816.51/1147
Memorandum by the Assistant Chief of the Division of the American Republics (Cabot)51
I have examined with some care the files relating to the Salvadoran loan negotiations of 1921–1923.…
(4) The State Department was copiously consulted during the negotiations. It acceded to the inclusion in the final contract of two provisions which involved it:
- (a)
- A provision by which in the event of default the Fiscal Agent should select, with the concurrence of the Secretary of State, two individuals, one of whom should be appointed by El Salvador as Collector General. (Article 19 of the contract of June 24, 1922)
- (b)
- Should any disagreement, question or difference arise regarding the interpretation or performance of the contract, it was to be referred to the Chief Justice of the United States, through the Secretary of State, for determination, decision and settlement. (Article 9)
. . . . . . . . . . . . . .
At the time of the original default on this loan El Salvador’s financial position was such that the establishment of a Customs receivership to enforce service on the loan would have resulted in chaos. Moreover, we did not recognize the de facto Government of El Salvador.[Page 331]The situation was further complicated by the formation of a private Bondholders Protective Committee which, while zealous in seeking readjustment on behalf of the bondholders, showed even more zeal in obtaining large personal profits. However, so far as I can ascertain, the provision by which any controversy which may arise in connection with the original loan contract is to be referred through the Secretary of State to the Chief Justice for his decision remains unmodified in law and practice. It seems to me that the recent arrangement made by the Salvadoran Government with the Banco Occidental is a dispute of the kind originally contemplated by this provision of the loan contract. Unlike the establishment of a Customs receivership, it appears questionable whether reference of such a dispute to the Chief Justice could justly be considered a derogation of Salvadoran sovereignty. The fact that a request for such reference would be highly embarrassing both to the Government of the United States and to that of El Salvador would not appear to relieve them of their respective moral and legal obligations to the bondholders. At a moment when El Salvador is financially able to resume payments on its debt, and we are no longer embarrassed by the probability that any representations on our part would redound to the personal profit of the Protective Committee as well as to the protection of the bondholders’ interests, would it be contrary to the long range interests of the United States if representations were now made, in view of the unethical act of a friendly country, for the protection of innocent American bondholders?
Many of these bondholders bought their bonds in good faith, in the belief that the role which the Department had voluntarily agreed to assume would protect them against loss. They have nevertheless suffered heavy losses. For good reasons of policy, the Department sidestepped the role it had previously accepted; but also it has taken no effective action in connection with acts of the Salvadoran Government prejudicial to the bondholders’ legitimate interests. By this Government’s hostile attitude towards the Protective Committee and by lending the Salvadoran Government Exim funds we may have prejudiced them further. Every concrete excuse for failing to fulfill our moral obligation to the bondholders seems now to have vanished. Moreover, in view of the reference in the recent letter of the Protective Committee to the inactivity of the Department, it would not be surprising if we began to receive complaints from bondholders and their Congressmen. I therefore favor sending Mr. Thurston a somewhat more vigorous version of the draft instruction I recently prepared for him directing him to make informal representations regarding this matter.
- Addressed to Philip Bonsal, Chief of the Division of the American Republics, and James Wright of that Division, to the Associate Adviser on International Economic Affairs (Collado), and to the Chief of the Financial Division (Livesey).↩