During the lifespan of the Estado Novo, propagandists endorsed Salazar as a financial wizard that magically saved Portugal from the clutches of Jacobin democrats who ran the economy amok with repeated bombing campaigns and political disorder. Praised for his prudence and sagacity, hailed as savior of the nation, even classical liberals like Ludwig Erhard sang ringing tunes for the man from Santa Comba Dao.
However, the reality is far different. António de Oliveira Salazar was merely an ascetic accountant who imposed the same principle of frugality upon his countrymen, employing tactics to aggrandize the state’s power. Some will argue with me and assert that the First Republic was a disaster; Catholics were persecuted, the economy was thrashed, people went hungry, while accumulating large foreign debts. I agree with such affirmations, although that doesn’t absolve Salazar from the policies he engendered, equally pernicious, nevertheless discreet. Writing about his life as the top public servant of a military dictatorship for 40 years is not the aim of today’s article. I merely want to debunk some of his financial policies because he’s practically unknown outside of Portugal, a country with a severe dearth of good economists, and this subject matter deserves more attention.
Shortly after becoming financial tsar, the discount rate from 1928 to 1940 decreased from 8 percent to 4.5 percent. The loan rates of Caixa Geral de Depositos—under the aegis of the state—decreased from 10 percent to 5.5 percent, while the maximum rate for demand deposits too were cut from 5 percent to 2.5 percent. Meanwhile, bank deposits increased from 2.8 million to 6.9 million contos. Thanks to the expansion of cheap money, it became less costly for the state to borrow funds.
During the first half of the 20th century, Portugal was barely industrialized, stagnating behind the rest of the continent. How else could the state plunder an impoverished population? Through these credit facilitations, they launched many public works, paying at a rate of 4 percent in 1940, and from 1944 onwards, at a rate of 2.5 percent. Deposits savings were transferred to cover the costs of inflation while eroding people’s purchasing power. But under the guise of keeping public spending lower than its receipts, propagating the myth of fiscal responsibility to spearhead the “good work” of Salazar and the economic model of corporatism. This led to a boom-bust cycle, whereby many entrepreneurial activities either received state handouts to survive or became inactive due to lack of profitability. And, because yields on bonds were low, lending to the state became more attractive compared to private investors.
From 1938 to 1943, the money supply increased by 300 percent, from 2.278 million contos to 6.541 million contos, while circulation of notes from 1939 to 1945 increased by 220 percent, simultaneously private deposits “grew almost fourfold.” By 1945, prices on food rose by 98 percent and the cost of living by 90.5 percent.
Gold reserves did increase in World War II—as Portugal supplied Nazi Germany with Wolfram—but prices couldn’t keep up with inflation. The state resorted to price controls, creating shortages. My maternal grandfather recollects his days of hunger and being provided with wartime rations during his youth despite Portugal’s neutrality.
The state also issued bonds to finance development plans. As a modern nation-state with a monopoly on the currency (escudo), they could inflate the money supply at any point, as the state is always the first recipient of new money. By the time it circulates around the general populace, prices have already driven up. This is known as the Cantillon effect. For example, the 5 percent bonds issued in 1971 during the III Development Plan (1968-1973), were financed in part by inflation, reaching almost 1 million contos before the end of 1972 (adjusted for inflation, that’s just under 56 million euros in 2025), further fueling prices out of control. In a 20-year gap between 1953 and 1973, the growth of money supply had surged up to 375 percent, starting at 9,243 million contos in 1953, reaching 43,897 million contos. In fact, bonds issued in 1946 at a rate of 2.5 percent were still in circulation, perpetuating the trend of currency debasement and debt, subjecting younger generations to carry the burdens. Ultimately, government issued bonds constituted another source of revenue for the state that could only be repaid through inflation (hidden taxation), stealing from people right under their nose.
The ridiculous assertion that inflation was a necessity for economic growth (Acta da Câmara Corporativa N.° 119, p. 1208), makes a lot more sense once we realize that states become more parasitic and deadly the more it infects society with its draconian laws. All taxation is involuntary when not consented by individuals.
There was very little banking competition during this period. Besides Caixa Geral de Depósitos, the state also directly influenced the Banco Nacional Ultramarino, Banco de Angola, Banco de Fomento, Crédito Predial Português e Sociedade Financeira Portuguesa. Minimum reserve requirements fluctuated during the 1960s, between 20 to 10 percent for commercial banks. This is one of the primary, fraudulent features of fractional reserve banking. Scriptural money created by commercial banks increased from 59.1 percent in 1963 to 61.4 percent the following year, before reaching 68.3 percent in 1965. At the same time, the Bank of Portugal itself issued less money. It is also significant that the “ratio of notes in circulation to sight liabilities” decreased from 213 percent from 1938 to 51.2 percent by 1954. Decreasing it meant that a smaller proportion of money circulating the economy was backed by notes, simultaneously creating more scriptural money that was backed by thin air. To put it frankly, nothing!
The Bank of Portugal increased the discount rate from 3.5 to 3.75 in 1971, and once more to 4 percent in 1972—an indictment of the state’s failure to curb inflation while restricting credit to commercial banks—thus stifling investment and making it more difficult for entrepreneurs to obtain credit. Only the natural market interest rate, reflecting the time preferences of consumers, can determine how much an individual values present versus future consumption, which emerges spontaneously from interactions between savers and borrowers. Malinvestment occurs when central banks manipulate credit, diverting resources to unprofitable activities, unviable under normal market circumstances.
Additionally, “special operations” or preferential interest rates were set by the state for certain sectors such as essential goods, raw materials and national equipment, aggravating distortions within the economy. This is evident from Base XVII, paragraph 2 of Law No. 3/72, of May 27, which stated the following:
The Government shall define, by decree of the Council of Ministers for Economic Affairs, the criteria to be followed in determining the list of industries that, given the needs for economic development, the conjunctural circumstances, the availability of productive factors, and the competitiveness prospects in the face of external competition, are considered priorities for the allocation of benefits.
It contributed to the growth of crony capitalism overtaking free market competition, the latter seen by the political establishment as detrimental towards growth, misallocating resources once again. The economy artificially grew at a rate of 6 to 7 percent since 1960, although, as Murray Rothbard wrote and taught regarding growth in Man, Economy and State:
Compulsory growth will not benefit the whole of society as will freely chosen growth, and it is therefore not “social growth”; some will gain—and gain at some distant date—at the expense of the retrogression of others…. Government investment or subsidized investment is either malinvestment or not investment at all, but simply waste assets or “consumption” of waste for the prestige of government officials.
But the nightmare didn’t end here. From 1960 to 1969, fiscal receipts escalated from 7690 million contos to 20,153 million (nearly 1.5 billion euros), expanding social security, creating public enterprises, sustaining three military campaigns during the colonial war, and the development plans, which, as Marcello Caetano (the prime minister deposed by inexperienced troops affectionate to Marxism in April of 1974) revealed in his memoirs, took notes from Keynesian economics and Soviet planning. The public debt more than doubled, from 16,175 million in 1960 to 33,007 million (2.37 billion euros) in 1974, and the number of public workers had ballooned to 200,000, a quarter of the present number. The money supply continued to increase. A 1958-1971 public accounts monograph reveals that prices adjusted to 1963 levels rose annually, with an 8.4 percent increase between 1969 and 1970. Later, the money supply rose by 10 percent at the end of 1972 and 17 percent in 1973 alone. Price controls were imposed to create the illusion of stability and, once again, shortages prevailed.
When the communists and socialists annually spend millions to celebrate “Freedom Day”—at the same time extorting taxpayers by the billions and demonizing the Estado Novo—they willfully ignore the parallels between the democratic Third Republic, and the military dictatorship. In the end, they are not so different, for all the inherent vices of Salazar and Caetano, the new and present governors have exacerbated existent issues. Salazar wasn’t shy from copying point five of the Communist Manifesto—centralizing credit under the state. The threat today, and yesterday, emanates purely from the state.
