the support of the Union. The German bank then recalled its offer. Such was the situation in October, 1906. Sober views might still have prevailed but for a new danger-the bumper crop of 1906-7. Brazilian production had risen slowly from 9,500,000 bags in 1899-1900 to 11,300,000 in 19051906. It jumped in 1907 to 20,000,000 at a time when there was already a surplus stock on the market of some 4,000,000 bags.

With the withdrawal of the Federal guarantee the other two states grew timid, and São Paulo decided to act alone. Valorization was begun by the issue of treasury bills for $5,000,000 (16,060,422 milreis). With the proceeds, the state purchased coffee and used it as the basis for loans. Arrangements were made with foreign merchants whereby loans were advanced up to 80 per cent of the price of the coffee bought, on condition that the coffee be deposited in

their warehouses. The service of the loans was to be met by the surtax of 3 francs per bag. Rio de Janeiro and Minas Geraes supported the plan to the extent of imposing a similar tax, but apparently took no part in coffee purchases.

São Paulo also succeeded in placing loans of $5,000,000 with the Brasilianische Bank für Deutschland (soon afterward redeemed), $15,000,000 with the federal government and $15,000,000 with Schroeder and Co., of London, and the National City Bank of New York. Of the total loans $16,000,000 was said to have been supplied by ten large coffee houses of Europe and the United States.

By the end of 1907 São Paulo had borrowed $88,400,000 and had purchased, at a price about $1.22 per bag above the market, 8,357,500 bags of coffee. This stock was held in various European and American

ports, except for 657,500 bags retained at Santos as security for the loans. But prices failed to rise; in fact, they fell slightly. The existence of the huge government stock induced conservation among dealers. It was possible, also, that stocks held in anticipation of valorization were thrown on the market. The proceeds of the surtax were insufficient to provide safely for interest, storage, commission and amortization. Attempts to dispose of portions of the government's holdings threatened further to demoralize the market. Creditors grew nervous and began to demand their money. São Paulo could not raise further funds on coffee collateral, and purchases had to be suspended. Valorization was practically at an end by the beginning of 1908.

The results of the Experiment were yet to be faced. São Paulo had incurred a heavy debt and possessed a huge stock of coffee for which prices above the market rates had been paid. The world supply continued to equal the world demand in spite of a decline of the Brazilian crop to more normal proportions. Creditors were clamoring for liquidation. The only escape from bankruptcy was a refinancing of the government's obligations and a definite plan for realizing on coffee holdings. Nearly all of 1908 was spent in negotiations for this end. In December of that year a successful issue was reached, but only after the federal government had come to the assistance of the state by granting an unqualified guarantee of a new loan of $75,000,000 to be used to refund earlier obligations.

The essential features of the loan and the contract accompanying it

were:

1. The Federal Government indorsed it with an unqualified guar

antee.

2. The São Paulo coffee holdings, amounting at that time to 6,994,920

bags (during the preceding six or eight months the state had sold about 1,300,000 bags out of its holdings in spite of repeated promises to the contrary) were stored in New York and seven European ports, and warrants for them were deposited with specific banks (Messrs. Schroeder and Co. and two French banks) which acted as trustees for the bondholders.

3. This coffee was placed under the sole control of a committee of seven residents of the United States or Europe (four to be nominated by Schroeder and Co., two by the Société Générale and one by the British government) who were given full power over its liquidation, saving only a proviso as to the minimum sales in the next ten or eleven years. At least 500,000 bags should be sold in the six months from January to June, 1910; 600,000 in the first half of 1911; 700,000 in 1912 and subsequent years, until the stock was exhausted.

4. São Paulo raised the surtax from 3 to 5 francs per bag and guaranteed the application of the proceeds to the sole purpose of satisfying the interest and amortization of the loan.

5. The state likewise agreed to limit the exports of coffee to 9,000,000 bags for 1908-1909; 9,500,000 for 1909-1910; and 10,000,000 for succeeding years by means of an additional tax of 20 per cent on the coffee in excess of these quantities.

The passing of this act marked the official end of the valorization experiment. The scheme was a more or less experimental one and has been frequently criticized. It has been praised and condemned, but the fact remains that it served its purpose and saved the coffee planters. Steadying of prices was due to the government's purchases and the fact that the government bought the higher grades of coffee gave a stimulus to better methods of cultivation. The result to the government itself was a direct financial loss of several millions of dol

lars, and considerable damage to the credit of the state.

The London Economist of December 19, 1908, comments on the floating of the loan as follows: "In view of all the harm that the scheme of valorization has done to Brazilian credit and the long negotiations which preceded this issue, the successful conclusion now reached is very satisfactory and we may fairly hope that the credit not only of the State of São Paulo but of the Brazil Government will improve as the unfortunate experiment is dropped and forgotten."

The valorization scheme may have been easily dropped but it was not so easily forgotten. Recent laws in particular have had rather unexpected effects. In 1909 the 9,000,000 bags limitation was reached in March, causing three months of trade paralysis. The limit of 1909-1910 set at 9,500,000 was reached in December, 1909. The 20% surtax did not work.

It failed to influence prices abroad, and at home it affected unfavorably the economic position of the state. The unsatisfactory results induced the government to search for more effective means of enhancing the value of the product. Instead of the extra export duty it was proposed to substitute a tax of 10%, payable in kind. Concerning the disposition of this 10% there were various suggestions, such as loading it in barges and sinking it in the sea, or using it for propaganda purposes. The London Economist states that this was about as sound as the breaking of plateglass windows in the interests of the glaziers. In the course of debate it was pointed out that coffee cultivation was so extensive that attempts to valorize the crop either by limiting exports or by destroying a percentage of the crop were frustrated. The prohibitive tax could not be maintained because it affected the revenue

and the tax in kind would be too small to effect any modification. Late in the session of Congress in December, 1909, a project was presented by which the 5 francs surtax should be reduced. This would have lengthened the time for liquidation. The merchants opposed the measure on the ground that it would prolong "vexatious official intervention," so it did not become law.

THE MINAS GERAES' PLAN

The scheme which the Government of Minas Geraes adopted in the coffee crisis is an interesting contrast to that of São Paulo. There was no direct official meddling, but indirectly the government supported the organization of co-operative societies for the direct exportation of coffee from the producer to the consuming markets with the object of saving the middleman's profits. Many such societies came into existence and the policy had considerable success.

In none of the coffee producing areas of the world did the war cause serious interruption to the harvesting of the crop. Brazil's export of coffee during the first year of the war was only 7% below that of the previous year. The business was disorganized during the first months of the war; but with the loss of the German fleets, shipping connections became almost normal again, and the great use of the beverage by the armies in the field kept the market active. There were no direct shipments to Germany, Austria-Hungary, and Belgium; but to Denmark, Norway, and Sweden they were ten times as great in 1915 as in 1914.

When the war broke out in 1914 there were 3,143,457 bags of the 1906-7 Brazilian crop stored in Hamburg, Bremen, Vienna, Trieste, Amsterdam, Antwerp, Havre, and Marseilles. The coffee stored in Germany was at once taken over by the military authorities, and its price, amounting

to $30,000,000 was deposited by the German government in a bank in Berlin, to be paid over at the end of the war. At this time Brazil was a neutral. When she herself became a belligerent against Germany it was supposed that she would lose the price of her coffee. But Brazil soon took over the 46 German and Austrian ships which had been lying idle in her harbors for nearly three years and, after repairing them, transferred them to her own service or rented them to France. Whether the valorized coffee is paid for or not, Brazil will not be the loser, for she will still have these vessels with which to bargain.

The harvest of 1917-18 in Brazil amounted to between twelve and thirteen million bags. Faced with an uncertain market, the Paulista Government decided on a method other than the old valorization plan; money was borrowed from the Federal Government of Brazil and used to buy from the planters several million sacks of coffee which would otherwise have. been thrown upon an unready market. The purchases amounted to over four million sacks and the situation was greatly relieved.

This coffee was

stored in Santos. There was also an arrangement with the French Government by which 2,000,000 sacks were purchased on behalf of France.

The United States market is perhaps the best market for Brazilian coffee. coffee. The total imports from Brazil were 5,880,619 bags in the year ending July 31, 1915. On an average every man, woman, and child in the United States uses about 10 lbs. per year, of which, about 7 lbs. come from Brazil. Coffee is so much of a necessity that the most liberal of tariff policies has been adopted, and it is admitted free of all custom charges, for the cry of "taxing the poor man's bread" is usually raised when a duty is proposed. On the other hand Brazil has shown that she realizes how

important the United States market is for her by granting favorable tariff treatment. Since 1904 she has put the United States in an especially favored position in her import trade. In 1899 a law had been passed by the Congress of Brazil authorizing the President to make certain tariff reductions to countries which established favorable conditions for Brazilian trade. Acting on this authority, in 1904 a reduction was granted to the United States of 20% of the Brazilian tariff on certain named articles. The list has since been lengthened and the United States now have an advantage over other states in a 30% reduction from the regular tariff rates on

flour. Under this law (1916) American flour, clocks, watches, paints, rubber manufactures, scales, pianos and typewriters have come to dominate the market in northern Brazil.

A commission has been sent to the United States with the object of placing the merits of Brazilian coffee before the American public. The coffee propagandists of Brazil have created a fund of $300,000, and $200,000 more is to be contributed by coffee merchants of the United States. As a result of this effort, average sales, it is hoped, will be kept at 8,000,000 sacks instead of the 7,000,000 which are normally consumed annually within the United States.

T

HE ever increasing need of Chilean nitrate in China for fertilizing purposes and the exorbitant prices paid for this commodity heretofore by the Chinese Government to Germany and Japan on the basis of existing contracts, have shown the need of direct dealings between the two countries.

A group of Chinese and Chilean manufacturers and commerce men have sought to fill this need by establishing a limited company called the Chungwa Navigation Company, Ltd., with capital sufficient to buy a cargo fleet which would ply between Chinese and Chilean ports.

The Chinese agriculturists should be able to buy nitrate at the price of ten shillings per cwt. as offered in the Chilean market, instead of paying the

prohibitive price of two dollars for the same amount when bought through those countries.

In exchange for nitrate, Chile would receive Chinese products for which there is a good market, such as rice, oil, butter, flour and other food articles, also at excessively low prices.

As this scheme not only favors Chile but other South American republics as well, the organization of this society has met with complete success. The organizers have been even encouraged to enlarge its scope, and in order to get the scheme on a wider basis, a series of shares is being floated in Hong Kong and other Chinese cities as well as in San Francisco and Panama, where the Chinese colony is both numerous and wealthy.