The guano bonanza also set in motion more negative trends. Castilla "nationalized" guano in order to maximize benefits to the state but in so doing reinforced aspects of the old colonial pattern of a mercantilist political economy. The state then consigned the commercialization of guano to certain favored private sectors based in Lima that had foreign connections. This created a nefarious and often collusive relationship between the state and a new "liberal" group of guano consignees.

Soon, this increasingly powerful liberal plutocracy succeeded in reorienting the country's trade policy away from the previous nationalist and protectionist era toward export-led growth and low tariffs. Capital investment derived from the guano boom and abroad flowed into the export sector, particularly sugar, cotton, and nitrate production. The coast now became the most economically dynamic region of the country, modernizing at a pace that outstripped the Sierra. Coastal export-led growth not only intensified the uneven and dualist nature of Peruvian development, but subjected the economy to the vicissitudes of world trade. Between 1840 and 1875, the value of exports surged from 6 million pesos to almost 32 million, while imports went from 4 to 24 million pesos. On the face of it, the liberal export model, based on guano, pulled Peru out of its postindependence economic stagnation and seemed dramatically successful. However, while great fortunes were accruing to the new coastal plutocracy, little thought was given to closing the historical inequalities of wealth and income or to fostering a national market for incipient home manufacturing that might have created the foundation for a more diversified and truly long-term economic development.

What proved a greater problem in the short term was the state's increasing reliance and ultimate dependence on foreign loans, secured by the guano deposits which, however, were a finite and increasingly depleted natural resource. These loans helped finance an overly ambitious railroad and road-building scheme in the 1860s designed to open up Peru's natural, resourcerich interior to exploitation. Under the direction of American railroad engineer Henry Meiggs (known as the "Yankee Pizarro"), Chinese coolies constructed a spectacular Andean railroad system over some of the most difficult topography in the world. But the cost of constructing some 1,240 kilometers of railroad, together with a litany of other state expenditures, caused Peru to jump from last to first place as the world's largest borrower on London money markets.

Peru also fought two brief but expensive wars. The first, in which Peru prevailed, was with Ecuador (1859-60) over disputed territory bordering the Amazon. However, Castilla failed to extract a definitive agreement from Ecuador that might have settled conclusively the border issue, so it continued to fester throughout the next century. More successful was the Peruvian victory in 1866 over Spain's attempts to seize control of the guano-rich Chincha Islands in a tragicomic venture to recapture some of its lost empire in South America.

By the 1870s, Peru's financial house of cards, constructed on guano, finally came tumbling down. As described by Gootenberg, "Under the combined weight of manic activity, unrestrained borrowing, dismal choice of developmental projects, the evaporation of guano, and gross fiscal mismanagement, Peru's state finally collapsed ..." Ironically, the financial crisis occurred during the presidency of Manuel Pardo (1872-76), the country's first elected civilian president since independence and leader of the fledgling antimilitary Civilista Party (Partido Civilista--PC).

By the 1870s, economic growth and greater political stability had created the conditions for the organization of the country's first political party. It was composed primarily of the plutocrats of the guano era, the newly rich merchants, planters, and businesspeople, who believed that the country could no longer afford to be governed by the habitual military "man on horseback." Rather, the new age of international trade, business, and finance needed the managerial skills that only civilian leadership could provide. Their candidate was the dynamic and cosmopolitan Pardo, who, at age thirty-seven, had already made a fortune in business and served with distinction as treasury minister and mayor of Lima. Who better, they asked, at a time when the government of Colonel José Balta (1868-72) had sunk into a morass of corruption and incompetence, could clean up the government, deal with the mounting financial problems, and further develop the liberal export-model that so benefited their particular interests?

However, the election of the competent Pardo in 1872 and his ensuing austerity program were not enough to ward off the impending collapse. The worldwide depression of 1873 virtually sealed Peru's fate, and as Pardo's term drew to a close in 1876, the country was forced to default on its foreign debt. With social and political turmoil once again on the rise, the Civilistas found it expedient to turn to a military figure, Mariano Ignacio Prado (1865-67, 1876-79), who had rallied the country against the Spanish naval attack in 1865 and then served as president. He was reelected president in 1876 only to lead the country into a disastrous war with its southern neighbor Chile in 1879.

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Source: U.S. Library of Congress