The Spanish Royal Tobacco Monopoly in the Viceroyalty of Peru, 1752-1813

Catalina Vizcarra, University of Illinois at Urbana-Champaign
Richard Sicotte, Universidad Carlos III de Madrid

Faced with the prospects of continued decay, Spain�s Bourbon monarchs initiated ambitious reforms with the goal of revitalizing the 18th century Spanish Empire. The establishment of the Royal Tobacco Monopoly in Spanish America was a crucial element in these reforms. The monopoly had the same objective throughout the continent: to increase fiscal revenues and remit them directly to the metropolis. Initially, the authorities monopolized the sale of tobacco leaf only. In the late 1760s, the Mexican monopoly expanded into manufacture, concentrating production in several great factories. Mexican monopoly profits flourished, supplying the Viceroyalty with approximately 20% of its total fiscal revenues. As a result of the stunning financial success of the Mexican monopoly, Spain sought to reform the Peruvian enterprise in its image. In spite of the adoption of nearly identical formal governance structures, the results were dramatically different. Although revenues did rise after the establishment of the �factory system� in 1780, they did not rise as much as in Mexico. In the midst of a heated bureaucratic controversy, the Peruvian factories were closed in 1791. Production of cigars and cigarettes resumed under the putting out system in the private sector, and the tobacco monopoly reverted to its previous practice of selling tobacco leaf only. This paper is the first attempt to analyze the Spanish tobacco monopoly in colonial Peru from a comparative institutional perspective. We obtained extensive micro-level cost and revenue data of the Peruvian monopoly for the years 1770-1813 from the Archivo de las Indias in Seville and the Archivo General de la Nacion in Lima. These data permit us to analyze rigorously the three stages of the monopoly�s history: the pre-factory, factory, and post-factory periods. The Peruvian tobacco monopoly achieved its highest profits under the �factory system�. By comparing the evolution of profits with measures of overall economic activity, we demonstrate that demand shocks do not explain the better fiscal outcome in the factory years. We also examine the evidence for supply shocks, and note that the trade disruptions from the Napoleonic Wars influence the monopoly�s performance. However, the monopoly was able to substitute local production for imports, and consumers also substituted among tobacco products in a manner that reduced the loss in profits for the monopoly. Interestingly, there is no evidence that the factory mode of production achieved significant economies of scale that the customary �putting out� process was not able to attain. The root cause of the higher profits during the factory years was the monopoly�s greater success in eliminating contraband. The monopolization of tobacco manufactures made it easier to detect contraband products. Additional reforms regulating the transportation of tobacco and increased security in the state warehouses also played a major role in reducing smuggling. Finally, we summarize briefly the political economy of the closure of the Peruvian factories. We provide evidence that Lima�s merchant elite, which lost profits at the government�s expense under the factory system, was able to exert influence and bring about its abolition.