The 1930s was marked by the institutionalisation of the Estado Novo regime, which had sprung up in the previous decade. The National Union arose as a single party in 1930 and a new constitution and the National Labour Statute formalised the corporatist organisation of the regime in 1933.

The fiscal and monetary reforms of the 1920s brought stability and soundness to public finances throughout the 1930s. In 1931, the escudo formally adhered to the gold standard, setting its convertibility in pounds sterling and maintaining parity with the English currency throughout the decade. In 1935, a new law reorganised credit concessions and introduced strict barriers to the entry of new financial institutions, which contributed to the Portuguese banking market changing little until the 1970s

The priority in economic policy was the replacement of imports. In agriculture, this doctrine came in the form of one of the most important agricultural policy campaigns in the country: the Wheat Campaign, which was aimed at combating the prolonged grain deficit and intensifying the protectionist system of the 19th century.

In industry, the constraints that appeared in the 1920s were gradually extended to the majority of sectors throughout the 1930s This consisted of a set of protectionist regulations that gave the government the power to authorise company openings in each sector, the acquisition of technology and capital participation by foreign entities.

Regulatory intervention also encouraged the use of national raw materials. It was in this context that oil refining and industrial production of bicycles began at the end of the decade.

State intervention also included a plan of investment and public spending, approved in 1935 and which would continue until 1950. Through the Economic Recovery Act, the state was attempting to foster an economy arm in arm with a new political regime.

Around 60% of the sums allotted were for transport (the road, rail, port and airport networks) and the modernisation of agriculture. Implementation began in 1936-37 and, all told, it represented an increase of over 20% in current public spending and a quadrupling of annual public investment when compared to the first half of the 1930s.

Economic stability joined the political stability of the regime, largely possible because the country’s economy was relatively closed off from the exterior. It is precisely because of this that Portugal was not much affected by two events marking the west during this decade: the Great Depression and the Spanish Civil War. The country remained isolated, not only because it was in the early stages of industrial development, but also through political choice. This is why agricultural cycles continued to be the main driver of developments in the business cycle. The 1935-36 drought and the aftermath of the Wheat Campaign led the country to its single recession in this decade, between 1934 and 1936.

Aggregate real GDP according to two series

The Wheat Campaign was implemented in 1931 and had a major impact on the production of the most import national grain crop. Its goal was the self-sufficiency of the country in the political context of the replacement of imports. It was aimed at a significant increase in farming area, encouraged by production subsidies and improved technology.

In terms of the markets, the state guaranteed the purchase of national production surpluses and set the prices in order to reduce the risk to producers.

This provided for an unprecedented increase in wheat production between 1931 and 1934, fuelled not only by large producers, but also by a significant number of medium and small farmers.

Despite this, wheat production fell sharply in 1935-36 to the level recorded in 1928. The reasons for this fall are still the subject of discussion, but there are important clues such as soil degradation and exhaustion or a contraction in investment, suggesting overcapacity in the previous years.

Between 1934 and 1935, wheat production was still high, but all other grain crops, such as rye, oats and maize, suffered significant declines as a result of the drought, which also affected wine production.

The weather in 1935-1936 was even hotter and drier, leading to a sharp fall in wine and grain production. Because of this, no other agricultural crop was able to make up for the significant fall in wheat production, causing an economic crisis in the isolated country that was too dependent on the land.

The 1934-36 recession therefore had three main causes: the end of the effects of the Wheat Campaign, with the exhaustion and erosion of the cultivated land, and the end of wheat production surpluses; the weather, which was unfavourable for most crops; and the poor harvest year in olive production.

As on other occasions, perhaps none of these factors in isolation would have led to a recession. It was a number of coinciding factors, all associated with agriculture, that gave rise to this recession.

Economy at the pace of agricultural capacity

Evolution of wheat, corn and potato crops

Industry continued to be a secondary sector for employment and production, lagging behind agriculture. The most important national industries were textiles and footwear, which went through a decade of growth up to 1938.

Conversely, the chemical and food industry sectors continued to decline for several years in the mid-1930s.

The industrial production index reached a peak in 1934 and a trough in 1936, resulting in a small downturn of 1.75% between these two years.

Cork, on the other hand, which represented around 15% of the value of exports, saw a small boom between 1935 and 1937. The national cork industry increased its exports at the expense of Spanish producers, who were the main world exporters at the time. From then on, Portugal established itself as the main global cork producer.

Throughout the 1930s, financial stability created a favourable environment for capital accumulation, which certainly contributed to the increase in the investment rate. It stood at 11% on average, more than triple the value recorded in 1910 and without any significant fluctuations that might contribute to the business cycle. In fact, from 1937 to 1950, with the implementation of the investments provided for in the Economic Recovery Act, the contribution of investment to growth was almost always positive.

Industrial production in the food industry

The food industry accounted for 18% of all industrial output.

Its decline between 1933 and 1937 was important for the evolution of the economic cycle.

Unlike the stability that Portuguese isolation allowed, the external context was harsh during the 1930s. The Great Depression of 1929, which began in the United States, had a considerable economic impact on Europe. In Portugal, the main effects of the depression made themselves felt in the balance of payments, through a fall in the price of national raw materials on foreign markets, the abrupt drop in remittances from Brazil, as a result of the capital controls in force there, and the steep fall in emigration to all destinations, particularly the United States. The 1930s was the first decade of the century to show a positive migratory balance, which would only be repeated in the 1970s and 1990s. From 1931 onwards, fluctuations in emigration and the working population also decreased.

Between 1936 and 1939, the Spanish Civil War made the neighbouring country the stage for a bloody conflict. From a political standpoint, Portugal remained neutral, although it did grant certain facilities to nationalist troops. From an economic standpoint, despite some impact on the cross-border regions, Portugal and Spain were largely disconnected and would remain so for a few decades more.

Countries like Brazil, England and Belgium were more important for national foreign trade. The main economic consequences of this conflict for Portugal seem to have been an increase in exports, particularly cork, because national industry was competing with Spanish industry for the same markets.

Emigration

There was a strong slowdown in Portuguese emigration in this decade, as a result of the international situation marked by the closure of borders and the Great Depression