The Portuguese Republic was taking its first steps, following the 1910 revolution that had put an end to the monarchy. The young regime was going through a period of prolonged political and economic instability and there were budget imbalances inherited from the royal governance, which had never fully recovered from the sovereign debt default of 1891.

At that time, Portugal had a poor, largely undeveloped and profoundly rural economy that was very much shut off from the outside world. The exceptions were exports of canned goods and port wine. Wheat, which the country depended on for food, was of prime importance in foreign purchases, as well as coal, a source of energy for the emerging industry.

The 1911 census paints a telling portrait of the sectors: 62% of the labour force worked in farming, very often on a self-subsistence basis. Industry – taken here in a broad sense that includes cottage industry, for example – employed only 22% of the working population and services accounted for the remaining 16%.

It is this country, lagging behind socially and economically, politically unstable and dealing with successive crises of governance, that was to be plunged into a long period of crisis, later worsened by the First World War and the Spanish Flu.

The crisis lasted six years and had multiple causes throughout this period. The political instability and fiscal difficulties inherited made the economy fragile. This was seen not only in production, but also in its measurement, as many of the national statistics were only produced years later and the collection of some data was interrupted during the War. This is why there are gaps in and omissions from many of the disaggregated series that the Committee uses for dating the business cycle.

The first decline in production in 1912 originated in the agricultural sector, which had a significant weight in the Portuguese economy. Adverse natural conditions in the 1912-13 farming year led to a fall in the production of wine and wheat, as well as other grain crops. In wine production, 1913 was a year when pests and thunderstorms led to significant falls in the production of port, which was an important export. No reliable data is available for olive production between 1912 and 1914, but there was a production peak in 1911. Bearing in mind the regular cycle of one good harvest year for olives being followed by another with far less production, 1912 can be expected to have been a year of possible contraction.

Later, between 1915 and 1918, wine production stagnated, linked to years of poor rainfall and the difficulty in importing fertiliser and pesticides during the War. The olive crop, which had increased in 1917, saw a contraction the following year.

Aggregate real GDP according to two series

It was in this context of a weakened economy that on 28 July 1914 the first shots of World War I were fired in the centre of Europe.

The beginning of the conflict contributed to another steep decline in production in 1915. After a slight recovery in 1916, the economy went into a sharp decline, coinciding with the two years that Portugal was active on the European front: 1917 and 1918. The first 30,000 Portuguese soldiers set sail from Lisbon in January 1917. In total, more than 100,000 military personnel were mobilised, equivalent to more than 3% of the working population.

The war economy in Portugal brought serious constraints to economic activity.

The war effort put a heavy strain on public finances without bringing any stimulus to demand for national industries, with the exception of the canning industry.

With the closing of borders, sea routes became inoperable due to German submarine activity and the land routes to Northern and Central Europe were interrupted by the German occupation of France. Portugal was dependent on coal imports for heating and for industry, as well as the wheat imports needed for bread production. Cod fishing also became impossible.

The government banned the export of coal and certain foodstuffs in a case of interventionism hitherto virtually unknown. And in April 1915, the prices of essential foodstuffs were set by municipal committees.

But the impact on the supply of essential products was not avoided. There are reports of frequent attacks on bakeries and grocery stores that caused more than 40 deaths. The food shortage led to an unprecedented movement known as the “potato revolt” in May 1917, following a sudden increase in prices.

That year, there were strikes in the construction industry and in posts and telegraphs. Generally speaking, there was an increase in strikes, riots and attacks between early 1916 and late 1917.

In 1917, the Ministry of Agriculture was set up with a programme to increase farm production and productivity, which tried to organise farming cooperatives for growing crops in wasteland and fallow land and providing the producers with seeds and fertiliser.

Port movement

The First World War led to a sharp reduction in maritime trade, which was the main channel of exchange with the outside world. The decline in movement in national ports was notorious.

In addition to the impact on external trade and the supply of raw materials, the restrictions on people's mobility led to a decrease in emigration, a relief valve for the poor agricultural conditions at the time. From the establishment of the Republic until the outbreak of the Great War, emigration increased rapidly, reaching a high of almost 100,000 people in 1912 (according to official records and estimates), whose main destinations were Brazil and the United States. From then on, Portuguese emigration fell steeply, heightening the social tensions running through this entire period, with the development of the workers’ movement, the demonstrations against inflation and political dissidence of various types.

Popular discontent led to severe political instability. Between January and May 1915, the parliament was suspended and a government created by presidential decree, which was known as the dictatorship of Pimenta de Castro. Several governments followed until the triumph of the military revolution led by Sidónio Pais in December 1917, which established a dictatorial presidential regime. It lasted one year, until the assassination of its leader.

With the end of the War, the opening of borders made it possible to resume supplies and export products, leading to a recovery in economic activity. However, the economy remained depressed in the first half of the 1920s.

The economic impact of the War was different in the Portuguese economy: while military expenditure in the American, English and German economies was on weapons and uniforms, which stimulated national production, not many weapons were produced in Portugal and the payments associated with military expenses went abroad. These were mainly financed through loans from the Bank of England. The largest slice of these expenses was the salary for the personnel, which did not stimulate consumption in Portugal.

Neither did the end of the War bring social peace. The persistence of shortages, the high prices of certain essential goods and the outbreak of the Spanish flu continued to aggravate living conditions in the country. Between mid-1918 and mid-1920, the pandemic caused the deaths of 100,000 Portuguese in three waves.

Mortality and the periods of convalescence for the sick contributed to the irregular operation of factories and public services.

One of the main scars left by World War I was the unparalleled financial and fiscal instability in Portuguese history.

The high deficits caused by the war were paid through debt issue. In 1918, this monetisation was provided for in a decree-law governing Banco de Portugal and led to a sharp rise in inflation. Inflationary pressure was common to most of the countries in the conflict, contributing to relative stability in the exchange rate with the pound sterling. World War I destroyed the national and international tendency towards stabilisation around the gold standard.

Emigration 

Emigration was an escape from the poor agricultural conditions at the time. From the establishment of the Republic until the outbreak of the Great War, emigration increased rapidly, reaching a peak in 1912 of almost 100,000 individuals, with Brazil as their main destination.