All About Coffee Part 98

Valorization was undertaken to save the coffee industry. Its intent was good, even if the theory was bad. The scheme was not new, and there were no encouraging precedents to augur its success. The situation was desperate and seemed to justify the trial of a desperate remedy. So Paulo attempted to carry the load; but her resources were insufficient.

The b.u.mper world crop of 19,090,000 bags in 1901-02 was followed, in 1906-07, with another extraordinary yield of 24,307,000 bags, of which Brazil alone produced 20,192,000 bags. To make good its promise to the planters, ready cash was needed; and so the So Paulo government sent a special commissioner to Europe to get it. For sixty years the Rothschilds had acted as Brazil's bankers. The commissioner went to the Rothschilds first. He was flatly refused. After that, he was turned down by practically every bank on the continent. It looked as if the bankers had entered into a gentlemen's agreement to make it unanimous. Then the commissioner bethought himself of the coffee merchants; and that thought naturally suggested Hermann Sielcken, who, singularly enough, happened to be conveniently resting at nearby Baden-Baden. In August, 1906, the commissioner waited upon Mr. Sielcken and begged his aid.

It was Sielcken's hour of triumph. For years he had been soliciting Brazil. Now the tables were turned, and Brazil was asking favors of Sielcken.

The rest of the story is best told by Robert Sloss, who wrote it for _World's Work_ from information furnished by trade authorities--and even by Mr. Sielcken, himself, in various speeches, newspaper articles, and on the witness stand. It is presented here with certain minor corrections by the author:

"Well, what do you want me to do?" asked Hermann Sielcken of the commissioner from the state of So Paulo.

"We want you to finance for us five to eight million bags of coffee," said the commissioner blandly.

Here was an adventure. Here was a proposition to lift bodily out of the market half as much coffee as the world's total production had averaged for the ten preceding years when prices had been so low.

Presumably, if this were done, prices would be doubled. But Hermann Sielcken shook his head.

"No," he said, "there is not the slightest chance for it, not the slightest." And then he pointed out that there would be "no financial a.s.sistance coming from anywhere" if the So Paulo planters kept on raising such ridiculously large crops of coffee.

The commissioner a.s.sured him that the prospect was for smaller crops in future. Hermann Sielcken was not so sure about it "At a price low enough," he mused, "I might be able to raise funds to pay eighty percent on a value of seven cents a pound for Rio No. 5."

The commissioner was dismayed. His government had already promised to take coffee from the planters at about a cent a pound above the market, and the market then stood at nearly eight cents. The government would have to dig to make up the difference. Hermann Sielcken's terms were the best that could be got, however, and the commissioner accepted them.

From that time forth Hermann Sielcken was the head of the movement.

He approached a few large coffee merchants, including his former rivals, Arbuckle Brothers, and drew up a contract. The merchants agreed to advance eighty percent of the sum required to buy two million bags of coffee at seven cents a pound. If the market went above seven cents, the government was to make no purchases. If it fell below seven cents, the government was to make good the difference to the merchants by cable.

Before the season was well advanced the unexpected happened. Brazil was reaping the largest coffee harvest in the history of the world.

The two million bags of coffee purchased by the government were as a drop in a bucket. Financed by Hermann Sielcken, Schroeder, the great London banker, and a few prominent European merchants, the government was forced to buy almost nine million bags. Toward the end of 1907, the government had lifted half of the world's visible supply of coffee, but the market stood only a trifle above six cents a pound. The government was practically bankrupt.

Hermann Sielcken now enlisted the Rothschilds on his side, and shifted the financial burden from the shoulders of the coffee merchants to those of the Paris bankers and their American a.s.sociates. Then the Rothschilds imposed their conditions on the government of Brazil. A national law was pa.s.sed determining a heavy penalty for any one who planted a new coffee tree in Brazil. The government guaranteed that not more than mine million bags of the next coffee crop and not more than ten million bags of any succeeding crop should be exported.

By the end of 1911, the coffee market stood well above thirteen cents. Here was a rise of more than one hundred percent in two years, more than sixty percent in six months. Evidently, valorization coffee in the hands of the bankers' committee had become a gilt-edged security. But how?

During the five crop years since the "plan" was launched on the heights above Baden, nearly 90,000,000 bags of coffee had been raised in the world. The bankers' committee still held 5,108,000 bags of this. At the highest estimate, consumption had exceeded production by only 4,000,000 bags. Here was a shortage of only a little more than ten percent in supply as against demand, so far as crops go. Yet there had been a rise of more than one hundred percent in two years in the price of coffee on the New York Coffee Exchange.... Upon the merchant's ability to deliver coffee on the New York Coffee Exchange depends the price of coffee in the world.

That explains why the bankers' committee from the beginning refused absolutely to sell valorization coffee on the public exchanges of the world. In Europe, they put it up at auction; and when it didn't go, it was bought in for them. In America, they announced in a printed circular that valorization coffee would be sold only on condition that the purchaser would not deliver it on the New York Coffee Exchange.

Hermann Sielcken absolutely refused to sell coffee to the merchants on the Exchange. Arbuckle Brothers kept on buying coffee heavily, as if they would corner the market. They resold the coffee, however, at private sales, exacting a written contract from the buyer that he would not deliver the coffee on the New York Coffee Exchange, or resell it to any one that would so deliver it. The Coffee Exchange began an investigation, but nothing ever came of it.

Shortly after the valorization committee had apparently cleared up $25,000,000 in one year, the restriction as to the delivery of valorization coffee on the New York Coffee Exchange was officially removed. Yet neither from Hermann Sielcken nor from Arbuckle Brothers, it is charged, could one buy any coffee to deliver for that purpose. In 1911, coffee rose to sixteen cents per pound.

At the end, it was found that the committee's holdings had been marketed at the various sales on a basis, for Santos 4s, from eight and five-eighths cents minimum, to the final sale here forced by the United States government, at which time the price realized was sixteen and three-quarter cents for Santos 4s, and fourteen cents for Rio 7s.

The one fly in the valorization ointment was Senator G.W. Norris, of Nebraska, who early in 1911 called for a congressional investigation of the operations of the valorization syndicate, which he said was costing the American people $35,000,000 a year. The attorney-general was instructed to report as to whether or not there was a coffee trust. It was a leisurely investigation, which encountered many snags placed in its way by those who believed it would be against international policy to question too closely the partic.i.p.ation of the Brazil government in the enterprise. Politics played no inconsiderable part in the investigation, which dragged along until May 18, 1912, when an action was begun in the Federal District Court for the southern district of New York, alleging conspiracy in restraint of trade on the part of Hermann Sielcken; Bruno Schroeder, of J. Henry Schroeder & Co.; Edouard Bunge; the Vicomte des Touches; Dr. Paulo da Silva Prado; Theodor Wille; the Societe Generale; and the New York Dock Co.; also praying for injunction and receivership of the valorization coffee then stored in the United States, and amounting to 746,539 bags. The injunction was denied.

Immediately thereafter, rumors began to circulate that the government's coffee suit would never be tried. The Brazilian amba.s.sador threatened diplomatic interference, and Attorney-General Wickersham let it be known that a friendly settlement might be effected. Sielcken boldly challenged the authorities to prosecute the case, and even seemed to invite criminal proceedings against himself. Saving the government's face, and Brazil's face, at one and the same time, proved to be a long and tedious process.

Meanwhile, Senator Norris introduced in Congress a bill designed to give the government power to seize importations of coffee when restraint of trade was proved. It was vigorously opposed by many prominent green-coffee men and roasters; but in February, 1913, it became enacted into a law. It effectively killed all future valorization schemes in so far as direct partic.i.p.ation by this country is concerned.

About December 1, 1912, Attorney-General Wickersham accepted good-faith a.s.surances from Mr. Sielcken's attorney--who represented also the Brazil government--and agreed that if the valorization coffee stored here was sold to bona-fide purchasers before April 1, 1913, the government's suit would be dismissed. In May, 1913, the attorney-general of the new Wilson administration, which came into office in March of that year, issued a statement saying that, good-faith a.s.surances having been received from the Brazil government that the understanding was fulfilled in letter and spirit before the date set by the previous attorney-general, and the entire amount of coffee disposed of to eighty dealers in thirty-three cities, the suit would be dismissed.

In the United States Senate about the same time, Senator Norris renewed his attack on "the international coffee trust". He charged that the coffee sale was not as represented, but merely a transfer, and called upon the Department of Justice for the facts, with names of the alleged purchasers.

Attorney-General McReynolds, on May 7, 1913, declined to send to the Senate the official correspondence in regard to the Brazil coffee-valorization matter, because it was "incompatible with the public interests." He did, however, send other papers on the subject. The secretary of state sent copies of some correspondence; but the doc.u.ments were not made public. This ended the matter, although Senator Norris called for a congressional investigation, charging that the attorney-general had been handed a "gold brick".

Sielcken contented himself with remarking that the suit was a mistake in the first place, and that it was a foregone conclusion the government would be defeated. Also, he offered $5,000 to any one who could explain the Norris bill.

Valorization, then, was started by the state of So Paulo in 1905, when a law was pa.s.sed authorizing the state to enter into an agreement with the other Brazil states and the federal government for the adoption of measures which would a.s.sure the valorization of coffee and facilitate a propaganda abroad for increased consumption.

The states of So Paulo, Mins Geraes, and Rio de Janeiro proposed, early in 1906, to withdraw from the markets such quant.i.ties of coffee as would keep down exports and maintain profitable prices. The plan comprehended the interested states borrowing about $75,000,000 from European and United States bankers with which to buy up the surplus coffee. To take care of interest and amortization, a tax of three francs per bag of 132 pounds (about 57 cents) was to be levied on all coffee exports, collectable at Santos and Rio de Janeiro. Further coffee-planting was to be checked by enforcing the law which carried a tax sufficiently high to operate toward restriction.

When it was understood that Brazil's federal government would not endorse the plan _in toto_, it was abandoned by Rio de Janeiro and Mins Geraes. However, the state of So Paulo in the course of the next two years borrowed some $30,000,00 on its own account for valorization purposes, obtaining half the amount direct from foreign banking interests, and the remainder, through the Brazilian federal government, from London sources.

This first valorization was abandoned in favor of the Sielcken plan, which the federal government ratified in July, 1908. By this new plan So Paulo borrowed $75,000,000 from the syndicate composed of American, English, German, French, and Belgian bankers. Out of this it repaid the $30,000,000 loan. The 1908 loan was to expire in ten years, in 1919.

Under the plan of the new loan, it was agreed that certain amounts of the valorized coffee should be stored as collateral in warehouses in New York and Europe in charge of a committee of seven, who were authorized to sell the coffee in the market in specified quant.i.ties and at prices that would not disturb the price of other coffees. The composition of the committee was as follows: Dr. Francisco Ferreira Ramos, of So Paulo and Antwerp; who was succeeded by Dr. Paulo da Silva Prado; the Vicomte des Touches, of Havre; the Societe Generale, of Paris; the firm of Theodor Wille, of Hamburg; Hermann Sielcken, of New York; Edouard Bunge, of Antwerp; and Baron Bruno Schroeder, of J. Henry Schroeder & Co., of London.

Brazil agreed to purchase 10,000,000 bags and to hold them off the market until conditions warranted their sale. It was also agreed that the total exports of unvalorized stocks from Brazil would be restricted to 10,000,000 bags for 1907-08, and to 10,500,000 bags for 1909-10. In addition, a surtax of five francs gold per bag (96-1/4 cents) was placed on every bag exported to pay carrying charges. The management of the government's holdings was placed in the hands of the international committee. This committee issued bonds which were quickly subscribed for; and because of its efficient handling of its huge holdings, prices held steady in spite of the record-breaking Brazilian crop of nearly 20,192,000 bags in 1906-07, and a later one in 1909-10 of about 15,000,000 bags. Indeed, there was an advance of about ten dollars a bag between 1904 and 1911.

Valorization had the effect of stabilizing the Brazil market, and giving the planters and allied interests the a.s.sistance they needed to ward off the disaster that threatened them through overproduction. The United States government action in 1912 forced the sale of the valorized stocks held in this country, and the Congress pa.s.sed the law making it impossible again to offer for sale in America stocks of coffee held under similar valorization agreements.

The coffee situation became so serious in 1913, that So Paulo again entered the money market for another loan, borrowing $37,500,000 through the good offices of the Brazilian federal government, following this up two years later with another loan of $21,000,000. According to a semi-official statement issued in Brazil early in 1919, the status of valorization at that time was that the first loan of $75,000,000 of 1908, had been entirely liquidated, and the two later loans were greatly reduced. At the same time, it was announced by the president of the state of So Paulo that the surtax of five frances would be withdrawn as soon as the liquidation of the loans had been completed. This surtax, however, is still in effect. In 1919, the So Paulo government proposed advancing the _pauta_, or export duty, very materially. A strong protest was made by all the exporters; and a compromise was at last effected by which the proposed increase in the _pauta_ was canceled, and the existing surtax of five francs per bag continued as an offset.

The valorization project just described was the second of its kind, a former attempt having proved a failure. At that time (1870), the Brazilian government had been a large purchaser of Rio coffee, buying it in lieu of exchange, as it had large remittances to make. The coffee was sold through G. Amsinck & Co., and it is believed that heavy losses were sustained.

Since the Sielcken valorization enterprise, the Brazilian government has promoted two more valorizations, one in 1918, another early in 1922.

_War-Time Government Control of Coffee_

The board of managers of the New York Coffee and Sugar Exchange, Inc., had realized, late in 1917, that war-time government control of coffee trading was likely in view of the government's activities in other commodities. To guard against the danger of a sudden announcement of such action, the president of the Exchange was empowered from month to month, at each meeting of the board, to suspend trading at any time that conditions warranted; so that, when President Wilson announced, on January 31, 1918, that all dealers in green coffees were to be licensed, the Exchange was fully prepared. Trading was suspended pending further information, and owing to the farsightedness of the board of managers, all danger of a panic in the market was averted.

By 1917, the allies had stopped shipments of coffee to Germany through neighbors who had been her sole source of supply. Stocks in all the producing countries were acc.u.mulating, and So Paulo had embarked on another valorization scheme to protect her planters. The markets of Europe were entirely controlled by the governments; and the United States was practically the only free and open market. The market here was steady and without particular animation, and showed none until the end of November, 1917. At that time, speculation activities, steamer scarcity, and the steady advance in freights, became decided influences in the market; and prices began to advance.

Freights on shipments from Brazil had advanced from one dollar and twenty cents per bag early in the year to unheard-of prices; and, before the bubble burst, had reached as high as four dollars per bag. With this steadily advancing freight, speculation in coffee became more active; and prices naturally began to rise. The relative cheapness of coffee compared with all other commodities; the fact that coffee here had shown very little advance; the prospect of an early peace; the large European demand to follow; were favorite bull arguments. The market became excited; speculative buying was general, every one, apparently, wanted to buy coffee; and twenty cents per pound for Santos 4s in the near future was a common prediction.

The United States food administrator had shown his antipathy to uncontrolled exchange operations by his action on sugar, wheat, corn, and other commodities, dealt in on the exchanges; consequently, the proclamation of President Wilson regarding coffee was not a surprise to those who had been watching the situation closely, especially as on January 30, 1918 (the day before the proclamation) the president of the Coffee Exchange was summoned by telegraph to appear in Washington to discuss ways for a proper control of the article, and the best means to bring about such control. As a result of this summons, a committee of the entire trade, representing the Exchange, the green-coffee dealers and importers, the roasters, and the brokers, was appointed by the Exchange to confer with the food administrator at once, in order to work out a plan whereby the business could be kept going. After a long conference, rules agreed upon were approved that became the basis on which business was conducted until the withdrawal of all regulations regarding coffee in January, 1919. Much trade criticism followed the publication of some of these rules.

George W. Lawrence, president of the New York Coffee and Sugar Exchange, was called to Washington on February 28, 1918, to take charge of a newly created coffee division under Theodore F. Whitmarsh, chief of the distribution division of the food administration. In this position he rendered a signal service to the trade and to his country. Although subjected to a cross-fire of criticism from many green and roasted coffee interests, he never wavered in the performance of his full duty; and his good judgment, tact, and loyalty to American ideals, won for him a high place in the regard of all those who had the best interests of the country at heart. He was ably a.s.sisted in his work by Walter F.

Blake, of Williams, Russell & Company, New York; and by F.T. Nutt, Jr., treasurer of the New York Coffee and Sugar Exchange.

A coffee advisory board was appointed in June 1918, to serve as a go-between for the trade and the food administration. Those who served on this committee were: Henry Schaefer, of S. Gruner & Co., New York, chairman; Carl H. Stoffregen, of Steinwender, Stoffregen & Co., New York, secretary; and William Bayne, Jr., of William Bayne & Co., New York; S.H. Dorr, of Arnold, Dorr & Co., New York; A. Schierenberg, of Corn, Schwarz & Co., New York; Leon Israel, of Leon Israel & Bro., New York; Joseph Purcell, of Hard & Rand, New York; B.F. Peabody, of T.

Barbour Brown & Co., New York; J.D. Pickslay, of Williams, Russell & Co., New York; Charles L. Meehan, of P.C. Meehan & Co., New York; B.C.

Casanas, of Merchants Coffee Co., New Orleans; John R. Moir, of Chase & Sanborn, Boston; and B. Meyer, of Stewart, Carnal & Co., New Orleans.

Others in the trade who served the food administration during the period of the World War were George E. Lichty, president of the Black Hawk Coffee & Spice Co., Waterloo, Iowa; and Theodore F. Whitmarsh, vice-president and treasurer of Francis H. Leggett & Co., New York.

The visible supply of coffee for the United States on January 1, 1918, was 2,887,308 bags. The world's visible supply was given as 10,012,000 bags; but to be added to this were more than 3,000,000 bags held by the So Paulo government. Thus there was little reason to fear a coffee shortage. That coffee should be permitted, with this large amount in view, to run wild as to price, was certainly not the intention of the food administrator, whose purpose was to keep foods moving to the United States forces and allies, and as far as possible, to keep reasonable prices for the United States consumers. Steadily advancing prices of foods meant increasing cost of labor, general unrest, and a difficult situation to meet at a period when the situation as a whole was most critical.

Trouble for the coffee trade was imminent early in 1918, when the shipping board, backed by experts, decided, or attempted to decide, that coffee was not a food product; that no vessels could be had for its transportation; and that it must be put on the list of prohibited or restricted commodities. Mr. Hoover, however, insisted that coffee was a very necessary essential, and that tonnage must be provided for an amount sufficient at all times to keep the visible supply for the United States up to at least 1,500,000 bags of Brazil coffee; and this figure was ultimately accepted and carried out by the shipping board.

These figures, based on the deliveries of the two preceding years, and with dealers limited to ninety days stock in the country, were deemed ample to care for all requirements. It was figured that by November 1, 1918, the freight situation would be relieved to such an extent by the new vessels building, that the amount could be increased should it be found necessary. The food administration, through the war trade board, offered steamer room to importers of record of the years 1916-17 at $1.70 per bag. The first few vessels were promptly filled on a basis of nine and one-quarter to nine and five-eighths cents, c. & f., for Santos 4s, well described. About the same time, our army and navy were able to buy at eight to eight and three-eighths cents f.o.b. Santos, for shipment by their own vessels. After the first few vessels offered by the War Trade Board were filled, the trade became indifferent. The warehouses in Brazil were loaded with stocks; vessels to carry coffee were a.s.sured buyers at a fixed rate (profits limited); and, as there was no apparent reason for an advance, buyers were willing to let the producing countries carry the stock.