The steady decrease in the price of coffee during several years led to a new departure in economics, by the three great coffee producing states of Brazil. A sack of coffee (one hundred and thirty-two pounds), which in 1895 was worth almost $20.00 in Europe, had fallen to $8.00 in 1905. The coffee planters were almost in despair over this low price, which threatened to spell ruin for many of them within a short time. Among themselves they had attempted various measures, but all of them had failed. An attempt had been made as early as 1901, by the state of São Paulo, to remedy this situation, by a practically prohibitive tax upon new plantations, allowing each planter to set out each year only five per cent. of what he already possessed. This would not much more than replace the natural decay. This order was originally made for a period of five years, but has since been continued for another period of the same length.
This measure failed to bring about the desired result. Finally, when the crop of 1906-7 promised to be such an unusual crop, the planters appealed to the government for further relief. The state was equally interested, since by far the greatest part of the revenue of the state, and the various municipalities as well, is derived from its tax upon coffee, and they were afraid that the planters would become panicky and abandon coffee cultivation. Because of this alarm the governments of the three states of Rio de Janeiro, Minas Geraes and São Paulo entered into an agreement, known as the Taubaté Agreement, by which these states, acting through São Paulo, agreed to buy up on the market the surplus production and store it until such time as, in the judgment of the commissioners, conditions warranted its sale.
This judgment was based upon the observation that coffee trees exhaust themselves by such an extraordinary crop, and yield only average crops for the next two or three years. They figured that by that time the natural increase in the consumption would give a market for this coffee. Further, it was known that coffee improves, rather than deteriorates, with age. A special export tax of $0.60 to $1.00 per sack was established at the ports of Rio and Santos, and the government of São Paulo was authorized to borrow not to exceed $45,000,000 to raise a fund to purchase the coffee, each of the three states jointly binding themselves in the obligation. As a result of this agreement that state purchased eight million sacks of coffee in the market, and these were stored in a number of central points in Europe, as well as in New York. Money was borrowed at comparatively high rates. Both the state obligation was given and the stored coffee pledged as collateral security. At that time it was estimated that there would be, including the new crop, a surplus stock of fourteen million sacks of coffee, representing almost one year’s consumption.