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CHAPTER 3

Never a Banana Republic

As large and as diverse as Colombia is, its candidacy for the ranks of banana republics was never promising. United Fruit might have been unrivaled in the northeastern part of the country during the first four decades of the twentieth century. However, the company exercised much less influence hundreds of kilometers away in Bogotá, especially compared to what it wielded in various Central American capitals. South of Colombia, Ecuador is smaller and less developed, a place where a foreign firm might seize and hold the commanding heights of the national economy and from time to time act as a political kingmaker. Yet the country never has experienced this kind of subservience, which has been examined from various scholarly perspectives.

Although he offers no specific observations about banana republics, economist Andrés Rodríguez-Clare has analyzed the multiple outcomes that can happen if an impoverished nation hosts a company from an affluent part of the world. Investment occurs and technology is introduced, to be sure. However, sizable gains for the host country are not guaranteed. It is possible, for instance, for the multinational to decide that its interests are best served by employing unskilled labor and little else from the local economy to produce “simple final goods,” such as a number of farm products. Even if more complex ventures are undertaken, inexpensive communications with headquarters far away might deter the firm from building up factors of production that are locally scarce, including the human capital needed for management and marketing. If so, overall economic progress in the host country may well disappoint.¹

Observations along these lines do not necessarily apply to the tropical fruit business. The operations Chiquita, Dole, and Del Monte have in Central America are intensively administered and most managerial jobs are held by local people. These people are as capable as their counterparts in places like the United States. Moreover, their familiarity with on-the-ground realities, commercial and otherwise, is often of great value and can be hard for foreigners to acquire. Transnational companies know that bringing in an expatriate usually makes less sense than recruiting a talented individual from the host country and training him or her as needed, which is why the local workforces of those companies do not consist only of unskilled laborers. Of course, local hiring is the norm for Latin American firms doing business in their respective nations.

Rodríguez-Clare’s analysis, which does not address foreigners’ possession of land, stands apart from the arguments of many authors who focus on the prolonged control of vital natural resources by multinationals in places like Central America. Writing about Honduras, for example, John Soluri contends that this control has had lasting and adverse effects.² Similar effects are possible today in Sub-Saharan Africa, where an indeterminate number of large rural holdings now belong to Middle Easterners and other outsiders.³

In the tropical fruit sector, resource ownership has been consequential not only for exporting nations such as Honduras. For decades, United Fruit safeguarded its control of the banana industry as a whole by locking up much of the best agricultural land in the Caribbean Basin. This dominant position traced back to Minor Keith’s acquisitions of Central American real estate during the 1800s and lasted through the 1960s, when United Fruit still exported a large share of the region’s bananas and grew much of the fruit it shipped overseas on its own plantations.⁴ In northeastern Colombia, corporate control of farmland and its produce took a form other than outright ownership. As explained in this chapter, United Fruit monopolized exports from the region by the way it structured production contracts with local growers.

This monopoly broke down during World War II, when North America and Europe halted imports of tropical fruit, and could not be reestablished after hostilities ended and normal commerce resumed. In western Ecuador, no foreign company ever replicated either the huge plantations and land reserves of Central America or production contracts of the sort used to suppress competition in northeastern Colombia. Additionally, Ecuadorian entrepreneurs have engaged in international marketing since the early days of their country’s banana boom, thereby preventing foreign monopolization of exports.

Making sure that their country would never become a banana republic, the authorities in Quito imposed restrictions on United Fruit in the late 1930s. However, it would be a mistake to infer from these restrictions that Ecuadorian opposition to foreign investment in the tropical fruit sector was ever categorical or unanimous. To the contrary, many national leaders pursued that investment assiduously, no less than foreign companies once tried hard for grants of land throughout the Caribbean Basin.

Ecuador Woos El Pulpo

The campaign to interest transnational fruit companies in Ecuador began in the early 1920s, when the cacao business was suffering a sharp decline. Output contracted because of a pair of fungal diseases: Witches’ Broom, caused by Crinipellis perniciosa, and Frosty (or Monilia) Pod Rot, caused by Moniliophthora roreri.⁵ Simultaneously, the prices Ecuadorian growers received for their diminished harvests fell because of increased cacao production elsewhere in the Western Hemisphere as well as in Africa.⁶

United Fruit would not have been able to establish new operations in Ecuador or anywhere else a few years earlier because a large segment of the company’s maritime fleet (the most sizable collection of vessels at the time in the United States aside from the U.S. Navy) had been requisitioned during World War I to carry troops and supplies to Europe. But with its ships returned after the Armistice of November 1918, United Fruit could consider an expansion of its business—including south of the Panama Canal, which had been completed in 1914.

The company had ample motivation for such an expansion. Panama Disease, which was a constant menace in the Caribbean Basin, had yet to make an appearance in Ecuador during the 1920s and would not do so for several more years.⁷ Also, the rarity of tropical storms in the costa was an important consideration because Gros Michel plants, which would not be replaced for another four decades, were tall with shallow roots and therefore were easily blown over—particularly right before stems of fruit weighing forty kilograms or more had been cut. Before the switch to the Cavendish variety in the Caribbean Basin, up to one-third of the banana harvest was destroyed every year because of hurricanes.⁸ Yet another attraction of western Ecuador was that prevailing wages were low, no higher than compensation levels in other banana-growing regions.

One person who understood that United Fruit might be attracted to Ecuador and that this would be beneficial for the country was José Luís Tamayo, an attorney and self-made businessmen from Guayaquil whose most significant achievement in the private sector was to serve as legal counsel and a member of the board of directors for the Banco Comercial y Agrícola (BCA). Created to serve the cacao sector, the BCA played a pivotal role in the national economy—not least because it had been given the authority in 1915 to print the currency it lent to the national government, which lacked a monetary authority of its own and which became more indebted to the bank as the years passed.

Elected to a four-year presidential term in 1920, Tamayo assigned J. Cicerón Castillo, who at the time was managing an oil field west of Guayaquil, the task of convincing United Fruit to buy land in the costa, provide shipping, and introduce better technology for banana production. In February 1922, a letter written by Castillo reached Victor M. Cutter, the acting vice president of the multinational. In response to this letter, which stressed the advantages for United Fruit of growing bananas in Ecuador for shipment to California, Cutter provided a list of fifty-one questions for Castillo to answer so that the company could decide about sending down one of its technical specialists to carry out a definitive evaluation.⁹

Castillo responded in short order with a thorough report, one based on wide-ranging observations in the field and reaching the conclusion that western Ecuador was “ideal” for banana production. Guayaquil’s deficiencies for modern shipping were acknowledged. For one thing, the Río Guayas was barely seven meters deep in front of the port city. For another, a sandbar between the river’s mouth and Guayaquil blocked the passage at low tide of vessels displacing more than 4,000 tons. In contrast, Castillo sang the praises of Puerto Bolívar, farther south and in the vicinity of Machala. A natural harbor able to accommodate ships of any size, Puerto Bolívar also had road and rail linkages to inland areas well suited to agriculture.¹⁰

Castillo emphasized land quality—in particular, the depth and fertility of soils in the southern costa as well as their porosity, which facilitates the thorough drainage that banana plants require. Precipitation in the area was reported to be in line with the hydrologic requirements of fruit production for most of the year; at other times, water for irrigation was readily available from rivers and streams originating in the Andes, not too far from the coast. Finally, banana plants in Ecuador, which were used to shade cacao trees in addition to supplying food, exhibited no signs of wind damage, which was a normal feature of Central American and Caribbean plantations.¹¹

Thanking Castillo for his “very excellent report,” Cutter dispatched one of United Fruit’s ablest experts, Charles W. Sinners, to inspect land, irrigation possibilities, navigable rivers, and coastal harbors. Sinners was also instructed to determine needs for railroad construction and to gauge real estate prices. Discretion was required since revealing the true purpose of this work would have caused the owners of farmland, which had lost value because of plant diseases and low cacao prices, to demand more for their properties. So as long as he was able, Sinners let people think he was mainly interested in untapped deposits of petroleum, which along with all other subsurface resources would belong to the state and not to individuals with surface land rights. This subterfuge was maintained for a while because he traveled with Castillo, who was mainly known as a mining engineer and geologist.

The report Sinners submitted in 1922 was enthusiastic and United Fruit’s headquarters in Boston cabled him to remain in Guayaquil, to await orders about how to proceed. After those orders arrived, Sinners journeyed to Quito in August for a meeting with Tamayo.¹² During that meeting, Sinners was shown a draft of a law authorizing creation of banana concessions. Steve Striffler speculates that the law, enacted later in 1922, was perhaps “generated” by United Fruit, although he offers no evidence to support his suspicions.¹³ In fact, the law was unexceptional in many respects. For example, access was guaranteed to harbors suitable for oceangoing ships. Also, private investors were authorized to construct railroads and other infrastructure. In addition, the law included a two-year exemption from export duties, which was not overly generous given the monetary outlay needed to ramp up operations.

The duties to be applied after the exemption expired were not out of line with export taxes during the 1920s in Central America, although Striffler’s characterization of those duties as “very low” is not off base. He also states that “virtually unlimited quantities of land” were made available in Ecuador.¹⁴ What Striffler does not mention, though, is that all the areas offered by Tamayo were undeveloped and none were within reach of Guayaquil, Puerto Bolívar, or any other seaport. Such areas appealed little to United Fruit, which had its sights set on properties in accessible settings that had been cleared during the cacao boom. That Tamayo’s offer to the company did not extend to these properties, more than four-fifths of which were in the hands of Ecuadorians,¹⁵ revealed that national authorities actively pursuing foreign investment would only go so far, even as the country’s leading export sector was reeling. Since there would be no official intervention in real estate markets on United Fruit’s behalf, the banana sector would never develop in Ecuador as it had earlier in Central America—in enclaves obtained for little or no money by foreign companies.

Denied in Ecuador the opportunities it had seized in countries such as Guatemala and Honduras, United Fruit maintained a presence in the South American nation by signing an agreement with the government in July 1923 to continue preparing for the production and export of tropical fruit.¹⁶ This work went forward at a leisurely pace.

Prolonged Crisis

Had United Fruit moved quickly in Ecuador soon after the investigations and discussions of 1922, Tamayo might have been lauded as one of the country’s greatest leaders: the head-of-state who spearheaded an expeditious and rewarding transition from the cacao era to the banana boom.

By no means was a transition along these lines beyond the realm of possibilities. U.S. imports of bananas, which were much higher after World War I than they had been at the turn of the twentieth century, continued to go up during the 1920s. At the same time, United Fruit and other producers were having difficulties in Central America, as already noted. Ecuador’s currency was losing value; worth forty-four cents in 1920, the sucre was equivalent to twenty-three cents five years later.¹⁷ However, this devaluation improved the country’s competitiveness in international markets, to the benefit of the fruit industry and other sectors with tradable output. In addition, the need to purchase land, rather than receiving real estate free from the government, was not an insurmountable obstacle given that United Fruit would end up buying old cacao farms in the southern costa in 1934—a decade after Tamayo had left office and, more to the point, at a time when the U.S. market for bananas was weak due to the Great Depression.

The chances for what might have been Tamayo’s crowning accomplishment, not to mention a watershed moment in the economic history of Ecuador, were not improved by the waning influence of the venturesome businessmen who had founded United Fruit. Neither Lorenzo Baker (born in 1840) nor Minor Keith (born in 1848) was as active in the company as he once had been, and Andrew Preston (born in 1846) passed away in September 1924. The following month, the same executive who had corresponded with Castillo and had sent Sinners to Ecuador became president of United Fruit, in spite of minimal time spent in the tropics. For the next several years, the firm was run out of its Boston headquarters by Cutter and other men whose understanding of the production end of the business was second-hand for the most part. Their lack of direct experience helps to explain why earnings stagnated and then declined after peaking at 44.6 million dollars in 1920,¹⁸ and why opportunities in Ecuador were passed up when they first presented themselves.

Political tensions, which rendered Ecuador unattractive to investors and worsened as the national economy deteriorated, also undermined Tamayo’s initiative. Tax receipts, which consisted primarily of tariffs on trade, diminished as cacao exports declined. Regardless, public expenditures were not cut significantly.¹⁹ To cover the difference between spending and tax revenues, the government borrowed more from the BCA, which in turn issued more currency. This monetary expansion had the normal result, which was to accelerate inflation. Rising prices, especially for food, helped spark civil unrest, including a general strike in Guayaquil that the military suppressed in November 1922 with more than 300 lives lost.²⁰

Tamayo was able to complete his four-year term. Forgoing the pension that he was entitled to, he returned to Guayaquil, where he was respected enough to win local office in 1940. Tamayo was honored two years later as the port city’s outstanding citizen, thanks to his steadfast public service and his refusal to accept a salary. However, his successor as president, Gonzalo Córdova, fared poorly, holding onto office for less than a year. In July 1925, military officers with strong backing in Quito forced their way to power.²¹ They blamed Ecuador’s economic difficulties on the BCA, which soon went out of business because the government reneged on its debts and confiscated all banks’ metallic reserves.²² After a brief detention, the BCA’s director fled to Chile. Other business leaders and a number of political figures also left Ecuador for a few years during this tumultuous period.

The closure of the BCA left Ecuador with no agency for administering the supply of money, which crippled the financial sector. In 1926, Edwin Kemmerer, an economics professor at Princeton University who previously had advised other Latin American governments on banking and monetary matters,²³ was brought to Quito together with a supporting group of experts. Based on the recommendations of Kemmerer and his colleagues, a central bank was established and the gold standard was adopted in 1927. Warning against expecting quick results from these and other measures, Kemmerer emphasized that they were really the first in a long series of reforms needed to revive the economy of Ecuador,²⁴ which during the 1920s had one of the worst credit ratings in the Western Hemisphere.

In fact, fiscal discipline was not maintained and the gold standard was honored in the breach. Reluctant to cut employment or levels of compensation in the public sector, Ecuador’s new leaders also constructed roads and other infrastructure. Just as had happened in the past, spending consistently ran ahead of tax revenues. One effort to close the fiscal gap involved the appointment of William F. Roddy, who had been a member of Kemmerer’s team, to administer the customs service. Given a mandate to reduce corruption and enhance government revenues, Roddy took his assignment seriously and was largely successful. Not coincidentally, he also became hugely unpopular, especially among importers and exporters, so his tenure was brief.²⁵ Once the meddlesome foreigner had been shown the door, business-as-usual returned in Guayaquil and other ports and tariff collections fell back to customary levels. Old habits of monetary management made a comeback as well, with the central bank printing money not in proportion to its metallic reserves, but rather on the basis of its holdings of government bonds—exactly as the BCA had done before the July 1925 coup d’état. The impact of monetary expansion was the same: ruinous inflation.²⁶

Macroeconomic conditions in Ecuador worsened once the United States and other leading nations tightened monetary policy and raised barriers to trade after the October 1929 crash of the U.S. stock market. The collapse of international commerce brought on by protectionism largely explains why the Great Depression was so long and severe. As happened throughout the world, Ecuadorian exports declined precipitously, from fifteen million dollars in 1928 to a little over four million dollars in 1933, which among other things resulted in a dwindling of metallic reserves in the central bank.²⁷ The country went off the gold standard officially in 1931, by which time currency was being issued with abandon because of chronic fiscal deficits. The ensuing inflation and high unemployment fueled political instability, which manifested itself frequently as angry demonstrations and military takeovers. During the 1930s, the Ecuadorian presidency changed hands fourteen times, never because of an orderly succession from one elected head-of-state to another.

United Fruit Acquires Ecuadorian Real Estate

Even though United Fruit proceeded slowly after Tamayo left office and especially after the 1925 coup, Ecuador’s capacity to supply the United States with bananas was not forgotten. Of particular interest to the company was an old cacao estate named El Tenguel, which took in nearly 45,000 hectares a little north of Machala. Rumors that Sinners might be negotiating on United Fruit’s behalf for the property had reached the U.S. consulate in Guayaquil in December 1924. The company, however, was not yet ready to put money down for farms in Ecuador, so El Tenguel, which had been mortgaged several years earlier, was foreclosed in 1926.²⁸

Three years later, in 1929, a U.S. businessman, Clarence L. Chester, began pursuing an exclusive license to ship Ecuadorian bananas to the United States for the Pacific Fruit Company, which he served as vice president. Chester promised growers higher prices in order to win them away from SAFCO—the Chilean company that had been the leading exporter of bananas harvested in the costa since the early 1900s. However, a bill in the Ecuadorian Congress to grant Pacific Fruit a monopoly on exports to the United States was defeated after the revelation that a legislator who had sponsored the bill was also a member of the firm’s board of directors. Chester left Ecuador for good in 1933, when his employer went out of business.²⁹

Just at this time, the country’s banana sector was beginning to stir, in spite of the Great Depression. The U.S. consul in Guayaquil, Harold B. Quarton, reported in April 1933 that Ecuadorian merchants intended to sell 350,000 stems overseas in 1934—a projected increase of more than 50 percent in just one year. Neither Quarton nor anyone else doubted that millions of stems could be produced annually in the costa, although he was skeptical about the projected increase in exports owing to the region’s poor infrastructure.³⁰

Roads, bridges, and rail lines did not get much better during the next few years, although maritime linkages with North America improved markedly. Grace Steamship Lines, which began transporting Ecuadorian cacao and coffee to New York in 1879, had offered the fastest service to the eastern United States since 1893, when the company’s fleet switched to steam power. Beginning in 1934, all the company’s ships docking in Guayaquil had refrigerated compartments, suitable for carrying bananas.³¹ The response to this development was immediate. Ecuador exported 1,075,756 stems from January through September of 1934, of which nearly three-quarters (745,450 stems) went to New York. These shipments not only exceeded the aforementioned goal of 350,000 exported stems for 1934, but also the 462,054 stems actually sent overseas in 1933.³²

With banana exports going up, United Fruit started at last to invest in western Ecuador. Samuel Zemurray had taken over the company in January 1933 and one of his first acts was to send Francis V. Coleman to the costa with instructions to acquire real estate. Coleman, who had worked in Ecuador more than a decade earlier for the West Indian Oil Company, knew the country well, including the places best suited to banana production for overseas markets. Mindful of the limitations of local infrastructure, he concentrated on properties close to existing railroads. One of the properties United Fruit purchased was El Tenguel. The company also bought the Taura-Vainillo plantation, with an area exceeding 30,000 hectares, and a dozen other holdings.³³