Papers Relating to the Foreign Relations of the United States, Transmitted to Congress, With the Annual Message of the President, December 1, 1879

No. 337.
Mr. Foster to Mr. Evarts.

Legation of the United States,
Mexico, December 16, 1878. (Received January 2, 1879.)

No. 855.]

Sir: On the 6th instant the Mexican executive sent to Congress a contract made by the minister of finance with certain holders of government bonds, which contemplates a new funding of the public debt, coupled with an arrangement for the construction of an extensive system of railroads in Mexico. The instrument, however, should more appropriately be termed bases for future contract, as in its express terms it binds no one but the parties who may hereafter enter into the arrangement designated.

As stated, the arrangement has a two-fold object, the funding of the public debt, and the railroad system, and the former is made dependent upon the latter. The main provisions of the agreement are as follows: The public creditors of Mexico who may enter into the contract are to construct, at their own cost, an interoceanic railroad from the city of Mexico to some point on the Pacific Ocean between San Bias and Mazatlan, and such other branches as they may choose, the whole to consist of not less than 1,000 kilometers, or say 625 miles, and the whole to be completed within six years from the approval of the contract by Congress. The construction and management of the road is to be upon bases hereafter to be agreed upon with the minister of public works. In consideration of the construction of the railroad, the Mexican Government agrees to recognize the public debt represented or held by the company which constructs the railroad, and to issue therefor a new consolidated fund in bonds, converting the capital and accrued interest as a rule at 50 per cent, of their face value, and which new bonds shall bear 1 per cent, the first year, and increasing 1 per cent, each year, as the building, of the road progresses, until at its completion, and thereafter they will bear 6 per cent, interest. The government also agrees to redeem and pay off in cash $8,000 of the new funded bonds for each kilometer of the railroad built; but in case it is not able to make this redemption and payment, it agrees to issue new bonds therefor, which, together with the coupons on the funded bonds, shall be receivable for 10 per cent, of the customs and other federal taxes. Nineteen separate classes or descriptions of public debts are to be admitted in this agreement, which embrace the London bondholders, the English and Spanish convention debts, the Carbajal-Corlies American bonds, and all kinds and descriptions of the domestic or interior debt, including claims for forced loans, damages, back salaries, pensions, &c; but it is expressly provided that none of these bonds or obligations are to be prejudiced in their present status, if the holders thereof do not enter into this agreement.

As I have stated, the contract was submitted to Congress on the 6th instant, and the approval of that body is required before it can have any binding effect or validity, but an adjournment of the session occurred on yesterday without any action whatever being taken upon the subject, so that the whole matter is held in abeyance until the next session in April.

In addition to the general interest which our country feels in the prosperity and development of the resources of Mexico, which would be greatly improved if such an arrangement as that contemplated could be carried out, many of the citizens of the United States are pecuniarily interested in the subject as holders of the Carbajal-Corlies bonds, which are allowed to be embraced in the agreement. To them it presents three questions: 1st, the probability of the ratification of the contract by Congress; 2d, the practicability of the scheme, and the ability of the Mexican Government to meet its obligations thereunder; 3d, does it offer them greater probabilities of payment of the principal or interest of their bonds, or of security therefor than they now hold?

The first question, as to the probability of the approval of the scheme by the Mexican Congress, is difficult to answer with any degree of assurance. The contract was made by the government mainly to arrange a settlement with the London bondholders, and there has always been, both in Congress and the country, a strong opposition to such a measure, and up to the present time has prevented any agreement, but the executive has strong hope that it will be approved at the next session.

Second, as to the practicability of the scheme and the ability of the Mexican Government to meet the obligations stipulated: The first difficulty will be to find any sufficient number of bondholders who will be willing to form a company and contribute the necessary funds to inaugurate the building of the railroad. It will require considerable capital to commence and carry forward such a work, and with the experience already had by the bondholders as to Mexican investments, it presents a very doubtful question. The only persons likely to undertake it are the London bondholders. If this class of bonds are alone represented in the company, and the road is built, it will require on the part of the Mexican Government during the next six years the payment in cash, in redemption of funded bonds and interest, of say from $12,000,000 to $18,000,000, according to the basis upon which the old bonds are funded. If other classes of bonds are also represented in the company, and the funded debt and interest proportion ably increased, the cash payments of the government will be likewise increased. When it is remembered that the government has not paid its current subsidy to the only completed railroad in the country for nearly three years, and that there is due thereon approximately $2,000,000, and that the current revenues are insufficient to pay the army and government employés, some estimate may be formed of the ability of the government to meet its obligations under the proposed scheme.

On the third question, as to whether the condition of the American holders of Mexican bonds would be improved either as to probability of payment of principal or interest or as to security thereon, several points are to be noted. It has been seen that it is proposed to fund the debt to be embraced in the contract at 50 per cent, of its face value. In many classes of bonds interest is to be forfeited altogether, and in all others, except the American bonds, to be allowed at 50 per cent, of the amount due the latter, however, to be allowed in full, for which the executive is entitled to all proper consideration. When it is remembered that the American bonds were issued to obtain arms and materials of war to maintain the republican government of Mexico against the European intervention and the Maximilian empire, it would seem that there is no good reason why the American bondholders should be placed on the same footing with European bondholders, whom the republican government have always charged with sympathizing with and aiding the intervention and empire. The American bonds bear 7 per cent, interest, and are secured by a pledge of a large body of public lands and 60 per cent, of the receipts of several important custom-houses, and of the federal and State taxes in two States of the republic. If these bonds are surrendered and the new funded bonds are accepted under the contract inclosed, the holders thereof consent to a reduction of one-half of the principal of their bonds, a great diminution of the rate of interest, and, as a security for payment, only 10 per cent, of the federal customs and taxes, and are placed on a level with all other creditors entering into the agreement, whatever may have been the origin of their bonds, besides incurring heavy obligations for the construction of a long line of railroad.

It would hardly seem, therefore, to offer much inducement to the American holders of Mexican bonds. Although, as stated in my No. 802, the Mexican Government has not paid interest on the bonds, according to their tenor, since their issue in 1865 up to the present date, it has always recognized them as a valid debt, and it is to be hoped that at no distant day it will make effective the solemnly pledged security for the payment of principal and interest which its financial necessities have induced it to divert to other uses.

I inclose herewith a copy and translation of the contract referred to, together with a printed copy of the documents sent to Congress with said contract by the minister of finance.

I am, &c.,

JOHN W. FOSTER.

[Inclosure in No. 855.—Translation.]

Contract entered into between the United Mexican States and the creditors of the republic for the construction of a railroad from the city of Mexico to the Pacific, and for the adjustment of the national debt and the payment of the interest thereon.

The Government of the United Mexican States and Messrs. Edward J. Perry and Pedro del Valle in behalf of the holders of Mexican bonds in London, and Pedro del Valle for himself and in the name of other creditors of the republic, whom he represents, have agreed on the following bases for the construction of a railway from the city of Mexico to the Pacific Ocean, connecting this work with the adjustment and payment of the Mexican debt, on the terms set forth in this agreement:

Chapter I.

regarding the construction of the railroad from the city of mexico to the pacific ocean.

1st. The creditors of Mexico, represented by Messrs. Edward J. Perry and Pedro del Valle, obligate themselves to construct and put in operation, on their own account or through the person or company to whom they may transfer the right conceded to them by this agreement, a railway with its respective telegraph, which commencing at the city of Mexico will terminate at a point on the Pacific Ocean, between San Bias and Mazatlan.

2d. The construction and operation of the railroad and telegraph will be subject to the bases established in either of the concessions granted up to the present by the Government of Mexico for interoceanic communication through the center of the republic that the government may select, except regarding those points with reference to which something else may be stipulated by this contract. This agreement will not prejudice the rights of other companies that may have entered into contracts with the Government of Mexico for the construction and operation of railroads in the republic.

3d. The department of public works will designate, upon this contract being approved by the Congress of the Union, to which of the concessions spoken of in the preceding clause will the construction and operation of the railroads to which this agreement refers be subject.

4th. The creditors of Mexico, represented by Messrs. Edward J. Perry and Pedro del Valle, or the company to which the rights granted in this agreement may be transferred, obligate themselves to construct and put in operation the railroad and telegraph referred to in the first clause of this agreement within the term of six years, counted from the day that this contract may be approved by the Congress of the Union.

5th. The construction of the railroad and telegraph, to which reference is made in the preceding clause, will be executed in the following terms: During the first year, counting from the day the Congress of the Union approves this agreement, there will be constructed and put in operation at least seventy-six kilometers of railroad and telegraph; during the second year, one hundred kilometers of railway and telegraph will be constructed and put in operation, and in each of the four following years there will be constructed and put in operation two hundred and six kilometers of railway and telegraph. No part of the railroad and telegraph will be considered constructed and concluded until it be received to the satisfaction of the department of public works.

6th. In case that, for any reason, the creditors of the republic, or the person or company to whom the rights conceded by this agreement may be transferred, fail to comply with the obligations imposed upon them by the same with respect to the construction of the railroad within the terms which it fixes, after the completion of the first four hundred kilometers and the conversion of the bonds of the national debt, in conformity with clauses 8, 9, and 12 of this contract, the creditors, or whoever may represent them, as a penalty, will lose half of the road that they may have constructed, which will become the property of the nation, and may be disposed of to any individual or company, so soon as the expiration of this concession may have been declared by the executive.

7th. The creditors of Mexico who accept this agreement, or the company to which they may transfer the rights which it concedes to them, may construct another line of railway besides the trunk road spoken of in the first clause of this agreement on condition that they subject themselves to the provisions of this agreement; that the line referred to is not already contracted for with another company, and that they commence the construction within six months from the day on which they give notice that they intend to construct said line, with the understanding that they can only enjoy this privilege within the six years allowed for the construction of the trunk road. With respect to the railroads which the creditors of Mexico may construct by virtue of the right given to them by this clause, $8,000 in bonds of the debt will be redeemed on the terms established in clause 13 of this agreement for each kilometer.

Chapter II.

regarding the conversion of the national debt and the payment of its

interest.

8th. In consideration of the fact that the creditors of Mexico, or the person or company to whom they may transfer rights granted to them in this agreement, are to construct, on their own account, the railroad and telegraph to which this same contract refers, without any pecuniary subvention or other remuneration than that stated in clause 13 of this agreement, the Mexican Republic will establish a new consolidated fund, in bonds which will bear an interest of 6 per cent, per annum, which will commence to have effect and be paid on the terms expressed in clause 15 of this agreement, a part of the capital being redeemable in the manner stated in clause 13.

9th. The cousolidated fund spoken of in the preceding clause will be formed of the following credits, which capital and interest will be converted at the rate of 50 per cent, on their face value, except in cases where something else may be determined in reviewing each one of said credits, and totally redeeming the capital as well as the corresponding interest of each one of the converted credits.

I. Bonds of 3 per cent. created by the law of November 30, 1850, and issued up to December 16, 1857, capitalizing their interest.

II. Bonds of 3 per cent. created by the aforesaid law and issued after December 17, 1857, on condition that they bear the annotation directed in the order of January 17, 1861, capitalizing their interest.

III. Bonds of 5 per cent, created by the law May 19, 1852, and issued up to December 16, 1857, capitalizing their interest.

IV. Bonds of 5 per cent. created by the said law and issued after December 17, 1857, on condition that they bear the annotation directed in the order of January 17, 1861, capitalizing their interest.

V. Bonds created by the decree of September 12, 1862, losing their interest.

VI. Bonds issued in San Carlos, Tamaulipas, July 4, 1866, capitalizing their interest at par.

VII. Credits of different classes issued before November 30, 1850, and which by the law of that date were deferred, losing their interest.

VIII. Certificates which the general treasury issued in accordance with the order of January 14, 1881, and circulated by the treasury the 17th of the same month, instead of the bonds created by the laws of November 30, 1850, and May 19, 1852.

IX. Certificates issued by the general treasury in accordance with the different orders of January 17 and 22, 1861, circulated by the treasury the 4th of the following February, and with the laws of February 14 and 16 of the same year.

X. Certificates issued by the auditor’s bureau of the treasury and the sections of liquidation in conformity with the law of November 19, 1867.

XI. Credits not converted according to the provisions of the laws of November 30, 1850, and May 19, 1852, and which appear represented in the receipts issued in the liquidation section created by the dispositions of the first of the laws cited.

XII. Balances due on salaries and civil and military pensions, loans, advances, contracts, &c., from November 20, 1867, to June 30, 1878.

XIII. Certificates of redemption of copper coin in Chihuahua issued in conformity with the bases accorded August 20, 1868.

XIV. Certificates of deposit of copper coin called in in the State of Sinaloa, issued by virtue of the determination of the department of finance September 25, 1875.

XV. The capital of the Mexican bonds issued in London in conformity with the law of October 14, 1850.

XVI. The coupons of the Mexican bonds issued in London in conformity with the law of October 14, 1850, due and unpaid, since July 1, 1867, until their conversion be effected.

XVII. Bonds issued by virtue of the conventions of December 4 and 6, 1851, and their interest legally due until the date of their conversion.

XVIII. The capital of the bonds issued by virtue of the convention of November 12, 1853, losing their interest.

XIX. The sum that may be liquidated as just of the bonds issued in London, besides those converted in conformity with the law of October 14, 1850, losing their interest.

10th. The classification and liquidation referred to by traction XIX of clause 9 of this contract, will be made by an arbiter appointed by the Government of Mexico, and another appointed by the holders of those bonds. The arbiters shall meet in the city of Mexico, and they shall appoint, before commencing their labors, an umpire for any case of discord.

11th. The holders of the bonds referred to in clause 9 of this agreement, who for any reason may not accept the obligations which it imposes, will not enjoy the advantages stipulated in it, and will remain in the position they occupy at present, with the modifications that may result from any ulterior arrangement that may be made with them, or from the laws that the Congress of the Union, in the exercise of its attributes, may dictate, without their present titles or rights being modified or prejudiced in any manner by virtue of this agreement.

12th. So soon as the department of public works shall have received to its satisfaction the first four hundred kilometers of railroad and telegraph to which this contract refers, the executive of the republic will liquidate and make the conversion of the bonds spoken of in clause 8 of this agreement, and will put in the way of payment the interest of the debt alluded to in clause 9, making the payment in the proportion and manner established in clause 15.

13th. For each ten kilometers of railroad and telegraph constructed and received to the satisfaction of the department of public works, the Mexican. Government will redeem in money and at par $80,000 or £16,000 sterling of bonds of the new emission spoken of in clause 8 of this agreement. With respect to the first three hundred and eighty-two kilometers that are to be finished before the new emission is made, the credits stated in clause 9 of this agreement will be redeemed with the reductions established in the same clause.

14th. If at the expiration of six months after the Mexican Government has received a completed branch often kilometers of railroad and telegraph, it shall not have redeemed the titles of the national debt in the terms established by the preceding clause of this agreement, the executive will issue in favor of the company bonds for the sum due, which will bear 6 per cent, interest per annum, and be redeemable with 10 per cent, of the importation duties collected in the custom-houses of the republic.

15th. For the first seventy-six kilometers of railway constructed by the company in the first year, conformable with clause 5, the Mexican Government will allow the bonds of the new emission 1 per cent, of interest; for the hundred kilometers constructed in the second year, in conformity with said clause, another 1 per cent, of interest will be allowed to said bonds; and for each two hundred and six kilometers of railroad and telegraph constructed in the third, fourth, fifth, and sixth years, respectively, conformable to the same clause, there will be allowed progressively 1 per cent, interest for each year, until reaching 6 percent., which will be commenced to be paid on the conclusion of a thousand kilometers of railroad and telegraph within the term of six years.

16th. The Mexican Government obligates itself to set aside the necessary sums to pay semi-annually the amount of the interest accrued and due in accordance with the last foregoing clause, and the payments will be made the 30th of June and the 31st of December of each year; the funds being sent opportunely to London or Paris, as the Government of Mexico may elect, for the payment of the interest which on account of the origin of the titles should be paid there, and the expense of exchange and commission being on account of the Mexican Republic.

17th. If the creditors of the republic who accept this agreement, or the company or person to whom they may transfer the rights which it concedes to them, should only construct a part of the railroad and telegraph to which this agreement refers, the Mexican Government will not be obliged to pay more interest on the bonds belonging to the creditors who accept it, than that corresponding to part of the railroad and telegraph constructed and in the proportion fixed in clause 15, the rest of the debt being comprehended in the consolidated fund, in the state which it is in at present, and with the rights actually possessed in conformity with clause 11 of this agreement.

18th. The credit of the nation being interested in the punctual compliance with this contract, the coupons due on the liquidated bonds will be admitted for their value in the payment of 10 per cent, of all imposts or contributions levied by the federation.

19th. Half of the transit-tax collected on goods crossing from one ocean to the other by the railroad to which this contract refers will be destined with all preference to the payment of the interest on and the redemption of the bonds issued by the government by virtue of this agreement and in conformity with its clauses 13 and 15.

20th. If the Mexican Government should at any future time enter into an arrangement for the payment of all or any of the classes of the bonds of the public debt, enumerated in clause 9 of this agreement, more favorable than that made with those who accept the present, it will be extended to those who accept this arrangement, if those advantages be conceded without conditions.

TRANSITORY.

21st. This agreement will be submitted to the ratification of the Congress of the Union, and will not be valid without it.

Mexico, December 6, 1878.

• M. ROMERO.
• EDUARDO J. PERRY.
• PEDRO DEL VALLE.

A true copy.

Mexico, December 6, 1878.

JESUS FUENTES CHUÑIZ,
Chief Clerk.