Memorandum of Conversation, by the Chief of the Division of the American Republics (Duggan)

After luncheon at the Mexican Embassy on Saturday I had the opportunity of a few moments conversation with Señor Beteta.

I told Sr. Beteta that he knew of the very great importance which this Government attached to the settlement of the petroleum controversy and inquired whether there was anything that he could tell me regarding the recent developments.

Señor Beteta stated that the negotiations were not making progress because the petroleum companies were taking too rigid and resilient a position. He went on to explain that in his opinion there were two principal obstacles. The first of these had to do with the relationship between the Government and the companies in the management of [Page 681] the properties under the proposal suggested by Mr. Richberg; the second had to do with the evaluation of the properties which was necessary to determine the share which the companies should receive from the profits of operation.

Concerning the first of these difficulties, he stated that it was politically impossible for the Mexican Government to agree that a foreigner should be the head of the administrative agency or that foreigners should have a majority on the board of representation of the agency. He stated that the Government was willing to give them minority participation and a substantial degree of technical supervision, but that it was not willing to give control of the management to the companies.

Without undertaking to argue the point I asked Mr. Beteta whether he thought that under these conditions the companies would invest the new capital necessary not only to keep the present properties in shape, but to develop the petroleum industry as the Mexican Government desired. Sr. Beteta said that from the companies’ point of view he could see objection to the management formula suggested by the Government, but reiterated that it was a political impossibility for the Government to return control of management to the companies.

With regard to the second difficulty, the appraisal of the value of the expropriated property, Sr. Beteta said that in his opinion this was a greater obstacle than the first, although there had been no discussion of it. He said that he did not understand how there could be any division of the net income of the proposed new company between the present companies and the Government if there was not some determination in advance of the amount of contribution of each to the new company. He thought that the appraisal of the value of the machinery, et cetera, would not present any great obstacle but that the difficulty would come in connection with the sub-soil resources. In this connection he mentioned that the Constitution of 1917 provided that the sub-soil resources vested in the Government. I reminded him that while this was correct it was my understanding that the Mexican Government had recognized that this provision of the Mexican Constitution was not applicable to concessions granted prior to 1917 and that most of the concessions which had been expropriated under the decree of March 18, 1938 were those entered into prior to 1917. Sr. Beteta stated that this had been the position of previous Mexican administrations but that it might not be the position maintained by the present administration should this aspect of the matter come to the forefront of the discussion.

Sr. Beteta then said he would like to tell me frankly that Mr. Richberg was making it appear that this Government considered his [Page 682] proposal the only one susceptible of solving the petroleum controversy. I told Sr. Beteta that while I did not think that the President or the Secretary would wish to take the position that Mr. Richberg’s proposal was the only one for settling the controversy, nevertheless it seemed to present the basis of an agreement which accounted for this Government’s hope that the arrangement suggested be given the most careful consideration.

Sr. Beteta replied that his Government thought that there were alternative proposals and had so indicated in the memorandum handed to Mr. Richberg. At this point I told Sr. Beteta that if he had reference to the payment of cash compensation to the companies I felt sure that he would agree with me that this would only be possible in case Mexico could borrow the money in the United States. I said that I thought I should tell him in all frankness that that was a vain delusion if indeed it was entertained seriously by the Mexican Government since I knew of no responsible bank that would undertake to loan money for that purpose. I started to say that if the Mexican Government thought that it could secure the money from W. E. Davis, it would find itself sadly mistaken. …

Señor Beteta said that he had been sent up here by President Cárdenas to find out what the “atmosphere” in Washington was. He told me that he had gathered from the press that the “atmosphere” was very bad; and then asked me whether that was correct. I told Sr. Beteta that I thought the press in Washington, which was usually well informed, had properly diagnosed the trend of thought. I said that the President and the Secretary were very concerned at the present status of the negotiations between Richberg and the Mexican Government; they had handled the oil situation from the day it occurred with the greatest deftness in an endeavor not to permit it to cast a blot over relations between the United States and Mexico; that they had assumed, on the basis of what President Cárdenas had publicly stated, that the Mexican Government intended to make good on the statements that it intended to make compensation; that they had been waiting for well over a year, but that it was only within the last few months that there had been any real effort to come to an agreement; that now that effort appeared on the verge of a breakdown so that naturally they were very much concerned. I stated that fortunately public opinion was not blazing forth in headlines against Mexico, but that there was a strong undercurrent of rising feeling against Mexico’s failure to make a really constructive effort to come to an agreement. I said that I assumed that it was no news to him that the companies if unable to secure an agreement under this administration, would throw all their power, which was considerable, behind whatever presidential candidate in the 1940 elections they [Page 683] thought would bring about a settlement I told him that without attempting to forecast the result of elections in 1940, if an opposing administration were to come into office a different policy might be pursued by the United States. Sr. Beteta, after taking objection to my statement about Mexico’s not having made a constructive effort to reach an agreement, went on to state that he recognized that the United States had within its power means of compelling Mexico to do whatever it wanted, even to the extent of requiring the return of the properties to the companies. I broke in here to state that this Government had, as he knew, never made any such request, but again, as he knew, had looked with some favor upon a cooperative management and sales plan under which the Mexican Government would retain the properties. Sr. Beteta continued that be that as it might, if the United States Government wanted Mexico to follow any particular line of action it could compel her to, but that this would mean the overthrow of the Cárdenas regime in Mexico, political and social chaos, probably continued civil strife, and very definite antagonism between the United States and Mexico; moreover, it would mean the end of the good neighbor policy, which would be completely unmasked as nothing more than crude imperialism. He added significantly that Mexico would take the steps to see that this was done.

Señor Beteta said that he regretted it had become known by the press that the United States Government was considering “taking strong action” against Mexico. I said that I did not think that the press had any idea of what measures the United States might be contemplating and that I wanted to make it clear to him that so far this Government had taken not a single means of pressure to bring Mexico to an agreement.

Laurence Duggan