No other state in the nation has a Development Bank, yet Puerto Rico has had one since 1942. Historically, most of the bonds sold by the Government, its agencies and the Public Corporations have gone through the capable hands of this institution. Currently, it is at the forefront of the Federal Bailout program, the single most important program available to Puerto Rico. What were the motives for establishing this institution? Has it functioned as a Development Bank? What were the initial objectives of this institution? Are these objectives still relevant?
At the start of the Second World War, Puerto Rico began to implement an industrial program. Given the economic crisis of the previous decade and the looming war, it was critical that Puerto Rico get on its feet in order to assist in the war effort. Industrialization was seen as the only solution to this economic dilemma. Newly appointed Governor Rexford G. Tugwell worked with the Popular Democratic Party (PDP) and Senator Luis Muñoz Marín to implement such a program. The two pillars of this program would be the Development Company and the Development Bank. The Development Company was designed to promote the industrial effort, while the Development Bank would be responsible for its finances. Unfortunately, things didn’t turn out as planned. Here we analyze the conflicts that prevented the original plan from being implemented, and its long-term impact on the Puerto Rican economy.
Development banks, such as Mexico’s Nacional Financiera, Brazil’s Banco Nacional de Desenvolvimiento Económico e Social, and Korea’s Development Bank have demonstrated the importance of these institutions to industrial development. In 1942, during the initial stages of its industrial development, Puerto Rico organized a Development Bank to serve as the financial arm of its industrial program. Our research demonstrates that the conflicting views of those implementing the industrial policy of Puerto Rico and those doing the financing severely affected the performance of this institution, to the point where it no longer functioned as the financial arm of the industrial program, but as a governmental bank whose major purpose was to finance infrastructure projects. Financing local and foreign industrial investments was left to the private banking sector.
During the beginning stages of Puerto Rico’s industrial development, Rexford G. Tugwell, Governor of Puerto Rico from 1941 to 1946, promoted the creation of a Development Bank. As local entrepreneurs did not want to invest in manufacturing, Governor Tugwell envisioned the Bank as an institution that would be willing to make loans into ventures that were considered too risky by private investors.
The amount of capital deposited in local banking institutions in 1942 was an astonishing $119,324,000. Fifty-four percent of these deposits belonged to private interest groups. Therefore, capital was available to invest in manufacturing. However, the animosity between the private interest groups and the Tugwell administration, the perceived income that the sugar industry would generate as a result of the impending war, and the weak internal economic structure made investors uneasy about investing their capital, and banks leery of lending it.
Rafael Buscaglia, the Treasurer of Puerto Rico who ultimately became President of the Board of Directors of the Development Bank, could not have disagreed more with Governor Tugwell. He believed that the Bank should not take undue risks and that the industrialization program should be undertaken by private investors, realizing, of course, that the Island’s weak infrastructure must be attended to first. Teodoro Moscoso, president of the Development Company-the promotional arm of the industrialization effort-believed that the Development Bank should assume the risks required to implement the industrial plan formulated by the Development Company. According to the laws that created both entities, the Development Company was to be given preferential treatment by the Development Bank.
Another powerful figure in the debate over the Island’s political and economic future was the recently elected President of the Senate, Luis Muñoz Marín. During his electoral campaign of 1940, Muñoz, acting as president and founder of the newly minted Popular Democratic party, promised the creation of a People’s Bank, which would safeguard public funds and would provide loans to those in need. This concept certainly did not fit the mold of any development bank, much less one envisioned by Governor Tugwell or Moscoso, or even, for that matter, Buscaglia. As such, the divisions within Puerto Rico’s political leadership severely limited the efficacy of this institution.
Looking at the challenges faced by Puerto Rico, the role of the Government Development Bank (The original Development Bank was dissolved in 1948, to be replaced by the current institution) is more important than ever. If this institution is allowed to exert its influence on all public corporations and government agencies requesting federal aid and loans, them we can rest assured the monies will be well spent.