Minister Hartman to the Secretary of State.

[Extract.]
No. 118.]

Sir: I have the honor to inform the Department that on April 28, 1915, I brought the substance of Department’s April 26, 4 p.m., to the attention of the Foreign Office in my note No. 127, wherein I asked that “the information requested be furnished as quickly as possible to the end that I may comply with the instruction of the Department, and cable the information promptly.”

On May 14 the note of the Minister for Foreign Affairs with its enclosure prepared by the Fiscal Attorney and approved by the Minister of the Interior was delivered to this Legation, and copies thereof, with translation, are herewith enclosed.

I think the Department will observe not only a complete failure to reply to the inquiries submitted, but also an express purpose not to furnish the desired information, for the reason stated: that it is the contention of the Government of Ecuador that the subject presented is not proper to be dealt with through the diplomatic channel.

The Department will recall that the same question was raised by the Minister for Foreign Affairs in his note No. 192, of June 22, 1914,4 in reply to my note No. 66, of May 16, 1914.

I would greatly appreciate receiving an instruction from the Department containing a full statement of its views on the question [Page 347]raised by the Government of Ecuador, so that I may have the benefit of them before answering the note of the Minister.

Referring to the communication of the Fiscal Attorney contained in the enclosure, and to the coarse and impolite language employed by him, I will say to the Department that on reading his production my first impulse was to return that enclosure to the Foreign Office with a polite note declining to receive it because of the character of the language used. But upon reflection I determined not to do so unless so instructed by the Department.

I have [etc.]

Charles S. Hartman.
[Inclosure—Translation.]

The Minister for Foreign Affairs to Minister Hartman.

No. 92.]

Mr. Minister: I have the honor to inform your excellency that I am in receipt of your esteemed note No. 127, dated April 28 last.

Your excellency transcribes in that note the substance of a cablegram which you have received from the Department of State at Washington, relating to another telegraphic despatch addressed by the President of Ecuador to the council of bondholders at London, a copy of which has been reproduced in the communication of your excellency.

In view of what the President of Ecuador has said, the Department of State at Washington addresses to my Government through the Legation, of which your excellency is so worthily in charge, a series of questions.

I could properly, within the strict right which Ecuador has, decline a reply through the diplomatic channel, because, as I have always expressed to your excellency, the diplomatic channel is acceptable only in cases of denial of justice, very different from the present one.

But as the question relates to concrete assertions made by the Department of State at Washington on a matter so important to Ecuador as this is, being that of the railway between Guayaquil and Quito, I see in this occasion an opportunity for your excellency’s Government to learn what the officials of Ecuador think on this matter.

On receiving your excellency’s note which causes the present one, I thought it my duty to bring it to the knowledge of the Ministry of Public Works, who in their turn thought it expedient to bring it to the knowledge of the Fiscal Attorney of Ecuador in connection with their business with the railway company. I have today received the answer of the Ministry of Public Works, and I feel it not only a duty of courtesy to bring it to the knowledge of your excellency, so that you may kindly transmit it to the Department of State at Washington, but also an adequate means of giving the Department a notion of the basis on which my Government rests in order to hold: 1st, that this matter does not belong to the diplomatic channel; and 2d, that the Railway Company, even outside of that channel, cannot justly complain of the acts of Ecuador, which are inspired by fundamental and even instinctive conceptions of legitimate defense.

On account of what I have just expressed, and, making the proper reserve to the end that the present procedure of this Chancellery cannot be taken as a precedent in the sense that it (the Chancellery) consents to discuss this matter diplomatically, I have the honor to send to your excellency together with this note an authentic copy of the one which has been addressed to me by the Minister for Public Works.

The undersigned would consider the present occasion a fortunate one if it were to assist in giving to the Government of the United States an adequate idea of the justice whereby Ecuador is supported in its differences with the Guayaquil & Quito Railway Company and of the earnest desire of my Government to discover a solution for the existing contention, and a means of [Page 348]stopping the enormous losses caused by a railroad which, as is affirmed by such an authorized organ as the “Financial Times” of London, has the unenviable reputation of holding the world’s record for losses or bad administration.

I avail [etc.]

E. H. Elizalde.
[Subinclosure—Extract—Translation.]

The Minister of the Interior to the Minister for Foreign Affairs.

Mr. Minister for Foreign Affairs: From your note of the 1st instant, No. 261, this Ministry has learned of the note which his excellency the Minister of the United States addressed to you, quoting [etc.]. Said note, on account of its importance, was referred to the Fiscal Attorney charged with affairs connected with the Constructing Company of the Guayaquil & Quito Railway, and the Fiscal Attorney has addressed to me the following:

The Fiscal Attorney to the Minister of the Interior.

Quito, May 11, 1915.

To the Minister of the Interior:

Enclosed with your note of the 6th instant I found a copy of the communication which the Minister of the United States sent to the Minister for Foreign Affairs.

The Government of Washington once more on this occasion insists in protecting officially, through diplomatic channels, the Guayaquil & Quito Railway Company, with which the Government of Ecuador contracted for the construction and co-administration of the railway indicated by the name of the said company; and I therefore consider it the duty of the Ecuadorian Foreign Office to repeat the abundant and conclusive reasons (not yet, to my knowledge, refuted by the American Government) which Ecuador has before now given for denying to the United States the right of presenting diplomatic claims or asking in any form for explanations not relating to one of the cases of damage to a subject of the claimant government which are contemplated by international law.

The United States of North America constitute a powerful nation that proclaims the principle of equality before the law with all other peoples, including the weak; and the good friendship that exists between the Republic of Ecuador and that nation deserves to be carefully maintained and cultivated by us; and precisely because of those two motives I believe we should always take refuge in the rigorous application of the prescriptions of international law, the only fairly solid foundation for this class of relations, and not accept any diplomatic discussion with respect to the difficulties provoked from day to day by the Guayaquil & Quito Railway Company; these should be settled by a direct agreement between the interested parties, or by judicial sentence.

This opinion, held by the Government of Ecuador, has been declared several times by the Ministry of Foreign Relations to the American Legation; and, not to quote any but recent cases, I shall recall only the notes of May 6 and 14, 1912,5 published in the memorial which that Ministry presented to the nation that year; that of April 1, 1913,6 which appears in No. 176 of the Registro Oficial of the 5th of said month; and that of June 22, 1914.4

And if in the cases to which those notes refer the aforesaid declaration was opportune, with much greater reason is it so now when the representative of the American Government goes to the inconceivable extreme of believing that the contents of the cablegram he has received authorizes him to request information from the Ecuadorian Foreign Office, not with respect to the cause of some aggression upon the Guayaquil & Quito Railway Company, but regarding the intention of the President of the Republic, in addressing to the secretary of the council of foreign bondholders, London, the cablegram of April 8—a request extremely vexatious to the Republic of Ecuador, which ought to call itself neither independent nor sovereign if it had not the ability and courage firmly to reject such a pretension.

The American Government undoubtedly very well knows, for its circumspect character would withhold it from addressing the Government of Ecuador until after having informed itself thoroughly of the facts, that the constructions of the Guayaquil & Quito Railway has given rise to rights and obligations intimately relating to the Government of Ecuador, owner of the property, the Guayaquil & Quito Railway Company, which entered into contract with the Government for the construction of the railway itself, and the bondholders in whose hands are the bonds issued with the Government’s guarantee and by the sale of which the railway company has been provided with funds.

This union of the three parties interested in the enterprise of the said railway arises from mention in the railway bonds and in the bonds of the preferred stock (prior lien bonds?) of the contracts on which the respective bond issues are based; and from the fact that all three appeared as parties to the transaction of September 30, 1908, executed by public instrument in Quito, and likewise modified on December 8 of the same year.

According to those contracts, the fundamental right of the bondholders consists in their being paid punctually every year, in two half-yearly dividends, the sum of eight hundred and fifty-nine thousand seven hundred and forty American dollars gold ($859,740), to [Page 349]which sum at present the interest and sinking-fund of the railway bonds and of the prior lien bonds amount; and to ensure the effectiveness of that right, the contracts themselves contain a number of powers and privileges that they may exercise, either against the railway company, which is the principal party bound and has to effect the payment out of the profits of the railway, or against the Government of Ecuador, which is the surety with a part of its customs’ receipts.

The correlative right of the Government of Ecuador as surety consists, consequently, in looking to it that the railway company pay that annual debt to the bondholders from the proceeds of the traffic, all of which go into the company’s hands; and that the bondholders oblige the company to effect said payment as provided by the contracts.

And no one can quote a code of any legislative body belonging to a people even half civilized from which it does not appear that the surety or bondsman has the perfect right to adopt the measures calculated to protect his interests, and oblige the creditor duly to make good his claim against the debtor; especially if that right is clearly and expressly recognized in solemn compacts, and when the debtor, as in the case with the railway company, is one who has contracted the habit of disposing at his pleasure of the funds meant for said payment, and lacks property of his own with which to respond to the surety for the amounts the latter finds himself obliged to disburse from year to year.

Now, then, the railway company does not pay this debt to the bondholders. Why? Did the American Government take the trouble to inquire, before its representatives in Quito addressed to the Government of Ecuador the offensive note we have before us? If it has indeed made the inquiry, and if the railway company has given some explanation after its own fashion, what opinion has the American Government formed of that reply? and what steps has it taken to ascertain the accuracy thereof before wounding the dignity of a small nation, which it calls a friendly nation?

In the allegation presented by the Fiscal Attorney to the arbitration tribunal are set forth the charges of negligence and fraud which the Government of Ecuador brings against the railway company; a copy of that allegation is on file in Washington, in the State Department, translated into English, handed in there by the North American arbitrator, Mr. A. L. Miller, who retired without having fulfilled his mission.

Just as Mr. Miller in 1914, so also Mr. Janes could have made the same investigation in 1913; but Mr. Janes likewise failed to fulfill his mission, and returned to the United States, giving rise to an unexpected discussion which may have been one of the reasons why Mr. Wilson relieved him from his office and replaced him by Mr. Miller. [Here follows a long digression intended to show that the failure to arbitrate was wholly due to unreasonable behavior of the American arbitrator.]

These are, in substance, the reasons why the arbitral award has not yet been rendered; and with respect to said reasons absolutely nothing had been discussed before Mr. Miller submitted them, much less had any agreement whatever been entered into in Washington or in any place.8

The person, therefore, who submitted to the consideration of the Washington State Department the cablegram addressed to Mr. Cooper by General Plaza gave a false report to Secretary Bryan when he affirmed that the Ecuadorian arbitrator had not consented to arrangements made before Mr. Miller came to Ecuador.7

But there is nothing surprising about that falsehood, since the informant is even ignorant of the name of Mr. Miller, whom he calls “George “8 instead of “Alexander L.”

Mr. Miller has also, on his part, submitted a report to Secretary Bryan, and therein he has probably stated the motives that induced him to withdraw from Ecuador without pronouncing sentence. At my verbal request, as Fiscal Attorney, when I was in New York, the Minister Plenipotentiary of our Republic, Dr. Gonzalo S. Córdova, asked the State Department for a copy of that report. With that report before us we could then see whether the Government of Ecuador would again be called upon to submit to inexplicable demands, in order that the arbitration suit might come to an end; but the State Department replied that it had not yet resolved to make public the document in question.

The great efforts the Government of Ecuador has made since October, 1911, to bring about the arbitration stipulated for in 1897 and 1898 with the railway company have thus been inefficacious, and the company continues to receive the proceeds of the railway and to dispose thereof, without paying its debt to the bondholders.

The Government of this Republic has not been able by friendly efforts to bring about the correct administration of the railway, nor to get access opportunely and without difficulty to the books, bills, and other original documents necessary in order to examine and certify to the effectiveness of all the expenditure, and ascertain and verify the true cost of operation, in spite of the special clause which, to this end, is set forth in the contract of June 14, 1897.

And although because of the acts of the North American arbitrators the arbitration stipulated with the company has suffered the fate we have already witnessed, the means the Government of Ecuador will employ to save its fiscal interests will under all circumstances be just and honest, it being well understood that in urgent cases, in which there is palpably not only the grave danger but the certainty of irreparable damage such as is caused by the railway company, it amounts to the same thing as far as the application of justice is concerned whether the sentence of the tribunals of justice precede or immediately follow it.

The Government of Ecuador, furthermore, very well knows what is the real importance attachable in the market to interests which, lacking any intrinsic value to sustain them in the field of truth, law, and good faith, have hastened with their surreptitious information to seek support from the Government at Washington; for the majority of the shareholders or stockholders, both of the common stock of the “B” class and of the preferred stock, have long since put up their shares for sale at the price of $750,000.

Nothing of what has been said above, of course, implies hostility to the company, and still less a failure to recognize the great benefits which the railway is called upon to contribute toward the progress of the country, once said railway line is finished and administered in the conditions which have constituted the hope—almost fatally frustrated up to date—of the Ecuadorian people.

And, while on this topic, there is need of rectifying the error into which the American Legation has fallen in stating that the railway has already produced the economic marvel [Page 350]of duplicating the Ecuadorian customs’ revenues; for it does not take into account the fact that, unfortunately, the duplication and reduplication of the duties are the real cause of that increase, and not any commercial activity that the railway ought to have promoted but has not done so on account of the innumerable disadvantages under which the service is performed. The railway of high tariff charges, of frequent abuses in the itinerary, neglected, dangerous, practically irresponsible, with frequent derailments and slides which oblige the passengers to spend long hours by day and by night without any accommodation whatever among the snows of the Andes, causing the loss of essential connexions, has not been a stimulus but on the contrary a cause of discouragement to the commerce of the country.

In short, it seems to me, Mr. Minister, that the Ecuadorian Foreign Office is in a position to refuse to give the information asked for by the American Legation, founding its refusal on the precepts of international law and, if the Government so please, on the antecedent facts that I have to that end cited above.

Manuel R. Balarezo.
The Fiscal Attorney to the Minister of the Interior.

Quito, May 13, 1915.

To the Minister of the Interior:

After having written my note of the 11th instant there was delivered to me, at my verbal request, by the Undersecretary of the Ministry of Foreign Relations, a copy of the original English of the American note, and in said copy I find the following sentence with regard to the arbitrator, Mr. A. L. Miller: “His selection was approved and accepted by both parties.”

As this statement does not appear in the copy you were pleased to send me, I said nothing about it in my above-mentioned note, and for that reason I have pleasure in pointing out to you in the present, which is complementary to the previous note, that it was not necessary for both parties either to approve or accept the appointment of either one of the arbitrators in order that they might assume the character of such.

The words of pleasurable acceptance, or other analogous terms, with which an agent of the Ecuadorian Government may have welcomed the appointment of the new arbitrator ought therefore to be regarded as the language of courtesy or as an expression of the great consideration justly due to President Wilson and to Mr. Miller, but not as belonging to the number of the requisites the case might demand for carrying on the arbitration.

I call your attention to this point because it may perhaps be advisable for the Minister for Foreign Affairs to be pleased to make it plain to the American Legation.

Manuel R. Balarezo.

This Ministry regards as well founded Dr. Balarezo’s observations; and although therein all the points the clearing up of which was indispensable have been dealt with, I wish to add some slight observations for the purpose of preventing the truth from suffering any impairment.

The shareholders of the Southern Railway Company have endeavored, as Dr. Balarezo states, to sell their shares, both of the common and of the preferred stock, to the Government of Ecuador, for the sum of $750,000, the nominal value of the first-named being properly $284,320, and of the second, the preferred stock, $286,320.

The Government of Ecuador agreed to enter into negotiations for the acquisition of the said shares at the price of $600,000; and although for some time it has not been possible to continue said negotiations on account of the difficulties that have arisen, the business is still pending, as has been declared in a communication from the representative of the heiress of the late Mr. A. Harman, to whom said shares belong.

In Mr. Norton’s report, read at the meeting of the shareholders in New York on March 2 of the present year, there appear the figures relative to the profit and loss account of the Southern Railway for the year counting from July 1, 1913, to July 1, 1914, which items, examined in the light of the contracts and of the facts, put it beyond all doubt how irregular and damaging is the present administration of the railway.

The constructing company ought to have made a first-class railway, with stations and rolling-stock in harmony with that classification. The length of the railway is only 287 miles. That being the case, the operating expenses connected with the maintenance of the track and of the equipment, the cost of fuel and water stations, miscellaneous expenses, etc., can not in a normal year amount to the exorbitant sum of two million, three hundred twenty-four thousand, nine hundred and thirty-three sucres (S/2,324,933).

How can the Government accept as correct such heavy expenditure, when it is not even credible? According to the above-mentioned report, the maintenance of the line during the said year cost S/644,818, and in the maintenance of the track there was invested the sum of S/418,170; but it is known to Ecuador, that in the former no renewals of any importance were made; the work was confined to the removal of obstacles caused by the badly constructed original embankments, the repairing of bad ties, and other expenditures of slight significance. And, with respect to the maintenance of the equipment, the administrators of the railway did not then make any innovation whatever in that [Page 351]wretched and scant equipment with which the company has been effecting the transportation of passengers and freight, neglecting its duty under the contracts to construct a railway with first and second class cars for the transportation of passengers, and sufficient cars for the conveyance of freight.

How then could there be expended in said year in the maintenance of the track and of the equipment the sum of S/1,062,988 when it is clear the administrators of the Southern Railway made no innovations of any importance, either in the track or in the equipment?

I call your attention to the item in the said profit and loss account, that appears as the amounts of the expenditures for fuel and for water stations, the former being S/812,544 and the latter S/91,347 (sucres). With respect to the latter item, it is incomprehensible in what said amount could have been spent, since the maintenance of the water-tanks costs very little, and if these are at any time repaired, the expenditure should not exceed a few sucres. With respect to the other item, it would be necessary to have a careful investigation made by an expert, both as to all the fuel the company has imported into Ecuador, and the quantity which should be employed, according to technical knowledge, in transportation, and that which has otherwise been disposed of; and I am sure that such an investigation would prove that the fuel for transportation could not have been consumed in such excessive quantities as would be indicated by the figures given by President Norton.

With reason, therefore, in the article published on March 30 of the present year in the “Financial Times” of London, it is stated that said account of profit and loss indicates something very curious, taking into account the statement made by Mr. Norton himself to the effect that the Southern Railway in Ecuador is one of the best lines, even in respect of rolling-stock; “for which reason it would be”, says the article, “a matter of common interest to know exactly how much unspent money has been included in operating expenses.”

How, therefore, can the Government of Ecuador remain indifferent, in the face of that administration of the Southern Railway, which neither conforms to the stipulations of the contracts nor to the transcendent interests of Ecuador? Why, therefore, is not the Government of Ecuador to employ all the means that law and right provide for the fulfilment of the object Ecuador had in mind in making great efforts and concessions for the construction of the Southern Railway, and to enforce honest compliance with all that has been agreed upon?

Many other observations I might make; but I leave to your learned judgment, Mr. Minister, all the rest that you may think it advisable to state.

Modesto A. Peñaherrera.
  1. For. Rel. 1914, p. 279.
  2. For. Rel. 1912, p. 418.
  3. For. Rel. 1913, p. 492.
  4. For. Rel. 1914, p. 279.
  5. A probably unintentional misreading of “Judge.”
  6. For Rel. 1913, pp. 502 and 503.
  7. A probably unintentional misreading of “Judge.”