The History of the Sebewaing, Michigan Sugar Factory

One of the men destined to join the ranks of Michigan’s pioneer sugar barons was John C. Liken. He was nearly 70 years old when the idea struck him and already rich beyond the dreams he probably had when he carved barrel staves for a living as an indigent immigrant in New York more than fifty years earlier. By 1900, he operated a big business in a small town that referred to him as the town father because his enterprise created the jobs that brought people to the town.

His annual sales during the years preceding 1900, in modern terms, equated to about $7.5 million. In a combination of enterprises that employed two hundred people, he operated four saw mills primarily engaged in manufacturing barrel staves, many of which he shipped to Germany, two flour mills, a major retail outlet for hardware, dry goods, groceries, and drugs which in 1884 employed nine clerks.

Liken’s enterprises were headquartered in a small town in Michigan’s “thumb”. The town was Sebewaing, a small collection of rustic homes nestled on the east shore of the Saginaw Bay some twenty-five miles northeast of Bay City. Its residents were day laborers who worked at one of Liken’s establishments or on one of the surrounding farms, or fished in the great Saginaw Bay that lapped the shores within walking distance of the town.

Sebewaing borrowed its name from the Chippewa word for crooked creek and some of its wealth from the abundant fishing in the bay. Not long before the 19th century came to a close, nearby forests fell to swift axes, making room for German settlers who quickly set about the twin tasks of removing stumps and planting crops.

Liken, a native of Lower Saxony in northwestern Germany met Wallburga Kunkle, the woman who would become his wife, in Binghamton, New York. She was a native of Bavaria and bore the name of a canonized nun who traveled to Germany from England in 748 to perform good works. St. Wallburga became the patron saint of plagues, famines and a host of other discomforts, including dog bites. John Liken had arrived in Binghamton after working for his passage aboard a sailing vessel.

After the birth of their fourth child, Emma, in 1864, who joined her siblings, Mary, born in 1856, Hannah born in 1858, and Charles, born in 1859, John and Walburga moved the family to Sebewaing, a Lutheran settlement that was attracting fishermen, farmers and timber men. The town’s population upon his arrival in 1865 was insufficient to proclaim it a village, but with the arrival of John Liken, that was about to change. He established a sawmill where he made barrel staves. Later, he would develop retail outlets, a creamery, granaries, and ships, incorporating in one person a source for all the goods and services required by the local farming community. The cream and crops, he placed on boats and shipped some thirty miles along the Saginaw Bay shoreline to Bay City, a bustling and growing city where the daily demand for groceries grew apace with its burgeoning population. In was in this connection, shipping, that he became acquainted with ship owner Captain Benjamin Boutell and it was through Captain Boutell that he would learn about sugar opportunities.

The hamlet grew into a village and the town folk began to think of Liken as the town father. Having brought two daughters and a son into the community, who like their father were all of good form, good health, and good cheer, it wasn’t unexpected that the Likens began to add substantially to the population. Mary took for a husband, Richard Martini and a few years later, Hannah allowed a youthful Christian Bach to turn her head (In later times, Christian adopted his middle name, Fred as his given name of preference. He appears in the Michigan sugar chronicles authored by Daniel Gutleben as C.F. Bach.) Charles and his wife, Elizabeth settled into the community to take up management of his father’s affairs.

John Liken had departed his Oldenburg home at the age of eighteen after completing a four-year apprenticeship in the cooperage trade. He would have known of sugar beets because of that experience and certainly would have been aware that men from his homeland had been enjoying some success with them in Michigan’s Bay County where three factories were then in operation and one more was underway and yet another was under construction in Saginaw.

Altogether, a total of eleven beet factories would soon pour sugar and profits into Michigan towns if one believed the hoopla created by railroads and others who would profit from the construction of factories. The excitement that had been stirring farmers and investors across the state seeped into Sebewaing. Liken saw no need to drum up support by the usual methods, holding town meetings, enlisting editors of local newspapers, hiring bands and front men to call upon the farmers. He was convinced of the need for a beet sugar factory and since a good portion of the local wealth resided in his coffers, he saw no need to persuade others to take up the cause. The Likens possessed sufficient resources to build a factory.

He formed an ad hock committee consisting of his son Charles, Richard Henry Martini, the husband of his daughter Hannah, and daughter Mary’s husband, Christian Fred Bach. All three had held important positions in Liken’s enterprises for many years and all were in their late 30′s, thus steeped in experience. In addition, the three resided next to one another on Center Street in Sebewaing, with Martini at Number 69, Charles next door at 68, and Bach at Number 67, thus the trio could convene at leisure and without formality. Should he and his committee approve the idea, the plan would go forward without the usual sale of stock to community members. It did not require a great amount of research on the part of the committee. They had plenty of arable land at their disposal. The Liken family controlled one thousand acres on their own account that combined with others, eliminated a need for a rail line to convey beets to a factory situated on Lake Huron’s shore. They had the financial capacity.

John C. had been generous. Each of his daughters and his son enjoyed full-time servants in their homes and each was well enough off to invest in the new sugar company on their own account and each had demonstrated managerial ability over a long period of time. They had every attribute needed for success in the new industry save one…experience in sugarbeets. News of the activity in Liken’s headquarters leaked into the community at large and inspired some farmers to plant beets, although a completed factory was nearly two years in the future. Those beets, when ready for market, were shipped to Bay City for processing.

Thinking to add the missing ingredient to an otherwise perfect equation for success, John Liken invited Benjamin Boutell and a few of his trusted friends to join in the endeavor. As a consequence, in a short time Liken learned first-hand, how the camel’s nose under the tent fable came into existence. Boutell, no doubt delighted that his expertise was in greater demand than his money, quickly enlisted men of wealth and experience. Among them was John Ross, who would soon become treasurer of the German-American Sugar Company, the last of four beet sugar factories built in Bay County. Next, came lumbermen Frederick Woodworth, William Smalley and William Penoyar, and a ship owner named William Sharp. When men of the stature of Ben Boutell and Penoyar signaled their interest, the floodgates opened; more men of wealth clamored for a stake in the new company. A pair of Saginaw attorneys Watts S. Humphrey and Thomas Harvey climbed aboard as did George B. Morley, legendary grain dealer and banker. Rasmus Hanson, a wealthy lumberman from Grayling, and future president of the German-American Sugar Company, bought in as did William H. Wallace, a quarry operator in nearby Bay Port.

Unwittingly, Liken in attracting investors from Saginaw and Bay City, brought together two distinct groups which could be described as two separate circles of influence. Boutell’s circle consisted of Bay County investors, Woodworth, Ross, Smalley, Sharp and Penoyar. George Morley’s circle included James MacPherson, Humphrey, Harvey, and William H. Wallace, all Saginaw residents, although Wallace was a native of nearby Port Hope and had been a long term resident of Bay Port, a village snugging the shoreline thirteen miles northeast of Sebewaing. In the wings was Ezra Rust, a wealthy Saginaw resident who had won a fortune in the lumber industry. While all of the Bay County investors had lumber interests, of the Saginaw group only MacPherson had a lumber background. The two circles would take up the sport of in-fighting once the new company got underway.

Representatives of what amounted to three distinct groups, Boutell’s Bay City contingent, Morley’s Saginaw faction, and John Liken’s family, gathered in Watts Humphrey’s Saginaw office in July 1901 to take up the matter of organization. Humphrey’s fame would come not from sugarbeet processing but from the fact that his then 12-year old son, George M. Humphrey, would one day achieve stature as the Secretary of the Treasury under President Dwight D. Eisenhower, serving from 1953 until 1957.

Wasting no time, the organizers had at hand, four representatives of construction firms specializing in building beet processing factories. They were Fuehrman & Hapke, E. H. Dyer, Kilby Manufacturing, and Oxnard Construction. It was expected that as soon as the shares were taken up by the attendees, a contract would be awarded to one of the four bidders. To Benjamin Boutell and his Bay City group, there was only one bid of any interest to them and that was the one from Kilby Manufacturing for $900,000. The price was a hefty $1,500 per ton of beet slicing capability, nearly double the $850 per ton price tag of the Essexville factory and almost $600 more per ton than the price for the German-American Sugar Company factory that was currently under construction. Oxnard’s bid of slightly more than $1,800 per ton (including, as usual, a Steffens process) and Dyer’s next to the lowest bid of $1,416 per ton were beaten out by Fuehrman & Hapke’s winning bid of $1,320 per ton for a total price of $792,000.

The first order of business called for the election of officer and directors, a normally placid affair when the company founders knew one another as well as did the gathering in Humphrey’s office. Representatives of each of the three main shareholder groups secured positions. Bay City lumberman, W. C. Penoyar was given the presidency, while Sebewaing’s Christian Bach took on the vice-presidency, and the Saginaw group saw William Baker and Thomas Harvey took the secretary and treasurer seats. Benjamin Boutell and William Wallace joined the executive committee. At the top of the agenda was the matter of deciding on the winning bid for the factory’s construction, which would be, as usual, a full turnkey operation. That’s when the temporary alliance between Bay City, Huron County, and Saginaw County investors fractured.

Boutell’s crowd, said the low bid made no difference, they would accept none other than the one submitted by Kilby. To the Saginaw group, this was tantamount to drawing a line in the sand. They believed firmly in awarding the contract to the lowest bidder. Accordingly, the Sebewaing-Saginaw representatives who controlled three of the officer positions, ignoring the fact that Boutell and his friends controlled 45 percent of the company and that a member of their faction just secured the presidency, gave the nod to Fuehrman & Hapke. Boutell and company recoiling from the suggestion that anyone except Kilby would build a factory in which they had invested, cancelled their stock subscriptions, resigned their positions and withdrew from the board of directors.

When the dust settled, Boutell and his co-investors were out and the Saginaw contingent held the controlling interest at 55 percent with control divided between the Morley and Rust families. The Rust family headed by Ezra Rust would leave its mark on the City of Saginaw in the form of a city park and a major thoroughfare bearing its name. Ezra’s confidence in the sugar industry may have stemmed from a stint he served as an engineer in a Cuban sugar mill during his youth. Morley held 5,000 shares in his own name, while various members of the Rust family held 4,000 shares. Family members and friends of John Liken held 45 percent.

The sudden withdrawal of Bay City investors necessitated a second election. The presidency went to Thomas Harvey. John Liken’s son-in-law, Christian Bach, retained the vice-president’s post and a seat at the director’s table. Liken’s son, Charles, accepted an appointment as treasurer but did not win a board seat. William F. Schmitt, a minor stockholder and Christian Bach’s sister Emma’s suitor, became secretary. In time and after having been tested by fire, he would prove that his advancement was owed entirely to his skill, not to his relationship to the Bach family. In 1906, he took charge of the Sebewaing factory which he then guided for six years before leaving the company for a senior position with Continental Sugar Company. Directors, in addition to Harvey and Christian Bach, included William H. Wallace, Watts Humphrey, George Morley, James MacPherson, who replaced Benjamin Boutell, and Richard Martini.

The appointed contractor for the factory’s construction, Henry Theodore Julius Fuehrman, normally addressed as Jules, arrived from New York where he had constructed a similar factory at Lyons and before that, Pekin, Illinois. He appeared in September for the groundbreaking ceremony. With him was his partner, Theodore Hapke who won high regard from area farmers of German extraction because of his knowledge of sugarbeets and his ability to explain the subject in the mother tongue.

Fuehrman had been closely involved with the construction of a beet factory in Grand Island, Nebraska, which to his good fortune happened to be in the place after Germany that he called home. He was the only son of Henry and Tulia Fuehrman of Brunswick, Germany. Beginning at the age of fourteen, he served an apprenticeship in the mason’s trade. After deciding to prepare himself for the duties of an architect, he devoted himself to the study of architecture in different polytechnic institutions throughout his native land. When twenty years of age, he entered the Germany Army, serving one year, and in 1882, he emigrated to America where after spending two years in Chicago he settled in Grand Island. There he accepted a number of commissions, including the design of the city hall, a church, a university, and eventually the Oxnard beet sugar factory in Grand Island.

Fuehrman’s success attracted the prestigious architectural firm of Post & McCord, the firm that built the roof over Madison Square Garden and the large iron frames for the skyscrapers that dotted Broadway and Wall Street and in 1931 would construct the world’s tallest skyscraper, the Empire State Building. Post & McCord partnered with the equally prestigious American Bridge Company, thus the Sebewaing factory’s formation was destined to be of solid construction. With William H. Wallace serving on the board of directors, the question of whether the foundation was going to be made of solid stones or the new building material, concrete, was resolved without discussion. The stones came from Wallace’s quarry, thirteen miles distant where they were carved by his expert workmen into squares that conformed to the architect’s specifications. Crushed stone from the same source made roadways for hauling equipment and later, beets to the factory. Already the community was enjoying the fruits of the presence of a sugar factory, improved roads and a richer economy as workers discovered gainful employment on the many work crews needed to fashion a factory that would soon win recognition as one of the largest of its kind in the nation.

Emile Brysselbout, Fuehrman and Hapke’s newest partner, was also on hand. Brysselbout’s credentials included the recently constructed Charlevoix, Michigan sugarbeet factory and he had supervised the construction of the Essexville factory.

The cornerstone was laid on October 21, 1901 but the absence of qualified engineers delayed construction. Experienced construction engineers had become a premium in a nation that suddenly could not have enough beet sugar factories. Twenty-five beet sugar factories were constructed between 1900 and 1905 of which ten were in Michigan. Adding to the difficulties was Fuehrman’s absence. He had departed for Dresden, Ontario to construct a similar factory for Captain James Davidson, a Bay City magnate who had decided to dedicate a portion of his wealth to the beet industry.

By appearances, Davidson’s contract held greater importance for Fuehrman than did Sebewaing’s. William Wallace, noted for always taking a firm hand where one was needed, approached Brysselbout with the insistence that Joseph Eckert be hired. Eckert was a man with a can-do reputation and one who would tolerate no obstacles in the path to his goal. Eckert had just finished an assignment at Mendall Bialy’s West Bay City Sugar Company where he had increased productivity more than one-third.

Gutleben relates that when Eckert arrived in Sebewaing, he found nature busy at the task of reclaiming the site. Weeds and wild flowers occupied the space intended for a factory. The few columns that had been erected on Wallace’s stone foundations were poised as if ready to fall to earth. Worse, there was no gear on hand to correct the steelwork in place or to install the balance of it. Fuehrman promised a steam engine but its delivery would have to wait until the steel erection work in Dresden was finished. It was April. The farmers wanted to know if they should plant a beet crop. “Plant ‘em!” exclaimed Eckert who then placed an order for the delivery of a steam engine to be charged against Fuehrman & Hapke’s account. Wallace backed the credit. Fuehrman’s complexion turned the color of spoiled liver during his next visit; he fired his innovative engineer for insubordination. Wallace accompanied by Brysselbout turned the decision around in a hurried meeting with Fuehrman.

One of the advantages of having Brysselbout and Eckert on staff was their ability to draw men of similar skill. Brysselbout, inspired by Eckert’s enthusiasm and unquestioned role as chief project engineer after Fuehrman’s failed effort to fire him, secured experienced and highly educated operators, men like Hugo Peters, an 1898 graduate of Leipzig University who would become Sebewaing’s first factory superintendent. James Dooley soon followed. He carried a reputation for practical application of scientific principles and a cool head during emergencies. Eckert attracted outstanding engineers such as Eugene Stoeckly and Pete Kinyon, a master at erecting the steal grids that became the frames for the factories. Nearby farmers, long experienced with neighbors William Wallace, “Bill” to all, and John Liken, both hard driving can-do business leaders, had full confidence that a factory would stand in their midst at harvest time, as promised. They set about planting the second sugarbeet crop in Huron County with results that would prove fortuitous for themselves and for the investors.

When the trees began to blaze red and orange and cool dawn breezes dried the morning dew before farmers stepped from their doors, the county’s first sugarbeet crop waited in neat soldiery rows for men, women and even children to approach them. A lifter, a device designed to loosen the beet from earth’s hold, operated by the farmer, would proceed across the field at a walking pace. Harvesters would follow, pulling the beets from the ground then knocking two of them together to loosen soils and then casting them into a pile to await topping. Eventually, automated motor driven machines would perform the task, a task enhanced by pre-topping and then cleaning of the beets via a shaking system and dumped into waiting trucks. But for now, it was brute work.

On October 10, 1902, it was done. The main building sixty-seven by 258 feet and five floors comprising approximately sixty thousand square feet, made of brick and filled with the most modern equipment available to the industry, opened for business. In a town where the average home consisted of fewer than seven hundred square feet of space, it was an awesome presence. It was one of the grandest and largest buildings constructed in the American Midwest up to that time.

It was agreed that only one man in all of Huron County deserved the honor of delivering the first load of beets to the factory, the man whose dream set off the chain of events that led to the magnificent building now standing at the end of the town’s main street. He was John C. Liken. His family had gathered round two months before on August 9, to celebrate his seventieth birthday and now at an age beyond that which men commonly set aside for the cessation of physical labor, he guided a team of four horses drawing a gaily decorated wagon brimming with sugarbeets onto the scales. The Liken family, standing beside the constructors, Bill Wallace and a contingent from Saginaw, applauded the advance of the high-stepping horses and the contented Mr. Liken. Within the week, Hugo Peter conducted an operational test, allowing only water through the factory to test the readiness as well as the harmony of the equipment. After making a few adjustments to correct weaknesses detected during the water test, he ordered the slicing of beets to begin on October 27.

The farmers delivered beets containing 13.23 percent sugar of which they harvested nearly seven tons to the acre. According to Gutleben’s history, the factory yielded more than 91,000 hundredweight of sugar on an extraction rate of seventy-one per cent giving it returns greater than from the West Bay City’s factory, the Essexville factory, the Bay City Sugar Company and certainly Benton Harbor, Kalamazoo, and the first year of operation at the Caro factory. The operational results mirrored those of the Kilby built Alma factory. Financial results, however, were far greater because the 48,250 tons of beets delivered by Sebewaing growers exceeded by two-hundred fifty percent the 19,100 tons delivered by Alma growers for that factory’s first campaign. Sebewaing growers delivered the greatest number of beets delivered to a single factory up until that time, loud evidence of the confidence Huron County farmers placed in Wallace, Liken, and Bach, confidence, as events revealed, that was not misplaced. Estimated profits for Sebewaing’s first year of operation approximated $140,000, 26 percent on sales and providing a 17 percent return on investment.

Soon, two important personages representing the American Sugar Refining Company called on Bill Wallace. They were Henry Niese, head of operations and W. B. Thomas from the company’s treasury department (Thomas would become president of American Sugar Refining on December 20, 1907 following the death of Henry O. Havemeyer earlier that month.). Their mission was to scout candidates for admission to the Sugar Trust. The visit occasioned a significant change in the company’s make-up when Charles B. Warren, a Detroit attorney who represented the interests of the American Sugar Refining Company arrived shortly afterward to offer an investment of $325,000. The company issued an additional thirty-five thousand shares of stock of which he acquired 32,500; other shareholders each increased their stake by approximately 8.3 percent, effectively giving Warren a 50 percent interest in the company with the other half in the hands of the Liken family (24 percent) and Morley’s Saginaw investors (26 percent).

The bloom of youth still graced the cheeks of Charles Beecher Warren when he appeared in Sebewaing like a godsend to drop what would amount to in current dollars nearly seven million dollars in a start-up company managed entirely by local investors. His youth disguised a young man bearing a sound education and a steely resolve to make something of himself. Before his time passed, he would become the US ambassador to two nations (Japan in 1921 and Mexico in 1924), write the regulations for conscription during World War I, head a major law firm and direct the affairs of a number of corporations.

In 1903 when visiting Sebewaing, however, he resembled not so much the power broker and respected lawyer he would become but instead, a pleasant young man with a pocket full of cash. He was fresh from Saginaw where he persuaded the owners of the Carrollton factory to take his cash in exchange for a 60 percent stake in the factory that came into existence when Boutell’s Bay City crowd parted company with the Sebewaing investors. He would, over the course of a few years, dispense more than three and half million dollars in Michigan alone ($60 million in current dollars) while acquiring sugar companies that would immediately report to the New York office of the American Sugar Refining Company-not bad for someone who had been taking rooms in a boarding house situated near Cass Avenue in Detroit in 1900.

His rise to power began six years earlier when he was appointed associate counsel for the US government in hearings before the joint high commission in the Bering Sea controversy with Great Britain. The matter concerned England’s perceived right to harvest seals notwithstanding the United States opinion that extinction would surely follow that practice. By 1900, he was a partner in the law firm of Shaw, Warren, Cady & Oakes a Detroit firm representing a number of banks and manufacturing firms, chief among them the American Sugar Refining Company. A few years hence, he would adopt the title of president of Michigan Sugar Company, a position he would hold for 19 years in addition to the presidency of a sugar company in Iowa and another in Minnesota. During that same time period he returned to the international arena once again where his carefully watched performance won accolades from imminent lawyers in Europe and America. This time, he appeared on behalf of the United States before the Hague tribunal to resolve a dispute between the United States and England concerning North Atlantic fishing rights.

The son of a small town newspaper editor, Robert Warren, he listed Bay City as his birthplace, but because of the nature of his father’s profession, moved from time to time while growing up, always within Michigan. He graduated first from Albion College then attended and graduated from the University of Michigan before attending the Detroit College of Law where he graduated LL.B. At the Detroit College of Law, he studied under Don. M. Dickenson and then joined Dickenson’s firm when he was admitted to the bar in 1893, the year he graduated. A few years later, he joined John C. Shaw and William B Cady in organizing a separate law firm, a firm he would eventually head throughout his career. Early on, displaying an understanding of the value of macro management, he tended to see to the installation of experienced managers and then leave them unmolested as they carried out the day to day requirements of conducting business.

Much as Caro served as a training ground for factory operators, Sebewaing acted as a school for factory managers who were sent throughout America to beet and cane factories owned by American Sugar Refining Company and others. Hugo Peters moved on to Dresden to oversee James Davidson’s operation and then took similar positions in Idaho, Utah, California and even the West Indies. In 1920, Peters turned his attention to spectro-photometric analysis for the US Bureau of Standards, making serious contributions to color analysis. Jim Dooley stayed on as manager at Sebewaing for a few years then headed operations for all of Michigan Sugar Company when it came into existence in 1906. Wilfred Van Duker, Sebewaing’s first chief chemist, dedicated the larger portion of his career to improving cane milling in Hawaii. There, he eventually managed four sugar estates. Richard Henry Martini became General Agricultural Superintendent for Michigan Sugar Company and Henry Pety moved on to Utah for a superintendency before returning to Michigan to manage the Mount Pleasant factory. The Sebewaing factory continued to expand by adding physical structures and equipment in the form of diffusion towers, automated affairs that replaced the older battery operations, evaporators, modern centrifugals, storage bins and other equipment that caused the daily beet slicing capacity to gradually expand from 600 tons per day to more than 5,000 tons per day.

Sources:

Estimated profits for the first year of operation: Records did not survive. The author determined an estimated profit by applying an estimated selling price of $5.12 for each one hundred pounds to the total hundredweight available for sale and then deducted costs estimated at$3.57 per one hundred pounds.

GUTTLEBEN, Daniel, The Sugar Tramp – 1954 p. 182 concerning purchase of sugar factories by the Sugar Trust, p. 177 concerning organization of Sebewaing Sugar and operating results, printed by Bay Cities Duplicating Company, San Francisco, California

MICHIGAN ANNUAL REPORTS, Michigan Archives, Lansing, Michigan:
Sebewaing Sugar 1903, 1904
Sebewaing Lumber, 1901, 1904
Bay Port Fish, 1901

Saginaw Courier Herald, July 11, 1901 – reporting on the meeting of stockholders of the newly formed Sebewaing Sugar Company.

Portrait and biographical album of Huron County:
John C. Liken, Christian F. Bach, Richard Martini

U.S. Census reports for Sebewaing, 1900, 1910

Material Handling Solutions For Budget-Minded Manufacturers

When the industry trade group Robotic Industries Association (RIA) released North American order figures last month, material handling robot applications made an impressive showing, with a 51% gain in units ordered over last year’s numbers. In a press release touting these figures, the president of the association said, “Material handling continues to be the largest application area for robots, so this big jump in the first half of the year is excellent news.”

He went on to note that “material handling robot sales will likely get a further boost when RIA collocates its Automate 2011 trade show (formerly International Robots, Vision & Motion Control Show), with ProMat, a leading trade show for the material handling and logistics industries sponsored by the Material Handling Industry of America”.

There’s a reason why these robotic devices have soared to new heights of demand. That’s because there’s no question that they can make moving inventory down, on or off the assembly line easier, more efficient and less error prone. Unfortunately, they can also be quite expensive. As a result, small and mid-size companies often can’t justify the cost. To their good fortune, a variety of cost-effective alternatives exist.

A consultation with an expert in ergonomic and material handling equipment can help you find the solution that is right for your needs, thereby improving your safety, efficiency and bottom line. What’s more, the wide array of solutions such an expert offers come with a complete range of services included in their purchase price, like:

  • process evaluation and analysis to determine the right equipment
  • engineering and design
  • project management
  • startup assistance and training
  • complete installation and service

So what are some of the material handling options available to budget-minded manufacturers?

  1. Manipulators and ergonomic lifters – These standard and custom lift assist machines come in electrical, self powered mechanical, compressed air and battery powered varieties and can robotically simulate the human arm, hand or wrist. A full range of attachments (standard hooks, electromagnets and core grips, as well as pneumatic clamps or vacuum) make them even more versatile.
  2. Conveyors and systems integration – The proper integration and application of equipment, logic and controls for the specific task can simplify order assembly, distribution sorting and manufacturing line product assembly.
  3. Custom fabrication and design – Choose from among a selection of mild steel, stainless steel, aluminum, cast, sheet metal to structural steel.
  4. Stainless steel equipment – Such equipment can be integrated with process equipment, manipulators and custom grab fixtures, conveyors, carts, work benches, cabinets and casters.
  5. Mezzanine and mezzanine lifts – designed to satisfy your need for additional space by maximizing the use of existing areas. As a result, you can increase your usable floor space without the expense of modifying the building layout or moving into a larger facility.
  6. Hoists and cranes – A material handling expert designs, manufactures, installs and services bridge cranes, jib cranes, monorails and runway systems, offering you a one-stop solution to your overhead material handling requirements.

The Blessings of the Black Economy

Some call it the “unofficial” or “informal” economy, others call it the “grey economy” but the old name fits it best: the “black economy”. In the USA “black” means “profitable, healthy” and this is what the black economy is. Macedonia should count its blessings for having had a black economy so strong and thriving to see it through the transition. If Macedonia had to rely only on its official economy it would have gone bankrupt long ago.

The black economy is made up of two constituent activities:

  • Legal activities that are not reported to the tax authorities and the income from which goes untaxed and unreported. For instance: it is not illegal to clean someone’s house, to feed people or to drive them. It is, however, illegal to hide the income generated by these activities and not to pay tax on it. In most countries of the world, this is a criminal offence, punishable by years in prison.
  • Illegal activities which, needless to say, are also not reported to the state (and, therefore, not taxed).

These two types of activities together are thought to comprise between 15% (USA, Germany) to 60% (Russia) of the economic activity (as measured by the GDP), depending on the country. It would probably be an underestimate to say that 40% of the GDP in Macedonia is “black”. This equals 1.2 billion USD per annum. The money generated by these activities is largely held in foreign exchange outside the banking system or smuggled abroad (even through the local banking system). Experience in other countries shows that circa 15% of the money “floats” in the recipient country and is used to finance consumption. This should translate to 1 billion free floating dollars in the hands of the 2 million citizens of Macedonia. Billions are transferred to the outside world (mostly to finance additional transactions, some of it to be saved in foreign banks away from the long hand of the state). A trickle of money comes back and is “laundered” through the opening of small legal businesses.

These are excellent news for Macedonia. It means that when the macro-economic, geopolitical and (especially) the micro-economic climates will change – billions of USD will flow back to Macedonia. People will bring their money back to open businesses, to support family members and just to consume it. It all depends on the mood and on the atmosphere and on how much these people feel that they can rely on the political stability and rational management. Such enormous flows of capital happened before: in Argentina after the Generals and their corrupt regime were ousted by civilians, in Israel when the peace process started and in Mexico following the signature of NAFTA, to mention but three cases. These reserves can be lured back and transform the economy.

But the black economy has many more important functions.

The black economy is a cash economy. It is liquid and fast. It increases the velocity of money. It injects much needed foreign exchange to the economy and inadvertently increases the effective money supply and the resulting money aggregates. In this sense, it defies the dictates of “we know better” institutions such as the IMF. It fosters economic activity and employs people. It encourages labour mobility and international trade. Black economy, in short, is very positive. With the exception of illegal activities, it does everything that the official economy does – and, usually, more efficiently.

So, what is morally wrong with the black economy? The answer, in brief: it is exploitative. Other parts of the economy, which are not hidden (though would have liked to be), are penalized for their visibility. They pay taxes. Workers in a factory owned by the state or in the government service cannot avoid paying taxes. The money that the state collects from them is invested, for instance, in infrastructure (roads, phones, electricity) or used to pay for public services (education, defence, policing). The operators of the black economy enjoy these services without paying for them, without bearing the costs and worse: while others bear the costs. These encourages them, in theory to use these resources less efficiently.

And all this might be true in a highly efficient, almost ideal market economy. The emphasis is on the word “market”. Unfortunately, we all live in societies which are regulated by bureaucracies which are controlled (in theory, rarely in practice) by politicians. These elites have a tendency to misuse and to abuse resources and to allocate them in an inefficient manner. Even economic theory admits that any dollar left in the hands of the private sector is much more efficiently used than the same dollar in the hands of the most honest and well meaning and well planning civil servant. Governments all over the world distort economic decisions and misallocate scarce economic resources.

Thus, if the goals are to encourage employment and economic growth – the black economy should be welcomed. This is precisely what it does and, by definition, it does so more efficiently than the government. The less tax dollars a government has – the less damage it does. This is an opinion shares by most economists in the world today. Lower tax rates are an admission of this fact and a legalization of parts of the black economy.

The black economy is especially important in times of economic hardships. Countries in transition are a private case of emerging economies which are a private case of developing countries which used to be called (in less politically correct times) “Third World Countries”. They suffer from all manner of acute economic illnesses. They lost their export markets, they are technologically backward, their unemployment skyrockets, their plant and machinery are dilapidated, their infrastructure decrepit and dysfunctional, they are lethally illiquid, they become immoral societies (obligations not honoured, crime flourishes), their trade deficits and budget deficits balloon and they are conditioned to be dependent on handouts and dictates from various international financial institutions and donor countries.

Read this list again: isn’t the black economy a perfect solution until the dust settles?

It enhances exports (and competitiveness through imports), it encourages technology transfers, it employs people, it invests in legitimate businesses (or is practised by them), it adds to the wealth of the nation (black marketeers are big spenders, good consumers and build real estate), it injects liquidity to an otherwise dehydrated market. Mercifully, the black economy is out of the reach of zealous missionaries such as the IMF. It goes its own way, unnoticed, unreported, unbeknownst, untamed. It doesn’t pay attention to money supply targets (it is much bigger than the official money supply figure), or to macroeconomic stability goals. It plods on: doing business and helping the country to survive the double scourges of transition and Western piousness and patronizing. As long as it is there, Macedonia has a real safety net. The government is advised to turn a blind eye to it for it is a blessing in disguise.

There is one sure medicine: eliminate the population and both unemployment and inflation will be eliminated. Without the black economy, the population of Macedonia would not have survived. This lesson must be remembered as the government prepares to crack down on the only sector of the economy which is still alive and kicking.

Operational Recommendations

The implementation of these recommendations and reforms should be obliged to be GRADUAL. The informal economy is an important pressure valve for the release of social pressures, it ameliorates the social costs inherent to the period of transition and it constitutes an important part of the private sector.

As we said in the body of our report, these are the reasons for the existence of an informal economy and they should be obliged to all be tackled:

  • High taxation level (in Macedonia, high payroll taxes)
  • Onerous labour market regulations
  • Red tape and bureaucracy (which often leads to corruption)
  • Complexity and unpredictability of the tax system

Reporting Requirements and Transparency

  • All banks should be obliged to report foreign exchange transactions of more than 10,000 DM (whether in one transaction or cumulatively by the same legal entity). The daily report should be submitted to the Central Bank. In extreme cases, the transactions should be investigated.
  • All the ZPP account numbers of all the firms in Macedonia should be publicly available through the Internet and in printed form.
  • Firms should be obliged by law to make a list of all their bank accounts available to the ZPP, to the courts and to plaintiffs in lawsuits.
  • All citizens should be obliged to file annual, personal tax returns (universal tax returns, like in the USA). This way, discrepancies between personal tax returns and other information can lead to investigations and discoveries of tax evasion and criminal activities.
  • All citizens should be obliged to file bi-annual declarations of personal wealth and assets (including real estate, vehicles, movables, inventory of business owned or controlled by the individual, financial assets, income from all sources, shares in companies, etc.)
  • All retail outlets and places of business should be required to install – over a period of 3 years – cash registers with “fiscal brains”. These are cash registers with an embedded chip. The chips are built to save a trail (detailed list) of all the transactions in the place of business. Tax inspectors can pick the chip at random, download its contents to the tax computers and use it to issue tax assessments. The information thus gathered can also be crossed with and compared to information from other sources (see: “Databases and Information Gathering”). This can be done only after the full implementation of the recommendations in the section titled “Databases and Information Gathering”. I do not regard it as an effective measure. While it increases business costs – it is not likely to prevent cash or otherwise unreported transactions.
  • All taxis should be equipped with taximeters, which include a printer. This should be a licencing condition.
  • Industrial norms (for instance, the amount of sugar needed to manufacture a weight unit of chocolate, or juice) should be revamped. Norms should NOT be determined according to statements provided by the factory – but by a panel of experts. Each norm should be signed by three people, of which at least one is an expert engineer or another expert in the relevant field. Thought should be dedicated to the possibility of employing independent laboratories to determine norms and supervise them.
  • Payments in wholesale markets should be done through a ZPP counter or branch in the wholesale market itself. Release of the goods and exiting the physical location of the wholesale market should be allowed only against presentation of a ZPP payment slip.

Reduction of Cash Transactions

  • Cash transactions are the lifeblood of the informal economy. Their reduction and minimization is absolutely essential in the effort to contain it. One way of doing it is by issuing ZPP payment (debit) cards to businesses, firm and professionals. Use of the payment cards should be mandatory in certain business-to-business transactions.
  • All exchange offices should be obliged to issue receipt for every cash transaction above 100 DM and to report to the Central Bank all transactions above 1000 DM. Suspicious transactions (for instance, transactions which exceed the financial wherewithal of the client involved) should be duly investigated.
  • The government can reduce payroll taxes if the salary is not paid in cash (for instance, by a transfer to the bank account of the employee). The difference between payroll taxes collected on cash salaries and lower payroll taxes collected on noncash salaries – should be recovered by imposing a levy on all cash withdrawals from banks. The banks can withhold the tax and transfer it to the state monthly.
  • Currently, checks issued to account-holders by banks are virtually guaranteed by the issuing banks. This transforms checks into a kind of cash and checks are used as cash in the economy. To prevent this situation, it is recommended that all checks will be payable to the beneficiary only. The account-holder will be obliged to furnish the bank with a monthly list of checks he or she issued and their details (to whom, date, etc.). Checks should be valid for 5 working days only.
  • An obligation can be imposed to oblige businesses to effect payments only through their accounts (from account to account) or using their debit cards. Cash withdrawals should be subject to a withholding tax deducted by the bank. The same withholding tax should be applied to credits given against cash balances or to savings houses (stedilnicas). Alternatively, stedilnicas should also be obliged to deduct, collect and transfer the cash withdrawal withholding tax.
  • In the extreme and if all other measures fail after a reasonable period of time, all foreign trade related payments should be conducted through the Central Bank. But this is really a highly irregular, emergency measure, which I do not recommend at this stage.
  • The interest paid on cash balances and savings accounts in the banks should be increased (starting with bank reserves and deposits in the central bank).
  • The issuance of checkbook should be made easy and convenient. Every branch should issue checkbooks. All the banks and the post office should respect and accept each other’s checks.
  • A Real Time Gross Settlement System should be established to minimize float and facilitate interbank transfers.

Government Tenders

  • Firms competing for government tenders should be obliged to acquire a certificate from the tax authorities that they owe no back-taxes. Otherwise, they should be barred from bidding in government tenders and RFPs (Requests for Proposals).

Databases and Information Gathering

  • Estimating the informal economy should be a priority objective of the Bureau of Statistics, which should devote considerable resources to this effort. In doing so, the Bureau of Statistics should coordinate closely with a wide variety of relevant ministries and committees that oversee various sectors of the economy.
  • All registrars should be computerized: land, real estate, motor vehicles, share ownership, companies registration, tax filings, import and export related documentation (customs), VAT, permits and licences, records of flights abroad, ownership of mobile phones and so on. The tax authorities and the Public Revenue Office (PRO) should have unrestricted access to ALL the registers of all the registrars. Thus, they should be able to find tax evasion easily (ask for sources of wealth- how did you build this house and buy a new car if you are earning 500 DM monthly according to your tax return?)
  • The PRO should have complete access to the computers of the ZPP and to all its computerized and non-computerized records.
  • The computer system should constantly compare VAT records and records and statements related to other taxes in order to find discrepancies between them.
  • Gradually, submissions of financial statements, tax returns and wealth declarations should be computerized and done even on a monthly basis (for instance, VAT statements).
  • A system of informants and informant rewards should be established, including anonymous phone calls. Up to 10% of the intake or seizure value related to the information provided by the informant should go to the informant.

Law Enforcement

  • Tax inspectors and customs officials should receive police powers and much higher salaries (including a percentage of tax revenues). The salaries of all tax inspectors – regardless of their original place of employment – should be equalized (of course, taking into consideration tenure, education, rank, etc.).
  • Judges should be trained and educated in matters pertaining to the informal economy. Special courts for taxes, for instance, are a good idea (see recommendation below). Judges have to be trained in tax laws and the state tax authorities should provide BINDING opinions to entrepreneurs, businessmen and investors regarding the tax implications of their decisions and actions.
  • It is recommended to assign tax inspectors to the public prosecutors’ office to work as teams on complex or big cases.
  • To establish an independent Financial and Tax Police with representatives from all relevant ministries but under the exclusive jurisdiction of the PRO. The remit of this Police should include all matters financial (including foreign exchange transactions, property and real estate transactions, payroll issues, etc.)
  • Hiring and firing procedures in all the branches of the tax administration should be simplified. The number of administrative posts should be reduced and the number of tax inspectors and field agents increased.
  • Tax arrears and especially the interest accruing thereof should be the first priority of the ZPP, before all other payments.
  • All manufacturers and sellers of food products (including soft drinks, sweetmeats and candy, meat products, snacks) should purchase a licence from the state and be subjected to periodic and rigorous inspections.
  • All contracts between firms should be registered in the courts and stamped to become valid. Contracts thus evidenced should be accompanied by the registration documents (registrar extract) of the contracting parties. Many “firms” doing business in Macedonia are not even legally registered.

Reforms and Amnesty

  • A special inter-ministerial committee with MINISTER-MEMBERS and headed by the PM should be established. Its roles: to reduce bureaucracy, to suggest appropriate new legislation and to investigate corruption.
  • Bureaucracy should be pared down drastically. The more permits, licences, tolls, fees and documents needed – the more corruption. Less power to state officials means less corruption. The One Stop Shop concept should be implemented everywhere.
  • A general amnesty should be declared. Citizens declaring their illegal wealth should be pardoned BY LAW and either not taxed or taxed at a low rate once and forever on the hitherto undeclared wealth.

The Tax Code

  • To impose a VAT system. VAT is one the best instruments against the informal economy because it tracks the production process throughout a chain of value added suppliers and manufacturers.
  • The Tax code needs to be simplified. Emphasis should be placed on VAT, consumption taxes, customs and excise taxes, fees and duties. To restore progressivity, the government should directly compensate the poor for the excess relative burden.
  • After revising the tax code in a major way, the government should declare a moratorium on any further changes for at least four years.
  • The self-employed and people whose main employment is directorship in companies should be given the choice between paying a fixed % of the market value of their assets (including financial assets) or income tax.
  • All property rental contracts should be registered with the courts. Lack of registration in the courts and payment of a stamp tax should render the contract invalid. The courts should be allowed to evidence and stamp a contract only after it carries the stamp of the Public Revenue Office (PRO). The PRO should register the contract and issue an immediate tax assessment. Contracts, which are for less than 75% of the market prices, should be subject to tax assessment at market prices. Market prices should be determined as the moving average of the last 100 rental contracts from the same region registered by the PRO.
  • Filing of tax returns – including for the self-employed – should be only with the PRO and not with any other body (such as the ZPP).

Legal Issues

  • The burden of proof in tax court cases should shift from the tax authorities to the person or firm assessed.
  • Special tax courts should be established within the existing courts. They should be staffed by specifically trained judges. Their decisions should be appealed to the Supreme Court. They should render their decisions within 180 days. All other juridical and appeal instances should be cancelled – except for an appeal instance within the PRO. Thus, the process of tax collection should be greatly simplified. A tax assessment should be issued by the tax authorities, appealed internally (within the PRO), taken to a tax court session (by a plaintiff) and, finally, appealed to the Supreme Court (in very rare cases).
  • The law should allow for greater fines, prison terms and for the speedier and longer closure of delinquent businesses.
  • Seizure and sale procedures should be specified in all the tax laws and not merely by way of reference to the Income Tax Law. Enforcement provisions should be incorporated in all the tax laws.
  • To amend the Law on Tax Administration, the Law on Personal Income Tax and the Law on Profits Tax as per the recommendations of the IRS experts (1997-9).

Customs and Duties

  • Ideally, the customs service should be put under foreign contract managers. If this is politically too sensitive, the customs personnel should be entitled to receive a percentage of customs and duties revenues, on a departmental incentive basis. In any case, the customs should be subjected to outside inspection by expert inspectors who should be rewarded with a percentage of the corruption and lost revenues that they expose.
  • In the case of imports or payments abroad, invoices, which include a price of more than 5% above the list price of a product, should be rejected and assessment for the purposes of paying customs duties and other taxes should be issued at the list price.
  • In the case of exports or payments from abroad, invoices which include a discount of more than 25% on the list price of a product should be rejected and assessment for the purposes of paying customs duties and other taxes should be issued at the list price.
  • The numbers of tax inspectors should be substantially increased and their pay considerably enhanced. A departmental incentive system should be instituted involving a percentage of the intake (monetary fines levied, goods confiscated, etc.)
  • The computerized database system (see “Databases and Information Gathering”) should be used to compare imports of raw materials for the purposes of re-export and actual exports (using invoices and customs declarations). Where there are disparities and discrepancies, severe and immediate penal actions should be taken. Anti-dumping levies and measures, fines and criminal charges should be adopted against exporters colluding with importers in hiding imported goods or reducing their value.
  • Often final products are imported and declared to the customs as raw materials (to minimize customs duties paid). Later these raw materials are either sold outright in the domestic or international markets or bartered for finished products (for example: paints and lacquers against furniture or sugar against chocolate). This should be a major focus of the fight against the informal economy. I follow with an analysis of two products, which are often abused in this manner.
  • I study two examples (white sugar and cooking oil) though virtually all raw materials and foods are subject to the aforementioned abuse.
  • White Sugar is often imported as brown sugar. One way to prevent this is to place sugar on the list of LB (import licence required) list, to limit the effective period of each licence issued, to connect each transaction of imported brown sugar to a transaction of export, to apply the world price of sugar to customs duties, to demand payment of customs duties in the first customs terminal, to demand a forwarder’s as well as an importer’s guarantee and to require a certificate of origin. The same goes for Cooking Oil (which – when it is imported packaged – is often declared as some other goods).
  • All payments to the customs should be made only through the ZPP. Customs and tax inspectors should inspect these receipts periodically.
  • All goods should be kept in the customs terminal until full payment of the customs duties, as evidenced by a ZPP receipt, is effected.

Public Campaign

  • The government should embark on a massive Public Relations and Information campaign. The citizens should be made to understand what is a budget, how the taxes are collected, how they are used. They should begin to view tax evaders as criminals. “He who does not pay his taxes – is stealing from you and from your children”, “Why should YOU pay for HIM?” “If we all did not pay taxes- there would be no roads, bridges, schools, or hospitals” (using video to show disappearing roads, bridges, suffering patients and students without classes), “Our country is a partnership – and the tax-evader is stealing from the till (kasa)” and so on.
  • The phrase “Gray Economy” should be replaced by the more accurate phrases “Black Economy” or “Criminal Economy”.