The First International Coffee Conference
All the Latin American coffee-producing countries finally recognized that the coffee crisis was not going to resolve itself. In October 1902 most Latin American producers sent representatives to the first International Congress for the Study of the Production and Consumption of Coffee, held at the New York Coffee Exchange, to address “the lack of profit and ruinous price paid for the commodity to the producer.”
The producing countries of course wanted high prices for their coffee, while the consuming nations hoped to pay as little as possible. In addition, producers bickered with and recriminated one another, each unwilling to sacrifice for the good of the other. Eventually, the delegates concurred on a few innocuous proposals: they suggested banning export of the worst grade of coffee, known as triage, along with a reduction of European coffee import taxes (the United States had abolished its coffee tax in 1873).22 They urged “a constant propaganda spoken or written” to increase the use of coffee. Finally, they sought some mechanism to limit coffee exports so that the visible stock remained at a reasonable 3 million bags, and prices would rise—but the conferees could not agree on how to implement such a quota system.
The committee on the cause of the crisis pointed out that during boom years planters spent extravagantly and “made excessive use of their credit, so that when the crisis came about most of them were in debt.” Desperate for cash, they rushed their crops to market, thereby increasing the glut and further lowering the price. Furthermore, “coffee lends itself admirably to become the object of syndicates, trusts, speculation of various kinds [and] to the advantages of a few middlemen.” Indeed, the giant importexport houses of the consuming countries in Europe and North America simultaneously acted the part of banker (to the farmer), exporter (from the principal shipping ports), carrier, importer, and lastly, distributor. “This is what in plain language is called monopoly.”
On the final day of the conference, J. F. de Assis-Brasil, the Brazilian representative, offered an astute summary of the coffee boom-bust cycle. “It seems that each ten years a climax of too high or too low prices must manifest itself,” he observed, predicting that prices would peak again in 1912. The reason? “Too high prices are inducements for extending unreasonably the plantations; as a consequence there comes an overproduction.” With supply outstripping demand, prices fall. “Many plantations are abandoned; the harvests begin to shrink, while consumption follows its regular expansion.” A new shortage prompts new growth, and the cycle repeats itself. The cycle could only be broken through “the combined efforts of the interested governments.”
The conference ended with plans for a second, more definitive meeting the next year in São Paulo, but the meeting never occurred.
São Paulo Goes It Alone
The international coffee conference had accomplished nothing and the São Paulo planters vented their frustration. At a January 1903 meeting they denounced the Brazilian government for its indifference to their plight. In response the Brazilian president imposed on any new coffee plantations a tax of $180 an acre, which amounted to a ban on new planting for the next five years. The effect of the law would not be felt until 1907 or 1908, however, since trees planted prior to 1902 would not be coming into production until then.
Though the plight of plantation owners was bad, the effect on workers was worse, as owners reduced fringe benefits, took over land previously allotted to laborers for subsistence plots, and cut wages. As a result, one Brazilian paper reported, “The exodus of the Italians is critical. They return to their homeland poor and disillusioned.” The Italian foreign minister responded by banning subsidized emigration after March 1902.
A late 1902 Brazilian frost reduced production for the next three years, and the visible supply shrank accordingly. Still, low prices persisted and the crisis continued. Growers who had lost trees to the frost replaced them with new seedlings. Meanwhile, the milreis continued to strengthen, which hurt the coffee farmer’s pocketbook.
Rather than blaming overproduction, many Brazilian planters pointed the finger at foreign coffee monopolies, asserting that short sellers (those betting on declining prices) and speculators were conniving to depress green bean prices. While the foreign firms could not be held responsible for the crisis, there was some truth to the allegations of price manipulation. The twenty biggest firms exported nearly 90 percent of the coffee, and the five largest accounted for over 50 percent. Theodor Wille & Company of Hamburg, at the top of the heap, exported nearly a fifth of Santos’s coffee.
In 1903 Alexandre Siciliano, a wealthy Italian immigrant to Brazil, suggested a valorization scheme (the term valorizacao came to mean maintaining the price of a commodity) in which the government would enter into a long-term contract with a private syndicate of merchants and financiers to buy up surplus Brazilian coffee and store it until prices rose. The success of the plan relied on the utter dominion of Brazilian coffee, however. If São Paulo held back its surplus coffee, would the other coffee-growing countries simply rush in to fill the gap? Would Brazil then lose its dominant position in the world market?
To answer these questions, the São Paulo secretary of agriculture sent Augusto Ramos on a 1904-1905 fact-finding mission to other Latin American coffee-producing countries. In his extensive report, Ramos concluded that these countries were simply no match for São Paulo in terms of capitalization, efficiency, and productivity. They too were hit hard by low coffee prices and were in no position to expand their production to offset any surplus held back by São Paulo.
In August 1905 representatives of Brazil’s major coffee states—São Paulo, Rio de Janeiro, and Minas Gerais—met with federal officials to discuss valorization. As the fall progressed, it became clear that the upcoming crop would be of unprecedented size. The three presidents of the coffee-growing states met in Taubate, São Paulo, on February 25, 1906. They produced a signed document, agreeing on a valorization scheme to buy surplus coffee and keep it off the market, asking for federal aid, and requesting that the government stabilize the milreis exchange rate.
The federal government refused to become involved, other than voting to stabilize the exchange rate. On August 1, 1906, the Disconto Gesellschaft Bank of Berlin, through its Brazilian subsidiary, loaned São Paulo £1 million for a year. To finance the purchase of a decent amount of coffee, São Paulo needed much more capital, and quickly. The state sped a special delegation to Europe to drum up support. But when the London Rothschilds refused, the Paulistas realized that no major bank was liable to help them. The huge 1906 crop loomed, threatening to bring the price of coffee down to a few pennies a pound.
Hermann Sielcken to the Rescue
The desperate Paulistas found help from an unexpected source: Hermann Sielcken, noted for his ruthless treatment of competitors, market manipulation, and attempts to corner coffee.
Sielcken, a ham-faced business titan, spoke excellent English with a slight German accent and not the slightest trace of humor or humility. A graying mustache slightly turned up at the ends sat atop lips set in a grim line. As a contemporary article observed, he was “one of the most feared and hated men in the Coffee Exchange.” Sielcken was enormously powerful. “Hermann Sielcken is a monarch of commerce and his rule extends the world over.”
Sielcken left Germany in 1868 before he was twenty-one to work for a German firm in Costa Rica. A year later he went to California, where he worked as a shipping clerk. Having learned English, he secured a job as an itinerant wool buyer. During his travels he was nearly killed in a train wreck, which left him with a slight stoop.
In 1876, thanks to the Spanish he had picked up in Costa Rica, Sielcken found employment at W. H. Crossman & Son, an import-export firm that dealt in coffee on a commission basis. Venturing to South America, he proved to be a wonderful salesman of “axes and shovels and spades and silverware and everything else,” while soliciting commission products for the house. For half a year every mail brought new Sielcken business.
Eventually the coffee king also ventured into steel and railroads and bought a sumptuous estate in Baden-Baden that included four villas, a bathhouse for guests, a rose garden with 168 varieties on 20,000 bushes, an orchid greenhouse, and elaborately landscaped grounds kept manicured by six professional gardeners and forty assistants.
The Brazilians turned to Sielcken because early in August 1906 he had written an open letter to Brazilian newspapers defending valorization. As a result, a mission made a pilgrimage to Sielcken’s Baden-Baden estate. Sielcken admonished the Brazilian delegation that “if you raise another crop like this there is no financial assistance coming from anywhere. . . . The rest of the world is not going to sit up all night drinking coffee just because São Paulo raises it all day.” Assured that smaller crops would be forthcoming owing to the ban on new plantings, Sielcken promised to do what he could.
Hermann Sielcken put together a consortium of German and British banks and coffee merchants. In the first week of October 1906, the São Paulo government and the syndicate authorized the syndicate to begin buying green beans in the Santos export market at an average price of 7 cents a pound. The financiers agreed to pay for 80 percent, with the State of São Paulo providing the other 20 percent. If the free-market price of coffee rose above 7 cents, valorization purchases would suspend. This arrangement meant that syndicate members never paid more than 5.6 cents a pound (80 percent of 7 cents) for coffee, and often considerably less. Not only that, the money advanced by the syndicate was technically a loan charging the Brazilians 6 percent interest, with the coffee itself serving as security. The beans were shipped to syndicate warehouses in Europe and New York. São Paulo, still nominally the legal owner, was to pay annual storage costs as well as a 3 percent commission for initial handling.
By the end of 1906 the syndicate had purchased about 2 million bags, each holding 132 pounds of coffee. Since the year’s bumper crop amounted to 20 million bags, taking such a small amount off the market had relatively little effect. But São Paulo had run out of money and couldn’t come up with its 20 percent for more. In addition, the £1 million loan would come due in August 1907.
On December 14 the Paulistas were bailed out by a new £3 million loan from J. Henry Schroeder & Company of London and the National City Bank of New York. Hermann Sielcken represented the U.S. bank and reputedly covered $250,000 of its loan with his own money. After paying off the million-pound loan, São Paulo now had £2 million to continue buying valorized coffee. By the end of 1907 over a million bags of valorized coffee had been warehoused in the ports of Hamburg, Antwerp, Havre, and New York, with lesser amounts in minor ports such as Bremen, London, and Rotterdam. There the beans remained, waiting for prices to rise sufficiently so that the syndicate could get rid of them at a profit. In the meantime the State of São Paulo continued to owe interest and storage charges. The small 1907-1908 crop allowed some of the valorized coffee to be sold off, but São Paulo remained in dire financial condition.
Late in 1908 Sielcken helped to arrange a mammoth £15 million ($75 million) consolidation loan. By this time the syndicate had sold off some million bags of valorized stock, leaving nearly 7 million bags still in the warehouses. These were placed under the control of a committee of seven, only one of whom represented the São Paulo government. Not surprisingly, Sielcken was one of the committee members. Thus, São Paulo lost control of the valorization coffee without ending its financial obligations. By manipulating the stocks and selling them quietly, the syndicate members had managed a virtual corner on the market. It was, as Sielcken candidly admitted at a congressional hearing a few years later, “the best loan I have ever known.”
At first, after the committee took over the valorized coffee, the price per pound remained relatively stagnant at 6 or 7 cents a pound. But in the fall of 1910 the coffee price began to rise. By December it had run up to nearly 11 cents a pound. Throughout 1911 it continued to rise, jumping to over 14 cents.
The United States Howls over Coffee Prices
A howl went up from American consumers and politicians. Never particularly concerned about the plight of the Brazilian farmer during the coffee crisis years, suddenly U.S. citizens were indignant that their morning-coffee price had risen a few pennies.
Buried in the U.S. National Archives outside Washington, D.C., is a thick file of correspondence kept by the Department of Justice covering valorization. It provides a fascinating chronology from the end of 1910 to the spring of 1913 showing how and why U.S. Attorney General George Wickersham gradually built a legal case against Hermann Sielcken and his valorized coffee. It also includes Wickersham’s polite battle with Philander C. Knox, the secretary of state, over the matter, and an occasional memo to and from President William Howard Taft.
“Brazil has simply mortgaged herself to this syndicate,” a small U.S. roaster wrote to Wickersham in December 1910, “and they in return are holding back this coffee to allow the syndicate to sell the 600,000 bags at 4 cents a pound more than they got last year.”
A few months later, in March 1911, Nebraska Representative George W. Norris sponsored a congressional resolution asking the attorney general to investigate “a monopoly in the coffee industry.” Wickersham replied that he indeed was conducting an ongoing investigation.
In April, Norris lambasted the coffee trust from the floor of the House, summarizing the valorization loan process. He concluded that “this gigantic combination [has been able] to control the supply and the sale of coffee throughout the civilized world. [They] sold only in such quantities as would not break the market.” Frustrated by Brazil’s involvement, he observed that when a conspiracy to monopolize a product involved a domestic corporation, it was termed a trust and could be broken. “But if the combination has behind it the power and influence of a great nation, it is dignified with the new term ‘valorization.’ Reduced to common language, it is simply a hold-up of the people by a combination.”
Norris suggested that the United States put a duty on all Brazilian importations—about $70 million in 1910—“until she should cease giving her support to the valorization scheme.” He wanted to allow coffee from other countries to enter freely, however. Though Norris regarded himself as a crusading idealist, he often antagonized party regulars. As a consequence, his denunciations of the coffee trust did not immediately produce legislation.
In the meantime the newspapers had taken up the cause. “It would be far better to go without coffee than to be openly fleeced by the Government of Brazil,” stormed the Albany, New York, Argus. “It is about time for the Department of Justice at Washington to take a look at this interesting band of robbers,” another New York editorial intoned. By June 1911 Wickersham was getting rafts of personal letters. “The coffee that is used to make [the poor’s] miserable slop,” wrote an Ohio businessman, “has been raised in price more than 100 percent.” The famed naturalist John Muir wrote to express his “indignation upon this coffee imposition.” He referred to “this iniquitous conspiracy between a foreign nation and an American citizen [Hermann Sielcken]” and asked, “Why should not this Trust be broken up?”
Restrictive sales were indeed the mechanism used by Sielcken and Arbuckle Brothers, which had joined the profit-making scheme. Together the two firms controlled the majority of the valorized coffee. To keep prices high they sold the coffee directly to roasters, often in the South or West, with the stipulation that n
one be resold on the exchange. Since they sold the coffee at a slight discount to the exchange price, the deal appealed to roasters. However, it circumvented the natural functioning of the Coffee Exchange. In addition, Arbuckle Brothers bought enormous quantities of coffee from the exchange to raise the price and then sold it, along with the valorized coffee, in secret private sales, insisting that it not be resold on the exchange. The old antagonists, Sielcken and Arbuckle, thus found common cause in making money from valorization.
The attorney general appointed William T. Chantland as his special assistant to look into coffee valorization. Chantland quickly proved himself a dogged opponent of the coffee trust and in July 1911 suggested prosecuting Sielcken. In a September memo he noted that the United States consumed nearly half of the world’s coffee and 80 percent of the Brazilian crop. Americans consequently were more affected by valorization than any other nationality. “In plain English,” he wrote, “this whole thing looks like a plan devised in the apparent interest of São Paulo and Brazil, but, in fact, carried out to the great glory and financial profit” of bankers and coffee merchants such as Hermann Sielcken, “the financiers and the committee members who now seem to be juggling the supply to suit themselves and to enhance their fortunes.”
Chantland singled out Sielcken. “He is the illegitimate trustee of the operations in this country of the illegal agreement or its results. . . . His acts must stand by themselves as misdemeanors.” He recommended “seizure and condemnation proceedings on the first valorization coffee to move in interstate commerce.”
Uncommon Grounds: The History of Coffee and How It Transformed Our World Page 11
