Guano
Boom-and-bust Life Cycle of a Critical Resource
Guano is the more “official” name for bird excrement and some types of bat excrement. The guano boom and bust cycle is endemic to many resources. During the guano boom in the 1800s, new islands in the Pacific and Caribbean were explored and claimed due to this resource. It drove the expansion of the American, British, and French Empires and often brought them into conflict with each other or local nations.
The history of guano is instructive when looking at the life cycle of a typical limited natural resource. This boom-and-bust cycle is representative of other early economic resources like whale oil, beaver skins, ostrich feathers, rubber trees, and more.
In summary, the typical lifecycle of these types of resources is:
A resource is “discovered” and creates a new demand.
That resource is exploited until the original deposits are depleted.
New geographic discoveries find more of the resource.
New resource sources are exploited, but usually, costs rise as the deposits are more complex to profit from.
The lifecycle ends when the resource is depleted, goes out of fashion, or a better system is devised to exploit the economic niche.
Guano
Guano is bird poop (for now, let’s ignore bat guano). In the right geographic conditions, guano deposits form, which are extremely rich in nitrogen and available phosphate. As a resource, indigenous people first used it in Peru for at least 1500 years before the Spanish colonized that part of South America. The name “guano” is a bastardized version of the indigenous Quechua word “wanu.” It was used to refer to any fertilizer from excrement, but the meaning transitioned to “bird excrement” over time.
How Guano was Exploited before 1813
Indigenous people in the Andes had used guano for centuries as a fertilizer. When the Spanish arrived, the Incas already knew the value of guano. The Incas had laws about the ownership and availability of guano and strict rules against disturbing the birds that created it. It was exported back to Spain but was not valued compared to gold and silver. Europe knew animal excrement could be used as a fertilizer, but its value was limited. This is because bird guano in Europe was deposited in rainy and humid areas and was therefore leached of nutrients. On the other hand, bird guano from Peru was highly concentrated. The water had been blasted away in the desert heat, and the concentrated result was uniquely helpful for agriculture.
In 1813, a Prussian (German) geographer and explorer, Alexander von Humboldt, began investigating Peru's guano. He discovered (in the “West”) that this guano was the best source of fertilizer available, just as the agricultural revolution was starting. He wrote a book titled “Elements of Agricultural Chemistry” which described using guano as a highly concentrated nitrogen fertilizer. With this, the use of guano skyrocketed.
The Guano Rush
In 1840, a Peruvian businessman negotiated the export of Peruvian guano to Europe. Guano was a national resource, so payments were made to the Peruvian government. An interesting side note is that Peru used some of this money to free 25,000 black slaves and to abolish a head tax for indigenous people.
The demand for guano created a gold rush effect to find more. A secondary massive site was found off the coast of southwest Africa (now the nation of Namibia), on Ichaboe Island. Ichaboe Island attracted extractors of all types – private and national – until the British gained complete control of the island in 1861. Ichaboe Island became the geographic template for what kind of area held the best guano deposits. The best resources were on islands with a vast population of birds, little or no previous human activity, and dry conditions.
The International Competition for Resources
In the mid-1800s, there were still many areas that had not been explored by colonialists, which were not or very lightly populated. Small and remote islands had been charted and ignored during the great age of discovery. These islands were possible sources of guano and, therefore, areas of conflicting national or economic interests.
America joined the race for guano resources and passed the Guano Islands Act in 1856. This act allowed Americans to claim any island “unoccupied and outside the jurisdiction of any other government.” This last condition was the cause of many problems when other nations had claims to an island but had no physical presence on it.
The Guano Islands Act resulted in at least 34 American claims on islands in the Pacific, Caribbean, and Indian oceans. Through discussions, treaties, and independence, only 8 of these are still left as US possessions unaffiliated with a state or organized territory (which includes American Samoa). Most other unique islands have been organized into new nations like Kiribati, Tuvalu, and Tokelau.
The United States was not alone in trying to grab islands for their guano deposits. Other nations included the British Empire, Germany, France, Mexico, Australia, and Hawaii. Demand for guano amplified the exploration of the South Pacific.
These claims and counter-claims for islands were made for access to guano deposits. The exploitation of the resource with no investment into the economy, even on islands with an indigenous population, transferred economic benefits to the colonizing power.
Boom to Bust
The guano boom turned into a bust in the early 1900s. One hundred years after a German scientist popularized guano as a fertilizer, another German chemist, Fritz Haber, created a process to synthesize ammonia from nitrogen in the air. This led to a more abundant and cheaper method to fertilize crops, and the guano industry crashed.
The islands that depended on guano production for economic output suffered severe downturns. In the early 1900s, mass tourism was not yet widespread, and the island economies were abandoned. Until the advent of jet aircraft and long-haul flights, most of these islands were nearly inaccessible with the end of shipping guano. Even today, most of these islands are not destinations; people rarely want to vacation on an island made of bird poop.
The reapplication of guano as a fertilizer might start a new, albeit smaller, boom. It is more expensive than artificial means, but a movement towards “natural” and “organic” foods in the rich world has mandated a change to a natural fertilizer.
What Guano tells us about Boom-And-Bust cycles
The life cycle of guano production tells us a lot about the mechanics of boom-and-bust cycles, particularly in the natural and limited resources sector.
Specifically
1) A “boom” begins with discovering a new resource or a resource that has suddenly become useful. This includes guano and other resources with a short life cycle of usefulness, like whale oil, herring, Dodo birds, giant tortoises, or natural rubber trees.
2a) Exploitation of the resource continues until that exploitation has depleted, like Dodos or whale oil.
2b) Exploitation of the resource continues until a better or cheaper solution is found in cases like guano, natural rubber trees, or beaver pelts. This is what occurred with rare earth minerals since 2000. The United States stopped producing these minerals once China brought them to market at a much lower price.
3) Once the natural product is no longer needed or available, the workers and the companies leave the business or watch their incomes collapse.
This life cycle can also explain the decision processes made by producers and how those producers get into the position.
People often wonder how resource producers can make decisions not in the company’s long-term interest, like over-reliance on one product or location. The decisions may look mistaken in retrospect but usually are best business practices in the short term.
An example the decision tree
Assume Company A – we will call it World Wide Guano (WWG) – has been created to mine guano on Quintin Island (we assume here a time when guano still commanded very high prices). WWG has been given 1 of 4 grants to mine on Quintin Island. The logical business decision here is to hire as many laborers as possible and to get as much guano to market as quickly as possible. A competitor will take advantage of the situation if WWG doesn’t exploit this as much as possible. This would mean less profit for WWG or less investment in the company of WWG. Looked at in retrospect, economic drivers will reward the over development of a limited resource. If Hudson Bay Company didn’t capture all the beavers it could, French hunters did. (footnote – Interestingly, to me, beavers were saved from the brink of extinction due to a change in tastes. The biggest market for beaver pelts hat making. Once readily available and stylish silk hats came into vogue, the beaver pelt market crashed.)
Busts that are not due to resource limitations
The same dynamic of economically understandable overinvestment can be applied to multiple market busts. Take the example of tech stocks in the late 1980s. Companies as diverse as giant internet providers (like UUNet or PSI Net), commerce providers (Toys.com), and local delivery companies (Pink Elephant in the Hollywood Hills) expanded rapidly as money poured into the “tech” field. If companies didn’t pour large investment funds from investors into expansion, they were considered poorly run or stuck in the past, and liquidity dried up. If they used those funds and expanded too rapidly (as all of the previously named companies did), they crashed when the liquidity dried up.
The investment decisions that made perfect economic sense at the time, but look short-sided now.
Is there a moral to all of this? Yes, two conflicting morals. The first is to exploit resources as quickly as possible to avoid being left out. This will maximize profits. If the sector prospers in the long term, then the first-movers will have the advantage.
The second is to moderate the exploitation of the resource if you have a monopoly or are part of an oligarchy in the sector. This will facilitate more profits by artificially controlling the access or distribution of the resource. Examples of a monopoly is the raw diamond industry in South Africa which is run by De Beers. The example of an oligarchy is the oil industry through OPEC, which manages pricing by managing availability.
If you rewatch “The Big Short” now, you will see this boom-bust process in action with regards to the housing crash of 2008.
As for the Pacific Islands, here is the new map and the Exclusive Economic Zones, which were redone after the bust in the guano trade.
