ABSTRACT: In 1824 the creation of political institutions that constrained the monarch’s bility to unilaterally tax, spend, and debase the currency allowed Brazil to borrow repeatedly in London and in Rio de Janeiro to an extent that (at least through the 1880s) was unrivalled among the new nations of Latin America. The share of total public debt accounted for by long-term funded issues grew, and domestic debt came to dominate foreign debt by mid century. Sovereign debt yields fell over time in London and Rio de Janeiro, and the cost of new borrowing declined on average. The market’s assessment of
the probability of Brazilian government default tended to decrease. The development of vibrant private financial markets did not, however, follow from the enhanced credibility of government debt. Business finance in Imperial Brazil suffered from politicized market interventions that undermined the development of domestic capital markets until the early
1880s. Private interest rates remained high, entry into commercial banking was heavily restricted, and limited-liability joint-stock companies were tightly controlled. The Brazilian case provides an important counterexample to the general proposition of North and Weingast that institutional changes that credibly commit the government to honor its obligations necessarily promote financial development more broadly. In Imperial Brazil the very institutions that enhanced the credibility of sovereign borrowing permitted the systematic repression of private financial development.