Papers Relating to the Foreign Relations of the United States, With the Address of the President to Congress December 2, 1913

File No. 814.51/199.

The Secretary of State to the American Chargé d’Affaires at London.

No. 1828.]

Department of State,
Washington, January 7, 1913.

Sir: With reference to the Department’s instruction of December 6, 1912,¹ on the subject of the Guatemalan debt, you are now informed that a note from the British Embassy, dated December 30, 1912,² and purporting to reply to the Department’s memorandum of December 3, 1912,³ has now been received. A copy thereof, together with the Department’s reply, is enclosed herewith for your information. Two copies of the Unified Loan Agreement arranged between the American bankers and the Government of Guatemala are also enclosed,⁴ one for the files of the Embassy and one for communication to the Foreign Office. The Department is also enclosing extracts from a letter addressed by Mr. Frederick Strauss, of Messrs. J. and W. Seligman and Company, to Mr. Cooper, of the Council of Foreign Bondholders, on December 26, 1912, which shows clearly the character of the proposed loan agreement and the consideration of the bankers for the bondholders in not wishing to have the agreement signed until after the Council shall have recommended it to the bondholders, nor ratified by the Congress of Guatemala until after having been favorably voted upon by the bondholders themselves.

The British Embassy’s note of December 30th is most surprising to this Government. As has been pointed out orally to Mr. Mitchell Innes of the British Embassy, the attitude of Great Britain in demanding one and only one solution of the difficulty, especially when the solution is one likely to block the development of a well-recognized policy of the United States in a sphere in which this Government is preeminently interested, would not appear consistent with even an ordinary regard for the broad interests and policies of the United States.

Considering, moreover, the special circumstances of the case, it is the judgment of the Department that in all probability the arrangement submitted by the bankers would secure to the bondholders better returns upon their money than any other measure which the Government of Guatemala could be induced to accept. You will note upon study of the Unified Loan Agreement, that, as pointed out in the Department’s instruction of December 6th, it provides for the collection of the customs by an agency to be appointed by the bankers and through a system of certificates which are issuable only by the customs agency, thus assuring the direct payment to the agency of all the revenues derived from the export duty on coffee and from all the import duties payable in gold. Your attention is also directed to articles 7 and 14 of the agreement. The Department believes that the loan contemplated by this agreement will be sufficiently well secured to relieve the bondholders of any fears such as they have felt in the past for the payment of the interest and principal of the loan. Arbitration, on the other hand, could have at best only results of doubtful value. Even should it result in the restitution of the coffee revenues there would be no guaranty that what has occurred in the past would not recur in the future, namely, that the export tax on coffee might be reduced or the revenues diverted to other uses. And the delay incident to such an arbitration and the fulfilment of an arbitral award should also be contrasted with the present proposal to give the British bondholders new four-per-cent bonds in exchange, bond for bond, for their present four-per-cent bonds. The new bonds should pay regular interest and be redeemed at par through the operation of the sinking fund. This offer, as stated in Mr. Strauss’ letter to Mr. Cooper, is considerably more favorable to the bondholders than the offer first contemplated by President Cabrera, viz: five-per-cent bonds to the amount of seventy-five per cent of their present holdings, instead of bond for bond.

Emphasis should be laid upon the fact that although the new loan will be not quite four times so large as the present British loan, the security behind it will be four times as great, and that by accepting the loan agreement the British bondholders will enter upon the enjoyment as security not only of the very coffee revenues the specific restitution of which the Foreign Office demands, but also of various other additional revenues.

The Department has stated orally to Mr. Mitchell Innes that it could not accede to the request of Great Britain that it should support the British demand for arbitration or for specific performance in restoring the coffee revenues. The British Embassy appears to be laboring under the misapprehension that this Government had already promised such support. What it actually agreed to in September, when asking a delay of twenty days in which Guatemala might negotiate through American bankers a satisfactory arrangement for financial rehabilitation that should include provision for an equitable settlement of just British and other claims, was informally to urge the British Government to desist from pressing its demand for arbitration for the period, and that at the expiration of that period “this Government in the present circumstances will regret to find itself absolutely unwilling further to intervene in the matter.”¹ Although Guatemala did not succeed in concluding such negotiations within the specified time, it now appears to have done so in a manner regardful of all equitable and just British pretensions while calculated to further the fulfilment of that broad policy of financial rehabilitation in Central America in which this Government has such a deep interest.

Thus the circumstances materially changed, and the turn of events for which this Government had hoped appears to have occurred. The Government of the United States, therefore, is greatly interested in seeing the loan agreement, which contemplates also the placing of Guatemala’s currency upon a gold basis, become an accomplished fact and it believes that if the British bondholders will promptly accept the Unified Loan Agreement, the Government of Guatemala will adopt it.

The Department desires you to seek an early interview with Sir Edward Grey to urge him to study carefully the Unified Loan Agreement, a copy of which you will hand him and with which he should already be familiar through consultation with Mr. Cooper, and to consider the question upon a broad basis of international policy. You will point out to him the fact that the Department considers that Great Britain should now show a fuller appreciation of this Government’s deep and predominant interest in the region of the Caribbean; that it is most desirous of seeing this financial plan accomplished; that it believes the agreement offers the bondholders immediately adequate security upon a basis more satisfactory than any they could probably obtain after extended delays; that this Government only agreed to support the British demands in case this agreement should fail of adoption in Guatemala after having been accepted by the bondholders; and that in view of all these circumstances this Government earnestly hopes that the Foreign Office will recommend to the Council of Foreign Bondholders the acceptance of the Unified Loan Agreement. In short, you will not conceal from the Secretary of State for Foreign Affairs the fact that the Government of the United States feels very earnestly in this matter and expects the British Government to consider it from a broader and friendlier viewpoint than appears to have been the case hitherto, when doubtless the importance attached to the subject had not been clearly understood. In the course of your conversation it will doubtless occur to you to give point to the attitude of this Government by the discreet suggestion that the British Government would doubtless be amazed if in some country correspondingly within a sphere of special British interest the Government of the United States should press arbitrarily for a specific solution of a question involving American citizens without any regard for the broad interests and policies of the State, in such a case Great Britain, in whose sphere of special interest the controversy had arisen. The argument indicated is hardly answerable, especially when it is borne in mind that in the case of the rights of the British bondholders the proposed arrangement offers them an alternative consideration quite as advantageous if not, indeed, more advantageous than would be obtained in the opinion of this Department by the specific solution for which the British Government presses to the great inconvenience of the interests of the United States.

You will add, should Sir Edward Grey not respond favorably, that this Government has already been much surprised at the apparent failure of the Foreign Office even to consider the loan agreement as outlined in the Department’s memorandum of December 3rd, and that in view of its failure to do so, this Government feels obliged to decline to support the demand of the British Government for the arbitration of the matter.

I am [etc.]

P. C. Knox.

[Inclosure—Extract.]

Mr. Frederick Strauss to the Secretary of the Council of Foreign Bondholders

December 26, 1912.

Dear Mr. Cooper: Herewith I enclose a copy of Unified Loan Agreement between the Republic of Guatemala and Speyer and Company and J. and W. Seligman and Company. This agreement has been under negotiation for some weeks and is now, I believe, in satisfactory shape. We are informed that the President of Guatemala is in a mood to sign this agreement without undue delay and to recommend its ratification by Congress. If our information is correct, this is a condition of affairs that should not be permitted to go by.

Permit me to point out that the revenues pledged under the agreement in question will be collected by an American Customs Agency. And that the bonds proposed to be issued will thus bear a character giving them greater value, both intrinsically and marketwise, than could be hoped for under any other form of collection. It is proposed to give to the English bondholders an amount in new 4% bonds equal to the principal of the existing bonds. Former agreements contemplated less than the par value in 5% bonds; the change to par in 4% bonds was at my urgent request, in order to meet the intimation you gave me while in New York that you would not look with favor on a settlement that reduced the par value of existing bonds. You will see that I have succeeded in getting what you prefer. You will observe in the schedule attached to the agreement a statement of the revenues pledged. These revenues are pledged not only for the 4% bonds to be given to the English bondholders, but also for the 5% bonds to be issued as soon as practicable; the proceeds of the 5% bonds are to be used for the reform of Guatemalan currency, for furnishing cash to Guatemala and for the settlement of its debts. The revenues are, you will notice, ample, amounting for 1912 to twice the service of the loan on bonds presently to be issued, without taking account of the increased coffee duty, raised on September 18, 1912, from $1 to $1.50 gold per quintal of cleaned coffee and from $0.80 to $1.20 gold for uncleaned coffee.

I further direct your attention to the concluding paragraph of article 14, authorizing the Customs Agency “to invoke and obtain from the national Government of the bankers such further protection and aid as circumstances may render requisite.”

A copy of this agreement will no doubt in due course reach you through the British Foreign Office, which will have obtained it through the State Department of the United States. Whether in the present state of the negotiations it is for the Council of Foreign Bondholders to give its answer through the British Foreign Office and thus through the Department of State and our firm at Guatemala, or to Guatemala through our firm direct, is a question of etiquette that I cannot undertake to answer. What I wish to emphasize is the importance of a prompt answer through either channel, if advantage is to be taken of what seems a favorable opportunity for settling this vexatious matter. What we require in the first instance is the statement from you that the Council of Foreign Bondholders is prepared to recommend the settlement to its bondholders. This having been done, nothing further will be required until President Cabrera has signed the agreement, whereupon we will notify you, so that a meeting of the bondholders may be called in London to approve the action of the Council. As soon as this formal approval has been had, President Cabrera will under the agreements be obligated, on notice from us, to submit the arrangement to Congress, and, if our information is correct, Congress is likely to approve whatever the President recommends. * * *

Very truly yours,

Frederick Strauss

.

P. S. In rereading the letter, I note that I have made no reference to the arrears of interest. The Government of Guatemala has absolutely declined to make any further concession.

1. For. Rel. 1912, p. 508.
2. Id., 510.
3. Id., 508 510.
4. Not printed.
1. For. Rel. 1912, pp. 502 and 503–504.