Instant coffee was invented in 1901 by a Japanese-American chemist, Satori Kato of Chicago. (Or alternatively, by an English chemist living in Guatemala--sources differ.) It became popular during World War I when it was shipped overseas to American soldiers, but it was not marketed commercially until 1938, when Nescafe was first perpetrated upon the coffee-drinking public.

Instant coffee is made by first preparing a coffee concentrate from ground coffee beans, just as when making regular coffee. If decaffeinated coffee is being made, the caffeine is removed before making the concentrate, again like your normal average decaf coffee.

The next stage of the instant coffee process is removing the water from the coffee concentrate, which can be done in two ways:

Spray Drying
In this process, the coffee concentrate is sprayed (or atomized) into a kind of wind tunnel through which hot air is blown. The stream of hot air makes a cyclone effect, spinning the drops of liquid. Centrifugal force causes the dry particles to separate from the wet air in the wind tunnel.
This is the same process used to make powdered milk.

Freeze Drying
Also known as lyophilization, freeze drying consists of three stages: freezing, primary drying, and secondary drying. Basically, this means that first, they freeze the coffee (it may be supercooled) until it is solid. Then, they lower the pressure in the freezing chamber until the liquid begins to sublimate. The resulting water is collected by a condenser. In the final stage, the "temperature is increased to desorb bound water, such as water of crystallization, until the residual water content falls to the range required for optimum product stability." Or in plain English, they slowly raise the temperature to let out any water that was stuck in the middle somewhere. This final stage takes place in a near vacuum.

Both of these dehydrating processes tend to strip the coffee of "coffee essences", so these are returned to the product after processing. The freeze drying process doesn't remove as much of the "essences", so it has been the most commonly used process since its invention in the 1960s.

Sources
http://www.geocities.com/chemforum/SprayDrying.htm
http://www.ico.org/ways2.htm (International Coffee Organization)
http://www.virtis.com/pages/freez101.html
http://pages.ivillage.com/joruss/instant.html

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