The sugar price peaked in late May at 221/2 cents , at which point the liquid funds available could no longer sustain the advance . The price receded to 171/2 cents by the end of June and 151/4 cents by the end of July . Such prices were still a boon to those producers who hadn ’ t borrowed heavily during the run-up , but the feverish bout of bank lending already undertaken made such producers scarce . Jenks acknowledged that , “ It was an unambitious [ planter ] who did not incur fresh indebtedness upon advances made to enable him to plant a larger acreage of cane .”
The downdraft accelerated as participants realized they were over-committed . By the end of August , the price had dropped to 11 cents per pound and by mid-September it was eight cents per pound . These prices were well above wartime levels , but many of the loans in the system were predicated on the continuation of the higher prices of spring 1920 . One estimate put the total of loans made assuming a sugar price of 15 – 20 cents per pound at $ 80 million .
The big financial problem created by this break in spot prices was therefore squarely focused on the Cuban banks . Their borrowers were not liquid , and the break in prices caused the transactions that fueled their working capital to freeze up as buyers often wanted to re-negotiate price or refused delivery .
The banking failures began with sugar prices still well above the prosperous wartime levels . On October 6 , Banco Mercantil Americano gave its depositors four hours ’ warning before closing its doors . On October 8 , Banco Internacional closed . President Menocal declared a banking moratorium on October 11 , but everyone understood this to be a temporary measure .
The Cuban banking system was frozen , but sugar prices continued their descent . The underlying problems could not help but get worse by the day , whether the banks were open for business or not . An American emissary , General Enoch H . Crowder , arrived in January , and he began to hear from American banking representatives . ( Credit conditions in the United States were also tight , for similar deflationary reasons .) A plan was approved to allow depositors to make partial withdrawals : 10 % in February , 15 % in March , 20 % in April , etc .
It was a hopeless situation for many Cuban banks . On March 28 , “ Pote ” was
Banco Nacional de Cuba
found hanged at his mansion in an apparent suicide ; 10 days later , the bank he controlled , Banco Nacional , Cuba ’ s flagship bank , closed . Banco Nacional ’ s balance sheet touted some $ 81 million in assets of which at least one-fourth were deemed worthless , less than $ 2 million in cash and some $ 68 million in liabilities . A few weeks later , leading sugar speculator and Banco Nacional client Jose Lezama fled the country along with Banco Nacional ’ s flamboyant president , W . A . Merchant , leaving behind some $ 25 million in borrowings from the bank .
The price of sugar continued to spiral downward . It was four cents per pound in December 1920 and would spend most of 1921 between two and four cents . Sugar production remained at boom-time levels , but pricing was such that total revenue for the Cuban sugar industry in 1921 was back to 1915 levels . A total of some 18 Cuban banks failed in the first half of 1921 , listing between them some $ 130 million in debts .
National City and Royal Bank of Canada soldiered on . “ When the Cuban banks … were quite generally failing ,” wrote Chapman , “ two great institutions , the National City Bank of New York and the Royal Bank of Canada , met every obligation .” National City found it necessary to foreclose on some 60 sugar mills in 1921 , and this — combined with the shuttering of so many Cuban banks — resulted in scathing newspaper editorials criticizing what they saw as the exploitative behavior of these “ foreign ” banks .
National City headquarters was no more pleased with their “ exploitative ” experience in Cuba than were the Cuban editorialists . Holding these assets on the National City balance sheet exposed the reckless nature of its Cuban operations . The company ’ s official history labeled their Cuban foray “ imprudent to the point
of folly .” The bank ’ s president resigned .
Sugar prices generally stabilized before declining to less than three cents per pound later in the decade , and as they did , National City ’ s sugar mills had trouble showing a profit of any sort . The American stock market , however , began a powerful upswing shortly after the Cuban debacle . The bull market in stocks permitted National City to issue some $ 25 million in new common shares in 1927 . With some of the proceeds , National City ’ s securities affiliate quietly purchased those Cuban sugar mills from the bank , thereby removing these very visible “ slow loans ” from the bank ’ s balance sheet and saddling the securities affiliate with them , a distinction without a difference to National City shareholders .
These sugar mills became even less profitable in the 1930s with the widespread collapse in all commodity prices . Sugar declined to less than one cent per pound in 1932 , and National City ’ s mills spilled a good deal of red ink . It was not until 1945 that National City found a buyer for those mills ; with the sale , their 25-year Cuban nightmare drew to a quiet close .
Cuba ’ s commercial spirit never really recovered from this boom-and-bust experience . British historian and Cuba scholar Hugh Thomas wrote years later that Cuban “ society had been built upon the dream of maximum production . Hence the origin of a whole series of fantasies which Fidel Castro , Cuba ’ s first international political figure , would satisfy .”
Daniel C . Munson enjoys reading and writing financial and technical history . He is the author of the new book , Fiscal Follies : A Little Fun with Economics ( and Economists ).
Sources Carret , Philip L . The Art of Speculation . New
York : Barron ’ s . 1930 .
Chapman , Charles E . A History of the Cuban Republic . New York : The Macmillan Company . 1927 .
Grant , James . Money of the Mind . New York : Farrar Straus Giroux . 1992 .
Jenks , Leland H . Our Cuban Colony : A Study in Sugar . New York : Hamilton Books . 1928 .
Thomas , Hugh . Cuba : The Pursuit of Freedom . New York : Harper & Row . 1971 .
Welldon , Samuel A . The First National Bank of the City of New York , 1863 – 1935 . ( manuscript )
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