Papers relating to the foreign relations of the United States, 1930, Volume III
812.51/1619
The Ambassador in Mexico (Morrow) to the Secretary of State
[Received August 27.]
Sir: With reference to my telegram No. 187 of August 21, 1930, 4 p.m., and to the memorandum of the Undersecretary of State dated August 3, 1930,16 in regard to the agreement recently signed in New [Page 478] York by Mr. Montes de Oca, on behalf of the Mexican Government, and Mr. T. W. Lamont, on behalf of the International Committee of Bankers, I have the honor to enclose herewith, for the information and records of the Department, a copy of my answer of August 18th to Mr. Lamont’s letter of July 24th, which Mr. Cotton, in his memorandum of August 3rd, states he has read. I enclose a copy of Mr. Lamont’s letter to me, as a matter of official record.
Respectfully yours,
The Chairman of the International Committee of Bankers on Mexico (Lamont) to the Ambassador in Mexico (Morrow)
Dear Dwight: Referring to the talk that you and I had over the telephone yesterday: I am a good deal upset that you and I should have to differ so radically on this Mexican financial and debt problem. You must realize from your side, my dear Dwight, just as I surely do from my side that the difference is philosophical and in no sense personal. You will continue to be guided by your own judgment and conscience as to how best to represent the interests entrusted to you, and I must follow the same course from my end of the line. I have a feeling that you are a bit disgusted with our mental processes up here and are genuinely upset that we are unable to adopt in toto your point of view. But I may recall to you that the view I have often presented to you is in no sense personal to me, but is shared and upheld more rigidly perhaps than I uphold it, by all the members of the International Committee; by eminent counsel to the Committee on both sides of the water; and by such sage members of our own firm as Charles Steele and R. C. Leffingwell, both of whom have had competent legal training as well as much practical experience.
In one way the difference between you and us is based on purely practical grounds. You deem a certain course to be workable: we deem it to be unworkable. You state in effect that the Mexican Government should pay nothing on account of any of its acknowledged debts, and until it has succeeded hi adjudicating practically all the claims against it and is able to make what you would term a fair composition as among all its categories of debts and claims. Now, of course, it goes without saying that if it were workable to get all of Mexico’s debtors and claimants in one room at the same moment and effect among all of them a fair composition, that might be an ideal way of settling the whole situation. But how can anyone for a moment deem such a solution practicable? The Mexican Minister points out to me that one class of claims alone consists of many thousand items, of which up to date only a few hundred have been adjudicated. He [Page 479] says that it will take several years to adjudicate and settle the balance. Now you may retort that there can be found a quick method for settling all these claims. There may be one, but that does not seem to be the Minister’s point of view.
I have discussed with the Minister the suggestion of indefinite delay that you have made, and I showed him yesterday the draft of statement which you proposed for him and for me to make, postponing the whole bond settlement. I asked him whether he wished me to join him in any such statement. He replied emphatically in the negative. He then went on to explain that while in theory it would be very fine to get all of Mexico’s debtors and claimants to settle up at noon on the same day, he, as Minister of Finance, could not work any such idea through. He added that he felt he had to make a start somewhere, and it was his plan to make it with respect to his external debt which he considered the most important single item in the whole category, not only in amount but in character. By that he did not mean to intimate that he had anything but profound regard for all valid claims against the State, but he felt that these were not of such a pressing character as the debts that were secured against the solemn pledge of public revenue, now being collected in substantial excess of the required debt service.
Now reviewing for a moment the present discussions which began here almost four weeks ago, let me remind you that at the very outset the Minister presented to us a memorandum which he entitled Aide Memoire No. 4, copy of which Munroe has, I think, forwarded to McBride. In this memorandum he took cognizance of the very point that you have been insistent upon,—namely, the necessity for considering all the categories of debts and claims against it. In fact, in this memoire he classified these claims in United States currency under four headings, namely,
- (1)
- Internal floating debt,
- (2)
- Claims against national commissions,
- (3)
- Claims before mixed commissions and before the general American commission,
- (4)
- The present public agrarian debt.
And the total of these he put in United States currency at the sum of $1,571,000,000. This, you see, was information that he furnished to show to us the necessity which he was under in connection with his treatment of the external debt, which fell outside the particular categories just listed.
At the outset then of these discussions, bearing in mind the very point that you have so often urged, and that has been so much on our own minds, the Minister (as Sterrett of Price, Waterhouse & Co. has written McBride) asserted full responsibility for all of the debts of Mexico, and at the first meeting stated that he could not consider [Page 480] entering into an agreement in respect to the foreign debt which would impair his ability to make a reasonably satisfactory settlement of the internal debt, including the agrarian and the foreign claims. Unless he were to be left in a position where he would have sufficient revenues to deal with these debts, any agreement in respect to the external debt would, he said, break down, and he must adhere to a very conservative position. This statement, you will observe, from which he has never departed and which he has reiterated over and over again, left the International Committee no ground at all for insisting that he should do what he had so categorically insisted that he must and would do.
In other words, when in the first telephone conversation that you and I had a fortnight or so ago you urged me to compel the Minister to state precisely how in his budget he intended to handle these various items; when you urged me to get the Minister to declare that he would default completely on his agrarian debt; and when in turn, anxious to fulfill your views to the utmost, I urged these points upon the Minister, he retorted by telling me politely that it was really none of my business; that what he was attempting to do was to scale down his foreign debt to a point where he could satisfy himself that any settlement that he might make was well within his capacity, always having due consideration for these other categories of claims or debts which he had pointed out to us. Now, my dear Dwight, you may have some means of compelling the Finance Minister to give you precise information as to his budget plans for several years ahead, but I must confess that in any such effort I, myself, am powerless. The Minister said to me very politely that in a personal sense he would not have the slightest objection to giving me such information if he possessed it himself, but that there were a good many bridges which he would have to cross. For instance, as to the agrarian debt; he said he knew he had to handle it as conservatively and perhaps even drastically as possible, but that he was in no position today to tell me just how he would handle it.
When I showed him your proposed statement for postponing the whole matter, he explained more fully than he has heretofore his attitude in regard to the direct Government external debt. He said he would have preferred, just as you would prefer, to postpone this settlement for another year, but that evidence was coming to him from many quarters that unless he came to a settlement soon he would find himself in a good many awkward situations with respect to the foreign debt. Pressure was being brought to bear on him from all sides,—not by the International Committee, of whose good offices in endeavoring to protect his position he spoke with high esteem; but from various groups of foreign bondholders who apparently felt that the Committee have not adequately represented their interests, (I, T. W. L., have frequently been accused of being too lenient towards [Page 481] Mexico) and who were no longer disposed to follow the International Committee. He felt that he could gain a settlement by dealing with the International Committee much more satisfactorily to his Government than he could possibly gain from independent settlements with various groups. And, therefore, he felt it expedient to negotiate with the International Committee and gain this settlement now before the Committee lost its clientele.
It was evident, too, in the Minister’s mind that the foreign debt has attracted a great deal of public attention and that a sincere attempt made to settle the debt would reflect credit upon his Government. He has undoubtedly also felt uncomfortable because of the position of the secured debt. Here he has a debt secured by pledge of 100% of the customs, calling for an actual debt service of well under $10,000,000, as against actual customs revenues of above $50,000,000 per annum. You, yourself, may have a satisfactory answer that you can make for the Minister on this point, but it would be hard to make it satisfactory to the bondholders who now see peace in Mexico and customs revenues that are annually increasing.
What the Minister feels about outside pressure on him on account of the foreign debt is no doubt perfectly true. It has been rolling up steadily for the last two years. The British and French sections of the International Committee have during that time frequently demanded that I, as Chairman of the Committee, make some public statement as to the situation and as to the reason for further delay in approaches to the Government. I have declined to make any such statement, because I could make no satisfactory one. But I have in consequence felt my position as head of the Committee steadily declining in influence. When I was in London in May several groups of people called on me on this matter. One of them was a prominent member of Parliament, who said that he was in a very awkward position with reference to many of his important constituents who held Mexican Government bonds and who were constantly demanding that he ask public questions of his Government as to their failure to make any representations to the Mexican Government. He said that there were many members of the House who had prepared questions on this point, but had refrained from putting the questions in the House of Commons in their belief that up to this time I had been endeavoring to effect a settlement; but that they could not hold their horses much longer.
People in the Foreign Offices said much the same thing. As you perhaps know, they are constantly in receipt of communications from private citizens, demanding information and action. The Foreign Office forwards such communications to the British section of the Committee, which, in turn, sends them to us, and we give the best [Page 482] answer we can, but never satisfactory to the recipient of it. The same sort of thing is going on in France, and to a lesser degree in Germany, Holland, Belgium and Switzerland. They also say in effect: “It is all very well to follow this Lamont fellow for a while, but he has become too easy on Mexico, and we must get some action.” All these people know, just as you point out in the statement that you prepared for the Minister yesterday, that for the last two and a half years the Mexican Government has been meeting all its current requirements with cash. They see the Government spending money for road construction and schools. They see that the Government has had a considerable balance, as you say, applicable to the debt payment, and they want to know why they don’t get some of it.
I apologize for reciting all the foregoing, but I have an idea that you may not be altogether familiar with all that has been going on and may be rather inclined to think that because for several years past the International Committee has been inclined to follow me, I could get the bondholders to do about anything that I want or that you want done. It may be that I still have some influence with the members of the Committee, but the point is that the Committee no longer technically represents the bondholders who, as the Minister points out, are showing signs of disintegration and independent action.
Now over the telephone yesterday, you told me that in your judgment I had no moral right to sign any fresh agreement in behalf of the Committee, because it would simply mean that in effect I should be urging the bondholders to take a further cut-down in the obligations due them, and in return would be receiving no proper consideration,—that is to say, should be getting another promise-to-pay from the Mexican Government in place of the one that the bondholders now have; should be merely getting promise and not fulfillment. Now as to the latter point you may be correct, but the Mexican Minister of Finance has expressed himself strongly to me in the opposite sense. He states that the 1922 and 1925 Agreements broke down from force majeure, that is to say, revolution. He said that of course if revolution occurs again, the pending Agreement, if executed, may break down, but that barring such an unhappy contingency, he is confident that the adjustment is now so well within Mexico’s capacity to pay, with every regard for these other claims, etc., that it should be fulfilled.
For instance, take one item,—the arrears of interest which have just as much validity and law as the original obligation. These arrears now amount to approximately $200,000,000. We are proposing to try to get them cancelled for about $11,000,000 thus relieving the Mexican Government in one swoop of a fixed obligation of $189,000,000, not counting compound interest which, if we figured that in, would be tantamount to perhaps half as much more again. Now you tell me that the Committee has no moral right to advocate such serious [Page 483] reductions for the bondholders, without having absolute certainty as to the Government’s future budget plans. But that is not the view of the Committee. It has not urged the Minister to make this settlement, but after the representations which the Minister has made to it, it cannot conscientiously refrain from signing and advocating such a settlement to the bondholders.
You expressed to me over the telephone yesterday the view that in case we signed the pending settlement with Mexico, the State Department would be likely to make a protest to the Mexican Government and try to prevent the settlement’s going through. I should be much surprised to find that upon further consideration either you or the officials in the Department of State would consider such action expedient. If the settlement with the Minister is signed, the situation will be as follows:
After having for years failed to pay the service on its direct debt, secured by its more than adequate customs receipts, the Mexican Government comes forward and offers to resume, on an amended basis, and with further sacrifices by the bondholders, the resumption of its service. The Government does so upon the very presentation which you, yourself, have outlined in the statement which you prepared for the Minister and me to make,17—namely, that for two and a half years the Government has been able to meet all its current requirements in cash; that it has expended considerable sums for highway improvement and education, and that it has a cash surplus in the Treasury earmarked for debt purposes but not disbursed; on the Government’s further representations that with all due regard for other categories of claims, it believes itself amply able to meet the proposed schedule of interest payments. Now confronted with that situation I can hardly imagine the Department of State making a protest or attempting to prevent the fulfillment of the agreement; being obliged in connection with such protest to notify all the Foreign Offices in the countries that I have mentioned that in effect they must tell the widow who has for years been a holder of the Mexican Government secured bonds that although the Government desires to pay her some interest, the American Government has held up its payment because of some American claims that have not yet been adjudicated. That would not prove helpful to anybody.
I haven’t touched on the railway debt, but you are even more familiar with that situation than I am. You are aware that it is difficult for the National Railways of Mexico and for the majority owners of their common stock,—namely, the Mexican Government, to refrain further from adjustment of the debt, because the earnings of the railways have so improved as to show on their face that they are [Page 484] able to meet the full service on the outstanding railway debt. Now you and I know that the railways merely require such further funds for their betterments as to make it impossible for them to pay the full service on their bonds. Knowing that, we advocate, as in the case of the direct debt, that the bondholders should make a drastic composition so as to enable the Government and the railways to effect thorough-going reorganization of the properties.
But if you were to suggest that we proceed with the railway agreement but postpone the direct debt agreement (and my only excuse for such action on the latter debt would be my anxiety to comply with your wishes), I would have to answer that such a suggestion was unworkable, because the Committee has always represented both categories of debt, and we should have no excuse for concluding a railway agreement, and with the figures which the Government presents to us omit to conclude a direct debt agreement.
You told me over the telephone yesterday once more that you based your views as to breaking off negotiations upon the theory that Mexico was a bankrupt or insolvent Government. That is the theory that was advanced in Secretary Kellogg’s famous letter of March twenty-seventh, 1929,17a which also advanced the view that in the present case the Mexican Government’s direct secured indebtedness had no more standing than an ordinary tort claim. This is the theory that I am not obliged to argue, because it has been fully covered by the counsel for the Committee. The only reason that I bring it up at this time is to explain that while Ovey, the former British Minister in Mexico, and also the French Minister, complied with your request and advanced this theory of yours to their respective Foreign Offices, I am informed that those Foreign Offices took no more stock in the theory than counsel in New York and London have been able to take.
Now as to your own attitude in this matter of a proposed direct debt settlement: of course, I realize perfectly well, because you have so often told us all, that you were opposed to the bondholders’ making at this time any arrangement to receive some of the money that was owed to them. And I know that you have strongly advised the Mexican Government officials to this end and have given to them what you consider sound reasons for your views. But now it would appear that they have not seen fit to accept counsel on this particular matter, and they have voluntarily come forward, asked for and executed a debt settlement, without urging on the part of the bondholders. That being the case, I hope you can see your way clear to letting the matter rest where it is rather than feeling called upon to attempt to defeat this plan. The Mexican Minister upon his arrival here declared that within certain limits he was fully authorized by President Ortiz Rubio to sign an agreement. He has now been able to bring about such an agreement apparently well within the limits of the authority which he [Page 485] bore. Therefore, failure of ratification by the Mexican Congress would simply mean a black eye for Mexican prestige. This does not mean that Congress is bound to ratify the agreement, but it means that such an agreement having been negotiated and executed by the President and the Minister of Finance, any effort now to defeat it might prove to be a grave disservice to Mexico.
Again apologizing for burdening you with such a long and perhaps involved letter, and begging you earnestly to forgive me for not being able to adopt your view point, I am [etc.]
The Ambassador in Mexico (Morrow) to the Chairman of the International Committee of Bankers on Mexico (Lamont)
Dear Tom: My delay in answering your letter of July 24th has been due to my absence from the office during the past two weeks on account of a slight illness.
Of course we must not let the difference between us be in any sense personal. I have taken it for granted that it was your duty to protect, in the way that seemed to you wisest, that portion of the Mexican debt which has heretofore been represented by the International Committee. I am sure that you have recognized that my duty is to protect American interests as a whole.
Captain McBride and I have read your letter with care. We have reviewed carefully all our correspondence and memoranda in connection with the financial question. I have done my best to understand the difference between us. You have undoubtedly done the same. And yet, at the end of two and a half years, the difference remains. It may be that you are right that the difference is in seme respects a “philosophical” difference, and in some respects a difference as to the “practical” steps to be taken. I cannot feel, however, that we could “radically differ” on such points for such a long period. It seems to me that the fundamental difference is a difference in our understanding of the facts.
I believe that the Mexican Government is now, and has been for several years, insolvent. By insolvency I mean that Mexico cannot pay all of its obligations according to their terms. This to me is not a theory but a fact. It seems to me a vital fact. My feeling in this respect is much the same as that expressed in the Egyptian report of 1879, which was drafted by Evelyn Baring (afterwards Lord Cromer):
“It will hardly be possible to begin laying the foundations for a better condition of things until it is acknowledged that the Government is now in a state of insolvency.
[Page 486]“However painful it may be to make this statement, we believe it our duty to do so; for it is unavoidable at some time or other, in some shape or other. Whatever the immediate effect of acknowledging it may be, the ultimate result cannot but be of advantage to the true interests of all persons who have a real and permanent interest in the financial affairs of Egypt.”
You seem to believe, on the contrary, either that the Mexican Government is not insolvent, or, even if it be insolvent, that each creditor or group of creditors may with propriety and safety make a separate agreement for composition of claims against the insolvent without stipulation or knowledge as to what provision is to be made for other creditors.
It seems to us that if Mexico is in fact insolvent, certain important relationships flow therefrom; certain important duties rest upon the Mexican Government with reference to all of its creditors, and certain important duties rest upon the creditors with reference to each other.
There are some expressions in the new agreement and in the joint statement issued by you and Mr. Montes de Oca in New York at the time of the signing of the agreement which indicate that both your committee and Mr. Montes de Oca understand that he contemplates making provision for the creditors of Mexico other than those represented by the Committee. President Ortiz Rubio has told me that this is his understanding, and that he does not intend to submit the agreement with your Committee to the Mexican Congress except as a part of a contemplated project of Mr. Montes de Oca dealing with the whole debt.
Captain McBride is hopeful that Mr. Montes de Oca may be able to submit such a general project. I hope this may prove to be so, and we are prepared to lend assistance and advice to this end so far as it may be asked for by the Mexican officials.
If, however, the preparation of such a project remains but an aspiration, without any more definiteness than resulted from the similar expressions used in the agreement of 1922, and if it should be proposed to ratify your agreement without any provision for the other creditors of Mexico, foreign and domestic, it will be the State Department, not the Embassy, that will determine what steps it should take for the security of the interests which it represents.
There are some statements or conclusions in your letter, especially in regard to my attitude on this question, which are not in accord with my understand[ing]. It does not appear necessary, however, to go into such questions at this time.
With warmest personal regards [etc.]