Bilbao began a second economic transformation and its leaders fixed their gaze on cities with cosmopolitan characteristics. The journal Hermes, founded in 1917, symbolized this new spirit. But it was also a city that was socially segmented: the working and popular classes lived in the “upper neighborhoods” (Bilbao La Vieja and San Francisco) and on the periphery of the city, as against the new expansion district which was occupied by the wealthy and bourgeois classes.

In the year 1917 the Central Government permitted the councilors to elect the mayor, temporarily renouncing the prerogative of his appointment, and Mario Arana (Basque Nationalist Communion) was elected mayor. This marked the start of the breakdown of the two-party system on which the parliamentary monarchy had been founded; the workers’ trade unions and republicanism increased their political and social influence.

The City Council of Bilbao hosted the first assembly of municipalities of Biscay in order to proclaim political self-government, and the event ended with street incidents. Moreover, it developed an ambitious program of urban housing and educational, social and health services.