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 (961⁄4 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 assistance 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 passed 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 São 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At the same time, it was announced by the president of the state of São Paulo that the surtax of five frances would be withdrawn as soon as the liquidation of the loans had been completed.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 São 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 accumulating, and São 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.