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Robert G. Greenhill and Rory M. Miller* Abstract retrieved from webEdit

The 1870s were a decade of crisis and change in the Peruvian economy. Guano, the bulk of Peru's exports, no longer dominated the republic's trade and finance as it had for thirty years. Quantity, quality and markets persistently declined from the peaks of the 1850s and 1860s. Two new growth sectors, however, increasingly diversified Peru's commercial pattern. On plantations in the north sugar production quadrupled between 1873 and 1876, overhauling cotton and wool among exports. At the same time, in the southernmost province of Tarapacá nitrate extraction and manufacture steadily increased.

Journal of Latin American Studies

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The Peruvian Government and the Nitrate

Trade, 1873–1879

Robert G. Greenhill and Rory M. Miller

Journal of Latin American Studies / Volume 5 / Issue 01 / May 1973, pp 107 131

DOI: 10.1017/S0022216X00002236, Published online: 05 February 2009

Link to this article:


How to cite this article:

Robert G. Greenhill and Rory M. Miller (1973). The Peruvian Government and

the Nitrate Trade, 1873–1879. Journal of Latin American Studies, 5, pp 107131


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/. Lett. Amer. Stud. 5, 1, 107-131 Printed in Great Britain 107

The Peruvian Government

and the Nitrate Trade, 1873-1879



The 1870s were a decade of crisis and change in the Peruvian economy.

Guano, the bulk of Peru's exports, no longer dominated the republic's trade

and finance as it had for thirty years. Quantity, quality and markets persistently

declined from the peaks of the 1850s and 1860s.1 Two new growth

sectors, however, increasingly diversified Peru's commercial pattern. On

plantations in the north sugar production quadrupled between 1873 and 1876,

overhauling cotton and wool among exports.2 At the same time, in the

southernmost province of Tarapaca nitrate extraction and manufacture

steadily increased.

This paper examines Peruvian policy towards the production and marketing

of nitrate in the 1870s. The period marked Peru's attempt to extend control

over her natural resources from guano to nitrate. Her policy had important

repercussions for European merchants and entrepreneurs whose economic and

social power was enormous, notably the salitreros, the owners of the nitrate

works, whose business success depended upon this lucrative trade. It was also

of concern to Peru's overseas creditors since increased government income

from nitrate might raise the price of existing bonds and permit renewed debt

servicing. Furthermore, government policy towards the nitrate trade was an

essential background to the formulation of international policies on the west

coast before the War of the Pacific in 1879. What encouraged Peru's interven-

• The authors would like to thank Professor D. C. M. Platt for his advice and criticism

during the preparation of this paper.

1 W. M. Mathew, ' Peru and the British Guano Market, 1840-1870 ', Economic History

Review, second ser., xxm (1970), 112-28.

2 Memorandum, 17 Feb. 1877, Antony Gibbs & Sons Papers, Guildhall, London (cited hereafter

as Gibbs MS) 11,121; Hayne to Henry, 1 March 1877, ibid., 11,120. James Hayne and

James Henry were managing partners in the west coast offices of Antony Gibbs & Sons.

Others were Thomas Comber, Alfred Bohl, Bruce Miller and Henry Read. See C. W.

Maude, Antony Gibbs & Sons Limited : Merchants and Bankers 1808-1958 (1958), pp.

127-31. Downloaded: 19 Apr 2013 IP address:

108 Robert G. Greenhill and Rory M. Miller

tion in an age ostensibly dominated by laissez-faire doctrines? How successful

was it? What was the reaction of European firms to interference? What effects

had this policy upon the well-being of the nitrate industry ?

The first part of this paper discusses the events leading to expropriation. The

second examines the links between the Peruvian Government and a British

merchant house, Antony Gibbs & Sons, after expropriation was achieved. The

whole provides an early and interesting example of the relations between a

national government and foreign business eager to exploit valuable natural

resources - a recurrent theme in Latin America's economic development.


In August 1872, after surviving an attempted coup d'etat, Manuel Pardo

became President of Peru. His inaugural statement to Congress on 2 August

promised that a first task would be to review the country's financial problems

and formulate long-term solutions.3 Peru faced bankruptcy. ' It appears',

explained Consul Jerningham, ' that in consequence of the lavish expenditure

of the late administration the financial state of this country is now found

to be in a most deplorable state '.4 The previous government of President Balta

(1868-72) had squandered vast overseas loans upon public works, allowed

ordinary domestic expenditure to exceed revenue and, under the 1869 contract,

incurred large deficits with the guano consignees.5 By 1872 there was a total

foreign debt of nearly £35 million, ^290,000 outstanding on the Pisco and lea

railway, £11-2 million on the 1870 6 per cent loan and ^22 million on the 1872

5 per cent loan. This last sum, nominally offered at 7 7 ^ , yielded just ^13

million. Only ^230,000 reached the advertised level, the remainder being sold

at as low as 60. And from this flotation barely £5 million was applied to public

works.6 Dreyfus, the issuing house, extracted ^1 million commission and a

further ^1-5 million owed under their guano contract. Conversions of earlier

loans claimed another £6 million. Servicing Peru's foreign debt required

nearly £2 million annually, absorbing the entire guano revenue.

Railway construction represented the great bulk of public works financed by

the Balta government.7 Unhappily, it was ill-planned, expensive and specula-

3 El Comercio, 2 Aug. 1872.

4 Jerningham to Granville, 27 May and 27 Sept. 1872, Public Record Office, London, Foreign

Office Archives, Peru (cited hereafter as F.O. 6i), vol. 272.

5 For an explanation of the guano consignment scheme, see W. M. Mathew, ' Anglo-Peruvian

Commercial and Financial Relations 1820-1865 ', unpublished Ph.D. Thesis, University of

London (1964), pp. 258-9.

6 W. Clarke, Peru and Its Creditors (1877), pp. 13-20; Charles A. MacQueen, Peruvian Public

Finance, Trade Promotion Series no. 30 (Washington, 1926), p. 87.

7 Watt Stewart, Henry MeiggsYankee Pizarro (New York, 1946), pp. 41-84. Downloaded: 19 Apr 2013 IP address:

The Peruvian Government and the Nitrate Trade, i8j^-i8jg 109

tive. The Moquegua line was badly sited. Its curves were too sharp, inclines

steep and embankments unsafe. The Chimbote railway was started before

difficult valley crossings were considered. The Oroya line, ' a railway to the

moon', remained unfinished far from its proposed Andean terminus.8 The

network, often unable to compete with llamas and mules, proved unremunerative.

Mollendo, an open roadstead still practically uninhabited, became the

Southern Railway's terminus. The British Minister, Spencer St John, later

reported that the line from Callao to the Andes ' passes through a sterile

country without population, resources or trade'. Silver ore shipments required

one truck monthly.9 Consul Graham (Islay) noted in 1874 that ' only one

passenger train a day runs between Mollendo and Arequipa and between

Arequipa and Puno only two trains a week. The goods trains are very few in

number'10 Peru's railways could not earn their amortization and interest.

They did not markedly encourage commerce or raise government revenues.

Then, there was a large internal debt and a serious budget deficit. Before

1869 guano revenues were available for normal government expenditure.

Under the loans of 1870 and 1872, however, they were pledged to external

debt servicing. President Pardo informed Congress on 21 September 1872 that

in the previous twelve months guano sales in Europe had totalled nearly

£3 million of which the external debt absorbed £2-8 million. The surplus was

already ear-marked to repay advances from Dreyfus which totalled ^3-3

million, even after die House had extracted a consideration from the 1872 loan.

Thus, widiout guano revenues the budget deficit rose alarmingly. Internal

expenditure for die past year totalled ^3-4 million but receipts were only

^175 million, mainly from customs revenues.11

President Pardo told Congress that he proposed to expand ordinary revenue

by some ^1-7 million per annum, bridging the gap between domestic income

and outgoings. He outlined three distinct measures, administrative decentralization,

an increase in customs duties of between 5 and 10 per cent, and an

export duty on nitrate I2; direct taxation, given die poverty and isolation of

die mass of the population, was out of the question. Foreign sources, however,

remained sceptical. The Peruvian Government's remedies would, as the

8 A. J. Duffield, Peru in the Guano Age (London, 1877), pp. 13 and 105.

9 St John to Derby, 27 May 1875, F - ° - 61/289.

10 Consular Reports (Islay), Parliamentary Papers (cited hereafter as P.P.) (1875), LXXV, 748

and (Peru) (P.P. 1878), LXXII, 530-62.

11 MacQueen, op. cit., pp. 7, 39 and 87; Diario de Debates, Cdmara de Diputados (Lima)

(cited hereafter as Debates) (1872), 11, 67-72.

12 MacQueen, op. cit., p. 39; Debates (1872), 11, loc. cit.; J. V. Levin, The Export Economies :

Their Pattern of Development in Historical Perspective (Cambridge, Mass., i960), pp.

98-105. Downloaded: 19 Apr 2013 IP address:

no Robert G. Greenhill and Rory M. Miller

United States Consul told Washington, ' only postpone a serious crisis in the

financial affairs of the Republic ' . "

The new export duty upon nitrate was the most important of Pardo's proposals.

It was a curious feature of the international economy that Peru possessed

a practical monopoly of the two major natural nitrogenous fertilizers,

guano and nitrate of soda. Both enjoyed a ready market in Europe, guano from

the 1840s, when it dominated Peru's commercial and political life, and nitrate

from the 1860s. Guano, found on offshore islands and in coastal areas, was the

property of die Peruvian Governmentl4; it was bagged and shipped direct

through a succession of agents and consignees. Nitrate, which was mined in


Nitrate Production and Export from Peru 1865-79
















(/) Total


(000 tons)














(2) Exports

To Britain
















To Europe
















(j) Price ir1, Europe

per ton

£5 -i 12 10/.-


13 5sr5

15 10/.-

15 I Of.—

15 5/.

14 5/.-

12 y.-

11 15/.



14 10/.-




15 15/.

16 5/.


14 15/.


14 15/.

Source: Column 1 C. M. Aikman, Manures and Manuring (London, 1894), p. 351; Consular

Report on Finance, Trade and Industry of Peru (P.P. 1878), LXXII, 551.

Column 2 Annual Statements of the Trade of the United Kingdom with Foreign

Countries and British Possessions in Parliamentary Papers; Memorandum

of Henry Bath & Co., 1 Jan. 1879, Gibbs MS 11,471/9.

Column 3 Figures given frequently in monthly editions of the Farmers Magazine.

Authorities differ by up to 10 per cent on their figures for nitrate production and exports.

They use varying blocks of twelve months to represent one year, they may or may not include

cargoes afloat or lost, and there are obvious errors and estimates.

13 Foreign Relations of the United States 1873 (Peru), p. 745, Thomas to Fish, 21 Oct. 1872;

cf. Jerningham to Granville, 27 Sept. and 27 Oct. 1872, F.O. 61/272.

14 W. M. Mathew, ' The First Anglo-Peruvian Debt and Its Settlement, 1822-49 '> Journal of

Latin American Studies, n (1970), 86. Downloaded: 19 Apr 2013 IP address:

The Peruvian Government and the Nitrate Trade, 1873-1879 111

die harsh Atacama desert and required tedious and costly manufacture to

remove the many impurities, was privately owned. The nitrate business needed

skill, capital and organization.15 Consumption rose rapidly - in Britain it

doubled between 1868 and 1873 — as technological change cheapened and

expanded production (Table 1). Large, enterprising foreign firms like the

Tarapaca Nitrate Company, pardy owned by Antony Gibbs & Sons, a British

merchant house, replaced parados, old, unmechanized workings, with large,

more efficient oficinas. At Carolina, where new steam-driven machinery raised

capacity, working costs fell from £8 to ^5 per ton after July 1872. By 1873

over twenty firms manufactured between 5,000 and 10,000 tons per annum.16

The previous tax upon nitrate exports, 4 centavos per quintal (3*. id. per ton)

fixed in 1868, was hardly oppressive, when the price of nitrate was between

£11 and ^15 per ton and costs were falling. It was, President Pardo told Con-


Guano Production and Export from Peru 1867—79














(/) Total


(000 tons)












(2) Exports

To Britain














To Germany







(3) Price in Europe

per ton

£" -£ 12 - 12 10S.


r3 5s-~ M



12 15/.


12 1OS.

12 iay.




Source: Column 1 Consular Report on Finance, Trade and Industry of Peru (P.P. 1878), LXXII,


Column 2 Annual Statements of the Trade of the United Kingdom with Foreign

Countries and British Possessions in Parliamentary Papers; Consular Report

(Callao) (P.P. 1872), LVII, 172.

Column 3 As Column 2.

13 The South Pacific Times (cited hereafter as SPT), 15 May 1875, recorded 415 nitrate works

capitalized at £3 million.

18 Henry to Hayne, 8 Jan. and 1 Feb. 1873, Gibbs MS 11,120; Memorandum, Jan. 1873,

ibid., 11,132; Reports of the Tarapacd Nitrate Company, 1875-81, ibid., 11,129; The Times,

26 Sept. 1873, 4a; Duffield, op. cit., pp. m-14. Downloaded: 19 Apr 2013 IP address:

ii2 Robert G. Greenhill and Rory M. Miller

gress in 1872, ' an incontestable right on the part of the country to look to

nitrate as a means to replenish the Treasury and we believe without any hurt

to the industry ' . "

Moreover, Peruvians entirely blamed the cheap, extensive output of nitrate

for the decline in guano sales which threatened the Government's chief source

of revenue and further encouraged Lima to examine the industry.18 It was

ironic that the profits which west coast houses derived earlier from the guano

trade should now finance a rival fertilizer, nitrate. As Table 2 shows, guano

sales fell from 575,000 tons in 1869 to less than 350,000 tons in 1873. Nevertheless,

the simple substitution of nitrate for guano is difficult to prove.

Although these factors were not generally recognized in Peru, the now lower

quality of guano and the discovery that other manures, like superphosphates,

were better for particular crops were also responsible for guano's decline.10 By

1872 the rich guano of the Chincha Islands was exhausted and deposits upon

the Guanape and Macabi Islands neared depletion. Unworked finds elsewhere

had a low ammonia and phosphate content.20 As early as 1870, Professor

Voelcker, the Royal Agricultural Society's analyst, demonstrated the increasing

adulteration of guano.' The supply of Peruvian guano of best quality ', he

explained, ' unfortunately is diminishing year by year'. Lower demand also

resulted from unscrupulous dealers who sold inferior guano as best quality,

artificially raising prices and further damaging its reputation. ' Peruvian

guano ', Voelcker continued, ' has lost credit with the farmers of England '

who were ' fully justified in declining to buy . . . on terms which do not offer a

reasonable guarantee for their money '.21 Similarly, Antony Gibbs, unimpressed

by Peruvian disclaimers, rejected ' all idea of again connecting

ourselves with it \22


After Pardo's speech to Congress the Ministerio de Hacienda published its

nitrate proposals, covering profit-sharing between state and producers, cost

17 Pardo's Message to Congress, Aug. 1872, Debates, vol. 11; see also Oscar Bermudez, Historia

del Salitrc (Santiago, 1963), pp. 321-2.

18 Pardo's Message to Congress, 21 Sept. 1872, Debates, vol. 11; El Comercio, 21 Oct. 1872.

19 Mathew, ' British Guano Market ', pp. 119-23.

20 Reports furnished to the Board of Admiralty and communicated to the Foreign Office,

relative to the Guano Deposits of Peru, Stanley to Secretary to the Admiralty, 16 Jan. 1874

(P.P. 1874), LXVIII, Consular Reports (Callao) (P.P. 1872), LXVII, 172-206 and (1873),

LXIV, 515-38; Duffield, op. cit., pp. 73-100.

21 Journal of the Royal Agricultural Society (cited hereafter as ]RAS), v (1869), 130-6; vi

(1870), 140-9; VII (1871), 284-8; vin (1872), 215-23 and xvi (1880), 311-21; Farmers Magazine

(cited hereafter as FM), LXX (1875), 443; LXXII (1877), 422 and LXXVI (1879), 282.

22 London to Lima, 1 March 1876, Gibbs MS 11,471/2; cf. Bohl to Hayne, 29 Nov. 1876,

ibid., 11,121. Downloaded: 19 Apr 2013 IP address:

The Peruvian Government and the Nitrate Trade, 1873-1879 113

and sale price determined by official commission, and an export duty of 25

centavos per quintal (19^. gd. per ton). At the same time Senator Manzanares

of Piura formulated a private project for an estanco or state monopoly of nitrate

sales. Both schemes were placed before the Senate's Finance Committee and

discussed in Congress. The idea of a state monopoly in any branch of business

at this time was anathema to most Peruvian politicians schooled in the principles

of laissez-faire. The Senate Commission, in fact, confessed that ' it

entered into the examination of the project with much foreboding and witli its

mind almost made up to opt for its rejection \23

Nevertheless, certain features of the estanco were attractive. A sales monopoly

in a booming industry offered lucrative possibilities. The estanco did not

affect an article essential to the everyday life of Peruvians. The Government

would control nitrate production, prevent over-supply, and raise prices, reducing

nitrate's competition with guano, the corner-stone of Peru's external credit.

Pardo would not wish nitrate exploitation to repeat the pattern of the guano

trade. After thirty years of continuous export, guano had left Peru few tangible

benefits. Thus, despite warnings that it was contrary to general economic

principles and to the Peruvian constitution which guaranteed freedom of

trade, the estanco law was promulgated on 18 January 1873 to become effective

in two months.21 The state would buy nitrate at 2.4 soles per quintal (^9 9*. 8d.

per ton), a price remunerative to manufacturers, without the interference of

middlemen. If nitrate sold above 3.1 soles, producers and the Treasury would

share profits. Production quotas were assigned to oficinas on the basis of existing

output and capacity. Unworked nitrate became state property and salitreros

were forbidden to extend holdings. A representative commission would advise

the Government upon procedure, and four local banks, Nacional, Providencial,

Peru and Lima, would undertake everyday administration.

The estanco threatened the established independence of the salitreros. Sited

in Tarapaca, a sparsely populated and infertile region, the nitrate industry was

economically and physically isolated from the rest of Peru. Although Peruvians

worked about a third of the oficinas, the largest and most profitable were

foreign-owned and accustomed to absolute freedom of action.25 The salitreros

had created in Tarapaca an ' enclave' economy. Their fast-growing export

commodity shipped from Iquique affected a limited sector but left the bulk of

the country untouched. Consigning and marketing passed through merchant

houses in Valparaiso, like Gibbs & Sons, who extracted large commissions, and

23 El Comercio, 22 Sept., 21 and 22 Oct. 1872.

24 El Comercio, 21 Jan. 1873; The Times, 1 Feb. 1873, 6a; Jerningham to Granville, 26 Nov.

1872 and 26 May 1873, F.O. 61/277; Henry to Hayne, 3-4, 11, 18 and 24-25 Jan. 1873,

Gibbs MS 11,121; Bermudez, op. cit., pp. 322-3.

« SPT, 15 May 1875.

L.A.S.—8 Downloaded: 19 Apr 2013 IP address:

ii4 Robert G. Greenhill and Rory M. Miller

on whom salitreros depended for advances and for imported provisions and

equipment. The Peruvian nitrate industry, largely organized by foreigners

who provided capital and skill, had little direct effect on native entrepreneurs,

local production or labour mobility. Net income went overseas. Foreign

managers took their earnings elsewhere. Low-wage local labour barely stimulated

demand.26 Of course, the prevailing laissez-faire environment determined

such developments. Until local capital was mobilized, foreign entrepreneurs

gladly raised the necessary means. Without tariffs, provisions were

purchased more cheaply outside. ' Everything Iquique consumes', F.I

Comercio noted, ' is brought from abroad, principally Chile with which

republic there is almost daily communication '. Ninety per cent of Iquique's

rapidly expanding population were said to be foreigners.27

The reaction of salitreros, at first surprised by the speed of the estanco's

promulgation, was extreme. In principle they opposed official interference in

an industry developed by private initiative and showing every prospect of

expansion. In particular, the largest firms, like the Tarapaca Nitrate Company

resented the allocation of quotas which ignored probable capacity. The

salitreros lobbied the President, Congress and the press. They threatened to

resist official enquiries.28' Unless the salitreros agree to co-operate ', Read, the

manager of the Tarapaca Company, explained,' commission after commission

will collapse'. He promised to delay matters ' to strengdien our particular

claims for consideration'. Gibbs' London office, alarmed at the opportunist

Read, advised caution. It would not do to advertise his views too widely. But

Folsch & Martin, a German house, refused outright to assist the Government.29

Resistance from salitreros only partially influenced the estanco's eventual

withdrawal. More potent factors discouraged the government, from the first

lukewarm to a breach of laissez-faire. Political crisis, a censure motion against

the cabinet, and financial troubles permitted little reflection on the estanco.

The administrative costs, estimated at 8 million soles, absence of trained

officials, and Valparaiso's strength as a sales centre were powerful disincentives.

30 Then, from February a sharp fall in the market price of nitrate to 1.87

soles per quintal (£j 6s. lid. per ton) as firms raised output to increase their

quotas under the estanco, presented the Peruvian Government with the un-

26 K. Berrill, ' International Trade and the Rate of Economic Growth ', Economic History

Review, second ser., xn (1959-60), 355-7.

2T El Comercio, 18 Oct. 1873.

28 Hayne to Henry, 1 Feb. 1873, Gibbs MS 11,120; Henry to Hayne, 21 Feb. 1873, ibid.,

11,121; MacLean to Derby, 26 Oct. 1874, F-O- W 2 ^ ; Money Market Review, 19 April

1873; Bermudez, op. tit., p. 325.

2» Read to Henry, 28 Oct., 24 and 26 Nov. 1873, Read to Bohl, 28 Aug. and 31 Dec. 1873,

Gibbs MS 11,123.

30 Minister of Finance's Speech, 28 March 1873, Debates, vol. iv. Downloaded: 19 Apr 2013 IP address:

The Peruvian Government and the Nitrate Trade, i8y^-i8yg 115

happy prospect of paying the salitreros more than would be received from

European consumers.31 In March 1873, when the two months' grace had

expired, the Minister of Finance successfully asked Congress for postponement.

In June, Read was confident that' the difficulties in the way of establishing

the monopoly would prove insurmountable \32 By autumn the estanco

project was shelved.

Nevertheless, two measures concerning nitrate were passed. Export duties

were raised to 15 centavos per quintal (1 is. wd. per ton). To raise taxes at a

time when increasing output was causing oversupply and falling prices was at

first sight ill-judged. Yet the Lima Government undoubtedly anticipated that,

given Peru's monopoly, the consumer, not the producer, would bear the

burden. In any case the level of taxation was still low. Then, in July 1873, the

Government approved the establishment by the Peru, Nacional and Providencia

Banks of the Compania Administradora del Estanco del Salitre to

collect export duties.33 This development was doubly significant. It marked

the first Peruvian attempt to run public policy through a privately-owned

institution. It also clearly suggested that the estanco, now successfully delayed,

was still a future possibility.


By 1875 a worsening financial outlook and intensified competition between

guano and nitrate demanded an immediate solution. Consul Graham warned

of ' the present disastrous state of financial chaos '.34 H.M. representative at

Arica reported an unhappy situation, rapid depreciation of notes, political

upheaval and an adverse trade balance.35 The United States Consul in Lima

informed Washington that Peruvian finances were ' deeply embarrassed '.30

Nitrate output rose persistently to 320,000 tons in 1875, but guano sales continued

to decline, so much so that in April 1874 Dreyfus & Co. forced Lima to

renegotiate the consignment contract and refused to service the foreign debt

beyond July 1875. The increasing difficulty in procuring efficient guano

induced farmers to buy nitrate of soda. Although the onset of the agricultural

depression is usually dated from the seventies, when cheap cereal imports

ruined British arable farming (the sector which normally used fertilizer),

manures still represented an important element in the British farmer's

81 El Comercio, 16 July 1873.

32 Read to Henry, 15 June 1873, Gibbs MS 11,123.

33 Manuel Cruchaga, Guano y Salitre (Madrid, 1929), p. 173; C. Camprubi Alcazar, Historia

de los Buncos en el Peru 1860-79 (Lima, 1957), p. 109.

s* Graham to Derby, 23 July 1877, F.O. 61/300.

« Consular Reports (Arica) (P.P. 1876), LXXVI, 182-201, and (Callao) (P.P. 1877), LXXXIII,


36 Foreign Relations of the United States 1875 (Peru), p. iooo, Thomas to Fish, 16 Feb. 1875. Downloaded: 19 Apr 2013 IP address:

u6 Robert G. Greenhill and Rory M. Miller

attempts to outflank foreign competition before the disasters of 1878 and 1879.

No doubt the continuous fall in the price of manures, especially nitrate,

boosted temporary demand while farming incomes were steadily shrinking.

Nitrate also enjoyed considerable popularity in Europe where die subsidized

beet sugar industry was an important customer.37 The South Pacific Times

pointed in 1874 to die disastrous national consequence of the competition

between nitrate and guano. It urged the Peruvian Government to interfere

' with the established rights of the few to protect the interests of the many V8

A Senate Commission reported that:

nitrate has been slowly invading the field hitherto reserved to guano. It continues

this invasion daily and the consequent fall in the consumption of guano [will be]

a very heavy blow to the national interest if Peru does not obtain a rise in the price

of nitrate or does not lower that of guano.39

Yet, since Pardo came to power two years before, the nitrate question had

remained at the same legislative stage. The operation of the estanco had been

indefinitely postponed. To resolve this stalemate, therefore, an extraordinary

session of Congress was arranged after the ordinary session closed in January


A new factor further complicated matters. In 1875 the nitrate industry was

less prosperous than two years before. Prices had dropped sharply, as Table 1

shows. El Comercio noted that the price in Valparaiso fell from ^12 per ton

in 1873 t 0 £fi l0s- m April 1875.40 The faster growth of productive capacity,

through the wholesale adoption of new techniques and enterprise, notwithstanding

die increase in demand, caused oversupply. Such a development

particularly direatened the many smaller manufacturers, amongst whom were

Peruvians who had invested late, and this provided an urgent reason for

official action. A distinct pattern of nitrate ownership had arisen whereby the

division between small, labour intensive oficinas and large, capital intensive

firms, better able to withstand the depression, followed domestic-foreign lines.

Various solutions, debated in the Chamber of Deputies in March 1875,

reflected the confusion in Peruvian political circles about the line to adopt.

In the Senate members argued that while higher duties would not unduly

hurt exports neither would they rescue the small Peruvian producer. Removing

duties to cheapen nitrate and dius boost sales would merely harm guano

further. The only measure to secure revenue and preserve investment, it

seemed, was official purchase of the oficinas, a view shared by bodi the

" JRAS, iv (1868), 334-8; v (1869), 73; vi (1870), 299-322; VII (1871), 365-88; ix (1873), 258;

xiv (1877), 246-55, and xv (1878), 346-53; FM, LXIX (1875), 337, and LXX (1875), 459;

Mathew, British Guano Market, pp. 121—4.

SPT, 14 Nov. 1874, 12 March and 14 April 1875.

39 El Comercio, 20 May 1875. *» El Comercio, 16-27 AP"' 1875. Downloaded: 19 Apr 2013 IP address:

The Peruvian Government and the Nitrate Trade, 1873-18ja 117

Deputies and the Senate.41 But Juan Elguera, die Minister of Finance, later

made the point that the Government accepted expropriation not only on its

own merits but because the plan probably conciliated most interests; in any

case, after mondis of discussion a firm decision one way or the odier was

necessary.42 Certainly the reaction of salhreros, who in 1873 were enjoying

substantial returns and resisted vigorously, was obliging enough. El Comercio

noted diat' die Government and the salhreros have already, it seems, entered

on a padi of prudence and conciliation concerning die metJiod of bringing

about expropriation'. It believed diat no difficulties would arise ' when it

comes to executing the law \43 The falling price of nitrate between 1873 and

1875 was> dierefore, central to the changed views of bodi officials and salitreros.

The Government's expropriation plan proposed a new £y million loan

secured on die oficinas of which £4 million would compensate salitreros and

the remainder would finance public works. The four major Lima Banks would

administer every aspect of the business, production, consignment abroad,

appointment of agents, collection of duties and loan-servicing. Oficinas were

valued by assessors and sales were arranged.44 However, the fall in her external

credit, the state of European money markets, and the general dissatisfaction

widi Latin American borrowers prevented Peru from raising die loan. Consequendy,

in exchange for dieir properties, salitreros accepted two-year certificates

bearing 8 per cent interest and a 4 per cent sinking fund. Owners would

work dieir oficinas as government tenants, manufacturing under fixed quotas

and prices supervised by the Banks. The measure was not strictly expropriation;

rather, it audiorized the state to buy nitrate property. Official closure

of some oficinas would end overproduction. But diose salitreros who were

opposed to government interference on principle or confident of their abilities,

could continue to operate privately, albeit under a heavier export duty. Thus,

the rising price of nitrate, either through official control or higher duties on

independent producers, would, die Government hoped, fall not on Peru but

on European customers, mitigate competition with guano and expand national

revenue. To lessen die conflict between nitrate and guano would have an

important bearing on die negotiation of die new guano consignment contract

at die end of 1875 when the arrangement widi Dreyfus expired.

The Lima Banks' involvement in expropriation arose from the ever-deepening

Peruvian financial crisis. Bank representatives approached officials to

suspend convertibility. The increasingly adverse trade balance, which had

4 1 El Comercio, 17 March and 10 May 1875. 42 El Comercio, 16 June 1876.

4 3 El Comercio, 13 May 1875.

4 4 El Comercio, 28 and 29 May 1875; The Times, 28 June 1875, ye and 9a; SPT, 12 March,

4 and 22 April, 1 and 3 June 1875 anc^ 2 2 Ju'y l^'> St John to Derby, 10 June 1875, F.O.

61/289. Downloaded: 19 Apr 2013 IP address:

u8 Robert G. Greenhill and Rory M. Miller

developed out of rising imports stimulated by die inflow of capital and die

vast sums lent to the Government, had seriously depleted the Banks' cash

reserves. By September, negotiators formulated a plan which allowed the

Banks to stay in business, thus preventing die total breakdown of Peruvian

commerce. In return for a loan of jf^-6 million to the Government, the Banks

were granted control of various items on which to restore their gold and silver

reserves, amongst diem the nitrate oficinas; die Banks were to receive a 5

per cent commission on all sales.45 It is interesting to note that once again the

exigencies of Peruvian finance determined a key decision in the nitrate


The whole expropriadon measure was open to criticism. The severity of die

financial crisis and die approaching termination of Pardo's presidency unduly

hastened its completion. Although the plan was not unattractive, an inexperienced

administration committed serious errors. Salitreros made spurious

claims of output and ownership which the harrassed commissioners did not

verify. Tarapaca's distance from Lima and comparative inaccessibility aggravated

matters. Valuations were by rule of thumb. Dishonest officials were

accused of favouring some producers.46 Then, delay between proposing and

implementing expropriation — die measure did not become law until mid-

1876, twelve months after promulgation — encouraged abnormal output,

becoming in part responsible for die enormous rise in shipments in 1875 and

1876 and the consequently low price, before government control and higher

duties took effect.


The most pressing problem, if expropriation were to succeed and the Government

to maximize income, was to arrange transport and marketing abroad.

There was no alternative but to sell in Europe where farmers could afford

nitrate. But, before the onset of rapid transportation and communications,

sellers ran great risks from changes in demand and supply between receiving

knowledge of a particular market and despatching goods there. Merchants

would buy only at a figure, well below the current price, giving them a large

risk-taking profit margin. Thus, sellers preferred to retain ownership until

the final sale to consumers, consigning their goods to merchants on a commission

basis and thereby reaping their own risk-taking profit margin. Much

mid-nineteendi-century international trade was conducted on this basis. The

Peruvian Government employed it before 1870 in the guano business. The

innovation which Lima introduced was exclusive consignment whereby com-

«s El Comercio, 2 Aug. and 11 Sept. 1875; MacQueen, op. cit., pp. 8, 95-6.

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The Peruvian Government and the Nitrate Trade, 1873-1879 119

petition was eliminated to maintain a higher level of prices. The monopolist

agent paid large advances to the Government and was rewarded upon a cost

plus commission basis.47 Without an efficient local administration to undertake

her own international marketing, Peru needed the managerial expertise

which a foreign firm offered. The second half of this paper discusses the

inevitable relationship between the Peruvian Government and an overseas

merchant house.

Antony Gibbs & Sons, once the Government's guano consignees and conducting

much of their business on a consignment basis, were obvious candidates

from among the west coast firms. The House had developed an important

role in every branch of die nitrate trade, continuously influencing

production and marketing. It owned oficinas managed at Iquique, but supervised

from the Valparaiso branch. It undertook agency work for other

salitreros, drawing commissions on shipments to Europe, and imported

supplies, and it bought nitrate outright for sale abroad. The House chartered

tonnage and insured shipments in Valparaiso on its own account and

for clients.*8 London dictated long-term policy, studying market openings

and renting storehouses. Gibbs, like most salitreros, did not oppose expropriation

outright despite its own extensive private interests. The House probably

recognized that, given Peru's chronic insolvency, some intervention was

inevitable. Resistance would merely alienate the Government. And the terms

of expropriation were attractive. The firm obtained a good, even inflated,

price for its nitrate properties under the official valuation. The Tarapaca

Company secured production contracts which, it was said, ' ought to leave a

handsome return '.40

At the same time Gibbs were anxious to maintain a place in the nitrate

trade. Elsewhere in Peru the interests of the House were steadily declining.

The guano business, in which Gibbs had once figured prominently, offered

few openings. At Arequipa the volume of alpaca wool which die firm

handled fell by 50 per cent between 1873 and 1875. The partners considered

credit to producers inappropriate when demand and prices were falling.

Trade was lost to more speculative buyers.50 Similarly, successive monetary

crises and excessive competition threatened the wholesale business on the

west coast. In 1876 Hayne, one of the local managers, reported that at Are-

«7 Levin, op. at., pp. 55-7 and 65-8.

48 Henry to Hayne, 3-4 Jan. 1873, Lima to Valparaiso, 18 Oct. 1876, Gibbs MS 11,121; Rimac

Nitrate Company Agreement, 3 Jan. 1873, ibid., 11,130.

*" London to Valparaiso, 1 Feb. 1876, Gibbs MS 11,471/3 and 25 March 1876, ibid., 11,121.

50 Arequipa to Lima, 17 March 1874, 17 March 1875 and 19 Jan. 1876, Gibbs MS 11,124; Hayne

to Bohl, 26 Aug. 1878, ibid., 11,120; E. M. Sigsworth, Blac\ Dy{e Mills (Liverpool, 1958),

pp. 234-54. Downloaded: 19 Apr 2013 IP address:

120 Robert G. Greenhill and Rory M. Miller

quipa wholesaling ' which years ago enjoyed a standard second to none...

has now dwindled down to a most insignificant extent '.51

By the 1870s, therefore, die nitrate trade was central to Gibbs' future on

die west coast. The House's commitment to the business was high. Expensive

plant had been erected and property acquired to an extent which endangered

' the quiet and economical style of management which . . . the House wishes

for \52 Gibbs could not now depart quickly from the west coast or transfer

resources. The House did not wish to surrender its valuable connexions with

dealers in Europe. Moreover, the entire transference to Gibbs of all existing

commercial relations between producers and other houses, under the supervision

of the Lima Banks, and the consequendy weaker competitive position

of those houses in other fields, would undoubtedly benefit the firm. Deprived

of the lucrative nitrate trade, Gibbs' rivals would lose business, prestige and

resources, and might even retire. Thus, the Peruvian Government's need for

an agency to arrange transport and marketing abroad coincided widi Gibbs'

desire for continued participation in the nitrate trade, even if not in an

extractive capacity.

In March 1876, therefore, Gibbs agreed to become consignees under the

Lima Banks. The House would advance to the Banks ,£40,000 at 6 per cent,

return 2 per cent commission upon all sales and pay 1.7 soles per quintal

(£6 14.C qd. per ton) to producers. It would charter boats at £4 per ton c.i.f.

until freights alone reached 52*. 6d. per ton. The Government placed these

limits since consignees, paid on a commission basis, might raise costs ro

expand their commission. Gibbs charged i1/^ per cent commission, y2 per

cent brokerage, and 5 per cent interest upon advances payable from the commission

which the Banks themselves extracted from the business. Each consignment

term would last three months.53 Gibbs' role was clearly defined.

The House would not deal direcdy with producers nor sample or weigh

shipments which required more staff and incurred greater risk. Merely

advancing under bills of lading avoided awkward questions of responsibility

for quality. London was well pleased. ' Possession is nine-tenths of the law ',

wrote a partner, ' and we have before us the almost certainty that the House

that gets the first contract will have the best chance . . . of continuing in the

business which promises to be one of great magnitude ' . " Anticipated profit

was ^3 per ton. Indeed, terms were so good that Gibbs mitigated certain

conditions to retain the business against rival houses. Interest charges above

5 1 Hayne to London, 2 Dec. 1876, ibid., 11,470/1.

5 2 Bohl to Hayne, 16 May 1873, Gibbs MS 11,121.

5 3 London to Valparaiso, 28 Feb. and 31 March 1876, Gibbs MS 11,471/3; Levin, op. cit.,

pp. 68-9.

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The Peruvian Government and the Nitrate Trade, 1873-1879 121

5 per cent were waived and credit to the Banks was increased. In August

1877 London authorised Valparaiso ' to advance up to ^50,000 . . . against the

consignment of another half million quintals' and was prepared to go to

,£140,000 for 1-5 million quintals.55

The partnership of Gibbs, the Banks and the Peruvian Government was

not smoodi. At every point sharply divergent views emerged. Pardo only

brought two-thirds of the oficinas under official control. And once the

government oficinas had been closed, private capacity, which amid a number

of small firms included the large Folsch & Martin concern and die Compania

Salitrera de Pisagua, was greater than that of the remaining state-owned

works.56 Pardo preferred the co-existence of public and private sectors in an

industry long accustomed to commercial freedom. High export duties were

not necessarily imposed to force salitreros to sell but to restrict their exports,

thus raising prices and assisting guano sales which would maximize government

revenues. Immediately before the end of Pardo's presidency, in June

1876, the Government recalled Congress for an extraordinary session to deal

solely with the nitrate question. Elguera, the Finance Minister, secured a

nitrate duty of 1.25 soles per quintal (nearly ^4 i8.r. gd. per ton), a rate he

believed the independent makers and the market would bear, but not one

which would automatically end private production.57

Unhappily, such ineffective state control made forecasting prices and

demand difficult. Private output competed for markets in Europe and for

shipping space on the west coast, squeezing die consignment business at both

ends. Gibbs' Valparaiso branch informed London that ' the nitrate business

is by no means a monopoly and it is extremely doubtful whether it will ever

become so'. Far from being hostile to government intervention Gibbs wanted

to forward expropriation ' in any way in our power'. London explained:

It has long appeared to us that the imposition of a duty which from its amount

should be practically prohibitive to outsiders is absolutely essential to the working

of the expropriation scheme and the difficulty which has taken place in adopting

that measure has materially increased the difficulty of carrying through the


5 5 London to Valparaiso, 16 Oct. 1876, 31 Aug. 1877 and 29 June 1878, Gibbs MS 11,471/3-5.

5 6 SPT, 6 May, 25 July and 17 Oct. 1876; El Comercio, 23 June 1876; Berrmjdez, op. cit.,

pp. 337—43. Private capacity represented 5'4m. quintals (235,000 tons). Government-owned

capacity, 8 5 m. quintals (390,000 tons), was halved after closures. Between Aug. 1876 and

July 1877 Pr ' v a t e output totalled 28m. quintals (120,000 tons) and Government-owned

production was 1-95111. quintals (90,000 tons).

57 El Comercio, 16 and 28 June 1876.

5 8 London to Valparaiso, 15 May and 15 Sept. 1876 and 1 May 1877, Gibbs MS 11,471/2-3;

cj. Valparaiso to Lima, 10 May and 14 June 1876, ibid., 11,120; Read to Bohl, 28 Aug.

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122 Robert G. Greenhill and Rory M. Miller

The succession of Prado to the Presidency in 1876 with a declared policy of

acquiring all oficinas did not quickly alter matters. Obstacles to private production

damaged smaller firms but the large, cheap producers survived. The

machinery of Peruvian Government did not make for efficient administration.

The fact that Congress met for only forty-five days, unless prolonged

by extraordinary session, might postpone measures for months. The gap

between promulgation and application of laws enabled owners to ship large

quantities of nitrate before the published deadline. Moreover, until the decree

of 16 May 1876 payment of export duties remained in local paper, now

steadily depreciating because of the suspension of convertibility and the

various financial pressures upon Peru.59 Thus, the rise in duty to 60 centavos

per quintal in December 1875 a n c^t 0 I i 25 so^es m Ju n e J^7^> m rea^ terms far

less steep, had no immediate effect. Similarly, the fall in exchange lowered

other working costs, particularly wages, which were payable in local paper,

thus further sheltering private producers from the rise in duties and lightening

their business problems generally. The potential threat from outsiders

remained serious, therefore, until 1878 when duties of 3 soles per quintal

(£12 2s. yd. per ton) now payable in drafts on Europe or in coin, overpowered

all opposition, making the Government ' the sole disposer of the nitrate

business . . . ' 6 0

Pricing policy, a vital weapon in the fight to establish monopoly, also

aroused dispute. Gibbs preferred, as they had when acting as guano consignees,

a moderate level of prices which would encourage demand, raise

gross proceeds and, therefore, commissions, and damage private firms now

burdened by duties. The Peruvian Government favoured the highest possible

price to maximize the yield from their diminishing nitrate resources and

prevent competition with guano, the income from which it had more than

ever to raise. Under the Raphael contract in 1876, by which the Peruvian

Guano Company succeeded Dreyfus as guano consignees, the Government

were to receive ^700,000 per annum as a first charge on the guano receipts

hypothecated to the Peruvian bondholders.61 Peru used her nitrate monopoly

as a means to exploit the consumer. She did not recognize that raising nitrate

prices merely encouraged outsiders to export profitably, notwithstanding the

newly imposed duties, thus expanding output to a point where in the long

term supply would alarmingly exceed demand.62 In addition, the allocation

59 El Comercio, 29 Oct. 1875 and 26 April 1876; MacQueen, op. cit., pp. 8 and 96; Camprubi

Alcazar, op. cit., pp. 227-333. The value of the Peruvian sol in London fell from 42^. in

Aug. 1875 to i&d. in Oct. 1875 and to i&d. in April 1876.

60 Valparaiso to London, 10 May and 14 June 1876, Gibbs MS 11,120; cf. London to Valparaiso,

10 May and 23 Dec. 1876 and Henry to Hayne, 24 March 1877, ibid., 11,121.

61 MacQueen, op. cit., p. 39. 62 London to Valparaiso, 16 Aug. 1877, Gibbs MS 11,471/3. Downloaded: 19 Apr 2013 IP address:

The Peruvian Government and the Nitrate Trade, i8j2~i8jg 123

of production contracts caused conflict. Gibbs and the Banks preferred output

concentrated among a few large firms to facilitate general working and

enable contractors like the Tarapaca Company or Gildemeister to operate

extensive plant at near capacity. The Peruvian Government, however, divided

the 5.0 million quintals among twelve salitreros. Then, as private production

was gradually eliminated, further contracts to bring some recalcitrants to

heel made matters worse. ' The Peruvian Government', Hayne explained,

' has granted production contracts on such a scale as to swamp the market for

die next two years'. Officials had awarded quotas ' without regard to the

future \63 No doubt Lima feared that the concentration of manufacture would

unduly strengthen particular producers. Moreover, Prado, facing increasing

domestic and external difficulties, could not ignore political pressure in

favour of small local firms against the powerful foreign companies. He was

' determined to complete the monopoly and no-one will now sell unless he

gets a production contract and everybody naturally asks for as large a quantity

as possible'."

Two external factors upset the careful balance which Gibbs and the

Peruvian Government sought. First, there was the question of demand in

Europe. Nitrate remained sensitive to agricultural needs. The increasing use

of alternative manures, bones, superphosphates and sulphates, threatened

markets. Adverse weather conditions in March and April, the period of

maximum manuring, affected consumption. In particular, the high prices

which Peru demanded from 1877, precisely the period when European agriculture

experienced intensified foreign competition and poor harvests,

restricted sales. In 1877, as Table 1 shows, exports fell by nearly 30 per cent

when the price jumped to ^14 per ton. Gibbs became increasingly anxious

because farmers throughout England preferred other manures.65 Professor

Voelcker told the Royal Commission on Agriculture in 1881 that the onset

of agricultural depression had forced farmers to use cheaper fertilizers.66 The

gradual shift from arable to pastoral farming in Britain had permanently

damaged demand for artificial manures. Moreover, the fact that nitrate output,

stimulated by artificial prices and numerous production contracts, was

increasing, discouraged European dealers (who daily anticipated a collapse in

price) from ordering.

Second, nitrate was discovered outside Peru. If deposits in Chile, far from

6 3 Hayne to Comber, 22 May 1878, Gibbs MS 11,121; cj. Hayne to Miller, 28 June and 30 Oct.

1878, ibid.

« Bohl to Comber, 8 Jan. 1878, Gibbs MS 11,121.

6 5 London to Valparaiso, 1 Nov. 1876, 1 May 1877, 1 Feb., 1 and 31 May and 16 Nov. 1878,

Gibbs MS 11,471/3-7.

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124 Robert G. Greenhill and Rory M. Miller

ports and incurring high working costs, were not yet taken seriously, those

in Bolivia could not be dismissed lightly. In the early 1870s, Bolivia

encouraged foreign nitrate entrepreneurs and under treaty with Chile freed

them from export duties. In 1876 the Peruvian Government bought the

nitrate concessions in Bolivia acquired by Henry Meiggs. The Antofagasta

Nitrate and Railway Company, founded in 1868 and incorporated in 1872,

was die most serious competitor.67 Its deposits were good, investment substantial,

and output rising sharply. The company clearly weakened Peru's

monopoly. It was significant that Antony Gibbs & Sons enjoyed a stake in the

Antofagasta concern. The House had held the original concessions in 1868,

which it transferred for a 29 per cent interest upon incorporation. The bulk

of capital, and therefore control, was in the hands of the Chilean banker,

Agustin Edwards. Gibbs were also die company's European agents and consignees,

appointing die works' manager, Hicks, in Antofagasta.68 The House,

on die basis of its unique position in the Peruvian and Bolivian nitrate trades,

pressed for co-operation, but die Antofagasta Company followed die line

dictated by Edwards and preferred the open market in Valparaiso. It rejected

a 25 per cent share in estimated European consumption, 250,000 tons a year,

demanding 35 per cent. Hayne, one of Gibbs' west coast managers, alarmed

' at die immovableness and short-sightedness of die directory', feared prices

would fall sharply if Antofagasta swamped markets.69


From late 1877 the nitrate question increasingly worried official circles in

Lima. Congress was due to meet, die Exchequer was empty and die external

debt was in default. Expropriation had conferred few financial advantages.

Gibbs' Valparaiso house reported diat after manufacturing costs, commissions,

charges and interest a selling price of £14 6.?. 8d. per ton for expropriated

nitrate yielded only 4^. a ton to the Peruvian Government aldiough it had

already received die monthly advances and interest on nitrate certificates.70

67 C. Cowley, ' Antofagasta and Bolivia Railway Company ', unpublished history (1949). This

work is held at the Antofagasta and Bolivia Railway Company's offices in London.

0 8 Valparaiso to London, 25 March 1874, Gibbs MS 11,128; Hicks to Comber, 28 June 1878,

ibid., ii,118.

0 9 Hayne to London, 26 May 1874, Gibbs MS 11,128.

7 0 Valparaiso to London, 16 Aug. 1877, Gibbs MS 11,471/3. In the April-June 1877 trimestre

Gibbs shipped 42,106 tons sold at £14 6s. Sd. per ton. The following deductions applied:

(i) Advances from which producers were paid and 2 per cent interest thereon, ^313,000,

interest on nitrate certificates, ,£90,000, and commission at '/i per cent, ^450, represented

£9 us. 6d. per ton. (ii) Working costs, freightage, loss of weight, insurance, loading and

storage, amounted to £3 us. 7,d. (iii) Discounts and commissions were 13*. yd. per ton.

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The Peruvian Government and the Nitrate Trade, 1873-187C) 125

El Comercio's calculations were more generous—although the net surplus was

still remarkably low. In the twelve months from August 1876 the Government

shipped 1-95 million quintals which sold for £1-2 million but yielded barely

^34,000 after costs. The export on 2-8 million quintals manufactured privately,

however, totalled ^48,000, less 5 per cent commission to the Lima

Banks.71 The European market would not bear increased output at a price

which satisfied Lima. Inevitably oversupply threatened stability. Peru could

not compensate holders of nitrate certificates which expired in 1878. Moreover,

official confidence in the Banks, increasingly active in public affairs,

was steadily diminishing.72 The Lima Bank withdrew from die consortium

of four in January 1878 to go into liquidation. The Government, hoping to

negotiate more favourably elsewhere, thus terminated the Banks' contract.

Carlos Pividal, an official agent, had left for Europe in 1877 to sound

finance houses' about some scheme which shall make nitrate assist the Government

in dieir present straits'." Antony Gibbs & Sons reacted cautiously.

London explained:

until the Government is fully convinced of the futility of its attempts to raise

money in Europe we think our policy is to remain tranquil doing our best to keep

the so far satisfactory business on its present footing. When they have discovered

what they cannot do they will probably come to us to see what we can do for


In particular, Pividal sought an arrangement whereby die nitrate and guano

questions could be resolved togedier, relieving die Government's foreign debt

liabilities — a distinct shift in emphasis from 1873 when nitrate control was

considered a solution to die internal debt problem. One house handling bodi

commodities, like Oliphants in die United States, could more easily prevent

competition and regulate prices. Gibbs refused uncompromisingly. Now profoundly

suspicious, the House wanted nothing to do with a joint guano-nitrate

business ' in any shape or upon any terms whatsoever...'" The quality of

the guano was very poor and about a million tons were already held in Europe

by Dreyfus and dieir successors, the Peruvian Guano Company, whose competition

depressed prices.

Moreover, despite direct approaches from Prado, die House preferred not

to go behind the backs of die Lima Banks whom Gibbs considered its principals

and a useful buffer between diemselves and officials. ' It does not add

to our desire to retain die business', London explained, ' diat in future we

71 El Comercio, 22 Dec. 1877. 72 Camprubi Alcdzar, op. cit., p. 342.

73 London to Valparaiso, 16 Aug. and 1 Oct. 1877, ct- Hayne to Bohl, 21 Aug. 1877, Gibbs

MS 11,471/3-5.

74 London to Valparaiso, 31 Aug. 1877, Gibbs MS 11,471/3.

75 London to Valparaiso, 16 Jan. 1878, Gibbs MS 11,471/6. Downloaded: 19 Apr 2013 IP address:

126 Robert G. Greenhill and Rory M. Miller

may find ourselves face to face with die Government'. And direct control

over manufacture and quotas would make the House ' die victim of endless

jealousies and suspicions in regard to the allotment of contracts V6 Gibbs also

disliked die increasing pretentions of the Peruvian Government which' would

never be satisfied with any arrangement which gave absolutely no money

down . . . ' " It was a business the House would rather avoid.

There were also third party approaches to Gibbs. Pividal's negotiations

widi French houses, Dreyfus, Societe Generate and Comptoir D'Escompte,

encouraged a consortium of bankers, led by a Mr Bamburger, to sound out

Gibbs. As late as 1879 further Peruvian commissioners, Rosas and Goyeneche,

induced several European financiers to contemplate a guano and nitrate business

with Gibbs & Sons. Peruvian bondholders also approached the House.78

Gibbs' reputation was such that no group would accept a Peruvian contract

without first seeking an alliance with the firm. Gibbs, however, refused negotiations,

suspecting that personal motives and stock market considerations

rather than a real desire to do business governed these developments. A public

revelation that a reputable house like Gibbs was considering a contract with

die Government would raise the price of Peruvian bonds which current

holders would then sell. On the other hand, early in 1878, Gibbs did seriously

discuss a merger with the Peruvian Guano Company to control the whole

Peruvian fertilizer market, enabling the company to recover £2 million owed

by Lima under the Raphael agreement. The company would negotiate a

contract on the west coast and Gibbs would act as consignees in Europe, having

a representative on die company's board. The terms offered, however, dissatisfied

the Lima Government, in any case at loggerheads with the Guano


In the spring of 1878, once it was clear that Pividal could not interest European

bankers, the Peruvian Government permitted La Compania Salitrera,

a creation of the Providencia and Nacional Banks who each held 3,200 of the

8,000 shares, to administer the nitrate business. These two banks, already

heavily committed to nitrate, considered that more direct management might

relieve their considerable liabilities.80 The Providencia, for example, had

received nitrate certificates as collateral for loans and to setde debts. Although

the Government preferred to rid itself of the Lima Banks' connexion, the

arrangement concluded in July 1878 indicated the extent to which they were

76 London to Valparaiso, i Oct. 1877 and 31 May 1878, Gibbs MS 11,471/3-7.

77 London to Valparaiso, 16 Nov. 1877, Gibbs MS 11,471/5.

78 London to Valparaiso, 1 Dec. 1877, 24 Feb. and 1 March 1878, Gibbs MS 11,471/5.

79 London to Valparaiso, 16 July 1878, Gibbs MS 11,471/6.

«° Daily Telegraph, 30 Aug. and 1 Oct. 1878; Bermudez, op. cit., p. 344; Camprubf Alcazar,

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The Peruvian Government and the Nitrate Trade, 1873-1879 127

involved and that diey could not easily be discarded. The conditions, however,

were onerous, requiring an outlay of nearly ^4 million in the first year before

any nitrate was sold.81 The Government's decision to employ La Compania

Salitrera did not cause Gibbs ' any great surprise or vexation'. The House

congratulated itself on avoiding a business ' which is bad in every style '. Anyone

who accepted these terms was' only buying trouble and probable loss \82


Gibbs now lost the nitrate consignment contract. Perhaps, because Gibbs had

negotiated with other tenderers, La Compania Salitrera did not approach die

House but turned to a rival, James Sawers & Co. In any case, Gibbs had little

faidi in die new administration and would not advance heavily in a weakening

market. But the lost consignment business did not damage Antony Gibbs

& Sons. The onerous conditions of the new arrangement forced La Compania

Salitrera to sell nitrate at around ^16 per ton, well in advance of prices previously

ruling in Europe. Although this price directly lowered demand, it

enabled Gibbs & Co. to realize their holdings at a good profit. And when

Sawers collapsed83 - die fact that the Peruvian administration should select

a failing house was a telling indictment of die declining state of die nitrate

business — Gibbs agreed prices widi Graham Rowe, a Liverpool house, which

succeeded as consignees. Graham Rowe, relying upon Liverpool brokers,

could not easily compete with Gibbs' stronger marketing organization which

enjoyed close links with British and continental dealers. Graham Rowe preferred

' some course of concerted action ' and in March 1879 transferred their

entire stocks to Gibbs who could now establish a strong position.84 The only

odier large holder of nitrate, Bordes & Co. of Paris, had hitherto co-operated

with Gibbs. But Barings, who briefly became consignees, refused to join

Gibbs, and by mid-1879 die prospect of competition for sales was genuine


Gibbs' other main interest in the nitrate business, production, further compensated

for die lost consignment. Gibbs did not now care to limit output

and opposed official attempts to lower die Government's price to salitreros.

8 1 The terms upon which La Compania Salitrera administered nitrate were as follows: in

the first year is was to advance £60,000 per month for six months and £20,000 per month

for six months (£480,000); it was to provide interest (8 per cent) and amortization (4 per

cent) on £4-5 million nitrate certificates (£540,000); it was to repay the Government's

liabilities to the Lima Banks (£400,000); it was responsible for production costs (£6 IOJ. per

ton) upon 234,000 tons (£1-5 million) and all charges (£936,000).

8 2 George Gibbs to Sawers, 14 Sept. 1878; cf. London to Valparaiso, 31 May and 31 July 1878,

Gibbs MS 11,471/6. 83 Gibbs to Graham Rowe, 12 Nov. 1878, Gibbs MS 11,471/7.

8 4 Graham Rowe to Gibbs, 14 Nov. 1878, Gibbs MS 11,471/7.

8 5 London to Valparaiso, 20 March and 16 April 1879, Gibbs MS 11,471/7-8. Downloaded: 19 Apr 2013 IP address:

128 Robert G. Greenhill and Rory M. Miller

The production contracts were more remunerative than the nitrate certificates,

quotations for which fell as increasing manufacture threatened nitrate's consumption

and ultimate market price. Indeed, many producers sold their certificates

to fellow salitreros or to speculators.86 Moreover, Gibbs bought up

production contracts from other manufacturers and used surplus producing

capacity to fulfil them.

By now war between Chile and the alliance of Peru and Bolivia ended any

possibility of normal commerce. The conflict was ostensibly caused by Bolivia's

imposition of duties upon Chilean entrepreneurs around Antofagasta

contrary to her treaty obligations. It had, of course, wider implications; an

aggressive desire on Chile's part for nitrate fields and hegemony upon the

west coast, Peru's ' secret' treaty with Bolivia and jealousy of her powerful

neighbour to die south, the international ineptitude of the Government at

La Paz.87 Chile's blockade soon seriously interrupted shipments of nitrate and

guano to Europe. Her armies overran Tarapaca in late 1879 and removed

Peru's control over these important raw materials. From the beginning of

1880 a new administration and fresh considerations governed the nitrate



Peru's eventual response to financial crisis and declining guano sales in the

1870s was, in the absence of practical revenue-raising alternatives such as direct

taxation, to expropriate the nitrate industry. With the benefit of hindsight,

the steps towards expropriation seem logical, even inevitable. They followed a

tradition of less thoroughgoing government interference, of export duties and

of an unpopular sales monopoly. The methods of expropriation - advances

from contracted consignees — somewhat resembled the republic's guano policy,

although the fact that nitrate had been traditionally owned and worked by

foreigners constituted a fresh dimension.

In reality, expropriation was a bold, even speculative innovation which

force of circumstances compelled. Both the estanco, an attractive compromise

between principle and necessity, and expropriation originated not with Pardo's

administration but emanated from Congress which altered or substituted

ministerial plans, developments which reflected presidential weakness. The

Government was not committed to state interference. In fact, a strong laissezfaire

tradition determined the Pardo administration's antipathy to the estanco

in 1873. In 1875, however, estanco was not a practical possibility. The first

8 6 Bohl to Smail, 29 June 1878, Gibbs MS 11,132; Bohl to Read, 4 Sept. 1878, ibid., 11,121;

Read to Bohl, 16 Oct. and 19 Dec. 1878, ibid., 11,472; Camprubi Alcazar, op. cit., p. 350.

87 R. N. Burr, By Reason or Force: Chile and the Balancing of Power in South America,

1830-1905 (Los Angeles, 1965). pp. 118-41. Downloaded: 19 Apr 2013 IP address:

The Peruvian Government and the Nitrate Trade, 1873-1879 129

clause of die expropriation law specifically repealed it. A sales monopoly,

guaranteeing returns to producers, was impracticable when prices were falling.

The deepening Peruvian crisis, as Pardo now appreciated, needed an

altogether more radical solution. In 1873 the internal financial situation and

the current budget deficit had determined the search for fresh revenue. By

1876, when foreign debt servicing had been suspended, tiie Peruvian Government

regarded nitrate as a solution to the overseas loan problem. A letter from

Juan Elguera, die Minister of Finance, to Peruvian diplomats abroad explained

diis new position:

However long the deposits of guano last Peru possesses in the nitrates of Tarapaca

the means to repay its loans. To realise this object the Government has adopted

measures conducive to establishing fresh income which can fulfil, when the guano

is exhausted, the republic's obligations to its overseas creditors.88

Expropriation failed to achieve its objectives. Financial crisis and declining

guano sales were unchecked. Debt servicing was not resumed. Although

income from nitrates may have steadied the financial position in 1877 and

supported the country's credit, few tangible benefits were felt before the War

of die Pacific. In purely financial terms government control achieved less dian

a judicious export tax.89 Peru received little beyond die monthly advances and

cash to service die nitrate certificates. In fact, expropriation raised new problems.

From die start Peru was burdened by fresh obligations, compensation

to owners and generous commissions which were a persistent drain on her

resources at a time when otiiers pressed for consideration. The interest on die

nitrate certificates alone absorbed £2 per ton of nitrate sold. There were

organizational difficulties. The Peruvian public administration was traditionally

corrupt and unreliable. In the very area which was vital to expropriation's

success, marketing in Europe, Peru was weakest. The intervention

of the Lima Banks and of foreign consignees did not allow the Government

to manage independendy. There were policy differences between officials who

wanted high prices and low handling charges and die consignees who preferred

moderate prices and high charges. Then, die delicate balance between

supply and demand which Peru had tried to create collapsed. Outside manufacture

among Peruvian producers and in Bolivia, and generous production

contracts, caused oversupply. Inflated prices and die problems facing British

and European agriculture lowered consumption.

Not surprisingly, Europeans criticized Peru's nitrate policy. They condemned

intervention and advocated a return to free enterprise. A. J. Duffield

accused Peru of ' meddling witii die important nitrate matters and thereby

destroying a great and important national industry'. Had she merely raised

88 El Comercio, 12 Jan. 1876. 88 MacQueen, op. cit., pp. 9 and 40.

L.A.S.—9 Downloaded: 19 Apr 2013 IP address:

130 Robert G. Greenhill and Rory M. Miller

duties, he continued, she would not have damaged manufacturing or trade.90

Spencer St John observed that state interference was generally unpopular and

bad for the industry.91 Antony Gibbs & Sons considered Peru had spoilt

' what under proper management ought to be a splendid business'. The

House found it ' difficult to sit still and see the business passing into other

hands in a form . . . prejudicial to every interest involved'. The firm's view

was that nitrate had assumed ' a. shape in which no one but very strong

people can deal with it \92

On the other hand, given Peru's financial plight, what alternatives were

there? Guano revenues, almost wholly applied to the external debt and to

maintaining her international credit, were suffering from nitrate's competition.

No reason existed why the nitrate industry should not contribute to the

hard-pressed national exchequer nor why Peru should not profit from, and

exercise stricter control over, the development of her natural resources.

Merely raising duties would still have aroused uproar amongst salitreros and

endangered a price-conscious fertilizer market. In many ways full control over

nitrate with adequate compensation was fairly sensible. Regular servicing of

certificates proved acceptable to many owners, as it did to Antony Gibbs. It

need not have further damaged the nation's credit and could have permitted a

joint nitrate-guano policy. Expropriation might have succeeded but for factors

beyond Peru's control. If British farmers themselves did not anticipate the

crisis of 1877-9, aggravated by adverse weather, it is unrealistic to expect Peru

to have done so. She could not prevent production in Bolivia. She did not

really want, but seemed unable to avoid, war in 1879.

Further, this paper presents a case study of relations between a national

government, struggling for financial credibility, and an overseas firm. Ostensibly,

merchant houses like Antony Gibbs & Sons, deeply entrenched in the

industry and economy of an underdeveloped country which was dependent in

turn upon a narrow export front, remained omnipotent throughout the period

of the nitrate expropriation. Their tentacles penetrated every level of business.

One of the largest salitreros with valuable wholesale and retail connexions,

Gibbs managed government nitrate shipments in Europe and profited enormously

from production contracts, sales commissions and interest on advances.

The House enjoyed a significant interest in the Antofagasta Company,

Peru's main rival. Even after the consignment contract lapsed, Gibbs'

influence on the nitrate market remained strong. The House bought up certificates

and outside quotas. It competed for nitrate sales against succeeding

consignees. Graham Rowe found that they could not match Gibbs' organizational

strength in European markets, a key to the House's power. The very

90 Duffield, op. cit., pp. 107-8. 01 Consular Reports (Peru) (P.P. 1878), LXXII, 550-62.

" George Gibbs to Del Pont, 9 July 1878, Gibbs MS 11,471/6. Downloaded: 19 Apr 2013 IP address:

The Peruvian Government and the Nitrate Trade, 1873-1879 131

fact mat no European consortium would consider consignment without

Gibbs' co-operation indicated die firm's established audiority. As with

Dreyfus in die guano business, alliance widi Antony Gibbs & Sons was

indispensable for success in nitrate.

Similarly, Peru's dependence seems well defined. There were real limitations

to her discretion. Paradoxically, to alleviate a financial crisis which

European investors had gready encouraged, Peru sought external help. She

employed overseas firms to execute measures partly aimed at decreasing

foreign interest. She depended heavily on outside aid for die factors of production.

Foreign capitalists offset die absence of local entrepreneurs and

investment. Imported technological skill replaced old paradas with new,

efficient, low-cost oficinas. Foreign administrative expertise bolstered Peru's

inefficient bureaucracy and handled everyday business affairs on die west

coast. Her crucial weakness, overseas contacts, sales and marketing, were the

strengdi of expatriate merchant houses. The tragedy was that such dependence

conferred so little return.

Yet it is important to recognize die real services which Gibbs & Sons tried

to render. The House overcame die absence of experienced national trading

interests and suitable administrative personnel as efficiently and honestly as

anyone. The knowledge and expertise die firm had acquired in Europe and

on die coast were invaluable to Peru. Transport and marketing, which Gibbs

undertook, were essential functions. The House's reputation was second to

none. The cost was high but die heavy risks which were incurred in advancing

large sums while prices fluctuated demanded a good rate of return. Gibbs

performed a delicate, difficult and dangerous balancing act between die needs

of die nitrate trade and die rising claims of die Peruvian Government.

In die last resort, if Antony Gibbs & Sons represented the major determinant

of die nitrate business in Europe, die Peruvian Government was still die

final arbiter on the west coast. There were absolute limits to die extent of die

House's intervention in die Peruvian nitrate business. Early opposition to

government interference did not prevent expropriation. Despite Gibbs' recommendations,

die official policy of partial expropriation, high prices and liberal

production contracts prevailed. The Government could and did dispense widi

die firm's services when it chose. The lasting impression is diat Gibbs did not

exercise disruptive control over die Peruvian nitrate business. The House only

employed, in its relations widi the Lima Government, die normal business

techniques of care and discretion. The whole episode dius adds to our understanding

bodi of die British commercial experience in Latin America and

more generally of die role of foreign merchants in die policies and economies

of underdeveloped nations.

Journal of Latin American Studies

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The Making of the Grace Contract: British

Bondholders and the Peruvian Government,


Rory Miller

Journal of Latin American Studies / Volume 8 / Issue 01 / May 1976, pp 73 100

DOI: 10.1017/S0022216X00018174, Published online: 05 February 2009

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the Peruvian Government, 1885–1890. Journal of Latin American Studies, 8, pp



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/. Lot. Amer. Stud. 8, i. 73-100 Printed in Great Britain . •• 73

The Making of the Grace Contract:

British Bondholders and the Peruvian

Government, 1885—1890


For most of the Latin American countries the five years between 1885 and

1890 were a period of rapid economic expansion. European investors sank

their money there as the trade of the area increased. To take one example,

imports to Britain from Argentina expanded from under a million pounds in

1880 to over four million in 1890, while British exports to Argentina grew

from two and a half million to eight and a half million pounds.1 Exports of

Chilean nitrate rose from 275,000 tons in 1880 to 1,000,000 tons in 1890, as

foreign capitalists invested heavily in the newly-conquered northern territories

of Chile.2 Most Latin American countries borrowed increasing amounts of

capital on the London market as their trade grew rapidly, and the boom only

came to an end with the Baring crisis of 1890.

The experience of Peru between 1885 and 1890 contrasts completely with

that of Argentina or Chile. The War of the Pacific with Chile (1879-83) had

seen the disappearance of the commercial structure the country had developed

in the 1860s and 1870s on the basis of the wealth of guano.3 The market for

the low-quality guano now being exported had disappeared, while Chile had

captured the nitrate fields, the new source of wealth developed by Peru in

1 D. C. M. Platt, Latin America and British Trade, 1806-1914 (London, Adam and Charles

Black, 1972), pp. 316-21.

2 Roberto Conde, The First Stages of Modernization in Latin America (New York,

Harper & Row, 1974), p. 66.

3 For this, see Heraclio Bonilla, Guano y Burguesla (Lima, IEP/Campod6nico, 1973); Shane

J. Hunt, ' Growth and Guano in Nineteenth Century Peru ' (Discussion paper No. 34,

Woodrow Wilson School, Princeton, 1973); Carlos Camprubi Alcazar, Historia de los Buncos

en el Peru, 1860-1879 (Lima, Editorial Lumen, 1957); Robert G. Greenhill and Rory M.

Miller, ' The Peruvian Government and the Nitrate Trade, 1873-1879 ', Journal of Latin

American Studies, v, 1 (1973), 107-31; J. V. Levin, The Export Economies: their Pattern

of Development in Historical Perspective (Cambridge, Mass., Harvard University Press,

i960); Ernesto Yepes del Castillo, Peru, 1820-1920: un Sigh de Desarrollo Capitalista

(Lima, IEP/Campod6nico, 1972); Oscar Bermudez Miral, Historia del Salitre desde sus

origenes hasta la Guerra del Padfico (Santiago, Universidad de Chile, 1963). Downloaded: 19 Apr 2013 IP address:

74 Rory Miller

the 1870s. The agricultural estates of the coast that had developed since the

1860s had been devastated by the Chilean army of occupation. Furthermore,

with the collapse of the Lima banks one of the chief sources of credit for

agriculture had vanished. The Government could no longer rely on the

extraordinary returns of guano and nitrate. It had to depend on whatever

internal taxation it could levy, although the machinery for this had been

abolished in the 1850s when guano income was at its height, and on the

customs revenues that it received from a depressed trade.

The crux of Peru's climb to recovery lay in her ability to borrow on foreign

capital markets that were all too eager to lend to Latin American countries

between 1885 and 1890. An influx of capital would ease the way to economic

recovery, revitalizing the country's remaining agricultural and mineral

resources. Peru, however, could not go to European or American capital

markets because of the continuing burden of a foreign debt on which the

Government had defaulted in 1876. The war had exacerbated the problem by

relieving Peru of the Government's two most precious assets: guano and

nitrate. In 1885 die prospects of agreeing a settlement of the debt with the

bondholders, enabling Peru to borrow again on foreign capital markets,

seemed further away than ever. Peru and the bondholders did, however,

negotiate a settlement in 1890, which has come to be known as the Grace

Contract and also to be taken as marking the start of Peru's post-war economic

recovery.4 The history of the agreement provides an insight into both the

relationship between foreign bondholders and businessmen and the Peruvian

Government in the immediate aftermath of the Pacific war, and into the limits

of the options open to the Government after the war. This paper will examine

the reasons for the negotiation of the contract, the tactical advantages, disadvantages,

and aims which dictated the policies followed by the bondholders

and the Government, and conclude by examining the repercussions of the

contract for each of the parties involved.

In doing so it fills a gap in the historiography of Peru in the nineteenth

century, for until now no writer has looked at the Grace Contract, despite its

importance, from the viewpoint of all the parties involved: die Peruvian

Government, the British and Chilean Governments, the bondholders, and the

man who gave his name to the contract, Michael P. Grace. Although acknowledging

the importance of the Grace Contract, Ernesto Yepes, the latest writer

on Peruvian economic history, devotes only four pages to it, most of which is

a direct quotation, from Jorge Basadre, of the contract's terms.5 Of foreign

writers, Christopher Platt studied the negotiation only up to 1884 and, like

4 See, for example, Jesiis Chavarrfa, ' La desaparici6n del Peru colonial, 1870-1919 ', Aportes,

No. 23 (Jan., 1972), pp. 120-53. 5 Yepes, op. cit., pp. 136-40. Downloaded: 19 Apr 2013 IP address:

The Maying of the Grace Contract 75

Harold Blakemore, considered only the diplomatic aspect of the negotiations

between Britain and Chile. W. H. Wynne's treatment is legalistic and nonanalytical.

For these reasons, perhaps, others have completely misinterpreted

it, and it is as well that the record should now be set straight.'

I. The Default of I8J6 and Pre-war Negotiations

In 1870 and 1872, following the negotiation of a contract with the French

house of Dreyfus for the export of guano, the Peruvian Government floated

two huge loans on the London market to finance the construction of railways.

In 1870 it issued bonds to a total of £11-2 million at a price of 82*^, and in

1872 a further £22 million at 77 }4, both loans being specifically hypothecated

first on the country's guano reserves, and secondly on the railways to be

constructed from the proceeds of the loans.7

In January 1876, however, the Peruvian Government defaulted on the

payment of the interest on the loans, a reflexion of the deepening financial

crisis afflicting the country. The loans had, of course, yielded to the Peruvian

Government a far smaller sum than dieir nominal value. The administration

of President Manuel Pardo had in fact received only £13 million from the

1872 loan, and, after repaying part of its debt to Dreyfus and converting

earlier loans, was able to apply to railway construction only £5 million of

the total issue.8 The real rate of interest the Peruvian Government had to pay

on the capital acquired to finance the construction of railways was, therefore,

very much more than the nominal 6 per cent of the 1870 loan or the 5 per

cent of the 1872 loan. In any case, railways as an investment need a lengthy

gestation period before they begin to give an adequate return on capital. The

Peruvian Government was, therefore, burdened with substantial interest payments

on capital which would not give it a reasonable return for some years.

It had, in fact, to devote all its income from guano to the service of the

external debt, which required some £2 million annually.9 Yet the guano

trade was in decline as the quality of the deposits fell, and other fertilizers

- superphosphates and nitrates - competed with it in European markets.

6 D. C. M. Platt, Finance, Trade, and Politics in British Foreign Policy, 1815-1914 (Oxford,

Clarendon, 1968), pp. 336-9; Harold Blakemore, The Chilean Revolution of 1891 (unpublished

Ph.D. thesis, London, 1955), pp. 74-96, 193-207, 412-18; and his ' Limitations of

dependency: an historian's view and case study', Boletin de Estudios Latinoamericanos y

del Caribe, No. 18 (June, 1975), 74-87, which looks at the question from the Chilean side;

W. H. Wynne, State Insolvency and Foreign Bondholders 11 (New Haven, Conn, Yale

University Press, 1951), pp. 109-95. See also V. G. Kiernan, ' Foreign Interests and the

War of the Pacific ', HAHR, xxxv, 1 (1955), 14-36.

7 Grcenhill and Miller, op. cit., p. 108.

8 William Clarke, Peru and its Creditors (London, 1877), pp. 13-20.

9 President Pardo's speech to Congress, 21 Sept. 1872, Diario de Debates, Camara de Diputados,

i8j2, 11, pp. 67-72. Downloaded: 19 Apr 2013 IP address:

j6 Rory Miller

Indeed, the Peruvian Government's policy towards the nitrate industry which

resulted in its partial and unsuccessful expropriation in 1875 was to a large

extent determined by the need to protect guano sales to continue the service

of the foreign debt.10

In response to the growing crisis, the Peruvian Government had no alternative

but to default on the interest payments on the foreign debt at the

beginning of 1876. Work on the railways had, in fact, stopped in the previous

year when funds had finally run out, leaving the lines poorly-equipped, halfcompleted,

and a further drain on government revenues: ' 232 miles of difficult

railway have been made at an expense of about £6 million in order that

diree or four goods trains may run per week ', the British minister wrote of

the Southern Railway, the longest. The other trans-Andean line, the Central

Railway, he added, ' appears destined to remain an unfinished work, as no

capitalists are likely to come forward with the means of completing i t ' . In

the second half of 1877 it left a surplus of only £350, ' nothing being allowed

for interest, depreciation or extensive repairs ' . "

The bondholders responded to the default by forming a committee to protest

against the Peruvian Government's attempts to conclude a new contract

with the Societe Generale of Paris for the export of guano. This they considered

prejudicial to their interests, especially as under the terms of the loans

the guano deposits were specially hypothecated to the service of the external

debt. Though they stressed this to the Foreign Office, the British Government

refused to intervene on their behalf.12 The Peruvian Government, however,

in the face of the bondholders' objections, cancelled the project with the

Societe Generale, and in June 1876 arranged a new guano contract with the

Peruvian Guano Company, supposedly with the approval of the bondholders.

Reactions to the new contract, in fact, proved mixed, and resulted in the split

of the Bondholders' Committee into two factions.13

However, the new contract with the Peruvian Guano Company produced

no results for the bondholders, as the market for Peruvian guano had become

overstocked and depressed. Late in 1878 they again appealed to the Foreign

Office for assistance. The appearance of a new Foreign Secretary, Lord Salis-

10 W. M. Mathew, ' Peru and the British Guano Market, 1840-1870 ', Economic History

Review, 2nd series, xxm, 1 (1970), 112—28; on the competition from nitrate, see Greenhill

and Miller, op. cit. pp. 107-18.

11 A. J. Duffield, Peru in the Guano Age (London, 1877), PP- 12<>-i; Report on the Finance,

Trade, and Industry of Peru (Spencer St John), Parliamentary Papers, 1878, LXXII, 560.

12 The Times, 12 April 1876; Lord Tenterden to Sir Charles Russell (chairman of the Bondholders'

Committee), 13 April 1876. London, Public Record Office, Peruvian Archive

(F.O. 61), Vol. 323.

« Echo. 8 June 1876; Standard, 8 June 1876; Bullionist, 10 June 1876; The Times, 9 June

1876. Downloaded: 19 Apr 2013 IP address:

The Maying of the Grace Contract 77

bury having replaced Lord Derby, produced a more sympathetic attitude to

the bondholders' claims, and the Foreign Office drew up a minute justifying

intervention within the terms of Lord Palmerston's circular of 1848, which

had generally disavowed an official interest in bondholders' disputes except

in specific cases. The important point to die Foreign Office was that they

believed that there was, in die Peruvian case,' a misapplication of die Property

specifically hypodiecated to die creditors \14 The Foreign Office proposed to

send a circular to die powers suggesting concerted action against Peru, but

this was forestalled by die Peruvian Government. President Prado offered to

pay die bondholders £300,000 a year out of die Peruvian Government's own

income from the guano contract. In the eyes of die British minister in Lima,

die attitude of die Foreign Office had indeed been decisive as the Peruvian

administration had given up this sum in the knowledge diat Salisbury himself

' had shown some interest in die question a n d . . . the Governments of

England and France were likely to intervene \15

By die time diat war between Peru and Chile broke out, therefore, in

April 1879, die position of die bondholders had begun to improve slightly.

£300,000 a year from die Peruvian Government was by no means a large

sum, sufficient at most to pay one per cent a year on the bonds, but it was a

step towards repayment. Moreover, die bondholders had secured die interest

of die Foreign Office in die affair. The outbreak of war, however, meant that

the Peruvian Government had again to default on its undertakings as the

Government, already in a straitened financial condition, needed all its income

to fight the war. The bondholders, therefore, received no money from die

Peruvian Government, and the war, by introducing a new complication into

the affair, led die Foreign Office to wididraw its offer to intervene.16

II. The Pacific War and Negotiations with Chile

The war introduced new complications into what had, until dien, been a

reasonably straightforward dispute between Peru and its bondholders. In die

first place, in 1880 die Government of President Pierola recognized debts due

to Dreyfus, die former guano consignees, of over £4 million. To die detriment

of die bondholders' interests, bodi die Government and Dreyfus agreed that

1* Minute of Sir Julian Pauncefote, 2 Oct. 1878, FO 61/323; Salisbury's minute on James

Croyle (president of International Committee of Bondholders) to Salisbury, 18 Sept. 1878,

FO 61/323. For Palmerston's circular of 1848, see Platt, Finance, Trade, and Politics, pp.

398-9; for the Foreign Office role in an earlier dispute, see W. M. Mathew, ' The First

Anglo-Peruvian Debt and its Settlement ', Journal oj Latin American Studies, 11, 1 (1970),


15 St John to Salisbury, 10 June 1879, FO 61/323.

16 Russell to Salisbury, 19 Nov. 1879; Pauncefote to Russell, 21 April 1879, FO 61/323. Downloaded: 19 Apr 2013 IP address:

78 Rory Miller

this debt was also specially hypothecated on Peru's remaining guano

resources.17 Secondly, Chile conquered the southernmost Peruvian province,

Tarapaca, which was the location not only of the nitrate fields, but also of

most of Peru's remaining guano deposits. The bondholders turned to negotiating

with Chile in an attempt to obtain the restoration of-payment on the debt.

In 1880 they agreed with Chile that the bondholders should have the right to

export guano on payment of a royalty to the Chilean Government. Chile,

however, abrogated this agreement in 1882, and arranged with the bondholders

that she herself would export guano and divide half the profits

amongst the creditors of Peru.18 The drafting error in the new agreement

which substituted the word ' creditors ' for ' bondholders ' complicated the

whole affair, as it laid Chile open to the claims of all the Peruvian Government's

creditors, including, of course, Dreyfus.

In 1883 the Chilean and Peruvian Governments agreed the Treaty of

Ancon which ended the war. The peace treaty was of vital importance to

the bondholders for Peru ceded the province of Tarapaca to Chile. Thus,

although it was the Peruvian Government that had contracted the original

debt in 1870-2, it was Chile that now possessed Tarapaca where most of the

guano deposits hypothecated to the bondholders lay. Furthermore, their rights

were further restricted by the clause of the treaty in which Chile recognized

the special hypothecation of the creditors of Peru only on those guano deposits

already discovered. This provoked protests from the British Government,

representing the bondholders, and the French Government, representing

Dreyfus. In the eyes of the Foreign Office this action was to be limited merely

to the attempt to obtain recognition of the bondholders' rights. As they

explained to the Quai d'Orsay:

Her Majesty's Government do not press for any payment to the bondholders, or

for any favour, or even enforcement of their rights... but against those articles of

the Treaty which would deprive British subjects of their property.19

To the bondholders, given the obvious poverty of Peru in the aftermath

of the war and the fact that Chile had conquered Tarapaca and the guano, it

seemed that their best hope of payment lay in Santiago, and for two years

they concentrated all their efforts on 'the attempt to obtain something from

Chile. They secured a further protest from the European powers to Chile in

1885, but Chile, recognizing the conflicting interests amongst the creditors,

17 St John to Salisbury, 2 Oct. 1879, FO 61/323.

18 Decree of 22 Feb. 1880, ' Correspondence between Minister Plenipotentiary of Chile and the

Bondholders' Committee ', p. 48, Peruvian Corporation Archive, University College, London

(hereafter PC/UCL); Pakenham (minister in Santiago) to Salisbury, 14 Feb. 1882,

FO 61/344.

19 Granville to Waddington (French minister in London), 17 April 1884, FO 61/357. Downloaded: 19 Apr 2013 IP address:

The Maying of the Grace Contract 79

especially between the bondholders and Dreyfus, replied that she was not

competent to discriminate between the claims of the various parties on. the

guano.20 In a miscalculated attempt to get something, at least, from Chile,

the bondholders even came to an agreement with Dreyfus in 1886 in which

they abandoned many of their rights. This, they hoped, would allow the

British and French Governments to act in concert against Chile. The Foreign

Office, however, always wary of backing bondholders' claims, declined to take

the responsibility for direct debt-collecting in co-operation with the French

under the 1886 agreement. By the end of 1886, ten years after the Peruvian

Government had first defaulted on the loan, the prospects of the bondholders

obtaining any redress appeared more hopeless than ever.21

III. The Negotiation of the First Grace Contract

Since the beginning of the Pacific war, the bondholders, attracted to

negotiation with Chile not only by Chile's conquest of the guano resources

hypothecated to the bondholders, but also by the obvious wealth of the

Chilean Government as nitrate exports grew, had ignored Peru. Given the

overwhelming contrast in the early 1880s between the wealth and stable

government of Chile and the poverty and instability of Peru, this is hardly

surprising. The bondholders must have felt that the best chances of cutting

their losses lay in Santiago.

There was no doubt, however, that the debt still remained a Peruvian

responsibility, and despite the destruction of its agricultural and mining

wealth, Peru did have assets that could be offered to the bondholders in settlement

of 'the debt. Indeed, as early as 1878 Manuel Pardo, the former president,

had suggested that the bondholders should take over the unfinished railways

and work them for their own benefit. From Peru's point of view, this would

both satisfy the bondholders, and possibly enable more capital to be realized

for their extension under British management. After all, the railways, as well

as the guano, were specially hypothecated to the bondholders. President

PieVola proposed this again in 1880 in a general scheme to settle with the

bondholders and restore Peru's credit in Europe.22 As the war drew to a close,

the idea was revived.

When work on the railways stopped in 1875, the Peruvian Government, in

recognition of its debts to Henry Meiggs, the contractor for most of them,

had allowed him to continue to operate them in an attempt to recover his

investment. Meiggs died in 1877, and under the terms of his will the operation

of the railways was confided to various people, among them both John Meiggs,

2 0 Fraser (minister in Santiago) to Salisbury, 1 Sept. 1885, FO 61/367.

21 Memo, by Pauncefote, 6 May 1886, FO 61/368; The Times, 12 Nov. 1886. <• • •

22 El Comercio (Lima), 14 Sept. 1889; South Pacific Times, 9 Jan. 1880. • • : Downloaded: 19 Apr 2013 IP address:

80 Rory Miller

his brother, and Charles Watson, one of his sub-contractors. In 1883 John

Meiggs approached both the bondholders and Watson with a proposal that

the bondholders should take over the two lines operated by Watson, the

Chimbote and Southern railways. The bondholders refused, however, to

entertain any project that would require additional investment by them in a

defeated Peru. Meiggs then suggested to Watson that the Peruvian Congress

should authorize the executive to make all the lines over to the bondholders,

in addition to the two worked by Watson, with ample concessions on taxes,

tariffs on imports of materials, and future construction rights.23 The idea,

however, lapsed through the bondholders' lack of interest. The chairman of

the Bondholders' Committee told the bondholders at the end of 1885 that it

would be pointless to approach Peru for the settlement of her share of the

debt because of the country's hopeless financial situation.24

The following year, however, 1886, the bondholders did turn back to Peru,

partly because of the failure of their attempts to reach an agreement with

Chile, but primarily through the activities of one man, Michael P. Grace. An

American west-coast merchant, Grace had begun to interest himself in the

unfinished Peruvian railways at the end of 1884. He approached the Government

of General Iglesias, and at the beginning of 1885 obtained the contract

formerly held by Henry Meiggs for the operation of the Central Railway, the

construction of a railway from Chicla to Cerro de Pasco, and a runnel to

drain the Cerro de Pasco mines - to be completed at a cost of £378,000."

Iglesias did not at the time control the Cerro de Pasco area, which was one of

the centres of a revolt being led by General Andres Caceres. Grace, however,

made his way to New York in an attempt to raise capital for this project, but,

not surprisingly, failed. He then went to interview bankers in London, but

there the Bondholders' Committee barred his efforts to obtain funds by

pointing out that under the loans of 1870 and 1872 the railways were hypothecated

to them.26 The political situation in Peru, however, was changing

rapidly. Caceres defeated Iglesias at the beginning of 1886. Now that an

apparently stable government had been formed in Lima which recognized his

Cerro de Pasco contract, Grace took the obvious line that had been suggested

by Pardo, Pierola, and Meiggs, and attempted to interest the bondholders in

a general settlement of the Peruvian debt, on the basis of the transfer to them

of the railways.

2a John Meiggs to Charles Watson, 8 Jan. 1884, Caja 6/4, Peruvian Corporation Archive

(hereafter PC) Lima. 2* El Comcrcio, 14 Sept. 1889.

23 Ibid.; Ministerio de Fomento, Andes de Obras Publicas, 1886 (Lima, 1890), pp. 86-90 and


26 Joseph Spinney to Charles Watson, 15 June 1885, Watson letters, Meiggs archive, PC/Lima

(hereafter Watson letters); El Comercio, 16 Sept. 1889. Downloaded: 19 Apr 2013 IP address:

The Maying of the Grace Contract 81

With the failure of their negotiations' with Chile impending, the bondholders

were by no means disinterested in Grace's plans. Grace's interests,

however, in settling the affair were completely personal. In his first project

he suggested that the railway be completed to Cerro de Pasco with funds

raised by the bondholders, but that he should retain control of the valuable

mineral rights there. For this reason, perhaps, he had great difficulty in persuading

the Committee to agree to his original plans, and was forced to alter

them.27 On his return to Lima late in 1886, he presented a revised project to

the Government, in which, however, he still retained his rights in Cerro de

Pasco. The bondholders would take over the state railways and commit themselves

to the construction of certain extensions. They would be able to.lay

claim to coal-mines on the Chimbote line, and to the Huancavelica mercurymines,

as well as any unclaimed oilfields in the north. They would establish

eight distinct colonies in the Oriente, and have a monopoly on the export of

guano. They would hold all these rights for seventy-five years (until 1961—2

if the plan had been accepted), and, until they had a return of £700,000 a

year, they would collect the customs duties at the Southern Railway porfof

Mollendo to make up this sum. After the return on the bonds had reached

5 per cent, however, the Government would have a 25 per cent participation

in the profits.28

Terms such as these were clearly far more onerous than any Peruvian

Government could accept. It would have meant handing vast areas of the

country over to foreign control with no guarantee that the bondholders would

complete their obligations or run their concessions in Peru's interests as well

as their own. Yet the only hope of a settlement of Peru's foreign debt lay in a

deal based on the railways.

The Government's bargaining position reflected its weak financial situation.

Chile controlled guano and nitrate, the pre-war sources of Peruvian

wealth. Other industries stagnated. ' At the moment our itrade is in a great

depression,' the Ministro de Hacienda told Congress, ' and its state does not

have the character of a passing crisis.' According to government statistics, not

only had the volume of production of Peru's remaining resources - sugar,

cotton, wool, and minerals - dropped, but world prices had also declined

from the previous decade.29 The country's trade did not provide enough in

-' El Comcrcio, 21 Sept. 1887, quoting an interview with Grace in New Yor\ Times, 31 Aug.

1887, . '•;'*

2 8 Anon, La Deuda Externa y la Cdmara de Diputados (Lima, 1888), p. 5. For the first project,

see Jose1 Maria Rodriguez, Andes de la Hacienda Publica del Peru, 1821-189} (19

vols., Lima, 1912-28), xvn, 4Oia-6a'. • . -

2 9 ' Memoria del Ministro de Hacienda al Congreso, agosto de 1887', in Rodriguez, xvm,

268a. ; . . . •

L.A.8.—6 Downloaded: 19 Apr 2013 IP address:

82 Rory Miller

the way of customs receipts to sustain government expenditure, and new taxes,

instituted to overcome the deficit, could not be collected in the disorganized

country. Revenue consistently fell short of budget estimates. Income in 1887

totalled only five million soles instead of the eight million forecast. The

Caceres Government claimed that when it entered office only 3,532 soles

remained in the treasury (about £500). The government, even after a stable

administration had been established under Caceres, remained so short of

money that in 1887 it had to borrow 10,000 soles from Juan Thorndike, now

concessionaire of the Southern Railway, in order to pay the troops in


Moreover, the Government had still gained no returns from the expensive

but unfinished railways, and had no source of capital to complete them which

would have given it a better return. The state engineers reported in January

1887 that to carry out repairs to the existing lines (on which virtually no money

had been spent since 1875) would cost an estimated £900,000 or more.31 As

the Ministro de Gobierno told Congress in 1886:

The Mollendo railway line, which has cost the State so many millions, has not

produced a single centavo for the Treasury since the day the contractor delivered

the work to the government.32

In 1886 the state received only 66,000 soles from the lines on which Peru had

spent so much. From 1880 to 1886 the contractor's profits from the Southern

Railway, the best-used, totalled no more than a million soles (about

£140,000)." Furthermore, the bondholders blocked every project, as Grace

had found, to raise money for the railways without recognizing their rights.

As Charles Watson wrote:

No Banking House or Financial Concern would agree to finance such a business

unless they could get a Stock Exchange quotation, and die Stock Exchanges of

Europe are quite agreed to forbid and refuse any such quotation, until the Peruvian

bondholders are arranged and dealt with.34

:Though the bulk of die bondholders were British, there was also a major

French group which would have prevented any quotation on the Bourse even

if Dreyfus had not also been interested in the affair.35 Thus, if the Govern-

30 Rodriguez, xvm, 19; xvi, 133; Charles Watson to Charles Watson, jnr, 18 May 1887,

Watson letters.

« El Comcrcio, 8 Jan. 1889.

33 Ibid., 30 Aug. 1886.

33 Andes de Obras Publicas, 1886, pp. 600-1; Andes de Obras Publicas, 1887 (Lima, 1890),

pp. 248-9.

34 Charles Watson to Charles Watson jnr, 13 June 1888, Watson letters.

35 In 1881 it was estimated that British speculators held between £24 and £25 million, French

j£ij4 million, with the balance in the hands of Italians, Germans, Belgians, Dutch. Pakenham

to Granville, 4 Dec. 1881, FO 61/344. Downloaded: 19 Apr 2013 IP address:

The Maying of the Grace Contract 83

ment wished to complete the unprofitable railways it had to settle with the

bondholders, and if die bondholders wished to arrange with the Government

they had to take the railways, die only material asset that Peru could offer

them. What remained was to fix the details of the concession.

IV. Reaction in Peru

Grace's first proposals met with a mixed reaction in Peru. Many Peruvians

believed that Peru did not possess an external debt, since the bondholders

had accepted the idea diat Chile was responsible for the debt by negotiating

concessions with her in 1880 and 1882 for the export of guano from Tarapaca.

But the presidential commission of three prominent politicians, established to

examine Grace's first proposals, destroyed this myth:

Although Chile's proposals [of 1880 and 1882] were accepted [they reported] it

cannot really be said that the external debt of Peru has been extinguished, or that

Chile has assumed responsibility for its total repayment.38

If Chile were to extinguish the debt under the Treaty of Ancon, they continued,

diere would have to be either a large quantity of guano still remaining,

or a large profit on each ton sold, neither of which was true. Thus they agreed

diat Peru still had an obligation to repay the bondholders. To rebuild after

the war Peru had to obtain access again to European capital markets, arid had

no alternative but to make an agreement with the bondholders, placing the

railways under dieir control. Indeed, with certain detailed changes in the

project, die commission would welcome it as a blueprint for Peru's future.

Above all diey valued the concessions for colonization and immigration:

However many methods may be employed to stimulate die prosperity and progress

of the country, none is comparable to European immigration. This can, in a short

time, realize results that cannot be expected from railways and capital alone.37

In February 1887 Michael Grace and Jose Aranibar, the Minister of Finance,

left for London to negotiate a final contract with the bondholders.

V. The Failure of the Grace-Aranibar Contract

The contract signed by Grace and Aranibar on 26 May 1887 attributed

half die Peruvian debt to Peru and half to Chile. Some important points distinguished

it from die earlier project. The Bondholders' Committee would

now have die right to take some £120,000 annually from die customs

revenues of Mollendo and Paita to guarantee the service of die debentures

they would issue to finance die completion of the railways. The contract

36 ' Report of the presidential commission of Francisco Garcia Calder6n, Francisco Rosas, and

Aurelio Denegri, dated 24 November 1886,' in Rodriguez, he. cit., XVII, 4073-233.

« Ibid. Downloaded: 19 Apr 2013 IP address:

84 Rory Miller

would last for sixty-six years, and also include a provision for the bondholders

to establish dn Lima a bank with exclusive rights of issue for twenty-five years,

to co-operate with the Government in retiring the vastly depreciated paper

currency. Although the concessions for coal and mercury mines remained,

the oil had disappeared; instead of establishing eight distinct colonies in

eastern Peru, the bondholders would now receive i-8 million hectares of land

in the ?nontana.SB

It took three years for the Grace contract - in a substantially modified

form — to pass the Peruvian Congress. What were the sources of opposition

to it?. First, Chile objected strongly to the clause that attributed the responsibility

for half the debt to her, in contravention of the Treaty of Ancon.

According to the president of Chile, he was also concerned about the provisions

that guaranteed the bondholders income from the custom houses, and about

the land concessions that Chile considered a surrender of Peruvian sovereignty.

Balmaceda asked what would happen if Peru reneged on either of these

concessions - what would the British Government do then?3° Chile's objections,

however, did not arise from an altruistic desire to protect her weakened

neighbour to the north, but went deeper. Under the Treaty of Ancon she had

retained the Peruvian .provinces of Tacna and Africa. In 1893 a plebiscite was

due to be held to determine whether Chile should hold the provinces in

perpetuity, or whether they should return to Peruvian sovereignty. The

successful country would pay the loser ten million dollars. Peru had no prospect

of doing this unless she could restore her external credit, or improve

her economic situation, neither of which seemed likely unless the Grace

contract was passed. For her part, Chile made repeated attempts to incorporate

the cession of Tacna and Arica into the negotiations for the removal of

Chilean opposition to the contract: This idea appeared in the secret proposals

the Chilean Foreign Minister, Augusto Matte, made to. Hugh Fraser, the

British charge d'affaires, in April 1888, and again in May 1889 when Matte

himself visited Lima.40 For their part, Peruvians feared that Chile, if held

responsible for half the debt, would eventually extract repayment from Peru.

Having already defeated Peru in war, and widi the economic disparity

between the two countries increasing daily, there seemed no reason why

Chile should not prove successful in such a claim.41

88 The-Grace-Aranibar contract is in ' Circular of the Committee of Peruvian Bondholders, 3

• June 1887 ', appendix, PC/UCL.

a" Fraser to Salisbury (very confidential), 2 Feb. 1888, FO 61/378.

*° Fraser to Salisbury (very confidential); tj.April 1888, FO 61/379; Sir Charles Mansfield

(minister in Lima) to Salisbury, 6 May 1889, FO 61/383.

41 According to the Earl of Donoughmore, the Peruvians were ' in • an .awful fright of the

Chileans ', Donoughmore to Lady Mary Loyd, 16 July 1889, Donoughmore letters. I am

grateful to the present Earl for allowing me to see his grandfather's papers. Downloaded: 19 Apr 2013 IP address:

The Maying of the Grace Contract 85

Apart from the opposition of Chile, the Peruvian Government faced

attacks from other claimants on the railways. These came from two sources.

Although British bondholders held most of the bonds, there were rival committees

in France, Belgium, and Holland, which impugned the contract; and

threatened that they would continue to hold Peru responsible for the debt if

it accepted Grace's proposals. Henri Guillaume, the French leader, presented

rival proposals to the Government for the bondholders to take over the

country's mines (under extra-territorial rights), and establish a bank with a

monopoly on emission.42 There were also other claimants on the railways,

particularly those who had administered the different lines since the death

of Henry Meiggs. They threatened that if the bondholders did not come to a

reasonable settlement with them, they would use their influence in Congress

to force the rejection of the contract.43

The passage of the Grace contract depended completely on the degree to

which the Peruvian executive could control Congress. Yet, in fact, for much

of this period President Caceres faced a hostile Congress. Cabinets tended to

endure only for a short time, and the situation deteriorated so much that in

October 1887 no ministers could be found to form a new cabinet. It had to be

constituted from the senior officials of each ministry.44 It was ironical, Watson

noted, that the clauses that the Chilean and Peruvian opponents of the contract

objected to most - on land, immigration, mines, and banking - were the

very ones inserted by Aranfbar on behalf of the Peruvian Government. All the

bondholders wanted were the railways, the guano, and a government subvention,

and they considered all the other concessions as negotiable.45 Ministerial

crises succeeded one another, exasperating Caceres and the bondholders.

As El Comercio noted in October 1887:

In effect we find that a third of Caceres' presidency has passed, and during that

time the Government has been able to do nothing, as the different ministries that

have conducted public business have been peaceful only in the intervals between

one legislature and the next.46

Aranibar returned to Peru to meet with a hostile reception. In September

1887, the Government announced that it would not submit the contract to.

Congress because of the opposition of Chile, though in fact the reason lay as

much in the expectation that submission of the contract to Congress would

provoke an opening of the splits within Peruvian politics. Indeed, the government

immediately faced a motion of censure on the grounds that it had

*• El Comercio, 16 March 1887.

*3 Charles Watson to Charles Watson jnr, 22 July 1887, Watson letters.

« El Comercio, 5 Oct. 1887.

<5 Charles Watson to Charles Watson jnr, 2 Nov. 1887, and 16 Nov. 1887, Watson letters.

<« El Comercio, 3 Oct. 1887. Downloaded: 19 Apr 2013 IP address:

86 Rory Miller

knuckled down to the demands of a foreign power. But as El Comercio

pointed out, there was some substance in the official reasoning of the government.

It was by no means certain that Chilean objections were unfounded,

and it would be absolutely impossible for Peru to support with force a decision

that they were.47

Both the Bondholders' Committee and the Peruvian executive now came

under attack. In London the bondholders turned back to negotiating with

Chile in the hope of removing Santiago's opposition. Colonel North, a

member of the committee, had several meetings with the Chilean minister in

London. The bondholders, however, demanded that besides the proceeds from

the export of guano under the 1882 decree they should also receive a portion of

the proceeds from the customs of Tarapaca, a concession that Chile could not

countenance.48 As frustration increased, the Bondholders' Committee became

unable to control its constituents. At the very time when they needed to mollify

Chile, one bondholder opposed a Stock Exchange quotation to the new

Chilean loan on the grounds that Chile was still responsible for part of the

Peruvian debt. In response the Chileans broke off the negotiations with


In Lima the opposition in the Chamber of Deputies extended their attacks

on the Government. They established a special commission to investigate the

titles under which the railways had been leased to their present operators. In

November 1887, Congress passed a law instructing the executive to take back

the Southern Railway under state control, and later a parallel project for the

Central Railway, at that time under Grace's control.50

In July 1887, Michael Grace had, in fact, threatened to ask the Government

to take the very same measure in order to force the old railway concessionaires

like Watson to come to a settlement with the Bondholders' Committee.51 Now,

however, the Committee treated it as a threat to the chances of the Grace

contract being passed, though, in fact, it could be argued that the passage of

the Grace contract would be eased once the former concessionaires had been

removed. There were, however, good reasons for the bondholders to be

concerned. First, the measure had been forced upon the government by the

opponents of the Grace contract. Secondly, the interests of Grace himself in

the Central Railway were under attack. Thirdly, international questions

entered their calculations. In Bolivia a pro-Chilean, Aniceto Arce, had come

to power with the explicit aim of obtaining for Bolivia an outlet to the Pacific.

u Ibid., 29 Sept. 1887.

48 Charles Watson to Charles Watson jnr, 16 Nov. 1887, Watson letters.

<9 Idem, to idem., 15 Dec. 1887, in ibid.

50 Rodriguez, loc. cit. xvm, 67-71.

51 Charles Watson to Charles Watson jnr, 22 July 1887, Watson letters. Downloaded: 19 Apr 2013 IP address:

The Maying of the Grace Contract 87

Early in February 1888, Lima begun to buzz with rumours concerning the

causes of the sudden visit to southern Peru of two government ministers.*2

At this point the British Foreign Office again became involved. The Committee's

solicitor demanded British Government intervention in dealing with

Chile to remove her opposition:

Matters are fast approaching a climax in Peru [he wrote] and in a fortnight or

three weeks we shall in all probability see the breakup of the settlement of the

Peruvian debt and the railways passed over to private hands.53

In actual fact the Peruvian Government took no steps to implement the resolutions

once Grace had lent it 20,000 soles.Si But it was important for the

bondholders to gain the assistance of the Foreign Office in negotiating with

Chile once North's manoeuvrings had failed, with die result of a complete

breakdown of relations between the Bondholders' Committee and the

Chilean Government - in this lay their only hope for the removal of Chilean

opposition. Privately, members of the committee applied pressure on the

Foreign Office.55 The Foreign Office — without any information except for

Ollard's statement, and without attempting to ascertain the truth from their

minister in Lima — responded by ordering their charge in Santiago to negotiate

with the Chileans. To ease the way, they persuaded the Stock Exchange

Committee to grant a quotation for the Chilean loan. As Sir Julian Pauncefote,

the under-secretary, explained:

The annexed letters [of Donoughmore and Ollard] show that the Grace contract

is in great peril of being wrested from the Bondholders by American syndicates

and others. This would be deplorable as it would destroy the last chance of the

settlement of the question and take out of English hands concessions (especially one

on the Pacific seaboard) which it is most important to keep under British


There are two strange aspects to the Foreign Office's intervention in the

dispute. First, it was now undertaking negotiations directly with a foreign

government on behalf of a group of bondholders, a rare event for the Foreign

Office in Latin America in the nineteentli century.57 Secondly, the letters of

Donoughmore and Ollard made no mention of a possible American threat to

5= El Comercio, 4 Feb. 1888, and 8 Feb. 1888.

53 Lord Donoughmore to Pauncefote, 10 Feb. 1888, enclosing Ollard to Donoughmore, 10 Feb.

1888, FO 61/378.

s* Charles Watson to Charles Watson jnr, 25 July 1888.

55 Watson later commented that the Earl of Donoughmore, a member of the Committee, was

' very intimate ' with Sir Julian Pauncefote, the under-secretary at the Foreign Office, and

had ' been useful in bringing pressure on Chile and Peru '. Charles Watson to Charles

Watson jnr, 8 Aug. 1888, Watson letters.

»« Memo of Pauncefote, 11 Feb. 1888, FO 61/378.

57 See Platt, Finance, Trade, and Politics, pp. 34-53. Downloaded: 19 Apr 2013 IP address:

88 Rory Miller . \

the Grace contract. Certainly the situation for the bondholders in Lima was

becoming serious, but there is not a mention of an American threat to the

Grace contract in the Peruvian press, Peruvian government documents,

Watson's private letters to his son, or the British minister's reports from

Lima. Pauncefote, one must conclude, was the target for exaggerated

rumours to force the Foreign Office into action. Once can see why the Foreign

Office should be so concerned about the possibility of a break-up of the Grace

contract, when it seemed that a settlement was imminent to a problem that

had now plagued it for twelve years. However, it showed surprising ignorance

about Peru, and, more surprisingly, never consulted its representative in

Lima, acting instead on what the Bondholders' Committee told it.

Fraser, the British representative in Santiago, did not succeed in his negotiations

with the Chilean Government. Matte insisted on incorporating the

cession of Tacna and Arica into the agreement, and the Foreign Office refused

to countenance such interference in the affairs of Chile and Peru. In addition,

Chile continued to attempt to limit her responsibility to the terms of the

Treaty of Ancon, and for the British Government to accept this would be

incompatible with the protests of 1884 and 1885 against the Treaty.58

Some of the Bondholders' Committee, tired of the delays, favoured a withdrawal

from the whole complicated affair. Michael Grace and John Meiggs,

however, persuaded them to make another attempt at settlement, by sending

the Earl of Donoughmore, a member of the Committee, to Lima with Grace

for direct negotiations with the Peruvian Government.59 This resulted in the

signature of a new contract on 25 October 1888, to which the Peruvian Government

added a protocol that it should not come into force until Chile had

approved the arrangement.60

VI. Delay and Success : the Donoughmore Mission

When Donoughmore signed the contract of October 1888, two years had

passed since Michael Grace had first suggested a plan for the settlement of

the foreign debt and the completion of the railways. Peru's economic condition

remained as poor as ever. According to El Comercio:

Commercial activity diminishes from day to day, all our industries are languishing.

The value of property is depreciated, our paper money worth nothing. The State

58 Salisbury to Newman (consul-general in Santiago), 18 July 1888, FO 61/379.

59 Charles Watson to Charles Watson jnr, 27 June 1888, Watson letters.

60 For the Donoughmore-Aspillaga contract, and the protocol, see Rodriguez, op. cit., xix,

3413-523. The contract eventually accepted by Peru and the bondholders is in ' Circular of

the Committee of Peruvian Bondholders, 29 November 1889 ', PC/UCL. It was the

Donoughmore-Aspillaga contract that came into force in 1890 with a few modifications. It

has always been known, however, as the Grace contract after the Eminence grise of the

whole affair. Downloaded: 19 Apr 2013 IP address:

The Maying of the Grace Contract 89

can hardly pay its servants; life and movement are missing. A sharp and radical

change is needed everywhere, a point of support for the reconstruction of the


Only the passage of the Grace contract, the newspaper said, could ensure the

regeneration of Peru.61

The executive again faced the problems of persuading a hostile Congress

to pass the contract. For some time, this showed its weakness, but in the final

event the ultimate power of the presidency was the final arbiter in the situation

within Peru. The greatest opposition lay in the Chamber of Deputies,

as the votes for president and vice-president of the chamber showed in August

1888. Three ballots failed to give any candidate a majority, and the offices

were filled by lot. Both vice-presidencies went to members of the opposition,

but Jose Maria Quimper, the leading opponent of the Grace contract in Peru,

just failed to win the presidency of the chamber. This would have allowed

him wide opportunities to block the passage of the Grace contract.62

The first method the opposition used to reject the contract was on the

grounds that the supplementary protocol made it pointless to discuss it. The

Government, however, re-submitted the contract without the protocol to

counter this objection. Now die opposition in die Deputies resorted to other

tactics: long speeches to hasten die end of die session, and non-attendance to

prevent a quorum being formed. The second extraordinary session of Congress

ended in February,' leaving to die Nation not one single agreement, not one

single law.'63

The Government was in a seemingly impossible position if it were to get

the Grace contract passed. There was little hope of deputies changing sides.

Voting in the chamber had been quite consistent, only seven out of eightythree

deputies altering their votes in the five most important divisions on the

Grace contract between November 1888 and February 1889." The economic

situation was not improving, and time was running out for Caceres' hopes

of getting the Grace contract approved during his presidency, and thus reviving

Peru's credit on European markets. El Comercio epitomized the pessimistic

attitude of official circles in Lima:

In reality the situation is desperate. Our ports are deserted, trade is depressed,

agricultural production has noticeably diminished, all industries are languishing,

property is losing its value every day, capital flees abroad, population declines, and

81 El Comercio, 10 Nov. 1888.

62 Verbatim report of preliminary session of the Camara de Diputados on 27 July 1888, in

El Comercio, 13 Aug. 1888.

«3 El Comercio, 15 Feb. 1889.

64 Nominal lists for the five divisions are to be found in Rodriguez, he. tit., xix, 47, 50,

70-1, 78-9. Downloaded: 19 Apr 2013 IP address:

90 Rory Miller

mosr recently we have lost the faith and even the conscience of the state, which is


The situation of the railways had deteriorated even further. Poor weadier,

leading to landslides, in the early months of 1889, left the Central Railway

with a repair bill of three million soles. Neither Grace, the concessionaire, nor

the Government could afford to repair it while the fate of the Grace contract

remained undecided. Meanwhile, the railway remained blocked, bringing

depression to the mining industry, especially to a newly-constructed smelter,

and provoking a rise in food prices in Lima.66

In April 1889, Caceres appointed as prime minister Pedro de Solar, who also

happened to be Grace's attorney! Solar provided the solution to the impasse

in Congress. He ordered partial elections to replace the opposition deputies,

on the grounds that, by not attending sittings of the house in order to prevent

the formation of a quorum, they were not fulfilling their constitutional functions.

67 By the end of October 1889 the contract had passed Congress without

further problems. A great deal of manipulation probably took place. As

Watson noted, the Government had not intervened in the Central Railway

after Grace had lent them 20,000 soles, and he commented:

I have no doubt that Grace will have his own way, provided he feeds them with a

few pounds sterling! The opposition in Congress will be overcome by judicious

management... I think I know enough of Peruvian patrioterism (sic) to be sure

that it cannot resist the force of effective argument.68

In its final version the contract differed considerably from earlier proposals.

The banking and mining concessions had disappeared, and the guarantee

was reduced to £80,000 a year with no control for the bondholders over the

customs revenues. The stipulations for railway construction had also been

reduced so that the bondholders now had to complete the Central Railway

only to La Oroya and not to Cerro de Pasco. Altogether it was very much

simpler and much more limited.69

The problem of Chilean opposition to the contract still remained, but it

rapidly subsided after Chile's hopes that the Peruvian Congress would block

its passage were confounded. The Chilean Government could not now reasonably

hope that a new settlement would be negotiated to include the cession

of Tacna and Arica. Other factors, too, dictated a withdrawal from Chile's

position of open disapproval. Her financial position was good, and would

stand a settlement with Peru's bondholders over the proceeds from the guano

contracts of 1880 and 1882. According to the Chilean Minister of Finance,

«5 El Comercio, 2 April 1888. 66 South American Journal, 4 May 1889.

«7 El Comercio, 8 April 1889.

<>8 Charles Watson to Charles Watson jnr, 25 July 1888.

69 ' Circular of Bondholders' Committee, 29 April 1889 ', Appendix, PC/UCL. Downloaded: 19 Apr 2013 IP address:

The Maying of the Grace Contract 91

the country had reserves of over £3 million and had not yet drawn on the

proceeds of the last foreign loan issued in Berlin. Over the previous two

years, duties on nitrate had exceeded £2 million. Politically, President

Balmaceda faced the prospect of an increasingly tense fight with Congress

over constitutional issues; it would help him if he could settle the long-standing

question of the bondholders' claims on Chile without giving away too much.70

Moreover, in November 1889 the Brazilian military overthrew the empire:

this affected Chile in so far as it provoked fears of a rapprochement between

the Brazilian republic and Argentina, with whom Chile had a worrying

boundary dispute. It would aid Chile's international position to clear up her

diplomatic tangle with the Peruvian bondholders.71

The Foreign Office did not become involved in the negotiation of a settlement

with Chile once the contract had passed the Peruvian Congress. The

bondholders now worked through the intermediary of a Peruvian administration

that was eager to clear the last remaining obstacle to the implementation

of the contract. In January 1890, agreement was finally reached between the

Peruvian and Chilean Governments. Chile agreed to make over to the bondholders

all the proceeds from guano under the 1880 decree, and a proportion

of those under the 1882 decree which had been for the benefit of other

Peruvian creditors besides the bondholders. Moreover, Chile agreed to allow

the bondholders to work the guano deposits now in Chilean territory for a

further eight years.72

VII. The Negotiations in Retrospect

In conclusion, it seems that two questions particularly deserve our attention

: first, we should analyse the negotiations in retrospect to determine the

balance of advantage and disadvantage of each of the parties involved. That

is, who controlled whom? Secondly, we should examine the exaggerated

claims made by both the bondholders and the Peruvian Government as to

the role of the railways in the country's future development. To put the

questions another way - did the Bondholders' Committee hold the upper

hand in their negotiations with the Caceres Government, and did they gain

the returns they hoped for from the control of the Peruvian railways ?

70 J. G. Kennedy to Salisbury (confidential), 18 Nov. 1889, FO 61/384.

71 Robert N. Burr, By Reason or Force: Chile and the Balancing of Power in South America,

1830-1905 (Los Angeles, University of California Press, 1974 ed.), pp. 184-8.

72 Tne text of these agreements is in ' Circular of the Committee of Peruvian Bondholders, 2

April 1890 ', PC/UCL. In 1893, after further delays due to French protests and Chilean

prevarication, the bondholders received from Chile £300,000 cash and £630,000 in 4j4%

bonds. However the issue led to continued lawsuits which were not finally settled until

1921. See Joel (consul-general in Santiago) to Rosebery, 27 Jan. 1893, FO 61/404; Wynne,

op. cit., pp. 161—9. Downloaded: 19 Apr 2013 IP address:

0,2 Rory Miller

The ordinary bondholders themselves, once they had elected a committee

in 1876 to represent their interests, occupied a relatively weak position. They

had no sanction against any financial chicanery on the part of the committee,

except for the retrospective one of voting them out of office - if the story

came to light. James Croyle and Thomas Cave, for example, admitted

speculating in the bonds in 1881 between the time they received information

from the bondholders' agent in Chile and releasing it to the public.73 Other

members of the committee doubtless speculated in the bonds, a charge that

has often been levelled by Peruvian historians who claim that the bonds

were brought up at a low price during the Pacific war in the same way as the

Peruvian Government's nitrate certificates.74 By die 1880s, Peruvian bonds

had largely become a speculative counter on the London Stock Exchange.

Indeed, Michael Grace himself probably became involved in the affair in this


As to Mr Grace's interest in the Contract with the Bondholders [wrote Charles

Watson] it is not by any means platonic. He assumes towards the new Corporation

all the responsibilities as their sub-contractor . . . I am not aware that he has speculated

much in Peruvian bonds but it is quite likely.75

What we do not know is whether Grace was speculating in the bonds on

information received before releasing it to the public, which would be

illegal, or whether he had bought bonds at a low price as a form of gamble

on his own success in reaching a settlement with the Peruvian Government.

The latter would be reasonable.

The bondholders, therefore, could not control speculation in the bonds by

members of dieir committee. Equally they could not control the settlements

that the Committee made with the former concessionaires of the railways -

Michael Grace, Charles Watson, and John Thorndike - under the clause of

the contract whereby the bondholders assumed the responsibilities of the

Peruvian Government in dealing witJi the lessees. Indeed, the details of these

negotiations were carefully kept from tne bondholders. Watson, who admitted

the weakness of his legal rights to the Chimbote and Southern Railways,

received £82,000 in cash and £375,000 in stock in the new company established

by the bondholders to work the concessions, the Peruvian Corporation.

Grace, who carried out these negotiations for the Committee, planned to pay

7 3 ' Circular of Committee of Peruvian Bondholders, 26 May 1884 ', PC/UCL; The Times, 27

May 1884; The Times, 31 Dec. 1884.

7 4 Yepes, op. cit., p. 173; for the parallel story in nitrates, see Harold Blakemore, British

Nitrates and Chilean Politics, /SS6-/S06: Balmaceda and North (London, Athlone Press,

1974), pp. 21-2 and 27-9; see also Emilio Romero, Historia Econdmica del Peru (Buenos

Aires, 1949), p. 379.

7 5 Charles Watson to Charles Watson jnr, 19 Sept. 1887, Watson letters. Downloaded: 19 Apr 2013 IP address:

The Maying of the Grace Contract 93

Thorndike, the sub-contractor for the Southern Railway, £50,000 cash,

£100,000 in bonds, and give him the construction contract for the extension

of the Southern Railway. Watson believed that the latter would leave Thorndike

an additional gain of at least £50,000.™ Moreover, the Committee was

thought to be open to bribery. John Meiggs, when acting on Watson's behalf

in 1883—4, reported to him:

My opinion is that if you can get your claims recognized by the government, either

before or simultaneously with an arrangement with the bondholders, giving to

your claims a very large margin jor the manipulation of the Committee and other

important personalities, you would manage the business.77

At times the actions of the Bondholders' Committee certainly seemed strange

and out of keeping with the interests of their constituents - as the press never

hesitated in saying. The Committee, as we have seen, completely miscalculated

the results of the Raphael contract of 1876, and in 1886 in their agreement

with Dreyfus not only recognized a claim that they had been fighting for

six years, but simultaneously showed a complete misunderstanding of the

methods of the Foreign Office. Over this sort of business the ordinary bondholder,

summoned to a meeting once a year, had absolutely no control.

The very fact that the Bondholders' Committee had to wait sixteen years

before they obtained any money for the bondholders, and four years from

the first draft of a contract until the passage of the final version through the

Peruvian Congress shows the limits to their control. In the last resort the

bondholders had to gain a reasonable settlement with the Peruvian Government

because Lima could not raise funds on European money markets without

the consent of her major creditors. Given the desire in Peruvian government

circles to re-establish the country's credit so that it could be reconstructed on

the basis of foreign loans, this was a weapon of great importance. Indeed, it

was the major reason which led the presidential commission of 1886 to favour

a contract on the lines suggested by Grace. Yet, to some extent the Bondholders'

Committee was forced to moderate its claims in the face of the

opposition in Peru, and this appears when we consider the differences between

the first contract and the one passed by Congress in 1889. The bondholders

lost the rights to the oilfields in the north, and to install their own officials

to collect the customs duties at Mollendo. In addition they were to operate

the railways and the other concessions for sixty-six years rather than the

seventy-five years first suggested. Though the bondholders were bound to

gain a settlement in the end, the actual contract was by" no means as extensive

as they first desired.

7 0 Idem, to idem, jnr, 22 July 1887, and 28 Aug. 1887, in ibid.

77 John Meiggs to Charles Watson, 8 Jan. 1884, Caja 6/4, PC/Lima. My italics. Downloaded: 19 Apr 2013 IP address:

94 Rory Miller

Furthermore, in the final analysis, the Bondholders' Committee failed to

gain from the Foreign Office the support that they solicited, and this brings

us to look at the Foreign Office's role in more detail. Professor Platt has

argued for a certain consistency in the attitude the Foreign Office took

towards bondholders' claims in the nineteenth century. He writes: ' The

general rule remained to avoid intervention if at all possible. But there were

certain circumstances in which the Foreign Office felt a duty to intervene

on behalf of the bondholders.'78 Platt categorizes the circumstances in which

the Foreign Office would consider intervening in a bondholders' dispute.

The uniqueness of the Peruvian case lay in the coincidence of two factors,

' the inalienability of securities already hypothecated to British bondholders',

and ' the transfer of territory from one state to another'.

Yet the impression left by the Peruvian case is to some extent one of inconsistency

in the actions of the Foreign Office. The only change in circumstances

between the refusal to support the bondholders in 1876 and the

decision to intervene in 1878 was the arrival of a new, inexperienced Foreign

Secretary. The press echoed the confusion that surrounded the Foreign

Office's vacillation on the issue. While the Daily Telegraph in 1884 claimed

that the protest to Chile could be justified in the light of previous Foreign

Office policy, if only because the Government had never faced a parallel case

and all the circumstances were unprecedented and exceptional, The Statist

three years later could not agree:

The attitude assumed from time to time by the different political parties in office

[it wrote], has been of a character to preclude the possibility of Her Majesty's

Government interfering in any matters of private contract between British subjects

and Foreign States... It seems very strange indeed that Her Majesty's Government

should now, apparently in violation of old-established precedent, take upon itself to

interfere in these matters.79

Other contradictions appeared as the Foreign Office acted to hasten a possible

settlement to a dispute that had plagued it for more than a decade, In 1884

it told the French minister that its policy did not involve it pressing for any

payment to the bondholders, merely a demand for the recognition of their

rights in Tarapaca. Yet in December 1889 it authorized the British minister

in Santiago to negotiate and sign a protocol for the settlement of Chile's debts

to the bondholders.80

The key step to intervention taken by the Foreign Office, the authorization

given to the British charge in Santiago to negotiate on behalf of the bondholders

in February 1888, spotlights another characteristic of Foreign Office

78 Platt, Finance, Trade, and Politics, p. 46.

« Daily Telegraph, 21 Feb. 1884, and Statist, 29 Oct. 1887.

so Salisbury to Kennedy (telegraphic), 18 Dec. 1889, F.O. 61/384. Downloaded: 19 Apr 2013 IP address:

The Ma\ing of the Grace Contract 95

policy: the poor information on which it worked. On that occasion it acted

on the basis of information supplied to it by the Bondholders' Committee that

it did not bother to verify through its representative in Peru. It is still arguable

that it did not harm the interests of the bondholders if the Peruvian Government

were forced to take a step that the bondholders diemselves had considered

some months before. The Foreign Office, moreover, was led into

negotiating with Chile because the bondholders told them that Chile was

now refusing to talk directly to the Committee. Yet the Foreign Office knew

nothing of the secret negotiations between North and Montt that had recently

taken place. The quality of the information reaching the Foreign Office was,

in fact, at best patchy, and its actions echoed this inconsistency.

On the Peruvian side, the successive negotiations for the Grace contract

clearly spotlighted the weakness of the Caceres Government, attacked on the

one side by the Bondholders' Committee, and on the other both by the

Peruvian opposition in Congress and by the Chilean Government. Once it

became clear after the conclusion of peace between Peru and Chile that Peru

could not deal separately with the problems of the railways and the bondholders

- when the bondholders blocked all attempts to raise money on

London capital markets — the Peruvian administration had no alternative

but to negotiate the lease of the railways to the bondholders. This, it hoped,

would fulfil its dual aims of completing the railway construction begun in

1870 and restoring its credit on foreign markets. But the Peruvian Government

proved unable to insert into the terms of the contract other schemes that it

wished the bondholders to undertake, on land colonization, mines, and

banking. Although the bondholders did not obtain the control that they

wished for over the Peruvian customs, they still retained the right to an

annuity of £80,000 for thirty years. Furthermore, as it soon discovered,

the Peruvian Government had no sanction under the contract by which they

could compel the 'bondholders to complete their obligations.81

When it came to getting the contract approved in Congress, the Peruvian

81 At the Annual General Meeting of the Peruvian Corporation in Dec. 1892, the chairman

told shareholders that the company could not afford to complete 160 km. of railway that

it was obliged to under the Grace contract. For its part the Peruvian Government paid the

Corporation £25,000 of the annuity when it first became due in 1893. This was, however,

only with the greatest difficulty at a time when trade was depressed throughout South

America, and as it became clear that the Corporation would not complete its obligations,

the Government ceased to try to pay the annuity. This resulted in a protracted dispute

between the Peruvian Corporation and the Peruvian Government which was finally settled

only in 1907. ' Report of Proceedings at Annual General Meeting of the Peruvian Corporation,

15 December 1892 ', p. 2, PC/UCL; El Comerio, 22 Jan. 1896; Report on the Finances

Trade, and Commerce of Peru (Sir Charles Mansfield), Parliamentary Papers, 1893-4, xcv,

802-3; ' Directors' Annual Report, December 1907 ', Appendix, PC/UCL. Downloaded: 19 Apr 2013 IP address:

96 Rory Miller

Government showed its weakness there. It had to give way in the face of

Chilean opposition throughout the case, not only in September 1887, but

even after the contract had been passed, when it had to complete negotiations

with Santiago before the contract could come into force. Furthermore, it

succeeded in getting the contract through Congress in the face of strong

opposition only by unseating a number of deputies. This was a move of

doubtful constitutional legality that exacerbated the political tensions within

the country. At no time, however, during the whole affair did the Peruvian

Government find itself able to dictate the course of events.82

VIII. The Grace Contract, the railways, and the Peruvian economy

From the point of view of the contracting parties of 1890, one might distinguish

two distinct aims. For its part, the Government saw the contract

not only as a means of restoring its external credit, but also as a method of

obtaining the capital abroad that would allow the railways to be completed,

thus stimulating the economic development of the country. The bondholders,

on the other hand, looked on the railways as the source of the profits by which

they could recoup their investments, and only incidentally did they look to

the country's economic development. In many minds, however, the two aims

were synonymous: profitable railways would naturally be an indicator and

a function of a successful economy.

The press was almost universally optimistic about the prospects both for

Peru and the Peruvian Corporation, the company that the bondholders

formed. The South American Journal described the company as ' one of the

greatest of joint-stock companies ever organised to carry on operations in a

foreign country ', and in fact compared the scale of its interests to those of

the East India Company.83 Observers accustomed to Peruvian business conditions

also looked with optimism on the formation of the country:

The prolongation of the railroads of Peru [wrote the British consul in Callao],

consequent on the Bondholders' contract with the Government, will lead. to the

opening up of immense agricultural and mining fields, and will give life to all the

great national industries of the interior, which so long have been awaiting the

means of communication with the coast in order to spring into activity... Peru may

reasonably look forward to a prosperous future.84

82 For.a more detailed analysis of the relations between the Peruvian executive and Congress

on • the question of foreign concessions between 1885 and . 1930, see Rory Miller, ' The

•Peruvian Government and Foreign.Firms, 1885-1930', Business Imperialism: an enquiry

based on British experience in Latin America before 1930, ed. D. C. M. Platt (London,

Clarendon Press, forthcoming). .

"3 South' American Journal, 15 Feb. 1890.

"4 'Report on the Trade and Commerce of Callao (Vice-consul Wilson), Parliamentary Papers,

1890, LXXVI, 421. Downloaded: 19 Apr 2013 IP address:

The Maying of the Grace Contract 97

The lack of adequate communications, it was assumed, was the only obstacle

to the development of the vast agricultural and mining potential of the


Peruvians have almost without fail denigrated the Grace Contract.

Mariategui considers that, in delivering the railways to British bankers, the

Peruvian Government managed slowly to stimulate the investment of foreign

capital in other sectors of the economy, re-emphasizing its colonial condition.8*

More recently, Virgilio Roel has written that' these railways were the most

important in the country. For this reason their foreign ownership put our

country into a typically colonial category even though it kept a facade of

political autonomy.' " Jorge Basadre, on the other hand, appreciates the fact

that the debts of the past were liquidated by die contract, though he declines

to answer the question as to whedier Peru paid too much.87 To conclude,

therefore, we shall examine two problems: the profitability of the railways,

and die contribution of die railways to Peru's development.

Various measures could be taken to indicate the income that the bondholders

received from die railways and odier concessions under die Grace

contract. First, as the dividend record of the Peruvian Corporation in Figure

1 shows, die company never paid a dividend on its ordinary stock, and never

paid more dian three per cent on its preference stock until the brief florescence

of die 1920s. It might, however, be argued diat so much of the company's

stock was watered that diis gives a misleading impression of its profitability.

When the bondholders formed the Peruvian Corporation, they did so on die

basis that die company's total capital was half die value of die outstanding

Peruvian bonds, a valuation diat bore no relation to the actual wordi of the

railways. Secondly, therefore, an attempt was made to deflate the Peruvian

Corporation's investment. As a basis the 1890 valuation of the railways was

taken (diis was £5-4 million), together with the later additional investments

of die Peruvian Corporation, to give a series for the internal rate of return

to capital for die railways.88 This appears as Figure 2, and Figure 3 shows the

parallel series for die two most important individual railways, the Central

8 5 )os£ Carlos Maridtegui, Seven Interpretive Essays on Peruvian Reality (Austin, University

of Texas Press, 1974), p- 13.

8 6 Virgilio Rod, Esquema de la Evolucidn Econdmica (Lima, Editorial Amauta, 1971), p. 76.

8 7 Jorge Basadre, Historia de la Refublica del Peru (5th ed., Lima, Ediciones " Historia " ,

1964), vi, 2770-2.

" ' Report of the Peruvian Bondholders' Committee, 30 January 1890 ', p. 8, PC/UCL. The

construction cost of the Southern and Central railways had been £106 million by 1890,

but by then their capital value was far less as no repairs had taken place since 1875 and

there had been no re-equipment although there had been considerable physical destruction

of plant in the war with Chile and during the civil strife that followed. For the original

cost of the railways see ' Resena: Transferencia de los Ferrocarriles, ,Descripci6n de los

mismos', pp. 24-37, typescript in Caja 36/4, PC/Lima.

L.A.S.—7 Downloaded: 19 Apr 2013 IP address:

Internal Rate of Return: Central and

Southern Railways 1891-1935

1890 1900 1910 1920 1930

Figure 3

Internal Rate of Return on All

Railways 1891-1935

1890 1900 1910 1920

Figure 2


Rates of Interest on Peruvian

Corporation Capital 1890-1935

6 r - -





1890 1900 1910 1920 1930

Figure i Downloaded: 19 Apr 2013 IP address:

The Maying of the Grace Contract 99

and Southern. Again, the rate of return on the railways exceeded 5 per cent

only in the 1920s, confirming the view that except for a very short period the

railways could by no means be considered a profitable investment. Thirdly,

to answer the charge that the real profit from the Grace contract came to those

speculators who had bought Peruvian bonds when they were at their lowest

price in the 1880s, a calculation was made to see how such a speculator would

have gained. An investment of £1,000 in Peruvian bonds in 1885, in fact,

would have earned less than £300 in dividends over the next twenty-five years.

In no sense, therefore, could the Peruvian Corporation be considered to have

fulfilled its original function - the servicing of a bondholder debt in perpetual

default. The major profits were, in fact, only to be made by speculation in

short-term sale and purchase of the bonds, and any capitalist who bought

depreciated Peruvian bonds in the 1880s in the hope of seeing a secure income

from the bondholders' concessions must have been highly disappointed.

I have endeavoured to analyse the effects of the railways on Peruvian

economic growth elsewhere.89 The railways, it appears, managed to cut

freight rates in the Peruvian sierra to some 30 or 40 per cent of the rates

charged by animal transport. This, however, did not advance agriculture in

the sierra to any great extent, as the obstacles to change there lay not in the

lack of communications but in other bottlenecks such as land tenure and

capital supply. In connecting the highlands of the central sierra to the markets

of Lima, the railways stimulated pastoralism to a greater extent, as for the

first time it became possible to export to Lima butter, milk, and, from the

1920s, meat. The real impact of the railways on the economy, however, came

in mining. It took place not on the basis of silver mining in Cerro de Pasco,

but in copper as prices rose after 1897, and, noticeably enough, the railways

did little to stimulate the miners or to develop their own concessions in Cerro

de Pasco. Other bottlenecks in Cerro de Pasco were extensive enough to force

the miners to take the chance of a windfall profit in 1901 when American

capitalists offered to buy the mines, and it was the Americans who supplied

the capital which made the mining industry of the central sierra a success. We

can generally conclude that the stimulus the transfer of the railways to the

Peruvian Corporation gave to the Peruvian economy was nowhere near as

great as die Peruvian promoters of the Grace contract claimed would be the


If, therefore, neither the Peruvian bondholders nor the Peruvian economy

gained die results expected from the Grace contract, who did? The answer

89 Rory Miller, ' Railways and Economic Growth in central Peru ', Social and Economic

Change in Modern Peru, Rory Miller, Clifford Smith, and John Fisher, ed. (Liverpool,

Centre for Latin American Studies, forthcoming). Downloaded: 19 Apr 2013 IP address:

ioo Rory Miller

is Michael Grace himself. He proposed the original arrangement and brought

together the Peruvian Government and the Bondholders' Committee.

Although he did ndt succeed in his original intention - to have the bondholders

construct the railway to the mining concessions he retained at Cerro

de Pasco - he did hold on to a continuing one-third interest in the Cerro de

Pasco mines. Apart from any speculation in Peruvian bonds that he may have

undertaken, he still profited considerably from the contract. For his work in

Peru during the four years of negotiation he received £150,000, togedier with

a 3 per cent commission on die shares, bonds, or cash distributed amongst

the bondholders.90 In addition, he received die contract for the construction

of extensions to the Central Railway. What he made from this we cannot

tell. However, if Watson's estimate that the profits on such contracts would

be of the order of 25 per cent is correct, diis would be over £ 100,000.91 Moreover,

Grace continued to influence the management of the Peruvian Corporation,

to the disgust of Antony Gibbs and Sons, the Corporation's financial

advisers.02 The years around 1890 saw extensive investment by Grace in Peru,

firstly in the Hacienda Cartavio in the Chicama valley, and secondly in the

Peruvian Cotton Manufacturing Company in Lima.93 Perhaps some of the

investment capital came from his profits in the bondholders' negotiations, for

it is certain that the chief beneficiary from the Grace contract was neither the

Bondholders' Committee nor the Peruvian Government, but Michael Grace


90 Agreement of 12 Dec. 1889 between Grace and the Bondholders' Committee in ' Contracts

and Documents, 1890 ', PC/UCL.

81 ' Resena: Transferencia de los Ferrocarriles, Descripci6n de los mismos ', p. 24, Caja 36/4,

PC/Lima; Charles Watson to Charles Watson jnr, 22 July 1887 and 28 Aug. 1887, Watson


02 ' The Corporation appears to be spending too largely on colonisation, exploration, surveys,

&c. probably under the Grace-Ollard influence ', wrote Herbert Gibbs at the beginning of

a campaign by Gibbs to oust the company's management; Herbert Gibbs to Harry Gibbs,

8 Dec. and 15 Dec. 1893. London, Guildhall Library, Archives of Antony Gibbs and Son,

File 11,040/2.

•3 Grace bought the Cartavio hacienda from Guillermo Alzamora in 1882, but did not really

begin to develop it until he formed the Cartavio Sugar Company in 1891. See Peter F.

Klaren, Modernization, Dislocation, and Aprismo: Origins of the Peruvian Aprista Party,

7570-/952 (Austin, University of Texas Press, 1973), p. 9. Although the Grace interests

did not buy the Vitartc Cotton Mill outright till 1917, both Michael Grace and the Peruvian

Corporation had taken an interest in the Peruvian Cotton Manufacturing Company,

a firm established in 1890 to get control of the Vitarte mill. See ' Memoria del Ministro de

Hacienda, 9 August 1890 ' in Rodriguez, loc. cit., xxi, 82, and ' Annual Reports of

Board of Directors of Peruvian Corporation ', Revenue Accounts, 1898-1900, PC/UCL.

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