamento Last Straw came with the financial shock wave caused by the default of Argentine government bonds following the 1st collapse of the Bank Baring Brothers in the ending of 1890, and although the burst has been initiated then, it occurred in a slowly way, until 1892.[29][30][31]
On January 20, 1891, Rui Barbosa stepped down as finance secretary to head two companies that were created during the Encilhamento and which he had partnership with the Counselor Mayrink.[32][33] General Deodoro da Fonseca resigned on 23 November of that year, during the 1st naval revolt, under imminent threat of deposition by the Republicans, represented by Vice President Marechal Floriano Peixoto, who assumed "naturally" the presidency.


The success of the new stage of economic development, that in theory intended Encilhamento, depended on to be able to create an enabling environment both regarding the relocation of domestic savings, as foreign investments.[34]
However, due to the extraordinary powers conferred to monetary authorities, the private interests in Encilhamento just overlapping the public interest. So, instead of a slow and steady promotion of development, economic growth, distribution of wealth, financial literacy & confidence; what occurred was an increase in concentration of wealth, overvaluation of profiteering at the expense of productive activity, widespread of bankruptcy, as well as of the ignorance and distrust about how politics and markets works, in addition to the geometric increase of debt and economic stagnation.[16][35][36]
So, are pointed out three main reasons for the failure of this speculative movement as a lever for development:[37]

Following the effects of the bust, came the usual period of "witch hunt" that lasted until 1895, when especially during the tenure of Floriano Peixoto, some Encilhamento prominent figures had for example their assets frozen, seized, beyond have been prosecuted publicly and administratively. Among these, was Rui Barbosa, who had to go into exile in Europe.[39]
Also, the legislation concerning the financial markets in Brazil, in a vain attempt to control their volatility, at a time when the concept of Antifragility[40][41] was unknown, suffered violent setback to the time of the "Barriers Act", having only get rid of it, 70 years later in 1965.[39]

Although the bubble burst has happened between 1890–92, their economic and political effects were made throughout the decade,[42] with only in the end of the Campos Sales administration, with Rodrigues Alves in charge of the Brazilian economy, been decreased, but at a high social cost,[43] due to the economic policy of austerity taken in accordance with requests of the big international capital.[44]


  1. Machado de Assis on Encilhamento in his 1904 novel "Esau and Jacob"; Chapter LXXIII "An Eldorado"
  2. Ney O. Carvalho ;"Encilhamento: Anatomia de uma bolha brasileira" ("Encilhamento: Anatomy of a Brazilian Bubble") (Portuguese) Bovespa 2004
  3. Amy Chazkel; "Laws of Chance: Brazil’s Clandestine Lottery and the Making of Urban Public Life" Duke University Press 2008 Chapter 4
  4. Jeffrey D. Needell; "A Tropical Belle Epoque: Elite Culture and Society in Turn-of-the-Century" Cambridge University Press 1987 Page 12
  5. Jose Murilo de Carvalho, "Os Bestializados, o Rio de Janeiro e a República que não foi" ("Brutalized ones, Rio and the Republic that didn't came") (Portuguese) Cia das Letras 1987 ISBN 978-85-85095-13-0 P.20
  6. Robert M. Levine; ”Vale of Tears: Revisiting the Canudos' Massacre in Northeastern Brazil, 1893–1897” University of California Press 1995 ISBN 0-520-20343-7 Page 330
  7. Ignacy Sachs, Jorge Wilheim & Paulo S. Pinheiro; "Brazil: a century of change" University of North Carolina Press 2009 page 58
  8. An Web Post contemplation about this analogy (Portuguese)
  9. Luis Nassif, "Os Cabeças-de-Planilha" ("Inbox thinkers"; How in Brazil at end of 20th century, the mainstream economic thought repeated its same mistakes of a hundred years before") (Portuguese) Ediouro 2007 ISBN 978-85-00-02094-0 Pages 20 & 21
  10. John Schulz, "The financial crisis of abolition" Yale University Press, 2008 Chapters 2 to 4
  11. Nassif 2007 Ibidem page 77
  12. Marta Barcellos & Simone Azevedo; "Histórias do Mercado de Capitais no Brasil" ("Histories of Financial Markets in Brazil") (Portuguese) Campus Elsevier 2011 ISBN 85-352-3994-4 Introduction (by Ney Carvalho) & page 22
  13. 1 2 3 Schulz 2008 Ibidem
  14. Nassif 2007 Ibidem page 79
  15. Nassif 2007 Ibidem, page 28
  16. 1 2 Nassif 2007 Ibidem
  17. Nassif 2007 Ibidem; pp 28 & 29
  18. Karl Polanyi, Joseph E. Stiglitz & Fred L. Block; "The great transformation" Beacon Press books 1957 ISBN 0-8070-5643-X Chapter 1
  19. Nassif 2007 Ibidem; p.29
  20. Nassif 2007 Ibidem; pág.81
  21. "Viscount Taunay; "O Encilhamento; scenas contemporaneas da Bolsa do Rio de Janeiro em 1890, 1891 e 1892" ("The Encilhamento: contemporary scenes of Rio Stock Exchange in 1890, 1891 & 1892") (Portuguese) Editora Melhoramentos, Rio 1893
  22. Gustavo Franco, "Crônicas da convergência" ("Chronicles of convergence") (Portuguese) TopBooks 2005 p.16
  23. Gustavo Franco, "Reforma monetária e instabilidade durante a transição republicana" ("Monetary Reform and instability during the republican transition") (Portuguese) BNDES 1987 pp. 112 and 114
  24. Ney Carvalho 2004 Ibidem; pág.174
  25. Schulz 2008 Ibidem; pág.84
  26. Ney Carvalho 2004 Ibidem; pág.146
  27. Gail D. Triner; "Banking and economic development: Brazil, 1889–1930" Palgrave™ 2000 ISBN 0-312-23399-X Pages 44–74
  28. Murilo de Carvalho Ibidem 1987
  29. 1 2 Triner 2000 Ibidem
  30. Gustavo Franco 1987 Ibidem, pp. 41-42 and 127
  31. Maria Eulalia L. Wolf, "História do Rio de Janeiro; do Capital comercial ao capital industrial e financeiro" ("Rio History: from commercial to industrial & financial capital") (Portuguese) IBMEC 1978
  32. Needell 1987 Ibidem; p.84
  33. Nassif 2007 Ibidem; p.104 3rd paragraph
  34. Nassif 2007 Ibidem, p.27
  35. Chazkel 2008 Ibidem
  36. Maria Alice R. de Carvalho, "República no Catete" ("Palatial Republic") (Portuguese) Museu da República / FAPERJ pág.95 2001
  37. Nassif 2007 Ibidem, pages 34 and 35
  38. Taunay 1893 Ibidem
  39. 1 2 Barcellos & Azevedo 2011 Ibidem
  40. Definition
  41. academic paper by Nassim Taleb; Polytechnic Institute of New York University, September 2010
  42. James D. Henderson, Helen Delpar, Maurice P. Brungardt & Richard N. Weldon; "A reference guide to Latin American history" M.E.Sharpe Inc. 2000 ISBN 1-56324-744-5 p.172
  43. Murilo de Carvalho 1987 Ibidem, p.21
  44. Needell 1987 Ibidem; p.17
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