The Minister in El Salvador ( Corrigan ) to the Secretary of State
[Received September 19.]
Sir: I have the honor to refer to the Department’s instruction No. 165 of April 11, 1934 and No. 28 of August 30, 1934,54 and to report that this study was begun immediately upon my arrival here. I had before sailing from New York a conference with Mr. Gilson the Chairman of the Bondholders Protective Committee, who gave me a complete summary of the salient facts in connection with the history of the loan and its present status. I have been in close touch with Mr. William Renwick, Fiscal Agent for the Loan, and have had several conferences with him and members of his staff. Mr. Renwick brought in Mr. John Armstrong, representing the British Bondholders, last month and the matter was also discussed from their point of view.
With particular reference to Mr. Gilson’s contention “that the Republic of El Salvador is financially able to meet its external obligations” but “that funds which should accrue to the bondholders are being diverted by the Republic for purposes directly contrary to the terms of the Loan Contract” I beg to report that the first part of Mr. Gilson’s contention is probably true. The second part “that funds which should [Page 271] accrue to the bondholders are being diverted by the Republic for purposes directly contrary to the terms of the Loan Contract” is open to question and has an important bearing on the first. About twenty-five per cent of the total revenue is devoted to the military expense, maintenance of National Guard and Police. Under the circumstances now obtaining and for a time at least a large part of this expenditure might fairly be charged against the maintenance of public order. There is a strong undercurrent of unrest fomented by communistic indoctrination which would become immediately manifest at any sign of weakness in the government either moral or physical. The authorities here recognize this quiescent but powerful opposition and it is their first consideration. Therefore, a considerable portion of this expenditure might be justified even from the bondholders point of view because a successful subversive movement would certainly imperil their investment.
Mr. Renwick and Mr. Armstrong both agree with me that the first consideration is that the face value of these bonds be safeguarded and the conservation of their validity as an obligation of this Salvadoran government be maintained so that the investors may sometime get back their principal.
The actual facts that confront the bondholders is not what the Republic of El Salvador is financially able to do under normal circumstances but what the Government of El Salvador will do under the special set of circumstances which govern. In this connection the position of the Department is important.
In order that the Department may be informed as to all phases of the Salvadoran Government’s attitude, I relate a conversation with … He told me that this as well as other Latin-American governments are inclined to construe the “good neighbor” policy into a license to do as they please with regard to financial obligations owed to foreigners. He cynically observed that the only reason that they had respected their obligations formerly was through fear of the State Department and that this fear was now removed. I felt that he over-drew the picture but I was compelled to give some weight to his opinion because it is confirmed in some degree by Mr. Renwick’s reports to me of his visits with the Minister of Hacienda. His mental attitude, according to this informant, is not such as to inspire a feeling of confidence that he wants to make a bona-fide effort to do all that is reasonably possible under the Loan Contract. It is characterized rather by an effort to postpone or evade its fullfillment.
With reference to such an attitude I told Mr. Renwick that the “good neighbor” policy did not imply lack of interest in the rights and interests of our citizens but only the belief that moral pressure was superior to physical force in protecting those interests. I was careful [Page 272] to keep within the meaning of public statements which have been made by the Secretary on these points in order to remain in line with the Department’s policy.
The Minister of Hacienda is demanding a flat fifty per cent reduction in interest rate on the A, B and C bonds with no amortization for two or three years. “B” bonds are the British owned issue. Mr. Renwick informs me that there is a wide difference between the “A” and “C” bonds which might warrant separate treatment on the part of the government. The holders of the “A” bonds invested actual money in good faith and are entitled to the most favorable treatment possible. The “B” bonds were issued against claims many of them exaggerated or of doubtful validity. The Salvadoran Government did not receive anything like one hundred per cent value for these bonds and might justly request a readjustment as regards this issue. Of course most of them were sold by the original holders and are now in the hands of people who bought them in good faith. All issues are now in default and I fear will remain so until a new agreement is reached. The Minister of Hacienda is not disposed to renew the temporary agreement. He wishes to proceed at once to a reconsideration of the 1922 contract and a new deal. Mr. Renwick would like to have these conversations take place in Washington. All that I have said here about the position of the Minister of Hacienda is from information furnished me by the Fiscal Representative or members of his staff.
The position taken by the Legation in these conversations is comprised in and did not go beyond what I have expressed in a letter on the subject addressed to Mr. Renwick, copy of which is appended.55 I sent this letter in order that Mr. Renwick might make what use he could of the fact that he had a communication from me which would indicate that the watchful interest and moral forces of the Government are still active in protecting and aiding American interests.
I am enclosing with this despatch a memorandum from Mr. William Renwick55 giving his view point of the present status of the loan negotiations.