The Guano Age in Peru

One hundred year ago the first economic boom of modern Peruvian history came to a devastating end in the War of the Pacific, in which Peru and Bolivia were defeated by Chile From the early 1840s until the 1870s Peru enjoyed a prolonged period of economic and speculative euphoria known as the Guano Age. During this time limited social reforms were initiated and a modern transportation system was begun. It was a time when Peru became known to farmers in Europe and North America has the most important producer of guano, then the most highly valued natural fertiliser. It was a time, too, when Peru seemed to be an attractive market for the army of merchant-traders that industrialisation had spawned in such large numbers in Europe. As long as the revenue from, guano poured into Peru, there was money to be spent on the latest European imports, and many European travellers commented on the glittering social life of Lima's upper class. The Guano Age also brought Peru to the attention of Europe's growing class of investors, chiefly English but also French and German. They were attracted by the obvious wealth of Peru and by the nebulous plan. of its successive governments to develop the country.

The War of the Pacific marked the end of the Guano Age, though the boom had in fact broken earlier and the 1870s were already years of decline. The war capped that decline and forced Peru to face the consequences of its foreign borrowing. Indeed, although tension had been growing between Peru and Chile for a long time, the straitened circum stances in which Peru found itself in the 1870s forced into a position of open conflict with Chile over regulation of the nitrate trade. The war, sometimes called the Nitrate War, provided a dramatic focus for the shift in European preference for fertilisers from guano to nitrate, and the shift of European interest from Peru to Chile. For Chile, this meant European development of first its nitrate and then its copper, the effects of which haunt that country to this day. For Peru this meant a period of rebuilding, of re establishing its international credit and of dealing with a foreign corporation that now controlled a large part of the nation's modern infrastructure.

Peru achieved its independence after a war with Spain (1822-25), financed in part by a series of loans raised in the London capital market. But independence brought many adjustments. As the centre of administration on the Pacific coast of the Spanish empire, Lima had enjoyed the prosperity of an important capital. With the break-up of the empire into numerous independent states, the new Republic of Peru had to develop a new set of economic relation ships with its neighbours and to find a new means to develop its economy and pay off the debts incurred in the war. Relief appeared in the most unlikely of places, a group of desert islands that were rich in a natural fertiliser, guano. Guano was to serve as the base of the Republic's economy from the 1840s to the eve of the War of the Pacific.

Guano had accumulated in the Chincha Islands and along the coast for centuries, deposited by the large colonies of sea-birds that nested in the area and fed on the rich sea-life of the Humboldt Current. The guano was preserved in a solid state by the dry climate, which prevented the breakdown of its nitrogen. The Inca had made careful use of the guano, going to the islands only when the birds were not nesting. The Spanish conquerors, interested in more glamorous treasures, ignored guano in their quest for gold and silver. But the industrialisation of Europe in the nineteenth century and the consequent need for a more efficient agricultural sector made guano a valuable commodity in the world market. In his South American travels at the beginning of the nineteenth century, Humboldt had experimented with guano and reported it to be an effective fertiliser. Publication of Liebig's research in organic chemistry in 1840 provided the scientific evidence of the benefits of fertilisers such as guano. Peru's future seemed assured.

The first commercial shipments of guano to Europe were made by a joint venture of a Peruvian and a British merchant, thus setting the pattern for the guano trade. The British were interested in the ideas of Liebig and most readily adopted the new fertilisers. Throughout the nineteenth century Britain was the chief market for guano, a factor that reinforced London's role as the most important source of funds for Peru. This was a mixed blessing for Peru. Although British merchants were playing an active role in selling the fertiliser, British creditors were just as vigorous in pressing their claims on Peru's defaulted independence loans. Peru had defaulted shortly after winning the war and, ever since, British investors had been looking for a way to obtain their money. Peru's dependence on guano sales in Britain provided them with the leverage they needed and in 1849 Peru agreed to a plan to redeem its debt, based on the sale of guano in Europe. The effect of this agreement was to pledge guano as a guarantee for the debt. Guano and foreign credit were thus formally linked.

Although Peru had found an important source of national revenue, its financial problems were not automatically solved. The Government held all the guano in a state monopoly and sold it on consignment; merchants shipped the guano to Europe or North America and sold it there for the Government, receiving a com mission on the sale. The Government retained ownership until the time of sale, and was willing to take all the risks because it believed that in this way it could more closely control both the amount sold and the price. But Peru received no income until after the sale and there were long delays between shipping and selling. Indeed, there were no incentives for the consignees to sell the guano quickly. It soon became apparent that for the consignees the longer the delay the better, for, to meet the needs of its Treasury, Peru borrowed from the consignees and paid them back, with interest, from the proceeds of the sale. The consignees granted these lucrative short-term loans because they guaranteed their continued relationship with the Government. By the 1860s the business of providing advances to the Government became even more profit able than selling guano.

The consignees were generally European merchant companies, the most prominent of them being Gibbs and Sons, which handled the most important markets until retiring from the guano trade in 1861. From the beginning Peruvian merchants tried to compete, but they could not raise the capital required to fit out ships, run agencies in Europe and, most importantly, make the advances to the Government. They also lacked the connections with European bankers that were needed when Peru wished to raise new foreign loans. Nonetheless the Peruvian merchants pressed the Government to adopt a policy that would favour them, and the Government responded in 1850 with a law that gave Peruvian companies preference in the guano trade. Despite this change, many European companies remained active in the trade by simply setting up Peruvian partnerships or agencies.

Participation in the trade was attractive because of the increasing volume of sales and the Government's growing dependence on guano for its income. Beginning in 1854, President Ramon Castilla initiated various reforms that simultaneously increased Government expenditure and decreased its revenue. Slavery was abolished but the Government compensated the slave-holders with an indemnity for each slave freed. Castilla also abolished the poll-tax, or tribute, on the Indian population which had hither to provided about 40 per cent of Government revenue. The customs regulations were also restructured. Guano was left to provide the bulk of Government in come and by 1857 about three-quarters of it was generated by guano.

Castilla's reforms profoundly affected the Peruvian economy in other ways. The massive indemnities paid to the former slave-owners set off strong surge of inflation and speculation that made guano dealings more attractive than domestic investment. The abolition of the poll-tax removed the chief stimulus for the Indian population to produce food for the urban areas, and their subsequent withdrawal from the agricultural market led to serious food shortages in the cities. Peruvian artisans suffered most directly from inflation and shortages. Their discomfort was evident in increasing crime and urban riots. The guano trade further weakened the artisan's position by providing merchants with a means to finance more imports of textiles and manufactured goods from Europe. The in evitable unemployment added fuel to urban discontent. Clearly not everyone benefited from the guano boom.

The changes brought about by guano and the reforms became a subject for debate among Peruvian merchants and intellectuals. The increased income from guano gave Peru an opportunity to develop its economy, but in the period following Castilla's reforms there was little evidence of progress beyond the dramatic increase in imported goods. Although many merchants favoured a form of laissez-faire liberalism and were closely related to foreign businessmen, the state owned the guano and thus already played a central, if not very effective, role in the economy. In the pages of the Revista de Lima , progressive merchants and writers tried to come to terms with this. The most important of these men, Manuel Pardo, urged the state to play an active role in development, particularly through a railway construction programme, but also through an austerity policy that would re-impose taxes, protect the local economy and reduce the bureaucracy. Pardo's first attempt to carry out such a policy ended when the Government in which he was serving was overthrown in 1868. Nonetheless he and his colleagues focused attention on the problem of Peru's development and the need to manage its guano resources.

Peru's stake in the guano trade was high, and the trade was closely watched in Lima where every termination or renewal of contract, every price change was keenly contested by businessmen, bankers and shippers. In London, Peruvian bondholders also followed these events because guano was the security for their loans. And the number of bond holders was increasing; since independence Peru had raised eleven loans in London, some of which were con versions of preceding loans. By the 1860s guano, Peruvian finances and foreign bondholders were intertwined in a way that effectively mortgaged Peru's future. There were many in Peru, especially among people without connections to the major Lima merchant houses, who wanted to change the situation.

Their opportunity came in 1868. A new president, Colonel Josèrola proposed a bold change: the Government would sell, by contract, two million tons of guano in Peru to a company that would then sell the guano in Europe and provide the Government with fixed monthly payments. The company would also pay the interest on the foreign debt. The Government would thus have a steady, predict able income and be able to meet its international payments.

The Government's enthusiasm for the proposal was not shared by the consignees, who saw their chance to make profits from the advances disappear. When the Government offered the con tract to them they refused it and the Government was forced to look else where, sending two agents to Europe to negotiate with interested contractors. In August, 1869, the agents returned with three proposals and eventually one of them was accepted, that of a French merchant house, Dreyfus Frères had not previously been involved in the guano trade and were not highly regarded in Lima business circles; Gibbs and Son, the leading English merchants in Lima, had been warned to be careful in dealing with Dreyfus, although there is no evidence of difficulty in Dreyfus's account with Gibbs. Auguste Dreyfus, the head of the company, had come to Lima in 1856 as a representative of his brothers' textile trading company. He left Lima in 1864 to run the company in Paris, leaving a younger brother to run the greatly expanded Peruvian business. When the Government announced the guano contract, Dreyfus expressed an interest and began to negotiate for it.

The contract required a great deal of capital and Dreyfus put together a group, the Guano Syndicate, to take the contract. The syndicate included Dreyfus Frérale, one of the new joint stock in vestment banks that were revolutionising the financial world of mid-nineteenth century Europe. The Syndicate, with a capital of 60,000,000 francs, had the resources to handle the contract and to float new bond issues.

The Government felt that the Guano Syndicate would free Peru from its dependence on short-term cash advances. Piérola referred to the contract as a 'miracle' that would allow Peru to escape form the bonds in which the consignees held it. The abandonment of the consignment system signalled Peru's economic independence. The consignees were puzzled and outraged by this argument abd freely expressed their feelings in an avalanche of newspaper criticism. They pointed out that Peru's most important resource was being handed over to a powerful foreign syndicate with little Peruvian participation or control. They were able to delay ratification of the contract in the Supreme Court and in Congress for a year but eventually the Guano Syndicate prevailed. In the process it had to make concessions in the terms of the contract to the Government, and the Syndicate even offered the Peruvian consignees a part in the operation. But they refused and continued to obstruct its implementation. At one point the Syndicate had to ship gold bullion from San Francisco to pay the Government because the local banks, in support of the consignees, refused to honour the Syndicate's notes. This led Dreyfus to set up his own bank in Lima in 1872.

The consignees had good reason to be alarmed by the Syndicate. For the first time, one group had a monopoly on all guano sales in Europe and the scale of operations was much grander than anything attempted before. The presence of the Societe Generale had more far-reaching consequences. The guano trade would never be the same. No longer could merchant capitalists play a significant role. Only groups with the support of finance capital could afford to run the trade as it had been reorganised. The Guano Age was fast drawing to a close, although this was not immediately apparent.

Dreyfus Frères consolidated the Syndicate's victory in 1870 with their appointment as financial agents for the Government in Europe. This gave the Guano Syndicate more power than any preceding group that had dealt in either the guano or the loan business. Shortly there after the government decided to redeem part of its existing debt and Dreyfus handled the operation. The success of the redemption was followed by a larger project in June, 1870, when Peru floated a new loan for the construction of rail ways to open the interior to economic development. The members of the Syndicate, together with a London banker, formed a new syndicate to issue the loan of $11,920,000 in London. The issue was a great success: the loan was oversubscribed. The recent re organisation of the guano trade, coupled with the successful retirement of part of Peru's outstanding debt, gave European investors renewed confidence in Peru.

The euphoria did not last long, but it stimulated the government to plan more projects that called for new loans. To ease the congestion in Callao, the nation's chief port, the harbour was to be re built, a project that was eventually awarded to the Sociérale. New railways were planned, one of which was to cross the Andes, a great technological feat. Although the Government intended these projects to contribute to the development of the Peruvian economy, in effect the projects, and the means taken to finance them, represented a new attempt to integrate Peru more fully into the world capitalist economy.

The government decided to return to the well in 1872 and launched a new loan, again through Dreyfus and his associates. This time the sum sought was a staggering £36,800,000 for irrigation, railways and conversion of the 1865 and 1866 loans. With this new loan Peru suddenly became one of the largest borrowers in the European capital markets. The result was disastrous. Only $1,076,820 was subscribed by the public in March, 1872. Undoubtedly Peru's rapid return to the loan market caused many to wonder about the soundness of its finances. In addition, rumours, which were eventually confirmed, circulated that Congress had only authorised President Balta to raise a $15,000,000 loan for irrigation and railways. The con version of the earlier loan was not authorised and it was this new conversion that most upset people; Peru was once again simply rolling over its debt and postponing payment. Those who followed Peruvian affairs were worried by the prospect of another long drawn-out battle between Balta and the Congress. The London Stock Exchange Committee intervened and restricted the immediate issue to $15,000,000, but this move did little to restore confidence. Although there were some brief speculative rises, the overall trend in Peruvian bond prices was downward until the final default. Peru's reputation was seriously damaged by this operation, from which it gained little capital.

For Peru, the failure of this loan was far more serious than a simple setback in the loan market. The guano trade itself was in disarray and everyone knew that the whole structure of Peru's finances was built on guano. Reports appeared in the European press that good quality guano was almost exhausted, and no one was disposed to listen to Peruvian assurances to the contrary. In fact, the best deposits in the Chincha Islands were almost depleted, and the intense, year-round mining of the guano by the Chinese labourers (discussed in the following article) had destroyed the nesting grounds of the birds. The reports were followed by complaints about great variations in the quality of the guano available in Europe. The Peruvian Government was forced to devise a formula that allowed for price changes based on the nitrogen content of the guano. This was the first time such changes had been permitted. Unfortunately it seemed to confirm the accuracy of the reports and complaints. Sales of other, cheaper fertilisers started to under cut guano sales and the price change was an attempt to maintain sales.

Since the publication of Liebig's work, interest in fertilisers grew steadily and there had been a lively pamphlet war in Europe among partisans of the different types of fertiliser: manure, bone-meal, potash, phosphate, super-phosphate, African guano, Peruvian guano and sodium nitrate. Perhaps the most imaginative attack on guano came from a French manufacturer of phosphate who declared that 'guano is like champagne; light, effervescent and short-lived'. Despite its numerous competitors, guano dominated the market until the 1870s, when sodium nitrate imports to Europe greatly increased.

Guano affairs were further complicated by the election of a new president, Manuel Pardo, who took office in August, 1872. As an associate of the former consignees and a former Minister of Finance, Pardo had been one of the leaders of the anti-Dreyfus campaign in 1869. Now, as president, he had a second chance to implement his ideas on national economic development. Un fortunately the Dreyfus contract, the two loans, inflation and unemployment gave him little freedom to change policy. Although hostile to Dreyfus, he had to continue to work with the French Syndicate. Pardo's election was a cause for concern to the Guano Syndicate, whose own affairs had not been going well. Because the consignees still held large stocks of guano in Europe, it was December, 1872 before the Syndicate was fully able to exercise its monopoly. Yet it was committed to monthly payments to the Government from 1869 and its restricted income caused liquidity problems. The strain on the Syndicate increased when the Government asked for extra payments. Dreyfus favoured giving the Government more money and accepting modifications in the contract. The Societe Generale followed a more cautious policy, strictly interpreting the contract, and only reluctantly providing the extra funds. Leiden, Premsel found itself over-committed and also wanted to restrict payments. The Syndicate members were never able to resolve their differences satisfactorily, which led to numerous legal suits. For at least one member the consequences were serious: Benjamin Premsel became a bankrupt and killed himself in 1885.

Matters continued to deteriorate for both the Syndicate and Peru. The Syndicate was stuck with vast quantities of ' unsold guano on its hands. The Government was again short of funds. The hostility between the new Government and the Syndicate developed into open confrontation. In 1873 the Government refused to accept the Syndicate's ac counts and Dreyfus' interpretations of various parts of the guano and loan contracts which favoured the Syndicate. The impasse led to the suspension of guano shipments and it was only resolved with a new agreement in April, 1874, that set an expiration date of January, 1876, on Dreyfus' contract. News of this agreement caused Peruvian bond values to rise briefly, but renewed disagreement between the two parties ended the rally.

The Government now faced the task of finding someone to take over guano sales in a declining market. There was no possibility of a return to small merchant houses. The stakes were too high; whoever sold the guano had also to be able to guarantee the service of Peru's debt of over $32,000,000. Several groups negotiated with Peru, among them the Banque de Paris et des Pays-Bas and the Societe Generale, which proposed to take the new contract without Dreyfus.

Peru worked against a deadline. Once it had agreed to end the Dreyfus con tract it had absolved Dreyfus of the responsibility for the January, 1876 interest payment to the bondholders. Before that date someone had to be found who could pay the interest due. Unfortunately no one was, and on December 18th, 1875 the Peruvian minister in Paris announced '... a momentary interruption in the punctuality with which Peru has always met its obligations with relation to its foreign debt'. In short, Peru defaulted on its debt of f"32,688,320; normal payments were never resumed.

Default made the negotiation process all the more difficult. Now the bond holders, most of whom were British, were claiming that they owned the guano that had been pledged as security for the loans. No contract could be completed that did not take account of their interests. Eventually an Anglo-Peruvian syndicate, the Peruvian Guano company, took on the new contract. But the Guano Syndicate still had over 500,000 tons of guano left to sell. To add to the confusion, there now would be two major sellers in the guano market.

In such a situation the Peruvian Government did not want to introduce any new factors to complicate the already difficult task of restoring its finances. Yet it was being forced to do so by large scale exploitation of nitrate in southern Peru, Bolivia and northern Chile. In creased use of nitrate meant that Peru had to act to protect guano. Peru was in a dilemma. If too much nitrate were produced it would depress the price of guano. On the other hand, all its guano was tied up with its creditors, and nitrate represented a new, largely unmortgaged resource. Pardo responded in 1875 by declaring a state nitrate monopoly and issuing nitrate bonds to compensate the owners. The nationalisation of nitrate sharply increased Peru's debt, something that was not encouraging on the eve of its default. Pardo was taking a great risk, but by controlling production and price he hoped to use nitrate in the same way as guano. However, the situation was very different.

The Atacama desert, divided between Bolivia and Chile, was equally rich in nitrates and Peru could not hope to control production there, despite the fact that it did have close ties with Bolivia. The boundary between Chile and Bolivia had long been disputed and since 1873 Bolivia had maintained a secret alliance with Peru against Chile. Chile and Bolivia had settled their dispute in 1874, but the rising value of the nitrate deposits doomed the settlement. The major deposits in Bolivia were mined by Chilean companies under Bolivian licence, and new conflicts soon arose. In 1878 Bolivia levied a new tax on nitrate production. The Chileans resisted this attempt at control, and the Bolivian Government gave them until February 14th, 1879 to comply or face expropriation. Negotiations failed, and before the Bolivians could act, the Chilean fleet seized the Bolivian port of Antofogasta and claimed all of the Atacama desert. The War of the Pacific began. Peru came to the aid of its ally and declared war on Chile, a war for which it was hardly prepared.

Chile seized the Peruvian guano deposits in the first month of the four year war, depriving Peru of its main source of income. The Chilean forces went on to occupy Lima the following year, but the Peruvians and Bolivians continued to resist. At Ancon in October, 1883 the Peruvians finally signed a peace treaty; the Bolivians signed a truce the following year but it was 1921 before a final Chilean-Bolivian peace treaty was concluded. Bolivia lost Antofogasta Province, its access to the sea. Peru lost the provinces of Tarapaca, Tacna and Arica, although Tacna was returned in 1929.

The Guano Age came to a catastrophic close in the War of the Pacific. During the war Peru lost control of its guano and nitrate deposits and. their revenue. When the Peruvian president fled abroad in late 1879, supposedly to raise money, Pierola, the former finance minister, seized power. In an attempt to raise money he agreed to a settlement of disputed accounts with the Guano Syndicate, whereby he recognised Peru's debt to the Syndicate at 16,9'08,564.62 soles . Pierola then signed a new guano contract with a French syndicate called the Compagnie Financière et Commerciale de la Pacifique, which agreed to pay the Guano Syndicate the money that Peru owed to it. The result of these desperate manoeuvres was simply to increase the number of guano merchants and the number of creditors that Peru had eventually to face. There were so many liens on the guano deposits that it took years to figure out who had priority. Peru did not receive much income from guano in this period. To make matters worse the bottom finally fell out of the guano market in the face of competition from other fertilisers, particularly Chilean nitrate. Ironically Chilean nitrate was now largely controlled by British investors, who had bought up the nitrate companies during the war.

Peru could not hope to raise any more money abroad and was trapped in a morass of debt. Every attempt to extricate herself foundered on the conflicting claims of her creditors. Dreyfus, on behalf of the Guano Syndicate, pressed his claim to the debt that Pierola had recognised but that succeeding governments denied. The British bondholders organised themselves in a special committee to protect their claim. The bank supporting the Compagnie de la Pacifique and the backers of the Peruvian Guano Company also claimed a share of Peru's guano revenue. Litigation of these claims promised to continue for a long time, a prospect dismaying to all but the most persevering of lawyers.

Eventually Peru's desperate need for capital led it to come to terms with the most powerful of its creditors, the bondholders. In October, 1889, the Government signed an agreement with Michael Grace, a merchant representing the bondholders. The agreement, the Grace Contract, settled the bondholders' claims against Peru. Peru turned over the nation's railways to a corporation formed by the bondholders, the Peruvian Corporation, for sixty-six years. It also agreed to pay the corporation an annuity of L80,000 for thirty-three years. Several other concessions were also handed over. The Grace Contract did nothing for the Guano Syndicate or the other creditors, who continued to try to settle their ac counts. They finally received some payment after a ruling by an international arbitration tribunal at Lausanne in 1901 and a further payment after a decision at the International Court of Justice at The Hague in 1921.

Peru at the end of the Guano Age was bankrupt and struggling through a long recovery. For a time sugar production, in which Auguste Dreyfus took some interest, replaced guano as a sup port for the economy, but the economy was badly shaken by the speculation of the Guano Age. The management of many of Peru's resources was in the hands of a modern, foreign corporation acting in the interest of its British share holders. The days when Peru could deal with small merchant houses were past. Peru was now confronted by the domination of European finance capital. That was the legacy of the Guano Age.

Dr John Peter Olinger was Lecturer in History at Bayero University, Kano.