File No. 815.51/209A.
The Secretary of State to the Chairman of the Senate Committee on Foreign Relations .
Washington , February 13, 1911 .
Sir: I have the honor, pursuant to the direction of the President and in conformity with the promise made in his Executive Message of January 26, 1911, with which he submitted to the Senate a Convention, signed January 10, 1911, between the United States and the Republic of Honduras “concerning a loan which the Republic contemplated making with citizens of the United States,” to furnish to the Senate, through your Honorable Committee, a more detailed account of the negotiation of that convention than was given in the message of the President, together with a copy of the Contract Agreement in question, which is about to be signed on behalf of the Republic of Honduras, of the first part, and the empowered representative of an American banking group, consisting of Messrs. J. P. Morgan and Company, Kuhn, Loeb and Company, the National City Bank and the First National Bank, all of New York, of the second part. I also furnish a copy of the corollary Agreement to be made between the Republic of Honduras of the first part and Guaranty Trust Company of New York, a corporation organized under the laws of the State of New York, of the second part, as the “Fiscal Agent of the Loan,” stipulating the powers and duties of that Company acting as Trustee for the holders of the proposed bonds; as Transfer Agents of such bonds and as Fiscal Agent of the Republic of Honduras in respect of the proposed loan. In thus furnishing the indicated statement and documents, it is my aim to afford the Senate, in available form, the fullest information for its guidance in the consideration of this important convention.
The Government of Honduras has long been cognizant of the need of reorganizing the deplorable financial condition of that Republic by the refundment of its debt, and of the reestablishment of the Honduran national credit through some equitable transaction with its foreign creditors whereby the heavy debt, improvidently contracted during nearly half a century and additionally burdened by the defaulted interest of many years, should be adjusted and consolidated into a single obligation, within the powers of the Republic to discharge and based upon reasonable guaranties for the security of the revenues to be devoted to its acquittance. Efforts in this direction have heretofore been fruitless, lacking in comprehensiveness and operating piecemeal to increase the already insupportable load of debt and thereby to diminish still further the eventual ability to meet the obligation. Each failure but aggravated the situation. Each year’s added default but augmented the difficulties, and emphasized the need of some practical as well as equitable general arrangement for the rehabilitation of the Republic’s financial status. A renewed effort in that direction became for Honduras an imperative necessity.
The present movement of Honduras toward effecting, with the assistance of the United States, this indispensable reform in the fiscal condition of the Republic began to take shape about a year ago. Preliminary [Page 569] conferences of the European creditors having disclosed their willingness to reach a rational adjustment with the Honduran Government, conditioned upon the negotiation of a refunding loan, and it appearing that financial interests in the United States were not indisposed to consider the negotiation of such a loan, the Government of Honduras, in January 1909, approached the Government of the United States with a view to making a conventional arrangement whereby the sanction of this Government could be obtained to some provision for securing the collection of the customs receipts of Honduras in such manner as to afford adequate revenue for the needs of the Republic and at the same time provide sufficient surplus income to satisfy the obligations of the loan. At the preliminary stage of the renewed Honduran negotiations with the Council of Foreign Bondholders, the Government of the United States was sounded in a necessarily general and vague way, inviting rather assurance of benevolent sympathy in the projected settlement than categorical formulation of a plan of international cooperation. It was not until April, 1909, that the Honduran Executive, realizing the disadvantageous terms then proposed by the foreign bondholders and the probably onerous character of any arrangements which might be made in the financial markets of Europe, sought the good offices of the United States in endeavoring to conclude a satisfactory arrangement with an American financial group for the general refunding of the entire debt of Honduras.
The friendly offices of the Department of State were accordingly used to bring reputable American banking interests into communication with the Government of Honduras, it being understood that the Government of the United States would not participate as a principal in this contractual transaction, but that, the initiative being taken by the Honduran Government, the feasibility of lending moral aid to the Republic in the attempt to reorganize its finances would be considered with every disposition to acquiesce so far as might be practicable and in proper consonance with national policies. Despite the uninviting character of the proposed investment in view of the long-standing default of Honduras toward its national and foreign creditors, the Department of State was fortunate in being able to arouse the interest of responsible financial elements in this country, with a view to bringing about such an arrangement between the Republic and the American bankers as should meet the conditions with due regard to the fiscal I situation in Honduras and the sovereign rights of the State in its dealings with citizens of other nations; and in July, 1909, the proposals of Honduras were answered by offering to put that Government in touch with American bankers through any representative whom the Honduran Government might send to the United States with a view to opening negotiations.
The Government of Honduras, deeming the prospect of the terms of an arrangement with American bankers more advantageous to the Republic than those which had been offered by foreign bankers, and the bondholders being also of the same mind, the negotiations theretofore had with a British syndicate, which had seemed liable to lead to an arrangement also objectionable because too regardless of certain important vested American interests, were abandoned by the mutual consent of the Honduran and British Governments, in order to leave the way clear for the proposed American negotiation.
[Page 570]In August, 1909, the American Legation was notified by the Honduran Foreign Office that the Government of the Republic had decided to appoint a commission to visit the United States to confer concerning the settlement of the foreign debt of Honduras. Two commissioners—General Juan E. Paredes, Minister of Finance, and Señor don Paulino Valladares—were thereupon appointed to negotiate directly with the representatives of the American bankers. The commissioners reached New York toward the end of September. Their conferences with the American bankers were had without intervention on the part of the Department of State, the Minister of Honduras being advised (October 7, 1909) that the United States stood absolutely impartial in the matter and had no interest except a natural desire to see the neighboring State enjoy peace and maintain good financial standing.
The ensuing negotiations were perforce protracted, owing on the one hand to the necessity of frequent consultations with the home Government at Tegucigalpa, which at the time was embarrassed by domestic political problems, and on the other to the complex negotiations which had to be conducted between the American bankers and the several associations of Honduran bond-holders in different European countries. As to the latter, an understanding was finally reached by which the foreign debt was to be refunded at about 3½ per centum of the total of its face value, swelled inordinately by the long accumulation of defaulted interest. As respects the former, much time was consumed in bringing about an understanding with the Government of Honduras as to the extent to which the countenance and support of the United States could be lent to the transaction, in a manner and to a degree comporting alike with the sovereign self-respect of the Honduran Republic and with the American interests involved, and yet be confined within the limits of our well-defined national policies.
By the middle of December last, the fiscal agreement between the American bankers and the Government of Honduras had taken definite and mutually satisfactory shape, and a draft of a convention between the United States and Honduras defining the attitude of this Government towards the loan transaction had been considered and accepted. Its signature took place January 10, 1911, and it is now before the Senate for consideration.
In the final stages of the negotiations the Department of State played the part of a disinterested counsellor, scrutinizing all the features of the proposed contract with deliberate care and seeking in every possible way to reduce the almost fantastic indebtedness of Honduras within practical limits, in order to free that State from its intolerable and menacing burdens without imposing any new load beyond its power to carry.
How jealous of the best interest of Honduras and how sensible of its grave responsibility the Department of State has been in responding to the request of Honduras for its good offices in placing a loan in the United States, may be judged from the fact that, not content with the most exhaustive examination of the earlier draft contracts, the Department employed one of the best known American financial experts to subject these draft contracts to a technical examination, especially to determine whether in any respect they might be found inequitable, economically unsound, or short of the most favorable [Page 571] terms that the Government of Honduras was likely to be able to obtain in any quarter. A copy of his analysis of the contracts is herewith submitted for your consideration.1 Further than this, the provisions of the two contracts, the one with the American financial group for the proposed loan, the second with the Trust Company selected to act as Fiscal Agent of the Loan, were subject [subjected?] at successive stages to competent legal analysis within and without the Department of State. As a result of this searching revision, amendments have been made from time to time, in most instances with a view to making the terms of the engagements entirely equitable to Honduras as well as to bring them in all regards into appropriate conformity with the sovereign rights of the Republic. A copy2 of the opinion of the attorneys consulted by the Department is also enclosed for the Committee’s information. Throughout the entire transaction, the influence of the Department of State has been exerted to establish the cordial friendliness of the United States for Honduras and to ensure just respect for Honduran interests. In so doing, the Department of State has aimed to maintain and affirm the high policy which has ever consistently controlled the intercourse of the United States with Honduras and the other Republics of Central America. It has, from first to last, been mindful of the traditional policy of friendly aid and assistance to the sovereign commonwealths of the northern continent and has been animated by a sense of the moral obligation to promote their wellbeing in all practicable ways. For nearly a century the United States has had this benign purpose constantly in view and it is gratifying to recall that through its timely aid good has been often wrought in composing difference between American countries and in making broader their path to that prosperity which rewards peace.
In its share of the transaction the Department of State has appreciated the merit of the desire alike of the foreign creditors and the bankers that some form of sanction should be obtained from the Government of the United States calculated to remove the execution of the contract from the field of domestic turbulence and political vicissitudes in Honduras and to insure the faithful and honest collection of the revenues pledged for the security of the contemplated loan.
As will be seen, while the Convention in no wise makes the Government of the United States a direct party to the loan-contract, it confirms and continues in regard thereto the kindly counsel and sanction which this Government has accorded since the matter was broached by the Government of Honduras. The two Governments will mutually take note of all the provisions of said contract when it shall be made, and thereafter, in case of any difficulties arising in carrying out its provisions, the two Governments agree to consult with a view to the faithful execution thereof. In like manner the two Governments agree to consult with regard to any change of the Honduran customs duties or other dues calculated to affect the revenues pledged as security for the debt, and it is mutually agreed that each Government shall be, periodically or when necessary, informed of all operations under the loan contract. Unlike the Dominican precedent, the present arrangement stipulates the appointment of a [Page 572] collector-general of the revenues, not by the President of the United States under the sole protection of the United States, but by the Government of Honduras from a list of names to be presented by the Fiscal Agent of the loan and approved by the President of the United States; and this collector-general is to receive from the Government of Honduras full protection in the exercise of his functions, with such additional protection from the Government of the United States as the latter may find requisite.
As affecting the tranquility of Honduras and through it the tranquility of the five Republics grouped to the north of Panama and the Canal, the importance of the present measure can hardly be overrated. Viewed as a mode in which American capital and enterprise can be most beneficially used and the sanction of this Government can best be accorded in the discharge of the duty of our position in the zone of the Caribbean, it illustrates the principle that the capital of the more advanced nations of the world is better employed in assisting the peaceful development of those more backward than in financing wars.
To maintain its neutrality, Honduras must have strength, stability, and support. Financial rehabilitation is obviously the first necessity to that condition. Hence the great natural interest of the United States in the Convention now transmitted to the Senate.
By the signature of the Washington Conventions was recorded the conviction of all Central America that a neutral Honduras would be the foundation of Central American peace: a conviction evidenced also on the part of Mexico and the United States by their participation in the negotiations, and a conviction which so far as the United States is concerned has by common consent thrown upon us a measure of moral responsibility to do what we properly can to prevent this most important provision of these Conventions from becoming a farce.
Finally, I feel it my duty especially to recommend the consideration and approval of this Convention at the earliest date, because upon it depends the carrying out of the loan which is so vital to Honduras; because the complicated arrangements made by the bankers affecting European creditors cannot much longer be held open, and if this Convention fail it may be difficult once more to interest American capital in a venture which it has not embarked upon without considerable public spirit and patriotic feeling; and because it may not be possible again so well to safeguard vested American rights in Honduras, unliquidated American claims, and foreign bondholders, and withal so well to protect the interests and entity and the political welfare of the Republic of Honduras.
I have [etc.]