Papers Relating to the Foreign Relations of the United States, Transmitted to Congress, With the Annual Message of the President, December 2, 1878

No. 370.
Mr. Foster to Mr. Evarts.

Legation of the United States,
Mexico, October 8, 1878. (Received October 29.)

No. 803.]

Sir: In my dispatch No. 802, of this date, I refer to the general foreign debt of Mexico in connection with information furnished therein concerning the Mexican bonds sold in the New York market and now in the hands of American citizens. As it is believed that an exhibit of the foreign indebtedness of the republic and the treatment of the bondholders by successive governments would enable American holders of Mexican bonds to form a more correct estimate of the value of their own securities, I have thought proper to prepare such a statement for the use of the Department.

The foreign debt of Mexico is of two kinds: 1st. That arising from loans negotiated through the sale of government bonds; and, 2d. That originating mainly in claims of various kinds held by citizens and corporations of other nations which have been made the subject of direct treaty stipulations or indirect diplomatic intervention. The first class embraces the loans made in London in 1823, now aggregating, principal and interest, say $88,800,000, and the loan negotiated in New York in 1865, aggregating $2,746,630. The second class includes various American, English, Spanish, and French convention and other recognized foreign indebtedness, amounting at present, principal and interest, to, say, $40,300,000. So that the total foreign debt of Mexico may be estimated in round numbers at $131,900,000.

This estimate is reached by taking as a basis the report prepared by Hon. Manuel Payno in 1862, by order of the government, with a revision thereof made by Hon. Matias Romero, Mexican minister in Washington, and sent to the State Department in a note dated February 27, 1866, and adding thereto the present amount of the New York loan of 1865, and the balance due under the American claims convention of 1868. Such estimate omits altogether the debts and claims arising out of the Maximilian Mexican Empire, which, according to Mr. Romero’s statement, amounts to over $190,000,000 additional. But as this latter debt has never been recognized by the republican government, I leave it out of the calculation entirely. The following table shows the recognized debt in detail, accepting the Payno-Romero estimate of the European indebtedness made in 1862:

British:
London loan of 1823	$51,208,250
Convention claims, &c	4,871,614
Interest due in 1862	13,231,793
Total British debts	69,311,657
Total Spanish debts	9,460,986
Total French debts	2,859,917
Sixteen years’ interest to date, at $2,760,022 per annum.	44,160,352
Total European debt	125,792,912
Carbajal-Corlies bonds, 1865.	2,746,630
American claims awards, balance	3,375,123
Total foreign debt	131,914,665

To attempt to give in detail an account of all the European debts embraced in the second class, those arising mainly out of personal claims, would make this dispatch entirely too lengthy. It is a history which would embrace the brief war with France in 1838, and the more important intervention of England, France, and Spain in 1861, as these claims were the main cause or pretext which brought about the tripartite convention of London of 1861, and resulted in the French occupation and Maximilian empire which was overthrown in 1867. The history of the Mexican foreign debt is one of brief intervals of interest payments, brought about by spasmodic efforts to re-establish its lost credit, or by the constraint of, some foreign power, and these intervals succeeded by long periods of suspended payments and wrangles with the creditors, resulting in new arrangements and funding of accumulated interest, and these arrangements soon followed by new suspensions of interest payments. Almost all these suspensions and failures are directly traceable to the disorders and bankruptcy of the treasury occasioned by the rapidly repeated revolutions, rather than to the deliberate bad faith of the government.

In 1861, by a decree of Congress, the payment of interest on all the foreign debt was suspended for two years, although very little interest had been paid since 1854; and since 1861 the Mexican Government has paid no interest on any of its foreign debt up to the present, the transactions under the Maximilian empire not being taken into account.

A sketch of the London loans of 1823, which is the oldest and most important of the debts, will best illustrate the treatment which the foreign creditors have received from Mexico. This debt arose out of two loans placed directly by the republican government upon the London market in 1823, each for $16,000,000, or a total of $32,000,000, at 5 and 6 per cent, interest respectively, on which the government only realized at the time $11,800,000. The bonds were secured by the pledge of one-third of all the customs receipts of the Gulf, ports.

The bankruptcy of the Mexican financial agents in London and the poverty of the national treasury in a few years brought about a failure to pay the interest, and in 1831 there was an accumulation of four years’ unpaid interest. In that year an arrangement was made with the bondholders whereby the interest was “capitalized” by the issuance of additional bonds secured by one-sixth of the customs of the Gulf ports.

But soon thereafter, owing mainly to the revolutions which followed, the interest was defaulted, in whole or in part, from year to year till 1837, when a new arrangement was made with the creditors, and a second “capitalization” of interest took place, with the additional security of the pledge of the public lands.

Not long after this “capitalization” the interest again failed to be paid, and so continued until 1842, when a third arrangement was made with the creditors.

In 1846 the renewed failure to pay the interest made a new convention necessary between the bondholders and the government, by which new bonds were issued, discounting the old issue 10 per cent, and the accumulated-interest bonds 40 per cent.; and to the former security already pledged was added a guarantee of the duty on the exportation of silver and the internal tobacco tax, which afforded the bondholders a superabundant security if possible of realization.

This arrangement was afterwards resisted by the government, and the American war coming on the interest was defaulted till 1850, when a fifth convention was made, whereby the principal and interest were again consolidated into a new issue of bonds, with a reduction of the rate of interest to 3 per cent., a pledge given of 30 per cent, of all the customs duties of the republic, and provision made for a sinking fund for the redemption of the bonds.

As the interest did not continue to be paid with punctuality and afterwards ceased altogether, and the customs duties were not appropriated as pledged, in 1857 a modification of the convention of 1850 was made, whereby the bondholders were authorized to appoint agents at the ports to receive the funds from customs set aside by the convention of 1850.

But the revolution of the Reform continued to interrupt the payments of interest, and in 1859 and in 1860 two formal agreements or treaties were made by the Juarez Government with British official representatives having in view the concession of additional securities to the bondholders and more strict supervision to make sure that the customs duties pledged should be faithfully appropriated to the payment of interest. But the continued state of revolution in the country made these arrangements fruitless to the creditors.

In 1861 a formal treaty was signed by Señor Zamacona (now minister to the United States) with the British minister in Mexico, making still more stringent regulations to secure the rigid appropriation of customs receipts to the payment of the interest; but this treaty was not approved by the Mexican Congress.

On the 12th of May, 1862, another treaty was signed by the Juarez government with the British minister, reaffirming the former conventions, and, in addition, under specified conditions, in case the authorities in any of the ports failed to account for and pay over the duties pledged for interest, giving the British Government the right to enter and take possession of said ports with military force, and collect and appropriate the duties. This treaty was ratified by the Mexican executive under its “ample faculties,” but was not accepted by Great Britain, owing to its relations under the tripartite treaty of London.

From this rapid sketch, it appears that the London loan made in 1823, owing to the repeated and almost continuous failure to pay the annual interest, has been the subject of ten separate and distinct agreements or conventions, some with the bondholders directly and others with the British Government, which sought to interpose its authority to secure to its subjects the funds which had been solemnly pledged to them, and which were being continually diverted by the Mexican Government to other purposes. Señor Payno, in the official report already referred to, in speaking of the disastrous effects of such a policy, uses this language: “The English debt, as well as others which we have with foreigners, instead of diminishing increases every year; so that the funds which are set aside in the custom-houses * * * become sterile at the end of the year; because, by not paying the interest with punctuality and the part stipulated for the redemption of the capital, neither the credit of the republic improves nor can the creditors depend with certainty on any receipts; and in the following year further arrears accrue, which render it more and more difficult to cover as time proceeds. This system, which has augmented the sum of eleven millions we received to something more than sixty-two millions [now more than eighty-eight millions], for which we are at present indebted, will carry us on to ruin.”

The last convention made directly with the London bondholders was in 1850. Those referred to as subsequent to that date (with one exception) were conventions or treaties exacted by the British Government, having in view measures to make effective the terms of the convention of 1850. From the date of this convention up to 1862, of the twenty-three semi-annual dividends due, only six have been paid, and from 1862 to the present date, sixteen years, none of the dividends have been paid. The debt under the convention is as follows:

Principal	$51,208,250
Interest due	37,638,055
Total of London debt.	88,846,305

for which the Mexican Government received in net proceeds, in 1823, $11,800,000, the balance of $77,046,305 being made up of discount and accumulated interest.

From the foregoing statement of the many changes and new arrangements to which the London loan has been subjected, we can appreciate the pertinence of the reflection made by the Mexican commissioner, Señor Payno, as follows: “We do not know if it happens the same in all parts of the world; but, in Mexico at least, matters of business never are what they are represented, nor are they carried out, continued, or realized as they appeared in the beginning, but suffer more metamorphoses than those of Ovid.”

The London bondholders have made repeated representations both to the Executive and the Congress of Mexico, since 1867, to obtain a new recognition of the debt, and such an adjustment as will secure the resumption of the interest payments. Notwithstanding the most intelligent and liberal of the public men of the country recognize the justice of these representations, and the necessity of making some arrangement in order to re-establish their lost credit abroad, nothing has up to the present time been done in that direction. The recent quotations of the bonds in the London market were 7¼ to 7⅜ cents on the dollar, on the 1851 bonds, and 3½ cents on the 1864 bonds.

The other European debts have received much the same treatment on the part of the Mexican Government since the decree of suspension in 1861. No interest has been paid upon them, and while they continue to be recognized in the reports of the finance department, no provision is made toward the payment of either principal or interest.

It is shown in Señor Payno’s report (p. 322) that in 1862 the entire customs revenues, excepting ten per cent., being the cost of collection, had been pledged for the various foreign debts. When it is remembered that the customs receipts are the main dependence of the federal government for its current expenses, the folly and impossibility of executing such a guarantee are apparent. Yet, notwithstanding this was made clear in Señor Payno’s report, in 1865, when the government placed its Carbajal-Corlies loan on the New York market, it pledged again sixty per cent, of the receipts of the ports of Tampico and Matamoros, which, according to Señor Payno, had already been pledged to their full value. And, as I noticed in my dispatch No. 802, on the Carbajal bonds, in 1868 it guaranteed twelve per cent, more of the receipts of these and other ports of the Gulf to the Mexican Railway Company; in 1873 eight per cent, more to the International Railroad of Texas; in 1874 the same eight per cent, to the Catoree Railroad Company, and a few months later the same eight per cent, to the Central Railroad Company. Although the last three enterprises proved to be failures, the action of the government in making these assignments of its revenues, already transferred, illustrates the prodigality and want of foresight which has marked its conduct in the treatment of its plighted faith and public credit. On this point the government commissioner, Señor Payno, says: “The want of foresight, the spirit of innovation, and the evil of enacting laws without meditation or judgment, has been and is an old standing evil in this republic. * * * From that period (1821) to the present we have marched on in incessant revolutions without fixed laws, without order, hanging on a thread, and acting without any established principles.”

In my dispatch No. 802 I have alluded to the action of the Mexican Government in the purchase of bonds of its foreign debt at the depreciated prices to which they had fallen, owing to its long-continued default in payment of interest. These transactions were made the subject of several dispatches from this legation to the department in 1868, wherein they were denounced in strong language as contrary to sound policy and public good faith. The first of these purchases was made in 1868 and 1869, and a considerable sum of money was appropriated by Congress, in the expectation that in this way the foreign debt could be largely reduced on very cheap terms to the nation. But the usual fate of most financial schemes in this country awaited this one, as revolutionary movements and an exhausted treasury very soon put an end to the operations for want of funds. In those years the bonds taken up embraced the English Convention debt, the London loan, the American Carbajal bonds, and possibly others. The purchases were, however, resumed within the past year, and were confined to the Spanish Convention debt. The subject having been noticed in the public press, the government official journal, the Diario Oficial, of the 27th of April last, in a lengthy article, entitled “Redemption of the Public Debt,” defended the action of the government in these transactions as a wise expenditure of public money, and, among other arguments, shows that the purchases of 1868–’69 were at the rate of 18¾ cents on the dollar, while those of the past year were at the rate of 4 cents only! It does not seem to have occurred to the Mexican officials that this good bargain, of which they make public congratulation, was accomplished by ten years’ additional default in meeting its own solemn obligations.

It is a question of interest to the holders of Mexican bonds, a part of whom are, as I have shown, American citizens, to form some estimate of the ability and probability of the payment by Mexico of its foreign debt, or at least of the resumption of its interest. A debt of $130,000,000 is not an excessive burden for nine millions of people, even if it had to be paid in full; but there is reason to believe that it might be reduced from 25 to 50 per cent, by agreement with the creditors if any reliable assurance could be given of certain and regular payments of interest in the future. But it may be safely predicted that if the country is to be afflicted by a revolution every few years, as has been its past history, there is little or no probability that either principal or interest will be paid. With peace and good government, prosperity and competence would gradually return, and the marvelous natural resources of the country could be developed in such measure as to afford the government the means, in time, of re-establishing its foreign credit. But justice to Mexico requires that it should be stated that at present the government is in no condition to resume the full weight of its foreign obligations. The incessant march of revolutions, as Señor Payno expresses it, has consumed the wealth which the colonial order accumulated, paralyzed business and public enterprises, disorganized the economic regulations of the government, and corrupted the revenue collection, and left the country impoverished to an extent hardly equaled in any other Spanish American country. The statistics of the exports of Mexico compared with that of other countries show, that while the amount per capita of the population in Mexico is a little over $3, for the Central American States it is $6.30; for Cuba, $66.60; Porto Rico, $13.80; Hayti, $15; San Domingo, $5; Venezuela, $9.60; Peru, $14; Chili, $18.60; Argentine Republic, $25; Brazil, $10.50.

The national treasury is just now in no condition to assume obligations additional to the ordinary and necessary current expenses of government. It has recently been compelled to suspend temporarily the payment of the salaries of the executive and judicial officials on account of the absence of receipts to pay them. It is now owing the United States over $3,000,000 under the late claims convention, and to the Mexican Railway Company, say, $2,000,000, and as it appears to act upon the principle of paying the debts last contracted in preference to the old ones, these two are likely to receive attention first, and in the present and prospective state of public affairs and of the treasury, it is a serious question whether It will not be thought necessary to continue its default on the payment of the last-named of these two. The prospect, therefore, for an early resumption of the payment of interest on the foreign debt does not appear to be very flattering.

I have not taken into consideration in this dispatch the large interior debt of the country, which, in addition to the funded part, is made up of a large amount of unadjusted claims, which increase enormously with each succeeding revolution.

I am, &c.,

JOHN W. FOSTER.