DREYFUS CONTRACT: BACKGROUND, AGREEMENTS AND CONSEQUENCES - HISTORY - 2025

The c ONTRACT Dreyfus was signed between the Peruvian government and the French company Dreyfus & Hnos House on July 5, 1869. Through the agreement signed in Paris, the company agreed to purchase two million tons of guano islands. This product was highly valued at the time for its use as fertilizer.

The economic value of the purchase was estimated at 73 million soles, which had to be paid by paying 700,000 soles. Besides, Dreyfus would also be in charge of covering all the foreign debt of the country. Peru was going through times of great economic weakness.

The war with Spain, the revolution in Arequipa and the subsequent Chiclayo uprising had left the public coffers with almost no resources and a huge foreign debt. Given this, President José Balta, who came to power in 1868, decided to make better use of one of his most valuable natural resources: guano.

To do this, the traditional system of sale through national consignees was changed, delivering almost all the production to the French company.

Background

The instability that Peru suffered at the beginning of the second half of the 19th century had a very negative effect on the economy. The war waged against Spain, which ended in 1866, deepened the economic crisis, as it forced enormous military spending.

In addition, there were continuous revolutions and armed uprisings between different factions seeking to achieve power. In October 1867 a revolution broke out in Arequipa and, later, one in Chiclayo under the command of José Balta.

The latter was successful and Balta, after an election was called, was appointed president on August 2, 1868. The new government found itself with totally ruined state accounts.

Guano

Guano, with a great foreign demand for its fertilizing properties, had been the product that had supported the national economy since the 1950s. Foreign sales involved a large amount of foreign exchange, but the marketing system was quite poor.

The structure created for the commercial exploitation of this product was based on a consignment system. The State signed agreements with the so-called consignees, who did the work of intermediaries with the end customers in exchange for a commission.

However, on many occasions the consignees did not deliver the agreed sums to the State or, if they did, they were very late. In addition, they were accused of numerous irregularities in the sales process, as they tried to obtain the maximum possible profit even if their practices were illegal or abusive.

Despite the malfunctioning of the system, the government was not able to change it; in part because, given the economic crisis, it had had to borrow from the consignees themselves, binding themselves to them. To make matters worse, the interest they claimed for each loan was very high.

Balta, a newcomer to the presidency, set out to change the situation, even if he had to take drastic measures.

Agreements

To try to alleviate the serious financial situation, Balta appointed Nicolás de Piérola, a young politician only 30 years old, as minister. It should be noted that no one else wanted to take on the task, as very unpopular decisions were expected to be made.

The new minister held the consignees responsible for the problems with the sale of guano. Before the appearance of chemical fertilizers, these intermediaries had dedicated themselves to speculating with the guano shipments, trying to obtain greater profits and without complying with their obligations to the State.

The way to solve it was to withdraw the concession to market the product to the consignees and find another company to take care of it.

The Dreyfus contract

In order to negotiate the new guano sales system, Piérola previously requested permission from Congress. His idea was to be able to directly negotiate the marketing conditions, without consignees involved.

Once his project was approved, he sent several representatives to Europe to find an interested company.

The winning proposal was that of Dreyfus & Hnos, a French company. On July 5, 1869, the contract was signed in Paris and on August 17 it received confirmation from the Peruvian government.

Main topics

The main points of the agreement between the Peruvian State and Casa Dreyfus Hnos. Were the following:

1- The company would buy a volume of two million tons of guano at the end of the contracts with the consignees.

2- Before that, Dreyfus would pay 2.4 million soles in advance in two monthly installments.

3- The monthly payment to the Peruvian State would be 700 thousand soles and would end in March 1871.

4- The company promised to cover the Peruvian foreign debt, 5 million soles a year.

5- In the contract, the interests and premiums were established. The company obtained the exclusivity of the guano trade for Mauritius, Europe and their colonies.

6- The sale price to Dreyfus was established at 36.5 soles per ton, higher than what the consignees paid.

Changes to the contract

In the years to come, the contract underwent several modifications. Thus, in 1872 the monthly payments were reduced by the advances and commissions that Dreyfus had paid to the State. The new agreement signed established that the company would pay a monthly payment of 500,000 soles for one year and only 200,000 the next.

In 1873, the government agreed with the company to suspend payment of 1 million pounds of foreign debt, since the bonds had already been redeemed. The delivery of 2 million pounds was also agreed to be able to face the railway works that the State was carrying out.

The last modifications took place in 1875, when the government regained the right to sell guano from November 1876.

Consequences

The first consequences of the Dreyfus contract were seen from the moment of signing. In Peru, the agreement sparked an intense debate about whether or not it was beneficial for the country. The first to complain were obviously the consignees who had lost their exclusivity in the sale of guano.

They tried to judicially annul the contract, so that the commercialization of the product was in the hands of nationals. At first, the Supreme Court agreed with their position, but the government ignored the sentence and declared the legality of what was signed.

Infrastructures

The main destination of the money paid by Dreyfus was the construction of infrastructure; specifically, to the development of the railroad in the country. Thus, of the only 90 kilometers of railroad that Peru had at that time, it was passed in just over a decade to 10 times more.

However, the works were more expensive than expected, and the government soon realized that what was stipulated in the contract was not enough to pay for them. Given this, he requested two loans from the same Dreyfus House for a value of almost 135 million soles.

The end result was disastrous for the Peruvian economy. The railway turned out not to be as profitable as the rulers hoped and, once it entered service, it did not cover the expenses incurred. Many lines had to be abandoned half-built. The public debt increased uncontrollably, leading to bankruptcy.

Economical

By 1872 the Peruvian economic figures showed that the State was bankrupt. The public deficit was 9 million soles and the construction of the railway had increased the external debt to 35 million pounds.

To make matters worse, guano sales had fallen by 50% due to the appearance of chemical fertilizers, leaving Peru without one of its main sources of income.

On the other hand, the loans that had been requested for the railroad were equivalent to practically all the monthly payments that Dreyfus had to pay, so there was no way to reduce the debt using that money.

When the Dreyfus House announced that it was abandoning the agreement in 1875, Peru tried to find another company to replace it, but without success. Faced with this panorama, the State had no choice but to declare bankruptcy in 1876. Not even the exploitation of nitrate was able to solve the problems.

Socially, there was a great crisis that affected the general population. The budget was not enough to cover the minimum services, whether educational or health. This led to the appearance of diseases such as yellow fever and high levels of malnutrition.

References

1. UNO newspaper. The Dreyfus Contract: A Shitty Story (Literally). Obtained from diariouno.pe
2. Orrego Penagos, Juan Luis. The "era of guano": the Dreyfus Contract and the economic crisis. Obtained from blog.pucp.edu.pe
3. From Peru. Signing of the Dreyfus Contract. Obtained from deperu.com
4. Quiroz, Alfonso W. Corrupt Circles: A History of Unbound Graft in Peru. Recovered from books.google.es
5. Vizcarra, Catalina. Guano, Credible Commitments, and Sovereign Debt Repayment in Nineteenth-Century Peru. Recovered from uvm.edu
6. Revolvy. Auguste Dreyfus. Retrieved from revolvy.com
7. Encyclopedia of Latin American History and Culture. Guano Industry. Retrieved from encyclopedia.com