File No. 422.11G93/822.

Minister Hartman to the Secretary of State.

No. 130.]

Sir: Referring to my telegram of August 9, 1915, 4 p.m., and previous telegrams to and from the Department, relating to conditions upon which the Department might be willing to assist Ecuador in obtaining a loan, I have the honor to enclose herewith copies of a memorandum prepared by the President of Ecuador and delivered to this Legation on August 9, 1915, together with translation thereof, which memorandum is in reply to a memorandum submitted by me to President Plaza on July 28, 1915, in which I gave to him the substance of the Department’s telegram of July 23, 1915, 5 p.m.

I have [etc.]

Charles S. Hartman.
[Inclosure—Translation.]

President Plaza to Minister Hartman.

memorandum.

The Government of the United States of North America would decidedly support the placing of a loan for Ecuador in the New York market, provided that part of the proceeds of such a loan were devoted to paying the matured coupons of the bondholders of the Ecuadorian public debt, and the pecuniary claims formulated against the Ecuadorian treasury by the Guayaquil & Quito Railway Company.

i. payment of the arrears on the bonds of the public debt.

This wish on the part of the American Government coincides absolutely with the desires of my Government, which, notwithstanding its conviction that the [Page 357]operation of the Guayaquil & Quito Railway should yield sufficient profits to attend to the punctual payment of the interest and sinking-fund of the railway bonds, would be disposed to assign, out of the loan to be contracted, the amount that might be necessary for the payment of what we owe to the bondholders.

But these declarations on my part call for one or two comments. I must first of all call attention to the strict punctuality that characterized my administration during the years 1901–1905 in the payment of these obligations, the default in which dates from Sr. Alfaro’s second period. Then I must point out that I have observed the same punctuality even in the years 1912 and 1913 and the first half of 1914, in spite of the heavy extraordinary expenses entailed on me by the internal war in which we have so long been engaged, for it must be remembered that since August 11, 1911, the life of the country has been abnormal. Again, it is indispensable to remark that the great decrease in the customs receipts of the country, caused by the European war, is the only reason for our having suspended, during the past year, the service of the public debt; for we have suffered a diminution of nearly 6,000,000 sucres in the fiscal revenues, and an additional charge of 6,000,000 in war expenditure during 1914 and up to date in the present year.

Extraordinary and fatal circumstances are therefore those that have made it impossible for my Government to attend duly to that sacred obligation.

But it has never been in the mind of our public powers to disregard the fulfilment of that duty; and the proof thereof is that, by the law of October 10, 1913, the contracting of a loan of £2,000,000 was authorized, in order, out of the proceeds thereof, to attend to the payment of debts, and among them preferably that of the overdue coupons.

From another point of view it is indispensable to record that if His Excellency President Wilson and his Honorable Secretary of State would grant us the favor of listening only two hours to our representative in Washington and to the financial agent of this country, Messrs. Cordova and Cueva García, the American Government would become fully convinced of the following great and painful truths:

1st. The operation of the Guayaquil & Quito Railway has yielded a sufficient income to sustain its administration and maintenance and to contribute large amounts towards the service of the railway bonds.

2d. But the total receipts of the business have been invested by the company’s board of directors, without the consent of our Government, in incredible expenses of administration, and in reconstructing the railway line and acquiring rolling stock and the consequent accessories, because the line was constructed flimsily without the slightest professional conscience; and because there is the testimony of the high officials of the company that confirms the fact that, with the income of only a section of the railway, that of Guayaquil-Alausí, the Alausí-Guamote section was constructed:

3d. So certain is the very bad and deficient construction of the line that, when the company tried to effect the delivery thereof to our Government, the latter could not accept it, because from the survey and inspection of the work it appeared that it was purely provisional, since it was badly ballasted, without permanent bridges, with the very worst stations, and very scant rolling-stock. Since then (the year 1911), the company has changed ties, refilled the embankments, acquired bridges, etc., out of the proceeds of the railway, without ever delivering to the Government one single cent.

4th. These unquestionable facts, that no employee of the company could deny if he were called upon to declare under oath before any American judge, prove that the Guayaquil & Quito Railway, which should have cost Ecuador only the amount agreed upon of $12,282,000 gold, and delivered by us in bonds of our debt, has cost up to date some millions more; for to the $5,000,000 that our Government added to that amount agreed upon, and which brings it up to the sum of $17,000,000 gold—the cost of 266 miles of railway—there must be added the amounts which should have been received by our Treasury as profit on the operation of the railway, which profit, instead of serving to pay off the interest and sinking-fund of the bonds, has been employed by the company, without the consent of our Government, for the construction and administration of the line; and

5. The American Government and people are completely unaware of the incalculable damage that this railway company causes the commerce of the United States and the just aspirations of its officials to win for the honor of their country a decisive influence in the nations of Central and South America, [Page 358]made to be felt by its diplomacy, its capital and its industries. The procedure observed by the company in its relations with the Ecuadorian Government, people and industries is so absolutely unacceptable that it has ended by creating an atmosphere of misgiving in our country respecting the influence of American capital, politics and efforts. And so abusive and illegal is this procedure, that I entertain the profound conviction that the Government of the United States would never tolerate it even for a moment in any company of whatever nature which might attempt to adopt it in the territory of the Union.

These antecedents, known to me in their minutest details, oblige me to state, with the moral authority to which I am given a right by my personal and administrative honesty, which no one even among my most rancorous enemies fails to recognize and which will be the only possession of mine I shall bequeath to my children, the profound and painful surprise with which I observe the resolute support that is granted by the honest Government of a great nation, such as the Northern Republic, to a company which has evaded all its obligations and refused to recognize any of our rights, creating for its (native) country, capital and men the most lamentable atmosphere it is possible to conceive of, under the shelter, too, of the American Government, which fact it has taken care to proclaim loudly in order to intimidate any one who might dare to remark upon its conduct. Nevertheless, I repeat, notwithstanding these reserves, which I think it my duty to set forth respecting so disagreeable a matter, I declare that we should have no objection to devote what might be necessary of a loan of ten million dollars to the payment to the holders of our bonds of the coupons due, and that such a loan we would guarantee with 50% of our customs receipts for export duties, which guaranty would greatly exceed the amount of the annual service that debt would impose on us.

ii. payment of the railway company’s claims.

The suggestion of this condition or demand on the part of the Government of the United States in order that it may help us in the negotiations to which I am referring, and which give occasion to the present memorandum, shows me that His Excellency President Wilson and his Honorable Secretary of State, who have been affording such great proofs of the intense sentiment of justice which inspires their acts, are absolutely, totally unaware of the situation of the railway company with respect to our Government.

If the company thinks it has the right to make claim against our Treasury for, say, ten units, our Government has claims for one hundred units. Such is the proportion. How then can we be resigned to pay what we do not owe, which, even if we did owe it, would never be enough to compensate us for what is due us?

I can understand without difficulty that the company’s agents have, on their part, been most careful to work to the end that the American Government should become acquainted only with such information as favors the cause of said company; and I really think they have succeeded to the full extent of their wishes; but it will suffice for my Government to say two words to put things in their true light with respect to the significance of the claims of each of the two parties.

Thus, independently of the foregoing, there is ground for setting briefly forth the circumstances, all of them in favor of the claims of the Government against the company.

1st. In order that the company might finish the line and bring the trains to the city of Quito, and that President Alfaro might inaugurate this work that has cost the country so many sacrifices, the Government lent to the Company many thousand sucres, which the latter has not returned, and which repayment it appears to ignore.

2d. The company organized an exotic firm called the “Express Company” to which it granted the privilege of being the only depositary of freight to be transported by the railway. Whoever sent freight had to come to an understanding with the Express Company, which charged a fixed tariff rate, high of course, and paid the company much lower rates—the minimum the company could charge. By means of this shameless combination, the income resulting from the operation of the line was the most insignificant possible; while the shareholders of the Express, who were the very members of the company’s board of directors, filled themselves up with the high rates they charged private consignees. So scandalous was this audacious machination that the company was obliged to suspend it, on the energetic intervention of my Government; [Page 359]but, meanwhile, what is the total of the amounts of which the railway, and consequently our Government, were defrauded by means of this ingenious method of lessening the proceeds of the operation of the line?

3d. Being aware of the pitiful condition of the company, we resolved to deliver to it, with the consent of the bondholders as an extra help, $2,486,000 gold in preference bonds (prior lien bonds), which amount was to be invested in the payment of the debts that harassed the company, in the acquisition of rolling-stock, the putting in order of the stations along the line, the formation of a fund for administration, and for the cancellation and withdrawal of 232 bonds of the special series. Well, with the exception of the payment of those debts, the company did not comply with any of the other conditions in consideration of which the Government of Ecuador and the bondholders resolved to make that considerable pecuniary sacrifice; and the mockery has even gone to the extreme of neither cancelling the aforesaid 233 bonds, worth $233,000 gold, nor their coupons, worth $40,785 gold, since the holders thereof continually claim the half-yearly service before the Republic’s trustee in London, the Government of Ecuador being obliged to present a claim to Messrs. E. H. Norton & Co. of New York, who were the financial agents of the company in 1908, the year in which that operation was effected, the principal of which firm being Mr. E. H. Norton, who is to-day the president of the company. Could more evident proof be afforded of the informality, to say the least of it, of the procedure of the Guayaquil & Quito Railway Company?

4th. It is necessary to call attention to the fact that, in addition to this extraordinary assistance the company received from the Government of Ecuador, the holders of our bonds on their part contributed to help the company by waiving their right to the proceeds of a whole coupon (the one due on July 2, 1907) which amounted to $359,700 gold, which proves more and more that the company has been an immense dump for gold, with no profit to any of the interested parties except the gentlemen who manage the company according to their sovereign will.

5th. The external manifestations of that dictatorial will have sought legal appearances to cover their true significance. Thus, with the object of justifying the incorrect and irritating inversion, greatly prejudicial to our interests, of the funds proceeding from the operation of the railway, the real expenses of administration being deducted, the company has conceived the very curious system of creating a series of stocks, reserve, depreciation, etc., to the accounts of which it assigns those surplus funds, until it leaves our Government without the option to a single cent of said proceeds. In this connection, the company has had the audacity to establish in New York a capital account, to which, according to its own books, there were applied the surplus funds resulting from operation for the year 1911.

6th. What would the Government of the United States of North America say of a railway company operating in its territory that should not keep its books in a scrupulous and frank manner that would show at any moment the details of its administration? Can it be acceptable that the delegates of the Government of Ecuador have no means of studying the book-keeping of the Guayaquil & Quito Railway, constructed with our country’s money, simply because the administrators of that railway refuse to permit the examination of all their books and documents?

7th. I do not believe there can be any railway company in the world in the book-keeping of which the accounts of the operation of the line and those relating to construction and reconstruction of same can be confounded. They are direct headings which no one can honestly confound; but in our Guayaquil & Quito Railway the confusion has taken place and does take place systematically, in order, by such means, to employ in the construction of the line the whole of the income derived from operating, and leave the Government without the receipt of a single cent with which to attend to the service of the bonds which have paid and over-paid for that work.

8th. To these merely economic aspects of our claims which amount to a sum much greater, very much greater, than that the Railway Company thinks it has a right to claim, my Government would have to add very bitter complaints about the service of the railway itself, the system of tariffs, the relations of the officials and employees with the public, etc., which complaints an honorable Government like that of the United States of North America could never disregard.

So profound is my conviction respecting these particulars that if it depended on me alone I should not hesitate to appoint as the judge of our cause any honorable [Page 360]functionary of the United States, with the full assurance that he would do us so much justice that it would exceed what we strive for—so unfounded are the claims of the company, and so just our demands.

Then again, in order to accept the suggestion made by the Government of His Excellency Mr. Wilson, our Government would have to ignore the stipulations of the contract that governs its relations with the said Company, which again, for the hundredth time, would thus be in a position to impose its dictatorial will on Ecuador and its Government.

I think that His Excellency the President of the Union can not have appreciated what a step of this kind would mean: it would arouse the Ecuadorian national conscience, totally discredit our Government in the opinion of the public, and increase to the utmost the opposition of the country to anything that might be understood to be related to the United States of North America, against whose interests of every kind the railway has conspired as though dealing with an eternal enemy. Should the American continent learn in all its details what the Railway Company has done with us, I am sure that the whole of America would declare itself in favor of our cause; and this solidarity would be unanimous and warm, should continental opinion learn that said company has the support of a democratic, just and honorable government like that of His Excellency Mr. Wilson.

This must seem strange to the North American Government and people; but if His Excellency Mr. Wilson, wished to learn the details of the annoying history of the Company, I am sure, once he became acquainted therewith, he would not hesitate for a second to exercise his greatest influence in order to reorganize entirely the administration of that Company, sweeping out with an energetic hand all of its employees from the first to the last, and placing at the head thereof an honest and careful functionary thoroughly conversant with railway affairs—a man like Mr. John Smith, the former general manager of the Panama-Colon Railway.

With the direction and administration of the Guayaquil & Quito Railway placed in other hands, the Ecuadorian Government and people would recognize in this change of the situation the direct influence of the Government of the United States; and slowly but surely national sentiment would be modified in favor of the politics and the commercial expansion of the Great Republic.

iii. conclusion.

My Government would therefore be much obliged to the Government of His Excellency President Wilson, if conjointly with its support in the negotiations we are carrying on for the purpose of contracting for a loan in the New York market, which loan with that support might be of ten million dollars, it would also resolve to receive information from our representatives, and in accordance therewith to contribute powerfully and decisively towards the reorganization of the Railway Company.

We, on our part, out of the proceeds of that loan, would have great pleasure in paying all arrears to the holders of our bonds.