Papers Relating to the Foreign Relations of the United States, 1918

File No. 812.6363/351

The Chargé in Mexico ( Summerlin) to the Secretary of State

No. 797

Mexico, February 20, 1918.

Sir: I have the honor to transmit, herewith, as of possible interest to the Department, copy of a translation of the argument presented by General Cándido Aguilar, while Governor of the State of Vera Cruz, supporting the proposed petroleum law which he submitted to the legislature of the State, with a view to conforming with the terms of Article 27 of the new Constitution.

I have [etc.]

George F. Summerlin

[Enclosure—Translation]

Argument of General Cándido Aguilar in support of the new petroleum bill

On the invitation of your distinguished body, I have the honor to submit the attached “Organic act of Article 27 of the Constitution, regarding petroleum.” I request that after due consideration, it be transmitted by the Legislature, by virtue of the authority vested in it by Section III, Article 71, of the Federal Constitution, in the form of proposed legislation to the Federal Congress.

I. General Observations as to the Necessity for Such Legislation

1. Present status of the industry.—In submitting the attached bill, I consider that both the legislative and the executive branches of the Government, over which I have the honor to preside, fulfil the duties incumbent upon them with reference to affairs in the State of Vera Cruz, and that any action taken enjoys not only the legal sanction and authority conferred by the constitutional provision above mentioned but is a measure urgently required by the general interests of the State of Vera Cruz. The largest and richest petroleum deposits are located within the territory of this State; their development constitutes an industry which daily takes on added importance in the State as well as in the Republic. In six years Mexico has risen to the third place in world production of petroleum, and this position has been attained in spite of our civil strife and even within its most acute period. The petroleum production which has placed our country in this happy position represents the output of a relatively small number of wells, when compared with those operated in other countries. This fact warrants the assumption that the potentiality of the oil regions as yet discovered exceeds anything thus far known in other countries. The public is familiar with the names of the foreign corporations that have invested several million pesos in this industry, and have been organized to develop, transport, store, refine, purchase, and sell petroleum and its by-products, oil lands, etc. The active and unlimited investment of foreign capital gives this industry a new aspect, which demands increasing consideration and attention. Mexican petroleum finds a ready market everywhere; one of the largest railroad companies in the United States moves its trains with our fuel; crude and refined petroleum in ever increasing quantities are being daily exported to England, and many oil companies are entering into contracts involving enormous amounts and covering a long period of years. These facts suffice to show the confidence reposed in the potentiality and in the excellence of the output of the oil regions of Mexico.

2. Inadequate official action.—Official action has not kept pace with this rapid growth; instead of fostering the petroleum industry it has hampered it to such an extent that the damage caused thereby can with difficulty be remedied. Our legislation on petroleum is wholly inadequate, as is evidenced by the fact that we have no law applicable to the subject in its entirety. A special paragraph of the present memorandum has been devoted to a study and criticism of the legislative and legal antecedents in this matter. It may be stated as a general proposition that the law of December 24, 1901, is the sole piece of legislation dealing with the development of hydrocarbons; and even this measure has been shown in practice to be so deficient as to make its operation impracticable. The same is true of the rules and regulations given in accordance with this law. What is even more regrettable is that the Federal authorities no less than those of the State of Vera Cruz have resorted to the questionable practice of granting franchises (concesiones) in every case. Although it is true that this procedure, in so far at least as relates to the Federal authorities, is sanctioned by the law of 1901 above mentioned, or by others as inapplicable to the subject as the law covering immovables of the Federal Government, such franchises conform neither to the text nor to the spirit of these and the other laws in force generally throughout the Republic. They must be considered, therefore, as constituting special laws whose validity is very questionable, as is, too, the authority of the legislative branch to enact them, and especially of the executive branch to enter into agreements based thereon. Another factor in bringing about the chaotic conditions prevailing in this industry is the lack of suitable regulations which shall define the powers and attributes of the several agencies of the Federal and State Governments, and of the various authorities which may be called upon for any reason to intervene in the administration and supervision of this industry. This step is designed to avoid constant clashes of authority which occur so commonly, and the granting of franchises, permits and contracts, whether directly or indirectly relating to this industry, by different bureaus and authorities as has heretofore been the case, and finally, any insecurity in their validity. Herein lies the reason why the petroleum industry has been a failure as a revenue producer. The districts where this industry has been developed have received no benefits from its enormous wealth. The people inhabiting the oil regions are practically in a state of abject poverty; and some of these villages are even tending to disappear.

Other nations have not found it necessary to tax petroleum, because other sources of revenue sufficient to meet their needs have been open to them; but Mexico has been compelled to resort to every source of wealth available. Although she has many such sources, they remain nevertheless undeveloped; and inasmuch as petroleum ranks among the most important whose development has been remarkable, it is but natural that the Nation should resort to it to meet its expenditures and public needs. This is why every administration has sought to levy taxes on petroleum; but as soon as they have encountered the restrictions and exemptions granted in favor of certain companies—and these have always been the companies with the largest production—they have had to resort to taxes of any nature, provided they were not excluded in the franchises. Thus the revenue derived from this source has been inadequate; and so long as these obstacles exist the same fruitless effort will be made to reach a favorable result.

The foregoing facts show clearly the need for the enactment of a general law governing this industry; such is the purpose sought in the bill submitted.

The State of Vera Cruz has a legitimate interest and an indubitable right to be the authority to initiate what will be the final decision in this matter, which has received the attention of the revolutionary authorities, although up to the present this urgent need has not been met. On the enactment of the Constitution of 1917, Article 27 of which vests in the Nation the dominium directum¹ of all petroleum deposits, it is evident that the law under consideration must follow this constitutional provision, and that it must have, in so far as relates to petroleum, the character of an organic law, which shall interpret and explain its provisions, and make it fully applicable and effective.

II. Legislative and Legal Antecedents

3. Laws.—It is of capital importance to bear in mind in this connection the legal and legislative antecedents of the subject. A knowledge of them is indispensable, so that any step taken in the matter may be a conscious evolution and a step forward in the history of our national jurisprudence.

In making a survey of our laws we find the following relating to petroleum, either because they deal exclusively with this matter or because they touch it indirectly:

Mining ordinances of Aranjuez May 22, 1783; Article 72, Fraction X of the Federal Constitution of February 5, 1867, as amended December 14, 1883; mining code of November 22, 1884; mining law of June 4, 1892, and regulations thereof; mining law of November 25, 1909, and regulations; law safeguarding the mining industry, July 6, 1887; petroleum law of December 24, 1901; Federal revenue act of June 3, 1912, and regulations concerning the stamp tax on crude petroleum; Article 27 of the Federal Constitution of February 5, 1917.¹

To these laws should be added the decree of January 8 [7], 1915,² issued in Vera Cruz by the First Chief of the Constitutionalist Army as the depositary of the Executive power of the Nation. This decree in virtue of the gross inadequacies of petroleum legislation ordered the suspension of all work relating to this industry “until the issue of new laws which shall settle the legal status of petroleum and its derivatives.”

4. Present status of the legislation.—A glance at the laws above enumerated will suffice to show the state of our petroleum legislation prior to the enactment of the Constitution at present in force. This condition may be summarized in the following concrete propositions:

1. There is neither a Federal nor local law covering the whole of the petroleum industry.

2. The subject of petroleum has been treated only in:

(a) Special laws, themselves inadequate and incomplete;

(b) Mining laws;

(c) Franchises and contracts entered into with private parties or companies.

3. Among the special laws may be mentioned the Federal law of December 24, 1901, which deals with the development of the subsoil of national and waste lands.

4. The mining laws in so far as they relate to petroleum only touch the two following points:

(a) Civil ownership;

(b) Fiscal régime.

5. With regard to the first point, the mining laws sustain the principle that the ownership of all fuels of the mineral order to be found in the subsoil belong to the owners of the land.

6. With regard to the second point the mining laws exempt from all Federal, local, and municipal taxation, excepting only the stamp tax, beds of fuels of a mineral order.

7. All the above laws have been enacted by the Federal Government.

III. Observations

5. Partial legislation.—The above sketch clearly shows that our petroleum legislation is inadequate and deficient. The inclusion of legal precepts governing petroleum in bodies of laws relating chiefly to other subjects is deserving of the sharpest criticism, since it introduces an element of disorder and discord into the whole of our legislation, and applies a single criterion to matters which require by their very nature separate treatment at the hands of the legislature. Petroleum, or more correctly speaking, the mass of social phenomena referring to petroleum, constitutes a single topic which should be dealt with in a special body of laws. This is demanded by the importance and number of these phenomena, and if we have heretofore had parallel treatment of these subjects, due to a diversity of causes, the time has now come to differentiate between the several subjects and to group under petroleum legislation the principles scattered throughout our several laws, with the addition of such others as are imperatively demanded.

6. Franchises.—Equally censurable, from every point of view, is the system of legislating on a certain subject, as has been the case with petroleum, by means of special provisions relating to concrete cases, embodied in the franchises and contracts entered into with particular parties. Franchises are to be condemned from several points of view: In general because the system of granting franchises for the execution of certain acts is unjust and creates privileges, if the act authorized by the franchise is not sanctioned by the general law; while it is needless if it is sanctioned by law. Furthermore, the provisions of the franchise which involve benefits and favors granted to certain persons are contrary to the principle of equality before the law, which is basic in our constitutional system. Lastly, the general principles, those which, so to speak, legislate on certain matters, contain at times franchises which are useless, for there is a law covering these points, while if there be none such, these franchises are wholly contrary to the principle of general interpretation, which should be applied in legislation; and they, furthermore, serve no purpose to determine the various juridical relations of those parties to whom the franchises in particular refer.

7. The prior rights of the Federal Government.—The preeminence of the Federal Government over the States is another of the general controlling features in such matters. The existence of this preeminence is beyond all question; it is shown in the jurisdiction above granted to the Federal Government in all mining matters, and in the existence in the Federal mining legislation of provisions directly affecting the States, and invading their sovereignty (such, for example, as that relating to the restriction in levying taxes, contained in the law of 1887), and in the exclusive character of the Federal administration in mining and petroleum matters. Many reasons may be adduced to justify this preeminence. The unity of the Nation and the development of its natural wealth affect not only the private interests of each State but the general welfare of the whole Nation.

In order that this development may be carried on under conditions suitable to the country, that is to say, to all its inhabitants and to the Government, it must be effected in accordance with the laws in force throughout the whole nation based on uniform principles, and not in accordance with local laws which may vary from one locality to another, and be subject even in the same places to more frequent and less well-advised changes. If, therefore, the State of Vera Cruz has the legitimate interest and unquestionable right to initiate the final decision in these matters, as is maintained in the bill submitted, it should not be forgotten that petroleum deposits exist not only in our State but in others of the Republic, and that the proper course is that which we have taken, namely, to take the initiative in securing enactment of a Federal law. This does not mean the complete elimination of the States, if such a phrase be permissible to explain the fact that these have not received any benefits from the petroleum industry even though the deposits exist within their confines, and hence vitally affect their internal sovereignty, based as this is on their territorial sovereignty; for nothing affects the domestic affairs of a sovereign entity more than what relates to the ownership of the land within its jurisdiction.

In the attached project of law, these conditions have been given careful consideration with the view to conciliating Federal interests with those of the municipalities and the States.

8. Law of 1901.—In concluding this brief sketch of the status of our petroleum legislation up to the promulgation of the Constitution of 1917, a few words as to the law of December 24, 1901, are not out of place. This law was enacted with a view to favoring the development of the subsoil of waste and natural lands. This subsoil belonged, as did the land itself, to the Nation, and its development could not be undertaken by the Government by virtue of its constitutional limitations. The law in question tried to stimulate this development by private parties, as is seen by its main provision which consists in authorizing the executive to grant permits for exploration and franchises for development of the subsoil of such lands. The law regulates this development, and although some of its provisions are wise and may serve as useful material, there is noticeable disorder, ambiguity, and even silence on many points. The closing articles of the law refer to the development of the subsoil of private lands. Here the law is content to reproduce the provisions of the mining laws on ownership of the subsoil, adding that private parties so desiring it may obtain the right to develop their lands and thus enjoy the benefits of the law, provided they comply with its requisites. This precept is not followed in practice. The development of the subsoil of national land is carried on by the concessionaires in the terms of the franchise, which, if they do not openly violate the principles of the law, at least deprive them of all importance. The same thing happens when the development is effected under a Federal franchise even though it refer to private land. Naturally every attempt to apply the law when the development is carried on without a franchise and on the lands of private parties should be rejected, since the law only refers to the cases above mentioned. It is this deficiency which constitutes its most serious defect.

iv. interpretation of the term “dominium directum” as used in the Constitution of 1917

9. Legislative interpretation.—The foregoing exposition serves to establish the criterion as to the juridical nature, effects, and consequences of dominium directum which Article 27 of the Federal Constitution grants to the Nation in regard to pretroleum deposits.

During the epoch of the viceroys under the Spanish law, the mines existing in the colony were the private property of the Crown of Spain, of the King and his successors, thus forming part of the Royal patrimony, no distinction being made between metallic substances and fuels of the mineral order. Independence once gained, the Mexican Nation came into all property situated within its territory which constituted the Royal patrimony, in which are included the substances of the subsoil. On the promulgation of the Federal form of government in 1857, and by virtue of the principle that the States are free and sovereign in all that pertains to their domestic affairs, the mines naturally remained under State jurisdiction. For these reasons all mining matters were withdrawn from State jurisdiction by the constitutional amendment of December 14, 1883, which provided that the Federal Congress should legislate on mining for the entire Republic. The law of November 24, 1884, enacted by virtue of this authority, introduced a most important amendment in the traditional principle declaring that beds of mineral fuel belong to the owner of the soil, as differentiated from metallic substances, which continued to belong to the Nation, as heir of the Spanish Crown; this principle was confirmed by subsequent mining laws and by the petroleum law of December 24, 1901.

On the promulgation of the Federal Constitution of 1917, the petroleum deposits have fallen under the dominium directum of the Nation, as provided in Article 27 of this code. The criterion which should guide the Legislature in issuing the organic law on this article, which shall define the nature and effects of such dominium directum, should be that which guided the constitutional assembly of Querétaro when it approved the second paragraph of Article 27. This reads as follows:

This (private property) shall not be expropriated except for reasons of public utility and by means of indemnification.

In accordance with this provision, if the dominium directum to which the Constitution refers implies the expropriation of petroleum deposits, such expropriation may only be effected through a considerable outlay of money, which the Nation is not in a position to make and with which it would be inadvisable to burden the public credit. The Constitution of 1917, therefore, could not vest in the Nation the property (propiedad) in the petroleum deposits; it has given the Nation, in unmistakable language, a superior right over such deposits, namely, the dominium directum.

10. Legal interpretation.—Dominium directum is defined by text writers as follows:

Escriche, in his dictionary on legislation and jurisprudence says:

Dominium. The right or power to dispose freely of anything, when not contrary to law, the will of the testator or any agreement … Dominium is divided into absolute and qualified, or perfect and imperfect. Qualified dominium is subdivided into directum and utile.¹

He continued as follows:

Complete or absolute ownership. The right which anyone has in any object to alienate it without the intervention of a third party, to receive all its benefits and to exclude the whole world from its use.

Incomplete or qualified ownership. Any of the elements of dominium divided among different persons, as when anyone has the right to concur in the disposal of a certain object or to demand something in recognition of his interest therein (seíorío), and another has the right of alienation, subject to certain limitations and to receive all its fruits by paying a certain annuity or rent to the former.

Dominium directum. The right which anyone has to concur in the disposal of anything, the use of which he has granted, or to receive a certain rent or annual tribute in recognition of his interest therein, or superior right over a certain property, or a better title on realty without the right of beneficial use.

Dominium utile. The right to receive all the benefits of anything subject to a certain rent or tribute paid to him who holds the dominium directum.

This superior right which is shown in the right to receive a certain rent or tribute at stated times in recognition of a certain interest, is the right which the Constitution of 1917 grants to the Nation as to petroleum deposits. This does not imply their expropriation, which might only be effected by means of indemnification; nor does it carry with it their spoliation, which would be an act contrary to every principle of justice.

Planiol, in his elemental treatise on Civil Law, Volume 1, paragraph 2326, in tracing the historical evolution of property says:

If the formalities of property are considered in Latin America, it will be noted that in two cases the right of property has been presented under complex forms, after having existed under a simple form to which it reverted later. The first of these phenomena was presented in the Roman Empire as the outcome of conquest; together with the dominium ex jure quiritium, which represented true ownership and did not exist in principle outside of Italy, the Romans put into practice for provincial property a general kind of ownership (according to the Roman theory, the State was considered as the owner of provincial property as represented by the conquered territories, private individuals having merely the enjoyment of them, possessionem et usufructum, to quote Gaius; but this enjoyment was protected to such an extent that it constituted real ownership). And this difference between these two classes of dominium lasted to the days of Justinian, at least in so far as the terms are concerned. The Italian and the provincial properties had hardly been consolidated when a new distinction, which lasted to the end of the eighteenth century, began to show itself through the tenancies and perpetual leaseholds, so that simple and complete ownership, full and unquestioned, existed generally only in three epochs; at the beginning of Roman history, at the end of the Roman Empire, and after the French Revolution of 1789.

Planiol continues his exposition by showing the feudal origin of the division, of dominium as follows:

From the days of the barbarians (6th and 9th centuries) a new system of land tenure was established. Many contracts granted to the holder of the-chattel belonging to another a right unlimited in time, so that the majority of lands were not held by their owners, but were held by other persons who had received them under different grants, by virtue of which, the owner or grantor, called the lord, retained ownership to the land but not the land itself; the vassal held the land without ownership thereto. Hence two persons, the lord and his vassal had at one and the same time perpetual rights of a different nature to the land itself.

Planiol then explains how the vassal was transformed into the owner.

Originally the holder was not the owner; the ownership remained in the hands of the grantor who was the true lord of the land; the holder had no more than a right or enjoyment on the property which was not his. Little by little, however, due to the extension and the perpetuity of his right, it became customary to consider the holder as the owner and his holding was given the name of ownership (dominium). In this way two owners over one and the same thing were created without it being possible to differentiate between them since their rights were not of the same nature. In order to distinguish them the ownership of the lord was called the dominum directum and that of the vassal the dominium utile.

Lastly, Planiol explains in his exposition how the lord ceased to be the owner.

Later, when the right of the vassal had been transformed into ownership, that of the lord underwent an inverse transformation. The lord was the victim of a sort of expropriation, the vassal holder or grantee came to be considered as the sole true owner because he had all the real advantages of ownership. The direct ownership merely appeared then as a kind of easement, a charge on another’s property, of which it would be advisable to free the land. Thus, the feudal grants, which at first left ownership in the grantor, later worked the disintegration of ownership into dominium directum and dominium utile and lastly, the disseisen of the property which passed from grantor to the holder. This evolution was operated without any upheaval, through the slow but powerful development of historical phenomena (P. Viollet), but prior to this the revolution had taken place.

Planiol illustrates his exposition with three examples of dates corresponding to each of the periods he cites. They show clearly the several conceptions which dominium directum enjoyed in those epochs, until it reached that which it at present has. They are as follows:

(A) Denis Dupont (Pontanus) who lived in the 16th Century writes: “Dominium duplex est, directum et utile. Directum id est quod verum, propium ac principalem dominium est … cui itiam directo dominio propietatis tantum appelatio convenit, nunquam utile” (Commentarii in Consuet. Blesensen, Art. 33.) Doumoulin in similar language thus defined the feudal agreement: “Translatio utilis dominii, propietate retenta …” (De Feudis, n/o 114). And Cujas says: “Feudum cst jus fundo alieno utendi fruendi.” (De Feudis, lib. 1 proemium.) It is thus seen that as far back as the 16th Century it was acknowledged that the vassal or holder did not own the land and hence was not the owner.

(B) Under Louis XIV, Hévin, a Breton feudal writer, wrote as follows:

There is no easement either in favor of the lord or of the vassal, and no one enjoys anything belonging to another by way of easement. The lord retains the dominium directum, which gives him the following rights: fealty, homage, ransom and rents; and the vassel enjoys the dominium utile and the property itself, with the advantages which this entailed, without receiving the benefits thereof by virtue of an easement imposed upon the property of his lord; his enjoyment is in his own right, jure propietatis et perpetuo.

In the 17th century both parties were considered as owners on equal terms.

(C) Pothier, in the 18th century, does not hesitate to say:

Dominium directum is no more than an ownership of superiority, and is no more than the right which the lords have to be recognized as lords by the holders of hereditaments held by them and to demand certain duties and rents in recognition of their overlordships. This species of dominium is not the ownership of property which is to be considered in the present work … With regard to hereditaments, it is the dominium utile which is known as the ownership of property. He who holds this ownership is called the owner. He who owns the dominium directum is known merely as the lord … It is not the latter but rather the beneficial owner who is, properly speaking, the owner of the hereditament.

The doctrine above set forth by Planiol with such clearness and precision leaves no doubt in the mind as to the juridical nature and effects of dominium directum. This doctrine refers to the whole system of continental law, which had its origin in the Roman epoch, was slowly modified in the middle ages, and was developed not only in France but in Spain as well. Inasmuch, therefore, as the Spanish legal system and the general European system constitute the historical foundation of our national jurisprudence, this antecedent should be applied in the interpretation of the constitutional text in arriving at the conclusion that when the constitutional assembly of Querétaro granted to the Nation the dominium directum of the petroleum deposits, it did not mean to grant the Nation ownership therein but only a better right based on the sovereignty which the Nation enjoys as a political state and as an entity according to the law of nations. Article 27 of the Constitution recognizes this when it says—

The ownership of lands and waters comprised within the limits of national territory is vested originally in the Nation which has had and has the right to transmit dominium thereof to private persons, thereby constituting private property.

By virtue of its sovereignty the Nation enjoys an original and superior right over lands and waters, which authorizes it to constitute private property. In the exercise of this authority the Mexican Nation and its assignor, the Crown of Spain, has granted titles of lands, permission for the use of waters, mining titles, etc. One method of exercising this authority was the second article of the mining law of 1909, which reproduced the principle of the former law and granted the owner of the soil the exclusive ownership of fuels of mineral order to be found within the subsoil. In acting in this way the Nation deprived itself of the dominium utile of these substances, but it preserved its dominium directum. The latter, as we have seen, is not synonymous with the former; it is a superior right, the right of the lord founded on his overlordship, which compels the owner to pay a rent or charge in recognition of such overlordship. To interpret the constitutional provision in any other way would be to violate rights legitimately acquired under express laws.

11. Conclusions.—In accordance with the foregoing, the attached project of law herewith submitted creates the right of ownership in petroleum as a right of civil character different from that which is enjoyed by the holder of the surface. This has been realized as a matter of fact, and it is urgent that it be recognized as a matter of law. From the economic point of view the value of the surface land is distinct from the value of the subsoil; each undergoes transformations and should be subject to different regulations. It is accordingly absurd that this distinction should not be established in legislation, which permits the legal acts referring to the ownership of petroleum to be established without confusing them with those which relate solely to the surface. The attached bill provides that the Nation has the dominium directum of all petroleum-bearing substances; that the Nation also enjoys the ownership of the petroleum to be found in the subsoil of national lands and in those other lands to which the Government has reserved title; it provides lastly that in so far as private lands are concerned, the ownership of petroleum belongs to the owner of the soil, provided he shall have shown that it is his intention also to hold the subsoil, and provided he pay the rent charge in recognition of the dominium directum of the Nation. This rent charge is of a two-fold character; one payable to the Federal Government by the person who develops the subsoil, whether owner or not, and consisting of 5 per cent of the gross products; and the second payable to the State Government and to the municipalities within which are located the lands, to be paid always by the owner, consisting of 5 per cent, either in money or in kind, on the price of the contract entered into for the development of the subsoil. When the owner himself makes the development, the law provides that he should pay 5 percent of the gross products of the development to the Federal Government as overlord, and another 5 per cent based on the same gross output to the State or municipality within which his land is located.

It is needless to add that in those cases where the Nation is the owner of the deposits, through being also owner of the surface land, or through having reserved title to the subsoil when granting title to the surface, the development may only be carried on by private parties who have obtained permission from the authorities, as granted in the corresponding contract. In such cases the Government should receive an equitable amount based on the price of the contract, one portion of which would go to the Federal Government and another to the State or municipality wherein the lands are located through the assignment made of the right of ownership in the petroleum; such assignment to be temporary because it would otherwise imply a total alienation; it should furthermore, be revocable whenever the concessionaire fails to pay the proper price on the contract. Such price should constitute an exclusive benefit of the State or municipality, whenever the contract involves the subsoil of lands belonging to these [entities?].

V. Fiscal Régime

12. System proposed.—The reasons why petroleum has thus far failed as a revenue producer have already been given. This situation is not only harmful to the Federal and State Governments but is prejudicial to the companies and private individuals interested in the industry.

Any action taken in this matter should accordingly be based on the conciliation of public and private interests alike, within a criterion of justice. To attain this end, it is necessary to remove every obstacle in the way of the enactment of a general measure. Thus economic and legal considerations may be weighed so as to permit of a fitting solution of the petroleum problem from a fiscal point of view.

The solution advanced in the bill herewith submitted comprises:

(1) The creation of a charge of 5 per cent in recognition of the dominium directum of the Nation, payable exclusively to the Federal Government by parties engaged in developing petroleum, and to be computed on the gross output of the product;

(2) Authority to the States to charge a rent on contracts of development entered into or to be entered into between the owners and the lessees, such charge to consist of 5 per cent of the amount of the contract, and to be paid by the owners of the soil;

(3) The establishment of the value of the contracts entered into for the development of the subsoil of lands belonging to the Federal Government, the States or the municipalities, such amount to be paid by those who develop the lands to the Federal, State or municipal authorities, as the case may be;

(4) The abolition of all existing taxes, including the stamp tax on crude oil, that of exportation, and all others at present being levied;

(5) The exemption from import dues on machinery and tools necessary to the development of the oil industry in its several lines.

It will be seen that the scheme of the proposed legislation consists in the elimination of every kind of taxation properly so-called, since the charges to which the foregoing paragraphs 1, 2, and 3 refer are charges emanating from the right of the Nation, as has been shown in the preceding chapter (IV). With regard to the charge authorized to be levied by the State, there can be no doubt that it emanates from the dominium directum of the Nation, since this affects the petroleum property and exists, as has been explained, as a right superior to ownership. Now, the Federal Constitution vests dominium directum in the Nation, which latter by the constitutional pact is formed by the federation of all the States. The national sovereignty, source, and origin of dominium directum is exercised by the States in principle, and by the Federal Government in such matters as fall within its jurisdiction. The exercise of the right of dominium directum should therefore pertain to the States on terms compatible with the administrative unit selected. On this basis and in so far as relates to the charge or rent which the registered holder should pay in recognition of the national dominium directum, it is just that the charge be distributed between the person developing the land and the owner thereof, both of whom enjoy, in their respective relations, this right, turning over to the Federal Government the amount that the lessee should pay and to the State the amount to be paid by the owner of the land. This distribution accords, too, with the Federal principle in the matter of taxation, which reserves to each sovereign State the territorial or land tax. In this way the owner of the land will pay, as is equitable, not only for the value of the surface which represents agricultural wealth, but also for the new value of the subsoil which the land tax has heretofore left untouched. The abolition of the present taxes is an absolute necessity, with a view to eliminating the irregularity arising out of such taxes, which has made them not only contrary to all principles of political economy and of law, but which has even given rise to protests and complaints. A potent reason for the abolition of all existing taxes is the fact that the payment of rents based on overlordship and for the privilege of franchise implies a charge upon the industry, and it would be contrary to economic principles to levy this burden without fittingly compensating the industry by removing taxes at present being levied. It is axiomatic that excessive taxation far from producing substantial returns has the effect of bringing disaster on the industries assessed, and hence of shutting off completely all revenue from this source.

The charges proposed in the bill submitted have the further advantage of being uniform, of being based on the rights of the Nation, and of permitting the development of the industry in such a manner that its returns will continue to increase and will allow the Federal Government, the States and municipalities to organize their finances by assigning to each a proper share in the development of this national wealth.

Such are the general principles underlying the bill herewith submitted. The measure contains other provisions to which it is not thought necessary to refer in this memorandum, both because they deal with less vital questions and because they are sufficiently treated in the notes accompanying the bill.

1. For Bouvier’s definition of this term, see footnote, post, p. 693.
1. Foreign Relations, 1917, p. 955.
2. Ibid., 1915, p. 872.
1. Dominium directum: Legal ownership; ownership as distinguished from enjoyment. Dominium utile; The beneficial ownership; the use of the property.—Bouvier’s Law Dictionary, Vol. 1, p. 605 [Rawle’s Third Edition, Vol 1, p. 924].