352.1153 St 2/18
The Chargé in Spam (Blair) to the Secretary of State
[Received January 12, 1928.]
Sir: In compliance with the Department’s confidential telegraphic instruction No. 104 of December 20th, 5 p.m., I have the honor to report that I had an interview with Primo de Rivera this morning and presented a note, a copy of which is transmitted herewith, embodying the Department’s instructions abovementioned. A brief report of this interview will be made in the Embassy’s telegram No. 144 of December 27th, 1927.45 Mr. Grummon accompanied me, as I wished to be able to make an accurate report to the Department, the whole conversation being carried on in Spanish.
At the beginning of the interview, I took occasion to inform Primo de Rivera that my Government was gravely concerned by the action of the Spanish authorities acting on behalf of the Petroleum Monopoly in seizing without appraisal, indemnification, and in some cases, without any notice, property belonging to American interests in Spain. General Primo de Rivera said that he was not familiar with the technical details of these cases, that the situation was an exceptional one and that, under the circumstances, he thought it would be better to have me take up the questions in greater detail with the Minister of Finance, Señor Calvo Sotelo. He at once called the Minister by telephone and arranged to have Sotelo receive me as soon as my interview with him was finished. A report in regard to the interview with the Minister of Finance follows later in this despatch. [Page 718] The main points brought out in the course of a general discussion of the situation with Primo de Rivera were as follows:
1. That the Council of Ministers in considering the question of indemnification to foreign companies expropriated for the benefit of the Spanish Petroleum Monopoly, would “deal generously with them” in accordance with his orders. However, the Marqués de Estella pointed out that in the nature of things, the oil companies would never be satisfied with the treatment of the Spanish Government no matter how generous and would, in any event, consider themselves entitled to greater compensation than they would receive. I here pointed out that I did not believe that the companies wished to make any unfair claims, that they recognized the Monopoly as a fact and that they now only wished to liquidate their businesses and leave Spain, always provided that they received fair treatment. I pointed out, however, that it seemed obviously unfair suddenly to put an end to a business originally established in accordance with the existing Spanish legislation without recognizing its value as a going concern for which, moreover, the Monopoly Decree itself seemed to provide when it spoke of payment for the “industrial value” of the properties expropriated.
General Primo de Rivera said that he did not know exactly how this would be worked out, although mentioning that he considered that the State was supreme in such questions and he said that it had better be discussed with the Finance Minister.
As the interview ended, Primo stated that my note verbal would be answered promptly and wrote a notation to this effect on the note in my presence and also an instruction to the Secretary General to answer in his reply the specific points raised in our previous notes. During our conversation I ignored the note which I received this morning and of which a copy is transmitted herewith, as I wished to get Primo’s ideas apart from his subordinates’ and did not wish to discuss the note in question, which, as the Department will see, does not contain any satisfactory answer to the precise questions addressed to the Spanish Government in past communications.
Primo said that he thought our various notes had received answers, but I pointed out that the question of the extra-legal seizures and the basis on which seized property would finally be indemnified had not been satisfactorily arranged and that, for this reason, I wished to obtain assurances’ in regard to the policy of the Spanish Government. Primo reiterated that this policy would be to buy out the interest affected on a generous basis, but he did not commit himself in regard to details.
I received the general impression both from the interview above outlined and the subsequent interview with Señor Calvo Sotelo that both Ministers were really rather ashamed of the procedure of seizure, [Page 719] as several times during the conversation, reference was made to the extraordinary circumstances, the necessity of quick action and the fact that the Petroleum Monopoly had to be brought into immediate operation.
Interview With Señor Calvo Sotelo
Señor Calvo Sotelo received me, accompanied by Mr. Grummon, a few minutes after my interview with General Primo de Rivera and I communicated to him the views of my Government regarding compensation of American interests affected by the Petroleum Monopoly. I also informed the Minister that my Government was concerned in regard to the illegal seizures and that these seizures were creating a most unfavorable impression in the United States because the implication was that neither the Civil Code nor the Monopoly Decree of July 28th last were being observed, to which he replied that the Decree of October 17th superseded the abovementioned Decree and that, in view of the extraordinary character of the Monopoly Decree, the provisions of the Civil Code conflicting with it had necessarily to be set aside.
Although he did not say so in so many words, the obvious implication is that the latest Royal Decree issued on any subject (which apparently is always exceptional) takes precedence over and sets aside any constitutional provision, the Civil Code, or previous Royal Decree, therefore leaving foreign interests in Spain absolutely at the mercy of the whim of an irresponsible Dictatorship.
In view of the above, I respectfully suggest to the Department that American interests which may contemplate starting new enterprises in Spain, be confidentially apprised of this extraordinary situation.
The subject of the arbitrary seizures, in some cases without any notice at all, then came up, and the Minister said that, in view of the large number of expropriations which had had to be made within the last few days, it has been found impossible to advise each company of the seizure. He, however, assured me that the expropriations would be completed shortly, that Boards of Appraisal were about to function and that the results of their labor could be expected within a few weeks. I here pointed out that, under the procedure to be followed by the expropriating authorities, these authorities, and indeed, the Council of Ministers were in the position of both judge and defendant, and that the nominal recourse to the Council of Ministers against alleged unfair treatment of the Boards of Appraisal was, in reality, no guarantee of fair treatment, inasmuch as the Boards of Appraisal were merely the creatures of the Ministers. I said that that was particularly true in view of the fact that all normal recourse to the courts and legal remedies were denied the injured companies by the Monopoly Decree itself.
[Page 720]The Minister admitted that such was the case, but said that the best guarantee the companies had was the fairness and good faith of the Spanish Government, which, he said, could not be doubted and he reiterated the intention of the Council of Ministers to deal generously with the oil companies.
Here again may I (parenthetically) draw the Department’s attention to the fact that, under the existing régime in Spain, the Ministers defend the principle of denying appeal to the courts whenever such appeal interferes with the Government’s policy. A precise instance in point is quoted in the Embassy’s despatch No. 393 of June 13th, 1927,46 when Primo, questioned by a member of the Government in regard to the possible appeal of Babel and Nervion to the Supreme Court said that, if the Supreme Court gave an unfavorable decision, he would simply annul it.
I then requested information from the Minister of Finance as to the methods and extent of indemnification contemplated by the Spanish Government’s provision in the Monopoly Decree of June 28th last, providing for the recognition of industrial value. Señor Calvo Sotelo replied that the Monopoly would, through its Boards of Appraisal, give a fair valuation to all physical properties taken over by it which were utilized by the respective companies at the time of the application of the Monopoly, giving, however, in each case, only the actual value less depreciation for use. He did, however, give me an assurance that piecemeal taking of the property was not contemplated and that the whole property of each company used in the importation and distribution of petroleum products would be taken over by the Monopoly. This assurance is rather comforting under the circumstances, because, as previously reported, the companies had reason to fear that the Monopoly might only elect to take part of the property, thus leaving the rest valueless on their hands.
In reply to the Minister’s assurances that the Spanish Government intends to take over all the physical property belonging to the various expropriated companies at what he called a fair value, I pointed out that, in addition to the intrinsic value of the installations, there is a real value universally recognized, attaching to the company itself as a going concern, business reputation, and so forth. He said in regard to this, that in view of the State character of the Monopoly, he personally was not disposed to give much consideration to good will (in Spanish, known as valor comercial) although he acknowledged that there was much to be said from the other point of view and he stated that his opinion was not to be considered as a definite refusal on this point. In this connection, having touched on the subject both with General Primo de Rivera and with the Minister [Page 721] and not having been confronted with a definite negative, I believe that when the final question of valuation comes up, it may well be possible to obtain some consideration of compensating the companies for the loss of their long established businesses in Spain.
Adverting for a moment to Primo’s conversation, he mentioned in the course of the discussion, that foreign oil companies had long been exploiting Spain, to which I replied that the companies had come to Spain under existing legislature [legislation] and had rendered loyal and fair service to the Spanish public, which Primo somewhat grudgingly admitted was true in general. In his light-hearted way he said, however, that oil was a good business and that the Spanish Government now intended to get a part of the supposed large profits which the companies had enjoyed in the past. Here I believe it may be of interest to the Department to know that, according to the best information which the Embassy has been able to obtain, profits of the oil business have been far from excessive in the last few years and I believe that the Spanish Government will have a decided disillusion when it finds that profits are not likely to come up to expectations.
In regard to the Spanish Government’s methods of expropriation and particularly the question of the commercial value of the companies expropriated, the Finance Minister stated that many interests had been injured by prohibition in the United States and had not been compensated. I replied immediately that I could see no connection whatsoever between a moral issue on the one hand and the present state of affairs which, in fact, put the State in the position of expropriating property used to make a legitimate profit in the hands of several private companies for the benefit of a new company which was only owned one third by the State and the other two thirds by private shareholders. I also stated that in the case of prohibition, the interests affected had ample previous warning before the law had been applied, that the present Monopoly had been put into effect almost over night, the companies being totally in ignorance of its coming and that they therefore had no means of getting out of the business or setting aside adequate reserves. His somewhat naif reply to this was that the Spanish Government could give no more advance notice of the establishment of the Monopoly as it had feared that the petroleum interests, warned in advance, would effectively thwart the Government plans.
Referring to the fact that the Monopoly shares are now selling at 25% premium, I observed that this was a concrete instance in point that the Government’s policy was a profit making one and that for this reason it seemed only fair that the commercial value of the expropriated companies should be compensated for, as the new [Page 722] Monopoly company would undoubtedly profit by this commercial value, and by the foreign companies’ past efforts. Señor Sotelo said that possibly a year from now or even less this would not be the case, as the Government intended to limit the Monopoly’s profits and he reiterated the fact that the Monopoly was a creature of the State and not of private interests and that the State would receive all the revenue with the exception of 5 or 6% dividends, increasing as provided for in the Monopoly Decree in partnership with the State. By implication, he seemed to admit the difference between American prohibition and the present day activities of the Spanish Petroleum Monopoly and made no further reference to this phase of the matter.
In connection with the procedure to be applied by the Spanish Government for the indemnification of the foreign interests injuriously affected by the institution of the Petroleum Monopoly, I pointed out to the Finance Minister that the oil companies were seriously disturbed by the fact that a totally inadequate amount of money was available under the terms of the Monopoly Decree for such compensation (as previously reported, the companies maintain that over two hundred million pesetas is the approximate value of their plants and businesses and as far as one is in a position to judge from the maze of Royal Decrees that are constantly guiding the Monopoly, only 72 million pesetas are available for compensation). The Minister replied that the value of the properties is still problematical, that decisions regarding valuation remained with the Appraisal Boards above referred to and the interview was ended with a reiteration on his part that the Spanish Government intends to deal generously (con largeza) with the interests affected, since it considers that to be good policy.
I well realize that the above very general statements in no way bind the Spanish Government and that, … little of concrete value was obtained from the two interviews. I believe, however, that the reference to public opinion abroad, notably in the United States, has served a useful purpose and I also believe that a frank discussion of the whole situation with the two Ministers, which fortunately was on a most friendly basis throughout, has done something to clear up a very complicated situation.
I believe that the net result of the several notes and of the above referred to conversations have been that the two Ministers in question realize the seriousness of the situation with which foreign governments view the arbitrary procedure and I am hopeful that some beneficial results in regard to practical compensation of the interests involved may be forthcoming.
I have [etc.]