The Forcible Collection of International Debts
I
THE internal disorders common to certain South and Central American republics, of which Venezuela and Santo Domingo have recently afforded typical examples, have always been a fruitful source of embarrassment to the United States. During such disorders, these countries, by their disregard of international obligations, frequently lay themselves open to European intervention. The result is that foreigners have fallen into the habit of appealing to their governments for the redress of grievances, real or alleged; and certain of the European powers have shown a disposition in recent years to intervene in Latin America on very slight grounds of provocation.
Claims of citizens of one country against the government of another may arise in several ways. They may be based, in the first place, on injury to person, such as cruel or inhuman treatment, false imprisonment, or mob violence. Where such injuries are real, — whether committed directly, by the officers or authorized agents of the government, or indirectly, by the failure of the government to afford protection, — and where legal remedy is denied, it is the right and duty of the state whose citizens have suffered, to come to their assistance and to demand redress.
A second class of claims arises from the destruction or confiscation of the property of resident aliens. The property may be taken for military purposes as a matter of necessity; it may be destroyed in the ordinary course of military operations; it may be taken by forced loans; or it may be pillaged by the military or by mobs. Cases of this kind present innumerable difficulties and in turbulent countries are of constant recurrence. The general rule of international law applying to such cases is that resident aliens are entitled to no greater exemption or protection than citizens. This is a principle that the nations of Europe too often fail to remember in their dealings with Latin-American states. The alien must exhaust every means of redress which the courts of the country afford before appealing to his government to interfere in his behalf. In cases of denial of justice or of flagrant injustice, his government should intervene diplomatically with the object of securing a settlement of the claim by negotiation or arbitration. When the ordinary means of diplomacy fail, either the case is dropped or the state whose subject has suffered may, in its discretion, resort to forcible intervention.
There is a third and distinct class of claims, however, with which we are especially concerned in this paper, and in regard to which the practice of states is not so well settled. I refer to claims based on breach of contract. Such claims are referred to usually as “pecuniary ” claims, and the contracts on which they are based may be government bonds, charters, or concessions for the construction of railroads or other works of internal improvement, the guaranty of dividends on investments, or contracts for military supplies furnished to the government. This class of claims has not, as a rule, received the attention of writers on international law, for the reason that states have usually drawn a sharp distinction between contractual and other claims.
The policy of England with regard to the claims of its citizens against foreign governments was made the subject of a circular dispatch by Lord Palmerston in January, 1848. In this dispatch, which has been much quoted, he held that every state had the perfect right to take up, as a matter of diplomatic negotiation, any well founded complaint which any of its subjects might prefer against the government of another country; that the government of Great Britain had always considered it undesirable that British subjects should invest their capital in loans to foreign governments, instead of employing it in profitable undertakings at home; and that with a view to discouraging hazardous loans to foreign governments, the British government had hitherto thought it best to abstain from taking up as international questions complaints made by British subjects against foreign states. These principles of policy, as laid down by Lord Palmerston, were reaffirmed by Lord Salisbury in 1880.
The policy of the United States in regard to contractual claims, which, as outlined in a long list of dispatches from the days of John Quincy Adams down, is in full accord with the principle set forth in Lord Palmerston’s dispatch, is well summarized in a dispatch of Mr. Bayard, dated June 24, 1885: —
“1. All that our Government undertakes, when the claim is merely contractual, is to interpose its good offices; in other words, to ask the attention of the foreign sovereign to the claim; and this is only done when the claim is one susceptible of strong and clear proof.
“2. If the sovereign appealed to denies the validity of the claim or refuses its payment, the matter drops, since it is not consistent with the dignity of the United States to press, after such a refusal or denial, a contractual claim for the repudiation of which there is by the law of nations no redress.”
II
The first serious case of intervention in the affairs of an American state for the forcible collection of debts was that of the governments of England, France, and Spain in Mexico in 1861. The political character which this intervention rapidly assumed, and the exciting episodes of Maximilian’s career, have obscured the fact that the alliance of the three powers above named, like the late Anglo-German alliance against Venezuela, was in reality a debt-collecting agency organized in the interest of bondholders. Yet such was the case, although the ostensible grounds of intervention included claims of indemnity for injury to the persons and property of the subjects of the intervening powers. The British and Spanish claims had been recognized by the Mexican government and arrangements had been made by which the debts were to be paid off by a percentage on import duties at certain designated custom-houses. The French claims, however, were of a decidedly questionable character. During Miramon’s administration in Mexico, arrangements had been made through the agency of Jecker, a Swiss banker, by which $750,000 were to be raised through an issue of $15,000,000 of bonds. These bonds fell into the hands of decker’s French creditors and were pressed by the French government, which thus demanded the repayment of twenty times the original sum advanced. A claim was also made for $12,000,000 for torts on French subjects.
When the Liberal Party came into power again in 1860, they were unable to meet the situation, and showed a disposition to question the obligatory force of engagements entered into by their various revolutionary predecessors. In July, 1861, President Juarez brought matters to a crisis by the publication of a decree declaring the suspension for two years of all payments on the foreign loans. This act led to the London Convention of October, 1861, and to the joint intervention in Mexico of the three powers concerned.
So great was the uneasiness occasioned in the United States by the determination of the powers to intervene in Mexico, and so strong was the desire to ward off the threatened danger to republican institutions on this continent, that Mr. Seward authorized the negotiation of a treaty with Mexico, providing for the assumption by the United States of interest on the Mexican debt at three per cent for a term of five years. By way of security the United States proposed a mortgage upon all public lands and mineral rights in the Mexican states of Lower California, Chihuahua, Sonora, and Sinaloa. Against such an arrangement France and England both protested, and while the negotiations for the treaty were still in progress, the United States Senate passed a resolution “that it is not advisable to negotiate a treaty that will require the United States to assume any portion of the principal or interest of the debt of Mexico, or that will require the concurrence of European powers.” Not long after the occupation of Mexican territory by the allied forces, England and Spain became convinced of the duplicity and ulterior designs of the French government and ordered the withdrawal of their forces and agents from Mexican territory. The subsequent career of France in Mexico was wholly of a political nature, and her schemes were ultimately doomed to failure. As a debtcollecting agency, the alliance of 1861 against Mexico was not a success.
The intervention of England and Germany in Venezuela in 1902 presented many points in common with the action of the powers in Mexico nearly half a century ago, though there were some striking points of difference and the outcome was wholly different. The claims were of the same general character in both cases. In the case of Germany, though the facts were somewhat obscured, the real purpose of the intervention was to collect claims which originated in contract between German subjects and the government of Venezuela. One claim was for the recovery of interest seven years in arrears on five per cent bonds, for which Venezuelan customs were pledged as security. Another was for seven per cent dividends guaranteed by the Venezuelan government on the capital stock of a railroad built by German subjects at a cost of nearly $20,000,000. There were still other claims amounting to about $400,000 for forced loans and military requisitions.
These claims were brought to the attention of the United States government by the German ambassador on December 11, 1901. Their dubious character, regarded from the standpoint of international law, led Germany to make a frank avowal of her intentions to the United States, and to secure for her action the acquiescence of that government. Her ambassador declared that the German Government had “no purpose or intention to make even the smallest acquisition of territory on the South American continent or the islands adjacent.” This precaution was taken in order to prevent a subsequent assertion of the Monroe doctrine. In conclusion the German ambassador stated that his government had decided to “ask the Venezuelan government to make a declaration immediately, that it recognizes in principle the correctness of these demands, and is willing to accept the decision of a mixed commission, with the object of having them determined and assured in all their details.” At the same time the British government demanded a settlement of claims for the destruction of property and for the ill treatment and imprisonment of British subjects in the recent civil wars, as well as a settlement of the foreign debt.
On December 16, 1901, Mr. Hay replied to the German note, thanking the German government for its voluntary and frank declaration, and stating that he did not consider it necessary to discuss the claims in question; but he called attention to the following reference to the Monroe doctrine in President Roosevelt’s message of December 3, 1901: “This doctrine has nothing to do with the commercial relations of any American power, save that it in truth allows each of them to form such as it desires. In other words, it is really a guarantee of the commercial independence of the Americas. We do not ask under this doctrine for any exclusive commercial dealings with any other American state. We do not guarantee any state against punishment if it misconducts itself, provided that punishment does not take the form of the acquisition of territory by any non-American power.”
A year later, after fruitless negotiations, the German government announced to the United States that it proposed, in conjunction with Great Britain and Italy, to establish a pacific blockade of Venezuelan harbors. The United States replied that it did not recognize a pacific blockade which adversely affected the rights of third parties as a valid proceeding. The powers then proposed to establish a “warlike blockade,” but “without any declaration of war.” This device was resorted to at the suggestion of the German government, in order to avoid a formal declaration of war, which could not be made without the consent of the Bundesrath. Meanwhile, Venezuela’s gunboats had been seized and her ports blockaded, acts which Mr. Balfour admitted on the floor of the House of Commons constituted a state of war; and on December 20 a formal blockade was announced in accordance with the law of nations, which created a status of belligerency.
The hostilities thus commenced were brought to a close by the diplomatic intervention of the United States. In an agreement with the powers, Venezuela recognized the justice of a part of their claims and agreed to set aside thirty per cent of her customs receipts for their payment. The powers, on the other hand, agreed to submit their claims to the arbitration of mixed commissions. The situation was, however, further complicated by the demands of the blockading powers that the sums ascertained by the mixed commissions to be due them should be paid in full before any thing was paid upon the claims of the peace powers. Venezuela insisted that all her creditors should be treated alike, and at the insistence of President Roosevelt, it was finally agreed that their demand for preferential treatment should be submitted to the Hague Court for arbitration.
During the summer of 1903 ten mixed commissions sat at Caracas to adjudicate upon the claims of as many nations against Venezuela. These commissions simply determined the amount of the claims in each case. The awards of these commissions are very instructive, as they show the injustice of resorting to measures of coercion for the collection of pecuniary claims which have not been submitted to arbitration. Belgian claimants demanded 14,921,805 bolivars and were awarded 10,898,643; British claimants demanded 14,743,572 and were awarded 9,401,267; German claimants demanded 7,376,685 and were awarded 2,091,908; Italian claimants demanded 39,844,258 and were awarded 2,975,906; Spanish claimants demanded 5,307,626, and were awarded 1,974,818; United States claimants demanded 81,410,952, and were awarded 2,313,711.
The decision of the Hague Court, which was rendered February 22, 1904, held that the three allied powers were entitled to preferential treatment; that Venezuela had recognized in principle the justice of their claims while she had not recognized in principle the justice of the claims of the pacific powers; that the neutral powers had profited to some extent by the operations of the allies, and that their rights remained for the future absolutely intact. This decision, emanating from a peace court, and indorsing the principle of armed coercion, was received with no small degree of criticism.
During the discussions on the Venezuelan situation that took place in Parliament in December, 1902, the members of the government repeatedly repudiated the charge of the opposition that they were engaged in a debt-collecting expedition, and tried to make it appear that they were protecting the lives and liberties of British subjects. Lord Cranborne declared: “I can frankly tell the House that it is not the claims of the bondholders that bulk largest in the estimation of the government. I do not believe the government would ever have taken the strong measures to which they have been driven if it had not been for the attacks by Venezuela upon the lives, the liberty, and the property of British subjects.”
During the same discussion, Mr. Norman said: “This idea of the British fleet being employed to collect the debts of foreign bondholders is assuredly a mistaken one. It was said by Wellington once that the British army did not exist for the purpose of collecting certain debts. It is still more true of the British fleet that it does not exist for the purpose of collecting debts of bondholders. People who lend money to South American republics know what the security is and what they are likely to get in return, and they ought not to have the British fleet at their backs.”
To this Mr. Balfour, the prime minister, replied: “I do not deny, in fact I freely admit, that bondholders may occupy an international position which may require international action; but I look upon such international action with the gravest doubt and suspicion, and I doubt whether we have in the past ever gone to war for the bondholders, for those of our countrymen who have lent money to a foreign government; and I confess that I should be very sorry to see that made a practice in this country.”
In spite of disclaimers like the above, when we take into consideration the real character of the claims in question, we are forced to conclude that the action of Germany and England constituted a decided innovation in the practice of nations. That both powers were conscious of this fact seems apparent from their manifest endeavor to disguise the real character of the claims they were trying to collect. It is perfectly apparent to those who have followed closely the controversy that the foreign debt was the real question at issue and that intervention was undertaken in the interest of bondholders. But this is an age of world commerce and of financial transactions of world-wide scope; capital is no longer satisfied with the interest earned at home, but ever seeks new fields of investment in foreign lands. In South America, in South Africa, in Egypt, and in China we see the foreign construction of works of internal improvement and the foreign exploitation of internal resources. Commercial interest in many cases involves sooner or later political intervention. England’s interest in the Suez Canal gives her a moral right in Egypt which the powers of Europe cannot gainsay. Temporary intervention in 1881 for the protection of her interests has assumed a character of permanent occupation. Russia’s commercial exploitation of Manchuria led to a military occupation which was terminated only by the bloodiest war of modern times.
That states should collect the debts due their subjects in foreign lands seems but an incident of the rivalry of the nations for a world-wide extension of commerce. The states of Europe are encouraging their subjects to build up commercial and business interests in all parts of the world, and they cannot refuse to protect these interests. In recognition of these changes the United States acquiesced in the intervention of England and Germany in Venezuela in 1902, and President Roosevelt has declared upon several occasions that such action was not contrary to the Monroe doctrine.
Against President Roosevelt’s interpretation of this doctrine, however, Signor Drago, Minister of Foreign Relations of the Argentine Republic, vigorously protested in a note dated December 29,1902. This note contained a statement of the “Calvo doctrine,” which takes its name from the celebrated Argentine publicist who died last May. In his well-known work on international law, Calvo contends that a state has no right to take up, even as a matter of diplomatic action, the pecuniary claims of its citizens against another state. This doctrine, which has received the indorsement of most of the Latin-American states, was so ably expounded in the note above referred to that it is now usually known as the “Drago doctrine.” Signor Drago held,first, “that the capitalist who lends his money to a foreign state always takes into account the resources of the country and the probability, greater or less, that the obligations contracted will be fulfilled without delay. All governments thus enjoy different credit according to their degree of civilization and culture, and their conduct in business transactions,” and these conditions are measured before making loans. Second, a fundamental principle of international law is the entity and equality of all states. Both the acknowledgment of the debt and the payment must be left to the nation concerned “without diminution of its inherent rights as a sovereign entity.”
He said further: “As these are the sentiments of justice, loyalty, and honor which animate the Argentine people and have always inspired its policy, your excellency will understand that it has felt alarm at the knowledge that the failure of Venezuela to meet the payment of its public debt is given as one of the determining causes of the capture of its fleet, the bombardment of one of its ports, and the establishment of a rigorous blockade along its shores. If such proceedings were to be definitely adopted they would establish a precedent dangerous to the security and the peace of the nations of this part of America. The collection of loans by military means implies territorial occupation to make them effective, and territorial occupation signifies a suppression or subordination of the governments of the countries on which it is imposed.”
III
Should forcible collection of international claims of a purely pecuniary origin be adopted as a general practice by the great powers, the means of coercion would have to be clearly defined, as well as the rights of third parties. Under present conditions, however, the forcible collection of such claims raises several questions of a very perplexing character.
The first consideration is one of equity between the repudiating and the coercing state. Intervention, such as that of Germany and England in Venezuela, coming in the midst of civil insurrection, endangers the very existence of the state, and the right to a continued existence is the most sacred of all sovereign rights. It is not always possible for a state to pay its debts, and of that fact the state itself is the sole judge. If foreign states are to be the judges whether a state is able to pay its debts or not, the very existence of that state is at the mercy of its creditors. The most that a foreigner has a right to expect is that his claims shall receive the same consideration as those of subjects.
The second consideration in interventions of this kind involves the claims of third parties. Intervening states are not usually the only ones holding claims against the debtor state, yet when a settlement is forced, the coercing states usually demand preferential treatment. In 1902 a committee of foreign bondholders of Guatemala in London invited the United States to join England, France, Germany, and other European powers in securing an adjustment. The United States replied that “While the government of the United States is indisposed to join in any collective act which might bear the aspect of coercive pressure upon Guatemala, this government would reserve for its citizens equal benefits with those which might be obtained for creditors of any other nationality in the adjustment of the Guatemalan foreign debt; and the United States minister to Guatemala will be instructed to advise the Guatemalan government of this attitude on the part of the United States.” It appears that the representatives of England, France, Germany, and Belgium notified the Guatemalan government that if arrangements were not made to satisfy their respective creditors on a specific date, a man-of-war would take possession of each of the principal ports of that republic. To this ultimatum Guatemala yielded and promptly paid a large part of the foreign claims. It is needless to say that the claims of the United States, which had shown such friendly consideration, were not among those settled upon this occasion, and the United States felt called upon to remonstrate against this discrimination. The question of preferential treatment was later decided by the Hague Court in the Venezuelan case, already referred to, in favor of the powers who resorted to coercive measures, so that in future the United States will be at a distinct disadvantage if it continues to adhere to its policy of not coercing an American state.
A third and still more difficult problem is how far measures of coercion should be allowed to interfere with the rights of neutral states. This consideration raises the question as to the means to be employed in the act of coercion. The most effective measure falling short of war is “pacific blockade,” but the United States does not recognize such a blockade as binding upon third parties. When the powers of Europe blockaded the Island of Crete in 1897, the United States declined to concede the right to establish such a blockade and reserved the consideration of all questions in any way affecting the commerce or interest of the United States. This position was in accordance with the views of the Institute of International Law, which, in 1887, endorsed the practice of pacific blockade under the following conditions: (1) Ships under foreign flags may enter freely, notwithstanding the blockade; (2) the pacific blockade must be declared and notified officially and be maintained by a sufficient force; (3) ships of the blockaded power may be sequestrated, but at the termination of the blockade must be restored, with cargo, to the owners, who are to have no claim for compensation. Such a blockade would, of course, be ineffective for the collection of debts, for the blockaded power could simply transfer its commerce to foreign flags. As we have already had occasion to notice, in the Venezuelan affair of 1902 the United States refused to recognize either a “pacific” or a “warlike” blockade, and England and Germany were compelled to resort to a regular blockade creating a status of belligerency. Such extreme measures are usually undesirable; for the status of belligerency seriously interferes with the commerce of belligerents, as well as with that of neutrals.
The only other effective measure of coercion seems to be the seizure of customhouses and the collection of dues; but such a step frequently leads to the permanent occupation of territory, which in the case of American states is in direct conflict with the Monroe doctrine. President Roosevelt’s solution of this question is stated in his message of December 6, 1904:—
“Any country whose people conduct themselves well can count upon our hearty friendship. If a nation shows that it knows how to act with reasonable efficiency and decency in social and political matters, if it keeps order and pays its obligations, it need fear no interference from the United States. Chronic wrongdoing, or an impotence which results in a general loosening of the ties of civilized society, may in America, as elsewhere, ultimately require intervention by some civilized nation, and, in the western hemisphere, the adherence of the United States to the Monroe doctrine may force the United States, however reluctantly, in flagrant cases of such wrongdoing or impotence, to the exercise of an international police power.”
The last clause of this message contains the principle upon which the President’s Santo Domingan policy was based. We have here a bankrupt republic, hard pressed by its European creditors, appealing to the United States for protection. In the protocol concluded between Santo Domingo and the United States, February 4, 1905, it was provided that the United States government should guarantee the territorial integrity of the Dominican republic, take charge of its custom houses, administer its finances, and settle its obligations, foreign as well as domestic. In short, the Dominican republic was to be treated as a bankrupt corporation and the United States was to act as receiver. The Senate failed to ratify this agreement ; but under a modus vivendi the president of Santo Domingo appointed a receiver of customs, named unofficially by President Roosevelt, who has since administered the affairs of the island, under the protection of the United States navy, in accordance with the original programme.
The President’s solution of the difficulty, if it had been concurred in by the Senate, would have converted our navy into a debt-collecting agency for the powers of Europe, for the bankers of Europe would have found it profitable to buy up all doubtful claims, of whatever character, against American states and urge their governments to press for payment. The only escape from such a predicament would have been the establishment of a protectorate over all the weaker LatinAmerican states and the enforced adoption by them of a provision like the “Platt Amendment,” by which Cuba has bound herself not to contract any foreign obligations the payment of which cannot be provided for by the ordinary revenues of the island.
Admitting President Roosevelt’s major premise, that European powers have the right to collect by force the pecuniary claims of their subjects against American states, and his minor premise, that the only effective means of collecting such debts, namely, the seizure of customhouses, is contrary to the Monroe doctrine, his conclusion that the United States should act as the agent in such collection, is perfectly valid. The President was, however, in the opinion of many competent critics, at fault in his premises. In the first place, it may be seriously questioned, on grounds both of expediency and of public law, whether the United States should ever recognize a pecuniary claim which has not been submitted to adjudication; and, secondly, it is certain that the collection of port duties need not necessarily lead to the permanent occupation of territory.
It may be contended that the main difficulty is to get a Latin-American state to agree to arbitrate such claims; but a number of Latin-American states have already put themselves on record in this matter. At the Second International Conference of American States, held in the City of Mexico in 1901, a treaty was signed containing the following clause: “The high contracting parties agree to submit to arbitration all claims for pecuniary loss or damage which may be presented by their respective citizens, and which cannot be amicably adjusted through diplomatic channels, and when said claims are of sufficient importance to warrant the expenses of arbitration.” It was further provided that all controversies of this character should be submitted to the Hague Court for arbitration, unless both parties should prefer that a special tribunal be organized. This treaty was signed by the representatives of the Argentine Republic, Bolivia, Colombia, Costa Rica, Chili, the Dominican Republic, Equador, Salvador, Guatemala, Hayti, Honduras, Mexico, Peru, Uruguay, and signed “ad referendum” by the representatives of the United States, Nicaragua, and Paraguay. It was ratified by Guatemala, April 25, 1902; by Peru, October 29, 1903; by Honduras, July 6, 1904; by the United States, January 25, 1905; and by Mexico, May 22, 1905.
In view of its great importance, the question is still being very generally agitated and has been given a prominent place on the programme of the Third International Conference of American States, which convened at Rio Janeiro, July 21, 1906. The programme of this conference shows as its fourth item, “A resolution recommending that the Second Peace Conference at The Hague be requested to consider whether, and, if at all, to what extent, the use of force for the collection of public debts is admissible.” This subject is not one for the Peace Conference to determine, as the right of a state to resort to force when it considers its interests affected cannot be limited except by treaty.
It will be seen from the facts presented in the foregoing discussion that the question here stated is one of the most perplexing and troublesome in the whole range of modern diplomacy. International law, as at present recognized, furnishes no clear rules on the subject, and the opinions of states differ. There can be no solution of the question in the near future except through treaty agreements. The pecuniary claims convention adopted by the International American Conference of 1901 should therefore receive the most careful consideration of all the great powers.
Now that the United States has ratified this convention, we are under no obligation to countenance any measures of coercion for the collection of pecuniary claims against any American state which is willing to arbitrate. The adoption of such a policy by the United States would undoubtedly force the remaining American states sooner or later to announce their adherence to the convention. Such a solution seems the only feasible one, and there is no reason to doubt that it would be satisfactory and just, for experience has shown that a state rarely refuses to pay a claim which has been adjudicated.