The Secretary of State to the Director of the Office of Economic Stabilization (Bowles)

My Dear Mr. Bowles: I understand that the Office of Price Administration is recommending to you that the increase in the green coffee price ceilings, which it is suggested should take the place of [Page 162] the present coffee subsidy, should be limited to approximately three cents per pound. I am certain that acceptance of this recommendation would be a serious mistake for the following reasons:

Treatment accorded coffee in respect of price control is much less favorable than that accorded domestically-produced agricultural commodities, even after allowance is made for the present subsidy of three cents per pound. Since coffee prices were frozen in December 1941, domestically-produced agricultural commodities have increased by approximately 40 percent. Furthermore, if it were impossible to impose a ceiling on coffee, as it is on domestically-produced agricultural commodities, until the price of coffee bore the same relationship to the prices of industrial commodities produced in the United States that it did in the base period 1910–14, the ceiling price on Santos 4 coffee would have to be at least nine cents a pound above the present ceiling of 13⅜ cents. The coffee producing countries are fully aware of the difference in treatment as between their product and the agricultural products produced in the United States.
Representatives of the coffee producing countries are convinced that there is at least an implied commitment to accord more favorable treatment to coffee by the time the present coffee subsidy is terminated. At the time the subsidy was first announced in November 1945, there was no recognition that the increased returns to coffee growers provided by the subsidy might be justified by increased costs of production or by an altered supply-demand position with respect to coffee. In fact, an attempt was made at that time to convince the coffee producers that the outlook was such that they would be fortunate to continue receiving even the nonsubsidized price after March 1946. It became necessary for supply reasons to extend the subsidy beyond March 1946, however, and when the extension was discussed with the Inter-American Coffee Board by the representatives of the OPA, it was presented as a temporary measure. It was stated furthermore that the Office was agreeable to entering into negotiations with the Board with a view to working out a longer-term arrangement with respect to coffee. Whatever this may have meant to representatives of the United States Government, it meant to the representatives of the coffee producing countries that the returns to the coffee growers would be increased considerably above the level of the subsidy. That this was a reasonable interpretation is suggested by the facts that the increase provided by the subsidy was generally known to be unsatisfactory to the coffee growers, that the extended subsidy was presented as a temporary expedient, and that the offer to negotiate a longer-term solution implied that concessions might be made to the viewpoint of the representatives of the coffee producing countries.
In view of the foregoing, continuation of approximately the same level of returns as that provided under the subsidy would lead to widespread resentment and very probably to a general withholding of supplies. Representatives of the coffee producing countries have shown upon numerous occasions recently a growing belief that the only condition under which they can expect to receive more favorable treatment for coffee is one of short supply. They are at present in a position to force the issue. It is, of course, desirable that any [Page 163] necessary adjustment in coffee prices not be brought about in this manner.
The statistical situation with respect to coffee has altered so drastically in the last ten to fifteen years that a much higher level of coffee prices would have developed in the absence of the war and of price control. A recent comprehensive and very detailed report from our Embassy in Brazil estimates that the number of coffee trees in Brazil is now more than 800,000,000 less than it was in 1934 and forecasts that it is likely to be less by a billion in 15 years than at present. If this estimate and forecast are accurate, the number of coffee trees in Brazil by 1960 would be only approximately one-third the number that were there in 1934. The effect of a change of this magnitude in the country which has customarily produced more than 60 percent of the world’s coffee is obvious. Already the coffee carryover in Brazil has been reduced to low and very manageable proportions.
By all odds the most serious single irritant in our relations with the coffee producing countries is the problem of coffee prices. In the considered judgment of this Department, an increase in the present ceiling prices of only three cents a pound when the coffee producing countries expect and feel that they are entitled to a larger increase would lead to further serious deterioration in our relations with such countries.

I believe that the only action which would be certain to correct all the difficulties now interfering with normal trade in coffee would be suspension or elimination of the coffee price ceilings. Only in this way could it be fully assured that coffee will be supplied in adequate volume, that the normal price differentials between the various grades of coffee will be re-established, that present practices of upgrading will be eliminated, and that the lower-priced blends of coffee will reappear on the American market.

If green coffee price ceilings cannot be suspended at this time, however, I recommend that they be increased on the average by approximately five cents per pound. Following are some of the reasons for selecting the five cents figure:

This amount of increase has been requested by the Price Committee of the Inter-American Coffee Board and would still probably be acceptable to the governments of the coffee producing countries and to the coffee growers even though the request was made many months ago.
The Brazilian Government has recently indicated that an increase of five cents a pound would be acceptable to Brazil.
An increase of approximately two cents a pound above the present subsidy of three cents a pound would appear to be necessary in order to legalize a large part of the business which is now taking place.
If, as seems probable, the Brazilian Government should not subsidize the exportation of the 1946–47 Brazilian crop, as it has subsidized the 1945–46 crop, an increase of approximately five cents per pound in coffee price ceilings would be required to prevent a reduction in the price even on that portion of the trade in Brazilian coffee which is at present being conducted on a legitimate basis.

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I also recommend that an attempt be made to obtain commitments from the governments of the coffee producing countries in exchange for the proposed action. These commitments might be in the form of an agreement not to increase their minimum prices or taxes on coffee for a specified period, and to take other action to assure the free sale of coffee at the new prices. In addition, I suggest that if new ceiling prices are established for coffee, a vigorous enforcement campaign be instituted to seek out and prosecute those of our importers who may violate the new ceilings. This would appear to be essential if the illegal practices which are reported to be common at the present time are to be avoided even at the new level.

If you are agreeable to these suggestions, this Department would be glad to cooperate in any way possible in helping to put them into effect.

I am sending copies of this letter to the Secretary of Agriculture, the Administrator of the Office of Price Administration, and the Director of the Office of War Mobilization and Reconversion.

Sincerely yours,

James F. Byrnes