Papers Relating to the Foreign Relations of the United States, With the Annual Message of the President Transmitted to Congress December 3, 1912

File No. 815.51/233.

The Secretary of State to the Chairman of the Senate Committee on Foreign Affairs .

Department of State,
Washington , February 27, 1911 .

My Dear Senator Cullom: For the convenience of the members of the Committee on Foreign Relations I am taking the liberty of sending herewith fourteen copies of the substance of the remarks made by Mr. Jennings before the Committee on Friday, concerning the Honduras loan convention and contracts.

I am this morning in receipt of a letter¹ from Mr. Jennings in which he points out the urgent necessity for prompt action on this convention. I also enclose fourteen copies of this letter.

Very sincerely yours,

P. C. Knox.

[Inclosure]

[Untitled]

Gentlemen of the Committee:

I had not expected to make any statement, but have come here at the request of the Secretary of State to furnish such information as you may desire in respect to the agreements which have recently been executed, providing for the issue of bonds by the Republic of Honduras and their purchase by a group of New York bankers and the disposition of the proceeds of the proposed loan.

Honduras has an area of about 48,000 square miles and a population of about 500,000, of which about ten per cent, are white of Spanish blood, eighty per cent, are Spanish and Indian, and ten per cent, Spanish and negro, the merchants and farmers, the more intelligent and substantial people of the country, being largely white. Its most important port upon the Pacific is Amapala, and upon the Atlantic side is Puerto Cortes, which is distant about 900 miles from New Orleans and also from Galveston, and about 850 miles from Mobile, with all of which places it has regular steamer connection. It is generally admitted to be one of the richest of the Central American countries in natural resources, which, however, have not been developed because the country has been constantly disturbed by revolutions, largely fomented by neighboring republics, and has been crushed under a burden of debt, and because of the lack of transportation facilities.

The purpose of the proposed loan is to furnish money with which to settle the debt of Honduras, to acquire, improve and extend its railroad and wharf at Puerto Cortes, and for other internal improvements necessary to the development of the country.

The Republic has outstanding bonds issued in 1867, 1869 and 1870 to the amount of about $27,000,000, upon which substantially no interest has ever been paid. These bonds are held largely in England and on the Continent, and the amount due upon them at the present time is upwards of $124,000,000. In addition, the Republic has an internal debt amounting to about $2,000,000 and other indebtedness and claims amounting to upwards of $1,000,000. Arrangements have been made by which the total indebtedness of Honduras, thus amounting to upwards of $127,000,000, can be discharged for less than $5,500,000.

The agreement made with the bankers provides for the ultimate issue of not exceeding $10,000,000 of five per cent, forty-year bonds, with a sinking fund of one per cent, per annum, to redeem the bonds before maturity. $7,500,000 of the bonds are to be issued at once, the remaining $2,500,000 to be reserved for future issue with the approval of the bankers and the Department of State of the United States when the needs and the development of the country are sufficient to justify it, the proceeds of such issue to be used only for the extension of the railroad or other internal improvements necessary to the industrial development of the country. The payment of interest and sinking fund upon the bonds is to be secured by the customs revenues of the Republic, to be collected by a Collector General appointed by Honduras from a list of names selected by the Fiscal Agent of the Loan and approved by the President of the United States, such revenues to the extent necessary to be paid by the Collector General to the Guaranty Trust Company of New York, the Fiscal Agent of the Loan and trustee for the new bondholders. The bonds are also to be secured by the net revenues from the railroad and wharf, which are likewise to be paid to the Fiscal Agent of the Loan.

The $7,500,000 of bonds to be issued at once are to be purchased by the bankers at 88. From the proceeds about $4,050,000 are required to take up the outstanding foreign bonds at fifteen per cent, of the face value of the principal, without interest. It is estimated that about $700,000 will be required to settle the internal debt, the validity and amounts of which are to be determined either by agreement, approved by an assessor appointed by the Secretary of State of the United States, or by three arbitrators, one to be appointed by the Republic, one by the claimants and one by the Secretary of State. It is estimated that about $700,000 will be required for the acquisition of the railroad and wharf and the settlement of other outstanding indebtedness and claims against the Republic connected therewith, such amounts also to be determined by agreement, approved by an assessor appointed by the Secretary of State or by three arbitrators, one to be appointed by the Republic, one by the claimants and one by the Secretary of State.

The remainder of the proceeds of the loan, amounting to not less than $700,000, is to be applied, with the approval of the Fiscal Agent and upon certificate of an engineer to be selected by it, to the improvement and extension of the railroad and the construction of branches which the Republic believes will largely increase its revenues and aid in the development of the country.

Pending the application of these amounts they are to be held by the Guaranty Trust Company for the purposes stated.

The wharf at Puerto Cortes is about 750 feet long, runs parallel with the land and has thirty feet depth of water alongside, so that any ships of whatever size can come up directly to the wharf. It was originally built and maintained and is now owned by W. S. Valentine of the City of New York. The wharfage dues are fixed by law and by the terms of his concession one-half of the earnings of the wharf are paid annually to the Republic. The total net earnings of the wharf amount to upwards of $30,000 per year. The custom-house at Puerto Cortes is situated upon the wharf and the tracks of the railroad run along it within eight feet of ships lying alongside. There is no other entrance to Puerto Cortes.

The railroad known as the Interoceanic Railroad was originally projected to extend from Puerto Cortes across the country to Amapala, a distance of about 220 miles. 57 miles are now in operation; 5 miles additional are substantially completed, but without rails laid; 5 miles additional are graded, and for 10 miles additional the right of way has been cleared. About one-half of the railroad was built from part of the proceeds of the bonds issued more than forty years ago, and the remainder was built by Valentine and the Honduras Syndicate. The Honduras Syndicate is an American corporation, composed chiefly of New York men, who, under a concession from the Honduras Government, operated and extended the road and made advances on account of customs to the Republic until several years ago they were ousted by the Government in part upon representations from the British Government claiming that the foreign bondholders had a lien upon the road. The Honduras Syndicate claims to have actually paid out in such advances to the Republic and in the maintenance and extension of the said railroad upwards of $700,000 in cash and its claim against the Honduras Government is based upon those facts. The railroad is now held under a lease made to Valentine, in which the Syndicate has an interest, which was originally for thirty years and now has about twenty-eight years to run, at an annual rent of about $10,000 per year for four years, regularly increasing every four years up to twelve years, and thereafter $25,000 per year, under which lease the first four years’ rent was advanced to the Government. The net earnings of the railroad and wharf amount to about $150,000 per year, on the basis of the actual returns for the last six months of the last fiscal year.

As the result of negotiations between the Honduras Commissioners and the representatives of Valentine and the Syndicate, it was found that the railroad and wharf could be acquired, and all their claims connected therewith or otherwise against the Republic, could be settled for about $750,000, but at the suggestion of the State Department provision has been made in the agreements whereby these claims must all be submitted to and determined by arbitration both in respect to validity and amount.

The credit of Honduras abroad is so bad on account of its continuous default in the payment of interest upon the large amounts of bonds previously issued by it, that the bankers have with considerable reluctance entered into this agreement for the purchase of the proposed issue of bonds and have been largely influenced thereto by the belief that it will be greatly to the public advantage of this country to assure more stable conditions in Honduras which on account of its geographical position will largely tend to tranquilize the entire Central American situation. They also believe, however, that if the customs can be honestly collected and applied that the amount required for the service of the loan can be easily provided without encroaching upon the amount required for the expenses of the Government.

The revenues of the Republic for the year 1909 consisted of

Customs duties	$766,495	gold
Liquor and powder monopolies stamp tax, etc	887,873	“
Making total receipts of	1,654,818	“
While the total expenses amounted to	1,643,360	“

Of these expenses 39% or $643,206 gold were incurred in the War Department.

Payments on account of the internal debt during that year were $251,635 gold.

The superintendent of the railroad and wharf estimates that with the extensions and branches to be built from part of the proceeds of this loan, the net earnings of these properties will be upwards of $300,000 gold per annum.

The Honduras Commissioners estimated that the war expenses under more stable government could be reduced at least one-half, thus saving on the basis of the year 1909, $321,603 gold per annum.

The amount of the annual payments upon the internal debt, which are to be discharged by part of the proceeds of this loan, will be saved, amounting for the year 1909 to $251,635 gold per annum.

In addition to these it is believed that the increase in customs, due to greater stability in the Government and also to an honest and business like administration, will alone amount to sufficient to offset the amount required for the service of the loan.

In the case of San Domingo the customs increased from $1,843,910 gold in 1905 to $3,354,776 gold in 1908.

The service of the loan will require $450,000 per year, and there would seem to be no doubt that under a proper administration that amount can easily be provided without encroaching at all upon the amount required for the expenses of the Government.

The obligation of the bankers to purchase the bonds is conditioned upon the consummation of the proposed arrangement and the delivery of the bonds on or before June 1st.

The old foreign bonds to the amount of $20,000,000 of principal have for more than a year been deposited with the Council of Foreign Bondholders subject to the proposed adjustment, and the bankers are advised that unless the proposed arrangement is consummated without undue delay it will be impossible longer to hold these bonds on deposit, and if they are once returned to their holders, it will be difficult, if not impossible, again to obtain assents and deposits, and that this certainly can not be done without an increase in the amount to be paid.

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