Mexico and its reconstruction/Chapter 6

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CHAPTER VI

MEXICAN FINANCE: FOREIGN LOANS AND FOREIGN CLAIMS

In discussing the financial operations of a well ordered country the layman's order of approach may be to review the expenditures that it undertakes and their purposes, the resources from which it draws its revenues for meeting current expenses, and, finally, the debts contracted outside the course of its ordinary life and the provisions made for paying them. But in studying many of the Latin American republics the conditions seem to counsel studying the debt first and then looking to what financial resources there are from which to pay the interest and sinking fund charges and the expenses of current activities. In some cases the national debt or a portion of it dates from before national independence and has been an important factor in the national politics throughout the life of the state.

In new and undeveloped countries also the national debt takes an unusual prominence in discussions of national finance because it is regularly a foreign debt, at least in majority, and carries with it, therefore, possible complications with other powers. Often its payment will have been undertaken at a time when the national credit was so low that the capitalists were not willing to accept the state's general promise to pay but insisted on the assignment of some specific income, such as the revenue from a stamp tax or a percentage of the customs dues at a certain port. Such arrangements make the creditor's claim one still more intimately connected with both foreign relations and domestic politics.

Mexico's financial history—both that of her foreign and of her internal financial operations—is a tangle that cannot be reviewed here except in the most general outline.^[1] From the beginning to the end of the Diaz régime there was a fairly steady improvement in the international standing of the republic. Defaulting, which was formerly a steady habit, disappeared after order was established, and bonds could be sold with interest and rate of issue which did not make them usurious. This had by no means been true in early Mexican history.

In 1824, for example, when obligations of a face value equivalent to $16,000,000 were issued for Mexico by the British house B. A. Goldsmidt & Co., the five per cent bonds had to be floated at 58.^[2] A six per cent loan the following year brought 89¾ per cent. After 1827 the interest went unpaid for a time and later was paid only irregularly.

Between 1837 and 1839 the debt and unpaid interest were refunded. The total of the obligations recognized was now about $54,573,730. At this time, too, the debtors took an added security for the risk they assumed in the grant of one-sixth of the customs receipts of Vera Cruz and Tampico, the two important east coast ports, for the service of the debt. But arrears arose again and in 1842, in return for raising the share of the customs receipts devoted to the loan from one-sixth to one-fifth, the creditors accepted non-interest bearing "debentures" at the rate of one dollar for each two dollars actually due.

In 1846 the creditors agreed to another cutting down of their claims. Various classes of bonds were rescaled at 90 to 60 per cent of their face, the outstanding foreign liability of $56,206,875 being decreased to $40,533,425. A new five per cent loan was issued to cover this and certain other liabilities. This time the security included besides one-fifth of the collections of the two ports, a fifth of the tobacco duty and the export duty on silver shipped from the west coast.

The agreement had hardly been made when war came with the United States and as a result the ports of the east coast fell into possession of the enemy, thus cutting off part of the guaranteed income. A similar agreement was put into force again in 1851. Interest payments fell into arrears. A new refunding issue was put through in 1864 but payments almost immediately fell behind again.

In 1864 the government of Maximilian floated a loan in London and Paris of $61,825,000 at 63 to secure funds to crush the republican forces. These obligations were later partly converted into a second loan. When the empire fell the republic definitely repudiated both sets of debts. A part of these issues was later repaid to the bondholders by France.

Further borrowings abroad were not resorted to until 1886. The new régime then and in 1888 put through refunding measures. In 1889, it sponsored the Tehuantepec Railway Loan, paying five per cent, issued at 77 to the amount of $13,500,000. In 1890, an issue of $6,700,000 of six per cents was made at 65 to secure money for the Monterey and Mexican Gulf Railway. In 1890, an external six per cent loan was made of $30,000,000 face, issued at 93½ per cent secured by 12 per cent of the total proceeds of the import and export duties. Three years later another 12 per cent was pledged for the service of a loan of $15,000,000 bearing six per cent and issued at 68.

Just at the end of the century the five per cent External Consolidated Gold Loan was put through which is the oldest of the direct external loans now outstanding against Mexico. For its service there was to be set aside 62 per cent of the national import and export duties. The face total of the obligations was $113,500,000.

Mexico was now reaping the fruits of the establishment of order. Foreign capital was flowing across her borders from all directions seeking opportunity to develop her resources. Her international credit stood on a better basis than ever before. In 1903, the City of Mexico was able to sell at 85, bonds amounting to $12,000,000, bearing five per cent interest. The next year the central government floated at 94 a loan of $40,000,000 bearing only four per cent and that without setting aside any specific portion of the national revenues for its service.

These were days in which Mexico did indeed seem to be coming into its own. It took up its older obligations bearing higher rates of interest, it paid off by the new loan amounts it had borrowed at six per cent to encourage building of railroads, and started public works under government support at its less favored ports on both coasts.

In 1910, another refunding operation took place. The loan of 1899 paying five per cent was changed to one bearing four per cent. The half of the new loan issued in Paris in July sold for 97.625 per cent. It was guaranteed by the 62 per cent of the import and export duties, which had protected the loan of 1899.

The cloud of revolution was already gathering but the world would not believe that its threat was serious. Progress in Mexico had been so steady for a generation that it was pointed to as the greatest of Latin American states. A country, which in 1890 saw its six per cent bonds sell at 65 per cent, now sold its four per cents at less than three points below par.

Its government, it seemed, was at last truly in a position to give protection to life and property. It could now look forward to an intensive development of its national resources sure to be as wonderful in its results as their extensive exploitation of the last quarter century had been. The government could undertake public works without having to pay high rates of interest and, most needed of all, the friends of Mexico felt that now had come the time when the government, at last securely on its feet, should and could give greater attention to improving the social and economic well being of its people.

All told the direct external loans, those of 1899, 1904, and 1910, now amounted to $140,709,065 plus the other issues guaranteed by the government. These latter totaled $104,071,950. The two classes together made a debt of $244,781,015; or, if the $50,747,925 General Mortgage Four Per Cent Gold Bonds of the National Railways of Mexico be included, $295,528,940. This was a debt easily borne by a nation of 15,000,000 people whose territory was developing as had that of Mexico in the last quarter century.

But the financial history of Mexico since 1910 does not justify the confidence which the investing world then placed in her nor the hopes that her friends then held. The revolution was not a passing and unimportant storm. It soon became evident that it was a much more fundamental demonstration than even the Mexicans best informed appear to have believed at the beginning. One of the indirect results that have followed in its train has been the temporary paralysis of Mexican foreign credit. When it was realized that the revolution was a serious movement, borrowing at once became difficult.

In May, 1913, a six per cent loan amounting to $80,000,000 was authorized by Presidential decree. It is certain that $8,100,000 worth of these credits were issued and it is understood that a very large proportion of the balance has been used for various purposes. No further loans appear to have been made abroad.^[3] To the difficulties of raising a loan brought about by the revolution there were added those caused by the World War—none of the lending nations of Europe had money to lend after August, 1914; and through much of the period since that date neither the government nor the people of the United States would have been willing to loan important amounts in Mexico.

But the World War is not the cause of the failure to keep up the services of the foreign debts of Mexico. All but one of the Mexican external debts, direct and indirect, were in default after July 1, 1914, a month before the outbreak of the war in Europe and since January 1, 1915, no payments whatsoever have been made. Meanwhile the obligations grow. By January 1, 1919, they had come to total $336,344,080, not including the bonds of the National Railways of Mexico.

When the foreign debt service will be resumed, of course, no one can tell. On September 1, 1918, President Carranza in his message to Congress stated that Congress had authorized him to contract abroad or in the republic three loans amounting to $300,000,000. But these were not apparently for the service of the foreign obligations already incurred. The government issued an official statement in January, 1919, to the effect that it intended to resume the payment of interest and settle arrears of interest on the foreign debt "as soon as the external commercial life of the Nation has been regulated." Claims have been put forward since that time that those now at the head of the affairs of the republic control practically the entire national area and that its foreign trade has been unusually prosperous. Nevertheless the recovery of normal conditions and the resumption of the services of the foreign debts seems to outsiders still in the indefinite future.

Unfortunately, when the revolution is over, the international obligations of Mexico will not be measured by the loans the government had made previous to the outbreak of the civil war and the accumulations of unpaid interest. In every civil war there arise large numbers of claims by individuals for damages, which the government is called upon to settle. These, so far as the citizens of the country are involved, can be disregarded if the government so decides, but the damages suffered by foreigners are not so easily put aside.

The destruction wrought by the armies of various leadership that for the past decade have been keeping Mexican public life in a turmoil, and the destruction due to the actions of the governments themselves, especially in interfering with the operation of railroads and banks, the property of foreign interests, will be the basis of a host of claims that will probably amount to at least as much as the outstanding public debt. When peace comes to Mexico, the national obligations to others than its own citizens will thus have grown out of all proportion to those carried before the Civil War. It is not possible at this time to give a satisfactory estimate of the claims that will be presented for payment. A large number, and probably the most important, will be those of companies, especially those which were engaged in services affected with a public interest such as the railways, tramways, and light and power companies. On July 31, 1919, the Department of State of the United States reported that 942 claims had been filed by American citizens. Of these 789 made a statement of the extent of damages suffered totaling $26,629,397.61. The claims of the largest companies operating in Mexico appear not to be included. No information is available showing the extent of damages of citizens of other nationalities. On November 24, 1917, President Carranza by decree established a commission for the consideration of all claims by foreigners against the government, but the procedure provided was of such character that the United States did not find it possible to approve it.^[4]

It is not possible at this time to state the amount of the debt of Mexico which involves the rights of foreigners. The current discussions are seldom detailed. Thomas R. Lill, an American accountant, in the service of the Carranza government, stated before the Senate Committee on Foreign Relations, on September 23, 1919, that the total debt left by the Diaz régime was about $425,000,000 Mexican gold. He declared the bonds approved by the Madero Congress and issued by Huerta amounted to another 190,000,000 pesos; loans due to banks, 53,000,000 pesos; and back salaries due to employees to 25,000,000 pesos. This would make a total of 693,000,000 pesos,^[5] not including about 170,000,000 pesos interest due. Luis Cabrera, Secretary of the Treasury in President Carranza's Cabinet, reported the total national debt as about 1,000,000,000 pesos, or $500,000,000 United States gold. This estimate did not include a number of important items said to be claimed by several foreign governments.^[6] The secretary of Hacienda announced that the total debt as of December 31, 1920, including foreign, internal, and state delegations, amounted to $426,791,555 Mexican. Accrued interest and Tehuantepec Railroad bonds amounted to $197,707,142 Mexican. The total of these items is $624,498,697 Mexican.^[7]

These estimates by employees of the Carranza and Obregón governments are much smaller than those of some of the best informed Mexicans outside governmental circles. A calculation published under the direction of a group of Mexican economists places the interior and exterior debt in August, 1920, at $1,200,000,000 Mexican. The obligations that the country has incurred through damages to banking, railway, and other interests belonging to nationals and foreigners is referred to as an additional large but unnamed sum. The cash

. taken over from the banks manu militari amounted to about $54,000,000 Mexican "according to the official figures of the Carranza government."^[8]

Before leaving the discussion of the foreign debts of Mexico it is worth while calling attention to several features of their history which may have a bearing on what may be expected or what should be demanded by investors in the period of reconstruction.

First of all, it is often asserted by Mexicans and by mistaken friends of Mexico that the republic has always meticulously fulfilled its financial obligations. The facts concerning the foreign debts above outlined make it necessary to interpret these words in a very special way if they are to be held to state the truth. As has been indicated, the earlier history of Mexico shows important readjustments of the claims of foreign creditors which cut down the amount they were to be paid. To be sure the creditors agreed to the scaling of their claims and it may be insisted that Mexico did not repudiate the obligations, except in the justified cases of the Maximilian era. Nevertheless, it is true, of course, that the reduction of claims was not a free-will offering upon the part of the creditors. They consented because the finances of the republic had come to such a state that they felt it desirable to sacrifice part of their property in order to obtain a chance to save the rest. Mexico may not have repudiated her obligations actually but the effect upon the creditors was the same as if they had held the notes of a corporation that had become bankrupt and could not pay its creditors in full. It need hardly be said that this is not a way of fulfilling its financial obligations that contributed to the credit of the republic.

The claim so often made in connection with Latin American countries that their revolutions are not to be taken seriously and that they have no important effect on the national economic life, has no application when the foreign loans of Mexico are under consideration. When Mexico has not had a stable government, she has not paid regularly interest on her debts and the principals of the debts have been paid by new borrowings. The only long period in which interest payments were punctually made was in the Diaz régime.

Unless some guarantee of payment of interest and principal can be secured that will be enforceable and that will be enforced by some other government if Mexico fails to do so, the loan of money to any Mexican government that has not proved its stability is a highly speculative venture. The interest rate that the investor will have to demand will naturally be higher, that is Mexico will have to pay more, if there is no guarantee. These are facts, which those who refinance Mexico in the reconstruction period will have to take into serious consideration. It may well be doubted whether the dangers to national independence alleged to attend foreign loans are less when money is borrowed in the open market at a high rate by a weak nation, than when made at a lower rate under the guarantee of a more powerful country that it will help so to shape conditions that the stipulations of the contract may be fulfilled.

Thirdly, the declarations on the part of certain Mexican statesmen that any sort of special guarantee for the payment of debts is without precedent, a reflection on the national honor and not to be considered, are declarations that lack straightforwardness. The financial record of the republic shows numerous cases of hypothecation of special revenues for the service of the foreign loans. In fact the republic, except for the first quarter century of its existence, the record shows, has never been without special claims on the national income in favor of certain of its foreign creditors.

The direct external loans now in force are all, with the exception of the gold loan of 1904, nominally under the protection of special guarantees. The loans of 1899 and 1910 are secured on 62 per cent of the national import and export duties and the bonds of 1913 issued during the revolution are a lien upon the rest.

Governments avoid such agreements if they can, but Mexico has not been able to do so. She seemed to be approaching that condition in 1904 and doubtless the loan of 1910 might have been negotiated without special guarantee but for the fact that it was a refunding measure and the creditors were in a position to demand the continuance of their former security. It seems hardly to be expected that any project for financing the reconstruction of the country will lack features of this sort.

What guarantees of this sort actually mean is not clear. In times of peace, with a responsible government in control, they constitute a check on the spending power of the government and promote promptness of payments. But under normal conditions a responsible government pays even without such guarantees. In time of civil disturbance in Mexico none of the passing governments has apparently felt the agreements to be ones it must obey. At the only time when reliance needed to be placed on the special guarantees they did not serve, and the bondholders find themselves in a position in which it appears the local government does not recognize its responsibility nor can they force it to do so by calling on their home governments to aid in securing the fulfillment of the contracts.

It is true, of course, that the Mexican debt service clauses may at any time be held to mean more than has appeared to be the case. The debts went into default just before the outbreak of the World War, and had peace continued elsewhere during the later period of the revolution it is possible that pressure would have been put upon the government of Mexico to live up to its contracts.

If this is not the case, it appears clear that the form of guarantee found in Mexican loan contracts is of little value whenever a government wishes to disregard it, whether in time of peace or of civil disturbance. If a guarantee cannot be secured, which means that the foreign government shall have a right to see to its enforcement, and if the enforcement by the foreign government cannot be considered reasonably certain, then investors in the securities of unstable countries must consider their money risked in a speculative venture for which they must be compensated by high interest rates or low rates of issue or both.

That such a basis for the financial rehabilitation of Mexico would be unfortunate is clear. If the debt service guarantees furnish a basis upon which other countries may help her to help herself, she may secure domestic order and a responsible government sooner than would otherwise be her lot. If those debt service contracts now in existence do not furnish such a basis and the Mexican government refuses to enter new ones that will do so in the future, then it must borrow on the chance which it has, unaided, of being able to meet the obligations it assumes. It will perforce load the people with greater obligations than would be necessary otherwise and delay the real reconstruction, which every friend of Mexico must hope may soon begin and rapidly progress. Some sort of effective international guarantee of the foreign loans seems highly desirable, not only for the protection of the investor and not even principally for him, but for the benefit of Mexico and of her people.

The basis on which debts should be paid in justice to the lender often bears a strong contrast to that which is practical. What has occurred in a number of instances in the past may again prove to be the case in Mexico. At first sight even the highest figures discussed do not appear to be an overwhelming load for the nation to bear. Compared to the burden that the World War has put upon many Western nations, the debt seems small. Even assuming that the total may be as great as $1,500,000,000 Mexican, the debt per capita would be only about one-fourth as great as that which the people of the United States are now called upon to carry. But such comparisons are deceptive for they fail to take into account the economic weakness of the Mexican population even in comparatively prosperous times, a weakness now much accentuated by a decade of civil disturbance.

Mexico, in the old régime, mortgaged her future to secure economic advance. She now finds herself called upon to mortgage the future to pay the cost of the upheaval that destroyed much of the advance attained. Unfortunately the pressure to meet her obligations comes upon her at a time when she is least able to make favorable terms. The post-revolutionary governments face a world money market in which the French government has to borrow abroad at eight per cent and in which that interest rate is a fair average of the payments on the loans of the most favored of European countries. It is hardly to be expected that under such circumstances those who loan their money in Mexico will not expect an unusual return.

When the Mexican governments look to the resources upon which they can count to meet the interest on their borrowings, past and to come, the prospect is far from encouraging. In a country even now not completely at peace with itself money must be raised from agricultural interests badly disorganized, cattle resources hard hit by the drain of ten years' army requirements, mining still suffering from the results of disturbed industrial conditions, and a labor supply depleted of many of its most enterprising elements by emigration. What commerce can be taxed must move over roads and railways very badly neglected and must rely on banking facilities still sadly inadequate. To this discouraging outlook is to be added the declining price scale of the chief commodities that Mexico sends to foreign markets.

Confronted by such an economic outlook it is not to be wondered at if the Mexican governments fall into believing that the end justifies the means and like a drowning man catch at straws.

1. A more detailed review of the foreign debt is found in the Forty-fifth Annual Report of the Council of the Corporation of Foreign Bondholders. . . for the year 1918, London, 1919, from which the figures in the following paragraphs are largely taken. See also a careful analysis by W. F. McCaleb, The Public Finances of Mexico, New York, 1921, passim.
2. The figures in this chapter are in Mexican gold except where otherwise stated.
3. The various issues of the revolutionary period not taken up above are discussed in W. F. McCaleb, op, cit., passim.
4. Senate Document 1, 66tH Congress, 1st Session, May 20, 1919, and Senate Document 67, 66th Congress, 1st Session, August 1, 1919.
5. C. Adolfo de la Huerta in his Presidential address reported in the Diario Oficial, September 2 et seq, 1920, reported the entire obligations, foreign and domestic, as totaling 657,599,122 pesos, including interest due.
6. These statements are based on the summary in the Commercial and Financial Chronicle, November 15, 1919, p. 1837. The testimony as to the amount of the Mexican debts is presented in detail in Investigation of Mexican Affairs, Hearing Before a Sub-committee of the Committee on Foreign Relations of the United States Senate, 66th Congress, 1st Session, pursuant to S. Res. 106, part 3, Washington, 1919.
7. Commerce Reports, June 14, 1921.
8. Manuel Calero, Ensayo sobre la reconstrucción de Mexico, New York, 1920, p. 89. This review published by a group of nine prominent Mexicans headed by Manuel Calero is a good summary of moderate progressive opinion on Mexican affairs.