During the Depression, some of the larger South American nations took advantage of the slowdown in foreign (U.S. and European) investment to diversify production, to reduce their dependence on manufactured imports, and to broaden their domestic market through industrialization. But the regime of dictator Jorge Ubico (1931-1944) in Guatemala, instead of seeking alternatives, reinforced the status quo. No measures were taken to alleviate the serious unemployment or to stimulate new areas of production. Efforts to diversity production were initiated during World War II only by the United States, in need of reliable and nearby sources of rubber, essential oils, vegetable fibers and other strategic materials. Nor did Ubico take advantage of the outflow (disinvesment) of foreign capital from Guatemala to establish national control over key sectors of the economy; instead, he granted new contracts, extending the privileges of the U.S. monopolies – the United Fruit Company and its affiliate, the International Railways of Central America.
Why was the state incapable of modernizing Guatemalan capitalism? The crucial factor was the social base of the Ubico regime, specifically the cafetelero (coffee-growers) export-import oligarchy allied with U.S. monopolies. Pushed to the wall by the world economic crisis, the Guatemalan bourgeoisie refused to initiate alternative solutions, such as industrialization and the expansion of the domestic market. Industrial investment would have altered the power structure and involved risks which the bourgeoisie were not prepared to take. Their response therefore was to secure state cooperation in protecting their specific interests, in facilitating exploitation of Indian workers (forced labor) and in maintaining law and order. Thus the 1930’s brought lower wages and new repressive labor legislation (e.g., the anti-vagrancy law of 1934 and a 1944 law permitting landowners to shoot trespassers seeking food, etc.).
These policies were enforced politically by censorship, secret police, and brute military force, directed against increasing social tensions and workers’ revolts. In 1933, for example, the government executed 100 labor leaders, students, and members of the political opposition. While perfecting the apparatus of terror, the Ubico government ruled with absolute authority, without elections. This authoritarian solution, “a way of making the popular sectors … pay the price of the economic contraction,” represented the last stand of a desperate and declining agricultural oligarchy.
As is generally the case for those defending an intolerable status quo, their violent defence combined with internal and external contradictions to destroy the very stability they sought. Even their dependence on the United States backfired. During World War II, the United States enforced the liquidation of the sizeable German coffee, banking and merchant interests in Guatemala, even sending FBI agents to carry out the expropriations and interning German Guatemalans in American camps. Thus Ubico and the cafeteleros were deprived of their strongest allies. The legitimacy of the regime was further challenged by the known pro-fascist sympathies of Ubico and the concrete ties to German interests of many of his close advisers and Cabinet Ministers.