When Porfirio Diaz achieved the political power he long sought he was faced with the chronic problem of rulers, it takes financial resources to rule. Mexico was a poor country little able to pay taxes and moreover Mexico was a country where it is not easy to collect taxes. Porfirio Diaz resolved his financial problems as best he could by doing what rulers have done for millenia; he created monopolies that could share their monopoly profits with the government. But by Diaz' time it was out of fashion to have such monopolies explicitly acknowledged as monopolies. Therefore the rules had to be written so as to make it seems that competition was possible but in reality was not.

The history of financial markets under Diaz shows how this charade was accomplished. Banking and finance are crucial elements in the functioning of country. Diaz needed a compliant bank for his operations. He could not simply force an operating bank to do his will. That would have simply resulted in the collapse of the bank as an effective financial operation. Instead Diaz gave the banks whose compliance he wanted a valuable benefit. He let those banks write the laws which would govern the financial markets of Mexico. The banks quite naturally wrote the laws in way that prevented effective competition for them from developing. The banks were more adept than the government in formulating the rules so that effectively a financial cartel was created without the rules explicitly stating that no new banks will be allowed.

The financial system of Diaz did not emerge immediately upon Diaz' assumption of power. It was not until 1884, more than a decade after Diaz' first presidency, that the full system emerged. In 1884 there effectively were only three Mexican banks. There were five insignificant banks in Chihuahua but they were of no consequence. Diaz merged two of the three banks into the Banco Nacional de Mexico, popularly known as Banamex. The third bank, The Bank of London and Mexico (Banco de Londres y Mexico) was too important to be squeezed out of the market. It was accomodated in the system, which was effectively a banking cartel.

The Commerce Code of 1884 and the Banking Act of 1897 formalized the system. The Commerce Code of 1884 made the provisions that:

• Banamex would increase its capital by 8 million pesos.
• Banamex would create a credit line of 8 million pesos for the Government of Mexico at an interest rate of 6 percent.
• Banamex would serve as the financial agent for the Treasury of the Government.
• Banamex would be the sole source of loans for the Government of Mexico. Foreign borrowing by the Government would thus involve Banamex borrowing from foreign sources and then lending the proceeds to the Government.
• Banamex could issue bank notes to a total three times its holdings of gold and silver. Other banks would be limited to an issue of notes totaling two times their species holdings. Furthermore other banks' note issue was subject to a five percent tax but Banamex would be exempt from that tax.

The system provided for the creation of state banks, one per state. These state banks could not operate outside of their states. Additional state banks beyond the first were legally possible but such state banks were subject to a 2 percent tax on their capital that the first bank in each state were not subject to.

The state banks and the governorships of the states were closely linked. In some cases the governors gained control of their state bank and in other cases influential state bankers or members of their families became governors.

The creation of a new bank or the increase in capital of any existing bank would require the approval of the Secretary of the Treasury and the National Congress.

(To be continued.)