The macroeconomic and financial reforms carried out between 1964 and 1966 affected the development of SCFIs through three main routes: inflation control, deepening of income concentration and the financial market segmentation project.
Castelo Branco’s presidential mandate (1964-1966) had two orthodox economists at the Finance Ministry, Roberto Campos and Octavio Bulhões. Under the auspices of Campos/Bulhões, Brazil witnessed a strong commitment to combating inflation gradually (Bastian, 2013). One of the main pillars in this commitment was to replace JK’s inflationary financing of the industrialization process by something else. In its place, the implementation of a fiscal policy that boosted revenues was a strategy pursued. And in order to do this, it was fundamental to recover the attractiveness of public bonds.
As we saw previously, the funding of the state via public bonds was hampered by the combination of high inflation and the Usury Law, resulting in negative real yields for all applications with longer maturities. Another important factor was the existence of the “Golden Clause”, which prohibited the issuance of inflation-indexed debt in the country. Thus, in order to increase assets yields, given the gradualist strategy to fight inflation, the solution found was to abolish the Gold Clause. Indexation was firstly introduced in public bonds, the ORTNs, and then it was progressively extended to other financial papers. A second strategy to improve revenues was the increase of indirect taxation.
Another pillar in the fight against inflation was wage policy. It was believed that existing policy fuelled cost-push inflation by granting wage increases which were higher than productivity gains. Consequently, a new adjustment rule was implemented which resulted in significant losses for employees, in real terms. The new wage policy, coupled with the increase in indirect taxation - which is inherently regressive, in the sense that it penalizes the poorest groups - culminated in a strong worsening of income distribution.
Therefore, on the one hand, the gradualist approach to combatting inflation laid the ground for the profitability increase of the letras de câmbio in the following period. To Syvrud (1972), real gains for investors only became positive from 1967, when annual inflation was around 25%. The author explains that the nominal rates paid to investors of bills of exchange rose steadily from 1960 to 1964 (amidst a financial environment marked by interest caps) – albeit at a slower pace than inflation rates. It was only after the structural reforms that nominal rates started to fall faster than inflation.
On the other hand, with the deepening of income concentration, the amount of “idle” resources in search of appreciation also increased. The result was the increased investment on bills of exchange - in other words, the increased funding of SCFIs. The ratio between accepted bills and the amount of money in circulation went from 32% by the end of 1967 to 102% by the end of August, in 1969.
At the same time that the funding of SCFIs was increasing, the investments of these institutions were increasingly being channelled towards the financing of consumption. The financial reform implemented during Castelo Branco’s government was inspired by the Anglo-Saxon model, which was based on the segmentation of the financial system. Macarini (2007) argues that commercial banks were confined to the role of remaining in their traditional niche of activity - short-term credit, thus assuming a relatively minor position in the government's project. Investment banks assumed a strategic role in long-term financing. And the future designated to the SCFIs by policymakers involved a progressive specialization on consumer financing41. While investment banks had the role of financing the industrialization effort, along with public investment, SCFIs boosted demand.
Therefore, in 1966, the most complete regulation of the SCFIs since 1959 came into force. Resolution number 45 (30/12/1966), besides defining the operational scope, created the direct credit to consumer, known as CDC42 (Almeida, 1980). As the name suggests, the consumer could obtain credit directly from a SCFI. Operations mediated by the retailer continued to exist, which could then be classified as indirect credit. In the latter case, the retailer was responsible for analysing the risk of the operation, since it was the issuer of the bill. The retailer was also the entity responsible for fulfilling the financial obligation with the SCFI. But the advent of the CDC eliminated important sources of risk for the retailer – the one of illiquidity because of a lack of resources to finance an increase in instalment sales and the risk of consumer’s default. All of these risks fell on the SCFI (Pellegrini, 1990).
The regulation also established that at least 40% of the SCFIs transactions had to be destined to CDC, paving the way for an increasing specialization of these institutions, which were previously free to also operate with business financing. In the following year, when Delfim Netto became the finance minister, a new rule radicalized the quantitative target to 100%, which was to be reached gradually. The official rationale was to make SCFIs finance consumption, exclusively.
The 1964-1966 reforms prepared the structural basis for SCFIs to become the platform of dissemination of consumer credit in the country. In the next period, known as Milagre Econômico, the SCFIs opened a virtually unexplored field of household indebtedness, which in turn opened a new dynamic front of accumulation attached to mass consumption.